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AnnTaylor Stores Corporation (NYSE:ANN)

Q4 2009 Earnings Call

March 12, 2010 8:30 am ET

Executives

Judy Pirro – VP, IR

Kay Krill – President and CEO

Mike Nicholson – EVP, CFO and Treasurer

Analysts

Neely Tamminga – Piper Jaffray

Liz Dunn – Thomas Weisel Partners

Sam Panella – Raymond James

Barbara Wyckoff – Jesup & Lamont

Adrienne Tennant – Friedman, Billings, Ramsey

Roxanne Meyer – UBS

Kimberly Greenberger – Citigroup Global Markets, Inc.

Stacy Pak – SP Research, Inc.

Dana Telsey – Telsey Advisory Group

Jeff Black – Barclays Capital

Jennifer Black – Jennifer Black & Associates

Operator

Good morning, ladies and gentlemen and welcome to Ann Taylor Stores Corporation’s Fourth Quarter 2009 Earnings Conference Call. At the request of the Company, today’s conference call is being recorded. If you have any objections you may disconnect at this time. Following the prepared remarks by the Company you will have the opportunity to ask questions.

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

Judy Pirro

Thank you, Hamilton, and good morning everyone. We’re pleased you could join us to review our results for the fourth quarter and full year 2009.

I’m here today with Kay Krill, Ann Taylor’s President and CEO, and Mike Nicholson, our CFO. Kay will start with a recap of the quarter and provide a perspective on our outlook for 2010 followed by Mike’s financial review, 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. With that, let me turn it over to Kay. Kay?

Kay Krill

Good morning and thank you for joining us. I’m pleased to report on our performance for the fourth quarter of 2009 and the momentum we are carrying over into fiscal 2010. Even this early in the New Year we believe that both Ann Taylor and Loft are on the right track and we are excited about the opportunities ahead for the brands and our Company.

As our press release indicated, we ended fiscal 2009 on a strong note, with fourth quarter results coming in ahead of our initial expectations, highlighted by stronger than anticipated sales, and a higher gross margin rate.

Our results also benefited from our continued focus on managing our expenses and our inventory. Our results during the fourth quarter were driven by the successful implementation of three key priorities. Better product at both divisions and effective marketing and promotional strategy that delivered strong margins and a disciplined inventory plan.

Overall, our top-line reflected the positive response from clients to our assortments, even as our bottom-line benefited from how we prudently positioned ourselves, given the economic landscape and the consumers’ cautious mindset.

Together, this enabled us to achieve significant improvement in our sales trend, while also delivering a very healthy gross margin performance of 52.5% for the Company.

Notably, both divisions reported dramatic increases in full price selling, fueling both the comp store sales improvement and the strong margin achieved in the quarter.

In terms of our balance sheet, Mike will review the details but I am very pleased that we ended the year in a very strong position, with more than $200 million in cash and no outstanding bank debt.

Let’s take a closer look at the results by division. First, Ann Taylor, as you know, the fourth quarter marked the second quarter in our multi season strategy to reposition this iconic brand.

Performance improved significantly from third quarter level as Ann’s product offering and value proposition gained further traction and clients took note of the brands new, more modern, aesthetic and exceptional quality.

While we still have work to do, we are encouraged by the progress we are making in terms of product, marketing, and translation of the brand vision. All of which are driving improved sales and margin.

Perhaps most gratifying at Ann is that we have seen a dramatic improvement in Ann’s comp store sales performance as the year progress. Specifically, for the fourth quarter, Ann’s comps were down about 7%, which represented a more than 18 point improvement sequentially from the third quarter and an approximate 31 point improvement from the second quarter.

I am especially pleased to note that the momentum at Ann is continuing into the current fiscal year and we achieved positive comp sales of approximately 10% in February, as our spring product reached our stores. In addition, we had very little fall clearance product as we began the spring season.

On a year-over-year basis, the fourth quarter of 2009 comp improvement reflected a significant increase in full price sales compared to last year when the environment called for a significantly higher promotional level.

Central to our overall strategy has been our continuing focus on maximizing gross margin performance. During the quarter, Ann Taylor’s gross margin performance again significantly outpaced its sales comp, reflecting the higher full price selling.

As we told you on our third quarter call in November, we had strategically planned to execute on various incentives during the holiday season to remain competitive and we continue to drive traffic and sales. We did so and we succeeded in delivering an improved traffic and sales trend while also delivering a dramatic increase in gross margin rate for the quarter over last year.

As you know, in light of the uncertain economy and our desire to test and learn, we kept inventories lean. And this certainly paid off from a margin perspective. As I’ll touch on later with this initial success under our belt, we have now positioned our inventory to support expected positive comp store sales for the spring 2010 season.

Turning to product, overall, we are encouraged by our clients’ response to Ann Taylor’s new design aesthetic and more modern point of view. As in the third quarter, the fourth quarter was a period of intense reading and learning for the brand, to build on the successes we’ve had and to make adjustments for the future where necessary.

In terms of wins, we have been very pleased with the performance of our suiting, dresses, and skirts, which have generated consistently strong results. In addition, we performed exceptionally well with jewelry, shoes and belts. And they are all continuing to exceed expectations.

We saw improved momentum in tops versus the third quarter, driven by sweaters and knits. We continue to enhance and refine this important category for the brand, adding more color and a better balance of versatility to the assortment.

Pants remain an area of opportunity, and we have improved the assortment for spring with better fabric choices and leg shape diversity as well as more attractive opening price points.

In fact, we completed a thorough strategic evaluation of our pricing structure by category across our full assortment at Ann. As a result, we now have put in place a more compelling, good, better and best assortment. We are offering more competitive opening price points in all apparel categories, while maintaining our high quality and standards.

For example, our average initial retail price in pants and tops is down 18% compared to the fall 2009 season in order to remain compelling and competitive. Value continues to be extremely important to our client and we also believe this will enable us to better appeal to a broader consumer base.

In terms of marketing, we continue to execute on the strategy we outlined on our last call with great success. This included a multi touch but cost-effective marketing plan to engage current and lapsed clients and drive new interest in the brand.

We used a variety of channels to get our message out, from selective media to online marketing, direct mail and in-store events. Our holiday marketing campaign featuring Heidi Klum was aspirational and extremely well received. And we are equally excited about our spring campaign featuring Milla Jovovich.

In summary, it was a solid quarter for Ann Taylor. We are rebuilding with a clear vision for the brand, a vision that is resonating with consumers. Fall 2009 was very much about introducing an evolved Ann aesthetic and we feel we’re on the right track.

Our focus in 2010 is now on growing the top-line. We have positioned our inventory to support positive comp store sales and feel this is the right strategy to support the top-line growth and momentum of Ann, while maintaining our continued focus on achieving healthy gross margins. Thus far in the quarter, we are very encouraged by our performance on the top and bottom lines.

Looking ahead, we remain cognizant of the continuing macro challenges and the impact this has on our core client, which reinforces our belief in a measured and strategic approach to growth moving forward. We are excited about the progress we’ve made.

Our team is focused on building Ann Taylor’s market share and further expanding the reach of the brand, in order to deliver long-term sales and profit growth for this division.

Now turning to Loft, Loft had another strong quarter, building on the progress and momentum we’ve made over the course of the year to continue this brand’s growth and drive incremental bottom line profitability.

Sales improved significantly from the third quarter and earlier in the year, with comp store sales in the fourth quarter turning positive at plus 2% at the upper end of our initial expectations. The gain was largely driven by a double-digit surge in full price selling compared to the prior year.

Gross margin was also very strong, coming in near record level, and reflecting the continued success of our product, marketing and inventory strategies.

As you know, inventory management has been a top priority. Loft has done an excellent job of keeping inventory levels clean, which enabled us to be more strategic in our promotional activity, allowing us to use incentives selectively to remain competitive and drive business.

From a product perspective, Loft continues to build on its successful formula of offering casual, feminine fashion at great quality and value. Knits were strong during the fourth quarter, with a novel embellished tees performing especially well. Jewelry emerged as the gift of the holiday season and Loft was well-positioned with a compelling assortment at attractive price points.

In Denim, our fashion styles perform well as our client clearly looks to us for newness and on trend fashion.

Finally, we were pleased with the excellent performance of our new Loft lounge selection, which in its second quarter since launch continued to exceed expectations.

We supported the strong marketing product offering with a solid marketing plan, designed to keep our clients engaged and highlight Loft as a destination for both self-purchase and gifting.

Looking ahead, we are excited about the spring collection, which has a good balance of fashion and versatility. We have received positive client response so far as evidenced by our comp sales increase of approximately 10% in February.

While Loft remains firmly focused on its core casual offering, we do see longer-term opportunities to build on Loft’s brand positioning. We will complement the core offering with a greater penetration in certain categories, such as relaxed separate that are appropriate for every day as well as an expanded assortment of shoes and jewelry.

As we have said, we view Loft as a growth vehicle and expansion of the brands store portfolio will contribute to this growth. As part of our strategic restructuring program, we have optimized Loft’s store fleet in the past two years by exiting less productive locations.

With this solid base, we are now ready to begin selectively adding to Loft’s store fleet to grow the brand. As part of this strategy, we have developed a new store prototype, which represents an evolved aesthetic for the brand. The new prototype will debut in mid-May.

In summary, we are extremely encouraged by Loft’s performance and are looking forward to building on Loft’s strong momentum in 2010 to take this brand to the next level. We are moving forward in a strategic and prudent way and clearly, see the potential to capitalize on Loft’s strong brand to drive long-term growth.

Turning now to our e-commerce channel, we have been very pleased with the performance of this business. Consistent with the Company’s overall strategy, our focus in the fourth quarter was on delivering strong gross margin improvement and maintaining conservative inventory levels.

The launch of our new Web sites for both Ann Taylor and Loft has been a strong catalyst for the business, as our clients have clearly responded to the enhanced brand experience, improved product imaging and overall ease-of-use.

Traffic during the fourth quarter showed significant growth with positive sales momentum. Notably, we have continued to see great success with our online exclusive products.

We remain very enthusiastic about the potential for further growth on our e-commerce business in 2010 and have identified this channel as a significant growth opportunity for us this year and beyond.

We are encouraged that our positive sales and traffic momentum continued into the month of February, indicating that our earlier initiatives to expand our e-mail list enhance our search ability on the web and to increase our presence on social media sites are gaining traction. To support our future growth, we are investing in a more robust marketing plan in 2010 and in a new technology platform that we’ll launch this summer.

In terms of our Factory business, both Ann Taylor Factory and Loft Outlet delivered a solid quarter, achieving significant gross margin improvement over last year’s fourth quarter.

And importantly, a positive comp for the fourth quarter. This channel continues to provide a valuable avenue for reaching a more price conscious consumer, particularly, in the recessionary environment in which we’ve been operating, while also producing attractive levels of profitability on a comparatively lower investment. As such, we plan to selectively expand Loft Outlet’s presence in this channel in 2010.

Mike will provide more details about our outlook and store growth plans in his discussion, but let me say a few words about 2009 and how we’re thinking about the spring season and fiscal 2010.

As you know, 2009 was a year in which our priorities were to strengthen and evolve our brands to ensure they remain relevant and covenant, continue to aggressively manage our cost structure and inventory levels, ensure that the Company’s balance sheet and cash position remained strong and take the actions necessary to position the Company for long-term success.

Our performance improved over the course of the year as the strategies we implemented gained traction. And our results underscore that we planned appropriately for a year marked by economic uncertainty, high unemployment, and a severe pull back in consumer spending.

In spite of these headwinds, we achieved an improving sales trend, higher gross margin dollars, and increased profitability, including very strong gross margin for Loft for the year and a significant improvement for Ann Taylor.

We also maintained the Company’s strong financial position including strong free cash flow and no bank debt. Overall, it was a prudent plan that delivered better earnings in a tough environment.

Now, as we move into 2010, we expect to continue to benefit from our more efficient and streamline operation. Our focus is on growing the top-line while remaining disciplined in our approach. Overall, we believe we are offering her more compelling and relevant product and we anticipate better leverage as sales improve.

Strategically, we’re focusing on the following key priorities. To continue the progress being made at Ann Taylor, to build on the positive momentum we are achieving at Loft by investing in the growth of the Loft brand and expanding the store base through the addition of approximately 10 Loft stores and 20 Loft Outlet stores in 2010.

To continue to invest in our high growth e-commerce business, putting greater resources behind this channel for both brands, to continue to elevate the client experience across all of our channels with a particular focus on product, value and the shopping experience, to remain disciplined in our approach to maximizing gross margin, managing inventory and controlling expenses, and to utilize our strong balance sheet and free cash to further enhance shareholder value.

Overall, we have made significant strides and are in a strong position as we enter fiscal 2010. We look forward to building on our progress in the year ahead. Mike?

Mike Nicholson

Thanks, Kay, and good morning everyone. As Kay mentioned earlier, our goals for 2009 centered on strategies to enhance our product at both divisions, employ an effective marketing and promotional strategy that delivered strong gross margins and to maintain a disciplined inventory plan. Our fourth quarter and fiscal year results clearly demonstrate that we’ve delivered against these goals.

Our actions in 2009 have positioned the Company to now pursue a more offensive, although still prudent, sales growth strategy as we move into 2010, which we expect to achieve while continuing to deliver strong gross margins.

Let me start with a review of our results for the quarter and the year, beginning with the fourth quarter. Net sales for the fourth quarter declined 2.9% versus year ago to $469 million on comps that were down 0.6%.

By division, net sales at Ann Taylor declined 12.5% to $128 million on a comp store decline of 7.3%. While at Loft, net sales increased 0.4% to $232 million on a comp store increase of 2.1%.

Our gross margin rate for the quarter of 52.5% reflected a dramatic increase of nearly 17 margin points above the 35.7% reported last year. This performance primarily reflected improved product at both divisions, a lower level of promotional activity during the quarter compared with the fourth quarter of 2008 and conservative inventory management.

We closed the quarter with total inventory per square foot that was essentially flat compared to last year, reflecting a 13.5% increase at the Ann Taylor division, and a 6.4% increase at Loft, offset by declines in the Factory channel.

Importantly, inventory increases at the brands reflected the earlier delivery of spring product. Both brands entered spring with very low levels of fall carryover and more than 90% of our mix consisted of fresh spring product.

Turning now to SG&A, total SG&A expenses for the quarter declined 9% or approximately $24 million to $242 million. This improvement largely reflected savings from our restructuring program and aggressive management of expenses, partially offset by an incremental $5 million in marketing investment to support our brands and an increase in performance-based compensation relative to 2008.

During the quarter, we recorded pre-tax, non-cash restructuring charge of approximately $3.6 million compared with pre-tax restructuring charges totaling $33 million in last year’s fourth quarter.

On an after-tax basis, restructuring charges in the fourth quarter of 2009 totaled $2.5 million or $0.05 per share compared with after-tax restructuring charges of $21.1 million or $0.37 per share in the fourth quarter of 2008.

We did not incur any non-restructuring related impairment or goodwill charges in the fourth quarter of 2009 compared with pretax non-cash asset impairment related to stores not included in the Company’s restructuring program and goodwill charges that totaled $313.4 million in the fourth quarter of 2008. On an after-tax basis, these fourth quarter 2008 charges totaled $296.4 million or $5.26 per share.

Excluding the aforementioned charges, we reported operating income in the quarter of $4.9 million compared with an operating loss of $92.8 million in the fourth quarter of 2008.

On the same basis, we reported net income of $2.5 million or $0.05 per diluted share during the quarter compared with a net loss of $58.1 million or $1.03 per share in the fourth quarter of 2008.

Weighted average diluted shares outstanding for the quarter increased 3% to 58.1 million shares versus 56.4 million shares in the fourth quarter of 2008. The increase in diluted shares in 2009 was primarily a function of the comparison to a period of loss in 2008 where there was no dilutive effect.

Our effective tax rate for the quarter was 95.5% versus 14.5% in the fourth quarter of 2008. The fourth quarter tax rate reflected the cumulative impact to the fourth quarter of the final full year effective tax rate and we currently anticipate a return to our historical effective tax rate in the coming quarters.

Depreciation and amortization in the fourth quarter totaled approximately $25 million compared with approximately $29 million in the fourth quarter of 2008.

Capital expenditures in the fourth quarter totaled $9.2 million compared with $27.1 million in the fourth quarter of 2008. During the fourth quarter, we did not open any new stores. We closed a total of 25 stores during the quarter, 12 of these were Ann Taylor stores and 13 were Loft stores. In addition, we converted 10 stores from Ann Taylor to Loft during the quarter.

Turning now to a quick recap of our full year results, net sales for fiscal 2009 declined 17% versus year ago to $1.8 billion on an overall comp decline of 17.8%. By division, net sales at Ann Taylor declined 33.8% to $456.6 million on a comp store decline of 30%. At Loft, net sales declined 13.6% to $939.9 million, on a comp store decline of 12.7%.

Our gross margin rate for the year increased 630 basis points to 54.4% compared to last year.

SG&A for the year was down 8% or approximately $84 million to $966.6 million relative to a weighted average square foot decline of about 1.2%. This improvement reflected the cumulative benefits of our ongoing restructuring program and aggressive management of expenses throughout the year, partially offset by an increase in performance-based compensation.

In terms of the impact of the various charges on our full year results, restructuring charges for fiscal 2009 totaled $36.4 million, which was $25 million after-tax or $0.45 per diluted share. This compared to the 2008 total of approximately $59.7 million in pretax restructuring charges which was $39 million after-tax or $0.67 per diluted share.

Asset impairment charges totaled $15.3 million in fiscal 2009 which was $11 million after-tax or $0.19 per diluted share. This is compared to 2008 asset impairment charges that totaled $29.6 million for the year, which was $19 million after-tax or $0.33 per diluted share.

There was no goodwill impairment in fiscal 2009 compared with goodwill impairment of $286.6 million in fiscal 2008, which was $279 million after-tax or $4.87 per diluted share.

Taken together, the cost of these charges in 2009 was $51.7 million on a pretax basis and $36 million or $0.64 per diluted share on an after-tax basis. For fiscal 2008, these charges totaled approximately $376 million on a pretax basis and $337 million or $5.87 per diluted share on an after-tax basis.

Excluding these impairments and restructuring charges, operating income for the year was $27.7 million compared with operating income of $4.2 million last year.

On the same basis, we reported net income of $17.8 million or $0.32 per diluted share in 2009 compared with net income of $2.9 million or $0.05 per diluted share in 2008. Weighted average diluted shares outstanding for the year decreased 1% to 56.8 million shares versus 57.4 million shares in fiscal 2008.

Our effective tax rate for the year was 30.3% versus 10.1% for 2008.

Depreciation and amortization in 2009 totaled approximately $104 million versus $122 million in 2008. And capital expenditures for the year totaled approximately $39 million versus approximately $110 million in 2008.

In terms of new store activity, we opened a total of 14 new stores in 2009, comprised of nine Loft stores, one Ann Taylor Factory store and four Loft Outlet stores.

We closed total of 42 stores during the year comprised of 18 Ann Taylor stores and 24 Loft stores, as part of our restructuring program.

In addition, we converted 11 stores from Ann Taylor to Loft during the year, and ended 2009 with 907 stores comprised of 291 Ann Taylor stores, 506 Loft stores, 92 Ann Taylor Factory stores and 18 Loft Outlet stores.

Our store square footage at the end of the year totaled approximately 5.3 million square feet, an approximate 3% decrease versus the 5.5 million square feet we reported at the end of 2008. And on a weighted average basis, square footage declined 1.2% over the same period.

Turning now to our restructuring program, as you may know, our multi-year strategic restructuring program, which was launched in January of 2008 is expected to generate total ongoing annualized savings of $125 million by 2010. Approximately $90 million of these savings represent SG&A savings and the remaining $35 million represent gross margin savings.

We realized approximately $40 million of these restructuring savings in fiscal 2008, approximately, $65 million in incremental savings in 2009 and we expect to realize the remaining $20 million of incremental savings in 2010.

One-time costs of the multi-year program are expected to total approximately $130 million to $140 million, of which approximately $128 million have already been incurred as of the end of fiscal 2009.

Importantly, of the total program costs, approximately, $85 million are expected to be non-cash costs, associated with the store closure program and virtually all of the savings are expected to be cash savings.

In fiscal 2010, we expect restructuring costs to be in the range of $2 million to $12 million and we expect to generate incremental ongoing savings of approximately $20 million.

Under our restructuring program, we currently expect to close a total of 174 stores during the three-year program period, approximately, half of which are expected to be Ann Taylor stores and half Loft stores. We closed a total of 60 of these stores in fiscal 2008 and 42 stores in fiscal 2009, and expect to close approximately 72 stores in fiscal 2010.

Timing of the 2010 closures will be weighted towards the back half of the year. And we currently expect to close 14 stores in the first half of the year, and the remaining 58 stores in the latter half of the year, with most of these closures occurring within the last two weeks of the fiscal year.

Turning now to our store growth plans, as Kay mentioned earlier, we are pursuing a growth strategy for our Loft brand in 2010. Our confidence in Loft is supported by the brands positive 2009 momentum that has continued into the first quarter and we plan on opening approximately 10 Loft stores and 20 Loft Outlet stores in 2010, to capitalize on the brands potential. The majority of these store openings are expected to occur in the third quarter.

In addition, we anticipate approximately five conversions to 10 conversions of Ann Taylor stores to Loft during the year. For both Ann Taylor and Loft, we are investing in new store prototypes, which will debut in May for Loft and in the third quarter for Ann Taylor.

In terms of our strong balance sheet, we ended the year with cash of $204 million and no bank debt. We did this during a very challenging year by tightly managing our inventories and aggressively managing expenses to conserve cash.

We generated operating cash flow of nearly $83 million in the fourth quarter and net cash flow of more than $70 million. We remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value.

Now, turning to the outlook for the first quarter and full year of 2010, for the fiscal first quarter, we expect total sales dollars to be approximately $445 million and we anticipate a gross margin rate that is approximately 100 basis points above the levels achieved in the first quarter of 2009.

SG&A for the first quarter is expected to be approximately $240 million, which includes an incremental $5 million in marketing investment to drive continued momentum at our brands. We will continue to focus on maintaining a strong balance sheet.

In terms of our inventory positioning, we will continue to be disciplined and balanced in our approach to support sales growth and maintain strong gross margin dollar generation, in what we believe will continue to be an unpredictable consumer spending environment.

Inventory receipts for the spring season are essentially in line with last year at both brands. We anticipate that greater sales productivity and better product will deliver positive comp store sales at both brands and in all channels during the spring season.

In terms of the full year, we currently expect fiscal 2010 total net sales growth compared to the levels achieved in 2009 and a return to positive comp store sales at both brands in each of the fiscal quarters of 2010, as a result of more compelling product assortments, strategic marketing initiatives and a disciplined approach to inventory management.

Total weighted average square footage is expected to decline by approximately 3% at year-end reflecting the impact of approximately 72 stores being closed in fiscal 2010 under the Company’s previously announced restructuring program, partially offset by the opening of approximately 30 new stores.

Gross margin rate is expected to remain approximately equivalent with the level achieved in fiscal 2009.

SG&A expenses are expected to be approximately $975 million, reflecting the ongoing benefits of our strategic restructuring program, offset primarily by costs associated with the opening of new stores and incremental investment in marketing.

Incremental restructuring savings for the year are expected to total $20 million and one-time restructuring costs are estimated to be in the range of $2 million to $12 million.

Capital expenditures for the year are expected to be approximately $70 million.

And finally, we will continue to focus on maintaining our healthy debt-free balance sheet and expect a year-end cash position that will exceed the Company’s cash position at year-end 2009. And with that, I’ll turn it back to Kay.

Kay Krill

Thank you, Mike. Before opening the call to questions, let me reiterate my excitement about the direction we’re moving and the opportunities ahead for our Company.

We have a dedicated and talented team in place. And our strategies at both Ann Taylor and Loft continue to gain traction. We have a more efficient cost structure, a strong financial position and are committed to utilizing our balance sheet to further enhance shareholder value.

Operator, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you, ma’am. Our first question will come from the line of Neely Tamminga.

Neely Tamminga – Piper Jaffray

Great, good morning and congratulations, you guys. Just an absolutely fabulous job.

Kay Krill

Thank you, Neely.

Neely Tamminga – Piper Jaffray

It’s a two part question on innovation, Kay and for Mike. First, could you talk a little bit about how this switch to offense or from defense to offense using your words, Mike, we’re starting to see the innovation at the core Ann Taylor division, was I think what we’re seeing as an intimate test, maybe clean off from the success of Loft lounge, just wondering if you could talk a little bit more about what we might see innovations throughout this year, Kay.

And then secondly to that, Mike, can you talk a little bit more about the e-commerce business, just trend you’re seeing maybe so far in the quarter for spring and how we should be viewing that division for the total Company this year? Thanks.

Kay Krill

Neely, I’m going to jump in first on the e-commerce because it’s really exciting. In the fourth quarter, our overall strategy was to focus on gross margin and we had great success there. We were up 85% over last year with only a slight sales increase over last year due to extremely low inventory levels in December and January.

However, the exciting news for us now is as we enter 2010 with a fresh inventory flow and increased marketing on that channel, our February comp was up 45% over last year and that trend is even stronger during the month of March. So both brands are doing very, very well. We’re investing in this channel this year too. As I said, we’ll have new platform this summer. We’re going to increase our marketing effort and expand our product offering online. So, we view e-commerce as having significant potential for us.

Judy Pirro

Neely, it’s Judy. Could you rephrase your first question? It was rather long.

Kay Krill

She’s gone.

Mike Nicholson

Let’s move onto the next call.

Judy Pirro

Okay, we’ll move on to the next call. We’ll get back.

Operator

Next we’ll have Liz Dunn.

Liz Dunn – Thomas Weisel Partners

Hi. Let me add my congratulations. I guess my question related to your thoughts on real estate. As you’re opening these Outlets, closing some other stores, is it your view point that the shift towards the Outlet channel is longer-term in nature, like is it a decade long trend or what are you expecting there? And what’s the return on Outlet relative to your full price stores? And then the new prototype, how much are remodels going to cost and will there be any change to the size of box? Thanks.

Mike Nicholson

Hi, it’s Mike. To answer your three-part question, I think, first, just in terms of the Outlet channel, the reality is here at the Ann Taylor Stores Corporation, we believe we believe we are targeting a different and unique customer base within the Outlet channel and we really view that as an opportunity to drive significant incremental sales and profitability for the corporation.

Your second question regarding return, I think, we’ve talked about this in the past. That particular channel has a very healthy, high return with low construction costs, the ability to drive very strong gross margins and the overall level of operating expense as compared to the other channels is lower. So, obviously, that then would result in a very healthy and high return.

And then finally, just in terms of new store prototype, we talked about this historically. We are aggressively looking at opportunities to reduce the overall cost of building our stores and that is absolutely incorporated into the plan and the strategy as we go forward here into 2010.

Judy Pirro

Before we get to the next question, we just like to be sure that we get in as many of you as possible today in order to facilitate that I’d ask if you could please limit yourself to one question each. I’ll be available after the call for follow-ups if you need me. Thanks. Next question.

Operator And the next question will come from the line of Sam Panella.

Sam Panella – Raymond James

Okay, good morning.

Kay Krill

Good morning.

Sam Panella – Raymond James

With respect to your SG&A guidance for fiscal 2010, what type of revenue growth is that predicated on or perhaps like the leverage point we should think about with SG&A? Thank you.

Mike Nicholson

Hi. So, we’re really not going to talk to that because, quite frankly, I didn’t provide a perspective on total year sales growth. What I will say, though, is at a very high level we are anticipating that we will be able to leverage SG&A year-on-year by at least a couple of points. I also talked about in terms of absolute dollars year-on-year, we expect to be able to drive further cost reductions due to the restructuring program as well as the ongoing store closure program. And that will be partially offset by incremental investment in marketing in order to continue to fuel the top-line growth within the business.

Judy Pirro

Next question.

Operator

Next question comes from the line of Barbara Wyckoff.

Barbara Wyckoff – Jesup & Lamont

Hi, everybody. Good quarter. I just have a question for Gary and Christine. They’re there, right?

Judy Pirro

No, they’re not, Barbara.

Barbara Wyckoff – Jesup & Lamont

Okay. I guess it would be for Kay. If you could do over fourth quarter and I know it was a good quarter, but what would you have done differently for both divisions? Thank you.

Kay Krill

Thank you, Barbara. I think from an inventory perspective, I think that especially in the e-commerce and Factory channels, we sort of ran out of gas in December and January we did not maximize the sales potential in either one of those channels. We had nice gross margin but the sales suffered during that two-month period.

I think for Ann Taylor specifically, we had momentum in the suiting and dress and accessory area, tremendous momentum. And I think in hindsight we should have put more inventory behind those businesses. And in Loft, I think the tops category and the jewelry category were definitely standout and we probably could have used more investment behind that.

Having said all that, I think that our strategic planned promotional activity was very successful at maximizing gross margin dollars on what we thought was going to be a highly promotional quarter. It ended up that we really maximized our dollars. We were pleased with the quarter overall.

Operator

And our next question comes from the line of Adrienne Tennant.

Adrienne Tennant – Friedman, Billings, Ramsey

Good morning. Let me add my congratulations as well. Kay and Mike, I know you’re not giving quarterly comp and you kind of had talked about the February, but we’re kind of entering the heart of the spring selling season, you have some really nice momentum, the weather’s getting warmer, is there any reason to think that we shouldn’t see an acceleration in the business given the inventory investments and what you’ve already seen?

Kay Krill

Adrienne, we definitely started off the season very strong with February having close to a 10 comp and March is even better than that. Our traffic’s up and all retail metrics are positive, it is very exciting. However, we still have seven weeks left in the first quarter and March is really prior to Easter is really where the heavy lifting occurs. So, we still are very excited about the momentum, but we’re cautious because Easter is in the month of March this year.

So April, in order for us to be successful in April and continue that momentum, we really need the weather with us and all brands need to continue to fire on all cylinders, which is an outcome we’re striving for, but it does have some risk as we head into April.

Operator

And our next question comes from the line of Roxanne Meyer.

Roxanne Meyer – UBS

Great, thanks. Let me add my congratulations. After coming off of a really solid gross margin gain in 2009, but at the same time knowing that your merchandise is better, you’re seeing better full price selling, you should still benefit from a lower average unit cost, how should we think about the gross margin opportunity this year? And just as released your guidance, it does imply that your gross margins likely will decline in the back half of the year. So just trying to get some perspective.

Mike Nicholson

Sure, Roxanne, it’s Mike. Let me just say a couple of things to circle back to the guidance. I think what we said is we expect the full year 2010 to be approximately in line with what we achieved in 2009. As I think about our gross margin opportunity rolling forward quarter-by-quarter, we provided a perspective in Q1 that we’re confident that we can deliver a rate that’s at least 100 basis points better than last year. If you recall last year in the second quarter, it was a fairly heavy period of promotional activity as we cleared through inventory at Ann. So we have a high degree of confidence as well in the second quarter.

I think the third quarter for us is going to be challenging. It was a quarter last year, where we delivered a record gross margin performance that exceeded some 57%, and as I sit here today, I’d like to believe that we have the ability to at least anniversary what we delivered here in the fourth quarter.

With all that said, as we think about all of the headwinds that we face in the business from a sourcing perspective in 2010, we have a high sense of confidence with respect to our ability to deliver improved IMU in the first half. However, again, significant headwinds that this industry faces and we believe we’re positioned with all of the strategies that Paula and the merchant team and the design teams have put in place, we have the ability to mitigate the cost pressures that we see today in the second half of the year. With all that said, we’ve guided to approximately equal to. If the stars align, we have the opportunity to do even better.

Operator

And our next question comes from the line of Kimberly Greenberger.

Kimberly Greenberger – Citigroup Global Markets, Inc.

Good morning, Kay.

Kay Krill

Good morning.

Kimberly Greenberger – Citigroup Global Markets, Inc.

The February comp was a huge acceleration in the fourth quarter. I’m wondering if you can help us understand the drivers. What’s driving the improvement? Is it better traffic? Is it better AUR? And do you think that the improvement that you’re seeing here in February are sustainable? In other words, are these going to be the comp drivers for the year?

Kay Krill

Kimberly, let me just say that as I said earlier, traffic was up in the single digits in the month of February and all retail metrics were positive, which is the first time we’ve seen that in a very long time. And there’re different categories that are selling in both brands. In Ann Taylor, we’re really selling pencil skirts, particularly neutral, colorful cardigans, feminine tops, the new slim crop pants are doing well. And as I said earlier, suiting and dresses are also off to a very great start. We’re still selling jewelry and Neutral Shoes and handbags and various skirts are doing well.

In Loft, the standouts for the month of February were the Lean Boyfriend, Modern Cargo Pants, Shorts, Novelty Woven Tops, Embellished and Striped Tees and Jewelry. We’re also seeing in both businesses that outerwear is off to a great start. So, I think the momentum is with us, but as I said a minute ago, this is our month. This is the Easter month in March. So, while we’re very excited about the momentum right now, we just are a little cautious as we head into April, because we’re anniversarying Easter in April last year. But off to a good start.

Operator

And next we have Stacy Pak.

Stacy Pak – SP Research, Inc.

Hi, guys. Congrats.

Kay Krill

Thanks.

Stacy Pak – SP Research, Inc.

Question on just sort of the promotional strategy in '10, particularly, at Ann Taylor, Kay, are you intending to kind of wean her off of some of those promotions? What should we be looking for there? And then could you repeat what you said about – I thought I heard an 18% decline in pricing in pants and tops. What are you thinking for overall average pricing going into '10, not realized?

Kay Krill

Okay, let me just try to be real quick, Stacy. As far as promotional activity, we are definitely seeing that we could be a little bit more strategic, as we head into 2010, weaning off some of the promotional activity that we did have to do in 2000, I mean in the fourth quarter, to drive traffic. So, we are a little bit more strategic and the promotional activities are definitely more gross margin positive. So that’s across both brands.

As far as pricing goes, we did a thorough evaluation in Ann Taylor, because that’s really where the opportunity was, and we have reduced the average initial retails across that business by 15%. There were a couple of categories that we got client feedback on, store feedback on, that were opportunities to reduce as we head into the spring and fall season that we felt like we were missing business, because we were too high in price and that is pants was one.

So, we reduced the average initial retail there by 18%, bringing the average down to about $88, which is under $100, we were $112 for fall, and then sweaters was also a category that we reduced down to $71 from $102. So we feel like by reducing the tops and reducing the pants AIR that that will benefit us for the entire year for 2010, while we did not have to touch the suiting category and accessories category. So, we were very selective and surgical about what we touched.

Operator

And our next question comes from the line of Dana Telsey.

Dana Telsey – Telsey Advisory Group

Good morning, everyone and congratulations. As you think of the complexion of the store, Kay, in both businesses, whether its special occasion, casual and the adjustments you’re making either to the assortment and the price points, how do you think of the margin opportunities for the stores going forward and what should they look like? Thank you.

Mike Nicholson

Dana, I’ll take the question regarding the margin opportunity. Again, sitting here today, finishing the year with a rate that approaches 55%, we have a belief that we can drive improvement in the first half of the year. Our objective in the back half of the year is to mitigate cost pressures and at least anniversary what we did this current year.

What I’d say going forward; improvement in margin rate is going to be one of the key components in order to drive improvements in bottom-line profitability as well as our overall profitability return to shareholders. So we’re very focused on it. We’re focused on it from a merchandising perspective, we’re focused on it from a sourcing perspective, and we’re focused on it from a technology perspective. And we believe improvement in margin dollars and margin rate going forward is going to be a critical component to the overall profit growth strategy for the business.

Operator

Our next question comes from the line of Jeff Black.

Jeff Black – Barclays Capital

So given what you just said, can you remind us what the sourcing initiatives are yielding? And Kay, have you lowered your average costs down to match the AUR drop that you’re seeing and is there an opportunity there? And just as a final, what’s the accessory penetration? Can you remind us where that is versus historical levels? Thanks.

Mike Nicholson

Jeff, it’s Michael. I’ll take a couple of those questions. I can’t recall how many you exactly asked. But at the end of the day, in terms of the gross margin impact of our restructuring program, we believe over that three-year period, it’s a $30 million to $40 million cumulative opportunity. Specifically, as it relates to the fourth quarter of this year and the overall improvement in our gross margin rate, 20% to 25% of the improvement in rate in the fourth quarter came from IMU and it was really all about cost reduction and cost efficiency.

Kay Krill

And Jeff, I’ll jump in and say that the opening price points that we’ve sourced into in the Ann Taylor division, we absolutely have improved costs and IMU is the same. We strategically sourced into those opening price points. And to answer your second question, accessories, the non-apparel area for Ann Taylor is in a 15% penetration, which is really an all-time high.

Mike Nicholson

One other just comment that I want to layer in regarding our discussion of our approximate 10% improvement in comp store sales in February. Just to clarify, the comp store improvement was driven by an improvement in all retail metrics across both brands and all channels. And Kay also did indicate as we moved into March, we did see an acceleration of the top line, and the trend that we experienced in February with respect to the retail metrics and the strength of those metrics across both brands in all channels was a trend that we continue to see as we moved into March.

Judy Pirro

And operator, we’ll take one more call.

Operator

And the last question comes from the line of Jennifer Black.

Jennifer Black – Jennifer Black & Associates

Good morning. And let me add my congratulations.

Kay Krill

Thank you.

Jennifer Black – Jennifer Black & Associates

I know you talked a lot about your price points on pants, but I wanted to know it seems like you barely touched the surface as far as your offerings in skinny jeans, ponte pants as well as other styles of casual bottoms. I mean, you’ve done a great job. And I wondered what your future plans for bottoms were, not on price, but just more on styling, what the opportunity is, as well as dressier pants. And then secondly, I wanted to know how the loyalty program was going. Thank you.

Kay Krill

Jennifer, are you asking Ann Taylor specific?

Jennifer Black – Jennifer Black & Associates

I am asking. I’m sorry, yes.

Kay Krill

Okay. We do have more skinny pants coming in and leggings and ponte pants coming into the Ann Taylor division like as we speak. So, we definitely chase into that trend in the fall season and they’re flowing in now. We’re going to build that assortment and we’re going to have a dedicated area to it I think with the next store set. So we’re on that. As far as all bottoms go, we’re seeing the most success is with versatile bottoms.

As you pointed out, ponte, definitely, in every category, be it skirts or pants or leggings, is doing very well, because the comfort factor is critical right now. But we are seeing success with our pants. In addition to price, I failed to say earlier, but I will say now that we are adding back an element of lined pants because we heard that comment from consumers that they wanted some of their pants lined. So we did that.

We also have a more diverse assortment of leg shapes, which I think is important, because as you recall, we really missed the wide leg and the skinny leg in the fall season. So we have all of that for the first quarter, right now, heading into the store set for the remainder of the season and also optimizing cropped pants and shorts. So, we feel very good about the overall assortment in our bottoms category, skirts and pants. Okay?

Judy Pirro

Okay, that ends our Q&A session today. Thank you all for joining us and we’re excited about the momentum we’re seeing at both Ann Taylor and Loft and as always, appreciate your interest in our company. Have a great day.

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Source: AnnTaylor Stores Corporation Q4 2009 Earnings Call Transcript
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