Ann Taylor Stores Corp. Q1 2010 Earnings Call Transcript

May.21.10 | About: Ann, Inc. (ANN)

Ann Taylor Stores Corp. (NYSE:ANN)

Q1 2010 Earnings Call

May 21, 2010 8:30 am ET

Executives

Judy Pirro - Vice President, Investor Relations

Kay Krill - President and CEO

Mike Nicholson – CFO

Analysts

Michelle Tan – Goldman Sachs

Betty Chen – Wedbush

Lorraine Hutchinson – Bank of America

Liz Dunn – Thomas Weisel

Neely Tamminga – Piper Jaffray

Roxanne Meyer – UBS

Brian Tunick – JP Morgan

Jeff Black – Barclays Capital

Jennifer Black – Jennifer Black & Associates

Robin Murchinson – Sun Trust

Stacy Pak – SP Research

Barbara Wyckoff – Jesup & Lamont

Dana Telsey – Telsey Advisory Group

Operator

(Operator Instructions) Welcome to Ann Taylor Stores Corporation’s First Quarter 2010 Earnings Conference Call. I would now like now to turn the conference over to Judy Pirro, Vice President Investor Relations.

Judy Pirro

We’re very pleased you could join us to review our results for the first quarter 2010.

I’m here today with Kay Krill, Ann Taylor’s President and CEO, and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter, and then Mike will review the financials in more detail and provide an update on our outlook for the balance of the year. After that we’ll open it up for questions.

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

I’m pleased to report on the company’s strong performance for the first quarter 2010. The year is off to an excellent start with both Ann Taylor and LOFT performing well ahead of our initial expectations. A dramatic up tick in sales, coupled with our continued focus on maximizing gross margin, enabled us to deliver significantly stronger results both sequentially from the fourth quarter 2009 and versus the year ago period.

We are very excited about our progress in both brands and all channels. When I spoke to you in March I noted that a key objective for 2010 was to profitably grow our top line sales. Clearly the first quarter performance was a significant step in that direction. For the company, comparable sales rose 14% with both brands achieving a significant increase in sales and profitability.

As you saw in our press release this morning we are now providing enhanced transparency on our results by brand and channel. Beginning this quarter we are giving you our results as we, and frankly our clients, view the business, as two brands, each with three channels.

The Ann Taylor brand including stores, our ecommerce channel, and Ann Taylor Factory delivered positive comps during the quarter of 16.4%. For the LOFT brand, again including stores, our ecommerce channel, and LOFT outlets achieved a comp gain of 12.5%.

Another highlight of the quarter was our gross margin rate which reached 59.4% and reflects our ongoing focus on growing full price sales. One more compelling product assortment was the primary reason for our success, which bodes well for the future as we are winning back customers and appealing to new customers as well.

An effective promotional strategy and well managed inventory levels were also key drivers of the performance as we continue to run the business to optimize profitability. Both brands started the quarter on a strong note with sales accelerating in March, in advance of the Easter holiday. Traffic was up at both brands and our client’s response to the product remained positive throughout the quarter as our newer spring assortment hit the floor. In fact, we achieved positive comps in every month of the quarter. Clearly we have been delivering compelling fashion and value and she is responding.

Let’s take a closer look at each of the brands. Turning first to Ann Taylor, overall the Ann Taylor brand achieved an excellent performance with both sales and gross margin coming in well ahead of our expectations. We continue to make meaningful progress in our multi-season strategy to enhance and grow the brand and this is reflected in the improved metrics across the business.

In the Ann Taylor stores and ecommerce channel the combined 19% comp increase represents an acceleration of positive momentum since the brand evolution began in fall 2009. Strong full priced selling drove this performance with the full priced sales comps significantly outpacing the overall comp performance. Our Ann client is demonstrating a strong appetite for fashion and newness and she is clearly recognizing our value proposition and compelling assortment both in store and online.

From a product perspective, our wear to work categories performed well including suiting, sportswear separates, and dresses. We achieved greater momentum in tops in both knits and woven and improved results in pants where we have tweaked our assortments, adding new fits and fabrications and greater diversity to the category. Accessories remained a standout and we continue to chase inventory across the category in response to the high demand.

Another primary driver of our success was our strategy to offer more attractive opening price points across the assortment, particularly in the categories of pants and tops. The value we offered resonated positively with our clients and also contributed to our significantly improved results.

Ann Taylor’s strong product offering was supported by a successful promotional strategy that drove sales while delivering a significantly higher gross margin. Importantly, all of Ann Taylor’s promotions were preplanned. We even cancelled a number of our planned promotions throughout the quarter because of the strength of the business.

At Ann Taylor’s ecommerce channel the product performance mirrored the success of the store performance and was also further enhanced by an expanded style assortment. We are very pleased with this significant improvement in sales, double digit traffic growth, and gross margin delivery in this channel and continue to view our online business as an area of great opportunity.

On the marketing front, we continue to move forward with our multi-touch strategy to drive greater interest and excitement in the brands. We engaged lapsed clients and attract new ones. We are encouraged by the results we are generating including positive traffic increases in store and online. We will continue to invest albeit cost effectively to support the brands top line growth.

From a real estate perspective, our 2010 strategy for Ann Taylor stores focuses on optimizing the productivity and enhancing the in store environment of our existing fleet, while the brand evolution continues to gain momentum. We will also introduce our new Ann Taylor store prototype in three markets during the third quarter. The new environment better reflects our updated brand aesthetic. We expect the new prototype to deliver a highly engaging client experience within a box that is roughly 40% smaller than our current average store.

Within the outlet channel, Ann Taylor factory’s performance remained strong, delivering comps of nearly 11% for the quarter which reflected improved conversion as well as an increase in dollars per transaction. This channel continues to offer the Ann Taylor aesthetic at tremendous value to the outlet shopper, allowing us to further extend the reach of the brand.

In summary, the Ann Taylor brand made significant progress and our team is very energized and focused on the opportunities that lie ahead.

Now let’s turn to LOFT. As you know, our focus in 2010 is to continue the strong momentum LOFT has achieved over the past year and to further capitalize on the growth potential of the brand. Certainly the momentum continued this quarter with the positive results we generated in each of the brands channels. LOFT stores and LOFT online delivered a combined 12% comp sales increase and continued to generate strong gross margin. Higher full priced sales drove this performance with clients responding strongly to the accessible fashion and newness that LOFT provides.

During the quarter our metric showed much improvement over last year and we are particularly pleased that in stores every region generated a positive comp in both traffic and sales.

In terms of products, pants, shorts, skirts, denim, woven top, jackets, and outerwear all performed particularly well. Accessories continue to be an area of strength, highlighted by exceptional results in jewelry, and a positive response to our expanded shoe assortment. LOFT lounge also exceeded our expectations for the quarter.

Our strong product offering, coupled with a prudent inventory positive enabled us to be strategic in our promotional stance. We effectively timed promotional activity to be competitive and to respond to our client’s desire for value. LOFT too stepped back from planned promotions during the quarter due to the strength of its performance.

Within the online channel LOFT experienced a nearly 40% improvement in traffic versus last year’s first quarter. This, coupled with a notable increase in dollars per transaction were the primary drivers of the 60% sales growth in LOFT’s ecommerce channel for the quarter. LOFT outlet also performed ahead of our expectations during the quarter, achieving a 24% comp. Compelling product and price points drove higher units and dollars per transaction.

From a marketing perspective we continue to be pleased with the results of LOFT’s strategy which utilizes a combination of direct outreach, advertising, PR and in store events. A highlight for the quarter was LOFT’s March style event which received an outstanding response from clients and drove significant incremental sales.

With respect to real estate, we are moving forward with our plans to add approximately 10 LOFT stores in 2010 and we successfully opened a new LOFT prototype earlier this month. For the outlet channel, with just 18 stores as of the first quarter, LOFT outlet is an attractive growth vehicle with significant long term potential.

We plan to open approximately 20 LOFT outlet locations in the second half of the year. The selected growth our LOFT and LOFT outlet store base will complement our continued strategy to drive sales growth and enhance the overall productivity of our existing fleet, to help drive further profitable expansion of the brand. Overall, it was a very strong quarter for LOFT as our client responded positively to our product assortments and tremendous value.

In summary, this year’s first quarter represented a dramatic improvement from a year ago and we believe our progress will continue throughout the remainder of this fiscal year. The Ann Taylor brand is making significant headway in its evolution and LOFT is building on its already strong foundation and we are encouraged that both of our brands are demonstrating a high degree of differentiation in the marketplace and both delivered strong results.

Looking ahead to the balance of the year, our plan is focused on increasing top line sales and productivity, investing in the growth of our successful ecommerce business, continuing to elevate the client experience across all of our channels through consistent delivery of quality fashion at compelling value, remaining disciplined in our approach to maximizing gross margin, managing inventory, and controlling expenses, and utilizing our strong balance sheet and free cash to further enhance shareholder value.

We have a highly talented and seasoned management team in place. Our strategies continue to gain traction and our financial position is strong.

Let me now turn it over to Mike.

Mike Nicholson

As Kay mentioned, we are pleased with our results for the first quarter and I find it particularly rewarding that the hard work we’ve done internally over the past two years to reduce our cost structure and improve our efficiency, is translating into greater profitability as we deliver improved top line productivity. We remain committed to maintaining the discipline we’ve instilled in our business through the restructuring process.

Let me start this morning with a review of our results for the first quarter. Net sales for the quarter increased 11.6% versus year ago to $476.2 million on total comps that were up 14.1%. Net sales at the Ann Taylor brand including stores, ecommerce, and the outlet channel increased 11.3% to $198.4 million on a comp improvement of 16.4%. At LOFT total brand net sales increased 11.8% to $277.8 million on a comp increase of 12.5%.

As Kay mentioned earlier, our brand comparable sales figures now incorporate stores, ecommerce, and outlet channels and a detailed breakdown by channel may be found on Table 3 of this morning’s earnings release.

Our gross margin rate for the quarter of 59.4% reflected an increase of 390 basis points above the 55.5% reported last year. This performance primarily reflected improved product at both divisions, a lower level of promotional activity during the quarter compared with the first quarter 2009 and disciplined inventory management.

We closed the quarter with total inventory per square foot that was down 2.3% compared to last year, reflecting an 11.5% increase at Ann Taylor stores, a 3.1% decline at LOFT stores, and double digit declines in the outlet channels at both brands. Both brands entered the second quarter with very low levels of carry over inventory.

At Ann Taylor stores carry over, which we define as March store set in prior is down approximately 35% compared to last year. As of the end of the first quarter, more than 85% of our mix consisted of fresh spring product. At LOFT stores, carry over inventory is essentially in line with last year and approximately 95% of LOFT mix consisted of fresh spring product.

Turning now to SG&A. Total SG&A expenses for the quarter increased 2.2% or approximately $5 million to $244 million. This reflected savings from our restructuring program, offset by an incremental $7 million in marketing investment to support our brands, variable store operating expenses related to an improvement in volumes, and an increase in performance based compensation relative to the first quarter 2009.

During the quarter we recorded a pre-tax restructuring charge of approximately $400,000 compared with a pre-tax restructuring charge of $1 million in last year’s first quarter. On an after tax basis, restructuring charges in the first quarter 2010 totaled $200,000 with no impact on EPS compared with an after tax restructuring charge of $700,000 or $0.01 per share in the first quarter 2009.

Excluding the aforementioned restructuring charges, we reported operating income in the quarter of $39.1 million compared with an operating loss of $1.8 million in the first quarter 2009. On the same basis we reported net income of $22.8 million or $0.38 per diluted share during the quarter compared with a net loss of $1.6 million or $0.03 per diluted share in the first quarter 2009.

Weighted average diluted shares outstanding for the quarter increased 3.3% to 58.4 million shares versus 56.6 million shares in the first quarter 2009 and was primarily due to the effect of stock options and restricted stock in the current year which were excluded from diluted shares outstanding in 2009 due to the net loss for the period.

Our effective tax rate for the quarter was 41.3% versus 28.2% in the first quarter 2009. The first quarter tax rate reflected the impact of permanent items in a period of net income versus a period of net loss, a change in the mix of earnings in various state taxing jurisdictions, and certain discrete items. We anticipate an effective tax rate of approximately 40% for the full year.

Depreciation and amortization in the first quarter totaled approximately $24.8 million compared with approximately $27 million in the first quarter 2009. Capital expenditures in the first quarter totaled $8.3 million compared with $11.7 million in the first quarter 2009. During the first quarter we closed a total of four stores, three Ann Taylor stores, and one LOFT store and did not open any new stores. In addition, we converted five stores from Ann Taylor to LOFT during the quarter.

You’ll note in our release that we now expect to close a total of 61 stores in fiscal 2010 down from our earlier target of 72 stores. Since we began our three year strategic restructuring program in January 2008 our store closure program has fluctuated to reflect both macro economic dynamics as well as real estate opportunities and we plan to continue to proactively manage our real estate portfolio going forward.

During the quarter, as part of our ongoing analysis of our real estate base, we’ve noted improved performance at several stores and consequently decided that they will not be closed in 2010. As we have done since launching our restructuring program in early 2008 we continue to actively manage and review our portfolio to optimize performance in today’s volatile consumer spending and commercial real estate market.

We ended the quarter with 903 stores comprised of 283 Ann Taylor stores and 92 Ann Taylor factory stores, and 510 LOFT stores plus 18 LOFT outlet stores at the LOFT brand.

Moving now to our store square footage, which at the end of the quarter totaled approximately 5.3 million square feet, an approximate 3.5% decrease versus the 5.5 million square feet we recorded at the end of the first quarter 2009. On a weighted average basis square footage declined 3.3% over the same period.

In terms of our strong balance sheet, we ended the quarter with cash of $207 million and no bank debt. We generated operating cash flow during the quarter of nearly $14 million and net cash flow of approximately $3 million. As we’ve stated previously, we remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value.

Now turning to our outlook for the second quarter and full year 2010. For the second quarter we expect total net sales to approach $500 million reflecting double digit comparable sales performance for the quarter. Gross margin rate performance is expected to be approximately 250 basis points better than the 52.4% level we achieved in the second quarter 2009. Selling, general and administrative expenses are estimated to be approximately $245 million which includes approximately $5 million in incremental marketing investment compared to last year’s second quarter.

In terms of the full year, our outlook calls for total net sales for the year in the range of $1.9 to $1.975 billion with positive comparable sales at both brands and in all channels in each of the fiscal quarters of 2010. As opposed to our earlier forecast for flat gross margin in fiscal 2010 we now anticipate our gross margin rate performance to be approximately 150 basis points better than the 54.4% level achieved in fiscal 2009. This improvement is based on favorable sourcing costs and our expectations for higher full priced selling.

Selling, general and administrative expenses are expected to be approximately $985 million reflecting the ongoing benefits of the company’s strategic restructuring program, offset primarily by variable costs associated with higher sales in our existing stores, and incremental investment in marketing as well as operating costs associated with the 30 new stores planned for the back half of 2010.

Incremental restructuring savings for the year are expected to total approximately $20 million and one time restructuring costs are estimated to be in the range of $2 to $12 million. Our total weighted average square footage is expected to decline approximately 3% by year end reflecting the impact of approximately 61 store closures in fiscal 2010 under the company’s previously announced restructuring program, partially offset by the expected opening of approximately 30 new stores, 10 of which will be LOFT stores and 20 of which will be LOFT outlet locations to support the continued growth of the LOFT brand.

Capital expenditures are expected to be approximately $70 million and finally, we continue to focus on maintaining a healthy balance sheet and expect a year end cash position that will exceed our cash position at year end 2009 and we will maintain our disciplined approach to inventory management throughout the fiscal year.

With that I’ll turn it back to Kay.

Kay Krill

Before we open it up for questions, let me reiterate how pleased I am with the performance we are making. We are off to a great start this year. We have a strong leadership team in place, both brands are on the right track, and we are excited about our future potential.

Operator we’re ready for our first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michelle Tan – Goldman Sachs

Michelle Tan – Goldman Sachs

I was wondering if you could give us a little color on your comp guidance by just the stores channel versus the total brand. Then also we’re hearing a lot about weather related choppiness, can you give us a sense of where you’re tracking in May versus your plan for the quarter?

Kay Krill

We’re pleased with our performance to date. We’re positive comping month to date and we are on track to have a good month. Directionally, we’re experiencing a trend that’s similar to the first quarter with Ann slightly ahead of the company average; overall fashion color novelty is really what’s performing well. As we stated in our release, we’re expecting second quarter sales to approach $500 million with double digit comps.

Mike Nicholson

Beyond that we’re not going to provide any further specifics with respect to our outlook at the brand or channel level as it relates to Q2 or the full year.

Operator

Your next question comes from Betty Chen – Wedbush

Betty Chen – Wedbush

I was wondering if we could get a little bit more color regarding inventory, again I know you gave some explanation. I was wondering if we’re now at that inflection point you have talked about where we feel good about the products and we really would like to invest and make sure we have the proper in stock and improve customer service, and therefore that’s why we’re up as we are at Ann Taylor division and whether we could see this kind of level of inventory increase at the end of Q2 and the balance of the second half as well.

Mike Nicholson

To recap briefly in terms of where we ended the first quarter, again total company was down about 2% on a dollars per square foot basis. Ann was up slightly north of 10% but I think it’s important for us to look at the composition of Ann stores channel inventory where their carry over was down about 35% as compared to last year so the majority of the product that they’re carrying into Q2 is extremely fresh and will fuel the anticipated growth that we expect from that brand and that channel as we head into the second quarter.

As it relates to LOFT, LOFT was down low single digits on a dollars per square foot basis, again composition of LOFT inventory extremely clean. Carry over was about equal to last year but from a composition perspective about 95% of their inventory was in fact April store set and forward. We feel very good about the overall level of inventory at the total company level as well as our overall level of inventory at the brands.

The other thing I want to highlight is if I look at our inventory position as of the end of the first quarter as compared to where we’ve been historically, I think we need to keep in mind that at the end of the first quarter ’10 as compared to say first quarter 2007 our inventory is down about 30% on a dollars per square foot basis.

As we move forward, we remain committed to being very disciplined in our approach with respect to inventory but I think the reality is as we expect this business to grow going forward and to comp positive across the brands and channels there will be some level of incremental investment as compared to the prior year going forward.

Betty Chen – Wedbush

What should we expect at the end of Q2?

Mike Nicholson

At the end of Q2 what I’d say is for the total company at this point from where I sit I’d expect a mid to high single digit increase.

Operator

Your next question comes from Lorraine Hutchinson – Bank of America

Lorraine Hutchinson – Bank of America

With seeing so much success with the opening price points can you just talk about how you’re thinking about pricing going forward for the next few seasons. Also as we start to see inflation come into the sourcing costs will you expect to raise prices to offset that or any thoughts on strategy going forward for pricing.

Kay Krill

We believe that the first quarter results, especially in Ann Taylor reflected a much better balance of good, better, and best pricing strategy. As we discussed last quarter, we reduced our spring average initial retail by 15% for the first quarter and for the entire spring season and I think that was very successful for us. We also identified and sourced into key areas such as pants and tops where we recognized a need for more products at opening price points in order for us to be competitive and to appeal to a broader audience in this macro environment.

I also want to tell you that we’ve already affected in the Ann Taylor division our fall 10 buy and we reduced our average initial retail from 2009 by 18%. I think for the entire year and go forward we are going to offer more compelling price points and a better balance in the Ann Taylor division.

In LOFT I think that we absolutely have kept our prices very consistent with the brand expectation and we’ve seen no level of change in that division.

Mike Nicholson

In terms of product costs, what I’d say is in terms if IMU we expect to deliver improved IMU in 2010 as compared to ’09 despite the headwinds that we see related to both commodity and freight prices as well as declining factory capacity as well as candidly some potential currency pressures. What I’d also say is moving forward into 2011 we’re committed to protecting the levels that we realize in 2010 and we fully expect in ’11 that we will be able to deliver an IMU that is in line with what we anticipate delivering in 2010.

In terms of the specific strategies, to mitigate this pressure we continue to rationalize our supply base, we’re further consolidating our volume with our strategic suppliers, we’re looking at strategies to shift penetration to countries that pose less currency and risk, and we’re rationalizing our mill base. As you can see, there are a number of strategies that are underway in the business that give us confidence in 2010 that we will be able to deliver improved IMU as compared to ’09 and as we transition into ’11 we believe that these strategies will enable us to anniversary what we expect to deliver in 2010.

Operator

Your next question comes from Liz Dunn – Thomas Weisel

Liz Dunn – Thomas Weisel

I had one point of clarification regarding the guidance; I wanted to make sure the $285 million in SG&A guidance did not include the restructuring charges. Regarding the ecommerce business it looks like it’s about 9% of your total mix, where do you see that going over time, do you have a goal there?

Mike Nicholson

For the second quarter our outlook reflected SG&A of $245 million and the $245 million excludes the impact of potential restructuring charges.

Kay Krill

I would really add on the ecommerce business, it’s on fire; it is significantly growing at a very rapid rate. What we are excited about is that we are re-platforming this summer and we think that that strategy is going to even greater help us to improve that channel even greater. For example, we’re adding technology enhancements that will make checkout simpler and quicker so she can add items to her cart and enhance conversion.

We’re also adding the capability for clients to post reviews and comment on our products, thus enhance client to client sales. We’re mobile enabling our sites, we are adding personalization and segmentation ability to the site which I think is going to be a huge win for both brands. And we’re enhancing our international shipping capabilities.

We continue to, we had for the first quarter and we continue to focus on expanding online assortments and also online categories such as weddings and beach and swim and maternity for LOFT which I think is going to further propel this business. I think that we’re in great shape on ecommerce; we continue to think it’s a significant driver for us and we’re really optimistic about the future.

Operator

Your next question comes from Neely Tamminga – Piper Jaffray

Neely Tamminga – Piper Jaffray

Clearly you guys are doing a better job especially here I’m thinking about the core Ann Taylor division and I’m wondering for fall how we should be thinking about inventory flows. As a shopper I almost had to pull the, don’t you know I know Kay Krill card to get the lace skirt. I’m wondering how, are you going to go more depth in fall per delivery or just maybe flow an additional delivery.

Kay Krill

We are still focused on constant flows because she is so responding to fashion and newness and we feel like the more flows we get out there every couple of weeks is really better for us. I think that we’ve learned a lot so far this year as to where we need to add depth and where we need to sell out. Quite honestly, those sell outs are creating demand and buzz and I don’t know if you saw but that lace dress was on eBay and sold for three times the amount of what we offered in the store. That was great PR and buzz for us but we are adding depth behind our marketing look and key categories and key fashion items that we think she’s going to love.

Operator

Your next question comes from Roxanne Meyer – UBS

Roxanne Meyer – UBS

Now that you’ve had only two real seasons behind you and your results are so impressive knowing that you really haven’t had much of an opportunity to take your learning’s and really apply them to the next season yet. I’m just wondering in light of the success that you’ve already had, what are the opportunities for fall where you’re able to capitalize on some of the learning’s since August. Secondarily, you alluded to returning cash to shareholders and enhancing value, just wondering if you have any buybacks planned and if you can remind us of what you have in mind in there and the timing.

Kay Krill

I’ll address our learning’s so far because it’s different by brand. In the Ann Taylor brand I think that definitely the wear to work category has significantly improved for us this quarter in suits and wear to work separates and dresses and all the tops related to that. We saw tremendous improvement in that category so she definitely has an appetite for wear to work, which as you can imagine we have definitely made sure we had the right inventory for the remainder of the year in those categories. As I just said to Neely, we have definitely added depth in the right areas that we know she’s responding to also. We feel great about that.

For the LOFT division she is definitely responding to fashion and newness in print and pattern and novelty and anything that’s go embellishment or novel trim. She is really not responding to basics as much as she had been so our inventory flow go forward for the remainder of the year is really focused on fashion and newness and novelty and print and pattern which is really what she had an appetite for. I feel great about the future pipeline of the inventory for the remainder of the year in both brands.

Mike Nicholson

We remain committed to delivering and creating value for shareholders and we expect to do so in a way that is both prudent and conducive to our long term success. I just remind you that currently we’re investing in new and more productive stores, we’re focused on building an improved ecommerce channel, and we continue to spend on technologies that we believe will enhance our efficiency and productivity longer term.

Looking ahead, as we continue to demonstrate momentum in the business we absolutely will consider other opportunities to deliver and return value to shareholders and as a reminder the company does have approximately $160 million remaining on its previously announced share buyback plan.

Operator

Your next question comes from Brian Tunick – JP Morgan

Brian Tunick – JP Morgan

Huge improvements obviously thus far, the customer obviously loves the merchandise at both brands. How do you guys think about your longer term operating margin goals? Do both businesses, do you need to get Ann Taylor stores back above $350 or $400 a foot in productivity, does LOFT need to be over $450 as well given your ecommerce penetration, your store rationalization today and the growth of outlets.

As the turnaround is underway have you completely tabled a new growth concept, I think a year or two ago you talked about one or is that something we could hear about again in the next year or so if the continued stabilization continues?

Mike Nicholson

Our near term or mid term goal is to get our EBIT margins back to double digit, say in the 10% to 12% range. As I look at the business on a total company basis we need to focus on a total company productivity performance that begins to approach $400 a square foot, that is essentially what we are focused on when we talk about enhancing our top line, focusing on delivering improvements in overall sales per square foot in productivity, that’s the goal that the management team is currently focused on.

Kay Krill

We are highly focused right now on both of our existing brands to optimize profitability and growth on those brands right now, in all channels; in the store channel and in ecommerce and the factory channels and that’s really where our focus is today. We don’t want to be sidetracked.

Operator

Your next question comes from Jeff Black – Barclays Capital

Jeff Black – Barclays Capital

Just to drill down on the prior question, is that $400 what really unlocks us and gives us the ability to take the SG&A rate back down underneath the 50 level? I wondered what kind of spend is really coming back into the business near term and where you see that rate long term and what’s the lever to take it down back closer to historical levels.

Mike Nicholson

I’m not in a position to provide you definitive outlook or framework with respect to SG&A rate longer term. What I would say though with respect to our outlook for the full year 2010 essentially that suggests a rate that is approximately 50% so I have confidence in the current year on a rate basis that we will approach 50% and if you assume growth on top of ’10 and ’11 I see no reason why the next few years that we can’t get back to a rate that is more respectable in the low to mid 40s.

Operator

Your next question comes from Jennifer Black – Jennifer Black & Associates

Jennifer Black – Jennifer Black & Associates

You’ve made great strides with your denim assortments and I wondered how large of an opportunity you think it is from this point and with the huge trend in khaki’s and cargos, skinny cargos especially, where are you positioned for the fall?

Kay Krill

As far as denim goes, it’s really different by brand. In the Ann Taylor division we really have to be more polished and darker denim and wear to work, denim you would wear to work is really where we win in the Ann Taylor brand when it’s a little more beat up and washed that really doesn’t work as well there. We feel like we’ve finally figured out what denim needs to be in Ann Taylor and we have that offering flowing through the remainder of the year.

However, in LOFT what really is important is not to have the full denim assortment of boot legs and everything, it’s really about what the fashion is. She is responding right now in LOFT to skinny legs and boyfriend fits so that’s really where we are in multiple washes as well as denim skirts, denim shorts at all lengths that’s really what’s selling. You are absolutely right, cargos are on fire and we absolutely have those in the pipeline through the remainder of the year in LOFT from a crop perspective, in the slim leg and in multiple fabrics because I think that’s important too, it’s not just a cotton based cargo. We feel very covered on that.

Jennifer Black – Jennifer Black & Associates

What about Ann Taylor for cargos.

Kay Krill

We have a more refined one for the back part of the year, let me just say that, not cotton based.

Operator

Your next question comes from Robin Murchinson – Sun Trust

Robin Murchinson – Sun Trust

The current style events it looks like you’re dialing back a little bit on the promotion; I think the LOFT this weekend the email said something like from 11am to 5pm so maybe you’re going to contain the hours. Then at Ann buy one get one 50% off. Can you comment, are you dialing back a little bit on the promo?

Kay Krill

Absolutely. As I said in my remarks, we had a lot of pre-planned promotions baked into our expectations for the first quarter really based on the run rate from the fourth quarter of what we had to do. We were able to cancel a lot of those. We are seeing a greater appetite for full price. We definitely will have some promotions baked in the second quarter and pull them as needed but we absolutely are able to pull back on the overall amount of offers as well as the overall deal, the richness of them. We’re very pleased about that.

Operator

Your next question comes from Stacy Pak – SP Research

Stacy Pak – SP Research

You’re saying you pulled back on promos in this quarter not just Q1? Also, can you explain why is LOFT able to deliver double digit comps on inventories down low singles but Ann needs inventories up doubles, I’m wondering if you can turn faster and control your risk. Also, can you guys give the comp metrics by brand?

Kay Krill

What I was referring to is we absolutely were able to pull back on first quarter. We have been able to pull back a little on second quarter but we’re a couple of weeks in so we’ll see how the quarter plays out but so far we’re positive comping for the month and we’re pleased. We were able to pull back on the richness of the promotion which I think is important.

Mike Nicholson

In terms of the LOFT comp performance I want to clarify; our perspective on comps for the second quarter was a total company perspective so first let me provide that clarification. Then I would also say as it relates to LOFT comp performance in Q1 on inventory that finished the quarter down a low single digit it was really a function of improved full priced selling, better product and quite frankly timing of receipts and as we transitioned into the second quarter we will actually begin to see LOFT inventory better aligned to the comp trend of the business.

In terms of your question on comp metrics, what I’ll do is just provide you some perspective on the store channel metrics. Within Ann Taylor the comp as we mentioned and reported in our release today for the quarter was up about 15%, traffic was up a mid single digit positive with transactions also up to the same degree. Then a big driver of Ann’s 15% comp performance in that channel was DPT and it was really driven by a significant increase year on year in AUR.

As it relates to LOFT, LOFT comp performance very healthy traffic, traffic that approached 10% growth versus last year, a corresponding growth year on year in terms of transactions and DPT was essentially flat within the LOFT stores channel for the first quarter.

Stacy Pak – SP Research

Is there opportunity to do better, I’m asking on the inventory is there opportunity to do better on the inventory turns so that you don’t need inventory up as much to drive comp?

Mike Nicholson

We believe it’s prudent to invest to support growth going forward. We will continue to do it in a measured, prudent fashion and at the same time we are focused on improving turns. We’re exploring opportunities to hold and flow. Yes, all of that is on the table and our goal longer term is to improve turns but also we want to be mindful that it’s important to fuel the top line growth for the business.

Kay Krill

We also have recently improved our ability to chase products. In LOFT specifically we’re chasing a lot in 12 weeks and under and that is chasing back obviously to best sellers so there’s not risk there. We’ve got multiple levers that we’re pushing right now.

Operator

Your next question comes from Barbara Wyckoff – Jesup & Lamont

Barbara Wyckoff – Jesup & Lamont

Should Ann Taylor and LOFT deliver similar operating margins over time, this is as you head towards that, theoretically could they do that? Should direct to consumer be higher and could you give us an idea of what you’re thinking the magnitude of margins in indirect would be.

Mike Nicholson

We don’t disclose and we don’t provide a forward looking perspective on bottom line operating margins by brand or channel. In terms of ecommerce what I’d say is sitting here today longer term I think the management team believes that a goal of doubling the business for the ecommerce business is a very achievable goal for the corporation.

Operator

Your last question comes from Dana Telsey – Telsey Advisory Group

Dana Telsey – Telsey Advisory Group

As you think about the gross margin and the opportunities there, how do you see the complexion of it going forward is merchandise margin opportunity, product costs, and what do you see in terms of inflationary pressures for balance of ’10 and into ’11?

Mike Nicholson

I would reiterate what I said previously regarding IMU. In 2010 we do expect to deliver an improved IMU off of ’09. We recognize that there are significant headwinds out there but we’ve got a number of strategies underway in the supply chain arena that we believe will help us mitigate the pressure of costs as we transition from ’10 into ’11.

Again, in terms of longer term goal, let me step back, in terms of 2010 our overall perspective with respect to gross margin we anticipate being able to deliver about 150 basis points of improvement in gross margin in ’10 off of ’09 and longer term within the business we have a goal to longer term begin to head towards 60%.

Judy Pirro

Thank you everyone for your excellent questions. This is Judy Pirro and as always I’m sure we couldn’t get to all of your questions today, I’m available all day today and the early part of next week to answer any questions you might have. We appreciate your interest and your support. Thanks have a great day.

Operator

Today’s call has concluded. All parties may disconnect.

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