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Q3 2011 Earnings Call

November 18, 2011 8:30 am ET


Katherine Lawther Krill - Chief Executive Officer, President and Executive Director

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

Judith Lord - Vice President Of Investor Relations


Stacy W. Pak - Barclays Capital, Research Division

Jeff Black - Citigroup Inc, Research Division

Samantha Panella - Raymond James & Associates, Inc., Research Division

Jennifer Black

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Janet Kloppenburg

Marni Shapiro - The Retail Tracker

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division



Good morning, ladies and gentlemen, and welcome to ANN INC.'s Third 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, Theresa, and good morning, everyone. We're very pleased you could join us to review our results for the fiscal third quarter of 2011. 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.

But 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 provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of November 18, 2011, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

And with that, I would like to hand it over to Kay.

Katherine Lawther Krill

Good morning, everyone, and thanks for joining us. We delivered another outstanding quarter, generating our fourth consecutive quarter of double-digit sales growth and our ninth consecutive quarter of strong double-digit growth in earnings and diluted earnings per share. I am extremely pleased that our results exceeded our expectations as we build the foundation that will enable us to continue to deliver long-term growth and shareholder value.

Overall, the third quarter results were driven by significant growth in both sales and margin. Sales for the quarter increased 12% to $564 million on a comp sales increase of 6%, on top of last year's 12% comp increase. At the Ann Taylor brand, comp sales increased 3% on top of last year's 22% increase. And at the LOFT brand, comps increased 8% on top of last year's 5% increase.

Our gross margin rate was up 30 basis points from last year's third quarter, reaching a very strong 57.5%. The increase was highlighted by strong product acceptance and lower promotional activity at the LOFT brand. We also benefited from very strong performance in our e-commerce channel, which achieved a 35% comp increase on top of a nearly 60% increase last year. This channel continued to deliver strong margins in the quarter as well.

In addition, our factory outlet channel also delivered double-digit sales growth and very healthy margin. The fact that a higher percentage of our third quarter sales volume was derived from the e-commerce and factory outlet channels was a positive contributor to our overall results.

And finally, our sourcing strategy enabled us to continue to effectively manage product costs for the entire company.

Driven by the strong sales and margin, net income for the third quarter was up by 33% to $32 million from the year ago period. Diluted earnings per share reached $0.61, up nearly 50% from $0.41 in the third quarter last year.

With nearly 85% of our projected fiscal year earnings already achieved, we are on track to deliver on our expectations for the full fiscal year and are clearly poised to achieve another year of outstanding growth in both sales and profitability.

Let's now take a closer look at the brands. First, Ann Taylor. The brand achieved a solid performance for the third quarter with a strong gross margin rate and a 3% increase in comp sales. By channel, comp sales in e-commerce increased 46%, factory increased 2% and the stores channel declined by 6%.

Turning now to the stores channel, which as you know, represents about 20% of our total company volume. Although the top line in stores was lower than we expected, margin in the channel was solid and traffic remains strong. While we know that the product mix could have been better in-store, the Ann client is telling us that she is spending more cautiously and being highly selective in her purchases due to the macroeconomic uncertainty. Her current appetite is for fashion and color versus core investment pieces. In fact, fashion and color performed extremely well during the quarter. Clearly, we would have benefited from having more depth and breadth in fashion and color in every product category. She is definitely responding to newness and we are seeing strong sell-throughs on styles and colors, not already in her closet.

In addition, dresses, skirts, fashion pants and new silhouettes and jackets, including capes, all performed very well. Knits and woven tops, particularly in neutral colors, were soft. Suits, which have been a major growth driver of the business over the past 2 years performed slightly ahead of last year's level but did not deliver the growth we had anticipated.

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