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Executives

Katherine Lawther Krill - Chief Executive Officer, President and Executive Director

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

Judith Lord - Vice President Of Investor Relations

Analysts

Stacy W. Pak - Barclays Capital, Research Division

Jeff Black - Citigroup Inc, Research Division

Samantha Panella - Raymond James & Associates, Inc., Research Division

Jennifer Black

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Janet Kloppenburg

Marni Shapiro - The Retail Tracker

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

ANN INC (ANN) Q3 2011 Earnings Call November 18, 2011 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to ANN INC.'s Third 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, Theresa, and good morning, everyone. We're very pleased you could join us to review our results for the fiscal third quarter of 2011. 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.

But 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 November 18, 2011, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

And with that, I would like to hand it over to Kay.

Katherine Lawther Krill

Good morning, everyone, and thanks for joining us. We delivered another outstanding quarter, generating our fourth consecutive quarter of double-digit sales growth and our ninth consecutive quarter of strong double-digit growth in earnings and diluted earnings per share. I am extremely pleased that our results exceeded our expectations as we build the foundation that will enable us to continue to deliver long-term growth and shareholder value.

Overall, the third quarter results were driven by significant growth in both sales and margin. Sales for the quarter increased 12% to $564 million on a comp sales increase of 6%, on top of last year's 12% comp increase. At the Ann Taylor brand, comp sales increased 3% on top of last year's 22% increase. And at the LOFT brand, comps increased 8% on top of last year's 5% increase.

Our gross margin rate was up 30 basis points from last year's third quarter, reaching a very strong 57.5%. The increase was highlighted by strong product acceptance and lower promotional activity at the LOFT brand. We also benefited from very strong performance in our e-commerce channel, which achieved a 35% comp increase on top of a nearly 60% increase last year. This channel continued to deliver strong margins in the quarter as well.

In addition, our factory outlet channel also delivered double-digit sales growth and very healthy margin. The fact that a higher percentage of our third quarter sales volume was derived from the e-commerce and factory outlet channels was a positive contributor to our overall results.

And finally, our sourcing strategy enabled us to continue to effectively manage product costs for the entire company.

Driven by the strong sales and margin, net income for the third quarter was up by 33% to $32 million from the year ago period. Diluted earnings per share reached $0.61, up nearly 50% from $0.41 in the third quarter last year.

With nearly 85% of our projected fiscal year earnings already achieved, we are on track to deliver on our expectations for the full fiscal year and are clearly poised to achieve another year of outstanding growth in both sales and profitability.

Let's now take a closer look at the brands. First, Ann Taylor. The brand achieved a solid performance for the third quarter with a strong gross margin rate and a 3% increase in comp sales. By channel, comp sales in e-commerce increased 46%, factory increased 2% and the stores channel declined by 6%.

Turning now to the stores channel, which as you know, represents about 20% of our total company volume. Although the top line in stores was lower than we expected, margin in the channel was solid and traffic remains strong. While we know that the product mix could have been better in-store, the Ann client is telling us that she is spending more cautiously and being highly selective in her purchases due to the macroeconomic uncertainty. Her current appetite is for fashion and color versus core investment pieces. In fact, fashion and color performed extremely well during the quarter. Clearly, we would have benefited from having more depth and breadth in fashion and color in every product category. She is definitely responding to newness and we are seeing strong sell-throughs on styles and colors, not already in her closet.

In addition, dresses, skirts, fashion pants and new silhouettes and jackets, including capes, all performed very well. Knits and woven tops, particularly in neutral colors, were soft. Suits, which have been a major growth driver of the business over the past 2 years performed slightly ahead of last year's level but did not deliver the growth we had anticipated.

Looking at the fourth quarter, our strategy will continue to focus on incenting client purchase while preserving margin. We believe our Holiday assortment features a better mix of fashion and color versus core wardrobe essentials compared to third quarter. However, our plan is to operate in a highly promotional environment for the remainder of the quarter.

Moving on to Ann Taylor store fleet. We continue to be extremely pleased with the outstanding performance of our new concept stores. These stores are delivering higher sales, productivity and profitability from a 30% to 40% smaller store footprint. They also elevate the brand's aesthetic.

During the quarter, we opened 6 new concept stores and downsized or converted 10 existing stores to the new format, giving us a total of 35 new concept stores at quarter end. Looking forward, we remain on track to meet our target of opening 45 of the new concept stores in fiscal 2011 and we're excited about the longer-term opportunity to maximize sales and profitability across the chain, as we continue to rollout the new format over the next few years.

Turning now to e-commerce. Ann Taylor's online business generated another quarter of outstanding double-digit growth with a 46% comp, and we have more than doubled this business in the last 2 years. Traffic, conversion and average order value were all up and performance of online exclusives continued to help drive growth.

Ann Taylor's brand and digital marketing campaigns have been highly effective in driving increased traffic to the site, and we benefited from the brand's multichannel promotions. Following the launch of our new site in June, we are moving forward with multiple initiatives in order to continue to drive meaningful growth in this high potential business.

In the outlet channel, Ann Taylor Factory delivered another solid quarter, with comps up 2%, its 8th consecutive quarter of positive comps, driven by higher conversion and UPTs.

Turning now to marketing. Ann Taylor continues to successfully execute on its multi-touch strategy to drive greater interest in the brand, attract and retain clients and elevate the brand's overall perception through aspirational campaigns. We have received a terrific response to the Fall marketing campaign featuring Demi Moore, and we are thrilled that she is continuing as the face of the brand this Holiday.

In summary, the Ann Taylor brand had a good quarter. We have identified and are working on meaningful opportunities to improve and increase sales and productivity in the store channel. In addition, we are pleased with the progress we're making to accelerate multichannel selling and to continue to attract new clients to the brand.

Turning now to LOFT. LOFT continued its strong momentum during the quarter. Clients definitely responded to the brand's offering of feminine casual fashion at tremendous value. As a result, we achieved a dramatic increase in full-priced sales and delivered substantially higher gross margin for the quarter. In fact, comp sales DPT, UPT, AUR and conversion were all up during the quarter. In terms of comp sales, the brand's increase of 8% reflects strong performance in all channels, with the stores channel delivering a 6% increase, e-commerce achieving a 23% increase and LOFT Outlet generating an 11% increase.

With a strong full priced sell-throughs, we continue to significantly scale back our promotional activity versus last year. We dramatically reduced total store promotions and successfully focused on planned promotions in key categories and items, which contributed to LOFT stores near record margin performance for the quarter.

LOFT's position as a destination for great fashion, quality and value continues to be a differentiator, particularly in the current macro environment. With 70% of the assortment priced at $50 or less, LOFT truly offers affordable fashion and compelling value. Our client feels good that she's getting the most heard [ph] for her dollar as she updates her wardrobe with the latest fashion and color.

Turning to product. LOFT achieved strong results across the entire assortment with every product category comping positively for the quarter. Tops were once again outstanding, driven by the right mix of feminine basics and fashion and strong client response to color, print and new silhouettes. In addition, skirts, colored corduroys, dresses and jewelry, all performed very well.

Looking ahead to Holiday, we have positioned the brand to continue to deliver profitable growth. We feel great about the assortment, including the overall mix and penetration of fashion and color, both for self-purchase and gifting.

Turning now to LOFT.com. Performance in this channel was once again strong. The 23% comp sales gain for the quarter on top of last year's 65% comp represents a near doubling of this business in the last 2 years. Comp performance was driven by increased traffic, higher conversion and average order value. Online exclusive product continues to perform very well. Looking ahead, we are very excited about the opportunities to maximize this business and to further expand our multichannel strategy.

Turning to LOFT Outlet. We continue to achieve excellent results and are realizing the benefits of our accelerated expansion in this channel. LOFT Outlet, which has comped positively since its inception more than 2 years ago, delivered an 11% comp increase for the third quarter. We also look forward to continuing to expand our store base in this attractive channel. During the quarter, we opened 2 new locations, bringing the current number of LOFT Outlet stores to 74, up from 36 at the start of the fiscal year. We are very pleased with the performance of these new stores and excited by the long-term potential of doubling the number of stores in this channel.

From a marketing perspective, LOFT strategy continues to be successful. The response to the new Fall advertising campaign featuring Carolyn Murphy has been very positive. In addition, LOFT continues to be innovative in its use of in-store events, targeted marketing campaigns and social media to strengthen its client relationships and reach new customers. We feel very good about LOFT's marketing strategy and remain focused on driving broader brand awareness and further expanding LOFT's base of loyal clients.

It was an outstanding quarter for the LOFT brand, which represents approximately 60% of ANN INC.'s business. Our compelling product at great value, effective marketing strategies and a highly engaging store experience enabled LOFT to deliver significantly higher sales and profitability. We are excited about the possibilities for future growth in the brand.

In summary, ANN INC. continued its strong momentum in the third quarter, delivering our fourth consecutive quarter of double-digit sales growth and our ninth consecutive quarter of double-digit growth in earnings and earnings per share. Year-to-date, sales were up 12%, earnings are up 29% and earnings per share are up 44%.

As I remind you every year, unlike some retailers, our fourth quarter, while important, is not as critical to us as it is to our peers. It typically represents only 15% of our annual earnings. But rest assured, we are relentlessly focused on winning our share this quarter by offering compelling fashion and value across the company.

Let me now turn it over to Mike to discuss the financial performance in more detail. Mike?

Michael J. Nicholson

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

Beginning with net sales. Net sales for the quarter were $564 million, an increase of 11.6% versus the $505.3 million in net sales reported in the third quarter of 2010. By brand, net sales across all channels at the Ann Taylor brand improved 2.9% to $229.7 million versus the $223.2 million reported in the third quarter of last year. At the LOFT brand, net sales were $334.3 million, an 18.5% improvement from the $282.1 million reported last year.

Moving on to comps. Comparable sales for the quarter increased 5.5% with comps at the Ann Taylor brand, up 2.5% and LOFT brand comps, up 7.9% versus last year. Since Kay has already run through the key points of channel performance, I'd like to focus for a moment on measuring performance in the Ann Taylor stores channel.

As I mentioned last quarter, we have been continuing with the accelerated rollout of our new more productive, smaller store format at Ann Taylor. And as you know, results from these stores are not captured in comparable sales. As a result, we believe a better gauge of our performance is sales per average store and sales per square foot. For the third quarter, sales per average store at Ann Taylor stores were down 4%, 2 points better than our comp performance and sales per square foot were down 2%, approximately 4 points better than comps.

Turning now to gross margin. Overall, we reported a 57.5% gross margin rate, 30 basis points above the 57.2% we achieved last year. Our strong gross margin for the quarter primarily reflected higher full-priced selling at LOFT stores, the benefits of growth in the factory outlet and e-commerce channels, as well as our ability to maintain product costs compared with the third quarter of 2010.

Turning now to SG&A. SG&A expenses in the third quarter were $269.5 million, an increase of approximately 9% compared to the third quarter of 2010 on a 12% increase in sales. As a result, SG&A as a percentage of net sales was 47.8%, reflecting 120-basis point improvement over the same period last year. This rate improvement reflected substantially higher net sales compared with the third quarter of 2010 and continued aggressive management of expenses, partially offset by costs associated with our accelerated factory outlet strategy, and an increase in variable costs associated with higher sales versus the 2010 period.

Moving down the P&L. Operating income for the quarter was up 34% to $54.7 million. This compares with operating income of $40.8 million in last year's third quarter. Third quarter net income was up 33% to $32.3 million compared with net income of $24.2 million in the third quarter of 2010.

Diluted earnings per share of $0.61 represented an increase of 49% over the $0.41 per diluted share achieved in the third quarter of 2010. Weighted average diluted shares outstanding for the quarter decreased 11% to 52.1 million shares versus 58.3 million shares in the third 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 40.6%, equivalent to the rate we experienced in the third quarter of 2010. And we continue to expect our effective tax rate in the future to be consistent with our normalized effective tax rate of approximately 40%.

Depreciation and amortization in the third quarter totaled approximately $24 million, equivalent with the third quarter of 2010. And capital expenditures in the third quarter were approximately $35 million compared with approximately $18 million in the third quarter of 2010.

Moving on to inventory. At the company, total inventory per square foot increased approximately 11% versus year ago, excluding e-commerce.

Drilling down to the stores channel. Total inventory per square foot at Ann Taylor was up 8%. However, as we continue with the rollout of our more productive new concept stores, we believe it is also helpful to measure inventory per store. By this measure, total inventory per store increased less than 5% during the quarter. The increase in the Ann Taylor stores channel was solely driven by a double-digit increase in the amount of goods in-transit relative to last year as we accelerated deliveries in advance of the November selling period, which includes an earlier friends and family this year and the all-important Thanksgiving week.

Excluding this in-transit product, our in-store inventory was down nearly 5%, in-line with sales per average store. For the remainder of Q4, unit inventory per store is anticipated to be at or below last year's levels. In fact, following our recent friends and family event, in-store unit inventories on an average store basis were down approximately 10%.

At LOFT stores, total inventory per square foot, excluding e-commerce, was up approximately 13% at the end of the third quarter. This result included the timing of deliveries to support our friends and family promotion which, as I mentioned, was planned earlier this year than last year. In-store inventory excluding these accelerated items, was essentially flat at the end of the third quarter.

Both the Ann Taylor and LOFT stores channel entered the fourth quarter with approximately 90% of the inventory representing fresh Holiday products. And looking ahead, we anticipate closing the fiscal year with an increase in total company inventories per square foot, excluding e-commerce, in the mid-single digits, in-line with our comp sales expectations.

Now to update you on our progress in real estate. During the third quarter, we opened 12 new stores comprised of 6 Ann Taylor stores, 4 LOFT stores and 2 LOFT Outlet stores. In addition, we closed 2 Ann Taylor stores and 2 LOFT stores. We also downsized or converted 10 existing Ann Taylor stores to the new format, giving us a total of 35 new concept stores at quarter end. And we ended the quarter with a total of 950 stores.

Our square footage at the end of the quarter totaled nearly 5.6 million square feet, up approximately 5% from the prior year on both an end-of-period and weighted average basis.

In terms of our strong balance sheet, we ended the quarter with $140 million of cash and cash equivalents, and we have no bank debt.

Before I turn to our outlook, I would like to provide a brief snapshot of our progress to date in 2011. For the first 9 months of the year, we reported earnings per diluted share of $1.58, an increase of 44% versus the $1.10 for the same period last year on more than $180 million in incremental sales. This represents a net sales increase of more than 12% and a comparable sales increase of more than 7% versus last year. And as we look forward to our fourth quarter, we are clearly expecting strong overall results for that period as well.

Now moving on to our outlook for the fourth quarter. We expect total net sales to be $580 million, reflecting total company comparable sales growth in the mid-single digits. We anticipate a gross margin rate that is expected to approach 52%. SG&A expenses in the fourth quarter are estimated to approach $275 million, with the increase versus last year primarily reflecting support for our accelerated factory outlet expansion strategy, an increase investment in e-commerce marketing compared with the fourth quarter of 2010 and an increase 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 be approximately $2,225,000,000, an increase of nearly $250 million or 12% versus fiscal 2010. 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 be approximately 48%, reflecting leverage of more than 150 basis points, as a result of continued disciplined expense management and expected sales growth versus fiscal 2010. Total SG&A expenses in fiscal 2011 are expected to approach $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 45 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 fourth, $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 $125 million. This reflects the following investments: first, $55 million in support of approximately 75 new stores for both brands; second, $25 million to support approximately 30 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.

Our total weighted average square footage for fiscal 2011 is expected to increase approximately 4% by year end, reflecting the opening of approximately 75 stores, partially offset by approximately 20 store closures and the impact of downsizes. The company expects to have approximately 950 stores at the end of the fiscal year.

And finally, we expect to maintain our healthy balance sheet, including a disciplined approach to inventory management. We also anticipate ending the fiscal year with an increase in total inventory per square foot, excluding e-commerce in the mid-single digits, in line with our comparable sales expectations.

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

Katherine Lawther Krill

Thanks, Mike. We achieved excellent results for the quarter. Our team remains highly focused on continuing to drive higher sales and profitability for the company. We also continue to build our foundation for future growth by executing on our strategic initiatives that we expect will meaningfully contribute to long-term sales and earnings growth.

Before I open up the call for questions, I wanted to take a moment to recognize our thousands of associates and millions of clients for the outstanding work we have done together to raise funds for the Breast Cancer Research Foundation through our ANN Cares charitable initiatives. Through their support, the company has raised nearly $3 million this year to fund important clinical research worldwide. As a company that is dedicated to helping women put their best selves forward everyday, we thank all of our associates and our clients for their contributions to this wonderful cause.

Operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Jeff Black of Citigroup.

Jeff Black - Citigroup Inc, Research Division

On -- Mike, on the remodels, looks like, I think, you said 30 next year, a little bit lower than maybe we were expecting. What are you seeing in terms of co-tenants for the existing stores and finding people to come into the existing stores? And how does that play in how fast we are able to do the kinds of conversions you want to do?

Michael J. Nicholson

So Jeff, first, I don't believe that I specifically commented on the number of conversions, downsizes and remodels that we actually think that we will be able to execute in 2012. But I think it's safe to say, based upon what we see today, we likely -- we believe that we have an opportunity to complete or touch an equal number, at least an equal number, of stores in 2012 as compared to 2011. In terms of performance, I think we've talked about this previously, that the goal out-of-the-box was to anniversary the total box volumes on 30% to 40% less square footage. And in fact, in all cases, the total box volume is up and we're actually seeing productivity lifts in excess of 50%. In terms of the landlords, they've been great partners with us so far and we've been able to successfully find other tenants to move into the existing spaces. And I think the other thing that we're clearly learning is, it's all about space and location and in many cases, we're seeing significant lifts in productivity because of much better locations in the malls and in the markets.

Operator

Sam Panella of Raymond James.

Samantha Panella - Raymond James & Associates, Inc., Research Division

Mike, if my math is correct and based on your revenue target and your square footage for the end of the year, it looks like you'll be at that $400 in sales per square foot at a total company level. One, is my math correct? And if so, then how do we get to the low double-digit operating margin, I think, that you had discussed in the past once you get to that targeted level of sales?

Michael J. Nicholson

So Sam, I think in terms of your math, you're probably performing that calculation at a total company level that includes the significant e-commerce volume. And so I actually come to a result that is less than $400 a square foot of the total company level for the year when I exclude the volume associated with e-commerce. I stated previously, what we need is productivity levels in the brick-and-mortar business of $400, that's one of the pathways to get us to double-digit growth. But beyond that, there are a number of opportunities ahead of us that should help us get to a 10% -- in excess of a 10% operating margin. Again, e-commerce. In 2011, we will double our performance in 11% off of 9%. Going forward, we also see significant benefits of channel mix as we continue to accelerate both LOFT Outlet and continue to fill in, in select Ann Taylor factory locations. And then also, within both Ann Taylor and LOFT, we think we have a significant distance or a significant runway ahead of us to continue to drive productivity improvements in our core full-priced brick-and-mortar business. So with all that, it gives the management team complete confidence in our ability to achieve these targeted levels of performance of the double-digit operating income as a percentage of sales.

Operator

Kimberly Greenberger of Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Kay, I'm wondering if you can talk about your strategies to win traffic here at Holiday. It looks like you -- as the promotional environment intensified through the third quarter, you were prepared to respond, and I'm just wondering about your outlook for Holiday. And then Mike, if you could just tell us, it sounded like there was a mix of the gross -- mix shift benefit to gross margin from your e-commerce business. Is the gross margin differential in e-commerce to stores similar to the factory to stores differential, or not quite so much?

Michael J. Nicholson

Yes. So I'll take that second question first, Kimberly. The simple answer is, not so much. Yes, there is a gross margin rate differential or benefit in e-com to core brick-and-mortar. But the differential is not as significant as what we typically see within the factory channel compared to the base business.

Katherine Lawther Krill

And Kimberly, to answer your question, at both brands, we believe that our product and marketing plans are well-positioned to drive and meet our sales and margin outlook. And as always, we are definitely going to be nimble and flexible and change promotions that were planned during the quarter in order to drive incremental sales and margin. I think that from a product perspective at Ann Taylor, the Holiday assortment has improved versus third quarter. We have more color and fashion in the stores channel and a better balance of fashion versus the core wardrobe essentials. And at LOFT, we feel like we're very well-positioned. There's a good balance of feminine basics and fashion as well as a high percentage of color pattern in novelty, which has been really driving the business. Tops, again, I expect to be the sales driver and we're in great shape in all of those categories. So our goal is to remain nimble, flexible and get our share.

Operator

Stacy Pak of Barclays.

Stacy W. Pak - Barclays Capital, Research Division

I guess a couple of questions. First of all, Kay, can you talk about -- I mean, given the sort of Ann Taylor women's performance so far, what gives you confidence that she's going to spend on herself in Q4? And I understand the higher fashion and color and all that, but just in her sort of psyche. And then second of all, what are you all looking for in terms of AUC in the second half next year? Should that come down? And then lastly, does the gross margin guidance that you're embedding for Q4 sort of expect the same performance by division, in other words, pressure at Ann Taylor? Or what are you thinking? And I know you're not going to give us some numbers, but maybe you can just talk qualitatively.

Michael J. Nicholson

Sure, Stacy, it's Mike. I'll take 2 of your 3 questions. Yes, our fourth quarter outlook reflects a continuation of the third quarter trend into Q4 at both brands as well as a channel -- at a channel level, and that is reflected in both our top line and our margin rate outlook. In terms of AUC, first, I think it's important to pause and reflect for a moment and recognize the tremendous amount of work that our sourcing team performed our merchants, our designers throughout 2011 in managing through this AUC crisis. And I think we've also said that we've effectively managed through this crises through the first half of 2012. So literally, all of 2011, first half of '12, we see no AUC pressure. Beyond that, we're still in the process of doing the work as we transition into our third quarter '12 buy, but it's safe to say that the trends are encouraging.

Katherine Lawther Krill

Stacy, let me just jump in and say that we definitely expect the brand to comp positively for Q4 with e-commerce and factory positive and stores slightly negative. But while we're anticipating that continued softness, we believe the Holiday deliveries are far better positioned with a higher penetration of fashion and color versus Q3 and an exciting assortment of both self-purchase and gifting, and we are definitely planning for a high rate promotional environment overall and we'll continue to focus on incenting her while preserving margin. But as far as what's selling right now for November, there are some encouraging signs in that -- at Ann Taylor, she is absolutely loving color and fashion, which fourth quarter versus third quarter, Ann Taylor has 40% more color which I think we could have had double the color easily in the third quarter because that was the top sellers. She's responded to all of the blue that we had at the beginning of the quarter, November and all the colors that's hitting the stores now. We're selling ivory head to toe and tops, skirts and pants, as well as the dressy drops that are arriving right now. Sweaters are also doing very well. So I think we're off to a better start right now. And as I said earlier, we will continue to be nimble and flexible in order to get our shares. So we are seeing different trends.

Stacy W. Pak - Barclays Capital, Research Division

That's great, Kay. So is the stores sort of in line with your thoughts now, then, it's improved with...

Judith Lord

Well, we have deliveries coming in, Stacy. We just had a delivery hit last week that offered more color to the assortment, as well as this Ivory head to toe. Our next delivery is going to hit the day after Thanksgiving and that is a lot more color. So I think as we progress through the quarter, you'll see the deliveries get more and more colorful and more and more fashionable.

Operator

Janet Kloppenburg with JJK Research, you may ask your question.

Janet Kloppenburg

Kay, just to continue on what you just talked about in terms of fashion deliveries, given the learnings from the third quarter and if you could also talk a little -- given the learnings from the third quarter, perhaps you could talk about what you were able to do to react to the transitional assortments for January and the Spring assortments in terms of maybe upping the fashion quotient? And could you also comment on the suiting business and the outlook there, given what you said may have been a slightly softer performance in the third quarter than expected.

Katherine Lawther Krill

Okay. Janet, we were able to -- based on the August assortment which, as you recall, was red-based with black, we were able to chase in the color because we knew immediately the red pant, red skirt, red dress, all sold out like within a week. So we were able to chase goods in August. Actually, in both brands and get back into it in the fourth quarter. We've never been able to do this. Our sourcing teams have been very supportive and very great about chase fabrics. So we were able to get back into more color starting with next week's delivery, so we didn't have to wait until January, which is really, really great news. And we did that in both brands. Now your suiting question is, the suit penetration was in the mid-teens about for the third quarter, which was in-line with last year. But as I stated in my remarks, we had planned and bought this category to drive even more growth because it had been the growth driver for the past 2 years.

Janet Kloppenburg

Right. So you're seeing that slow up a bit at the expense of...

Katherine Lawther Krill

In Q4, we were able to move some fabrics out and move some suiting out for Q4, so that we are better align to last year versus third quarter.

Janet Kloppenburg

So would you say that the opportunities and as you shift to more fashion, that there's a margin opportunity there, that perhaps you can garner a higher margin on the fashion product than on the basics?

Katherine Lawther Krill

Well, if it works. I mean, I think that a lot of our fashion, what we have chased is proven items that we had in August and late July, let me say, and early August, that we were able to chase back into. I think that for the fourth quarter, we were able to bring our suit receipts down that's more in line with her appetite for suits right now because her appetite definitely is for more fashion and color.

Janet Kloppenburg

Okay. And with respect to LOFT, it sounds like the knit and sweater business had some momentum, and I think that's a pretty attractive margin business. And I'm wondering if you think you're well-positioned with enough inventory in those category for the Holiday season?

Katherine Lawther Krill

Absolutely, Janet. We are very well-positioned in tops for LOFT. And tops for LOFT, let me just remind you, it's about 50% of the business in the fourth quarter, and we are seeing traction in knits, sweaters and woven tops. So all 3 are working.

Janet Kloppenburg

Okay, largely...

Katherine Lawther Krill

Definitely well-positioned in feminine basics versus fashion, as well as color and novelty.

Janet Kloppenburg

At LOFT?

Katherine Lawther Krill

Yes, LOFT. Absolutely.

Operator

Lorraine Hutchinson from Bank of America.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

I just wanted to follow up on your store closure plan. It looked like you brought that number from 30 down to 20 for this year. Can you just give us an update of progress on some of these store closings? And then just a little bit of color around the decisions on when you will and will not close those stores?

Michael J. Nicholson

Sure, Lorraine. The differential of 10, nearly 2/3 of that pull down in terms of store closures relates to LOFT stores. LOFT has gained a significant amount of traction on both the top line and bottom line and in many cases, those stores that were sort of on the brink of underperformance, we've now made the decision that it makes sense going forward to continue to operate those stores. That's simply the change between the end of Q2 and where we are now. So we're looking at 20 store closures for the year.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

And then any thoughts on the coming years as it relates to store closures?

Michael J. Nicholson

Going forward, in terms of an annualized basis, clearly, there will be instances where we recalibrate our locations in both brands within a given mall or market. So I think it's reasonable to expect going forward each and every year that there will be a number of store closures. And as I look at this, the number we're closing this year, somewhere in, call it, 10 to 20 range is a reasonable way to think about it as we begin to effort to reposition both brands in markets around the U.S.

Operator

Anna Andreeva from FBR.

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

I was wondering if you could talk a little more about just your promotional philosophy at Ann Taylor's stores. I guess, we've been seeing either blanket 40% off entire store or categories specific promotions pretty much all year. Just maybe talk about how you approach some of these promos? And we've been seeing actually the first markdown a little bit more shallow at ATF specifically. Is that reflective of some of the new systems you guys are implementing?

Katherine Lawther Krill

At Ann Taylor, you'll definitely -- actually, in both brands, you'll be seeing us be very nimble and flexible, as I said, and change promotions during the quarter to drive incremental sales and margin. We are positioning both channels to be highly reactive to current trends and to get our share and this is all baked into our Q4 outlook.

Anna A. Andreeva - FBR Capital Markets & Co., Research Division

Okay. Got it. And just on the IT standpoint, maybe talk to a little bit about the multichannel initiatives that you guys have into the next year. Some of the opportunity was local promotions and optimizing inventory management. How big of an opportunity do you think that is going forward? And could this maybe help offset some of the occasional fashion misses in the business?

Katherine Lawther Krill

I'll take that, and then Mike can add-on. We definitely think the multichannel initiative is a very positive for us and we really look forward to it next year. We are seeing both clients shop multichannel more and more, especially the Ann client this past quarter. As you see, our e-commerce was up 46 comp in Ann and down 6% in stores and we saw a lot more multichannel shopping. So we are excited about this and think that it's absolutely going to enable the client to have a seamless access to all of our inventory regardless of where it sits. If she's shopping in the store, we're going to have tools to find styles, colors and sizes in other stores and in our distribution centers. And if she's shopping online, she will see the full breadth of our assortment available in stores and our distribution centers. So we think it's absolutely going to be a win-win and I wish we could get there quicker, but we will get there in the back half of Fall 2012. We're going to start piloting this initiative at the beginning of Q2, with the expectation of a full rollout at the beginning of Q3.

Operator

[Operator Instructions] Marni Shapiro of The Retail Tracker.

Marni Shapiro - The Retail Tracker

Can you talk a little bit about your ability online to test products or move products through the channel a little bit more quickly? Are you able to -- for example, Ann Taylor, you talked about not having enough color novelty. Are you able to test or move product through the online channel a little bit more quickly than you are in stores, or is it consistent across the board? And are accessories and things like that selling better online than in the store where they sometimes don't have a stronger presentation?

Michael J. Nicholson

Sure, Marni, I'll take that one. Yes. So we are able to absolutely get early reads online in terms of selling and importantly, we're actually able to get a geographic read online where product is selling. In addition, our historical experience is when we're in a markdown mode, we absolutely can clear through inventory much more profitably and productively through the e-commerce channel, and that is clearly going to be one of the benefits going forward as we think about the concept of pooled inventory and multichannel selling, the ability to maximize the collective investment of inventory across the enterprise.

Katherine Lawther Krill

And we have been diverting inventory, I would say, starting in the second quarter and definitely through the third quarter, to the online channel from the distribution center in categories where needed. So we are already doing a little bit of that. But to Mike's point, we're going to be far more efficient as we go into 2012.

Marni Shapiro - The Retail Tracker

Great. And the accessories and stuff, are you seeing better results online than in store because some of your stores don't seem to have a full assortment compared to what I see online.

Katherine Lawther Krill

Absolutely. Shoes is the primary thing, Marni. The shoe business online in both brands is outstanding. So we are concentrating on adding to that assortment online. It's far more profitable online.

Operator

Jennifer Black from Jennifer Black & Associates.

Jennifer Black

I wondered when you look out to Spring and Summer, what kind of a fashion cycle do you feel that we are in skirts versus dresses, versus pants, do you see any big callouts as far as fashion? I know it's about bright colors, so anything you could give would be great. And then I wondered on the suiting side, it seemed like the jacket silhouettes were very similar and I wondered if there -- I just wanted your thoughts on that? And lastly, where are you with the mobile applications?

Katherine Lawther Krill

Okay, let me just first take -- let me just also agree with you on the jackets. We absolutely needed diversity in the Ann Taylor brand in jacket silhouette for the third quarter. We fully realized that and have reacted to it, so that's done. For Spring and Summer, we feel like we are still going to be in a huge color and fashion cycle. And as I said, we basically have 70 -- I don't know if said this, but I'll tell you now, we have 70% more color in the Ann Taylor assortment for Spring versus what we had in Q3. So we have been chasing, chasing, chasing color because I don't know how high is high at this point. We know in LOFT that it's effectively about 40% of the assortment, so we still feel very bullish about color, very bullish about skirts and still very bullish about dresses. Pants have been really more about novelty pants with novelty details, with the exception of denim which skinny denim and has still been incredible and colored corduroys have been incredible. So I think colored jeans obviously is going to translate well into the Spring season, too, for both brands. So I will say color, color, color and fashion.

Jennifer Black

Great. And the mobile app?

Katherine Lawther Krill

The mobile app. We are definitely going to be launching that in Q1 of 2012.

Operator

Our last question comes from Adrienne Tennant of Janney Capital Markets.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Kay, I actually have a question that sort of 30,000 feet. Lots of retailers are talking about international. Clearly, the brands seem to have the strength to be able to go over abroad. I think they're very, very strong brands, and I'm just wondering where that is in the line items of strategic initiatives, and what you think the opportunity is? And then for Mike -- go ahead, actually, go ahead.

Katherine Lawther Krill

No, go ahead. You finish.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Oh okay. And then for Mike, really the question is, I know you're going to low double-digit operating margin target. It looks like your merchandise margins are at historical highs, which is pretty amazing given that you're increasing the promotional activity. So it seemed to me, given your IMUs, that there's actually more opportunity above and beyond the 55 8 I know. Just wondering if you could speak to that in combination with the leverage you're getting from the $400 a square foot?

Michael J. Nicholson

I'll take the last question, first so that Kay end the call. So yes, sitting here today, I think, as I look at both brands and the 3 channels within each brand with great product and higher full-priced selling, that should yield higher margins going forward. But beyond that, as we think about the mix of business across the channels and think about the initiative we have around multichannel selling, that should yield opportunity in terms of driving improvement in gross margin rate going forward. That, coupled with higher top line productivity and our ability to leverage expense, should enable us to achieve our goal of delivering that double-digit target.

Katherine Lawther Krill

And regarding international, we definitely see international expansion as a growth opportunity for both brands. And as first steps, we're going to be adding international shipping capabilities to our e-commerce site early next year, and I'm very anxious to see demand by country, so we will know further where we can expand. But having said that, we are actively pursuing entry into the Canadian market for late 2012 and this is absolutely a natural step for us given the strong awareness that we have at both brands in Canada. And you can expect to hear more specificity regarding Canada on our Q4 call in March.

Thank you all for your interest in ANN INC. and have a great day and weekend.

Operator

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.

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