ANN INC Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Ann, Inc. (ANN)


Q2 2013 Earnings Call

August 23, 2013 8:30 am ET


Judith A. 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


Janet Kloppenburg

Kimberly C. Greenberger - Morgan Stanley, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Jeff Black - Avondale Partners, LLC, Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

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

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

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

Anna A. Andreeva - Oppenheimer & Co. Inc., Research Division


Good morning, ladies and gentlemen, and welcome to the ANN Inc.'s Second Quarter 2013 Earnings Conference Call. At the request of the company, today's conference call is being recorded. [Operator Instructions] I would now like to turn the call to Judy Lord, Vice President, Investor Relations. Please go ahead.

Judith A. Lord

Thank you, Rebecca, and good morning, everyone. And thank you, all, for joining us as we review our results for the second quarter of fiscal year 2013. I'm here with Kay Krill, ANN Inc.'s President and CEO; and Mike Nicholson, our Chief Operating Officer and CFO. Kay will lead off with an overview of the quarter and will briefly address our strategic growth initiatives. Mike will then discuss our financial results and outlook. After that, we'll open it up for your questions.

Before turning it over to Kay, we would like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of August 23, 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 love to hand it over to Kay.

Katherine Lawther Krill

Good morning, everyone. Thank you for joining us to review ANN Inc.'s results for the second quarter of 2013. We are very pleased to report a strong performance for the quarter, including record earnings per share, a double-digit increase in net income and significantly stronger sales versus the year-ago period.

Total net sales reached $638 million, up 7% from $595 million a year ago on a comparable sales increase of 3%. Gross margin rate was a solid 54.7%, with our merchandise margin rate up over last year.

Net income increased 16% to $36 million, and earnings per share for the quarter reached a record $0.76, up $0.21 from $0.63 last year.

Both brands achieved positive comp performance and strong profitability in a highly promotional and challenging environment. We remain focused on delivering great fashion, tremendous value and an engaging shopping experience, and we continued to benefit from the positive impact of our strategic initiatives, which are providing us with near-term and long-term growth opportunities.

All in all, it was a great quarter, and we are well-positioned for a strong second half of the year.

Let me now turn to the brands. First, Ann Taylor. Ann Taylor has continued to generate strong sales and higher profitability. In fact, the second quarter represented the fifth consecutive quarter delivering positive comp performance.

The brand's 3% comp increase reflected a 9% increase at Ann Taylor, partially offset by a 7% decrease at Ann Taylor Factory. We are pleased to be seeing stronger, more consistent performance from the brand, driven by the continued execution of our multi-part strategy to offer our client an expanded assortment of fashion in all stores and online; to enhance the value we are offering her by continuing to provide a balanced assortment across good, better and best price points; to be more targeted in our promotional strategy; and to elevate the shopping experience, both in-store and online.

Together, these initiatives are resulting in higher full price sell-throughs and an increased gross margin rate.

In addition, the team did a great job navigating a competitive environment.

Turning now to product. Ann Taylor saw strength across the entire assortment. Dresses, tops, skirts, suits, jewelry, accessories and shoes all received positive results for the quarter.

In addition, Ann Taylor's color offering, grounded in white, navy and black, was well-received. Kate Hudson capsule collection was also highly successful, and Weddings performed exceptionally online.

We continue to benefit from our strategy to enhance her overall shopping experience in-store, and we are on-track to meet our objective of having 80% of our store fleet updated in the modern format by year end.

At the same time, we have continued to enhance the online shopping experience, offering her expanded assortments of online exclusives, as well as new features and functionality to provide a more seamless experience.

From a marketing perspective, Ann Taylor is achieving positive results, as we continue to focus on increasing loyalty with our core clients while attracting new clients to the brand.

Our campaign featuring Kate Hudson has been very successful, and we are very pleased that Kate is featured in our fall campaign.

Turning now to factory. As you know, our strategy for the first half of 2013 has been to position our inventory to maximize gross margin due to the softer traffic trends at outlet centers. This strategy was again successful for us in the second quarter.

Looking ahead, as we mentioned on our last call, we are positioning this channel for top line growth in the second half of the year.

Overall, we are optimistic for the second half and fully expect our momentum to continue in the Ann Taylor brand.

From a product perspective, the assortment is stylish and versatile, offering transitional fabrics and a strong offering in neutrals. Black, navy and camel will anchor the collection, with pops of color and a broad assortment of print, pattern and novelty items. We are particularly excited about our new shoe collection, designed in partnership with Vince Camuto. The new product is in stores and online this month and is off to an unbelievable start.

Our jewelry collection offers an elevated aesthetic and is also selling extremely well.

In addition, Ann Taylor will be offering special occasion dresses again this fall, which have historically been successful for the brand.

In summary, Ann Taylor's performance had been strong and more profitable. We have entered the third quarter with a compelling assortment and significant opportunities to drive top line growth and profitability over the balance of the year.

Let's now turn to LOFT. The brand's comp increase of 3% came on top of last year's 4% increase and was comprised of a near 4% increase at LOFT, partially offset by a 3% decline at LOFT Outlet.

In terms of product, we saw strength across the assortment. Leathers, woven and knit tops, casual dresses, denim, LOFT lounge and jackets all generated positive comps.

Clients responded to the expanded offering in both denim and LOFT lounge, resulting in another quarter of substantial growth.

LOFT's color offering performed well, highlighted by navy, black and white, and our print and novelty offerings were well-received.

Similar to Ann Taylor, LOFT online continues to be a significant contributor to the growth of the brand, driven by the strength of the product offering and our digital marketing efforts.

From a marketing perspective, LOFT's strategy continues to be effective in driving brand awareness and new client growth.

In fact, LOFT's active client file has increased significantly, and we are attracting new customers to the brand. Looking ahead, LOFT will continue to focus on expanding our market share.

Turning now to LOFT Outlet. Total sales for the quarter increased 19%, reflecting new store growth. Similar to Ann Taylor Factory, we manage this business to maximize profitability in spite of the soft traffic trends. As we discussed on our last call, we are expecting LOFT Outlet to comp positively in the third quarter.

Looking ahead, LOFT is well-positioned for the balance of the year. For fall, LOFT has updated and relaunched its pant offering with new fits, fabrics and silhouettes. This is a huge opportunity for LOFT to grow market share in this core category.

The strength of LOFT lounge and denim also offer continued growth potential for the brand.

And importantly, we expect that LOFT's exceptional value proposition will continue to resonate with clients.

In summary, we are expecting a strong second half of the year for LOFT, and our strategies are creating meaningful opportunities to further grow the brand, in-store and online.

Before I turn it over to Mike, let me provide a brief update on the strategic initiatives we are executing to position ANN Inc. for continued profitable growth.

First, multichannel. In the 11 months since we launched this initiative, we have been leveraging this new capability to drive increased sales and client satisfaction. We are making more productive use of our inventory investment across channels and have been able to more effectively clear through sale merchandise at a higher margin.

Multichannel has also given us a greater sense of the online demand for our marketing looks and key fashion. And beginning this fall, we are investing, from an inventory perspective, to better meet this demand.

Overall, multichannel has been a major win for us, and more opportunity still to come.

Second, e-commerce continues to be a major contributor to our growth. Online sales continued to increase at a double-digit rate again this quarter, with traffic and conversion up at both brands. Ongoing investments in our platform, the client experience and digital marketing, combined with a continued expansion of our exclusive online product offering, are driving the results.

Looking ahead, we are on track with a number of initiatives for the balance of the year to continue to grow this important channel.

Separately, our international shipping capability, launched earlier this year, is generating the strongest response in English-speaking countries and allowing us to reach new clients outside of the U.S.

Third, our real estate strategy is on track. At Ann Taylor, we are continuing to rightsize our locations to our smaller, more productive new concept store format, while also updating stores through our more cost-effective, capital-light refresh initiative.

As I noted earlier, 80% of Ann Taylor's fleet will be updated by year end.

At the same time, LOFT is proceeding with a strategy to expand the brand's footprint in small and mid-markets, where we have identified meaningful potential. And we're continuing to update and refresh high-profile existing relationships.

Fourth, CRM. Our Client Relationship Management initiative is focused on delivering a more personalized and relevant client experience. We are utilizing our new capabilities to drive more targeted communications with our clients across various marketing programs.

We are very encouraged by our initial results and, over time, expect our CRM capabilities to increase sales and efficiency of our marketing initiatives.

And finally, our international growth initiative. Our expansion into Canada continues to be a home run. Our stores are outperforming our expectations, and during the quarter, we opened 2 new LOFT stores and 1 new Ann Taylor store, all in the Greater Toronto market.

We are on track to have 10 stores in Canada by year end. Both brands are benefiting from a loyal client base in Canada, and there is significant potential for us to continue to broaden our reach.

Overall, these strategic initiatives provide a strong foundation for the continued long-term profitable growth of our brands and our company. We have meaningful initiatives we are working on for 2014 and beyond.

Finally, as you read in our press release this morning, following the completion of our $600 million share repurchase program, our Board of Directors has approved a new $250 million share repurchase program, reinforcing our ongoing commitment to continue to enhance 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 second quarter 2013, and then I'll provide you some perspective on our outlook for the third quarter and our increased outlook for the full year fiscal 2013.

Beginning with net sales. Net sales for the second quarter were $638.2 million, an increase of approximately 7.3% versus the $594.9 million in net sales reported in the second quarter of 2012.

By brand, net sales across all channels of the Ann Taylor brand were $245.2 million, a 5.1% increase over the $233.3 million reported last year.

At the LOFT brand, net sales were $393 million, up 8.7% versus $361.6 million reported last year.

Moving on to comps. Total company comparable sales for the quarter increased 2.8% on top of a 4.7% comp increase last year.

At the Ann Taylor brand, total brand comps increased 3.1%, reflecting an increase of 9.3% at Ann Taylor, partially offset by a 7.2% decrease in the factory channel.

At the LOFT brand, total brand comps increased 2.5%, reflecting an increase of 3.7% at LOFT, partially offset by a decline of 3.2% at LOFT Outlet.

Turning to gross margin. We delivered a second quarter gross margin rate of 54.7%, 120 basis points below last year's record rate of 55.9%.

This performance reflected higher merchandise margins than last year's period, which were more than offset by increased shipping and handling costs associated with our very successful multichannel initiative.

The merchandise margin rate improvement in the second quarter reflected the strong performance at the Ann Taylor and the factory outlet channel, partially offset by a slightly lower performance at LOFT when compared with the second quarter of 2012.

Turning now to SG&A. SG&A as a percentage of net sales was 45.3%, a 170-basis-point improvement compared with 47% in the second quarter of last year. SG&A expenses in the second quarter were $289.3 million compared with $279.5 million reported in the second quarter of 2012.

The improvement in SG&A rate during the second quarter of 2013 primarily reflected fixed cost leveraging resulting from increased sales, partially offset by costs associated with new store growth plans and other expenses supporting the expansion of the business.

Moving down the P&L. Operating income during the second quarter was $60 million, representing a 13% increase compared with operating income of $52.9 million in the second quarter of 2012.

Our second quarter net income was $35.6 million, representing a 16% increase compared to net income of $30.7 million achieved during the second quarter of 2012.

Diluted earnings per share in the second quarter was $0.76, an increase of 21% compared to the $0.63 earned in the second quarter of 2012.

Weighted average diluted shares outstanding for the quarter decreased 4.1% to 46.1 million shares versus 48.1 million shares in the second quarter of 2012.

Our effective tax rate for the quarter was 41.1% versus 41.5% in the second quarter of 2012.

Depreciation and amortization in the second quarter totaled approximately $26 million compared with $23 million reported in the second quarter of 2012.

And finally, capital expenditures in the second quarter totaled $31.4 million compared with $31.7 million in the second quarter of 2012.

Moving on now to the details of our quarter end inventory. We ended the second quarter of 2013 with total inventory per square foot for the company up 8% compared with last year, which reflected a 5% decrease at Ann Taylor, an 18% increase at LOFT and an 11% increase in the factory outlet channel.

However, as we mentioned in today's release, the increases at both LOFT and in the factory outlet channel were impacted by timing shifts of merchandise receipts versus last year. And when we adjust for these timing shifts, inventory per square foot would have been up in the mid-single-digits for both LOFT and the factory outlet channel. And importantly, both Ann Taylor and LOFT entered the third quarter with approximately 90% of their inventory representing fresh fall product.

Turning now to store openings and closures. During the second quarter of 2013, we opened a total of 21 stores, comprised of 3 Ann Taylor stores, 3 Ann Taylor Factory stores, 11 LOFT stores, and 4 LOFT Outlet stores.

We closed a total of 3 stores during the quarter, comprised of 1 Ann Taylor store and 2 LOFT stores. The total store count at the end of the fiscal quarter was 1,007 stores, comprised of 275 Ann Taylor stores, 105 Ann Taylor Factory stores, 525 LOFT stores, and 102 LOFT Outlet stores.

Our stores' square footage at the end of the second quarter totaled approximately 5.8 million square feet, a 3.5% net increase from the total square footage at the end of the second quarter 2012.

Turning now to our store growth plans for fiscal 2013. We continue to see opportunity throughout the remainder of this year to invest in the profitable growth of our fleet at both brands, through both square footage growth and continued enhancement of sales and productivity at Ann Taylor and LOFT stores.

For the full year of fiscal 2013, we expect to open a total of approximately 65 new stores, including store openings in both the U.S. and Canada. We've opened 34 stores year-to-date and expect to open the remaining approximately 30 stores during the second half of the year.

Regarding store closures, we expect to close approximately 30 stores in total this year. 11 stores have closed, thus far, in the first half of 2013, and we expect to close the remainder in the back half of the year, with the majority of the remaining closures expected to occur at the very end of the fiscal year.

And as always, we will continue to manage our real estate portfolio to maximize store profitability and ensure brand presence in key regions and markets.

By brand, we will continue to pursue the further rollout of the Ann Taylor new concept stores, and expect to have nearly 40 additional stores in this format by year end.

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, approximately 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 LOFT, we expect to open a total of approximately 40 LOFT stores this year, primarily reflecting continued expansion of our small and mid-market strategy, as well as approximately 15 LOFT Outlet stores to further capitalize on the brand's potential for sales and profit growth.

In terms of our strong balance sheet, we ended the quarter with cash of approximately $107 million and no bank debt, following the repurchase of approximately 1.5 million shares at a cost of approximately $49.1 million, marking the closure of our $600 million share repurchase program.

Through the inception of that program until its completion in the second quarter, we repurchased nearly 40% of our outstanding shares, and I'm very pleased that the Board has approved a new $250 million share repurchase program, and we fully expect to continue to use our strong balance sheet and free cash flow to further enhance shareholder value as we move through 2013 and beyond.

Before I turn to our outlook for the third quarter and full year of 2013, let me remind you that last year's third quarter results included a benefit related to the cumulative impact of gift card and merchandise credit breakage, which benefited third quarter 2012 sales and gross margin by approximately $6 million and gross margin rate by approximately 40 basis points, resulting in an EPS benefit of $0.08.

Now for the third quarter of 2013, we expect total net sales to be $655 million, reflecting a total company comparable sales increase in the mid-single-digits. Our gross margin rate performance is expected to approach 57%, and selling, general and administrative expenses are expected to be $305 million.

In terms of the full year, we have increased our 2013 outlook as follows: We expect fiscal 2013 total net sales to be $2,515,000,000, reflecting a total company comparable sales increase in the mid-single-digits. Our gross margin rate performance is expected to be 54.3%. Total SG&A expenses in fiscal 2013 are expected to be $1,190,000,000 compared to SG&A expenses of approximately $1,136,000,000 in fiscal 2012.

The overall increase primarily reflects support for the company's 2013 strategic growth initiatives as follows: First, $30 million of incremental expense associated with our 2013 new store growth plans, including our Canadian expansion; second, $10 million in incremental marketing investment, mainly for our e-commerce channels to support continued multichannel growth; third, $10 million associated with merit increases and performance-based compensation; and finally, $5 million in variable store operating costs to support continued sales growth in our existing fleet.

Our 2013 effective tax rate is expected to be 41%. Capital expenditures are expected to be approximately $160 million. This reflects the following investments: First, $55 million in support of approximately 65 new stores for both brands, including our Canadian expansion; second, $35 million to support approximately 35 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.

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 46 million shares in 2013, which includes the benefit of our second quarter share repurchases, but does not include any potential future repurchases.

And for the purposes of modeling EPS in 2013, note that this figure also excludes the impact of approximately 1 million participating securities that should be incorporated into your models, for a total of approximately 47 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 will turn it back to Kay.

Katherine Lawther Krill

Thanks, Mike. In closing, ANN Inc. delivered record earnings per share in the second quarter, and we are well-positioned for the second half of the year.

Our team is highly focused on continuing to generate long-term profitable growth and increased value for our shareholders.

Operator, we're ready for our first question.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Janet Kloppenburg with JJK Research.

Janet Kloppenburg

Just a couple of questions, Kay. Can you talk a little bit more about your outlook for the factory outlet to deliver -- I think you're looking for the factory stores and the outlet stores to deliver positive comps in the third quarter, although I'm not sure. And can you talk about what the drivers are there? And on the merchandising margin front, do you expect that -- I'm sorry, on the gross margin front, do you expect that shipping and handling will continue to be a pressure? And lastly, Mike, can you just give us what our share count should be for the third quarter?

Michael J. Nicholson

Sure, Janet. Let me do my best. So in terms of the first question regarding our outlook for Outlet. As you know, our strategy year-to-date has clearly been on focusing on maximizing profitability, and we've been very, very disciplined with respect to our inventory investment. We said on the prior call that we fully expect, beginning in Q3, that we are going to position this business to comp positive in the back half of the year. And I think it's important to note that we will begin to anniversary much easier traffic compares as we move through the back half of the year. And importantly, as we turned the corner into the third quarter, we did begin to see an uptick in the trends with respect to the outlet business on a combined basis as compared to the second quarter. In fact, outlet on a combined basis quarter-to-date, 3 weeks doesn't necessarily make a trend, but 3 weeks in on a combined basis, the outlet channel is comping positive. Your second question regarding gross margin rate and the impact of shipping and handling. In terms of the framework, of the guide that we provided, in terms of the third quarter gross margin rate outlook, the way I think about it versus last year, we're anticipating about a 50-basis-point impact of shipping and handling versus last year. And also as I mentioned in our prepared remarks, we are anniversary-ing a onetime benefit last year that was a benefit to the tune of about 40 basis points in terms of the gross margin rate.

So on an adjusted basis year-on-year, after taking those 2 items into account, we're effectively providing you with a framework that is essentially equal to last year's gross margin rate outcome. And then finally, your third question, Janet, can you remind me? I apologize. So operator, let's move on -- sorry, share count for the third quarter. So what I did say in terms of our full year outlook, in terms of share count for the full year, we provided a framework of approximately 47 million shares, including the 1 million shares of participating securities. And what I'd say is, in terms of the third quarter, you can expect -- you can utilize the share count that is slightly below that 47 million share guide. And with that, let's move on to the next question.


Our next question comes from Kimberly Greenberger with Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Kay, I am wondering, what are the pros and cons about bringing your e-commerce business in-house? I think right now, there's a third party fulfilling it and, just given the growth you're seeing and the future opportunities in cross-channel inventory management, is there any thought that perhaps that could be an incremental opportunity for you going forward?

Michael J. Nicholson

Sure, Kimberly, it's Mike. I'm happy to take that question. We have a long-standing partnership with a third-party service provider that has positioned us well throughout the growth of this business. And what I'd say is, for the foreseeable future, we continue to anticipate working with this partner. We've had good success year-to-date and historical-to-date. And while we continue to plan for significant growth in this business moving forward, we are incredibly confident in this partner and confident that we'll be continuing to work with this third party.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Just here on third quarter to-date, the stores look fantastic, Kay. And I'm wondering if you care to comment on just the trends that you're seeing so far with all of the new fall transition deliveries.

Katherine Lawther Krill

Yes. August is off to a strong start for us. Both brands are comping positive month-to-date. And in fact, we comped positive in both brands every month of Q2. So far, in Q3 at Ann Taylor, we're getting a great response to our fall offering, with sweaters, blouses, pants, skirts and jackets performing particularly well. And as I said on the call, our new shoe and jewelry collections are off to an unbelievable start. At LOFT, the fall assortment is also performing extremely well. She's loving our new pant offering, LOFT lounge, denim, dresses, fall tops and statement necklaces. So I'm also very pleased that our inventory carryover was minimal at both brands, with 90% of our product representing fresh fall goods. So we are well-positioned to support continued momentum at LOFT and Ann for the back part of the year. Overall, we're on track to deliver positive comp performance at both brands and another year of record performance.


Our next question comes from Adrienne Tennant, Janney Capital Markets.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Actually, a follow on to Kimberly's question on comp. So did the -- does the comp guidance assume an acceleration throughout the balance of the quarter? And then Mike, can you talk about the gross margin, the implied gross margin guidance for the fourth quarter? It seems like so little improvement in the fourth quarter, when there's so much opportunity. And then finally, Kay, can you give us a little bit more color on the LOFT pant relaunch? It looks great.

Michael J. Nicholson

So the first 2 questions, in terms of whether the framework that we've provided for the third quarter assumes that the comp accelerates, I'd say the answer to that is no. We're very pleased with the start to the third quarter and we're fully confident in our ability to deliver on the outcome or the framework that we provided. In terms of the fourth quarter and effectively the guide or the squeeze in terms of gross margin rate, what I'd say is, it is a highly promotional environment. The fourth quarter, in particular, historically, typically nets out to be incredibly competitive and promotional. And I think we're being appropriately prudent in our thinking with respect to where we've positioned the rate for the fourth quarter. And we hope at the end of the day that we're able to deliver a better outcome than the guidance framework that we provided.

Katherine Lawther Krill

Okay. And then about pants in LOFT. We tweaked the fit overall and also tweaked the waistbands, primarily for comfort. So the fit of the pants are definitely improved. We also added stretch to all the pants because we know that's important to her. And we're going to begin to showcase, after Labor Day, all our pants by fit, which is Julie, Marissa and Zoe, in-store and online. So the pants are being very well-received right now. And I think after Labor Day, it's definitely going to be clearer in the store and online what our strength is.


Our next question comes from Jeff Black, Avondale Partners.

Jeff Black - Avondale Partners, LLC, Research Division

Mike, on the SG&A, I know you said you leveraged your fixed cost a little bit better. But is there something more at work here? Is there some sort of inflection point we're seeing with omni-channel business and the leverage you're seeing out of that? Or are there other initiatives at work? And can we expect to see this type of leverage on this type of comp going forward? I know you gave 3Q guidance, but is this an area for potential upside?

Michael J. Nicholson

Sure, Jeff. Thanks for that question. I appreciate that. As we've talked about in the past, the magic in this model is with productivity gains on the top line, the sizable and significant opportunity to leverage our expense base and the significant flow-through to the bottom line. And I think, really, in terms of our second quarter results, that really speaks to our long-term strategy. We made good -- we did some really good work in the second quarter and made some good progress in terms of really leveraging our 4-wall expenses, and we were aggressive in managing our corporate overhead as well. And so, like I've said in the past, if we are able to deliver the productivity gains on the top line, we should be able to continue to realize a significant sizable opportunity in terms of the profit flow-through on the bottom line.


Our next question comes from Dana Telsey, Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

Can you talk a little bit about LOFT, what you're seeing in terms of the fall and also the holiday product, how you're thinking about pricing this year versus last year, and the balance of casual versus wear-to-work, given the expanded customer you're targeting? And then on the core Ann Taylor business, the accessories pieces of business, how big can that get, and how do you see the margin on accessories versus the core?

Katherine Lawther Krill

Okay. I'm going to start with accessories and shoes, Dana. They are off to a tremendous start. I think our partnership with Vince Camuto and our definite jewelry and specifically, necklace statement, is also being very well-received because I think it's significant and it looks very elevated. We are definitely experiencing and planning for double-digit penetration in that business. So off to a great start. And then pricing at LOFT is absolutely the same as it's always been. We have not changed our price points in LOFT, and we will not. And casual is really the lions share of that business. It's about 80% of the business between casual and every day, and about 20% of relaxed go-to-work. We figured out, definitely in the second quarter and we're expanding that into fall, that we absolutely need about 20% of our assortments to offer her a relaxed assortment of go-to-work. So we think that LOFT is definitely on track and did a really good job in managing its business and promotions in a highly competitive environment. We're definitely going to continue to offer targeted promotions and we feel really great about LOFT's fall offering in Q3. And as I said, it's had a great response so far. We feel it's well-balanced in terms of color, product and price points and we feel it's definitely well-positioned for third and fourth quarter.


Our next question comes from Brian Tunick, JPMorgan.

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

I guess, just 3 quick ones. One, if you could talk about maybe more on the omni-channel, maybe how she's shopping the brands and whether she's buying different categories, or you have a different basket size online, would be interesting. Second would be if Mike could just talk about the longer-term store growth opportunities for LOFT, I guess, in small markets, and both brands in Canada? And then maybe just remind us on Hurricane Sandy, maybe the impact on the business from the store closings, the website being down, just what was the overall impact.

Katherine Lawther Krill

Brian, let me just start real quick on multichannel, and Mike might pipe in after I finish. We -- as I said, we are very pleased with the results of multichannel, actually in both brands. We've seen incredible sell-throughs on fashion items and we're also seeing great results as we utilize that channel to more profitably clear through inventories. And long-term, we're absolutely testing and learning right now, and look forward to offering her a more seamless access to our inventory in order to maximize sales and margin. And we are working on Phase 2, as you know, which is definitely going to be highly focused on capitalizing on the many opportunities that we've seen in Phase 1.

Michael J. Nicholson

The only thing I'd add -- other thing, Brian, I'd add in terms of the multichannel, omni-channel question is, we know that clients or customers that shop multiple channels spend more with ANN Inc., and so we are incredibly focused on driving more multiple-channel shoppers or clients across the company. And in addition, what I'd say is basket size in e-commerce is traditionally and typically larger than the store basket size. So we're on it. We're focused on it, and it's a significant growth initiative for us moving forward.

In terms of your other questions, longer-term store count or store growth opportunities at a high-level domestically. In terms of Ann Taylor, our focus is on rightsize and remodel. We're comfortable with the size of the chain and it's about focusing on productivity gains. At LOFT full price, we've previously articulated the view that we believe that it is at least a 600-store chain, and the growth over the next few years, in terms of box growth, will come predominantly from mid and small markets. In terms of the factory outlet channel, we've said that Ann Taylor Factory is at least a 125-store opportunity. And then finally, in terms of LOFT Outlet, we believe it's at least a 150-store opportunity. And then finally, in terms of Canada, while we haven't provided a precise numbers with respect to Ann Taylor and LOFT specifically, what we have said is, longer-term, that we believe it could be at least a 50- to 75-store opportunity. And then finally, in terms of the fourth quarter and the fourth quarter hurt last year to Sandy, we've said that it impacted us to the tune of about $0.10. So there you go.


Our next question comes from Neely Tamminga with Piper Jaffray.

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

Just 2 real quick questions here. First, Mike, could you talk a little bit about, specifically, I think you guys had changed through your allocation strategies, your initial allocation strategies for e-com to make sure that things were better-balanced between the store and e-com. It seems like you have evidence of that working. I'm just wondering where some of the tweaks could be for the back half and the opportunities. And then just broadly speaking related to that, did you see a lot more consistencies on a month-to-month across e-com relative to maybe store traffic? We're just trying to size it up. And then for Kay, your partnership with Vince Camuto, the shoes look amazing and it's very well-crafted shoes overall. It's our understanding in talking at the store level that you all have this going through holiday. Are there any discussions about extending this beyond holiday? Could you give us some clarity?

Katherine Lawther Krill

Neely, let me answer the first question with Vince Camuto. We're in partnership with him for the long term. We definitely have seen amazing success so far in the styling and the fit and the comfort. So it's kind of all 3 things. So you can expect us to continue to partner with him and continue to grow this business. As a matter of fact, we are definitely increasing our styles and assortment as we move forward.

Michael J. Nicholson

And then just in terms of your question regarding channel positioning, the e-commerce channel with more inventory. We really won't begin to learn about that strategy until the back half of the third quarter and into the fourth quarter. So we were playing a little bit of catch-up in terms of the learnings of multichannel and really understanding the true baseline dot-com demand, so I'll be in a better position to share some initial thinking or initial reads in November related to the third quarter. But really, we're going to learn a lot about that in the fourth quarter. Your other question, just in terms of consistency in business, candidly, Neely, while we talk to you and report on full price on a combined basis, we did see pretty consistent results across both e-commerce and stores during the second quarter. I think Kay actually did indicate earlier in the Q&A that we did comp positive in every month of the second quarter. Clearly, May started off incredibly strong and was the strongest month of the quarter, but both June and July were positive. And importantly, store traffic for ANN Inc., both for Ann Taylor and LOFT, was not a challenge for the second quarter. It wasn't up significantly, it wasn't down significantly. It was essentially flat. And so I think that bodes well for us moving forward into the third quarter and the back half of 2013. And then just in terms of a traffic metric regarding e-commerce, I mean, the numbers are huge, they're significant, and we just continue to see huge traffic growth to our e-commerce sites. And to some degree, it's a function of us really strategically focusing and efforting on driving more single-store-channel clients to the website.


Our next question comes from Betty Chen, Wedbush Securities.

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

I was wondering if maybe, perhaps Kay, could talk a little bit about marketing. It sounds like on both ends, we're seeing, for both brands, really good effort in terms of not only keeping the loyalty of existing customers, but capturing, adding to the customer files. Can you talk to us a little bit more about what we may be able to see without being -- I guess, sharing your competitive secrets, what we may be able to see to kind of continue that momentum and how we can also -- or how the team can use personalization to really accelerate that process?

Katherine Lawther Krill

Okay. Ann Taylor's and LOFT's marketing strategy is definitely being positively affected by our CRM ability, and it's creating, for us, a more personalized and relevant shopping experience for the client. It's going to increase loyalty and attract new clients to the brands. But right now, in both brands, we're reaching her through multiple ways: e-mail, social media, direct mail and magazines. And we really feel like we're making great progress there. And from a traditional marketing stance, we're really moving in a more digital way, which we feel like is the right way for today.


And we'll be taking our last question. We have Anna Andreeva with Oppenheimer.

Anna A. Andreeva - Oppenheimer & Co. Inc., Research Division

A question on merchandise. Margins were up during the quarter, obviously, very impressive in this environment and -- versus your guidance were down. Talk about maybe where you saw the upside versus your expectations. What kind of a merchandise margin you're embedding in your guidance for the third quarter? And I'm not sure if I missed that, what was the drag from the shipping costs in 3Q? And then just quickly on SG&A, it really has been coming in better the last few quarters. Obviously, you guys are doing a great job of flexing there. Maybe talk about some of the buckets where you're seeing the opportunity.

Michael J. Nicholson

Sure. In terms of gross margin for the second quarter, what we did say, there was about a 100-basis-point impact due to shipping and handling, consistent with what we experienced in the first quarter and fourth quarter of last year. Going forward into the third quarter, in terms of our guide or our framework and the way I think about it year-on-year, about a 50 basis point -- we're anticipating or projecting about a 50-basis-point impact in the third quarter of this year compared to last year, as well as, in the prepared remarks, I talked about a 40-basis-point impact year-on-year due to the one-time item that we recognized in the third quarter of last year. In terms of gross margin during the second quarter, clearly, Ann Taylor was the primary driver of that gross margin, merch gross margin rate outcome, and they were up a few hundred basis points year-on-year. Factory was, on a net basis, slightly positive, and LOFT was down slightly on a merch margin basis. And then moving forward, in terms of the third quarter on an all-in basis, we're anticipating a fairly consistent year-on-year merch margin outcome in the third quarter and slightly better in the fourth quarter. And then finally, in terms of SG&A, yes, thank you, Anna. We did make good progress this quarter. We did leverage our expenses. We were able to effectively manage our store base with less 4-wall overhead, as well as leveraging our corporate overhead, and that is clearly our objective moving forward. There was a question a bit earlier on the call regarding SG&A. And as we've talked about, clearly, that's the power of this model and the leverage opportunity, with productivity and top line gains, the significant opportunity longer-term that we have to leverage our expense base and realize significant profit flow-through on the bottom line.

Katherine Lawther Krill

Okay. With that, thank you, everyone. As always, we appreciate your interest in ANN, and we look forward to reporting on our continued progress in the second half of the year. Have a great weekend.


Thank you. Thank you, all, for attending today's conference. This concludes the conference call. Thank you for your participation.

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