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ANN INC (NYSE:ANN)

Q1 2013 Earnings Call

June 06, 2013 8:30 am ET

Executives

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

Analysts

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

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

Kimberly C. Greenberger - Morgan Stanley, Research Division

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

Jeff Black - Citigroup Inc, Research Division

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Rebecca Duval

Janet Kloppenburg

Operator

Good morning, ladies and gentlemen, and welcome to ANN Inc.'s First Quarter 2013 Earnings Conference Call. At the request of the company, today's conference call is being recorded. [Operator Instructions] Following the 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. Thank you.

Judith Lord

Thank you, Erlan. Good morning, everyone. We're very pleased you could join us to review our results for the first quarter of fiscal 2013. I am here with Kay Krill, ANN Inc.'s President and CEO; and Mike Nicholson, our Chief Operating Officer and CFO.

Kay will begin with an overview of the quarter and provide a brief update on our strategic initiatives. Mike will then discuss our financial results and 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 and Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of June 6, 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 first quarter of 2013. As we reported this morning, our result for the quarter was slightly better than the outlook we provided a few weeks ago.

To recap, sales in the quarter were $575 million. Comparable sales for the company were down 0.5% from the first quarter of last year, reflecting an increase of 1.9% for the Ann Taylor brand and a decrease of 1.9% for the LOFT brand. Gross margin rate for the quarter was 55.8%. On the bottom line, EPS was $0.44 per diluted share.

There is no question that the cold, unseasonable conditions during the first quarter had a significant impact on our business, primarily at LOFT. Our offering featured a greater breadth and depth of warm weather product categories such as shorts, cropped pants and knit tops. You may recall that these categories were standouts last year when they benefited from the unseasonably warm spring at that time and drove an 11% comp increase for LOFT in the first quarter of 2012.

With the arrival of more seasonable temperatures in late April this year, sales trends accelerated at both businesses, and that has continued. In fact, I'm very pleased that we achieved positive comps at both brands and in all channels for the month of May, and we are on track to deliver higher profitability compared with the second quarter of 2012, as well as positive comp performance at both brands for the second quarter of 2013.

Let's now take a closer look at the brands. First, Ann Taylor. For the first quarter, Ann Taylor continued to deliver strong year-on-year performance. We are particularly pleased with the continued improvement in gross margin rate, which was up significantly from last year's first quarter. On a comp sales basis, the 1.9% increase for the brand was comprised of a healthy 6.2% increase at Ann Taylor, partially offset by a 5.8% decrease at Ann Taylor Factory.

Overall, the brand's performance reflects the continuation of our multipart strategy: to provide our client with an expanded assortment of relevant fashion in all stores across the chain; to enhance the value we're providing by giving her a better offering across good, better and best price points; to be more targeted and surgical in our promotional strategy; and to elevate the shopping experience, both in-store and online. By executing on these initiatives, we are focusing in on what matters most to her: compelling products, excellent value and an engaging multichannel shopping experience.

In terms of product, dresses, skirts, woven tops, jewelry and shoes all generated strong results for the quarter. Suiting also delivered a positive comp, and we achieved an excellent response to our weddings offering online. From a promotional perspective, we made continued progress in reducing the overall level of activity. We utilized more targeted promotions and fewer storewide events, resulting in more profitable sales growth compared to last year.

In stores, our strong performance has continued to benefit from our focus on elevating the overall shopping experience in a more aspirational environment. Our 80 new concept stores outpaced the balance of chain both in terms of sales and profitability. In addition, we have continued to see a lift from our capital-light refreshed stores, which include approximately 100 locations. Together, these 180 locations represent approximately 2/3 of our store fleet and better showcase the Ann Taylor brand. Online, Ann Taylor's business continues to show excellent momentum with substantially higher sales and merchandise margin rate versus last year.

Turning now to marketing. Ann Taylor's strategy remains focused on developing a more personalized and relevant shopping experience for our clients and to drive increased loyalty and to attract new clients to the brand. We are reaching her through e-mail, social media, direct mail and media and feel good that we're building on the momentum we achieved in 2012.

Turning now to Factory. As you know, our strategy in the factory outlet channel has been to deliver higher profitability. Thus, despite lower sales, we were successful in increasing gross margin rate for the quarter, reflecting higher full-priced selling and disciplined inventory management. As for the second quarter, we feel confident that the Ann Taylor brand is on track to continue to deliver positive comps and higher profitability versus the year-ago period. Our performance in May provided a strong start to the quarter. Specifically, she is responding to all woven tops, dresses, pencil skirts, suits and jewelry. We also have a strong offering in navy and ivory, and black and white, complemented with pops of color. Our second quarter offering has a broad assortment of print, pattern and novelty that has been very well received. So in summary, we feel well positioned at Ann Taylor to continue our strong momentum through the remainder of second quarter and over the balance of the year.

Let's turn now to LOFT. The brand's overall sales for the first quarter were slightly higher than a year ago. However, LOFT comps and gross margin were impacted by the higher level of promotional activity to clear through warm weather product. Comps for the total brand were down 1.9% for the quarter compared to an 11% increase for the first quarter last year and reflected decreases of 0.9% at LOFT and 7.9% at LOFT Outlet. From a product perspective, denim, LOFT lounge, dresses and jackets all delivered positive comps. In fact, denim achieved a record first quarter performance, led by a success in all silhouettes and across the entire color offering. LOFT lounge has delivered significant growth over the past 3 quarters, and we are expanding this category for 2013. She also responded to versatile knit dresses, novelty dresses and jackets. In fact, we definitely would have benefited from more selection in jackets and greater depth in denim.

Our print and novelty offerings were also well received, and our color assortment was well balanced and delivered improved performance over the course of the quarter. However, these wins were offset by our investment in warm weather products that did not meet our sales and margin expectations.

Online, LOFT business has continued to grow at a strong double-digit rate with online exclusives continuing to perform very well. In terms of marketing, LOFT continues to focus on strengthening our connection to our existing loyal clients while increasing our brand awareness. Our recent campaigns have been well received, and we are making significant progress in expanding LOFT's client base.

Turning now to LOFT Outlet. Sales for this channel increased 15% for the quarter, driven by new store growth. However, soft traffic resulted in lower comp sales. Similar to Ann Taylor Factory, we managed outlet for profitability, and as a result, delivered a significantly higher gross margin rate and profit growth.

So in summary, LOFT is definitely well positioned to achieve tremendous growth. In fact, the business accelerated during May, resulting in positive comps for every channel of the LOFT brand. The product offering has been very well received, with particular strength in woven tops, knits, denim, LOFT lounge, cotton jackets and print and pattern across all categories. The LOFT brand has a loyal and engaged client base and has significant opportunities to broaden its reach, attract new clients and further expand its market share.

Before I turn it over to Mike, I'll provide a brief update on a number of strategic initiatives we have underway to drive growth in 2013. First, our multichannel initiative. As you know, we're about 9 months in to the launch of our multichannel fulfillment capability last fall, and this continues to be a major win for us and our clients. We are better positioned to meet her needs and to deliver a seamless and more convenient shopping experience. In addition, it has enabled us to more effectively clear through sale merchandise at a higher margin. The team is continuing to test and learn how to best harness these capabilities to maximize our overall sales and margin.

Second, e-commerce continues to drive significant growth for us. Online sales continue to increase at a strong double-digit rate, and we will continue to invest in this channel through growth in inventory, marketing spend, site enhancement and new functionality to drive continued strong performance. We also launched international shipping to more than 100 countries worldwide earlier this year, and we are seeing positive response in a number of countries. We look forward to continuing to expand our base of international clients and further grow our online business.

Third, real estate. At Ann Taylor, our focus will continue to be on rightsizing our locations to our smaller, more productive new concept stores to optimize the sales, productivity and profitability of our Ann Taylor fleet. At LOFT, we are continuing to execute on our dual strategy of expanding the brand's footprint in small and mid-markets while updating and refreshing high-profile existing locations.

Fourth, our client relationship management. CRM takes on heightened importance this year as we continue our emphasis on delivering a more personalized and relevant experience for her. We launched a new CRM system this quarter, which will enable us to aggregate client and order data to create a single view of our client. This will allow us to develop a deeper connection to her, as well as provide new analytical insights to inform our brand growth and marketing strategies.

And finally, our international growth initiative. I'm pleased to report that our first 3 stores in Toronto continue to perform exceptionally well. And with the launch of international shipping, our retail presence in Canada is now complemented by e-commerce. We are seeing a very positive response at both brands and look forward to further expanding our reach in Canada with a handful of new stores slated to open later this year. Overall, these strategic initiatives provide multiple avenues to continue to build the Ann Taylor and LOFT brand and deliver continued long-term profitable growth and increased value for our shareholders.

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 first quarter of 2013, and then I'll provide you some perspective on our outlook for the second quarter and full year fiscal 2013.

Beginning with net sales. Net sales for the first quarter were $574.5 million, an increase of approximately 2.5% versus the $560.4 million of net sales reported in the first quarter of 2012. By brand, net sales across all channels of the Ann Taylor brand were $219.3 million, a 3.2% increase over the $212.4 million reported last year. At the LOFT brand, net sales were $355.2 million, up 2.1% versus the $348 million reported last year.

Moving on to comps. Total company comparable sales for the quarter decreased 0.5% versus a 3.8% comp increase last year. At the Ann Taylor brand, total brand comps increased 1.9%, reflecting an increase of 6.2% at Ann Taylor, partially offset by a 5.8% decrease in the factory channel. At the LOFT brand, total brand comps for the first quarter declined 1.9% against last year's strong 11% comp, reflecting decreases of 0.9% at LOFT and 7.9% at LOFT Outlet.

Turning to gross margin. We reported a first quarter gross margin rate of 55.8%, an 80-basis-point decline versus last year's rate of 56.6%, primarily reflecting the impact of higher shipping and handling costs associated with multichannel sales. In fact, from a merchandise margin perspective, the total company was up year-on-year, with Ann Taylor, Ann Taylor Factory and LOFT Outlet each delivering higher merchandise margin, partially offset by a lower rate at LOFT as compared to the first quarter of 2012.

Turning now to SG&A. SG&A expenses in the first quarter were $287 million compared with $272 million reported in the first quarter of 2012. As a percentage of net sales, selling, general and administrative expenses were 49.9% compared with 48.5% in the first quarter of 2012, reflecting the impact of increased expenses associated with our year-over-year store growth and increased investments in marketing and other expenses to support the expansion of our business.

Moving down the P&L. Operating income during the first quarter was $33.9 million versus operating income of $45.4 million in the first quarter of 2012. Our first quarter net income was $20.9 million or $0.44 per diluted share compared with net income of $28.7 million or $0.58 per diluted share achieved in the first quarter of 2012. Weighted average diluted shares outstanding for the quarter decreased 4.3% to 46.5 million shares versus 48.7 million shares in 2012. Our effective tax rate for the quarter was 39% versus 37% in the first quarter of 2012. Depreciation and amortization in the first quarter totaled approximately $25.3 million compared with $23.3 million reported in the first quarter of 2012. And finally, capital expenditures in the first quarter totaled $29.3 million compared with $27.9 million in the first quarter of 2012.

Moving on now to the details of our quarter end inventory. We ended the first quarter of 2013 with total inventory per square foot for the company up 6% compared to last year, which reflected a 3% increase at Ann Taylor, a 13% increase at LOFT and a 3% decline in the factory outlet channel. As mentioned in our release this morning, the increase at LOFT reflected a change in the timing of a summer delivery versus last year. And without this impact, inventory per square foot at LOFT would have been up in the mid-single digits. I'm also pleased to report that we entered the second quarter with approximately 90% of our inventory representing fresh summer product.

Turning now to store openings and closures. During the first quarter of 2013, we opened a total of 13 stores, comprised of 1 Ann Taylor store, 1 Ann Taylor Factory store, 9 LOFT stores and 2 LOFT Outlet stores. We closed a total of 8 stores during the quarter, comprised of 3 Ann Taylor stores and 5 LOFT stores. The total store count at the end of the first quarter was 989 stores, comprised of 273 Ann Taylor stores, 102 Ann Taylor Factory stores, 516 LOFT stores and 98 LOFT Outlet stores. Our store square footage at the end of the first quarter totaled approximately 5.7 million square feet, a 3% net increase from the square footage total reported at the end of the first quarter of 2012. As we mentioned on our fiscal year-end call, we are continuing to pursue opportunities at both Ann Taylor and LOFT to invest in the profitable growth of our fleet. Overall, we expect to open approximately 65 new stores through the end of this year. In terms of timing, we opened 13 stores during the first quarter and anticipate approximately 20 openings in the second quarter of 2013 with the remainder scheduled to open in the second half of the year. Regarding our store closure plans, we closed 8 stores in the first quarter and expect to close an additional 20 stores during the fiscal year, with the vast majority of those closures slated to occur at the very end of the fiscal year.

By brand, we will continue to pursue the further rollout of the Ann Taylor new concept stores and expect to add nearly 40 stores in this format during fiscal 2013. Approximately 5 of these will be new stores, 15 will reflect existing store downsizes and remodels, and 20 will reflect capital-light refreshes of existing stores. By year end, nearly 80% of the Ann Taylor fleet is expected to reflect our new store format. In addition, we expect to open approximately 5 Ann Taylor Factory locations at premier outlet centers this year.

At the LOFT brand this year, we expect to open nearly 40 LOFT stores, including continued store growth in small and mid-markets and Canada, as well as approximately 15 LOFT Outlet stores to further capitalize on the brand's potential for sales and profit growth. And finally, as always, we will continue to manage our real estate portfolio at both brands to maximize store profitability and ensure brand presence in key regions and markets.

In terms of our strong balance sheet, we ended the quarter with cash of approximately $80 million and no bank debt. We remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value as we move through the balance of 2013.

Turning now to our outlook for the second quarter and full year of 2013. For the second quarter of 2013, we expect total net sales to be $640 million, reflecting a total company comparable sales increase in the mid-single digits. Our gross margin rate performance is expected to be 55%, and selling, general and administrative expenses are estimated to approach $300 million.

In terms of the full year outlook, our outlook is as follows. We expect fiscal 2013 total net sales to be $2,540,000,000, reflecting a total company comparable sales increase in the mid-single digits. Our gross margin rate performance is expected to be 54.5%. Total SG&A expenses in fiscal 2013 are expected to be $1,210,000,000 compared to SG&A expenses of approximately $1,136,000,000 in fiscal 2012, with the overall increase primarily reflecting support for the company's 2013 strategic growth initiatives as follows: first, $30 million of incremental expense associated with our 2013 new store growth plans, including our Canadian expansion; second, $20 million in variable store operating costs to support continued sales growth in our existing fleet; third, $15 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 effective tax rate for 2013 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 for both the 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 million shares in 2013. And for the purposes of modeling EPS in 2013, note that this figure excludes the impact of approximately 1 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, we feel very good about the balance of the year, and we are positioned to deliver another year of profitable growth for our company. In addition, our strategic initiatives are gaining traction and creating significant opportunities for the long term.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Lorraine Hutchinson from the Bank of America.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

You spoke about both brands being on track to improve profitability this quarter, but it looks like the guidance implies operating margins will be down. Could you just talk about some of the challenges that you expect in the second quarter?

Michael J. Nicholson

Sure, Lorraine. It's Mike. First of all, from an implied guidance perspective on the bottom line, at least in terms of through my lens, I actually see that our framework provides for an overall increase in operating profit. As Kay mentioned in her opening comments, the month of May, we started off second quarter very strong, positive comps, the total company level. Both brands, positive comps, as well as all channels of both brands comped positive. And I think that's important to note, that we mentioned in our prerelease that as the weather turned and the weather got warmer, we did see in late April and as we transitioned throughout the month into May a strong start. In terms of our framework, I'd also say from a gross margin rate perspective, the environment is a little uncertain, and I think that we're being appropriately conservative with respect to our view of the level of promotional activity that we will need to execute in the second quarter. And then just in terms of what we're seeing by brand, I'd ask Kay to chime in as it relates to Ann Taylor and LOFT in particular.

Katherine Lawther Krill

At Ann Taylor, quarter to date, we're seeing terrific response to our summer product offering, particularly woven tops, dresses, pencil skirts, maxi skirts, suits and jewelry. And our Kate Hudson capsule is being extremely well received. At LOFT, we're seeing a great response to all print and pattern across all categories. Knits and wovens tops are both performing well. Denim continues its strong performance, and we're also seeing a strong response to maxi dresses and skirts. And importantly, I just want you all to know that our balance of color to neutral at LOFT is back on track, so we believe we're off to a great start.

Operator

The next question comes from Brian Tunick.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Curious on the gross margin. It certainly seems like you've done a very nice job given the environment out there. So wondering if you could talk a little about how the supply chain has changed your ability to flow goods and how you're positioning inventory differently today versus a couple of years ago where a season like this would have had a much bigger impact on your merchandise margins. And then also, Mike, can you talk about when you think the shipping impact will be more neutralized to the gross margin?

Katherine Lawther Krill

Brian, let me just start first on our supply chain and lead times. We have definitely improved our speed to market dramatically over the past several years in order to primarily respond quickly to fashion trends. And we have staggered lead times across categories. We've determined the needs of the business in each channel. For instance, some lead times on fashion items are shortest 6 to 8 weeks, and much of our product can be sourced in as little as 12 to 15 weeks. And we retained longer lead times on investment pieces such as suitings just to make sure that we deliver the quality that our client expects. So I feel like we've made tremendous product -- progress with lead times. We've also come a long way in our sourcing capabilities and have managed extremely well through the difficulties of cost pressures that have impacted others in our industry. So we feel like we still see opportunity to continue to -- on our quest with speed and flexibility and also to manage costs.

Michael J. Nicholson

And Brian, it's Mike. I think there were a couple of other questions in there in terms of inventory and how we're thinking about positioning the business from an inventory perspective over the balance of the year. For the second, third and fourth quarter of this year, we are positioning both brands and all channels of both brands to deliver mid-single-digit comps. And then finally, in terms of the gross margin rate impact of shipping and handling, we did a rewind in the third quarter of last year. We did talk about when we, mid-quarter or third quarter, ramped up multichannel. I talked about a 50-basis-point impact in Q3 of last year. On the year-end call, I talked about 100-basis-point impact. First quarter of this year, there was about 100-basis-point impact again, and I actually see that continuing into the second quarter. So when I think about the year-on-year gross margin rate impact, you need to think about the second quarter of 2013, assuming about 100 bps impact to shipping and handling, year-on-year. And then as we move to the third quarter, there'll be half a quarter impact, so I think about a 50 bp impact in Q3, and then we'll be neutralized or whole as we transition into Q4.

Operator

The next question comes from Betty Chen from Wedbush.

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

I was wondering, Kay, if you can talk a little bit more about LOFT marketing. What are some of the new strategies the team is continuing to test and maybe refine to expand the targeted demographic, which I believe was quite large when you had talked about it before, maybe 21 million women or so, if I think of the right number. And then related to the outlet and factory channels, it seems like those centers, some of those centers continue to see erratic traffic patterns. Should we expect the strategies for that business to continue to be on profitability for the balance of the year? Or is the team thinking about maybe increasing some inventory to drive sales?

Katherine Lawther Krill

Why don't you take the factory...

Michael J. Nicholson

Betty, it's Mike. I'll take the factory question first. You're absolutely right. Traffic trends over the last few quarters have been choppy. And as we think about and reflect on and analyze our first quarter performance, comp and traffic -- our strong correlation between traffic trends and the comp outcome. I would say, though, as we begin to anniversary easier traffic compares as we move forward to the balance of the year, you can expect us to continue to be relatively conservative in the second quarter. But as we transition forward to the back half of the year, we are going to position back those to that channel in both Ann and LOFT to deliver positive comp growth in the back half of 2013.

Katherine Lawther Krill

And I will address the LOFT marketing, Betty. We believe -- we also believe absolutely that there is a huge opportunity to continue to expand the base of LOFT clients. And we're definitely gaining market share, I would say, in the double-digit range as far as new clients to the brand. And we're doing this primarily through print and a lot of digital, a huge social media presence, e-mails and compelling windows. We're also, as I said in my remarks, leveraging CRM capabilities to deliver a great multichannel experience. We're also making progress due to the new system of personalizing messages for the client, which is going a long way in expanding our client base, targeting new clients. And we definitely still have our sights on the 21 million women.

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

Any thoughts, Kay, on using TV advertising or some of the other sort of bigger medium out there?

Katherine Lawther Krill

You know what, we did test it last year, Betty, and it's not off the table. We continue to talk about it and determine the right time if we are going to get to back into that. But we have no plans right now.

Operator

The next question comes from Kimberly Greenberger from Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Kay, it sounds like e-commerce growth continued to be very robust. And you mentioned in your remarks that you're seeing an ability to clear through sale products at a higher merchandise margin. Is that benefit at this point offsetting the higher shipping costs? And once we anniversary the higher shipping costs in Q3, would you expect to see further merchandise margin benefit later this year and into 2014?

Michael J. Nicholson

So Kimberly, I mean, to some degree, our full year outlook provides you with some perspective, at least from a macro perspective, as to how we're thinking about our ability to drive margin rate improvement in the back half of the year. As I look at the back half of the year, I think the big opportunity clearly sits in the fourth quarter. And you'll recall, we're really only 2.5 quarters into this new technology and multichannel world, and we continue to learn a lot. But you're absolutely right. Kay said it and I will reconfirm that our ability to clear -- tick the product that we're selling below full ticket, we're able to clear it much more profitably online. And I think the other benefit of this is we're really learning what the true underlying sort of base demand is for e-commerce. And as we move to the back half of the year, we will be positioning e-commerce to deliver that full price growth that we're seeing.

Katherine Lawther Krill

And also, let me just jump in and say that traffic online continues to be very, very strong. Obviously, the business is growing very fast, and we are supporting this with continued growth in inventory, continued increased marketing spend, site enhancements, and of course, international shipping. And we have many more initiatives teed up in this channel for the second half, so stay tuned because we'll be reporting those in August.

Operator

The next question comes from Adrienne Tennant from Janney Capital Markets.

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

It's Gabriella Carbone calling in for Adrienne. So my question is regarding the outlet channel. On the last call, you mentioned you're going to put more units and more costs to help drive the top line. So I was wondering where that stands for that channel. If you could give an update, that would be great.

Michael J. Nicholson

So here's what I think we said. For the first half of 2013, that our inventory plans were going to be more of a conservative approach, and we were going to drive for gross margin rate and profitability in the business. So a bit of a conservative point of view in the first half of the year in light of the choppy traffic trends. Again, I'll remind you, the negative comp in the first quarter was truly a function of traffic. And that is our view going into Q2, as we move forward to the back half of the year, we are positioning that channel to drive positive growth from an inventory perspective. I also want to point out, as it relates to the month of May, and Kay pointed this out in her opening comments, that the factory channel did, in fact, comp positive in the month of May at both Ann and LOFT, and that was really a function of traffic -- comp store traffic trends.

Operator

The next question comes from Jeff Black.

Jeff Black - Citigroup Inc, Research Division

It sounds like things are stabilizing. Kay or Mike, let's just take a step back, if you will. And we've been through a restructuring. We're on path on the outlets. We've done a lot of remodels. We're adding on e-channel, yet the operating margin just hasn't really responded. And Mike, I'm wondering, can you update us on the long-term target? And really, what is the key to unlocking that potential? And what's really inhibiting it? I'm assuming the markdown rates are higher than history, but any color on that?

Michael J. Nicholson

Sure, Jeff. I think it's a very important question. And I'd start by saying, and we've said this over the course of the last couple of years, management has very strong conviction about our ability to get back to and exceed levels of operating profit and operating profit margins. Sitting here, I think there's a number of key initiatives and reasons that give us comfort and confidence in our ability to deliver on that objective. First, it all starts with top line productivity, and it's driven really by strengthening the connection with our clients and providing with her with engaging client experience across all of our channels. And it comes down to offering her great fashion, great product and value. So it starts with top line productivity. Second, sort of related to top line productivity, our multichannel initiative. And we continue to learn. We're only 2.5 quarters into the strategy, but we're learning a lot, and we believe evolving this business to one that thinks about the customer on a multichannel basis will be incredibly powerful for ANN INC. moving forward. Third, Kay mentioned this, e-commerce has been strong and continues to be very, very strong, and we're going to continue to invest in that high-growth channel. From a real estate perspective, lots of runway domestically in terms of our real estate strategy. At Ann Taylor, we continue to execute the downsize or rightsize and remodel strategy, as well as refreshing the fleet. We are seeing strong results to date out of every store we've touched. And by the end of 2013, nearly 80% of the Ann Taylor fleet will reflect the fresh new face. At LOFT, a little more than 500 stores at the end of the first quarter. We believe domestically there's at least a 600-store opportunity with the primary growth coming from mid and small markets. And then in terms of factory outlet, we believe that at LOFT Outlet, there's an opportunity to increase the footprint by 50%; and at Ann Taylor Factory, at least another 25 stores. And then beyond the U.S. and Canada, while we only have a handful of stores today, we will continue to invest in Canada in 2013. And we believe that there is a nice opportunity in terms of store growth in Canada. And then I'd say beyond Canada, there's a tremendous amount of interest on many parts -- in many parts of the world, interest in our brands, and I'd say that we're doing some work, studying, assessing, monetizing and prioritizing what those opportunities could be internationally beyond Canada. And then finally, I'd say just in terms of sort of base retail operations, I think we've demonstrated historically our commitment to continue to manage expenses aggressively and manage our inventory prudently and appropriately. And so when I think about all of those opportunities, as well as our operational excellence that we've delivered -- committed to and delivered on over the course of the last few years, that we have conviction in our ability to get back to record levels of profitability.

Katherine Lawther Krill

Jeff, let me also remind you that LOFT was the primary sales and margin issue for Q1, and it is our largest business. But however, business at LOFT improved as soon as the weather turned warmer, so we are all optimistic for our Q2 and beyond.

Operator

The next question comes from Paul Lejuez from Wells Fargo.

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

Not to be too picky, but I'm just wondering how you guys define mid-single digits as you guide comps to that level, and I just want to make sure we're thinking about it the same way you're thinking about it. And can you also remind us of how the second quarter last year trended by month? Do comparisons get easier or harder as we move throughout the second quarter?

Michael J. Nicholson

Yes. So Paul, we've really walked away from talking about inter-quarter or monthly trends. And in terms of mid-single digit, my definition would be anywhere between a 5% and 7% outcome.

Katherine Lawther Krill

And we're also anticipating positive comps every month of the quarter for Q2.

Operator

The next question comes from Dana Telsey from Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

And yes, I have been seeing the improvements in the stores lately also. Mike, can you expand on the multichannel initiative and timing of benefit to the margin? And Kay, can you talk about how it's helping you plan inventories better in each division and what we should see as inventory cadence go forward?

Michael J. Nicholson

So I'll start by saying there were benefits to margin that commenced in the third quarter of last year and benefits in the fourth quarter and there were benefits in the first quarter. I think Kay talked about in the first quarter of this year, we had a bit of a challenge in clearing warmer weather product in LOFT, and had it not been for our need to clear that inventory, I'm confident in saying that our all-in merchandise margin rates would have been significantly higher than what we reported. I also talked about the fact that we need to continue to anniversary and lap about 100 bps of pressure in the second, and call it, 50 or so in the third quarter, and then we fully anniversary-ed the effect to shipping and handling is going to transition into Q4. So Dana, I think it's safe to say that we, since commencing multichannel, the process and the technology and initiative, in the third quarter last year, had been realizing gross margin rate benefits. And we fully expect moving forward that we will continue to realize those benefits in connection with the initiative.

Katherine Lawther Krill

And also, Dana, regarding the inventory, what we have seen through the multichannel initiative is we are definitely pulling a lot of fashion out of the store in smaller sizes. So as we go forward, we have definitely pumped up the inventory on fashion items online, smaller sizes online and absolutely marketing looks because that's the first thing to go through multichannel. So I think we've learned a lot in the past 3 to 6 months, and we're definitely affecting all of that for the third quarter.

Operator

The next question comes from Rebecca Duval from BlueFin Research Partners.

Rebecca Duval

I just want to talk little bit about the denim and other categories at LOFT. You mentioned you thought you didn't have invested depth in this category. And so as you're seeing an improved customer response, I'm wondering, is this a category that you're thinking about expanding? I know you had mentioned the expansion on the loungewear, so as you expand onto other categories, are there other categories that aren't performing as well that you'll be retracting? And then secondly, for the balance of the year, do you feel that you're setup or positioned in the denim and other key categories for chase-type strategies that will allow you to be more nimble to selling trends?

Katherine Lawther Krill

Okay, great question. And as I said on the call, we did have record performance in denim for the first quarter, so that's really exciting. And one of the things that we've done for the back part of the year is we did develop a specific chase strategy for LOFT. We have positioned fabric in order to chase silhouettes and chase colors as we move forward. I'm sure you noticed, as all of us did, we were absolutely stocked out in sizes all during the fourth quarter and the first quarter, actually. So we did develop this chase strategy specifically for denim, specifically for knits. And I anticipate this making a huge impact on the category, both categories, driving increased sales and margin because we really don't have to mark down denim. We exclude that a lot from our target. We absolutely never target that as a promotion. So we are, as I said in my lead time answer to Brian, that we are positioning certain categories to have much shorter lead times, which is really a lot of progress, I would say, in the past 9 months in that. So you should not see us stocking out as much as we have in the past.

Operator

The final question comes from the line of Janet Kloppenburg from JJK Research.

Janet Kloppenburg

Just a couple of questions, Kay. I was wondering, what are the learnings from a season like you had at LOFT where it was terribly cold and you couldn't sell seasonal products? Is there any way to protect yourself from that? I mean, what if it's really hot in October, and sweaters, and how do you manage through these situations going forward? And for Mike, I just was wondering if your inventory levels now on seasonal products were at appropriate levels or if you would still be clearing -- if you were still clearing through May on some of that excess product?

Katherine Lawther Krill

Great question, Janet. And for the first quarter, all of that warm weather product was invested in due to last year's strength and the year before strength when we had warmer springs. I mean, it was a significant part of our business, and we were absolutely selling through at a rapid rate, the shorts and tees and sandals and crop pants last year. But what we have done is we have absolutely realized that the first quarter and the third quarter need to be more transitional assortments and better balanced between wear now and warm weather product. I think our balance was definitely off. And as you can see, Ann Taylor was less affected by the cooler spring because they had a more transitional assortment and less warm weather product. So we definitely recognized it, and we're definitely fixing it for third quarters and first quarters. I mean, we really feel like second quarter is going to be warm, and fourth quarter will be cold. So it's really a first and third issue.

Michael J. Nicholson

And then, Janet, from an inventory perspective, as I mentioned in the opening comments, overall, we ended the first quarter with all-in inventory level at the company level up 6%. The Ann Taylor brand was up 3%. I'd argue, if anything, that we're in a little bit of a chase mode in light of the top line trend. Factory was down 3%. And on an improved performance in May, again, I'd argue there's a little bit of a chase need there. And then in terms of LOFT, it was up 13% on a reported basis. But when I exclude the impact of the timing of second quarter receipts, we were up 6%, and we feel very good about that up 6% as we transition into the second quarter. From a mix perspective, more than 90% of our inventory represented fresh summer product, which we plan to sell in Q2. So I believe that our clearance issues, in particular, as it related to LOFT and the first quarter warm weather product, are behind us.

Katherine Lawther Krill

Thank you, everyone. We appreciate your interest in ANN and look forward to updating you as we progress through the year. Have a great day.

Operator

That concludes today's conference call. Thank you for your participation.

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