Judith Lord -
Michael Nicholson - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer
Katherine Krill - Chief Executive Officer, President and Executive Director
Jeff Black - Citigroup Inc
Adrienne Tennant - Janney Montgomery Scott LLC
Linda Tsai - MKM Partners LLC
Paul Lejuez - Credit Suisse
Roxanne Meyer - UBS Investment Bank
Janet Kloppenburg - JJK Research
AnnTaylor Stores (ANN) Q4 2010 Earnings Call March 11, 2011 8:30 AM ET
Good morning, ladies and gentlemen, and welcome to Ann Taylor Stores Corporation's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Judy Lord, Vice President, Investor Relations. Please go ahead.
Thank you, Caroline, and good morning, everyone. We're very pleased you could join us to review our results for the quarter and fiscal year 2010. I'm here today with Kay Krill, Ann Taylor's President and CEO; and Mike Nicholson, our CFO. Kay will provide an overview of the quarter and address our strategic priorities for 2011, and then Mike will review our financial results and comment on our outlook for our first quarter and fiscal year 2011. 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 11, 2011, concerning future events, and are subject to a number of factors and uncertainties that could cause actual results to differ materially.
And with that, let me hand it over to Kay.
Good morning, everyone, and thanks for joining us. I am very pleased to report on our strong performance for the fourth quarter, which capped off a terrific year for the company. For both the quarter and the 2010 fiscal year, we achieved substantial increases on both top and bottom line and we are excited about our continued growth and momentum as we enter fiscal 2011.
For the quarter, earnings per share, excluding charges, reached $0.19, an almost fourfold increase from the $0.05 we reported, excluding charges, in the fourth quarter last year. Net sales for the quarter increased 10% to $515 million and comparable sales for the quarter were up 11% over last year, with both brands comping positively. In fact, the company achieved positive comps in every quarter of fiscal 2010.
I'm especially pleased with our sales growth for the quarter, which was higher than our earlier expectations despite the impact of weather events during the fourth quarter. While the storms resulted in lost sales, we nevertheless moved efficiently and thoroughly through our fall inventory and prepared the stores for the arrival of fresh spring products at both brands.
Overall, the company delivered significantly better results for fiscal 2010 that were well ahead of fiscal 2009. As Mike will review in more detail, earnings per share for the year, excluding charges, increased to $1.30, almost $1 per share greater than the $0.32 we reported for fiscal 2009. This dramatic improvement reflected sales growth of more than $150 million and a higher gross margin rate for the year, up nearly 150 basis points to a fiscal-year record of 55.8%.
Coupled with this significant growth, we also delivered on our commitment to further enhance shareholder value through the repurchase of our shares. During the year, we repurchased 4.2 million shares at a total cost of $100 million. And during the first quarter of 2011, we repurchased an additional 4.2 million shares, also at a cost of approximately $100 million. I am also pleased that our board has authorized an additional $200 million under our existing share repurchase authorization, giving us nearly $260 million available to repurchase our shares.
With that, I'll turn now to a review of fourth quarter performance at our brands. The Ann Taylor brand continued its strong momentum, delivering on all fronts and resulting in another quarter of exceptional performance. Comparable sales for the brand increased 21%, with significantly higher sales across all channels. This included a 19% increase in the stores channel, a 74% increase in our e-commerce channel and a 9% increase in our factory channel.
Importantly, the strong sales growth was accompanied by a much improved gross margin rate for the brand, compared with its fourth quarter of last year. Overall, the performance this quarter reflected a continuation of the successful strategies that have worked for us throughout the year, as we have provided a highly relevant product assortment, including a balanced mix of versatile core items, perfect pieces and fashion; built on our legacy as the go-to-work destination for her wear-to-work wardrobe; and offered her truly exceptional quality and value. In addition, our team has supported these initiatives with effective marketing and targeted promotional strategies that have driven higher traffic and increased conversion.
From a product perspective, wear-to-work separates, suiting, dresses, sweaters, holiday occasions separates, pants, jewelry were all particularly strong, and in fact, every category generated positive comp performance. Overall, we appropriately balanced the mix of self-purchase and gifting items and saw positive results across the assortment.
Our success in stores was also replicated online, with Ann Taylor's e-commerce business delivering another quarter of tremendous growth. In terms of product, results were consistent with in-store, with our core offering performing well, in addition to the continued success with our online exclusive sizes, colors, styles and categories. The 74% comp sales increase was driven by much higher traffic, significantly improved conversion and solid growth in average order value. One of our key priorities in 2011 is to further capitalize on the enormous potential of this channel, as I will address a little later.
In terms of marketing, we continue to execute on the successful multi-touch approach that has been key to our strategy since repositioning the brand in fall 2009. We incorporated digital marketing, selective advertising, direct client outreach and PR. And this effort continues to deliver meaningful results by enhancing visibility for the Ann Taylor brand; generating increased traffic, both in-store and online; and driving greater consumer interest by re-engaging lapsed clients and attracting new customers. We are particularly excited about the increased response we are generating from our direct mail outreach, with resulting transactions up significantly as we have refined our approach.
We also saw a strong response to our holiday campaign featuring Heidi Klum and have received very positive feedback on our spring campaign with Katie Holmes.
Turning to real estate. Our new concept stores continued to greatly exceed our expectations. As you know, we are currently operating four of these new concept stores. Our goal for these stores was to drive an equivalent level of volume out of a footprint that is roughly 4,000 square feet, or 30% to 40% smaller than the fleet average. And we are exceeding this objective in all locations. The productivity gauge generated by these stores are very exciting.
Building on this success and encouraged by the momentum at the Ann Taylor brand, we are accelerating the rollout of the new store concept in 2011. This will involve opening new stores as well as rightsizing and remodeling existing stores, all in the new format. This strategy represents a very significant opportunity to drive increased sales and profitability across the chain, as well as to create a store experience for our clients that reflects an aspirational aesthetic and best showcases our product. Mike will update you on the specifics of our store investment plan in his remarks.
In summary, it has been a period of outstanding growth and progress for the Ann Taylor brand, and we believe we have the wind at our back as we continue to take steps to build on a solid momentum. Recent product and marketing initiatives have reinforced the aspirational nature of the brand, and we are playing to our strengths with a stylish and versatile wear-at-work assortment that is resonating with our clients. And we are delivering tremendous quality for the price. Our team has done a truly remarkable job in putting the brand firmly on a growth track, and we are thrilled with the results.
Turning now to the LOFT brand. LOFT's fourth quarter performance was very strong in the online and outlet channels and softer in the stores channel. However, the LOFT stores' performance strengthened notably towards the end of the quarter. Overall, the brand generated a 4% comp sales increase that reflected a 77% increase in the online channel, a 27% increase at LOFT Outlet and a 3% decrease in the stores channel. The brand experienced gross margin pressure, primarily reflecting a heightened level of promotional activity as we move to compete effectively in the highly promotional environment, as well as to efficiently move through our fall product assortment and clear the stores for fresh spring products. There is no doubt that in LOFT's segment of the market, the client remains highly value-conscious in her purchases and continues to be promotionally driven.
During the quarter, the LOFT stores channel achieved a significant improvement in sweaters, as well as strong results in pants, sweater dresses, cold-weather accessories and jewelry. Overall, there was an appropriate balance of wear-now product and a higher penetration of novelty and embellishment, which was well-received.
In terms of color, clients responded strongly to the breadth of neutrals throughout our assortment. We also experienced strong selling in corals, pinks and rich purples.
The knit and woven top categories were more challenging in the early part of the quarter. We continued to rebalance the assortment of feminine basics and fashion throughout the quarter. And we were able to even more fully address the balance issue for the spring season, which is in stores now.
Looking forward, we have also worked to restrengthen the wardrobability of the line, which has always been the cornerstone of the LOFT brand. Importantly, we generated positive comp sales in all channels of the LOFT brand in February and achieved a healthy gross margin rate as well. Clearly, we have made meaningful progress in the stores channel and are off to a good start in the LOFT brand for spring.
Turning to e-commerce. LOFT.com continues to achieve significant growth with our success this quarter driven by pants, sweaters, sweater dresses, cold-weather accessories and jewelry. As with the Ann Taylor brand, we also generated outstanding results from our online exclusives, including expanded offerings in petites, pants, jackets, dresses and shoes.
Traffic and conversion were up at a strong double-digit rate, and we experienced growth in average order value. We were well-positioned from an inventory perspective, and our digital marketing efforts and attractive product offering effectively drove both new and existing clients to the site. We see significant opportunity ahead as we move forward with key initiatives to continue to grow this channel.
Turning to LOFT Outlet. We delivered a sixth consecutive quarter of positive comps in this channel. Same-store sales were up 27%, driven by higher conversion and traffic. We are looking forward to the spring opening of nearly 40 LOFT Outlet stores associated with our accelerated factory-outlet strategy, giving the brand a more meaningful presence in this important channel.
In terms of overall marketing, LOFT has continued to achieve strong results from their strategy, which is focused on expanding LOFT client base while strengthening our relationships with existing clients. During the fourth quarter, in-store events, select advertising and PR, direct outreach and online marketing initiatives combined to deliver solid traffic growth and successfully support our ongoing efforts to attract new clients to the brand.
Overall, we are excited about the opportunities ahead for LOFT. The online and outlet channels continue to be on a strong growth trajectory, and the stores channel is showing meaningful improvement. We have applied our 2010 learnings to adjust the mix and better position the offering for our core clients, and those lessons are already showing positive results so far this spring.
The brand's successful formula of providing high-quality, feminine casual fashion at great value continues to be a powerful differentiator in the marketplace, and we look forward to capitalizing on the significant potential across all three channels.
As we look ahead to the expected first quarter 2011 performance for the Ann Taylor and LOFT brands, we are very encouraged that both brands are comping positively season to-date, driven by continued momentum at the Ann Taylor brand and improvement at LOFT. However, as you all know, there are still seven critical weeks, including the important Easter selling period ahead of us for the first quarter. That said, we're very pleased with our performance in both brands thus far in the spring season.
Let me now take a moment to highlight our strategic priorities for 2011, as we position the company for another year of profitable growth. As always, we are focused on continuing to deliver high-quality fashion at tremendous value for our client, as we build on the momentum of 2010 and lay the foundation for further growth in the years ahead.
Specifically, our seven 2011 priorities are as follows:
First, continuing Ann Taylor's strong performance by increasing traffic to the brand and further enhancing the brand experience.
Second, growing the LOFT brand by delivering significant improvement in the stores channel and continuing to capitalize on the potential of the online and outlet channels.
Third, investing in the continued growth of the e-commerce channel. This includes the planned re-platforming in late spring of our e-commerce sites in order to facilitate new features such as international commerce, improved checkout features, site personalization and mobile commerce. The re-platforming will also play a key role as we continue to move towards multi-channel inventory capabilities in the back half of 2011 to better capture consumer demand.
Fourth, driving profitable growth through our real estate strategy. For the Ann Taylor brand, we anticipate meaningful productivity benefits from the rollout of the Ann Taylor's more profitable new concept stores. LOFT plans for 2011 are focused on the accelerated expansion of LOFT Outlet, supported by selective openings and renovations across the LOFT store base.
Fifth, continuing to implement strategies to carefully manage our product costs throughout the supply chain. By pre-positioning fabrics and yarns for the second half of 2011 and other key initiatives, we have effectively mitigated higher costs for the full year. As a reminder, we had told you last quarter that we were ahead of the curve regarding mitigating sourcing costs, and I can't emphasize strongly enough how well our team has managed through this global issue. In addition, as I have said before, we are fully committed to maintaining our opening price points across all categories in both brands.
Sixth, implementing technology enhancements aimed at driving incremental top line sales and margin, including multi-channel inventory management, localized markdown management and international shipping for e-commerce. Longer-term, for 2012 and beyond, we recognize there are further opportunities associated with localized allocations and demand-driven replenishment.
And finally, continuing to use our strong balance sheet and free cash flow to further enhance shareholder value.
These strategic priorities for 2011 build on the success of our earlier efforts to be more efficient organization and position us to be more dynamic and competitive as we pursue our tremendous growth opportunities. Overall, we expect our 2011 plan will translate into meaningful top line growth and higher profitability.
As a company, we continue to evolve and grow. Today, we are brand-led and highly focused on becoming a world-class multi-channel retailer. We are no longer solely focused on stores, as our corporate name currently suggests. So to better reflect our multi-channel focus, we will be changing our corporate name to Ann, Inc. This better describes our company as we now operate two distinct brands across three channels. We want to reach our clients seamlessly wherever they shop, whether it is in our stores, online or in factory-outlet centers.
We are very excited about our future. Ann, Inc. serves two distinct segments of the market with two differentiated brands. Ann Taylor represents aspirational luxury and is focused on the professional working woman, while LOFT targets a middle-income consumer, with a feminine, relaxed, casual-product offering. Our talented and experienced team is moving forward strategically to capitalize on the opportunities in both brands, with a focus on delivering continued sales and profit growth, while maintaining a strong balance sheet.
Let me now turn it over to Mike.
Thanks, Kay, and good morning, everyone. Today, I'll start with a summary of results for the fourth quarter and full year 2010, and then I'll provide some perspective on our outlook for the first quarter and fiscal year 2011.
Beginning with net sales. Net sales for the fourth quarter were $515.3 million, an increase of approximately 10% versus the $469.1 million in net sales reported in the fourth quarter of 2009. By brand, net sales at Ann Taylor were $234.9 million, up nearly 14% versus $206.2 million reported last year. At the LOFT brand, net sales were $280.4 million, up nearly 7% versus $263-point million reported last year.
Moving on to comps. Total-company comparable sales for the quarter increased 11%. At the Ann Taylor brand, total brand comps were up 20.9%, reflecting increases of 19.1% at stores, 74.3% in the online business and 9.2% in the factory channel. At the LOFT brand, total brand comps were up 3.5%, reflecting a decrease of 3.2% at stores that was more than offset by an increase of 77.2% at LOFT.com and a 26.9% increase at LOFT Outlet.
Turning to our margin discussion. We reported a fourth quarter gross margin rate of 51.7%, approximately 80 basis points below the fourth quarter 2009 rate of 52.5%. Despite being below last year's level, this performance nevertheless represented a historically strong quarter from a rate perspective, with results driven by a healthy balance of inventory to sales at both brands, and strong full-price selling at the Ann Taylor brand offset by a higher promotional activity at the LOFT brand during the quarter.
Turning now to SG&A. SG&A as a percentage of net sales declined to 48.9%, a 260 basis point improvement over the same period last year, primarily reflecting the benefit of fixed-cost leveraging as a result of higher net sales as well as our continued focus on controlling expenses. SG&A expenses in the fourth quarter were $252 million, an increase of approximately $10 million compared to the fourth quarter of 2009, primarily reflecting incremental marketing investment, as well as an increase in performance-based compensation.
Moving down the P&L. Operating income, excluding a pretax restructuring charge of approximately $3.9 million, was $14.3 million during the quarter. This compares with operating income of $4.9 million, excluding pretax restructuring charges totaling $3.6 million in last year's fourth quarter. On an after-tax basis, restructuring charges in the fourth quarter of 2010 totaled $3 million, or $0.05 per diluted share compared with after-tax restructuring charges of $2.5 million or $0.05 per diluted share in the fourth quarter of 2009.
On the same basis, we reported fourth quarter net income of $11 million or $0.19 per diluted share, substantially higher than the net income of $2.5 million or $0.05 per diluted share achieved in the fourth quarter of 2009.
Weighted average diluted shares outstanding for the quarter decreased 1.9% to 57 million shares versus 58.1 million shares in the fourth quarter of 2009. The decline in weighted average diluted shares in 2010 was primarily related to our share repurchases of approximately 4.2 million shares in the second half of fiscal 2010.
Our effective tax rate for the quarter was 22.9% versus 95.5% in the fourth quarter of 2009. The fourth quarter 2010 tax rate reflected the benefit of certain state tax credits for prior periods and the favorable settlement of state examinations. And we expect our effective tax rate in the coming periods to be consistent with our historical effective tax rate of approximately 40%.
Depreciation and amortization in the fourth quarter totaled approximately $22 million compared with approximately $25 million in the fourth quarter of 2009. And finally, capital expenditures in the fourth quarter totaled $24.7 million compared with $9.2 million in the fourth quarter of 2009.
Turning now to a quick recap of our full year results. Net sales for fiscal 2010 increased more than 8% versus year ago to nearly $2 billion on an overall comp improvement of approximately 11%. By division, net sales at the Ann Taylor brand increased nearly 12% to $863.7 million on a comp increase of approximately 19%. At the LOFT brand, net sales increased nearly 6% to $1,116,500,000 on a comp increase of 5%. Our gross margin rate for the year increased to a record 55.8%, an increase of 140 basis points compared to last year.
SG&A as a percentage of net sales was 49.4%, an improvement of nearly 350 basis points compared to the 52.9% reported in fiscal 2009. The rate improvement was primarily due to the benefit of fixed-cost leveraging as a result of higher net sales, restructuring program savings and a continued focus on controlling our expenses.
SG&A expenses for the year were $978.6 million, an increase of approximately $12 million compared to fiscal 2009, primarily reflecting increased marketing investment to support the growth of our brands in 2010, higher performance-based compensation costs and an increase in variable costs related to higher sales, partially offset by the cumulative benefits of our strategic restructuring program and other cost savings.
In terms of the impact of various charges on our full year results, restructuring charges for fiscal 2010 totaled $5.6 million, which was $3.5 million after-tax or $0.06 per diluted share. This is compared to the 2009 total of approximately $36.4 million in pretax restructuring charges, which was $25 million after-tax or $0.45 per diluted share. There were no asset impairment charges in fiscal 2010 compared to fiscal 2009 pretax asset impairment charges that totaled $15.3 million, which was $11 million after-tax, or $0.19 per diluted share.
The total cost of these charges in 2010 was $5.6 million on a pretax basis and $3.5 million, or $0.06 per diluted share on an after-tax basis. For fiscal 2009, these charges totaled approximately $51.7 million on a pretax basis and $36 million, or $0.64 per diluted share on an after-tax basis.
Excluding these charges, operating income for the year was $125.4 million compared with operating income of $27.7 million last year. On the same basis, we reported net income of $76.9 million or $1.30 per share in 2010 compared with net income of $17.8 million or $0.32 per diluted share in 2009.
Weighted average diluted shares outstanding for the year increased 2.3% to 58.1 million shares versus 56.8 million shares in fiscal 2009. Our effective tax rate for the year was 38.4% versus 30.3% for 2009.
Depreciation and amortization in 2010 totaled approximately $96 million versus $104 million in 2009. Capital expenditures for the year totaled approximately $61 million versus approximately $39 million in 2009.
Moving on now to the details of our fiscal year-end inventories. Total inventory per square foot, excluding e-commerce, at the end of fiscal 2010 increased 14%, in line with our comparable-sales performance and reflecting incremental inventory to support our plans to open 44 factory-outlet stores in the first half of 2011.
In addition, inventory per square foot increased 24% at Ann Taylor stores and 1% at LOFT stores. And importantly, we entered the first quarter of 2011 very well-positioned to support our first quarter growth plans with very low levels of carryover inventory.
During fiscal 2010, we opened 24 stores, comprised of 10 LOFT stores and 14 LOFT Outlet stores. We closed a total of 35 stores during the year, comprised of 16 LOFT stores and 19 Ann Taylor stores. In addition, we converted six Ann Taylor stores to LOFT stores and four LOFT stores to LOFT Outlet stores. The total store count at the end of the fiscal year was 896, comprised of 266 Ann Taylor stores, 502 LOFT stores, 92 Ann Taylor Factory stores and 36 LOFT Outlet stores.
Our store square footage at the end of the year totaled approximately 5.3 million square feet, a 1% decline from the square footage total reported at the end of fiscal 2009 and a 3% decline over the same period on a weighted average basis.
As noted in today's release, the fourth quarter of 2010 marked the completion of our three-year Strategic Restructuring Program, which generated a total of $125 million in ongoing annualized savings. Approximately $90 million of these savings represent SG&A savings and the remaining $35 million represent gross margin savings. We realized approximately $40 million of these restructuring savings in fiscal 2008, approximately $65 million in incremental savings in 2009 and the final $20 million of incremental savings in 2010.
Onetime costs of the multi-year program totaled $134 million. Of the total program costs, approximately $85 million were non-cash costs associated with the store closure program, and virtually all of the savings were cash savings.
Under our restructuring program, we closed a total of 137 stores during the three-year program period, approximately half of which were Ann Taylor stores and half LOFT stores. We closed a total of 60 of these stores in fiscal 2008, 42 in fiscal 2009 and 35 in fiscal 2010.
Turning now to our store growth plans for 2011. As Kay mentioned earlier, during 2011 we are pursuing a real estate growth strategy for our Ann Taylor and LOFT brands with the goal to enhance both sales and productivity at stores in 2011. Overall, we expect to open approximately 80 new stores this year. From a timing standpoint, approximately 60 are expected to open in the first half of 2011, with the remainder scheduled to open in the second half of the year. Regarding store closure plans for 2011, we currently expect to close 30 stores during the fiscal year. As always, we will continue to manage our real estate portfolio for maximum store productivity and to ensure brand presence in key regions and markets.
In terms of the overall square footage impact, the net effect of store openings, closures and conversions is expected to result in a year-end square footage of approximately 5.5 million square feet, an increase of 4.3% on a year-end basis or 3.6% on a weighted-average basis.
By brand, we expect to open approximately 38 LOFT Outlet stores and 14 LOFT stores in 2011 to capitalize on the brand's potential for improved sales and gross margin. The vast majority of the LOFT Outlet store openings are expected to occur in the first half of the fiscal year.
For the Ann Taylor brand, as Kay mentioned, we have achieved compelling sales and profitable results from the new concept stores we opened last year. And as a result, we are accelerating the rollout of the new format with the opening of approximately 20 new Ann Taylor stores, as well as the conversion or downsizing of 20 to 25 current Ann Taylor store locations. In addition, we expect to open approximately six Ann Taylor Factory locations at premier outlet centers this year.
In terms of our strong balance sheet, after share repurchases totaling $100 million in fiscal 2010, we ended the year with cash of approximately $227 million and no bank debt. We remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value, primarily through investing in the continued growth of our brands, as well as continued share repurchases during 2011.
To that end, in the first quarter, we have repurchased an additional 4.2 million shares also at a cost of $100 million. As noted earlier, the board has authorized an additional $200 million for our share repurchase authorization, giving us nearly $260 million available under the authorization.
Now turning to our outlook for the first quarter and full year of 2011, beginning with the first quarter of 2011. We expect first quarter total net sales to approach $510 million, reflecting a total-company comparable sales growth in the positive mid- to high-single-digits. Gross margin rate performance is expected to be approximately 58.5%, which would represent the second-best first quarter performance in our history. Selling, general and administrative expenses are estimated to be approximately $255 million, with the increase versus last year primarily in support of our strategic growth initiative to accelerate factory-outlet expansion in the first half of fiscal 2011, which we expect will begin to produce profitable sales beginning in the second quarter. The increase also reflects the first quarter 2011 impact of the 18 new LOFT Outlet stores we opened in the second half of fiscal 2010.
In terms of our expectations for the full year, our outlet calls for fiscal 2011 net sales of approximately $2,175,000,000, reflecting a total-company comparable sales increase in the mid-single-digits. Our gross margin rate performance is expected to reach a new, record high of approximately 56%, slightly stronger than the record gross margin rate of 55.8% achieved in fiscal 2010. Selling, general and administrative expenses as a percentage of sales are expected to improve nearly 100 basis points to 48.7%. This reflects continued discipline in expense management and nearly $200 million in anticipated sales growth versus last year.
Total SG&A expenses for fiscal 2011 are expected to be approximately $1,060,000,000. This compares to SG&A expenses of approximately $979 million in fiscal 2010. The overall increase reflects the following factors:
First, approximately $35 million of incremental expense associated with 44 factory outlet locations scheduled to open in the first half of 2011, as well as the full year impact in 2011 of the 2010 LOFT openings.
Second, we expect $20 million in variable store operating costs in support of the continued momentum at the Ann Taylor brand and planned top line growth at the LOFT brand.
Third, we anticipate $15 million in incremental brand marketing investment to drive traffic to all channels, as well as continued investment in our high-growth e-commerce business.
And finally, we have $5 million associated with restatement of the company's 401(k) match and $5 million associated with merit increases.
Moving on to the tax rate. We expect our effective tax rate for the year to be approximately 40%.
Our capital expenditures for fiscal 2011 are expected to be approximately $130 million, reflecting the following investment initiatives:
First, $60 million in support of approximately 80 new stores for both brands.
Second, $25 million to support approximately 35 downsizes and remodels, largely associated with the accelerated conversion of select Ann Taylor stores to the new, more productive, smaller store format.
Third, $20 million for store renovation and refurbishment programs, primarily for LOFT stores.
And finally, $25 million to support continued investment in information technology and our high-growth e-commerce channel.
And as always, you should expect us to remain disciplined in regards to maintaining 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.
Thanks, Mike. Before I wrap up, let me take a moment to acknowledge our associates and clients who raised nearly $6 million in fiscal 2010 to support two causes very important to us as an organization. Together, we raised $2.7 million to support the Breast Cancer Research Foundation and $2.8 million to support St. Jude's Research Hospital [St. Jude Children’s Research Hospital]. I am extremely proud of contributing to these world-class organizations, and am equally proud of the strong support we've received from our associates and our clients. Our charitable initiatives are an important part of our culture today.
Let me conclude by reiterating our excitement about the business opportunities ahead. We have two strong and differentiated brands, each with tremendous growth prospects. Our team is focused on the strategic initiatives that will drive our continued success in fiscal 2011 and position the company to deliver increased sales, earnings and shareholder value this year and beyond.
Operator, we're ready for our first question.
[Operator Instructions] Our first question comes from Janet Kloppenburg from JJK Research.
Janet Kloppenburg - JJK Research
I had a question on the gross margin guidance, which is very encouraging, given what we're hearing about cost increases. And I wondered if you could talk a little bit about the timing there? You're looking for the gross margin to be down a bit in the first quarter. Should we be thinking about gross margins to be up in the back half of the year? And secondly, I am very encouraged also to hear about the LOFT business trends. Maybe we could hear a little bit more about what's driving that. And also some comments on the Ann Taylor business trends would help for first quarter, given the inventory levels right now.
So Janet, I'll take the first question regarding gross margin rate and how we should think about it by quarter. So as we mentioned in terms of our first quarter outlook, we do expect a slight compression in the rate year-on-year in Q1. As we move through the balance of the year, I fully expect that we should be able to improve our margin rate year-on-year in the second, third and fourth quarter.
Janet, specifically at Ann Taylor, which I had said, both brands, all channels comped positively in February and quarter-to-date are also positive, which is great, great news for us. But specifically, what's driving that is at Ann Taylor, business is really strong across the board. All of our colors are selling, especially the neutrals -- they're very strong -- and obviously color always sells for us. So everything is working there. Print and pattern is working. But the wear-to-work category is roughly 70% of our business and that continues to drive the momentum in that brand. So off to a good start in Ann Taylor, could not be more pleased. At LOFT, their color assortment is also resonating well with their clients. They are selling neutrals very well and also the corals and the pinks and the rich purples. Coral has really turned out to be the color of the spring season, I think, from designer on down. Also within LOFT, all the blouses have been incredible in the months of January and February, as well as feminine knit tops and sweaters, jewelry, belts, and pants have been very strong in LOFT. In addition to pants, denim trousers, particularly the wide leg trouser, has been strong. So all in all, we are very encouraged thus far.
Janet Kloppenburg - JJK Research
And the gross margin outlook, could that be helped by a bigger influence of made-for-factory products in fiscal '11?
Sure, absolutely. Mix of business will also be a contributor with respect to our ability to drive improved rate performance in the second, third and fourth quarter.
Janet Kloppenburg - JJK Research
Great. And Mike, could you just reiterate for me your capital expenditure plan, the amount for fiscal '11, please?
Yes. So $130 million for fiscal 2011.
Our next question/comment comes from Paul Lejuez from Nomura Securities.
Paul Lejuez - Credit Suisse
Can you talk about the drivers of the mid-single-digit comp guidance for the year? How many points come from e-com? And then I guess, at the store level, how much from transactions versus ticket?
So Paul, at this point, we're not going to provide specific brand- or channel-level outlook regarding our overall comp outlook.
Paul Lejuez - Credit Suisse
Alright. Let me try a new one. In terms of the new class of outlets, how do you expect that to compare to the sales productivity of existing outlets? How should we model that? Is the quality of real estate much different? And just wondering if should we expect lower levels of sales per foot?
From my perspective, the real estate is as good or better than the real estate we have in the base business.
Our next question comes from Linda Tsai from MKM Partners.
Linda Tsai - MKM Partners LLC
Could you talk about how you're thinking about inventories for the balance of the year? How will this trend relative to your comp expectations? And then, what does it look like on a unit basis?
Sure, Linda. Just in terms of the comments, in terms of our year-end position, let me just remind you that we said at the end of the year, our inventory per square foot, excluding e-commerce, was up about 14%, with Ann Taylor stores up about 24% and LOFT up 1%, with the overall growth also being driven by our positioning of inventory in support of the first-half openings within LOFT Outlet and Ann Taylor Factory. I also want to comment for a moment in terms of our mix at the end of the year, and our carryover inventory was less than 10% of the total mix. So more than 90% of the inventory we're carrying in to the first quarter of 2011 represented fresh, clean, spring product. Sitting here today, looking at our outlook for the end of the first quarter, I fully expect that at the total-company level, that our inventory level will be up about the same degree that it was at year end, with Ann Taylor up in the 15% to 20% range on a dollar basis, the LOFT brand up low single-digits. And I would expect factory outlet to be up fairly significantly again, and that really relates to the ramp-up in the second quarter of that strategic initiative. And then, just a comment in terms of our full year outlook and how we're thinking about positioning our inventory from a unit receipt plan perspective, and I'll talk specifically just to the store channel. Within Ann Taylor, we're positioning units to be up about 15% for both spring and fall. And for LOFT, we're positioning the business up in the mid-single-digits on a unit basis.
Linda Tsai - MKM Partners LLC
And then just one follow-up. What's your strategy around promotional buys for spring at LOFT?
Promotional buys? We have really planned out our promotional strategies for both Ann Taylor and LOFT for actually the first quarter and the second quarter. So we're on track and we've actually pulled back versus last year. And we'll continue to do so based on the strength of the business.
Our next question or comment comes from Adrienne Tennant from Janney Capital Markets.
Adrienne Tennant - Janney Montgomery Scott LLC
Kay, just clarifying on your LOFT comments, LOFT stores, is that also comp positive? I think the implication there is yes.
Yes. Yes, yes, yes.
Adrienne Tennant - Janney Montgomery Scott LLC
And then to the extent that you've been running these sort of key items, sweaters, et cetera, will you continue to do those? Because it seems like they've been successful in driving traffic. And then just really quickly from Mike, clarification on the share count at the end of Q1 with the additional share repurchase, it's about 55 million -- I’m sorry, 53 million and then going to 51 million in Q2. If that's correct, please.
Adrienne, I will answer you real quick. The key items, sweaters and knit tops that we have planned throughout the spring and summer season, are definitely driving business, and they are absolutely bought to be promoted. So we are realizing high margin on those items as well.
And Adrienne, to answer your question regarding share count, and I'm happy to walk you through the math after the call. End of Q1, I'm looking at a share count, inclusive of the recent repurchase activity early in Q1, of about 54 million shares and then in the range of low-52s by the end of the second quarter.
Our next question comes from Jeff Black from Citigroup.
Jeff Black - Citigroup Inc
Yes, I guess, Kay, if you could just give us a little bit of color on LOFT and what changes you've made on the merchandising side. I mean, we know the e-commerce channel did fantastic in Q4, but stores lagged. What have you done specifically on the merchandising side with the new addition to the team there? And what kind of traction might we see across the year on that?
It's a multiple answer, obviously. First of all, let me just say that a lot of our issues in the latter part of 2010 were due to the mix in the tops category, which tops is roughly half of our business. So as we've made progress in correcting those mix issues, especially in the stores channel, of offering more -- a better balance of feminine basics as well as fashion and a good assortment of color and novelty and embellishment, we have seen the business get progressively better. In the back part of fourth quarter, in January, it was stronger. It was much stronger in February, and we're continuing to see those results. So I would say it's primarily tops-focused that we have seen a lot of the progress, which is great news because I think the team has balanced it even -- with every month, it's getting better and better. The other thing regarding team is we absolutely have strengthened the merchandising team with a new GMM [General Merchandise Manager], who had been with the company for 10 years prior, worked with me in LOFT at the very early stages. I feel very confident about the whole LOFT team right now that they're all in sync and doing a great job.
And our last question comes from Roxanne Meyer from UBS.
Roxanne Meyer - UBS Investment Bank
Two questions for you. One, just on your assumptions for gross margin. As we move throughout the year, I mean, clearly you guys have done one of the best jobs in the industry in terms of prepositioning your fabric and really being able to mitigate your sourcing cost increases. So wondering if you are able to break out how much of your gross margin increase, or really how much of an offset you are assuming from the sourcing cost pressures versus gains you're getting from each of your divisions. And separately, I'm just wondering on the remodels, what is the -- based on how many leases you have coming due over the next two years, what is the timing on remodels beyond 2011? And when are you targeting getting a more significant piece of your chain completed on that initiative? And how much more productive, if you're willing to share at this point, are those remodels?
So Roxanne, let me reiterate what I said regarding our gross margin outlook for the year. Sitting here today, we believe we have an opportunity to deliver a record gross margin rate in fiscal 2011. With respect to our first quarter outlook, we talked about a bit of compression year-on-year. But going forward, second, third and fourth quarter, we do confidently, sitting here today, confidently believe that we'll be able to drive rate improvement over the second, third and fourth quarter. I want Kay to comment on the sourcing aspect of product cost, but I would say that we have successfully navigated through this economic crisis and turmoil and have effectively, at this point, been able to maintain our product costs through the first nine months of the year. And we've also made very good progress with respect to the fourth quarter.
And I'll just jump in and say it was really a combination of prepositioning the core fabrics; producing particularly tops, sweaters, off-cycle production; our e-sourcing capabilities; value engineering as we have gone through each season; and leveraging our strong vendor partnerships that we've been able to virtually mitigate all the costs through Q3. We've also positioned nearly 80% of our raw materials for Q4, which, as you know, represents the majority of the costs of the garment. So we've done all this extraordinarily successfully, and I just want to reiterate that we have done this and we will be protecting our opening price-point businesses because we know that was a really important strategy for us last year. It is absolutely always important in the LOFT brand, and we will not be messing with the pricing architecture at all in that brand. And we feel very comfortable as we go forward, without sacrificing quality at all.
And then just to your final question, your final point regarding the Ann Taylor downsize and remodel strategy, clearly, the results have been out of the park. They've wildly exceeded our expectations. I think it's premature to go there with respect to the overall level of productivity improvement, but it has been significant. You're absolutely right. We have a number of leases that come up for renewal over the next few years. And sitting here today, we want to do more and we want to do it faster.
Thank you, thank you, everyone. This is Judy. Sorry, I know we didn't get to all of your questions today. It was a long call with the fiscal year end. As always, I'm available throughout the day today for your follow-ups, and thank you so much for being interested in Ann Taylor -- Ann, Inc.
Ann, Inc. Good bye.
That concludes today's conference call. Thank you for your participation. You may now disconnect at this time.