Ann Taylor Stores Corporation Q2 2009 Earnings Call Transcript

Aug.21.09 | About: Ann, Inc. (ANN)

Ann Taylor Stores Corporation (NYSE:ANN)

Q2 2009 Earnings Call

August 21, 2009 8:30 am ET

Executives

Kay Krill – President & CEO

Mike Nicholson – EVP & CFO

Judith Pirro – Director IR

Analysts

Betty Chen - Wedbush Morgan

Dana Telsey - Telsey Advisory Group

Randy Konik – Jeffries & Co.

Michelle Tan – Goldman Sachs

Roxanne Meyer – UBS

Neely Tamminga - Piper Jaffray

Jennifer Black - Jennifer Black & Associates

Brian Tunick - JPMorgan

Jeff Black - Barclay’s Capital

Samantha Panella - Raymond James

Kimberly Greenberger - Citigroup

Operator

Good morning ladies and gentlemen and welcome to the Ann Taylor Stores Corporation second quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Judith Pirro, Director Investor relations; please go ahead.

Judith Pirro

Thank you and good morning everyone. As you know earlier this morning we issued our results for the second quarter of fiscal 2009. Kay Krill, Ann Taylor’s President and CEO and Mike Nicholson our CFO will provide an overview of the quarter, update you on our outlook, and then 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 concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the SEC.

With that, I will hand it over to Kay.

Kay Krill

Good morning and thank you for joining us. I am pleased to report on our second quarter and the progress we are making in our businesses as we continue to effectively manage through the current environment and position our company for improved performance and future growth.

Overall the quarter played out better than we anticipated and as a result we were able to deliver a bottom line performance that was ahead of our expectations. We told you on our first quarter call that our strategy was to manage the business conservatively with lean inventories, solid expense control, and an eye on maximizing gross margin dollars.

We also told you that sales would remain under pressure given the current environment and the fact that we are transitioning the assortment at the Ann Taylor division. That turned out to be the case. But we were pleased that LOFT sales came in better than expected.

That combined with a solid gross margin rate and the cost savings initiatives we implemented throughout the company enabled us to produce a better bottom line. This progress is encouraging but make no mistake, I am not satisfied with the overall sales performance and we are working to turn this around.

As you know from the announcement we made several weeks ago, based on the success of our strategic restructuring program to date and further opportunities identified we now anticipate total annualized cost savings over the three year period ending in 2010 to be approximately $125 million.

We took these additional steps based on a very thorough analysis and I feel good about where we’re heading into the fall season. We are a leaner, stronger, and more effective organization and with a more efficient cost structure. We will be well positioned to drive increased profits to the bottom line as sales trends improve.

Importantly our financial position remains strong with approximately $130 million in cash and cash equivalents on our balance sheet at quarter end. Mike will walk you through the details but I am pleased that we have continued to manage our expenses, inventories, and cash flows well and have built cash as planned.

Let’s now turn to our brands, at Ann Taylor our focus has been on positioning this business for the launch of our new collection this fall season. As you know we see fall 2009 as the first step forward in a multi season evolution of this brand as we reposition the assortment to be more relevant and compelling for our clients.

Overall the business performed as expected during the second quarter and we closed the quarter with an exceptionally clean inventory position, down 30% on a per square foot basis from last year.

Thus we entered the third quarter with carry over merchandise, down by more than 50% versus last year so that our inventory composition is dramatically healthier. This should help set the stage for improved margins this fall season.

There is no question our client is more cautious in her spending today updating her wardrobe with fewer pieces and shopping her own closet. She is definitely looking for incentives before making a purchase. In addition as you may have heard others say, the demand for wear to work clothing has been particularly negatively affected in this economic cycle and the Ann Taylor brand has clearly felt this impact.

As I have said previously we believe the environment and the external factors account for much of the sales weakness however I also believe that a portion of this weakness was attributable to the spring assortment and the fact that we should have offered more versatility and [wardrobability].

Given these factors our team focused on controlling the controllables by aggressively containing costs and tightly managing inventory. Our goal was to clear through the spring merchandise and maximize gross margin dollars and we were successful in this regard.

Our traffic trend again outpaced our comp sales performance, a reminder that we have a loyal client base that continues to visit our stores and looks to us for comfortable, feminine items that can be outfitted for her wardrobe needs and fashion sensibility.

As I mentioned on our last call we have been carefully gauging the success of select forward-looking items from our May through July deliveries which are representative of the direction in which we’re taking the brand.

For July we accelerated a small portion of our August deliveries and have seen success with some items such as frothy feminine tops, structured dresses, including our trench and leopard dress, outerwear, shoes, jewelry, and select sportswear separates particularly pencil skirts.

Grey suiting has also performed well. Importantly when the fashion has been compelling and versatile we have seen strong client response and sell throughs. For August we have continued to flow product into the store that represents our new brand positioning and we expect a full fall lineup by the end of the month.

As you know our fall collection introduced a new design perspective and reengineered the assortment architecture placing greater emphasis on versatile pieces which is very much Ann Taylor’s heritage.

We have focused on the product having a softer hand feel and also adding stretch to many fabrics for comfort. Our client has given us recent feedback that she is noticing the difference in the aesthetic and the quality of the product. In many ways the line harkens back to Ann Taylor’s legacy of using beautiful and luxurious fabrics.

We have also responded to our clients’ desire for more color and fashion and we have tweaked and improved our fits in key categories to be even better. We are very pleased that we’ve been able to accomplish all of this without incurring higher product costs.

Overall I feel the quality, style and price we are offering with the new line is truly exceptional. We are supporting the new collection with a strategic and cost effective PR and marketing plan that has been designed to update perceptions of the brand and peak new interests while driving traffic and profitable sales and increasing our client base.

We will be launching a new advertising campaign for fall which will include testing an increased presence in key local markets and we are selectively ramping up and expanding our client outreach through email, direct mail, and in store events.

At the same time we are focused on improving and enhancing our marketing in store. In addition we have changed our interior store layout and signage to enable our clients to navigate the store more easily.

For the third quarter we are continuing to be extremely conservative with our inventory receipts. We are planning for a gradual improvement in comp store sales trends but bought to and have planned for a negative double-digit comp, albeit somewhat better then what we experienced in the first half.

From my perspective I believe that the product we have developed for fall is compelling and offers an outstanding value proposition given the quality, styling, and price. However what I can’t predict is how our client will respond. In this environment and given the overall softness in the wear to work category we just don’t know when she’s going to open up her wallet to update her fall wardrobe.

We do know however that she’s continuing to seek out incentives to purchase. So despite the fact that I think we did a good job given the macro environment and her price conscious mind set we must remain cautious in our outlook.

Turning now to LOFT, overall LOFT turned in a solid quarter. Our product resonated well with our clients and sales showed overall improvement over the first quarter coming in ahead of our expectations.

In terms of the sales cadence, we got off to a good start in May but felt the impact of the unseasonable weather in June. July rebounded to some degree but because of our healthy inventory position our team focused on maximizing margin dollars and aggressively managing inventory levels rather then matching the promotional stance taken by many of our competitors during the month.

The gross margin rate was up significantly for the quarter as compared to last year driven primarily by greater product acceptance by our client and our disciplined approach to managing inventory. We ended the quarter with inventory down 30% on a per square foot basis versus last year and importantly, this includes approximately 50% reduction in carry over inventory versus last year.

Consistent across the quarter was a marked improvement in the conversion rate as our client responded to brand appropriate product offering with a strong emphasis on feminine casual product. We have definitely seen an uptick in our clients’ response to casual product.

Knits and casual bottoms did particularly well and our team was successful in quickly responding to emerging trends chasing into new receipts and reordering of strong performing styles especially in embellished knits.

I believe that LOFT’s positioning of providing fashionable styling and outstanding quality at surprising prices has helped us in an environment in which the consumer is looking for great value.

Relaxed separates that can be worn to work were more challenged for the quarter in line with first quarter trends and reflective of the economy and our LOFT’s clients’ increased preference for more casual and versatile styles.

Newness and value continued to be very important to the LOFT client. She is very loyal to the brand and shops us often. We will continue to focus on additional ways to keep her engaged on the product side through our in store merchandising and marketing and compelling incentives.

Looking to the third quarter we feel good about the fall offering which we believe is in tune with what our LOFT client is looking for. We kicked off the period with a strong relaunch of our denim offering where we’re tweaked our fits, added a new fit, and expanded our selection of washes and colors.

We are highlighting pants this fall and supporting this effort with new on [garment] and in store marketing. In addition we anticipate knit and woven tops with feminine details to continue to be strong for fall and we are already seeing some successful with light weight jackets and outerwear.

Late this month we are looking forward to the launch of LOFT Lounge featuring a collection of sweaters, knits, fleece tops, and knit bottoms that will further expand the breadth of our casual offering. This collection can be worn together or mixed and matched with our apparel collection to offer more versatility as well as provide more lifestyle options.

We are very excited about this opportunity. We believe LOFT is well positioned from a product perspective and in the current environment for its high quality and great value. As a result we are strategically increasing our marketing investment for the season to drive interest, traffic, and profitable sales.

Direct outreach will continue to be very important, both online and direct mail, and will be combined with selective advertising and in store events. Overall our strategy will continue to prioritize gross margin dollars and profitability over comp store growth, although we are anticipating continued [top] comp store sales improvements for the back half of the year.

Let me touch briefly on our Factory and internet businesses, at Factory although the soft consumer environment has continued to impact this business we did experience some sequential improvement in sales and traffic trends and sales remain in line with traffic.

Our gross margin rate while still robust did experience some pressure in the second quarter. Turning to our internet channel, while top line sales reflected the overall macroeconomic conditions, we were pleased that this business achieved an improvement in its gross margin rate compared to the prior year and experienced steady traffic growth.

This channel has been successful with online exclusives such as weddings for Ann Taylor and maternity for LOFT and we will continue to pursue opportunities to broaden the offerings online. We are looking forward to September when we will be launching a fresh new look for both the Ann Taylor and LOFT websites.

The new sites will be more modern and will better capture each brands identity further distinguishing the two brands. We continue to see great potential to grow our online channel and see the new sites as an important step in our progress.

Let me now turn it over to Mike for a detailed review of the financials.

Mike Nicholson

Thanks Kay and good morning everyone. Today I’ll start with a summary of results for the second quarter and then I’ll provide you some perspective on our outlook for the third quarter and full year.

So let’s get started with net sales, net sales for the quarter were $470.2 million, a decline of 21% versus the $592.3 million in net sales reported in the second quarter of last year. By division net sales at Ann Taylor were $108.9 million versus $185.7 million in the second quarter of last year.

At LOFT net sales were $250.5 million versus $299.1 million reported last year. Comp store sales for the quarter decreased 22.5% with Ann Taylor down 38% and LOFT down 15.4%. I would note that at LOFT our strategy to buy second quarter inventory very tight and limit the amount of markdown product in the mix resulted in a much stronger gross margin for the quarter but it did pressure LOFT’s comp store performance.

In fact, LOFT’s second quarter comp performance for full price product was stronger while comp for markdown goods approached negative 30%. So we have comped better with more product, absolutely, but as we’ve said previously our second quarter strategy was focused on maximizing gross margin dollars, not comp performance, while mitigating inventory risk.

Which leads me to our margin discussion, as we had anticipated in our call last quarter our second quarter gross margin rate of 52.4% was equivalent to the rate we reported in the second quarter of 2008. Both LOFT and Factory reported solid gross margin rates for the quarter while Ann Taylor division was a bit weaker as we had earlier anticipated due to their aggressive promotional stance.

Turning to inventories, both total inventory per square foot and in store inventory declined 28% versus year ago. At the Ann Taylor division total inventory per square foot which includes items in transit declined 30% while in store inventory declined 37% in line with their comp performance.

Last quarter we discussed our strategy at Ann Taylor to enter the third quarter cleaner then we’ve ever been from an inventory standpoint and without a doubt we delivered on that. As Kay pointed out earlier, our carry over inventory at Ann which I define as the June store set and prior, was down by more than 50% on a dollars per square foot basis.

This positions us with a lower mix of lower markdown product as we enter the third quarter and we expect that this will support solid gross margin performance going forward. At LOFT total inventory per square foot declined by 30% and on an in store basis inventory declined 26%.

LOFT too cleared through much of their carry over inventory in the second quarter so this division is also entering the third quarter with a favorable mix of inventory that we believe will support solid gross margin performance in Q3.

Turning now to SG&A, total SG&A declined approximately $20 million versus the prior year, an 8% decline relative to a 2% decline in square footage. This improvement reflects restructuring program savings and other cost reduction activities in the areas of store payroll, tenancy, and depreciation.

Turning now to our strategic restructuring program, as we announced a few weeks ago we now expect our multi year restructuring program to generate approximately $125 million in ongoing annualized savings over the three year program period ending in fiscal 2010.

As you may know we realized approximately $40 million of these savings in 2008 and we expect incremental savings in 2009 to total approximately $60 million. The remaining incremental program savings of approximately $25 million are expected to be realized in 2010.

In terms of restructuring program costs, we anticipate minimal incremental total costs for the remainder of fiscal 2009. Second quarter pre-tax restructuring costs were approximately $31 million with an EPS impact of $0.38 per share.

Excluding restructuring we reported operating income of $6 million during the quarter compared with an operating income of $49.7 million last year. On the same basis, we reported second quarter net income of $3.6 million or $0.06 per diluted share compared with net income of $31.2 million or $0.53 per diluted share in the prior year.

Weighted average diluted shares outstanding for the quarter declined 2.7% to 56.8 million shares versus the 58.4 million in the second quarter of 2008. Our effective tax rate for the quarter was 30.5% versus 37.4% in the second quarter of last year.

Depreciation and amortization in the second quarter totaled approximately $27 million versus $30 million in the prior year. Capital expenditures for the second quarter totaled $15 million versus the $29 million in the second quarter of 2008 and for the full year 2009 we continue to expect CapEx to be approximately $35 million.

Our square footage at the end of the second quarter totaled nearly 5.5 million square feet, down approximately 2% from the prior year on an end of period basis but virtually flat on a weighted average basis.

During the second quarter we opened four stores and closed 10 ending the quarter with 933 stores. The LOFT division opened two new stores and closed seven, while Ann Taylor closed three stores. We also opened one LOFT Outlet and one Ann Taylor Factory store during the quarter.

Turning now to our balance sheet, we ended the quarter with $204 million of cash and cash equivalents of which $75 million reflected the cash drawn down under our revolver. Last quarter we indicated to you that we would continue to monitor conditions as the year progressed and that we might choose to pay down all or a portion of our revolver before year end.

During the second quarter we did in fact pay down $50 million of our outstanding borrowings against the facility. In terms of operating cash flow we typically build cash during the second quarter of the year and we did increase cash by approximately $55 million during the quarter excluding the impact of the repayment of $50 million of outstanding borrowings noted previously.

Turning now to the third quarter and the remainder of the year, while we’re not providing specific guidance I do want to provide a framework for you to use as you think about our upcoming performance.

First, we will continue to prudently manage the business for what we believe will continue to be a difficult and unpredictable consumer environment throughout the remainder of 2009. We positioned our inventory receipts conservatively, down in the double-digits for the third quarter, and we will continue to tightly manage our expenses while making prudent marketing investments behind our brands as we enter the fall season.

Importantly we will continue to maintain our focus on gross margin dollar performance rather then comps as we manage through the remainder of 2009. For the third quarter we expect a slight sequential improvement in both total sales and gross margin rate performance from the levels achieved in the second quarter of 2009.

SG&A expenses in the third quarter are estimated to be approximately $250 million with the sequential increase off of Q2 primarily reflecting incremental marketing investments of approximately $10 million in support of the new fall product launches at Ann Taylor and LOFT.

I would also note that SG&A for both the third and fourth quarters of this year is expected to reflect an increase in performance based compensation compared with the second half of 2008 where this was not a factor.

Looking ahead to the full year we expect that full year sales will continue to be under pressure particularly at the Ann Taylor division due to the significant impact that this recession has had on the aspirational luxury sector and on women’s wear to work attire.

However we do expect comps to improve at both brands in the second half of the year as compared to the first half. We expect total square footage to decline approximately 3.6% at year end on an end of period basis, or approximately 1% on a weighted average per square foot basis reflecting the impact of the 53 stores planned for closure in fiscal 2009 under the restructuring program partially offset by the opening of 14 new stores.

Our gross margin rate for the year is expected to improve versus year ago due to continued aggressive inventory management and improved product at both brands. Selling, general and administrative expenses are expected to be below year ago reflecting restructuring savings and our ongoing focus on cost reduction.

And finally the company will continue to focus on maintaining a health balance sheet and expects to achieve a year end cash position in excess of our second quarter 2009 cash position excluding the impact of the revolver.

And with that I’ll turn it back to Kay.

Kay Krill

Thanks Mike, before we open the lines for questions, let me reiterate that I think we have made good progress as we enter the second half of the year. First and foremost I believe that our fall product offerings are compelling, relevant and more on brand for both Ann Taylor and LOFT and we are taking steps to enhance our marketing and in store experience to further drive traffic and sales.

In addition from an operational standpoint we have successfully implemented our strategy to manage inventories tightly, reduce expenses and maximize gross margin dollars. While we expect the macro environment to remain challenging we believe we have positioned our business to deliver improved performance in the second half of the year versus last year.

With that, let’s open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Betty Chen - Wedbush Morgan

Betty Chen - Wedbush Morgan

Congratulations, I was wondering if you could maybe give us a sense of how you feel about some of the new merchandise, obviously we’ve been in the stores and just want to at least give you a lot of [praise] for the major improvements we’ve seen at both Ann Taylor and the LOFT stores, and then also related to that if you can give us a little bit more color around the marketing campaign that we should expect to see to support the improved merchandise.

Kay Krill

I’ll start with Ann Taylor, while it’s still early I’m pleased that the comp performance has improved from the second quarter in this division and I think that’s important. And we’re seeing strong selling so far in any feminine tops with details, structured dresses, shoes is a surprising category that is ticking up versus last year, jewelry and select sportswear separates, particularly pencil skirts and outerwear.

Those are both very strong. Grey suiting is also particularly strong and it looks like grey is emerging as a strong color for the season in all categories. I just want to highlight that our inventory levels have been extremely light in this division and we’re building our full price levels from this point. This is our low point right now, with the addition of approximately 300 SKUs next week.

So we should have a much better read on the new product direction in September. This was a building month. So we are encouraged but its still early days for Ann Taylor. In the LOFT division we are definitely seeing particular strength in the casual area and that was definitely the right thing to do to focus the assortment purely on casual. Denim, casual tops, and other casual bottoms, lightweight outerwear and jackets are particularly strong and any top or specifically knit that are embellished are really great.

Our denim assortment and our denim positioning is very exciting for us because we gave denim a much stronger voice then its had in the past through inventory investment and in store positioning and marketing and we believe that our assortment is very competitive from a style and price point of view.

We have every leg shape and fit covered and we’re seeing success in this category and chasing into select styles. So we feel very good about that right now. In marketing we really focused on traffic driving, direct marketing, we increased our direct marketing to our client base as well as prospecting for the first time, and we have reentered the print media for the fall season because we had basically been out of that for the past year.

And in select markets, particularly New York and Chicago, we are testing the potential of heavy up marketing in buses, bus shelters, newspaper, etc. because we really felt like we needed to get our new brand message out. And in LOFT we’re really upping the marketing spend in enhanced window presentations and in store styling events to drive traffic and conversion.

We’re also rolling out a digital marketing strategy that’s geared towards clearly defining the LOFT brand positioning and voice. We also have direct outreach that will continue to offer incentives because that’s very important in this environment. We know that value is very critical to her in both businesses, but particularly LOFT right now.

So you’ll see us doing selective incentives throughout the season.

Operator

Your next question comes from the line of Dana Telsey - Telsey Advisory Group

Dana Telsey - Telsey Advisory Group

Can you please talk about the opportunities on the merchandise margin side, both at Ann Taylor and at LOFT and as you go forward with the assortment how you’re planning holiday, how do you see the evolution occurring.

Mike Nicholson

Just in terms of merchandise margin, as you know at this point Paula and her team, Paula has been in place now for about a year and for the first six months of her tenure, we’ve been indicating that we would anticipate as we enter in the back half of this year that we would begin to see some improvement in IMU and merchandise margin and the good news is that we are seeing the fruits of Paula and her team’s efforts with respect to the IMUs that we’ve been able to attain for the fall season.

Kay Krill

As far as holiday goes, you all are seeing that in the middle of September so I’ll look forward to showing you that but we have ad positive reception thus far from the fashion editors on holiday for both brands and one of the major differences this year versus last year or any other years in fact, is the assortment is less focused on occasion dressing because we really don’t believe she’s going to be buying that product.

We’ve seen no indication that she’s buying that product, and its going to be more focused on versatile and every day wearability as well as key categories of gifting, of course cashmere and definitely we’re seeing upticks in jewelry and accessories which I think is probably going to be the gift of the season.

Operator

Your next question comes from the line of Randy Konik – Jeffries & Co.

Randy Konik – Jeffries & Co.

Can you just clarify a comment I think you made on the sales line, did you say that you expect, you are expecting sequential improvement in the back half of the year on the comp but you expect it would remain down in the double-digit range for the remainder of the year. Can you just clarify that statement please.

Mike Nicholson

For the third quarter what we said is we expect a slight sequential improvement in total Q3 sales off of Q2 2009 and we expect for the back half of this year an improvement in overall comp store performance as compared with the first half of this year.

Randy Konik – Jeffries & Co.

But did you say down double-digit or no.

Mike Nicholson

No.

Operator

Your next question comes from the line of Michelle Tan – Goldman Sachs

Michelle Tan – Goldman Sachs

I was wondering if you could, with the sales guidance you’re giving it seems like there is a pretty significant improvement in year over year sales trends expected in the third quarter, can you talk a little bit about your ability to chase and then also on the SG&A side, how should we think about marketing spend in the fourth quarter and other upward pressures on SG&A.

Kay Krill

I’ll address chase first, we are, let me just speak by division, in the LOFT division we definitely think we are at a low point right now as well as inventory, but by September and for the remainder of the fall season we are virtually even or a little bit above last year in units. So we feel good about that even though we look low right now.

We have been able to chase into certain key categories of denim and embellished knits and items, outerwear items, to get fast turn. We’re seeing right now about an eight to 10 week turn on some of those items. Beyond that what we’re doing is we’re moving up store sets. So we do have the ability and the flexibility in order to do that.

For the Ann Taylor division as I said we’re definitely at a low point as far as inventory and we do get better with each month but not above last year. We are definitely moving up items as we are seeing trends emerge and thankfully we did have some fabric availability to be able to chase back into some of these hot items.

So we are able to chase into some things within an eight to 10 week period, and other categories we’re not. But we’re doing the best we can to try to get the inventory in better shape as we head into October.

Mike Nicholson

Just to dimensionalize marketing for you, Q4 off of Q3, I would expect our overall spend to be down about $5 million Q4 2009 versus Q3. So the incremental investment, the heavy up investment really is in the third quarter of this year.

Operator

Your next question comes from the line of Roxanne Meyer – UBS

Roxanne Meyer – UBS

Congratulations on managing well in a really tough environment, I know its still early days but from accelerating some of your early fall floor sets into July of any focus groups you may have been doing, are there any learnings you can share with us about some of the feedback that customers are giving you on the merchandise and things that you’re already able to do as it relates to impacting holiday and even beyond and then just continuing on that, what categories do you think could take a little bit longer to turn at each division.

Kay Krill

Well I think as far as, let me start with Ann right now, a lot of the new fashion is selling but as I said in my remarks the wear to work category in general has been on the down tick. So what we are finding there is there’s really two different trends that are emerging, that people are definitely shopping their closet and what’s already in their closet, they might not be picking up right now but they’re buying selectively pieces to perk it up.

And what we’re seeing is interesting, is grey suiting is outpacing black suiting right now because that’s not already in her closet, that’s just a perfect example of that. But we are seeing trends as I said in any feminine top that has details, we’re calling them frothy tops, but any details or embellishment or mixed media.

We’re seeing success there. We’re seeing skirts, pencil skirts, far outpacing pants at this point in time. And some of the shoes and some of the new items, we have not seen the shoe business take off like ever, like it has this season so far which is very encouraging to us as well as jewelry.

And I know jewelry [isn’t] a major fashion statement out there right now anyway, but we’re definitely seeing our share of success. I think that there’s certain categories we have a lot of Merino sweaters in the store right now that are slow moving and I think that’s really a seasonality issue and not a styling issue and I think as we get more into the fall season we’ll see those pick up.

But they’re slow right now, that’s probably the slowest category. As far as LOFT we’re really seeing success across the board in casual particularly. They are also having some softness in sweaters as well because knits and wovens are really overtaking the selling there because of the newness. It’s really all about the newness in those two categories.

And as I said before denim has been surprisingly successful for us. This is a category that’s always been part of our assortment but Gary and his team really took it to the next level and really positioned it as the must have of the season and added new washes and added new fits and we’re seeing particular success with the new fits, such as the skinny jean and the boyfriend jean that are not in people’s closets.

So we feel very good about the direction in the LOFT business and the product assortment. We really don’t see any weakness thus far except for in sweaters.

Roxanne Meyer – UBS

And just a quick follow-up, clearly you’re managing to gross margin dollars and trying to chase items that are really working well, but are you able to share what’s the best comp you can do given your inventory constraints.

Mike Nicholson

I would say that’s very difficult to gauge, as we kind of reflect on this strategy here as a management team, we really think in this environment its prudent for us to continue to focus on maximizing gross margin dollars and be comfortable with backing off comp for a bit as we work through this crisis.

Operator

Your next question comes from the line of Neely Tamminga - Piper Jaffray

Neely Tamminga - Piper Jaffray

Just a real quick clarification in your prepared remarks you did indicate that third quarter, you plan to be very conservative with your inventory receipts on the Ann Taylor division and I think in that context, going to Randy’s point, you had indicated that you would expect and planned for negative double-digit comps, clearly the guidance you have put out there for Q3 would imply maybe closer to like a high single-digit decline for total company if you have a slight sequential improvement in total sales dollars. Just wondering, can you confirm that just to make sure that we’re all clear on the call because the news wire is picking this up incorrectly. And number two, average unit retail opportunities, can you speak a little bit to that in the second half or maybe size up where the opportunity for upside in comp could come.

Mike Nicholson

So let me clarify, in terms of Kay’s comments, yes she was talking specifically about the Ann Taylor division and she mentioned that we were, we are planning for and we anticipate a gradual improvement in our comp store sales trends at Ann that we have planned for, and we have bought to a double-digit negative comp at Ann.

In terms of what that translates to at the total company level, the reality is that all depends on how the volume shakes out by division but I think it’s important to clarify that Kay’s comments related specifically to the Ann Taylor division.

Neely Tamminga - Piper Jaffray

And could you comment on the opportunities for upside in comp. Clearly yours were significantly pressured last year, how are you looking at that this year in the second half.

Mike Nicholson

I guess what I’d say again, I’m not comfortable at this point specifically providing you with a target or perspective on comp upside. What I’d say is a lot of that has to do with the promotional environment and to what degree and how promotional we need to be from an incentive perspective not an aggressive liquidation markdown strategy, but more of an incentive perspective in order to drive customer conversion with respect to product.

So if we’re able to incent less and drive more full price sell through then the comp will be better.

Kay Krill

And the AUR will be higher.

Neely Tamminga - Piper Jaffray

Just let me add my congratulations. It’s the first time I’ve bought Ann in the last 12 months. I really appreciate the better assortment.

Operator

Your next question comes from the line of Jennifer Black - Jennifer Black & Associates

Jennifer Black - Jennifer Black & Associates

Let me add my congratulations, at the Ann Taylor division the stretch fabrics are fantastic and I noticed one particular black dress with ruffled sleeves is no longer on your website and it sold out within a matter of days in the store, and I also noticed quite a few other stretch items that had size stock outs and I wondered what percent of the collection sold through like this, if you can measure that, and then I wondered if there’s anything you’re doing to encourage or persuade her to try on the new improved fitting in the clothes and with the great stretch and the longer dress lengths and I know that you have some verbiage online but as she walks into the store how does she know.

Kay Krill

You’re absolutely right, everything that has stretch in it right now is selling really well which is tremendous for us for learning for the future and that’s in tops as well as bottoms and dresses. So I think we’ve got a good fabric recipe to work with going forward and to virtually put it in everything that we do.

And we have had some high sell throughs on select items, you’re absolutely right. As far as how to introduce them to the pant, we’ve got that strategy baked into September and we have some in store events all around pants, really in both divisions.

Jennifer Black - Jennifer Black & Associates

And I didn’t just mean pants, I meant like everything, with the longer dress lengths, as well.

Kay Krill

A lot of this is about education to the sales associates too and about getting them in the clothes and we are definitely offering high incentives to get them in the clothes so they can talk about it because if they’re wearing it, they’re going to absolutely have a stronger focus on selling it and being able to talk about the features of it and I think that has a lot to do with this perfect pump selling so well because they’re in it.

So they can speak to the fashionability and the comfort of it and a lot of it, as you know, has got to be focused on the balance of that. Not just the fashion, but its got to be comfortable hence the stretch fabrics in everything that we’re offering and then the comfort in the shoes.

So we’re focused on it and we’re trying our best to get the sales associates to talk about it and incent them to do so.

Jennifer Black - Jennifer Black & Associates

And I just have quick follow-up, on the non-exclusive stock outs online, is there any way to pull them from that merchandise from the stores or is that—

Kay Krill

We’re lean in both areas. Unfortunately the online is very lean right now in inventory and as you heard Mike comment, we’re also very lean in the stores. We’re at our lowest point right now and we’re going to build from there.

We’ve got about 300 more SKUs hitting the stores and online within this week so I think by the beginning of September or the end of August we’ll be in much better shape. We’re too low right now, we know that.

Jennifer Black - Jennifer Black & Associates

Just one more, the grey suiting and pencil skirts, are those items you can chase.

Kay Krill

Yes, and we already have.

Operator

Your next question comes from the line of Brian Tunick - JPMorgan

Brian Tunick - JPMorgan

So it looks like for the first time the Factory and direct businesses did more revenues in the quarter then the Ann Taylor stores division and I was just wondering with the business down to a $400 million run rate and more store closings being announced, what margins do you think that the Ann Taylor division can really get back to on these lower sales revenue numbers and then secondly it looks like some of the numbers out there for next year have another $50 to $100 million of SG&A savings, would that come from more store closings or is there something more you see on the store payroll side or home office.

Mike Nicholson

So to your first question, obviously business unit operating unit level of profitability is not something that we specifically comment on. What I would say is on a total company basis clearly our objective over time is to get back to where we once were in the high single-digits and at some point cross the bridge to a double-digit operating profit as a percentage of sales.

In terms of restructuring savings just to briefly recap how I think about it in terms of the $125 million, as I mentioned in my opening comments some $40 million we realized in 2008. We expect an incremental $60 this year, with the balance to come in 2010. And when we talk about that $125 million of savings, that excludes the four wall expense impact associated with the store closure plans.

So what you would need to do is model out the anticipated four wall save associated with the store closure program and we haven’t provided a level of specificity around the exact benefit from a dollar perspective related to that program. One thing I would caution the group on is that related to our store closures as I look forward to the balance of this year, the stores that are slated to close, there’s about 38 store closures to go and the majority of those store closures happen in the fourth quarter and the last two weeks of the fourth quarter.

And there’s a similar trend as we move forward into 2010 as well with stores closing typically in the back half of the year and heavily weighted to fourth quarter. And obviously we’ll be talking more about our expectations with respect to SG&A as we get closer to the end of the year for 2010.

Brian Tunick - JPMorgan

And I’m sure incentive comp was obviously down last year, how are you thinking about incentive comp as we get into the back half of this year.

Mike Nicholson

From my perspective I’m thinking that incentive comp will be a component of our SG&A and is a component of the $250 guidance that I provided to you for the third quarter and third quarter and fourth quarter last year there was no expense impact of incentive comp.

Operator

Your next question comes from the line of Jeff Black - Barclay’s Capital

Jeff Black - Barclay’s Capital

On the traffic trends at Ann Taylor you mentioned they were better than the comp, but did they improve from Q1 and everyone is trying to get around what kind of comp you’re planning for and inventory on the Ann Taylor, on the double-digit that you keep referring to is that double-digit between 10 and 20 or double-digit over 20 down, I think that’s important to know to access whether the margin guidance is optimistic or not.

Mike Nicholson

I’ll first take the traffic question, as Kay mentioned in the second quarter and consistent with the first quarter performance that our traffic trend did outpace the comp store performance at Ann Taylor. I would dimensionalize traffic per average store at Ann second quarter off of first quarter fairly consistent in the mid to high teen decline as compared to the comp store performance so the traffic trend at Ann second over first quarter was fairly consistent.

Again back to the Ann Taylor, our outlook with respect to Ann Taylor and their comps for the third quarter, we’re not providing a specific framework for you as it relates to how we’re thinking about comps but what I will say is that the inventory buy plan as well as our inventory position going into the third quarter will support an improvement in the overall comp store performance as compared to the second quarter of 2009.

And so that’s how we’re thinking about it. On a absolute basis we are anticipating that the Ann Taylor stores division comp store performance in the discrete third quarter period will improve off the second quarter of 2009.

Jeff Black - Barclay’s Capital

On the stuff that’s working how are you finding in terms of what’s required to incent the buys, is there less markdown in the new stuff that you’ve seen that you’ve moved forward into July.

Kay Krill

Yes, I definitely would say there’s less markdowns. What we are doing though is what we’re seeing is that we are taking select groups of product and doing price promotions within the store, not many, I think we have three or four going on right now, in order to incent them to buy.

What we found is we cannot be in this environment purely full price. We can not sit there full price, with a full price ticket. We’re going to have to have select, very select, full price promotions and also we’re testing store wide incentives to drive traffic particularly on the weekend right now.

I don’t know if we’re going to have to do that for the remainder of the season, of if this is just an August issue, which you know August is typically, you have to incent people to buy and we’re so clear going into August we don’t have the sale inventory in the store which she is normally used to.

Operator

Your next question comes from the line of Samantha Panella - Raymond James

Samantha Panella - Raymond James

You gave us more color with LOFT to probably explain why the two year same store sales trend in the second quarter worsened slightly from the first quarter given the inventory constraints, so given the inventory build that we’re expecting now in the second half here at LOFT, I guess we could think that that two year trend should get a little bit better at LOFT again in the second half and then also, could you just remind us of the number of store closures to expect next year in 2010.

Mike Nicholson

To your first point I think that’s a very reasonable assumption that we expect comps in the discrete period as well as the two year trend for LOFT in Q3 to improve off of Q2. Your second question regarding store closures, I think as I mentioned in my comments that to date through the second quarter that we’ve closed about 15 stores and there’s another 38 to go, so in total 53.

And in terms of how they come out, three stores are targeted for closure in Q3 and another 35 in Q4.

Samantha Panella - Raymond James

And then next year, there’ll still be another 80 next year then.

Mike Nicholson

Correct, approximately 190 over the three year program period. You have to really keep in mind you’ve got a back end weight, the 2010 closures and heavily weight to the fourth quarter.

Operator

Your next question comes from the line of Kimberly Greenberger - Citigroup

Kimberly Greenberger - Citigroup

I had a question on the Ann Taylor division, we’re definitely seeing improvement in the product there but the one pushback I’m hearing is that the ticketed prices are a little bit steep, maybe not necessarily relative to where Ann Taylor has priced historically but with the whole market coming down, do you think you need to rethink the pricing architecture at the Ann Taylor division.

Kay Krill

Well like I just said, and that’s a very good point, is that we are seeing the ticketed price selling at a lot of the items, the full price ticket, but we really feel its important to pepper throughout the store these $59.50 or $69.50, or $49.50 price points on categories to get her to buy. And interestingly enough, some of them are very light markdowns.

There’s a short sleeved sweater for example, cardigan sweater, which is terrific which was ticketed at $75.00, we’re promoting it at $59.50 and its moving very nicely at $59.50 at a high margin. So I think its important to have those throughout the store so she can see value and what we’re doing for the future and for next year is absolutely buying into it that way.

Although I must say that we need to be very careful about reducing ticket price because she wants to see the comparison. She wants to see that it was $75.00 and now she can have it for $59.50. Had we brought it in at $59.50, I don’t think it would be selling as well.

So I think it’s a very important strategy that we are all over for the future but right now its working well.

Kimberly Greenberger - Citigroup

So if I understand you correctly, you’re just thinking that in store planned promotions are probably going to be a thing of the future but now that you’ve acknowledged that you’re sourcing into it more effectively—

Kay Krill

Yes, but I want to say that with some of these items though, particularly the sweater I referred to, its still a nice margin at $59.50 because its less then a 20% discount.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Kay Krill

Thank you all for joining us this morning and have a great day and weekend. We appreciate your support.

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