ANN INC's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug.19.11 | About: Ann, Inc. (ANN)

ANN INC (NYSE:ANN)

Q2 2011 Earnings Call

August 19, 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

Dana Telsey - Telsey Advisory Group

Stacy Pak - Barclays Capital

Jeff Black - Citigroup Inc

Betty Chen - Wedbush Securities Inc.

Paul Lejuez - Nomura Securities Co. Ltd.

Adrienne Tennant - Janney Montgomery Scott LLC

Brian Tunick - JP Morgan Chase & Co

Jennifer Black - Jennifer Black & Associates

Robin Murchison - SunTrust Robinson Humphrey, Inc.

Kimberly Greenberger - Morgan Stanley

Janet Kloppenburg - JJK Research

Lorraine Hutchinson - BofA Merrill Lynch

Operator

Good morning, ladies and gentlemen, and welcome to ANN INC.'s Second 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, Fran, and good morning, everyone. We're very pleased you could join us to review our results for the fiscal second quarter of 2011 this morning. I'm here 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 our 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 provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of August 19, 2011, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that, let me hand it over to Kay.

Katherine Krill

Good morning, everyone, and thanks for joining us. I am pleased to report on our strong performance for the second quarter of fiscal 2011. We grew both sales and earnings substantially from a year-ago period, while maintaining the record second quarter gross margin rate we achieved last year. We are also on track to deliver strong results for the balance of the year. ANN INC. continues to lay the foundation for sustainable, profitable growth over the longer term as well.

On the top line, sales for the quarter increased more than 15% to nearly $560 million. Comparable sales for the quarter were up 9%, with the Ann Taylor brand's comp up 5% and the LOFT brand's comp up 11%. We were pleased that comps at both brands became progressively stronger over the course of the quarter, with both brands delivering strong double-digit comps in the month of July.

On the bottom line, net income grew more than 30% from last year's second quarter. Diluted earnings per share increased more than 50% to $0.47, up from $0.31 in the year-ago period. Our strong EPS performance was driven by substantially higher sales, a record gross margin rate and significantly improved results at the LOFT brand. We also benefited from our continued focus on managing our costs and our previous share repurchase activity.

Let's now turn to the brands. First, Ann Taylor. Overall, we continue to be pleased with the evolution of the brand as we focus on our long-term objectives of growing the business, increasing productivity levels and expanding our client base. Since Fall 2009, when the brand was repositioned, we have made significant progress and remain very excited about the opportunities ahead. The brand's 5% comp sales increase for the quarter was comprised of a 32% increase in the e-commerce channel, a 7% increase in the factory outlet channel and a 1% increase in the stores channel.

Overall, the softer-than-expected performance in the stores channel was driven by select print and novelty components of the assortment, specifically bold prints, which did not resonate with our clients. Excluding these prints, the balance of our assortment achieved comparable sales growth of 5% for the quarter. The good news is this was a product-specific issue and we effectively worked through that inventory during the quarter. Our Fall season assortment reflects more subtle prints, similar to those that performed well during the second quarter.

Ann Taylor delivered strong results across key categories such as dresses, pants, skirts and casual separates. In addition, our client responded very well to Ann Taylor's color offering, particularly shades of orange, red and teal. The brand's gross margin rate for the quarter was impacted by the steps we took to clear inventory at the stores channel. This higher level of promotional activity versus last year was effective and I am pleased to note that we have entered third quarter with inventories in line with our Fall plans.

Looking ahead to the third quarter, our Ann Taylor collection is anchored by a strong core wear-to-work offering, featuring the versatile suiting, sportswear and dresses that we know our client loves and expects from us. Our pre-Fall assortment of colorful skirts, dresses, pants and color block tops and dresses sold very well. Importantly, we believe Ann Taylor's combination of style, quality and value is a clear standout and a powerful differentiator for us, especially given that today's consumer continues to face a number of economic headwinds.

Turning now to e-commerce. Ann Taylor's e-commerce business achieved another quarter of significant growth. The online results were driven by higher traffic, as our digital marketing strategies continue to be effective in bringing clients to the site and we achieved continued growth in average order value. Online exclusives once again performed very well. During the quarter, we completed the re-platforming of both the Ann Taylor and LOFT e-commerce sites. This has provided us with new capabilities to support the continued growth of our online business where we see significant potential. Already, we have introduced a simplified checkout process and other features to make the online shopping experience more convenient for our clients. We are also looking forward to the future introduction of additional features, such as international shipping, site personalization and mobile commerce. The re-platforming plays a key role as we move toward multichannel inventory capability to better capture consumer demand. We look forward to the opportunities ahead to continue to grow this important channel.

Turning now to marketing. We continue to be pleased with the results of Ann Taylor's marketing strategy, which is focused on attracting new clients to the brand, engaging existing and lapsed clients, and elevating the overall profile of the brand. The strategy continues to incorporate direct consumer outreach, digital marketing, advertising and PR to drive traffic and increase the brand visibility. Earlier this month, we introduced Demi Moore as the new face of the Ann Taylor brand for the Fall 2000 (sic) [2011] season. We are excited that she is representing the brand this Fall and have received an overwhelming positive response.

Moving on now to real estate. I am very pleased to report that our new concept stores are continuing to achieve exceptional results, delivering higher sales, productivity and profitability from a smaller store footprint. As you recall, at first quarter end, we had 5 of the new concept stores. During the second quarter, we downsized an additional 7 store locations to the new format and we opened 7 new stores for a total of nearly 20 new concept stores at quarter end. They are performing significantly above our expectations. The new openings put us on track with our plan to roll out approximately 45 of these stores in fiscal 2011. We are very excited about expanding the new store concept to our fleet over the next few years, which we expect will meaningfully enhance the chain's overall sales and profitability. The new prototype beautifully showcases our product, as well as enhances the brand's aspirational aesthetic.

In the outlet channel, Ann Taylor factory continues to perform well. Our nearly 7% comp sales increase for the quarter reflected improvements in conversion and UPTs.

In summary, as we look to the third quarter, we have a strong Fall offering that is well-balanced, well-priced and offers tremendous style and value for our client. We are enthusiastic about the continued growth of the Ann Taylor brand.

Turning now to LOFT. We are very pleased with LOFT's second quarter performance. Sales and profitability were both up dramatically for the quarter, and we achieved positive comps in every product category of the business. No doubt, LOFT had the right balance of feminine basics and fashion, and our client responded. From a sales perspective, the brand's comp sales increase of 11% was driven by strong performance across all channels, including a 9% increase in the stores channel, a 34% increase in the e-commerce channel and a 24% increase in the outlet channel. Full-priced sales were up significantly, reflecting the strong product acceptance by our client. As a result, gross margin was also strong in all channels. Based on the strength of the offering in full priced sell-throughs, we were able to significantly scale back promotional activity versus last year. The promotions we did run were preplanned, focused mostly on key categories and items and were successful in driving high-margin sales.

All categories at LOFT comped positively and in fact, tops were a definite standout, delivering comps in the high teens with strength across all tops categories: sweaters, knits and wovens. Dresses, denims, skirts and jewelry also performed very well. In terms of color, she responded particularly well to white and the soft neutrals, as well as our strong color offering, with shades of blue, purple and orange resonating especially well. LOFT saw a strong response to their print and pattern offering, especially animal prints and anything striped.

As we look to the Fall season, we are well-positioned to build on our success with an appropriate mix of feminine basics, fashion and color. We fully expect LOFT to continue their strong momentum for the remainder of the year.

Turning now to LOFT.com. This channel delivered another quarter of strong performance, achieving a comparable sales increase of 34%. The excellent results reflect higher traffic and a significant increase in average order value. As you may recall, we entered the second quarter with very lean inventories. At LOFT.com, we built inventory over the course of the quarter, sales improved dramatically. We will continue to position this channel to meet growing demand online, as our digital marketing strategies remain focused on driving traffic to the site.

In terms of marketing, LOFT continues to focus on driving profitable growth of the brand and deepening relationships with its clients. During the quarter, our marketing campaigns resonated with clients across all channels. In addition, in-store events, digital marketing and social media are all continuing to play an increasingly important role in our strategy. As we look to Fall, we will be launching a new branded advertising campaign in select media. As you recall, we had scaled back our advertising in LOFT over the last couple of seasons, and we are excited about our expanded media presence this Fall, which is designed to support the brand's overall marketing objectives and help grow our base of loyal clients.

Turning to LOFT Outlet. We are very pleased with the continued strong performance in this channel. Our 24% comp increase this quarter marks our eighth consecutive quarter of positive comps and was driven by higher traffic, conversion and UPTs. We have made significant progress in expanding our presence in this channel as part of our accelerated factory outlet strategy. During the quarter, we opened 11 new locations, bringing the current number of LOFT Outlet stores to 72. And I am delighted to say that initial results of our rapid expansion are exceeding our expectations. We remain very enthusiastic about LOFT's growth in this channel and our ability to better reach the outlet shopper.

In summary, we are very pleased with the LOFT brand's excellent performance during the second quarter. We look forward to capitalizing on the opportunities we see to expand LOFT's client base and continue to drive even higher sales and profitability.

Overall, the company delivered strong performance for the second quarter, including our third consecutive quarter of double-digit sales growth and our eighth consecutive quarter of delivering double-digit growth in earnings and earnings per share. Our brands delivered strong results in the quarter, especially LOFT and we will continue to differentiate both brands by offering our client compelling fashion and value. We also continue to build our foundation for growth by executing on our strategic initiatives that we expect will meaningfully contribute to future sales and earning growth.

This quarter highlights included the re-platforming of our e-commerce sites for both brands and the continued execution of our real estate strategy, which includes the rollout of our Ann Taylor new concept stores and accelerated growth of LOFT Outlet. We also continue to realize the positive impact of the multiple actions we have taken to successfully manage our product costs for all of 2011 and early 2012.

Looking ahead, we will continue to proactively manage those things within our control, especially given the current environment. With continuing macro uncertainty, we are highly focused on managing our business prudently and keeping a close eye on expenses and inventory. We have positioned ourselves to deliver higher gross margin dollar performance and overall profitability in the second half of 2011.

Let me now turn it over to Mike to discuss the financials in more detail.

Michael Nicholson

Thanks, Kay, and good morning, everyone. Today, I'll start with a summary of results for the second quarter and then I'll provide you some perspective on our outlook for the third quarter and full year. Beginning with net sales. Net sales for the quarter were $558.2 million, an increase of 15.5% versus $483.5 million in net sales reported in the second quarter of 2010. By brand, net sales across all channels at the Ann Taylor brand improved 5.1% to $217.9 million versus the $207.2 million reported in the second quarter of last year. At the LOFT brand, net sales were $340.3 million, a substantial 23.2% improvement from the $276.2 million reported last year.

Moving on to comps. Comparable sales for the quarter increased 8.6% with comps at the Ann Taylor brand up 5.3% and LOFT brand comps up 11% versus last year. Since Kay has already run through the key points of channel performance, I'll refer you to Table 3 of this morning's press release for details on sales and comps by brand and channel. However, before moving on from comps, I want to take a moment to highlight that the benefits of our new Ann Taylor store concept are not included in comparable store sales results, which, as you know, only includes sales for stores that have been open for at least a year. As we continue to accelerate the rollout of our new Ann Taylor concept stores, we believe a better gauge of our performance will be sales per average store, which includes the performance of our new concept stores. On this basis, for the second quarter, Ann Taylor stores achieved a more than 3% increase versus last year.

Turning now to gross margin. Overall, we reported a 55% gross margin rate, equivalent to the record second quarter performance we achieved last year. This primarily reflected higher full-priced selling at LOFT stores and in the factory outlet and e-commerce channels at both brands, as well as higher promotional activity at the Ann Taylor stores channel.

Turning now to SG&A. SG&A expenses in the second quarter were $265.1 million, an increase of approximately $29.7 million compared to the second quarter of 2010. SG&A as a percentage of net sales was 47.5%, reflecting a 120-basis point improvement over the same period last year. This rate improvement reflected substantially higher net sales compared to the second quarter of 2010 and continued aggressive management of expenses, partially offset by costs associated with our accelerated factory outlet strategy, an increase in variable costs associated with higher sales versus the 2010 period and higher performance-based compensation expense.

Moving down the P&L. Operating income for the quarter was up nearly 40% to $41.7 million. This compares with operating income of $29.9 million in last year's second quarter. Second quarter net income was up 33% to $24.8 million compared with net income of $18.6 million in the second quarter of 2010. Diluted earnings per share of $0.47 represented an increase of 52% over the $0.31 per diluted share achieved in the second quarter of 2010. Weighted average diluted shares outstanding for the quarter decreased 11.3% to 52.2 million shares versus 58.8 million shares in the second quarter of 2010. The decline in weighted average diluted shares in 2011 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 39.9% versus 37% in the second quarter of 2010, and we continue to expect that our effective tax rate in the future to be consistent with our normalized effective tax rate of approximately 40%.

Depreciation and amortization in the second quarter totaled approximately $25 million, equivalent with the $25 million in the second quarter of 2010. And capital expenditures in the second quarter were approximately $34 million compared with approximately $11 million in the second quarter of 2010.

Moving on to inventory. At the company, total inventory per square foot increased approximately 9% versus year ago, excluding e-commerce. However, if we exclude the impact of our high-growth factory outlet channel, total inventory per square foot would have increased less than 5%.

Drilling down to the stores channel. Total inventory per square foot at Ann Taylor was up 8%. However, total inventory per store increased only 5%, essentially in line with our sales per average store. From a composition perspective, we effectively moved through Summer inventory and our carryover inventory at Ann remains very low with nearly 90% of our inventory reflecting fresh Fall product. At LOFT stores, total inventory per square foot was up approximately 3% at the end of the second quarter. In addition, carryover at LOFT is extremely light with more than 90% of the merchandise reflecting fresh Fall product.

Now to update you on our progress in real estate. During the second quarter, we opened 24 stores comprised of 7 Ann Taylor stores, 1 Ann Taylor Factory store, 5 LOFT stores and 11 LOFT Outlet stores. In addition, we downsized 7 Ann Taylor stores to our more highly profitable new concept store format and we ended the quarter with a total of 942 stores. Our square footage at the end of the quarter totaled nearly 5.6 million square feet, up nearly 6% from the prior year and on an end-of-period basis and up less than 5% on a weighted average basis.

In terms of our strong balance sheet, we ended the quarter with $145 million of cash and cash equivalents and we have no bank debt.

Now turning to our outlook for the third quarter and the remainder of the year. As Kay mentioned earlier, we will continue to closely monitor the macro environment as we head into the second half of 2011 and we have taken the appropriate steps to ensure that we are well-positioned to deliver higher gross margin dollar performance through the balance of fiscal 2011. In addition, we have positioned our inventory receipt plans to support our sales expectations of a low- to mid-single-digit comparable sales performance for the Ann Taylor stores channel and high-single-digit comparable sales for the LOFT stores channel in the Fall season.

In terms of our outlook for the third quarter, we expect sales to be $565 million, reflecting total company comparable sales growth in the mid-single digits. We anticipate a gross margin rate that is slightly better than the rate of 57.2% that we achieved in the third quarter of 2010.

SG&A expenses in the third quarter are estimated to approach $275 million with the increase versus last year primarily reflecting support for our accelerated factory outlet expansion strategy, an increased investment in marketing compared with the third quarter of 2010 and increases in variable store operating costs to support our planned top line growth.

Looking ahead to the full year. We expect fiscal 2011 total net sales to approach $2,225,000,000, an increase of nearly $250 million or 12% versus fiscal 2010 and this reflects a total company comparable sales increase in the mid-single digits. Our gross margin rate performance is expected to approach 55.5%. Selling, general and administrative expenses, as a percentage of net sales, are expected to leverage by more than 150 basis points to approximately 48%, reflecting continued disciplined expense management and expected 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 the company's 2011 strategic growth initiatives, as follows: First, approximately $35 million of incremental expense associated with the opening of 44 factory outlet locations 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 sales growth at both the Ann Taylor and LOFT brands. 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 401(k) match and $5 million associated with merit increases.

Our full year effective tax rate is expected to be approximately 40%. Capital expenditures are expected to be approximately $130 million and this reflects the following investments: 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, $25 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.

Our total weighted average square footage for fiscal 2011 is expected 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, we expect 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.

Katherine Krill

Thanks, Mike. In closing, ANN INC. achieved strong sales, record margins and significant earnings growth during this quarter. These excellent results are directly attributable to the hard work of all of our associates, and I thank them for their passion, dedication and contributions to the business. As a company, we look forward to the opportunities ahead as we continue to execute on our strategic initiatives to maximize the long-term potential of ANN INC.

Operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first request is from Lorraine Hutchinson, Bank of America.

Lorraine Hutchinson - BofA Merrill Lynch

I wanted to follow-up on the gross margin guidance for up gross margins in the back half. Margins were obviously down in the first half, so I was just hoping that you could give us a little bit more detail on what gives you the confidence that you'll be able to achieve higher year-over-year gross margins in the second half?

Michael Nicholson

Sure, Lorraine, happy to. So I think there's 3, 4 or 5 factors you need to consider in terms of our outlook for the balance of the year. First, in terms of our product costing. I first want to remind you of the incredible success that we've had in the sourcing arena in 2011, and essentially, we've been able to effectively mitigate all of the costing pressure across both of our brands and all of our channels year-on-year. Second, as it relates to LOFT, we expect LOFT to continue to deliver significant year-on-year improvement in the third and fourth quarter, similar to the second quarter performance that we realized this year. Third, in terms of Ann Taylor, while we did have a bit of promotional activity this year in the second quarter, we believe that Ann's inventory is appropriately aligned to the trend of the business. Moving forward in Fall, we have great confidence that we expect to see an improvement in Ann's rate performance in the third quarter of this year as compared to the second quarter performance. And then finally, what I would say is in terms of mix of business, if you think about our full year view and the fact that we plan for nearly 2/3 of our year-on-year volume growth to be driven by our highly profitable factory and e-commerce channels, all of those factors give us great confidence in our ability to realize a gross margin rate performance in the third and fourth quarter of this year that will be slightly better than last year's performance.

Operator

Our next request from Janet Kloppenburg of JJK Research.

Janet Kloppenburg - JJK Research

For Kay, I wondered if you could talk a little bit about your confidence level in the product at both brands right now. I don't know if you're willing to make a comment about current sales trends others have. But I happen to think both look really great and I would highlight the article yesterday's style section on the importance of the color teal, Kay. So also for Mike, your SG&A guidance for the full year, Mike, infers that your SG&A spending in the fourth quarter will be up maybe only 7% versus it being up close to 9% in the first half. Perhaps you could talk a little bit about that opportunity?

Katherine Krill

Okay, thanks, Janet. I'll jump in first. It's important for you to understand our July results in order for you to understand where we are in August. We delivered a very strong double-digit comp, positive comp in both brands in July due to the strength of the pre-Fall assortment, as well as our successful end-of-season clearance activities. Therefore, we entered August significantly down in in-store unit inventory, resulting in a slow start for the month. However, as we've received new Fall product flow in, the business has gotten much stronger and in fact, we're positive comping in both brands. In the Ann brand, our clients are responding to new fashion, i.e. colorful skirts, the orange skirts basically sold out, dresses, red dresses, red pants, as well as color block tops and new proportions and sweaters and knits. At LOFT, all the tops, especially blouses and shrunken sweaters and novelty knits and dresses and denim are all quite strong. So we have a lot of fashion, as well as exciting new colors that's selling in both brands. We absolutely are going to remain flexible in this environment and we feel that we're offering tremendous style and value to both client bases. And we fully expect to deliver positive comps in both brands in all channels for the third quarter.

Michael Nicholson

And Janet, to answer your SG&A question, I mean the way I think about it in terms of year-on-year in the back half of Fall '11, we will actually lap or anniversary the 24 or so new store openings that we opened in the third and fourth quarter of last year. So that's the primary reason why we actually see year-on-year dollar relief on a percentage basis.

Operator

Adrienne Tennant of Janney Capital Markets.

Adrienne Tennant - Janney Montgomery Scott LLC

Mike, can you talk about sort of the thought behind the repurchases in the first quarter, taking a little hiatus in the second quarter. When does that window reopen? And kind of your thoughts with regard to stock repurchase activity?

Michael Nicholson

Happy to, Adrienne. First, I think it's important for me to remind you that over the last 12 months, we repurchased approximately 8.4 million shares for a total cost of about $200 million. And ANN INC. has always viewed share repurchases as just a number of ways that we have available for us to provide value to shareholders. Now while we don't provide specific guidance on the cadence, amount or timing of future share repurchases, I can provide you with a bit of a framework. First, I typically want to maintain a cash cushion of approximately $100 million to $150 million, however, I am comfortable with some reasonable flex during periods of unique opportunity. Second, I think it's important for you to think about the seasonality of our working capital build and debuild in terms of the timing and availability of cash, as well as our fairly aggressive capital plan for 2011. And then finally, just bear in mind that we have great conviction that we can also create significant value for our shareholders through the pursuit of our growth opportunities such as continuing to invest in our high growth e-commerce channel, as well as the accelerated rollout of the Ann Taylor's more productive new store format. However, I believe that we are clearly undervalued today. And I am personally committed to being a good steward of capital and we'll continue to prioritize profitable growth and reinvestment of our stores, while using any excess cash to create value for our shareholders. And I think that's evident, if you look at our EPS result today, that we're reporting for the second quarter, a more than 50% increase over last year, as well as the activity, the 8.4 million shares that we repurchased over the last 12 months that represent some 15% of our outstanding shares.

Operator

Our next request from Jeff Black of Citigroup.

Jeff Black - Citigroup Inc

Mike, just a clarification on, first, on the inventory at Ann you said low- to mid-, I mean what portion of that is geared to the stores, if you will? Well, then on the remodels, can you just remind us what the revenue target is for the remodels? What on average we’re really exceeding that by? And can you talk about rent, how much is rent going up in that picture? And do you think moving forward the rent picture looks like what you've just seen?

Michael Nicholson

Sure. So in terms of inventory. The up 8% on a dollars per square foot basis is an Ann channel store statistic. However, on an average store basis, inventory is up only 5%, essentially in line with the more than 3% performance that we experienced in the second quarter. In terms of the Ann Taylor new store format, what we've said historically is that our goal out-of-the-box was to deliver a volume equivalent to the legacy store and in all cases, the dollars are greater than the legacy store. So when you think about a square footage decline in the range of 30% to 40%, it's safe to say that we're seeing a productivity lift that is in excess of 50%. And then just in terms of rent dollars, what I'd say is on average, total rent dollars for these new stores is less than, in the aggregate, less than what we were paying or incurring for the prior store.

Operator

Your next request, Stacy Pak of Barclays Capital.

Stacy Pak - Barclays Capital

One clarification, did you say that the comps are positive quarter-to-date in all brands, in all channels? And if not, can you comment on that? And I guess my question, Kay, is -- and Mike, is what did you see historically from the LOFT and the Ann Taylor customers when you have this crazy volatile macro environment that we're living through? What kind of pullback did you see in the business, if any, in '08 and in prior downturns and what are you seeing from the customer now?

Katherine Krill

Stacy, I'll answer your first question. As I said, we entered August significantly down in in-store unit inventory, resulting in a slower start for the month. However, as we have received in new Fall product, the business has gotten much stronger and in fact, we're positive in both brands this week.

Michael Nicholson

Then just in terms of what we experienced in the '08, '09 downturn. Stacy, clearly, it is all about the product and great value, and that's what we're incredibly focused on moving forward is offering our clients great product at a great value and if we're able to deliver that, we're confident that we will be successful. I also highlight if you reflect on the activity and the aggressive action that we did undertake during the '08, '09 time frame, I think this management team has clearly demonstrated the ability to react and be flexible where necessary. So whether it be inventory, expenses, every and any lever within the business, we're prepared to react, if and when necessary.

Katherine Krill

And I would just like to add in one thing and I think it's really, really critical in this environment today and that is value. So I want to remind all of you that we successfully mitigated cost increases. We are not raising our retails in LOFT at all. As a matter of fact, 70% of our receipts for the Fall season are under $50 versus 60% last year. And for Q2, 90% were under $50 and I think that was definitely one of the reasons LOFT had a great quarter, we are giving the client tremendous value. The only places that we are raising retails at all is in one fabrication in suits, which is a high-demand category and silk blouses. So we feel like we are definitely differentiated in the marketplace right now and will be for the entire back half of the year in offering great value. And I think that's really important in this day.

Operator

Our next request, Kimberly Greenberger, Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

I wanted to talk a little bit about inventory. It looks like the spread between sales growth and inventory growth at the Ann Taylor division has compressed pretty significantly from the end of first quarter to the end of the second quarter. Is that reflective of your plan to sort of manage the inventory there down over the second half of the year? And then on the contrary, LOFT looks perhaps a little light and I'm wondering if you can talk to us about your ability to chase LOFT bestsellers in season?

Michael Nicholson

Look, Kimberly, I'll address Ann and then turn it over to Kay to address LOFT. Yes, our inventory positioning at the end of the quarter is incredibly reflective of our view moving forward to just sort of tighten the overall positioning of the inventory on both a dollars and unit basis more closely to the trend of the business and in particular, the recent macroeconomic softness that we're seeing environmentally. So we feel it's appropriate and prudent as we move forward to manage it a bit more tightly.

Katherine Krill

And regarding LOFT, Kimberly, I just want to highlight that you're absolutely right. We are lighter than we would like to be. We entered second quarter lighter than we would've liked to be, but we built inventory during the quarter. We had a great quarter and we ended going into August light as well. An important fact for you all to know, is we effectively chase 75% of the units. We either had to move up during the quarter or chase inventory, especially in the knit categories because we had the highest and best knit sales that we've ever had ever. So we remain very flexible and very on top of the supply chain and in moving units up when needed to be. As I said, we opened up August very light in inventory in units in store in the LOFT division. And every week, units continue to come in. We are moving them up and up and every week, it's a little bit better. And I think we'll probably be in the best shape probably next week. But we are on it.

Operator

Our next is from Robin Murchison, SunTrust.

Robin Murchison - SunTrust Robinson Humphrey, Inc.

Kay, you mentioned managing product costs all 2011 and early 2012. I'm just wondering if you can tell us anything about how you're thinking about product costs past first quarter next year?

Katherine Krill

Robin, we've just finished all of holiday, everything is complete. So I can absolutely say we're finished with all of 2011. We have also finished first quarter purchasing of 2012 and we're in good shape there. We just now, the teams are working on Summer. They're in line review as we speak on Summer product so I don't have an answer there. But I'd fully anticipate that all the work that we have done on our raw materials strategy and value engineering and sending the teams over to Asia multiple times, country diversification, all of those efforts, I am absolutely confident will pay off for the Summer season as well. I just don't have any facts on that one yet.

Operator

Our next request from Jennifer Black of Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

I'm curious about the technology changes at both divisions. When will you begin to incentivize the sales associates for pulling inventory from all channels versus just their stores? And then also do you have plans for the use of iPads at either division? And if so, how will you utilize them and is there anything else in technology?

Michael Nicholson

Sure, Jennifer, I'll take that question. First and foremost, all of our technology investments are incredibly focused on driving both our top and bottom line. As it relates to 2011, first and foremost, during the second quarter, we re-launched our e-commerce platform and I think there's a number of areas of opportunity or benefit that we see going forward with respect to that new platform, whether it be site personalization, as well as going forward, enhancing the site to include things like improved navigations, single-screen checkout features. International commerce will be a big area of growth for us moving forward either at the very end of 2011 or as we enter the first half of 2012, as well as we are incredibly focused on developing an effective and a profitable mobile commerce strategy. To answer your question about iPads in stores, the answer to that question is absolutely yes. And we are testing that concept in something, call it around 75 to 100 stores in the Fall season of this year across both brands. In addition, from a technology perspective, we're incredibly focused on optimizing our inventory and being able to give the client what she wants, wherever she wants it and when she wants it. So we're incredibly focused on evolving and developing a comprehensive multichannel strategy over the next, call it 6 to 12 months. In addition, our technology will – gives us the capability to execute localized promotions and markdowns, as well as enhancing our analytical capabilities. And then beyond all of these areas of focus, call it more midterm, we'll be looking at opportunities to improve our planning and allocation capabilities, localized allocation and demand-driven replenishment capabilities. But I think about that as more of a midterm opportunity. And then finally, the area of CRM over the last year, has been an area of focus for us and it will continue to be a great area of focus for us as we continue to learn more about our clients and customers moving forward.

Operator

Our next request from Paul Lejuez, Nomura.

Paul Lejuez - Nomura Securities Co. Ltd.

Just wondering if you guys are seeing, or what you're seeing, in your terms with vendors? It looks like your payables are up a bit below inventories, so just wondering what's going on there? And Mike, I think you were directing us to use a sales per store, not sure if I heard that 100% correct. You guys are shrinking the size of the stores, so I’m just wondering why we should be using sales per store not sales per square foot?

Michael Nicholson

So a couple things. One, no change in terms of vendors. Number two, in terms of comp versus average of productivity, as I said, downsize and remodels, the Ann Taylor smaller, more productive store format. We believe that average is a better reflection of performance than comp, at least over the next 12-month period and I agree with you productivity is also a relative measure.

Operator

Our next from Brian Tunick, JPMorgan.

Brian Tunick - JP Morgan Chase & Co

I think first one for Kay. In the past couple of quarters, you've talked about the strength in animal prints and in belts, so just wondering if you could maybe comment on what you're seeing on the fashion side? And then for Mike, you've talked about this double-digit margin goal, I think before and I was hoping you could maybe rank sort of in order the rightsizing of the average store, the channel mix towards factoring e-comm and then the multichannel inventory, how did those 3 things play out in the ability to get to those double-digit margins?

Katherine Krill

I'll take the first one, Brian. I mentioned that the LOFT success in the second quarter had to do with the balance of prints, be it animal prints, stripes, smaller, more subtle prints, that was really the success that they had. Those kinds of prints and pattern absolutely sold in the Ann Taylor division as well. But what they had on top of that was a bolder print that did not resonate with the client. We always sell animal prints. So we will continue to have those in both brands and have them be trend-appropriate as we approach each quarter. Belts are absolutely probably the number one -- belts and bracelets are probably the number one fashion issue right now within the accessories category, and we are very bullish on belts in both brands, especially colored belts. So we're all over that and hopefully have enough inventory for the client in both quarters.

Michael Nicholson

Brian, your second question, as I think about the levers and opportunities moving forward, that should help us get to our double-digit midterm operating margin goal, the way I think about it is productivity first; productivity, productivity, productivity within the existing channels. And yes, you're absolutely right that the downsize and remodel strategy within Ann Taylor should be a big driver moving forward. Second, in terms of force ranking the opportunities, mix within the channels, clearly, we are anticipating e-commerce to continue to grow aggressively this year and over the next few years and in addition, the continued growth within factory. So as our mix of business evolves over the next few years, that will be a driver. And then finally multichannel, I think multichannel, Brian, is what we don't know is what we don't know. What we believe, it represents a very big opportunity for us moving forward and being able to fulfill that client's needs if the product is not available, the color or the size in the store or online, we will be able to get it to her moving forward.

Operator

Next request from Betty Chen, Wedbush Securities.

Betty Chen - Wedbush Securities Inc.

Following on that, Mike, could you give us a sense over the medium term to get to that double-digit midterm target, what penetration on mix of your sales or business could be coming from the direct and the factory channels? It looks like it increased year-over-year quite a bit from the first half, it’s almost 1/3 of your business. Where do you see that longer term and what's the margin differential? And then I had a follow-up on the Spring 2012 costing question, Kay. Did you say that the costing in Spring is also flat year-over-year and that you were able to mitigate all the costs?

Katherine Krill

Betty, I will jump in real quick and then Mike can take it from there. Yes, I did say Q1 specifically because that is what we have already bought and purchased. We are working on Q2 as we speak. The teams are in line review. So I have no facts on that yet, but I fully anticipate that all of the strategies that have worked for us for all of 2012 and early -- I mean 2011 and early 2012, will absolutely benefit us in the second quarter as well.

Michael Nicholson

And Betty, to your second question, as I think about the levers or drivers of growth moving forward. In 2011, when I reflect at what the e-commerce business could be in terms of a total volume basis, I think we're looking at about a double off of '09. And I think it's safe to say over the next couple years, we have growth goals to double that business again. And then in terms of factory outlet channel moving forward, I think it's fair to think about LOFT Outlet as an additional 20 store play over the next few years as well. So as you think about 20 new stores a year from LOFT Outlet, as well as continued aggressive growth within e-comm, that should give you some perspective in terms of how the mix of business within channels should benefit us moving forward.

Operator

And our last request from Dana Telsey of Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

At Ann Taylor, should we expect to see -- given the increased shift to suiting and pants, is it natural to expect a shift to higher AUR and the impact on gross margin there? And at LOFT, given the mix of goods, perhaps more opening price points from what we've been seeing, what do you see the impact on gross margin there?

Katherine Krill

Well, I can tell you in Ann Taylor, Dana, definitely 75% of the assortment is geared towards go-to work, which is up over last year. And you're absolutely correct, the skirts and pants and blouses and suitings are all the higher AIR categories and that's really where we're focused for Ann for Fall. So that should definitely help the overall business. We have seen, not in Q2 specifically, but in other quarters, when we tend to dip our toe too heavy in casual product that does not work, so I feel like we're very well-positioned in the Ann Taylor brand for the back half of the year for go-to-work product. In LOFT, what we have seen is really anything under $50 is really what works in LOFT. So 70% of the receipts are under $50 for LOFT and we're seeing that go out at ticket price. So the AIR is really becoming the AUR. So I think that we're in great shape, better than ever than we've ever been, as we enter Q3 with retail pricing positioned to offer unbelievable style, quality and value for both consumers.

So I'd like to end the call and thank you all for your continued interest in ANN INC. and have a great day and weekend.

Operator

The conference has concluded. All lines may please disconnect.

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