ANN INC Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Ann, Inc. (ANN)


Q4 2012 Earnings Call

March 08, 2013 8:30 am ET


Judith Lord - Vice President of Investor Relations

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

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


Jeff Black - Avondale Partners, LLC, Research Division

Roxanne Meyer - UBS Investment Bank, Research Division

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Janet Kloppenburg

Kimberly C. Greenberger - Morgan Stanley, Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division


Good morning, ladies and gentlemen. Welcome to ANN INC.'s Fourth Quarter and Fiscal Year-End 2012 Earnings Conference Call. At the request of the company, today's conference is being recorded. [Operator Instructions] Following prepared remarks by the company, you will have the opportunity to ask questions.

I would now like to turn the call over to Judy Lord, Vice President, Investor Relations. Please go ahead.

Judith Lord

Thank you, Mary Ann, and good morning, everyone. We're very pleased you could join us to review our results for the fourth quarter and fiscal year of 2012. I'm here today with Kay Krill, ANN INC.'s President and CEO; and Mike Nicholson, our CFO and Chief Operating Officer. Kay will begin with an overview of the quarter and our full year results, followed by a brief update on our strategic initiative. Mike will then discuss our financial results and our outlook. After that, we'll open it up for 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 provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of March 8, 2013, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that, I'd like to hand it over to Kay.

Katherine Lawther Krill

Good morning, everyone. Thanks for joining us to review ANN INC.'s results for the fourth quarter and the full year 2012.

Overall, it was a very strong year for our company with the exception of the fourth quarter, which I will review shortly. We achieved record earnings per share for 2012 and double-digit growth in net income, reflecting our third consecutive year of positive comp sales and our fourth year of operating profit expansion. The results were driven by strong client response to our product offering, as well as the positive impact of our strategic initiative, and we are poised to continue our progress in fiscal 2013. There is no doubt that the fourth quarter performance was disappointing, and especially coming on the heels of record earnings per share results in the first, second and third quarters of last year.

For the fourth quarter, the less-than-expected results can be attributed to 2 primary factors, each of which represented about half of the impact, Hurricane Sandy and disappointing results at LOFT due to the heavy investment in bright colors that didn't resonate with our clients. As you know, ANN INC. has a high concentration of business in the Northeast. And as that region continued to experience the lingering effects of Sandy, it required a higher level of promotional activity to clear holiday product. We regard both of these factors as relatively short term and importantly, we entered the spring season with clean, fresh inventories in both brands.

For the year, ANN INC.'s total sales grew to $2.4 billion, up from $2.2 billion last year. Comparable sales for the year rose more than 3% and our gross margin rate increased to a strong 54.8%. Net income for the year increased 19% to $103 million and diluted earnings per share reached a record $2.10, up nearly 30% from $1.64 in fiscal year 2011. Reflecting our ongoing commitment to enhance value for our shareholders, we repurchased nearly 5 million shares over the course of the year, representing approximately 10% of our outstanding shares. We ended the year with $167 million in cash on our balance sheet and no debt.

All in all, it was a very strong year for ANN INC. marked by positive comp sales, record earnings per share and healthy cash flow generation. Let's turn now to performance by brand for the quarter. Then I'll spend a few minutes updating you on our strategic priorities for 2013.

First, Ann Taylor. For the fourth quarter, I'm pleased to report that the brand drove higher sales and profitability and is continuing to deliver positive results. In this highly competitive environment, the business was able to deliver more profitable growth with the gross margin rate up dramatically from the fourth quarter last year. For the quarter, comp sales for Ann Taylor's multichannel business increased 5%. However, comps at Ann Taylor Factory declined 7%, resulting in a comp sales increase of 1% for the brand overall.

As you know, our strategy for Ann Taylor has focused on the following: providing our client with an expanded assortment of relevant fashion in all stores across the chain; keeping our prices approachable by offering her more opening price points across every category; becoming more category specific in our promotional strategy; and enhancing both the in-store and our online shopping experience. It is clear that our client responded as we've executed on these initiatives and sharpened our focus on providing her with great product, outstanding value and an engaging shopping experience.

From a product perspective, the brand's modern take on wear-to-work dressing continues to resonate with her with fashion items performing significantly above expectations. Dresses, skirts and woven and knit tops have all been standouts. Casual bottoms and jewelry also performed well. As in the third quarter, we reduced our inventory in suits and shoes in-store and this strategy was successful. Online, however, we've continued to carry an expanded assortment in both of these categories and demand has continued to be strong. From a pricing perspective, she is definitely responding to the value we are offering with more choices at good and better price points. And this is translating into stronger, full-priced sell-throughs.

In terms of promotional activity, we have made continued strides in scaling back the overall level of activity. It was clearly a highly competitive environment this holiday season. And no question, we took action to get our share. However, we focused on more targeted promotions and fewer storewide events, enabling us to successfully improve our gross margin versus last year.

Finally, with respect to the shopping experience, we felt very good about the progress we've made. The launch of our multichannel initiative last September has been successful, enabling us to fulfill merchandise orders placed online with store-based inventory and allowing us to better respond to our client demand and drive higher sales and profitability company-wide. Ann Taylor's online business once again delivered excellent results this quarter, including continued double-digit sales growth. Higher traffic, better conversion, increased average order value and the positive impact of multichannel, all contributed to the increase.

Maximizing the opportunity in e-commerce will continue to be a strategic priority for us in 2013. In stores, as you know, a key area of focus has been to elevate the experience through enhanced service and creating a more modern, upscale environment. At year end, we had nearly 80 new concept stores in addition to 100 locations that were refreshed in October with minimal investment to reflect the brand's modern aesthetic. As a result, approximately 2/3 of our store fleet has now been remodeled or refreshed to better represent the aspirational positioning of the brand. We continue to hear terrific feedback from clients.

Turning now to Ann Taylor's marketing. During 2012, we made important strides toward developing a more personalized and relevant shopping experience for our client. We are utilizing email, social media, direct mail and media to strengthen our connection to our existing clients and to continue to attract new clients to the brand.

Turning now to factory. We are pleased that Ann Taylor's outlet business continued to deliver higher profit growth versus last year despite the challenging environment. While comp sales and traffic were lower, we managed the business for profitability delivering gross margin expansion both in terms of rate and dollars.

In summary, the ANN team has done an excellent job of evolving the Ann Taylor brand to better respond to the wardrobing needs of women today, while remaining true to our heritage. The changes we've implemented have put us in a stronger position competitively to drive higher sales and profitability. We have entered the year with a strong offering, featuring a compelling fashion component and outstanding value. We look forward to capitalizing on the brand's potential for future growth in 2013.

Let's turn to LOFT. As you know, the LOFT brand delivered significant sales growth and profitability during the first 3 quarters of 2012. However, the fourth quarter fell short of our expectations. While total brand sales increased by nearly $25 million, our multichannel comps declined 1%.

At LOFT Outlet, comps decreased 7%, resulting in a comp decrease of 2% for the brand in the quarter. Notably, the impact of Sandy was more significantly felt at LOFT, given its larger concentration of sales in the Northeast market affected by the storm. From a product perspective, LOFT achieved positive comp results for the fourth quarter across the majority of the assortment. Tops, representing 60% of the business, comped positively with strength in knits, wovens and sweaters. In addition, denim and cords and LOFT lounge continued to be strong. This was offset by an overinvestment in bright colors in relaxed separates that did not resonate with our client during the holiday season. In addition, we didn't have enough neutrals or blacks in the mix.

LOFT e-commerce business was once again outstanding during the fourth quarter, delivering double-digit top line growth driven by higher traffic, better conversion and increased average order value. Online exclusives performed very well and our results also benefited from the positive impact of our multichannel initiative.

Looking ahead, our product assortment is in a better place for the spring season as compared to fourth quarter. Our color investment declines as we move through the first quarter and by second quarter, will be below last year's investment. Over the same period, we will have a greater investment in black, white and neutral as well as print and pattern, all of which has been resonating well with our LOFT client.

In addition, we have a strong offering in all categories of tops, denim, casual pants and shorts, as well as LOFT lounge. LOFT online is expected to continue to drive strong top line growth. And from a real estate perspective, we are pleased with the progress we're making as we expand LOFT's footprint. We continue to be encouraged by the results we're seeing as we bring LOFT into new small and mid-sized markets. As for LOFT's marketing, we continue to focus on driving higher brand awareness and expanding our universe of loyal LOFT clients and we are achieving positive results in building our client base.

Turning now to outlet. Similar to Ann Taylor Factory business, we successfully managed the LOFT Outlet business for profitability this quarter. In a competitive environment, we managed our inventories effectively and deliver higher profits in this channel compared to last year. Over the longer term, we continue to see opportunity to expand this highly profitable business.

In summary, we remain as excited as ever about the prospects for the LOFT brand. LOFT offers a unique combination of feminine fashion, quality and value. We continue to see a meaningful opportunity to broaden our reach, introduce the brand to new clients and further expand our market share.

Before I turn it over to Mike, I'd like to update you on our strategic growth initiatives for 2013. First, e-commerce. As you know, our online sales have increased at a strong double-digit rate, reflecting our investment and success in continuing to grow our multichannel business. As part of that strategy, we recently launched international shipping to more than 100 countries worldwide. This is a key step forward as we continue to build the online business and to expand the global reach of both brands.

In addition, by selling internationally through e-commerce, this will further inform where significant demand exists outside of the U.S. as we consider future opportunities for Ann and LOFT. On our last call, we discussed at length of the significant benefits that the multichannel offers us in terms of enabling our client to have a seamless shopping experience in our brands. Overall, we believe multichannel is the future of retailing, and this represents a significant opportunity for us.

Next, our real estate strategy. In 2012, we made significant strides in enhancing and expanding our store fleets for our 2 brands. In 2013, we will continue to optimize the footprint of our Ann Taylor stores with our smaller new concept stores. And at LOFT, we will continue to execute on our dual strategy of expanding the brand's footprint in small and mid-markets, while upgrading and refreshing existing locations.

Finally, our international growth initiative. As you know, we opened our first 3 stores in Toronto, Canada last fall. I am pleased to report that the results have continued to exceed our expectations. We are actively seeking additional stores in the market, but we'll take our time to make sure we get the right locations. We see significant opportunity in this underserved market and look forward to growing our presence in Canada.

In summary, our focus is clear, to generate continued long-term profitable growth. And to that end, as you read in our press release, our outlook for fiscal year 2013 is to deliver another record year with growth in net sales, positive comps and higher gross margins. We also expect to report a strong first quarter despite the fact that we do not anticipate our bottom line to equal last year's record EPS.

Let me now turn it over to Mike.

Michael J. Nicholson

Thanks, Kay, and good morning, everyone. Today, I'll start with a summary of results for the fourth quarter and full year 2012. And then I'll provide you some perspective on our outlook for the first quarter and full year fiscal 2013.

Beginning with net sales. Net sales for the fourth quarter were $607.7 million, an increase of approximately 7% versus the $566.7 million in net sales reported in the fourth quarter of 2011. By brand, net sales across all channels of the Ann Taylor brand were $255 million, a 7% increase over the $237.4 million reported last year. At the LOFT brand, net sales were $352.7 million, also up more than 7%, versus $329.3 million reported last year.

Moving on to comps. Total company comparable sales for the quarter decreased 0.7% against a 5.3% comp increase last year. At the Ann Taylor brand, total brand comps improved 1.4% reflecting an increase of 5% at Ann Taylor, partially offset by a 6.8% decline in the factory channel. At the LOFT brand, total brand comps declined 2.1%, reflecting decreases of 1.2% at LOFT and 7.1% at LOFT Outlet.

Turning to gross margin. We reported a fourth quarter gross margin rate of 49.1%, an increase of 20 basis points compared with last year's rate of 48.9%. This performance primarily reflected higher full-priced selling at Ann Taylor and in the factory outlet channel at both brands, partially offset by higher promotional activity at LOFT versus last year.

Turning now to SG&A. SG&A as a percentage of net sales was 48.8%, compared with 48.4% in the fourth quarter of last year. SG&A expenses in the fourth quarter were $297 million, compared with $274 million reported in the fourth quarter of 2011. The increase in SG&A rate during the fourth quarter of 2012 primarily reflected fixed-cost deleveraging related to our year-over-year store growth and other expenses supporting the expansion of the business that were partially offset by higher net sales compared with the fourth quarter of 2011.

Moving down the P&L. Operating income during the fourth quarter was $1.6 million versus operating income of $3.2 million in the fourth quarter of 2011. Our fourth quarter net income was $2.4 million or $0.05 per diluted share, compared with net income of $2.2 million or $0.04 per diluted share achieved in the fourth quarter of 2011. Weighted average diluted shares outstanding for the quarter decreased 6.2% to 47.6 million shares versus 50.8 million shares in the fourth quarter of 2011. The decline in weighted average diluted shares in 2012 was primarily related to our repurchase of approximately 4.9 million shares during fiscal 2012.

Our effective tax rate for the quarter was 9.4% versus 28.1% in the fourth quarter of 2011, primarily due to the interest benefit associated with a federal tax exam settlement. Depreciation and amortization in the fourth quarter totaled approximately $27.2 million, compared with $22.5 million reported in the fourth quarter of 2011. And finally, capital expenditures in the fourth quarter totaled $36.1 million, compared with $22.6 million in the fourth quarter of 2011.

Turning now to a quick recap of our full year results. Net sales for fiscal 2012 increased more than 7% versus year ago to nearly $2.4 billion on an overall comp increase of 3.3%. Net sales included the benefit of approximately $25 million in additional revenue from the 53rd week in fiscal 2012.

At Ann Taylor, total sales across the brand increased to $945.2 million, compared with $907.9 million in 2011, and comparable sales rose 1.1% on top of last year's positive comp of 5.2%. At the LOFT brand, total sales increased nearly 10% to $1,430,000,000 in 2012, compared with $1,305,000,000 in 2011. Comparable sales increased 4.8% on top of last year's positive comp of 8%.

Our gross margin rate for the year was 54.8%, an increase of 20 basis points from the 54.6% achieved in fiscal 2011. Our 2012 gross margin rate improvement primarily reflected favorable client response to our merchandise offerings and lower promotional activity. To a lesser extent, the full year gross margin rate also benefited from the effect of gift card and merchandise credit breakage. These improvements were partially offset by an increase in client shipping costs during the back half of fiscal 2012 due in part to the success of our multichannel initiative.

SG&A as a percentage of net sales was 47.8%, an improvement of 20 basis points, compared to the 48% reported in fiscal 2011. This rate improvement was primarily due to the benefit of fixed-cost leveraging as a result of higher net sales and a reduction in performance-based compensation expense, partially offset by an increase in expenses to support the expansion of our business. SG&A expenses for the year were $1,136,000,000, compared with $1,063,000,000 in fiscal 2011, primarily reflecting costs associated with store growth during fiscal 2012, an increase in variable costs related to higher net sales and other costs associated with the expansion of our business.

Operating income for the year was $167 million, reflecting a 15% increase in operating income, compared with the $145 million last year. Net income for the year totaled $102.6 million, reaching a record $2.10 per diluted share in 2012, compared with net income of $86.6 million or $1.64 per diluted share in 2011. Weighted average diluted shares outstanding for the year decreased nearly 8% to 48 million shares versus 52 million shares in 2011, reflecting the repurchase of 4.9 million shares during 2012.

Our effective tax rate for the year was 38.8% versus 40.1% for 2011, primarily due to the effective settlement of certain tax positions. Depreciation and amortization in 2012 totaled approximately $98 million versus $94 million in 2011. Capital expenditures for the year totaled approximately $147 million versus approximately $119 million in 2011.

Moving on now to the details of our fiscal year-end inventory. We ended fiscal 2012 with total inventory per square foot for the company flat compared with last year, which reflected flat inventories per square foot at Ann Taylor, LOFT and the factory outlet channel. And importantly, we entered the first quarter of 2013 with extremely clean inventories and very low levels of carryover at both of our brands.

Turning now to store openings and closures. During fiscal 2012, we opened a total of 63 stores, comprised of 11 Ann Taylor stores, 3 Ann Taylor Factory stores, 26 LOFT stores and 23 LOFT Outlet stores. We closed a total of 32 stores during the year, comprised of 16 Ann Taylor stores, 1 Ann Taylor Factory store, 14 LOFT stores and 1 LOFT Outlet store. The total store count at the end of the fiscal year was 984 stores, comprised of 275 Ann Taylor stores, 101 Ann Taylor Factory stores, 512 LOFT stores and 96 LOFT Outlet stores. Our store square footage at the end of the year totaled approximately 5.7 million square feet, a 2% net increase from the square footage total recorded at the end of fiscal 2011.

Turning now to our store growth plans for 2013. We continue to see an opportunity to invest in the profitable growth of our fleet at both brands through both square footage growth and continued enhancement of sales and productivity at Ann Taylor and LOFT stores in the coming years. Overall, we expect to open approximately 65 new stores this year. From a timing standpoint, approximately half of these stores are expected to open in the first half of 2013 with the remainder in the second half of the year.

Regarding store closure plans for 2013, we currently expect to close 30 stores during the fiscal year. And as always, we will continue to manage our real estate portfolio to maximize store profitability and ensure brand presence in key regions and markets. In terms of the overall square footage impact, the net effect of store openings, closures and the continued rollout of the smaller Ann Taylor new concept stores is expected to result in weighted average square footage in 2013 of approximately 5.8 million square feet, reflecting an increase of 4% over 2012.

By brand, as Kay mentioned, we will continue to pursue the further rollout of the Ann Taylor new concept stores and expect to have nearly 30 additional stores in this format by year end. Approximately 5 of these will be new stores, 20 will reflect existing store downsizes and remodels and 5 will reflect capital-light refreshes of existing stores. By year end, approximately 75% of the Ann Taylor fleet is expected to reflect our new store format. In addition, we expect to open 7 Ann Taylor Factory locations at premiere outlet centers this year. At the LOFT brand, we expect to open more than 35 stores, including further store growth in mid- and small markets, as well as an additional 15 LOFT Outlet stores to further capitalize on the brand's potential for sales and profit growth.

In terms of our strong balance sheet, after share repurchases totaling $135 million in fiscal 2012, we ended the year with cash of approximately $167 million and no bank debt. We remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value in 2013.

Turning now to our outlook for the first quarter and full year of 2013. For the fiscal first quarter of 2013, we expect total net sales to be $600 million, reflecting a total company comparable sales increase in the low single-digits. Our gross margin rate performance is expected to be 56.5% and selling, general and administrative expenses are estimated to approach $300 million.

In terms of the full year, our outlook is as follows. We expect fiscal 2013 total net sales to be $2,565,000,000, reflecting a total company comparable sales increase in the mid-single-digits. Our gross margin rate performance is expected to be 55%. Total SG&A expenses in fiscal 2013 are expected to approach $1,225,000,000, compared to SG&A expenses of approximately $1,136,000,000 in fiscal 2012. The overall increase primarily reflects support for the company's 2013 strategic growth initiatives as follows: first, $35 million of incremental expense associated with our 2013 new store growth plans, including our Canadian expansion; second, $25 million in variable store operating costs to support continued sales growth in our existing fleet; third, $20 million associated with merit increases and performance-based compensation; and fourth, $10 million in incremental marketing investment mainly for our e-commerce channels to support continued multichannel growth.

Our 2013 effective tax rate is expected to be approximately 41%. Capital expenditures are expected to be approximately $165 million. And this reflects the following investments: first, $55 million in support of approximately 65 new stores to our both brands, including our Canadian expansion; second, $40 million to support approximately 45 downsizes and remodels primarily at the Ann Taylor and LOFT stores; third, $45 million for store renovation and refurbishment programs; and finally, $25 million to support continued investment in information technology, including our high-growth e-commerce channel. As I mentioned earlier, our total weighted average square footage for fiscal 2013 is expected to increase by approximately 4% and we expect to end the year with approximately 1,020 stores.

Regarding our share count, we anticipate that our full year weighted average diluted shares will be approximately 47.5 million shares in 2013. For purposes of modeling EPS in 2013, note that this figure excludes the impact of approximately 0.5 million participating securities that should be incorporated into your models for a total of approximately 48 million shares on a weighted average basis. And finally, we expect to continue to maintain our healthy balance sheet, including a disciplined approach to inventory management throughout the fiscal year.

And with that, I'll turn it back to Kay.

Katherine Lawther Krill

Thanks, Mike. In closing, ANN INC. delivered a solid year in fiscal 2012, and we are excited about the opportunities ahead to continue to build our Ann Taylor and LOFT brands, while delivering profitable long-term growth for our shareholders.

Before opening the call up to your questions, I want to briefly thank our clients and our associates for their generosity in helping us raise more than $4 million for St. Jude Children's Research Hospital during 2012. We also raised $4 million for the Breast Cancer Research Foundation. And these funds are supporting 13 researchers. As a company committed to helping women put their best selves forward everyday, ANN INC. is extremely pleased to be making a difference in the lives of women and children in need through our ANN Cares initiative.

With that, let's open it up for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Jeff Black of Avondale Partners.

Jeff Black - Avondale Partners, LLC, Research Division

Kay, could you talk about factory? I know it's by design we've seen some slowdown in comps. But when do we see -- or do we see at all a chance to add more inventory? And how should we look at comps for that channel for the first quarter and for the year perhaps?

Michael J. Nicholson

Jeff, it's Mike. I'll take that one. You're absolutely right. Clearly, traffic dropped 2012 in the factory outlet channel both at Ann and LOFT. And quite frankly, we see it, with our peer group, has been choppy. And we did significantly pull back in terms of both dollar and unit investment in inventory. And we do believe as we've hindsight-ed 2012 that we did leave some sales and potentially some gross margin dollar generation on the table. We are going to put more units and more costs behind driving incremental top line growth in factory in 2013. And we expect that channel to continue to be a significant profit driver for ANN INC. in 2013 and beyond.


Our next question is from Roxanne Meyer of UBS.

Roxanne Meyer - UBS Investment Bank, Research Division

My question is on sourcing. Brian Lynch has been talking about looking at new factories and changing up some sourcing and opportunities for AUC. So I'm just wondering if you can give us an update on that. And how much of your gross margin outlook -- how should we think about the opportunity for improving AUC in 2013 versus the opportunity for improved markdowns?

Katherine Lawther Krill

As we discussed previously, during 2012, we did successfully evolve our offering at Ann Taylor to reflect a broader selection of product in the opening and good price points, including some of the opening price points in categories where we really weren't competitive in 2011. So in 2012, our stores definitely reflected that change, which resonated well with our clients. And then as we move through 2013, we're going to continue to focus on offering Ann Taylor client quality, while ensuring we have the right mix of good, better, best that resonate with her. We also see the opportunity as we progress through the year to add more emotional fashion, which is highly novel at a little bit higher price points because we're selling that product out very fast.


Our next question comes from Lorraine Hutchinson of Bank of America Merrill Lynch.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

I just wanted to get an update on your long-term operating margin goal. It looks like you've guided for another year of flat operating margins in spite of a mid-single-digit comp. And I was just hoping to hear sort of a timeline, and then maybe a roadmap to how we can see that margin start to improve over the next few years.

Michael J. Nicholson

Sure. Lorraine, it's Mike. I'll take that. First, I'd say that our full year outlook does reflect a first quarter and first half that, quite frankly, from the client and consumers' lens is a bit uncertain. So there is uncertainty on the first half of the year. We have said on previous calls that our mid-term goal is to get back to a double-digit operating margin rate performance. And while we have not specifically defined a timeline, in terms of a roadmap, I'd say at a very high level, we've talked about continued business and mix shift into our lower-cost, higher-return channels. So in 2013, we're going to continue to invest in incremental or new store growth both at Ann Taylor Factory and LOFT Outlet in '13, as well as beyond. In addition, we continue to invest in our high-growth e-commerce business, and we believe that both e-commerce and multichannel represents a significant opportunity moving forward. Within Ann Taylor, we've talked about the continued investment in the Ann Taylor new concept stores. And I said in the opening remarks that about 75% of the Ann Taylor fleet will reflect the new design. And in fact, the stores that reflect the new design that we downsized, the good news is that the store productivity levels continue to significantly outperform the balance of the company, and we continue to see productivity lifts in excess of 50%. As it relates to the capital-light refresh strategy, you'll recall we just finished executing the work in-store during the latter part of the third quarter. And as we hindsight back on the fourth quarter, the good news there is we've seen significant lifts in traffic, which have translated into higher sales, stronger retail metrics, stronger gross margin and stronger four-wall profitability. And then finally, just in terms of international, we talked about the first 3 stores in Canada this year. The good news is all 3 stores have significantly overdelivered in terms of what our expectations were and our objective will be to continue to rapidly roll out our Canadian strategy as quickly as we can. So when we step back and we think about all of these high-growth, profit-additive initiatives, coupled with our long-term commitment to continue to aggressively manage expenses as well as inventory, it gives us confidence in our ability to achieve our desired goal of double-digit operating income as a percent of sales over the next few years.


Our next question is from Janet Kloppenburg of JJK Research.

Janet Kloppenburg

Kay, I was wondering if you could just talk about what our expectations should be for LOFT here in the first quarter? Should we look for comps to improve as the balance of assortments improve? Or do you feel like we need another quarter on LOFT? And for Mike, I was just wondering if you would update us on your share repurchase authorization and the company's outlook for share repurchase this year.

Katherine Lawther Krill

Janet, we feel that the first quarter offering in LOFT is vastly improved versus Q4. And we expect Q2 to show even greater strength. We've seen improvement so far as we've added more balance of assortment with more neutrals, including our recent black and white offering, which is in stores now and doing very well. As we noted in our remarks, the color investment declines over the first quarter and is actually lower than last year by Q2 because we have an emphasis on neutrals, white, black and more print and pattern. And we're currently seeing a great response in many areas of the business thus far. Denim continues to be strong with a continuation of the skinny and the straight leg and the introduction of the boyfriend jean. We are selling all shades of blue as well as soft colors. Novelty cardigans and textured sweaters are doing well. All dresses appropriate for work and casual are strong. And all of our jackets are doing really well, especially those under $100. Woven tops are great and lace in general. So we feel we have a good balance of fashion and everyday essentials, a great value. And all of this gives us confidence that we're on the right track as we progress through the spring season.

Michael J. Nicholson

And then to your question regarding share repurchases. First, let me start by reminding you that since the third quarter of 2010, we've repurchased more than 16 million shares, representing more than 25% of our outstanding shares. And we have always viewed share repurchases as one of a number of avenues that we have available to us to further provide value for our shareholders. While we don't provide specific guidance on the cadence of future repurchases, I can provide you with the following framework, Janet. First, we would typically want to maintain a cash cushion of approximately $100 million to $150 million. However, I am comfortable with some flex during periods of unique opportunity. Second, as we've talked about previously, you need to think about our seasonal working capital build and debuild in terms of the timing and availability of cash, as well as our aggressive capital plan for 2013. And then finally, bear in mind our conviction that we can also create significant value for our shareholders through the pursuit of our considerable growth opportunities, such as continuing to invest in our high-growth e-commerce channels, continued growth of LOFT, the highly profitable factory outlet segment for both brands, as well as the continued acceleration and rollout of Ann Taylor's more highly productive new concept stores. However, with all of that said, we are committed to being good stewards of capital and we intend to use our strong free cash flow in 2013 and beyond to invest in the profitable growth of ANN INC. as a means of delivering value to our shareholders.


Our next question is from Kimberly Greenberger of Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Kay, I'm wondering if you can talk about some of the tweaks you're making to the products. You said you feel even better frankly about the second quarter deliveries than you do here in Q1. And then what adjustments might you be making for the second half of the year? And I'm wondering in particular here in Q1, does the guidance assume that the quarter-to-date trends you've seen so far continue for the rest of the quarter? Or do you think there might be an opportunity for sales trends to actually to get a little bit better from here?

Katherine Lawther Krill

Both brands and actually all channels are much stronger right now versus Q4. In fact, comps are slightly positive quarter-to-date and we're seeing substantially improved gross margin rate. Bear in mind though, that the majority of our Q1 sales opportunity is still ahead of us since Easter is at the end of March this year and is by far our most significant selling period of the year actually. However, we are being cautious, given the macro environment, particularly the payroll tax increase, which directly impacts consumer spending. She is absolutely noticing that she has less disposable income. That said, we do expect to comp positively for the first quarter and the second quarter and gaining momentum as we head in the back part of the year. So we are expecting positive comps in every quarter of the year.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Kay, that gross margin improvement you're seeing, is that better full-priced selling or lower cost of goods or a combination of both?

Katherine Lawther Krill

It is definitely better selling.


Our next question is from Neely Tamminga of Piper Jaffray.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

I just had a question for you on some of your e-com and tech initiatives. Kay, what's on deck here for mobile? And it seems to me if you kind of look at the overall overture of a lot of businesses right now, they really are citing kind of this migration towards the smartphone and really developing more for mobile than for the overall PC URLs. So what's on deck for Ann Taylor and LOFT? And how do you guys going to play in that competitively?

Katherine Lawther Krill

Well, definitely, let me just tell you that we are currently mobile-enabled for iPad and the iPhone. And it is accounting for a significant portion, actually about 30% of our online traffic. And we absolutely have initiatives to further enhance our mobile capabilities over time. We've continued to view e-commerce as driving significant growth for us and continue to focus on investment in this channel overall. Our multichannel initiative provides meaningful growth for us. In addition, we're adding new features and functionality to our sites to make them even quicker, easier and more convenient to shop. As you heard, we have introduced international shipping last month, which has gotten off to a good start. And we're also going to be focused on offering more personalized and targeted message to her -- messages to her. So we absolutely remain enthusiastic about this channel in all aspects. And we have more to come for the back half of the year as far as initiatives.


Our final question comes from Betty Chen of Wedbush.

Betty Y. Chen - Wedbush Securities Inc., Research Division

I was wondering if you can speak a little bit about the concept stores and the capital-light stores. I know in the past, they have been seeing much better productivity than the older format, so if you can update on that. And then also in terms of omnichannel. I think, Mike, you had mentioned some initial costs related to the launch of this initiative in Q3. Could you remind us if there were also some costs in Q4? And in terms of margin opportunity as we shift towards omnichannel, Kay, I think in the past, you had mentioned that the ability to clear product at a better markdown rate is one of the benefits of omnichannel. Is that true still? And how should we think about that if possibly by quantifying the benefit?

Michael J. Nicholson

Sure, Betty. I'll first answer your Ann Taylor real estate questions, and then we'll make our best efforts to answer all of your multichannel questions as well. So first, in terms of the Ann Taylor new concept stores, stores that we're downsizing, in all cases, we are realizing productivity lifts well in excess of 50%. In addition, as it relates to the capital-light refresh strategy that we talked about back in November, recall that we had just completed the work in-store in the latter part of the third quarter, so we're now hindsight-ing the first quarter's worth of performance. And discussing this with the Ann Taylor team yesterday, a terrific news to report, we are seeing significant lifts in traffic, which is translating into higher sales. In addition, we continue to convert client traffic successfully, as well as the underlying retail metrics of AUR and units per transaction are higher, all resulting in a higher client sale. In addition, we're seeing a particular distortion to full-priced selling, and as a result, all translating into higher four-wall profitability, which is exciting news as we transition into 2013. As it relates to the multichannel initiative, yes, we are able to confirm that, number one, there represents a significant opportunity in terms of sort of what I call baseline e-commerce full-priced selling. So what this did prove out in the back half of the year as that looking back, we had been underestimating the true underlying demand of the client in that channel, and we will be positioning that channel to support the top line growth more so in the back half of 2013. Number two, in terms of ability to liquidate, once we move off full ticket, we are able to liquidate product on markdown at a much higher gross margin rate than we are able to in stores. That also bodes well for 2013. And then finally, with respect to your question on costs, yes, there was a few million dollars, a number that is short of $5 million in the fourth quarter that we incurred in relation to store payroll, as well as client shipping costs to support the e-commerce multichannel pick and pack activities.

Katherine Lawther Krill

Thank you, everyone. We appreciate your interest and continued support. And we look forward to updating you on our progress as the year unfolds. Have a great day.


That concludes today's conference call. Thank you for your participation. You may disconnect your phones at this time.

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