ANN INC. (ANN)

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ANN INC (ANN)

Q2 2011 Earnings Call

August 19, 2011 8:30 am ET

Executives

Judith Lord -

Michael Nicholson - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Katherine Krill - Chief Executive Officer, President and Executive Director

Analysts

Dana Telsey - Telsey Advisory Group

Stacy Pak - Barclays Capital

Jeff Black - Citigroup Inc

Betty Chen - Wedbush Securities Inc.

Paul Lejuez - Nomura Securities Co. Ltd.

Adrienne Tennant - Janney Montgomery Scott LLC

Brian Tunick - JP Morgan Chase & Co

Jennifer Black - Jennifer Black & Associates

Robin Murchison - SunTrust Robinson Humphrey, Inc.

Kimberly Greenberger - Morgan Stanley

Janet Kloppenburg - JJK Research

Lorraine Hutchinson - BofA Merrill Lynch

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to ANN INC.'s Second Quarter 2011 Earnings Conference Call. At the request of the company, today's conference call is being recorded. [Operator Instructions] I would now like to turn the call over to Judy Lord, Vice President, Investor Relations. Please go ahead.

Judith Lord

Thank you, Fran, and good morning, everyone. We're very pleased you could join us to review our results for the fiscal second quarter of 2011 this morning. I'm here with Kay Krill, ANN INC.'s President and CEO; and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter, and then Mike will discuss our financial results and our outlook. After that, we’ll open it up for your questions.

Before turning it over to Kay, we would like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of August 19, 2011, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that, let me hand it over to Kay.

Katherine Krill

Good morning, everyone, and thanks for joining us. I am pleased to report on our strong performance for the second quarter of fiscal 2011. We grew both sales and earnings substantially from a year-ago period, while maintaining the record second quarter gross margin rate we achieved last year. We are also on track to deliver strong results for the balance of the year. ANN INC. continues to lay the foundation for sustainable, profitable growth over the longer term as well.

On the top line, sales for the quarter increased more than 15% to nearly $560 million. Comparable sales for the quarter were up 9%, with the Ann Taylor brand's comp up 5% and the LOFT brand's comp up 11%. We were pleased that comps at both brands became progressively stronger over the course of the quarter, with both brands delivering strong double-digit comps in the month of July.

On the bottom line, net income grew more than 30% from last year's second quarter. Diluted earnings per share increased more than 50% to $0.47, up from $0.31 in the year-ago period. Our strong EPS performance was driven by substantially higher sales, a record gross margin rate and significantly improved results at the LOFT brand. We also benefited from our continued focus on managing our costs and our previous share repurchase activity.

Let's now turn to the brands. First, Ann Taylor. Overall, we continue to be pleased with the evolution of the brand as we focus on our long-term objectives of growing the business, increasing productivity levels and expanding our client base. Since Fall 2009, when the brand was repositioned, we have made significant progress and remain very excited about the opportunities ahead. The brand's 5% comp sales increase for the quarter was comprised of a 32% increase in the e-commerce channel, a 7% increase in the factory outlet channel and a 1% increase in the stores channel.

Overall, the softer-than-expected performance in the stores channel was driven by select print and novelty components of the assortment, specifically bold prints, which did not resonate with our clients. Excluding these prints, the balance of our assortment achieved comparable sales growth of 5% for the quarter. The good news is this was a product-specific issue and we effectively worked through that inventory during the quarter. Our Fall season assortment reflects more subtle prints, similar to those that performed well during the second quarter.

Ann Taylor delivered strong results across key categories such as dresses, pants, skirts and casual separates. In addition, our client responded very well to Ann Taylor's color offering, particularly shades of orange, red and teal. The brand's gross margin rate for the quarter was impacted by the steps we took to clear inventory at the stores channel. This higher level of promotional activity versus last year was effective and I am pleased to note that we have entered third quarter with inventories in line with our Fall plans.

Looking ahead to the third quarter, our Ann Taylor collection is anchored by a strong core wear-to-work offering, featuring the versatile suiting, sportswear and dresses that we know our client loves and expects from us. Our pre-Fall assortment of colorful skirts, dresses, pants and color block tops and dresses sold very well. Importantly, we believe Ann Taylor's combination of style, quality and value is a clear standout and a powerful differentiator for us, especially given that today's consumer continues to face a number of economic headwinds.

Turning now to e-commerce. Ann Taylor's e-commerce business achieved another quarter of significant growth. The online results were driven by higher traffic, as our digital marketing strategies continue to be effective in bringing clients to the site and we achieved continued growth in average order value. Online exclusives once again performed very well. During the quarter, we completed the re-platforming of both the Ann Taylor and LOFT e-commerce sites. This has provided us with new capabilities to support the continued growth of our online business where we see significant potential. Already, we have introduced a simplified checkout process and other features to make the online shopping experience more convenient for our clients. We are also looking forward to the future introduction of additional features, such as international shipping, site personalization and mobile commerce. The re-platforming plays a key role as we move toward multichannel inventory capability to better capture consumer demand. We look forward to the opportunities ahead to continue to grow this important channel.

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