ANN INC's CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: Ann, Inc. (ANN)

ANN INC (NYSE:ANN)

Q1 2011 Earnings Call

May 20, 2011 8:30 am ET

Executives

Judith Lord -

Michael Nicholson - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Katherine Krill - Chief Executive Officer, President and Executive Director

Analysts

Lizabeth Dunn - FBR Capital Markets & Co.

Jeff Black - Citigroup Inc

Stacy Pak - Prudential

Adrienne Tennant - Janney Montgomery Scott LLC

Betty Chen - Wedbush Securities Inc.

Brian Tunick - JP Morgan Chase & Co

Roxanne Meyer - UBS Investment Bank

Jennifer Black - Jennifer Black & Associates

Unknown Analyst -

Kimberly Greenberger - Morgan Stanley

Lorraine Hutchinson - BofA Merrill Lynch

Operator

Good morning, ladies and gentlemen, and welcome to ANN INC.'s First Quarter 2011 Earnings Conference Call. At the request of the company, today's conference call is being recorded. [Operator Instructions] I would now like to turn the call over to Judy Lord, Vice President, Investor Relations. Please go ahead.

Judith Lord

Thank you, Gwenie, and good morning, everyone. We're very pleased you could join us to review our results for the fiscal first quarter of 2011. I'm here today with Kay Krill, ANN INC.'s President and CEO; and Mike Nicholson, our CFO.

Kay will begin with an overview of the quarter, and then Mike will discuss our financial results and outlook. After that, we’ll open it up for your questions.

Before turning it over to Kay, we would like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of May 20, 2011, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that, it's my pleasure to hand it over to Kay.

Katherine Krill

Good morning, everyone, and thanks for joining us. I am very pleased to report that we have gotten off to an excellent start in fiscal 2011, with a strong first quarter performance. We delivered significant increases on both the top and bottom line over the year-ago period. And we have continued to lay the groundwork for further profitable growth this fiscal year and beyond.

Sales for the quarter increased 10% to $524 million, up from $476 million in the first quarter last year. Comparable sales rose 8%, which came on top of last year's 14% comp increase. The Ann Taylor brand was up 15% on top of last year's 16% increase, and the LOFT brand was up 2% on last year's 13% increase.

These increases were all the more gratifying, given the combination of the double-digit comps we achieved last year, the unseasonably cool weather this spring, continued macro pressure and the very late Easter holiday. As you all know, Easter is our most significant holiday selling period of the year, for both brands. Ann Taylor and LOFT generate more sales in the week prior to Easter than the week prior to Christmas.

On the bottom line, net income increased by more than 20% compared with last year's first quarter. Diluted earnings per share grew 34% to $0.51, up from $0.38 in the year-ago period, reflecting higher sales due to a better product assortment, our continued focus on managing our costs and inventory and our share repurchase program. Overall, a very positive start to 2011. And we are on track to exceed our financial objectives for the year.

Let's now turn to the brands. First, Ann Taylor. The Ann Taylor brand achieved another outstanding quarter, continuing the momentum from our strong fall season. All channels delivered positive comp performance, with the stores channel up 14%, the online channel up 43% and the factory channel, up 9%. With this quarter's 15% comp increase for the brand on top of last year's 16%, our 2-year comp is up a very strong 31%.

Gross margin was strong despite a slightly higher level of promotional activity versus last year. Our clients continue to respond positively to Ann Taylor's successful formula of offering a balanced mix of versatile core items, perfect pieces and fashion with an outstanding quality and value.

Wear-to-work remains the cornerstone of the Ann Taylor assortment and with the brand's updated modern perspective, we continue to gain in this important segment of the women's market. Wear-to-work separates, suiting, dresses and pants all performed very well during the quarter. In fact, we were chasing the suiting category throughout the quarter.

In addition, sweaters were strong, and our client responded positively to our assortment of color, print and pattern. We would have benefited from even a broader selection of color throughout the quarter, and we do have more color options for the second quarter.

Ann Taylor's e-commerce business achieved another quarter of significant growth. The comp sales increased a 43%, was on top of a 51% increase in this channel in the first quarter last year. This strong performance again, reflected substantially higher traffic, improved conversion and an increased average order value. In addition to the strength of our wear-to-work offering, we also generated exceptional results with our online exclusives, including the weddings category, which was a standout.

We continue to be very excited about the potential for further growth in the e-commerce channel and remain focused on the significant opportunity we see to drive multichannel sales and better leverage our inventory investment across all of our channels. Our goal is to serve our client on her terms, not ours. If she wants it and we have it, we will get it to her.

From a marketing perspective, Ann Taylor's multipronged strategy incorporating digital marketing, selective print advertising, direct client outreach and PR continues to be successful. Overall, the strategy has been effective in attracting new customers, reengaging lapsed clients and elevating the profile of the brand. We have had a terrific response to our Spring campaign featuring Katie Holmes, and we are delighted that our digital marketing continues to drive significantly higher traffic to our site and is cultivating the next generation of Ann Taylor clients.

Turning now to real estate. I am pleased to report that our new concept stores continued to achieve stellar results. As you recall from our fourth quarter call, we operated 4 of the new concept stores at year end, and we have just opened our fifth location in Dallas at the Galleria.

The stores continue to significantly exceed our expectations, driving a much higher level of comp and bottom line productivity from a store footprint that is 30% to 40% smaller than our fleet average. The new format also better reflects the Ann Taylor brand's aspirational aesthetic and better showcases our product.

Looking forward, we're on track with our plan to roll out up to 45 of the new concept stores in fiscal 2011, which will include opening approximately 20 new stores and converting or relocating approximately 25 existing Ann Taylor stores.

In the factory outlet channel, Ann Taylor Factory continues to perform well. Our 9% comp sales increases reflect improved conversion and from a product respective, strong performance in tops, dresses and separates. During the quarter, we opened 4 additional factory locations, which are off to a good start.

In summary, the Ann Taylor brand delivered another strong quarter. We are excited about the meaningful opportunities we have across each of our channel to continue to expand our client reach, drive higher sales and profitability and further the evolution of this great brand.

Turning now to LOFT. The LOFT brand's comp sales increase of 2% reflected continued strong performance in the online and outlet channels and improvement in the stores channel. Comp sales in the online and the outlet channels were up 33% and 16%, respectively, with the LOFT stores channel at a negative 1%. Last year's 9% increase in the stores channel represents our most difficult quarterly comparison of the year and on a 2-year basis, comps for the store channel were up 8%.

Gross margin was quite strong, even when compared to last year's record gross margin. The performance reflects in part, the brand lean inventory position. While the lean inventory helped our gross margin rate, it held back our sales growth. In hindsight, we were too lean at LOFT stores in the key categories that drove demand during the quarter.

As you may recall, it was our plan to enter the first quarter with tight inventories due to our concern about spending by the middle-income consumer. However, following a very strong response to our February offering, we pulled deliveries forward in March and April to try to keep pace with client demand, but we were still light on product in key categories.

As a result, we entered the second quarter with LOFT inventory down in the mid-single digits. However, our inventories are now better aligned with client demand.

From a promotional perspective, we remain strategic in our use of marketing and promotional activity to remain competitive, drive traffic and appeal to LOFT's highly value-conscious clients. During the month of April, we were a bit more aggressive than last year due to the combination of the very late Easter, the cooler weather versus last year and the competitive environment.

LOFT's overall spring assortment was better balanced, with an appropriate mix of feminine basics and fashion. Tops and missy separates were both strong. The knit and woven top categories delivered significantly improved results, with both categories delivering positive comps for the quarter. We are seeing even further improvement in these categories with May delivery.

In addition to knit and woven tops, LOFT also generated strong results in dresses, pants, shorts and jewelry. Our novelty and embellished offering also performed well. In terms of color, we achieved strong results in neutrals and whites as well as shades of blue, pink, coral and purple.

The petite category was the soft spot for the quarter. In fact, absent petites, comps in the stores channel were positive for the quarter. We view petites as a major opportunity for LOFT, and we need to do a better job of reaching these clients and maximizing our potential.

In the e-commerce channel, LOFT.com achieved another quarter of excellent performance, significantly higher traffic, as well as improved conversion contributed to the 33% comp sales increase for the channel, which was on top of a 60% increase last year. Online exclusives remain a key part of our strategy and have continued to generate substantial year-over-year growth, with the expanded online assortments all performing well.

From an inventory perspective, we are focused on positioning this channel to meet growing demand online as our digital marketing continues to gain traction. As at Ann Taylor, we have a number of initiatives underway to continue to drive multichannel sales growth and better leverage our inventory investment across all channels.

From a marketing perspective, LOFT has continued to focus on driving profitable growth of the brand and strengthening relationships with its clients. During the quarter, we generated positive results with our category-specific marketing focus. In addition, LOFT continues to successfully leverage in-store events, as well as digital and social media to grow its client base. Continuing to expand the client base is a huge opportunity for us. Very few brands have the broad appeal that LOFT does, with its multi-generational client base. And there is considerable potential to continue to expand the ranks of loyal clients.

Turning to LOFT Outlet. This channel continues to perform very well, delivering comparable sales of 16% and our seventh consecutive quarter of positive comps. Late in the quarter, we opened 25 LOFT Outlet stores as part of our accelerated factory outlet strategy. The stores look fantastic and are off to a positive start.

In summary, we are very pleased with the current trend of the LOFT business, including significantly improved performance in the stores channel and continued strong growth in the online and outlet channels. We are also very excited about the growth potential within each channel of the LOFT brand.

Looking ahead and coming off a very strong April in both brands, we fully expect to deliver positive comp performance in both brands and across all channels for the second quarter.

Let me now turn it over to Mike to provide additional color on the financials and our outlook.

Michael Nicholson

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

Beginning with net sales, net sales for the first quarter were $523.6 million, an increase of approximately 10% versus the $476.2 million in net sales reported in the first quarter of 2010. By brand, net sales at Ann Taylor were $222.9 million, up 12.4% versus $198.4 million reported last year. At the LOFT brand, net sales were $300.8 million, up 8.3% versus $277.8 million reported last year.

Moving on to comps. Total company comparable sales for the quarter increased 7.8%. At the Ann Taylor brand, total brand comps were up 15.3%, reflecting increases of 13.7% at stores, 43.1% in the online business and 9.2% in the factory channel. At the LOFT brand, total brand comps were up 2.4%, reflecting a decrease of 1% at stores, that was more than offset by an increase of 32.8% at LOFT.com and a 15.7% increase at LOFT Outlet.

Turning to our margin discussion. We reported a first quarter gross margin rate of 57.3%, approximately 200 basis points below the first quarter 2010 record rate of 59.4%. The strong gross margin performance in the first quarter reflected solid product execution at both brands, offset by a promotional strategy to drive traffic and mitigate the combined impact of an unseasonably cool spring, a very late Easter holiday and a highly competitive promotional environment.

Turning now to SG&A. SG&A expenses in the first quarter were $254 million, an increase of approximately $10.2 million compared to the first quarter of 2010. SG&A as a percentage of net sales declined to 48.5%, reflecting a 270-basis point improvement over the same period last year.

This rate improvement reflected substantially higher net sales compared with the first quarter of 2010 and continued aggressive management of expenses, partially offset by costs associated with our accelerated factory outlet strategy, as well as an increase in variable costs associated with higher net sales versus the 2010 period.

Moving down the P&L. Operating income for the quarter was up nearly 20% to $45.9 million. This compares with operating income of $38.7 million in last year's first quarter. First quarter net income was up more than 20% to $27.3 million or $0.51 per diluted share, which was substantially higher than the net income of $22.6 million or $0.38 per diluted share achieved in the first quarter of 2010.

Weighted average diluted shares outstanding for the quarter decreased 9.1% to 53.1 million shares versus 58.4 million shares in the first quarter of 2010. The decline in weighted average shares outstanding was primarily related to our share repurchases of approximately 4.2 million shares in the second half of 2010, and another 4.2 million shares in the first quarter of 2011.

Our effective tax rate for the quarter was 40.5% versus 41.3% in the first quarter of 2010. And we continue to expect our effective tax rate in the coming periods to be consistent with our normalized effective tax rate of approximately 40%.

Depreciation and amortization in the first quarter totaled approximately $23 million compared with approximately $25 million in the first quarter of 2010. And capital expenditures in the first quarter totaled $27.6 million compared with $8.3 million in the first quarter of 2010.

Moving on to the details of our inventories. Total inventory per square foot, excluding e-commerce at the end of the first quarter increased 9%, in line with our overall sales performance, including the impact of incremental inventory to support our accelerated factory outlet growth strategy. In fact, inventories per square foot for the quarter were up only 4%, excluding the LOFT Outlet channel.

Inventory per square foot increased 20% at Ann Taylor stores and declined 6% at LOFT stores. As Kay mentioned, we could have used more inventory in the first quarter at LOFT stores in categories of high demand. And in fact, our inventories are now better aligned to meet second quarter sales growth in this channel.

Overall, from a total company perspective, as we move through the second quarter, we believe our inventories are well positioned to support our growth plans.

Now to update you on our progress in real estate. As we've mentioned to you on our fiscal year end call, 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 approximately 30 stores during the fiscal year. During the first quarter, the company opened 32 stores comprised of: 3 LOFT stores, 25 LOFT Outlet stores and 4 Ann Taylor Factory stores, the majority of which were opened very late in the quarter.

In addition, the company closed 5 LOFT stores, resulting in a total store count at the end of the fiscal first quarter of 923 stores, comprised of 266 Ann Taylor stores, 500 LOFT stores, 96 Ann Taylor Factory stores and 61 LOFT Outlet stores.

As you may recall, we had originally intended to open the 44 stores associated with our accelerated factory outlet strategy in the second quarter of this year. I'm pleased to report that we were able to open 29 factory outlet stores at the end of the fiscal first quarter, which resulted in approximately $5 million in incremental sales. And we continue to expect the majority of the remaining factory outlet stores to be opened in the second quarter.

Now turning to our square footage. Our total company store square footage at the end of the quarter totaled approximately 5.5 million square feet, a 4% increase from the square footage total reported at the end of fiscal 2010 and a 1% increase over the same period on a weighted-average basis.

In terms of our strong balance sheet, after our previously reported repurchase of 4.2 million shares totaling $100 million in the first quarter of fiscal 2011, we ended the quarter with cash of approximately $104 million and no bank debt. We remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value.

Now turning to our outlook for the second quarter and our increased outlook for fiscal 2011. First, beginning with the second quarter of 2011. We expect total net sales to be $550 million, reflecting a total company comparable sales increase in the mid-single digits. Gross margin rate performance is expected to be approximately 55.5%.

Selling, general and administrative expenses are estimated to be $265 million, with the increase from last year primarily reflecting support for our strategic growth initiative to accelerate factory outlet expansion in the first half of fiscal 2011, as well as the second quarter 2011 impacts of 18 new LOFT Outlet stores that were opened in the second half of fiscal 2010.

And finally, our earnings per diluted share for the second quarter of 2011 is anticipated to be slightly higher than the current consensus of analyst expectations.

In terms of fiscal 2011, we have increased our expectations for the year as follows: we currently expect fiscal 2011 total net sales to approach $2.2 billion, reflecting a total company comparable sales increase in the mid-single digits; our gross margin rate performance is expected to be in line with the record gross margin rate of 55.8% achieved in fiscal 2010; selling, general and administrative expenses, as a percentage of net sales, are expected to improve nearly 100 basis points to 48.5%, reflecting continued disciplined expense management and more than $200 million in anticipated sales growth versus fiscal 2010. Total SG&A expenses in fiscal 2011 are expected to be approximately $1,065,000,000 compared with $979 million in fiscal 2010.

The overall increase primarily reflects support for our 2011 strategic growth initiatives as follows: first, approximately $35 million of incremental expense associated with the 44 factory outlet locations scheduled to open in fiscal 2011, as well as the full year impact in 2011 of the 2010 LOFT Outlet openings; second, $25 million in variable store operating costs to support continued sales momentum at the Ann Taylor brand and top line growth at the LOFT brand; third, $15 million in incremental brand marketing investment to drive traffic growth to all channels, as well as continued investment in our high-growth e-commerce business; and finally, $5 million associated with the reinstatement of our 401k match and $5 million associated with merit increases.

Our effective tax rate is expected to be approximately 40%. Our view of capital expenditures for the year of approximately $130 million has not changed. This represents investments as follows: 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.

We continue to expect our total weighted average square footage for fiscal 2011 to increase approximately 4% by year end, reflecting the opening of approximately 80 new stores, partially offset by approximately 30 store closures and the impact of downsizes. The company expects to have approximately 945 stores at fiscal year end.

And finally, 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, for a few concluding remarks.

Katherine Krill

Thanks, Mike. I wanted to take a moment to reiterate the strategic priorities we outlined on our last call. These provide our roadmap for achieving continued profitable growth in fiscal 2011 and beyond. Our focus includes: first, continuing Ann Taylor's strong momentum by further enhancing the overall 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. Toward this end, the replatforming of our e-commerce site is on target for June. The new platform will ultimately enable us to introduce new features such as international commerce, improved checkout features, site personalization and mobile commerce. The replatforming will also play a key role as we continue to move toward multichannel inventory capabilities in the back half of 2011 to better capture consumer demand.

Fourth, driving profitable growth through our real estate strategy. We expect that the rollout of our new Ann Taylor concept stores will continue to deliver meaningful productivity benefit. And at LOFT, we are making good progress with accelerated expansion of LOFT Outlet, as well as selective openings and renovations across the LOFT store base.

Fifth, continuing to implement strategies to carefully manage our product costs throughout the supply chain. The multiple strategic actions that we took, have enabled us to successfully mitigate higher costs for all of 2011. And we remain focused on continuing to manage our costs as we approach spring of 2012.

Sixth, implementing key technology enhancements designed to drive incremental top line sales and margin, including multichannel inventory management, localized markdown management and international shipping for e-commerce. Longer term, for 2012 and beyond, we also see opportunities associated with localized allocation and demand-driven replenishment.

And finally, continuing to use our strong balance sheet and free cash flow to further enhance shareholder value. We are confident that by executing on these 7 strategic priorities while continuing to deliver compelling products, service and value for our clients at both brands, we are well positioned to achieve continued, profitable growth in 2011 and beyond.

In closing, our first quarter performance was a strong start for the year and we are well positioned to continue our momentum in the second quarter and over the balance of the year. We are moving forward with our strategic initiatives to drive future growth in both sales and profitability and to continue to enhance shareholder value.

Operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Roxanne Meyer, UBS.

Roxanne Meyer - UBS Investment Bank

Congratulations on a terrific quarter and improvement at LOFT.

Katherine Krill

Thank you, Roxanne.

Roxanne Meyer - UBS Investment Bank

My question has to do with gross margin. I guess I'm wondering, what gives you some confidence that gross margin can improve in the second quarter despite the decline that you saw in the first quarter? Maybe it would be helpful to appreciate how you're looking at Ann Taylor versus LOFT margins.

Michael Nicholson

So Roxanne, it's Mike. A couple of things I'd say, as Kay mentioned in terms of the success we had this year in the sourcing arena, on like-for-like products, our average unit cost year-on-year for the balance of the year are expected to be flat. Second, I'll remind you that we are clearly anticipating and expecting to drive gross margin improvement in LOFT stores, which is incredibly meaningful to us in the second, third and fourth quarter. And then third, what I'd say is, the benefits of channel mix, with the significant continued growth in e-commerce, as well as the factory channel in 2011, that gives us a high degree of confidence with respect to our ability to drive gross margin rate improvement in 2011.

Roxanne Meyer - UBS Investment Bank

Great. Best of luck.

Michael Nicholson

Thank you.

Operator

Your next question comes from Betty Chen, Wedbush Securities.

Betty Chen - Wedbush Securities Inc.

Kay, I was wondering if you can talk a little bit about the LOFT retail business. It certainly looks so much better to us starting in the first quarter. And I recognized you're up against a very difficult comparison in the first quarter. But as we look to the balance of the year and especially starting with Q2, I think you mentioned that you're pleased with the main momentum so far. Give us a little bit more color if you can around the top business, what you're seeing there? What we should expect to see to continue to drive that improvement? And also, how do you believe the direct and the outlet business at LOFT are giving you maybe some learnings that you can apply to the retail channel?

Katherine Krill

Okay, thanks Betty. May is off to a good start, and we're on track to deliver positive comps in both brands in all channels for the quarter, which is really exciting. But the great news is that we're specially pleased that the LOFT stores channel is comping positive month to date, now that their inventory is better aligned to client demand. As we noted on the call, another thing is that we have a more appropriate mix of feminine basics in fashion, especially in tops, which has been struggling during the entire fall season. And in fact, as I said, if we excluded petite, the balance of the assortment would have comped positively in the first quarter. So given that the summer deliveries, especially May thus far, are further improved from spring and the LOFT channel is definitely improving, making great progress, the knit and woven tops categories have turned around. Knit dresses are doing really well. I also think that the bolder, cleaner, bright color and print and pattern in the store is also helping the business. And one important part is, as you all know, color, print and pattern is very important to the LOFT brand. And we now have for the second quarter, 60% of the assortment is color, print and pattern versus 48% for Q1. So I think we're headed in the right direction, and that's also above last year. So I definitely think that LOFT is on the right track. And we fully expect them to have a great Q2 in all channels.

Betty Chen - Wedbush Securities Inc.

Best of luck.

Operator

Your next question comes from Brian Tunick, JPMorgan.

Brian Tunick - JP Morgan Chase & Co

I guess, Mike just 2 quick ones. Just given the expenses that are now normalizing, it sounds like -- what kind of total sales growth do you need to get operating leverage? And then can you just remind us in some of the assumptions that you guys made on the outlet store acquisition? What kind of revenue and operating contribution? And when you think most of that should hit the P&L for the year?

Michael Nicholson

Sure, happy to do that. In terms of the outlet question, for the full year, in light of our success in pulling off the early openings late Q1, I now expect there to be about an $80 million top line benefit in 2011. And in your previous question, your first question Brian, can you remind me?

Brian Tunick - JP Morgan Chase & Co

Yes, sure, well, before that Mike just on the outlet question.

Michael Nicholson

Sure.

Brian Tunick - JP Morgan Chase & Co

On the contribution, how do you expect it to benefit you on the earnings line. . .

Michael Nicholson

Yes, we haven't specifically -- we don't specifically disclose channel level profitability, but I think it's fair to say that the outlet channel delivers a bottom line benefit that is better than the company average. And then in terms of the leverage question, we could have leveraged SG&A in Q1 on a low single-digit comp, but as we begin to ramp the expenses up in Q2, 3 and 4 related to outlet, we'll need a comp that approaches a mid-single digit in order to leverage. And sitting here today, we fully expect that we'll be able to leverage SG&A by about 100 basis points this year versus last year.

Brian Tunick - JP Morgan Chase & Co

Terrific. Good luck to everyone.

Michael Nicholson

Thanks, Brian.

Katherine Krill

Thanks.

Operator

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

Adrienne Tennant - Janney Montgomery Scott LLC

So my question is, we were starting to see in May, particularly at Ann Taylor stores, less depths of the entire purchase markdown to, maybe like a 25% level versus some deeper ones maybe earlier in the quarter. I was wondering if you're starting to test, sort of pulling back a little bit on the depth of promotion or the number of days? And if you think that's something that you can continue to work on and improve as we go through the rest of the year?

Katherine Krill

Yes, we are testing pulling back the depth of promotions and absolutely going into more category promotions as we had planned. Based on the first quarter, as everybody experienced the challenging seasonably cool weather and traffic conditions in the very late Easter, we did have to be more promotional in April in order to drive traffic. And we're not seeing that thus far in May. So we hope to get back to more normalized promotional levels.

Adrienne Tennant - Janney Montgomery Scott LLC

Both stores look very, very good. What share count should we use in Q2 to fully diluted?

Michael Nicholson

I'm sorry, say that again?

Adrienne Tennant - Janney Montgomery Scott LLC

What share count should we use in Q2?

Michael Nicholson

So the way I'm thinking about share counts, they reflect our share repurchases last year and as well as the activity in the first quarter, I believe that a share count in the low 53 millions for the second quarter and slightly higher than that for the full year would be good for modeling purpose -- purposes. And that would incorporate the weighted average diluted shares that you see on the face of the P&L, as well as you know, the million or so additional shares that do not show up on the face, but are used for EPS calculation purposes.

Adrienne Tennant - Janney Montgomery Scott LLC

Great. Thank you very much. Best of luck.

Operator

Your next question comes from Stacy Pak, Barclays.

Stacy Pak - Prudential

I guess a few questions. First of all, can you share with us what you're seeing in terms of product costing for Spring 2011. Do you think you're going to be able to keep it flat again? Second of all, on the May comps, I guess question is how does the comparison change into June and July. Does it get tougher? And will you give us more sense by division? And then...

Judith Lord

Stacy, I think you had a limit to one, so we'll take these first two.

Stacy Pak - Prudential

Okay.

Katherine Krill

Yes, I'll definitely address the pricing issues, Stacy. I hope you all heard that our teams have successfully mitigated the cost inflation for all of 2011 without compromising quality, and I think this is a huge win for our corporation. And at Ann Taylor, by division, we've maintained our retail prices this season. And as I've said before, we are going to tweak AIRs for the third quarter just in high demand category, such as select novelty pieces or select suiting, which is really categories that we can't keep in the store. But even with all of that, I think it represents outstanding value. And we're absolutely not touching opening or good price points at all. And at LOFT, we have no plans to increase AIR at all in 2011. LOFT is a value proposition, and we absolutely know we have to keep the price points where we are. And as a matter of fact in Q2, under $50, which is a really key point for LOFT, represents 90% of the receipt versus 77% last year. So I think for Q2, we're going to -- we are offering tremendous value to the client. We are not touching retail prices at all for LOFT going then into the back part of the year. And as a matter of fact, the AIR for LOFT for this spring season -- for the Q2, is below last year and back to '09 levels. So we feel like we're in great shape. The teams did an outstanding job in an extremely challenging environment. And I feel like we were upfront ahead of this issue and managed it well.

Stacy Pak - Prudential

I guess, but Kay my question was spring '12. Do you see anything...

Katherine Krill

Oh, you said '11. I'm sorry, Stacy. Spring 2012, we are focusing all of our energies right now on our raw material strategies. We've been working on that for the past few months and making tremendous progress. So we don't want to raise prices at all if we don't have to, and we're not planning on it.

Stacy Pak - Prudential

Okay, and do I get. . .

Michael Nicholson

And then to your question regarding the compares. Stacy, as you know, we moved away from reporting monthly comps. I guess what I'd say is, the second quarter, at the Ann Taylor brand, we're up against a fairly similar compare to what we were in Q1. And as we mentioned earlier in our opening comments as it relates to LOFT, clearly the first quarter of 2010 was our most challenging compare.

Operator

Your next question comes from Jeff Black, Citigroup.

Jeff Black - Citigroup Inc

Can we get some color, Mike, on just framework around the Ann new concepts and how those are trending from a sales basis? And then you've told us how many new and how many existing can touched this year, but what about looking at the total base? How many stores could you eventually impact with the new concepts?

Michael Nicholson

Sure. So as we have been saying over the last 6 to 9 months, that our goal initially with this smaller store format, 30% to 40% less square footage, was to maintain the same level of total store volume. And it's safe to say that we are greatly exceeding our expectations. So we're seeing a significant lift in productivity. And also, the good news with this is in terms of construction costs, we're actually able to build these smaller, more productive stores for less costs. They're running anywhere from 15% to 20% below what our cost per square foot was on the prior design. In terms of accelerating downsize and remodel, we have a very healthy appetite to accelerate and downsize. And we are in active dialogue with the landlord community, and the initial indications are that they are equally excited and supportive of the strategy. And it's safe to say that in the next 6 to 9 months or so, we'll have some more dialogue with you about what the opportunity could be.

Jeff Black - Citigroup Inc

Great. Good luck.

Operator

Your next question comes from Kimberly Greenberger, Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Great start to the year.

Katherine Krill

Thank you.

Kimberly Greenberger - Morgan Stanley

Kay, I'm just looking back at your historical sales per store at the Ann Taylor division. Historically, it looks like it was running in the $2.3 million to $2.5 million range per store and obviously declined through the recession. You thought about a 20% improvement off the loads in that productivity number last year. But it looks to us like you could still have another 20% to 30% improvement in your store volume before you get back to your historical averages. Is -- are you targeting to get back to those historical averages? And maybe you could just help us understand your strategies at Ann Taylor and LOFT separately to restore those store productivity numbers?

Katherine Krill

You go first.

Michael Nicholson

Kimberly, what I'd say is in terms of our outlook for the full year, as it relates to the Ann Taylor, I think it's safe to say that we are anticipating a continuation of this top line momentum. And you're right, on a per-store basis, Ann full price stores last year was about $1.8 million per store. And sitting here today, we'd like to see ourselves be able to cross that $2 million per store threshold in 2011. And we recognize there's still lots of opportunity ahead of us to drive total box volume as well as overall levels of productivity. Similarly to the LOFT stores, last year was about, call it, $1.8 million to $1.9 million per average store in the full price channel, and we'd like to see ourselves get closer to $2 million a store this year.

Operator

Your next question comes from Lorraine Hutchinson, Bank of America.

Lorraine Hutchinson - BofA Merrill Lynch

I just wanted to follow-up on the first quarter gross margin. It sounds like from the commentary, it sounds like you were running out of inventory at LOFT. So should we assume that the gross margin shortfall versus your guidance was at Ann? And also could you comment on how Ann is doing month-to-date?

Michael Nicholson

So here's what I'd say in terms of the gross margin question. Both brands -- all channels did experience some compression in rate quarter-on-quarter, year-on-year and really, it had everything to do with the promotional activity the last 2 to 3 weeks of April as we and many other retailers were challenged by the weather, as well as both the late Easter holiday. Moving forward, over the balance of the year, we are planning for and fully expect to drive improvement in rate in LOFT stores year-on-year, and I would expect a similar level of performance in the Ann full price channel year-on-year moving forward.

Katherine Krill

And as I said, Lorraine, I'm pleased that we're on track to deliver positive comps in both brands and in all channels for Q2. And Ann's strength is still in the go-to work separates and suits and dresses. And we're off to a good start for Q2, we're pleased.

Operator

Next question comes from Liz Dunn, FBR Capital Markets.

Lizabeth Dunn - FBR Capital Markets & Co.

Let me add my congratulations. I was wondering if you could address store closures and tell us how many stores in the chain are not four-wall profitable? And if there's a concentration Ann Taylor stores versus LOFT?

Michael Nicholson

I'm not prepared, Liz, to get into that level of specificity. I guess what I would say is the 30 or so store closures that are planned for the balance of the year, they are not significant contributors overall in terms of top line, overall profitability and cash generation. So it's safe to say that we're pruning out the underperforming stores this year.

Lizabeth Dunn - FBR Capital Markets & Co.

But beyond the 30, are there many more that are not making?

Michael Nicholson

No, I would say if you reflect on the success of the 3-year restructuring program over the 2008, '09, '10 period. During that 3-year period, we were able to successfully close the majority, the vast majority of the unproductive stores in our fleet.

Operator

Your next question comes from Michelle Tan, Goldman Sachs.

Unknown Analyst -

This is Tiffany [ph] on behalf of Michelle. Just going back to the LOFT inventory. You mentioned that LOFT was a little bit lean in 1Q and that you felt like sales were somewhat constrained. I was wondering if you can give us a sense of whether sales have accelerated now that you're more in line, inventory position?

Katherine Krill

Absolutely. We entered, let me just remind you, we entered Q1, down high-single digits in inventory, for LOFT. And we entered Q2, down mid-single digit inventory in LOFT. So we were really pressured from an inventory perspective the entire quarter. And as I said, I believe in my opening comments that we absolutely have seen LOFT sales pick up as their inventory has become more aligned with client demand. So absolutely, we're seeing LOFT rebound and we're positive comp month-to-date.

Operator

Our last question comes from Jennifer Black, Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Let me add my congratulations. It appears that you're selling through your accessories quickly at both divisions. And I wondered how big is big as far as the opportunity is going forward? And then also, Kay, I wondered what new trends you're focused on for fall at each of the divisions?

Katherine Krill

Okay. Accessories, Jennifer, is definitely something that we're focused on. And we are -- we're seeing great performance in LOFT and have been for the whole Q1, and that's a brand that we had struggled a little bit with accessories. But everything's working. The only thing that we really are working on right now is expanding our whole accessories category online because we're seeing tremendous results, especially in shoes online. So that's something that we're focused on for the LOFT brand, as well as the Ann Taylor brand that shoes and certain categories of accessories are really exciting and have tremendous growth opportunity online, as well as in store, but even more so online. So we're excited about that. And as far as fall trends, the one thing I would say is I think this clean, bold color is definitely going to continue into the fall season. And silhouettes are just getting simpler and less tricky and less embellished. So I think that we're on a good track. I think that both brands look absolutely outstanding for the fall season, and we're really pleased.

Jennifer Black - Jennifer Black & Associates

Great, and just a follow-up to the accessories. What percent of your business is accessories and what percent do you feel that it could be?

Katherine Krill

Right now, it's trending between 10% and 12%. And our target really always is 15%. I think we can get to 15%.

Jennifer Black - Jennifer Black & Associates

Okay, well your stores look great.

Katherine Krill

Thank you, Jennifer.

Operator

I will now turn the conference back to you for closing remarks.

Katherine Krill

Okay, thank you, everyone, for your interest in ANN INC., and have a great day.

Operator

This does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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