ANN's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.14.14 | About: Ann, Inc. (ANN)

ANN INC. (NYSE:ANN)

Q4 2013 Results Earnings Conference Call

March 14, 2014 8:30 AM ET

Executives

Judy Lord - Vice President, Investor Relations

Kay Krill - President and CEO

Mike Nicholson - Chief Operating Officer and CFO

Analysts

Dana Telsey - Telsey Advisory Group

Brian Tunick - JPMC

Roxanne Meyer - UBS

Anna Andreeva - Oppenheimer

Kimberly Greenberger - Morgan Stanley

Adrienne Tennant - Janney Capital Market

Janet Kloppenburg - JJK Research

Operator

Good morning, ladies and gentlemen. And welcome to ANN INC.'s Fourth Quarter 2013 Earnings Conference Call. At the request of the company, today's conference call is being recorded. If you have any objections, please 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 Lord, Vice President, Investor Relations. Please go ahead.

Judy Lord

Thank you, Wendy, and good morning, everyone. Thank you for joining us. I'm here with Kay Krill, ANN INC.'s President and CEO; and Mike Nicholson, our Chief Operating Officer and CFO.

Kay will lead off with an overview of the fourth quarter and full year 2013 performance followed by an outline of our strategic growth initiatives for 2014. Mike will then review our financial results in more detail and provide our outlook for the fiscal first quarter and full year 2014. After that, we'll open it up for your questions.

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

These forward-looking statements reflect the company's current expectations as of March 14, 2014, concerning future events and are subject to a number of factors and uncertainties that can cause actual results to differ materially.

And with that, let me hand it over to Kay.

Kay Krill

Good morning, everyone. Thank you for joining us to review our results for the fourth quarter and full year 2013, and provide you with our outlook and strategy for profitable growth in the coming year.

Overall, 2013 was another strong year for ANN INC. We delivered record earnings per share for the second consecutive year and for the fourth consecutive year comparable sales were positive at both Ann Taylor and LOFT.

While we are pleased with our performance this year in a very challenging market environment, we continue to look for opportunities to optimize our cost structure, while also accelerating growth in all channels.

To that effect, this morning we announced a strategic realignment which is expected to result in ongoing annualized savings of $25 million. Mike and I will cover this in more detail later in our remarks.

As you know, unlike many other retailers, the fourth quarter is not a make or break period for us and typically represent less than 10% of our net income for the year. And even though the fourth quarter came in lower than anticipated, our performance did not prevent us from delivering another record year of earnings per share.

Topline sales, comparable sales and gross margin rate all showed improvement from the fourth quarter of 2012, but soft traffic and tepid consumer spending across the industry impacted us, particularly in factory outlet centers and in those regions that were negatively affected by extreme winter weather.

Total sales for the fourth quarter reached $623 million, up from $608 million last year on a comparable sales increase of 3%. Gross margin rate was a solid 49.3%, a 20 basis point improvement from the fourth quarter of 2012. On the bottom line, diluted EPS was $0.10 up from $0.05 last year.

For the full 2013, total sales increased 5% to $2.5 billion and comparable sales were up 2%. Gross margin rate was a healthy 53.9% and diluted EPS for the year reached $2.19 up from $2.10 in 2012.

During the year as part of our ongoing commitment to enhance value for our shareholders, we repurchased 1.5 million shares of our common stock. As you recall, we currently have a 250 million share repurchase program, which was authorized following the completion of our prior 600 million program in 2013.

Our balance sheet at year end remained strong with more than 200 million in cash and no debt, giving us a flexibility to continue to use our cash and borrowing capacity to enhance shareholder value. By almost any measure, 2013 was another successful year for ANN Inc. driven by the strength of our product, marketing and brand strategy.

Let’s now turn to the brand. First, Ann Taylor, the brand’s comparable sales for the fourth quarter decreased 1%. Comps at Ann Taylor rose 1%, offset by a decrease of 6% at factory.

Ann Taylor had a strong product offering and higher conversion but traffic was soft in store, especially in those markets where weather was a factor. In terms of the product, Ann Taylor generated a strong response across the assortment with the fashion offering resonating especially well, particularly product that was special or holiday inspired.

In tops, the performance was driven by wovens and cashmere sweater. Skirts, suites and outerwear were also strong. Our weddings collection and our expanded events line of special occasion dresses performed particularly well including Little Black dresses and party skirts.

In addition, handbags, jewelry and shoes continue to be standout. Our footwear partnership with Vince Camuto has been a home run and we have had success with both classic, as well as fashion styles. The offering is a combination of amazing quality, great style and tremendous value.

As you all know one of our priorities has been to further enhance the in-store shopping experience for our clients. Towards that end Ann Taylor has continue its program of updating and refreshing its store fleet.

For the year, we met our objective of having 80% of our stores reflect our more modern format. These stores have continued to deliver higher levels of productivity and profitability.

From a marketing perspective, the brand has continued to engage its core client through multiple touch points, including e-mail, social media and direct mail. Our focus for 2014 will remain on building a stronger connection to our core clients, regardless of how she shopping with us, whether it’s in-store or online, while attracting our next-generation Ann Taylor client.

Turning now to factory, performance in Ann Taylor’s factory business was softer than planned. As you know, factory traffic levels have been inconsistent in this channel for some time. Nevertheless, factory continued to deliver solid gross margin performance.

Looking ahead for the Ann Taylor brand, we feel good about Ann Taylor’s product offering for spring, which continues to provide relevant fashion and great style for her wear to work and special occasion need. From a color perspective, the pallet is sophisticated and features a strong neutrals component.

In addition, I'm excited about a special capital collection we will offer that was design with Kate Hudson, launching in April the line will feature an elegant selection of Black Event dresses.

Turning now to LOFT, the brand continued its strong momentum in the fourth quarter, with clients responding very positively to the brand’s offering a versatile and affordable fashion.

LOFT successfully navigated a challenging environment, executing on a strategy to reduce the level of promotional activity and delivering performance metrics that were all up versus a year ago.

In terms of current sales, the brand achieved a 6% increase. This included an 8% increase for LOFT, partially offset by a decrease of 4% at LOFT outlet. From a product perspective, the results were driven by success across all key categories. Tops were outstanding, driven especially by woven.

LOFT lounge which was expanded and relaunched during the quarter under the Lou & Grey brand name was exceptional. In addition, pent, denim, skirts, dresses, accessories and jewelry were all strong. In denim skinny and straight styles and new [watches] (ph) help drive a double-digit comp even over last year’s colored denim trend.

Client responded very well to LOFT’s print and novelty offering, and from a color perspective. the assortment was on trend with neutrals performing best including black, grey, ivory and navy.

With respect to marketing, LOFT strategy continues to be successful, driving double-digit growth in our active client file year-over-year. We will continue to work to broaden the brand’s client base, while deepening relationships with our existing clients and gaining a greater share of her wallet.

Turning now to LOFT outlet, total sales for the quarter increased 4%, reflecting new store growth. However, comp sales were impacted by the week traffic levels at factory outlet centers. The environment was highly promotional but the team did a good job of successfully managing the business to maximize profitability.

Looking ahead, LOFT assortment for spring is well balanced with a strong fashion component and great essentials for her everyday wardrobe, all at great value. Before I turn it over to Mike, let me outline for you our strategic initiatives for 2014, which are designed to position ANN INC. for continued long-term profitable growth.

First, we are strategically realigning our organization to position ANN INC. for accelerated growth and efficiency in an omni-channel environment. As consumers purchasing behavior has shifted and online shopping has grown, we have been at the forefront of this evolution, investing in infrastructure and systems enhancement that led to the launch of our omni-channel platform in 2012.

We are now taking the next critical step by realigning our organization to support an integrated stores and e-commerce structure to accelerate our strategic growth agenda and overall financial performance. The new structure will enhance our focus on delivering great fashion, building our brands and servicing our client wherever and whenever she chooses to shop.

In connection with the changes, I am very pleased to announce that Gary Muto has been named to the new position of President, ANN INC. Brands, where he will primarily focused on design, merchandising and marketing for all channels of the Ann Taylor and LOFT brands. This new role will enable the company to benefit more fully from Gary’s many years in building and growing brand.

In connection with the realignment, we've also streamlined our management structure and corporate workforce, creating a more efficient organization and importantly, taking advantage of our incredible bench strength and depth of talent across the organization.

The realignment is expected to result in ongoing annualized pretax operating savings of approximately $25 million by year end fiscal 2014, with approximately $50 million in savings realized this year. All in all, this is the right strategic move to better position ANN INC. for 2014 and beyond.

Second, omni-channel, clearly, this will continue to be a key focus as the realignment suggest. We are pleased with the success we’ve seen from Phase 1 of our program, which has enabled us to fulfill online orders to our stores enhancing our ability to meet her needs and providing additional sales and margin opportunity. In 2014, we are laying the groundwork for Phase 2 of the program. This phase will give our client access to our online product from the store environment.

As part of our effort to deliver a superior online experience for our client, we are on track with key site upgrades for 2014 that will improve speed, simplify navigation and deliver a better more user-friendly shopping experience.

For example, earlier this quarter, we updated the appearance of LOFT.com to best capture the brands modern appeal and energy. The new aesthetic has generated a great response from clients. An aesthetic refresh at anntaylor.com is nearing completion as well.

Third, real estate. In the current environment, we are being very mindful about where and how we grow our stores lead. During 2014, our primary focus will be on expanding the LOFT brand footprint and as you all know, LOFT is a brand that works everywhere and we will continue to build our presence in small and mid-tier market as well as in the outlet channel.

Fourth, international. During 2013, we continued our successful expansion in Canada where brand recognition for both Ann Taylor and LOFT is strong. At year end, we operated 10 stores in this market and we plan to open a handful of additional stores during 2014. At the same time, we're moving forward with plans to enter Mexico with the LOFT brand in the back half of the year. We see this as an exciting opportunity to continue to grow our client base and geographic reach.

Finally, Lou & Grey. As you know Loft lounge has been a growing part of our LOFT business. The success of this category has provided us with an opportunity to develop a new brand concept under the Lou & Grey name.

We’ve elevated and expanded the offering to include a greater selection of styles. Clients are loving Lou & Grey’s effortless casual style. Looking ahead, we are very excited about the potential for this brand. The product assortment combines casual style and comfort and is very much in sync with how women are dressing today.

Lou & Grey is uniquely positioned within our attractive segment with significant opportunity for expansion. In addition to offering Lou & Grey in all 540 LOFT stores and online, we plan to bring the brand to market through a shop-in-shop concept and test free standing stores.

I'm looking forward to continuing to work very closely with Gary to bring this brand to life. Overall we are committed to expanding the scope of our entire product offering at ANN INC. making us the clear wardrobing destination for women with style.

Ann Taylor is focused on wear-to-work and special occasion LOFT on relaxed wear-to-work and casual separates and Lou & Grey on effortless casual comfortable style. Together they enable us to meet the full spectrum of women's wardrobing needs, further positioning ANN Inc. as the go-to destination for stylist feminine fashion, all at great value for every dimension of her life.

In summary, our strategic initiatives present significant opportunities for Ann Inc. in 2014 and beyond. We look forward to continuing to deliver long-term profitable growth and increased value for our shareholders.

Let me now turn it over to Mike.

Mike Nicholson

Thanks Kay and good morning, everyone. Today I’ll start with a summary of results for the fourth quarter and full year fiscal 2013. And then I'll provide you with some perspective on our outlook for the first quarter and full year fiscal 2014.

Beginning with net sales. Net sales for the fourth quarter were $623.3 million, an increase of approximately 3% versus the $607.7 million in net sales reported in the fourth quarter of 2012. By brand, net sales across all channels of the Ann Taylor brand were $246.2 million, a decrease of 3% when compared with $255 million reported last year. At the LOFT brand, net sales were $377.1 million showing growth of 7% over the $352.7 million reported last year.

Moving on to comps. Total company comparable sales for the quarter increased 2.9% versus last year. At the Ann Taylor brand, total brand comps declined 1.1%, reflecting an increase of 0.9% at Ann Taylor, offset by a 6.1% decline in the factory outlet channel. At the LOFT brand, total brand comps increased 5.7%, reflecting an increase of 7.6% at LOFT, partially offset by a decline of 3.5% at LOFT outlet.

Turning to gross margin. Gross margin as a percentage of net sales was 49.3%, up 20 basis points when compared to the 49.1% rate achieved in last year's fourth quarter. The gross margin performance in the fourth quarter of 2013 reflected effective planned promotional activity at both Ann Taylor and LOFT, partially offset by a higher level of promotional activity in the factory outlet channel versus the fourth quarter of 2012.

Turning now to SG&A. SG&A expenses in the fourth quarter were $301.5 million compared with $296.6 million reported in the fourth quarter of 2012. The increase was primarily driven by increases in variable costs associated with higher net sales versus the fourth quarter last year as well as expenses associated with our year-over-year store growth.

SG&A as a percentage of net sales was 48.4%, a 40 basis point improvement from the 48.8% in the fourth quarter of last year. This rate reflected the benefit of increased fixed cost leverage as a result of higher net sales.

Moving down the P&L. Operating income during the fourth quarter was $5.8 million versus operating income of $1.6 million in the fourth quarter of 2012. Fourth quarter net income was $4.7 million compared to net income of $2.4 million achieved in the fourth quarter of 2012. Diluted earnings per share was $0.10 double our fourth quarter 2012 diluted EPS of $0.05.

Moving on to our share count. Weighted average diluted shares outstanding for the quarter decreased 4% to 45.7 million shares versus 47.6 million shares in the fourth quarter of 2012. Our effective tax rate for the fourth quarter 2013 was 13.2% versus 9.4% in the fourth quarter of 2012. Depreciation and amortization in the fourth quarter totaled approximately $27.9 million compared with $27.2 million reported in the fourth quarter of 2012. And finally capital expenditures in the fourth quarter totaled $37 million compared with $36.1 million in the fourth quarter of 2012.

Turning now to a quick recap of our full-year results. Net sales for fiscal 2013 increased 5% versus last year to $2.5 billion on an overall comp increase of 2.3%. At Ann Taylor, total sales across the brand increased 2% to $959.8 million compared with $945.2 million in 2012 and comparable sales rose 1.1% on top of last year's positive comp performance of 1.1%.

At the LOFT brand, total sales increased 7% to $1,534,000,000 in 2013 compared with $1,430,000,000 in 2012. Comparable sales increased 3% on top of last year's 4.8% comp. Our gross margin rate for the year was 53.9% as compared to the 54.8% achieved in fiscal 2012.

Our 2013 gross margin results were negatively impacted by a highly competitive retail environment, which cost us to be more promotional at both brands in order to clear through inventory. Our gross margin rate was also impacted by higher levels of client shipping associated with a full year of omni-channel sales as compared to 2012.

SG&A expenses for the year were $1,173,000,000 compared with $1,136,000,000 in fiscal 2012 primarily reflecting costs associated with store growth during fiscal 2013, an increase in variable costs related to higher net sales and other costs associated with the expansion of our business. All of which was partially offset by lower performance-based compensation expense.

SG&A as a percentage of net sales was 47.1%, a 70 basis point improvement compared to the 47.8% reported in fiscal 2012. This rate improvement was primarily due to the benefit of fixed cost leverage as a result of higher net sales and lower performance-based compensation expense when compared with fiscal 2012.

Operating income for the year was $170 million, reflecting a 2% increase compared with the $167 million reported last year. Net income for the year totaled $102.4 million, delivering a record $2.19 per diluted share in 2013 compared with net income of $102.6 million or $2.10 per diluted share in 2012.

Weighted average diluted shares outstanding for the year decreased more than 4% to 46 million shares versus 48 million shares in 2012, reflecting the repurchase of 1.5 million shares during 2013. Our effective tax rate for the year was 39.7% versus 38.8% for 2012, primarily due to the benefit in the prior year period of tax positions that were considered effectively sold.

Depreciation and amortization in 2013 totaled approximately $107 million versus $98 million in 2012. Capital expenditures for the year totaled approximately $141 million versus approximately $147 million in 2012.

Moving on, now to the details of our fiscal year end inventory, we ended fiscal 2013 with a 7% increase in total inventory per square foot at the company level, which reflected increases of 10% at Ann Taylor, 7% at the LOFT brand and 6% in the factory outlet channel.

The increase in inventory per square foot at Ann Taylor was a direct result of our 2013 strategy to buy into more fashion and novelty products at higher initial ticket versus last year. In fact, on a unit basis, inventory per square foot at Ann Taylor was down 4% versus 2012.

At LOFT, inventories ended the quarter in line with the performance of the business. And importantly, we entered the first quarter of 2014 with clean inventories and low levels of carryover at both Ann Taylor and LOFT. And finally at factory outlet, inventory levels at the end of the fourth quarter were largely a result of timing shifts in the delivery of spring receipts.

Turning now to store openings and closures, during fiscal 2013, we opened a total of 66 stores, comprised of seven Ann Taylor stores, seven Ann Taylor Factory stores, 38 LOFT stores and 14 LOFT Outlet stores. We closed a total of 25 stores during the year, comprised of 14 Ann Taylor stores and 11 LOFT stores.

The total store count at the end of the fiscal year was 1,025 stores, comprised of 268 Ann Taylor stores, 108 Ann Taylor Factory stores, 539 LOFT stores and 110 LOFT Outlet stores. Our store square footage at the end of the fiscal year totaled approximately 5.9 million square feet, a 3% net increase from the square footage totaled at the end of fiscal 2012.

Turning now to our real estate plans for 2014, we continue to see opportunity to invest in the profitable growth of our fleet in 2014. We will be focused especially on the LOFT brand, where we see further runway for growth in small and mid-markets and some incremental potential for LOFT Outlets.

We plan to open approximately 20 LOFT full price stores and approximately 20 LOFT Outlet stores in 2014. We also plan to open the first LOFT store in Mexico. And expect to test Lou & Grey on a standalone basis this year. At the Ann Taylor brand, we plan to open approximately five new Ann Taylor stores and five new Ann Taylor Factory stores in 2014. So in total, we expect to open approximately 50 new stores in 2014 and from a timing standpoint, approximately 30 of these stores are expected to open in the first half of 2014, with the remainder in the second half of the year.

Regarding store closure plans for 2014, we currently expect to close approximately 30 stores during the fiscal year. From a timing perspective, one-third of the stores will be closed in the first half of 2014 and the remaining two-thirds will close in the second half of the year, most at the very end of fiscal 2014. And as always, we will continue to manage our real estate portfolio to maximize store profitability and ensure brand presence in key regions and markets.

In terms of our strong balance sheet, after share repurchases totaling $49 million in fiscal 2013, we ended the year with cash of $202 million and no bank debt. We remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value in 2014.

Now before I go through our outlook for the first quarter and full year of 2014, let me first sum up for you, the financial implications of the strategic realignment that we announced earlier this morning. As you know, 2013 represented the first full year of operation for our omni-channel platform, a change that impacted not only how we interface with our client but also how we operate and view the business overall.

In the process of realigning our company for an omni-channel world, we have identified a number of opportunities to streamline operations. As a result, we expect to reduce our corporate workforce by approximately 100 positions, resulting in a pre-tax restructuring charge of approximately $15 million, the vast majority of this charge will be recorded in the first quarter of 2014.

We expect ongoing annualized savings associated with the realignment to amount to approximately $25 million. Of these, approximately two-thirds will be SG&A savings and one-third will be gross margin savings. For fiscal 2014, we expect to realize approximately $15 million in operating savings on a pre-tax basis.

Turning now to our outlook for the first quarter and full year of 2014, for the fiscal first quarter of 2014, we expect total net sales to approach $600 million, reflecting total company comparable sales that are approximately flat with the first quarter of 2013. Our gross margin rate performance is expected to approach 55%.

And finally, our selling, general and administrative expenses are expected to be approximately $305 million, excluding the impact of the previously mentioned pre-tax restructuring charge of approximately $15 million related to our strategic realignment.

In terms of the full year, our outlook is as follows. We expect fiscal 2014 total net sales to be $2.615 billion, reflecting a total company comparable sales increase in the low-single digits. Our gross margin rate performance is expected to be 54%. Total SG&A expenses in fiscal 2014, excluding the first quarter pre-tax restructuring charge of approximately $15 million are expected to be $1.225 billion compared to SG&A expenses of approximately $1.173 billion in fiscal 2013.

The overall increase primarily reflects support for the company's 2014 strategic growth initiatives as follows. First, $30 million of incremental expense associated with our 2014 new store growth plans and second, $20 million in variable store operating costs to support continued sales growth within our existing fleet.

Our 2014 effective tax rate is expected to be approximately 40%. Capital expenditures are expected to be approximately $120 million and this reflects the following investments.

First, $40 million in support of approximately 50 new stores for both brands, including our continued expansion in Canada. Second, $20 million to support approximately 20 downsizes and remodels, primarily at Ann Taylor and LOFT stores. Third, $30 million for store renovation and refurbishment programs. And finally, $30 million to support continued investment in our information technology, including investments to support our omni-channel capabilities.

Our total weighted average square footage for fiscal 2014 is expected to increase by approximately 3%, reflecting 50 store openings and 30 store closures and we expect to end the year with approximately 1,045 stores. Regarding our share count, we anticipate that our full year weighted average diluted shares will be approximately 46 million shares in 2014.

And for the purposes of modeling EPS in 2014, note that this figure excludes the impact of approximately 1 million participating securities that should be incorporated into your models for a total of approximately 47 million shares on a weighted average basis. And finally, we expect to continue to maintain our healthy balance sheet, including a disciplined approach to inventory management throughout the fiscal year.

And with that, I'll turn it back to Kay.

Kay Krill

Thank you, Mike. Before I open the call up for questions, I’d like to leave you with some thoughts as we formally close out 2013, which was our second consecutive year of record EPS and our fourth consecutive year of comp growth at both brands. Although, 2013 was a challenging environment for all retailers, our record results for the year demonstrated the power of compelling product and the important of evolving a long step with the consumer, not just from a product perspective but and how she is shopping today. We are committed to being there for her whenever and wherever she wants to shop our brands.

As a company of women for women, we are committed to becoming her ultimate wardrobing destination, dressing her from head to toe for all facets of her life. We believe that by delivering on this strategic initiatives that support this objective, we will maximize our performance in an omni-channel world and drive continued profitable growth for ANN Inc. in 2014 and beyond.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Dana Telsey with Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Good morning, everyone.

Kay Krill

Good morning.

Dana Telsey - Telsey Advisory Group

Kay, Ann and obviously the strategic realignment definitely shows the evolving changing of the business model. We would love to hear a little bit more. How do you see the operating margin potential as a result of this strategic alignment and where it goes? And Kay for both outlet stores and both the stores in full-price and in outlets, what do you see product-wise and how do you see that developing through the year, also in terms of pricing and category? Thank you.

Mike Nicholson

Sure, Dana, it’s Mike. Good morning. Thanks for the question. First, in terms of the operating margin impacts or benefit on annualized full year run rate basis. As we stated in the press release this morning, we anticipated the realignment will benefit the bottomline from an expense perspective to the tune of approximately $25 million. So I think about that on an annualized basis of about a 100 basis point improvement on the bottomline.

Kay Krill

Dana, I think you’re referring to Ann and LOFT, I am sorry, I didn’t catch the end of it, but in LOFT, as I said, we’re continuing to grow all casual aspects of the brand and trying to balance the relaxed go to work separates with the casual element. But as I said earlier, our primary growth initiative, a growth category in LOFT is definitely Lou & Grey. And we’re thrilled about that, because we’re growing it inside the 540 stores as well as testing it outside that box. So that is the primary growth initiative there.

And the other part for Ann Taylor is our continuing evolution of offering more and more fashion because that’s what’s selling in the Ann Taylor world is fashionable go-to-work. So that is really our focus right now.

Dana Telsey - Telsey Advisory Group

Thank you.

Operator

Thank you. The next question is from Brian Tunick with JPMC.

Brian Tunick - JPMC

Thanks. Good morning, everyone.

Kay Krill

Good morning.

Brian Tunick - JPMC

I guess one question on, just sort of omni-channel, can you maybe talk about sort of the learnings of what’s been happening from ship from store and how do you think about planning inventory? Just how should we think about the recapture opportunity for some of the gross margin lines this year?

And then the second question, just sort of more on the full year guide versus the Q1 guide, sort of what assumptions are you making in regarding the factory stores, I guess in particular to get to your full year guidance? Thanks very much.

Mike Nicholson

Brian, as always, I thank you for your many questions. So I will start and if there is anything I missed, feel free to chime in and then I will let Kay at the end to pick up your omni-channel question in terms of the learnings and the strategy going forward.

So in terms of gross margin recapture for the full year 2013, there was about a 50 basis point negative impact on the overall total company gross margin rate related to incremental client shipping costs. And as you look forward to ’14 in terms of our full year guide, we are essentially guiding the full year in line with ‘13’s results. And so while we do expect to recapture a significant portion of the impact of the client shipping costs on the gross margin rate, I think we’re actually being appropriately conservative and reflective of what we see is a very promotional environment in terms of the consumer. So while our guidance does include a significant portion of the recapture of the client shipping costs, we’re being appropriately cautious moving forward with respect to the overall promotional environment.

Next, I’m going to move on to your question regarding assumptions as we move through the next second, third and fourth quarter of the year. So for the full year, our guide assumes a low-single-digit comp performance for the company and our quarter framework suggests a flat comp. So the math ultimately then suggests as we move through the balance of the year, a slight uptick in overall comp performance. So the way I think about it is a low-single-digit comp performance is what we will need to deliver as we move through the second, third and fourth quarter.

Factory, as we talked about on the fourth -- on the call related to the fourth quarter, the environment was tough. Overall, traffic was down mid-single digits and that trend did continue into early spring. Overall, as we progress through the balance of the year, we’re not planning growth in factory, we’re planning for essentially a flat to low, low, low single-digit comp performance, and that’s sort of how we’re thinking about how we position that inventory, as we move through the balance of the year.

Kay Krill

And Brian, regarding omni-channel, we’ve definitely seen upside in our multi-channel initiative Phase I in sales and gross margins, and we’re now focused on the next phase. So from 2014, we’re finalizing the upgrade of our web platform, which will improve site speed, function and experience. And we’re in the midst of a site evolution project that will greatly improve the web visual aesthetic and experience while also simplifying the client shopping path.

And third, our site evolution project will be completed using responsive design, which we believe will greatly enhance conversion by optimizing the client viewing experience across mobile and desktop devices.

And finally, we’re beginning to lay the groundwork to improve our in-store omni-channel experience, which will include both endless aisle and advanced client telling capabilities in order to fully satisfy her wardrobing needs. And we will update you all throughout the year on all of these initiatives.

Brian Tunick - JPMC

Thank you. That’s super helpful and great luck with spring. Thank you.

Kay Krill

Thank you.

Operator

Thank you. The next question is from Roxanne Meyer with UBS.

Roxanne Meyer - UBS

Thanks. Good morning.

Kay Krill

Good morning.

Roxanne Meyer - UBS

I just had two questions -- two quick ones. One, just can you comment on your trends to-date, whether they are already in line with your flat guidance and whether you’ve seen any change in comp performance, as we move from early February and the storms to more current trends?

And then second, just quickly, how important is an association with LOFT for the Lou & Grey brand, as you build it out, are you going to plan to test it right next to a LOFT store or actually associated with the LOFT label or really have it as a standalone brand? Thanks.

Kay Krill

Okay. Our first quarter is definitely off to a choppy start, some weeks are good, some weeks are softer. But that said, when we look at our comp performance at our warm and hot weather stores versus the balance of the chain, we have seen a meaningful delta in sales performance. So when spring weather does finally arrive, we expect it to benefit the business.

So we are approaching the first quarter outlook with caution, given the extreme weather conditions, the heightened promotional environment and soft traffic. And also bear in mind that approximately 80% of our Q1 sales opportunity is in March and April, and Easter, which is late this year, is by far our most significant selling period of the year. So we’re being appropriately cautious and we’re doing everything in our control to maximize the results of the quarter. But importantly, we do expect to deliver another year of record performance despite this challenging first quarter environment.

In Lou & Grey…

Roxanne Meyer - UBS

Yes.

Kay Krill

In Lou & Grey, we are opening our first shop in shop concept very shortly in Westport, Connecticut and we are also close to signing free-standing stores for the fall season, a few of them for the fall season because we want to test them, we want to test the size, we are hoping to get them in geographic -- in various geographic regions to test that aspect as well. And we are launching a dedicated Lou & Grey micro site later this month. So we are making a lot of progress and we are moving forward, because we really feel like this brand has tremendous growth potential for the corporation.

Roxanne Meyer - UBS

Great. Thanks so much and best of luck for the quarter.

Kay Krill

Thank you.

Operator

Thank you. The next question is from Anna Andreeva from Oppenheimer.

Anna Andreeva - Oppenheimer

Great. Thanks so much. Good morning, guys. A couple of quick ones. Just a follow-up on gross margins, do you expect gross margins to be up in every quarter after this 1Q, or is it more back-half and particularly 4Q weighted? And maybe talk about how you think about promotional cadence at each division as we go through spring. And I’m not sure if I missed this, did you buy back any stock in the fourth quarter? And with CapEx levels coming down and $4 in cash per share, could you guys be more acquisitive as we go through the year? Thanks so much.

Mike Nicholson

All right. So let me start in terms of the gross margin guide, so I’m not in a position today to provide the framework for the second, third and fourth quarter. But what I can tell you is, we have a clear perspective on the first quarter and the promotional environment. I did say for the full year in our guide that we are anticipating the recapture of a significant portion of the ’13 impact of the erosion on rate in ’13 due to increased client shipping and handling costs.

And then finally, I would say that in terms of the fourth quarter, our performance this year is [Technical Difficulty] environment going forward over time. So I am providing you perspective, a predefined perspective on the first quarter and some perspective on the fourth quarter and I will let you do the math in terms of the second and third quarter.

Your question regarding, did we buy back stocks during the fourth quarter? We did not buy back stock. We did end the year with a little more than $200 million of cash. We have an open existing authorization of $250 million that the Board approved last August.

You also have to keep in mind that we do have some seasonality in terms of working capital used in our business and typically the first quarter is a period where we consume cash as we build towards Mother's Day.

But with that, all that said, taking into account our repurchase, our historical share repurchase activity, which by the way since the third quarter of 2010 was about 18 million shares, just shy of $500 million or 40% of our outstanding shares. So I think if history is an indicator, it’s a strategy that we believe in and we do generate healthy cash flow and excess cash flows above and beyond our base business needs. And it’s a strategy that we will continue to employ as we move forward.

Anna Andreeva - Oppenheimer

Great. Thanks so much, guys.

Mike Nicholson

Take care.

Operator

Thank you. The next question is from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Great. Thank you. Kay, the stores, both Ann and LOFT, look really great right now. I just wanted to make sure I mentioned that before I get into the questions.

Kay Krill

Thank you.

Kimberly Greenberger - Morgan Stanley

I’m wondering if you can talk about this reorganization and just a bit -- a couple of examples, perhaps of how the stores organization and the dotcom organization will be more integrated going forward post this reorg. And then I just had two really quick questions for Mike. Mike, it looks to us like the share guidance for 2014 actually doesn’t include any repurchase assumptions, would that be upside?

And even though you continue to buy back stock, the cash just keeps building year-after-year, is there maybe an opportunity to get a little more aggressive on the share buyback? Thanks.

Kay Krill

Okay. Kimberley, let me just address a little quick. We definitely believe this new structure. It will best position us in this omni-channel world. And we’re creating a new integrated in-stores and e-commerce structure, which primarily focuses on combining the merchandising planning and inventory management area of e-commerce and stores. So colliding that which we think will create a much more efficient management organization and take advantage of incredible depth of talent that we already have.

So that is really what we’re focused on primarily from that part. Let me just address Gary too, while I'm talking about it that, as I said, Gary is going to have an expanded role, primarily overseeing design, merchandising and marketing for all channels of the LOFT brand. And I'm really excited about that, because as you know part of my role as CEO has always been to leverage my expertise as a merchant for our brand. And today’s actions really make that part of my job easier and more efficient and allow me to partner with one senior executive on design, marketing and merchandising across the company, because this is my passion and what I feel I add the most value to ANN Inc.

So I'm very excited about this move. And I think that it’s going to benefit the company enormously. And also with this reorganization too, Mike is also going to take on increased responsibility in his capacity as Chief Operating Officer. And I know you all know that’s very well served. So we are really optimistic about this next chapter of our life.

Mike Nicholson

And then in terms of your share repurchase question Kimberley, you're actually correct that the guided framework does not include or assume any share repurchase activity in 2014. We had said historically that we typically like to maintain a cash cushion of $100 million to $150 million. You’re absolutely correct that our end of period balance was slightly in excess of couple hundred million dollars.

But again as a reminder you have to recall the seasonality of our working cash flow or working capital and we do consume cash during the first quarter. However, with all that said, again I think, our history suggests that we are a proponent of this strategy. And when there are a unique periods of opportunity that we have been demonstrated our willingness to step outside of that the predefined framework and cash cushion target.

Kimberly Greenberger - Morgan Stanley

Very helpful. Thanks so much.

Mike Nicholson

Thank you

Operator

Thank you. The next question is from Adrienne Tennant with Janney Capital Market.

Adrienne Tennant - Janney Capital Market

Good morning and let me congratulate Gary on the new position. My question is actually part of that, in his -- are you looking to backfill his prior leadership at the LOFT and will people report into Gary? And what’s the organizational structure going to look like there? And then can you give us a little bit more color just on the quarter to-date performance by division LOFT and then the outlets and then Ann Taylor store that will be very helpful.

And then final question, the clarifying one, it seems like there is $15 million of the savings that coming in the first quarter. Would $5 million of that be up in gross margin and $10 million of that be down in the SG&A? Just how we should look at that sort of, I know you gave the guidance but just I want to see what it looked like before hand. Thank you.

Mike Nicholson

Sure. I’ll take the last question first, Adrienne and thanks for that. So the $15 million to be clear is the benefit that we expect to realize for the full year fiscal 2014. So $15 million for the full year 2014, one-third of it, call it $5 million will be a gross margin benefit and two-thirds $10 million will be an SG&A benefit. And then this realignment on an annualized run rate benefit will approximately be $25 million. So really there’s incremental $10 million that we would realized that return the quarter into 2015.

Kay Krill

Got it. Okay. Regarding Gary, and how it’s structured. He will have a brand president for the LOFT division who has a proven track record. So she has been elevated and she will oversee design in merchandising and marketing and visual for LOFT reporting Gary. And then the Ann Taylor team, the design and merchandising and visual and marketing functions have very strong leaders, who will report in to Gary right now as kind of the office of the president.

And as I said before, e-com is combined with those teams and we have very experience in successful GMM within those respective channel as well as a fantastic marketing head. And they will fall under Gary as well.

Mike Nicholson

And then finally your question in terms of early quarter trend, what I can say -- Kay, answered that question earlier on in the Q&A. What I can say is for the month of February, clearly the back half, the last two weeks was much stronger than the first two weeks of the month with LOFT stronger than ANN and I would say, at a high level really no change in terms of factory. Factory continues to be very tough in that environment.

Adrienne Tennant - Janney Capital Market

Okay. Great. Well the stores really do look great and best of luck for spring.

Kay Krill

Thank you.

Operator

Thank you. Our final question today is from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Good morning everyone. Congratulations on a very good fiscal ‘13 and my congratulation to Gary as well. I wondered if you could elaborate on your strategies for the factory channel. Obviously its been challenging there but you clearly are investing in that channel. So I’m wondering what you will do to drive traffic in that business?

And also, I was wondering about the Lou & Grey concept if you can tell us a little bit more about the store prototype, how large it is? And I think, Kay, you also mentioned the shop-in-shop concept and maybe you could elaborate on where you're going with that? Thanks so much.

Mike Nicholson

Thanks for the question, Janet. I’ll take the factory question and then let, Kay address Lou & Grey. As we’ve talked about traffic clearly has been the primary issue in the factory outlet channel for sometime now. Hence, I think it’s important to know that in 2014, we will be lapping some pretty easy compares. In terms of the fourth quarter, we did promote heavily to attract our client and importantly move through inventories as much as possible.

And I think the good news is as we sort of dissect the results, is that when the traffic there, we are able to convert and drive growth. Also, the similar step that we talked about in terms of the comp delta between warm, hot warm and cold also carries to the factory outlet channel. You're right. We are continuing to invest in outlet, as we transition into ‘14 with the distortion towards LOFT outlet. And I think that's an important point as well.

Janet Kloppenburg - JJK Research

Okay.

Mike Nicholson

And then finally, I would just remind everyone the attractiveness of the returns in that particular segment of the business with overall, even though on lower levels of traffic, still much higher levels of topline productivity, healthy levels of gross margin rate, overall low levels of overhead and so therefore, very high levels of bottom line flow through and resulting cash generation. And so it's a strategy that we believe in and that we’re not going to walk away from it.

Janet Kloppenburg - JJK Research

Great. Thanks, Mike.

Kay Krill

Janet, regarding Lou &Grey, while we’re just getting started, we definitely see Lou &Grey as an opportunity to expand its growth of our entire offering, so that we position ourselves to address the full spectrum of women’s wardrobing needs. Loungewear alone represents about a $9 billion market and we see Lou &Grey is more than just the loungewear collection. It’s really a unique offering that can sync with how women are really dressing today.

And we don’t feel like it is being fully addressed in today’s market from a fashion and wardrobing and value perspective. So as I said, our first shop-in-shop concept is opening in Westport shortly, which is a smaller square footage of what we will be doing because of the existing space that we already own. But as I said, we are close to signing deals for free standing Lou & Grey for the fall season that will be bigger and bigger square footage.

We thinking around the 2,000 square foot mark is what will probably be right and we will test in different various geographic areas to really get a beat and a pulse on where this is going to resonate. I really think it’s going to resonate everywhere. So, I'm really excited about it, very excited about the potential.

Janet Kloppenburg - JJK Research

Well, it looks terrific and I want to wish you lots of luck with that and I forgot to say, congratulations to Mike.

Mike Nicholson

Thanks, Janet.

Kay Krill

Okay. All right. Thank you everyone. We can appreciate your interest in ANN and we look forward to updating you on our continued progress this year. Have a great day.

Operator

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

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ANN (ANN): Q4 EPS of $0.10 beats by $0.03. Revenue of $623.3M (+2.6% Y/Y) in-line.