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ANN INC (NYSE:ANN)

Q4 2011 Earnings Call

March 09, 2012 8:30 am ET

Executives

Judith Lord - Vice President of Investor Relations

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

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

Analysts

Kimberly C. Greenberger - Morgan Stanley, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Michelle Tan - Goldman Sachs Group Inc., Research Division

Jennifer Black

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to ANN INC.'s Fourth 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, Teresa. Good morning, everyone, and thank you for joining us to review our results for the fourth quarter and fiscal year 2011. I'm here this morning with Kay Krill, ANN INC.'s President and CEO; and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter and fiscal year, followed by a brief summary of our strategic priorities for fiscal 2012. Then Mike will discuss our financial results and outlook, and after that, we'll open it up for your questions.

Before turning it over to Kay, we would like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of March 9, 2012, 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 Lawther Krill

Good morning, everyone, and thanks for joining us to review our results for the fourth quarter and fiscal year 2011. While the fourth quarter came in lower than we initially expected, overall, it was an excellent year for the company. We made meaningful progress strategically while achieving significant increases in both sales and profitability.

In line with our February 2 announcement, sales for the fourth quarter increased 10% to $567 million with comparable sales up 5%. Excluding charges, net income was $5.5 million or $0.10 per diluted share compared to net income of $11 million or $0.19 per share a year ago. Overall, the results reflected strong performance across all channels of the LOFT brand and in the e-commerce and factory channels of the Ann Taylor brand, offset by significantly lower-than-anticipated results in the Ann Taylor stores channel.

For the year, total sales increased 12% to more than $2.2 billion with comparable sales up a solid 7%. Net income excluding charges reached $89.9 million, up 17%, and diluted earnings per share excluding charges increased 31% to $1.70 from $1.30 in fiscal year 2010. We also maintained our very healthy balance sheet, ending the year with $150 million in cash and no debt. In addition, over the course of the year, we delivered on our commitment to further enhance shareholder value through the repurchase of 7.3 million shares, representing nearly 15% of our outstanding shares.

Let's turn now to performance by brand for the quarter, and then I'll spend a few minutes outlining our strategic priorities for 2012. First, Ann Taylor. For the fourth quarter, comparable sales for the Ann Taylor brand decreased by 1%. This reflected an increase of 28% in the e-commerce channel, a 6% increase in the Ann Taylor Factory channel and a decline of 11% in the Ann Taylor stores channel. As you know, for the past couple of quarters, performance of the stores channel has been soft versus the growth we've achieved in the brands' other channels.

As we announced in February 2, Brian Lynch has assumed responsibility for this channel in his new role as Brand President. He has driven outstanding results across diverse businesses, channels and responsibilities at ANN INC. over the past 8 years, most recently, in our e-commerce and factory channels. We are confident that under his leadership, the Ann Taylor brand will continue to deliver strong results in e-commerce and factory and that we will see meaningful progress in the stores channel as well.

The Ann Taylor team is focused on executing a number of initiatives to position the assortment in the stores channel for improved performance. Among the number of changes underway, we are evolving the assortment in-store to offer her a better balance within each category, including more color choices, greater versatility and more depth in key fashion items and marketing looks.

In addition, we will be offering more depth and breadth in opening price points in virtually every category to provide her with even greater value. At the same time, we recognize there's an opportunity to create a more engaging and personalized client in-store experience with an emphasis on superior service. I am pleased to note that within the Ann Taylor stores channel, one of the highlights continues to be the strong performance of our new concept stores. These stores once again achieved outstanding results, delivering approximately 50% higher productivity than the balance of the chain.

During the quarter, we opened 4 new concept stores and downsized or remodeled 5 existing stores to this new format, giving us a total of 44 new concept stores at fiscal year-end. Based on the strong results, I continue to be very excited about our strategy to expand our fleet of new concept stores, and we will be adding approximately 40 of these in fiscal 2012. Our focus is very clear, to drive increased sales, productivity and profitability across the Ann Taylor stores fleet, while enhancing the aspirational element of the iconic Ann Taylor brand.

Turning now to our e-commerce and factory channels. In e-commerce, Ann Taylor continued its track record of double-digit growth this quarter, generating a 28% comp increase on top of last year's 74% comp increase. These results were driven by very strong traffic and a balanced product assortment that included more depth and breadth in our core offering, as well as online exclusives. Ann Taylor Factory also delivered another strong performance, achieving our ninth consecutive quarter of positive comps. The comp increase of 6% was driven by higher AUR, UPT and traffic. We opened 2 new factory stores during the quarter for a total of 99 at year end.

From a marketing prospective, Ann Taylor's strategy has continued to focus on driving greater interest in the brand, attracting and retaining clients and elevating the brand's aspirational appeal. Going forward, we'll be placing an increased emphasis on direct outreach and online marketing across the brand.

Looking ahead to 2012 in the Ann Taylor stores channel, our strategy is to reduce our overall level of promotion and drive improved gross margin and profitability, even at the expense of comp growth. As a result, for the first quarter, we expect comp sales performance in the stores channel to be in line with fourth quarter but at a significantly higher gross margin rate. Our inventory levels are lean in-store, and we expect to return to a more appropriate level by May.

Beginning in the second quarter, we expect sales, comps, gross margin rate and profitability in the stores channel to improve in every quarter over the year-ago period through the balance of the year. In addition, in the e-commerce and factory channels, we expect continue to deliver profitable sales growth over the course of the year. Overall, I am confident in the direction the team is taking and look forward to improved performance at Ann Taylor as we progress through 2012.

Turning now to LOFT. LOFT delivered excellent results for the fourth quarter, continuing the strong momentum we've achieved in all channels of the brand. We were well positioned from an inventory perspective and our client continued to respond to the brand's unique company should of feminine fashion, quality and value.

Sales and margin were both strong, driven by significant increases in conversion, DPT and UPT. Comp sales for the brand were up 11%, and as I noted earlier, reflecting substantial growth in all channels. LOFT stores achieved an 8% increase. E-commerce generated a 28% increase, and LOFT Outlet delivered a 10% increase. Gross margin was very strong in a highly competitive environment. LOFT was successful in reducing total store promotions and primarily focused on planned promotions in key categories and items, although the environment did require us to be flexible in our approach.

Turning to product. I'm pleased to report that sales were strong across the assortment. Our clients responded to the brand's compelling mix of feminine basics and fashion, with color, print and pattern and novelty all performing especially well. Colored cords, skinny denim, stripes across all product categories, woven tops and knits were all exceptional. LOFT lounge and skirts and dresses and accessories were also standouts. Sweaters was the only category that was soft, where we were certainly impacted by the warm weather. However, this category has turned the corner and is performing very well spring to date.

Beyond the product, LOFT has also done a great job of delivering a highly engaging in-store experience for our client. The LOFT team has successfully combined an appealing and energetic in-store environment with attentive service, and our clients have definitely responded. All in all, we were extremely pleased with the strong performance at LOFT for the quarter and are thrilled that the momentum is continuing.

Turning now to our online channel. LOFT.com delivered another outstanding quarter. The 28% comp increase came on top of last year's 77% comp and was driven by higher traffic and improved conversion. E-commerce is a huge growth vehicle for us and we will continue to enhance the online shopping experience for clients and drive the future growth of this channel.

LOFT Outlet also achieved strong results for the quarter, driven by both new stores and comp growth. In fact, with the 10% comp increase this quarter, LOFT Outlet has delivered 10 consecutive quarters of double-digit comp sales for every quarter since the brand's inception. Increases in UPTs, conversion and traffic all contributed to the strong performance. It has been a year of significant growth for this business. As we dramatically expanded our store footprint and ramped up LOFT presence in this important channel, we ended the fiscal year with 74 LOFT outlet stores, up from 36 a year earlier. We look forward to continuing to expand our outlet presence in 2012, and we see the potential to nearly double this business over the next few years.

Turning now to marketing. We continue to be pleased with LOFT's strategy, which is focused on driving growth among existing clients and prospects by building further brand awareness and loyalty. Our holiday ad campaigns were well received, and LOFT continues to effectively utilize in-store events, targeted campaign and online marketing to strengthen our client relationships and attract new interest to the brand.

In summary, the LOFT brand once again delivered an outstanding quarter driven by strong performance in all channels. Looking forward, we are confident that the LOFT brand is well positioned to continue to drive profitable growth in all channels in 2012 and beyond.

Before I turn it over to Mike, I'd like to spend a few minutes outlining our strategic priorities for 2012 and beyond to profitably grow the business and to enhance value for our shareholders. At a high level, 2012 is all about strengthening our connection to our client. With 2 exceptionally strong brands, our goal is to be there for her, wherever and whenever she chooses to shop. This means providing her with an engaging client experience across all of our channels. But it all starts with offering great fashion, great service, quality, value and personalization. We are focused on making sure we offer her a well-balanced assortment and outstanding value in both brands, building on the momentum LOFT has achieved while driving stronger results at Ann Taylor as the year unfolds.

The launch of our new e-commerce platform last summer was a critical first step on the pathway to implementing a multichannel experience, which we expect to roll out in the latter part of 2012. We will continue to improve the online shopping experience in both brands. We are currently integrating new capabilities and service to our e-commerce platform, including the addition of mobile, customer comments, international shipping and site personalization. You can also expect that we will be supporting the further growth of our online business through continued investment in digital media and other forms of online marketing to drive traffic. Since 2009, we have doubled the size of our e-commerce business, and we are committed to continuing its rapid growth.

Another component of our strategy is to expand our store fleet and optimize its productivity and profitability. Specifically, at Ann Taylor, we will continue to roll out our new concept stores with a focus on urban locations. During 2012, we're planning to open a total of 40 new concept stores comprised of 15 new locations and 25 downsizes and remodels of existing stores. These, in addition to the 44 new concept stores opened in 2010 and 2011, will bring us to an expected total of approximately 85 new concept stores, representing nearly 1/3 of the fleet by fiscal year end. In addition, as we improve the assortment at Ann Taylor stores, we expect sales, comps, gross margin rate and profitability to improve significantly over 2011.

At LOFT, we are anticipating another strong year for the brand. In 2012, we will expand on the brand's broad appeal by continuing to add stores to small to midsized markets, which, as you know, has been part of the LOFT brand strategy and has been very successful. Our research indicates there is demand, and our client is currently underserved in these markets. We expect to add 25 new stores in 2012 and we'll also complete a number of relocations and remodels especially in key markets such as New York, LA and Chicago. It is clear that LOFT is a brand that works everywhere.

We will also continue to expand our presence in the outlet channel, through the continued growth of LOFT Outlet and the further expansion of Ann Taylor Factory. We currently expect to add 40 LOFT Outlets and 2 Ann Taylor Factory stores. In addition, we will begin to expand internationally to enable us to serve new clients outside of the U.S. Our first step will be the addition of our international shipping capabilities in e-commerce, followed by our planned entry into Canada in late 2012 or early 2013. Our brands have great awareness in the Canadian market, so this is a natural for us.

Together, these strategic initiatives will serve as our roadmap for 2012. We have tremendous opportunities to continue to deepen our relationship with our clients, expand our customer base and deliver continued growth in sales and profitability. We are highly focused on offering her great fashion, compelling value, as well as an engaging client experience in every channel of the business.

Now let me turn it over to Mike to discuss the financial performance in more detail and our 2012 outlook.

Michael J. Nicholson

Thanks, Kay, and good morning, everyone. Today, I'll start with a summary of results for the fourth quarter and full year 2011, and then I'll provide you with some perspective on our outlook for the first quarter and full year fiscal 2012.

Beginning with net sales. Net sales for the fourth quarter were $566.7 million, an increase of approximately 10% versus the $515.3 million of net sales reported in the fourth quarter of 2010. By brand, net sales across all channels of the Ann Taylor brand were $237.4 million, a slight increase over the $234.9 million reported last year. At the LOFT brand, net sales were $329.3 million, up more than 17% versus $280.4 million reported last year.

Moving on to comps. Total company comparable sales for the quarter increased 5.3%. At the Ann Taylor brand, total brand comps declined 1.1%, reflecting a decline of 10.9% at stores. The softness in stores was largely offset by comparable sales increases of 28% in the online business and 5.7% in the factory channel. At the LOFT brand, total brand comps were up 10.5% reflecting increases of 8.1% at stores, 28.1% at LOFT.com and 10.3% at LOFT Outlet.

Turning to gross margin. We reported a fourth quarter gross margin rate of 48.9% compared with last year's rate of 51.7%. This performance primarily reflected significantly higher promotional activity in the Ann Taylor stores channel versus last year.

Turning now to SG&A. SG&A as a percentage of net sales declined to 48.4%, reflecting a 50-basis-point improvement over that same period last year, primarily reflecting the benefit of fixed cost leveraging as a result of higher net sales, as well as our continued focus on controlling expenses, which was partially offset by onetime costs associated with the management realignment that occurred during the fourth quarter. SG&A expenses in the fourth quarter were $274 million compared with $252 million reported in the fourth quarter of 2010. The increase primarily reflects higher tenancy costs, the impact of onetime costs associated with the fourth quarter management realignment and an increase in variable costs associated with higher net sales during the fourth quarter of 2011.

Moving down the P&L. Operating income, excluding a pretax management realignment charge of approximately $5.5 million, was $8.7 million during the quarter. This compares with operating income of $14.3 million, excluding a pretax restructuring charge of approximately $3.9 million in last year's fourth quarter.

On an after-tax basis, onetime costs during the fourth quarter of 2011 were $3.3 million or $0.06 per diluted share compared with after-tax restructuring charges in the fourth quarter of 2010 totaling $3 million or $0.05 per diluted share. On the same basis, we reported fourth quarter net income of $5.5 million or $0.10 per diluted share compared with net income of $11 million or $0.19 per diluted share achieved in the fourth quarter of 2010. Weighted average diluted shares outstanding for the quarter decreased 10.8% to 50.8 million shares versus 57 million shares in the fourth quarter of 2010. The decline in weighted average diluted shares in 2011 was primarily related to our repurchase of approximately 7.3 million shares during fiscal 2011.

Our effective tax rate for the quarter was 28.1% versus 22.9% in the fourth quarter of 2010. However, we expect our effective tax rate in the coming periods to be consistent with our historical effective tax rate of approximately 40%. Depreciation and amortization in the fourth quarter totaled approximately $22.5 million, essentially in line with depreciation and amortization reported in the fourth quarter of 2010. And finally, capital expenditures in the fourth quarter totaled $22.6 million compared with $24.7 million in the fourth quarter of 2010.

Turning now to a quick recap of the full year results. Net sales for fiscal 2011 increased 12% versus year ago to more than $2.2 billion on an overall comp increase of 6.8%. At Ann Taylor, total sales across the brand increased to $907.9 million compared with $863.7 million in 2010, and comparable sales rose 5.2% at the brand. At the LOFT brand, total sales increased to $1,304,600,000 in 2011 compared with $1,116,500,000 in 2010, and comparable sales increased 8% on a total sales increase of nearly 17%. Our gross margin rate for the year was 54.6% compared with the record rate of 55.8% achieved in fiscal 2010.

SG&A as a percentage of net sales was 48%, an improvement of 140 basis points compared to the 49.4% reported in fiscal 2010, and this rate improvement was primarily due to the benefit of fixed cost leveraging as a result of higher net sales and a continued focus on controlling expenses. SG&A expenses for the year were $1,063,000,000 compared with $979 million in fiscal 2010, primarily reflecting costs associated with store growth, particularly in the factory outlet channel, and an increase in variable costs related to higher net sales, all of which was partially offset by lower performance-based compensation expense in fiscal 2011.

During the year, we recorded pretax management realignment charges of $5.5 million compared with pretax restructuring charges totaling $5.6 million in 2010. On an after-tax basis, these charges totaled $3.3 million or $0.06 per diluted share in 2011 compared with $3.5 million or $0.06 per diluted share in fiscal 2010. Excluding these charges, operating income for the year was $151 million compared with operating income of $125.4 million last year. On the same basis, we reported net income of $89.9 million or $1.70 per diluted share in 2011 compared with net income of $76.9 million or $1.30 per diluted share in 2010.

Weighted average diluted shares outstanding for the year decreased nearly 11% to 52 million shares versus 58.1 million shares in 2010, reflecting the repurchase of 7.3 million shares during 2011. Our effective tax rate for the year was 40.1% versus 38.4% for 2010. Depreciation and amortization in 2011 totaled approximately $94 million versus $96 million in 2010. Capital expenditures for the year totaled approximately $119 million versus approximately $61 million in 2010.

Moving on now to the details of our fiscal year-end inventories. Total inventory per square foot, excluding e-commerce, declined 1% at the end of fiscal 2011. In the Ann Taylor stores channel, inventory declined 11% on a per-square-foot basis and declined 15% on an average store basis. At LOFT stores, inventory per square foot increased 6%, and in the factory outlet channel, inventory per square foot declined 6%. Finally, at the total company level, we entered the first quarter of 2012 with extremely clean inventories and very low levels of carryover.

Turning now to store openings and closures. During fiscal 2011, we opened a total of 76 stores, comprised of 17 Ann Taylor stores, 7 Ann Taylor Factory stores, 14 LOFT stores and 38 LOFT Outlet stores. We closed a total of 19 stores during the year, comprised of 3 Ann Taylor stores and 16 LOFT stores. The total store count at the end of the fiscal year was 953 stores, comprised of 280 Ann Taylor stores, 99 Ann Taylor Factory stores, 500 LOFT stores and 74 LOFT Outlet stores. Our store square footage at the end of the year totaled approximately 5.6 million square feet, a 6% increase from the square footage total recorded at the end of fiscal 2010 and a 4% increase over the same period on a weighted average basis.

Turning now to our store growth plans for 2012. As Kay mentioned earlier, during 2012, we are pursuing our real estate growth strategy for our Ann Taylor and LOFT brands with a goal to enhance both sales and productivity at stores in the coming years. Overall, we expect to open approximately 65 new stores this year. From a timing standpoint, approximately 25 are expected to open in the first half of 2012 with the remainder scheduled to open in the second half of the year.

Regarding store closure plans for 2012, we currently expect to close 30 stores during the fiscal year, and as always, we will continue to manage our real estate portfolio to maximize store productivity and ensure brand presence in key regions and markets. In terms of the overall square footage impact, the net effect of store openings, closures and the continued rollout of the smaller Ann Taylor new concept stores is expected to result in weighted average square footage of approximately 5.6 million square feet, reflecting a slight increase over 2011.

By brand, as Kay mentioned, we will be pursuing the further rollout of our Ann Taylor new concept stores and expect to have 40 additional stores in this format by year end. Approximately 15 of these will be new stores, and the balance will be remodels of existing stores. In addition, we expect to open 2 Ann Taylor Factory locations at premiere outlet centers this year. At the LOFT brand, we expect to open approximately 25 LOFT stores and 20 LOFT Outlet stores in 2012 to capitalize on the brand's continued potential for sales and profit growth.

In terms of our strong balance sheet, after share repurchases totaling $175 million in fiscal 2011, we ended the year with cash of approximately $150 million and no bank debt. We remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value, primarily through investing in the continued growth of our brands, as well as continued share repurchases during 2012. And to that end, in the first quarter to date, we have repurchased an additional 1.5 million shares at a total cost of $35 million, leaving approximately $149 million remaining under our share repurchase authorization.

Turning now to our outlook for the first quarter and full year of 2012. For the fiscal first quarter of 2012, we expect total net sales to be $560 million, reflecting a total company comparable sales increase in the low-single digits. Our gross margin rate performance is expected to approach 56.5%, and selling, general and administrative expenses are estimated to approach $275 million.

In terms of the full year, our outlook which includes a 53rd week is as follows. We expect fiscal 2012 total net sales to be $2.375 billion, reflecting a total company comparable sales increase in the mid-single digits. Our gross margin rate performance is expected to be 55%.

Total SG&A expenses in fiscal 2012 are expected to be $1,140,000,000 compared to SG&A expenses of approximately $1,063,000,000 in fiscal 2011. The overall increase primarily reflects support for the company's 2012 strategic growth initiatives as follows. First, $30 million in variable store operating costs to support continued sales growth in our existing fleet, including new concept store conversions. Second, $30 million of incremental expense associated with our 2012 new store growth plans. Third, $10 million associated with merit increases and performance-based compensation. And fourth, $5 million in incremental marketing investment for our high-growth e-commerce channels.

Our 2012 effective tax rate is expected to be approximately 40%. Capital expenditures are expected to be approximately $150 million, and this reflects the following investments. First, $55 million in support of approximately 65 new stores for both brands; second, $45 million to support approximately 50 downsizes and remodels, primarily a result of the conversion of additional Ann Taylor stores to our proven, successful new concept format; third, $30 million for store renovation and refurbishment programs; and finally, $20 million to support continued investment in information technology, including our high-growth e-commerce channel.

Our total weighted average square footage for fiscal 2012 is expected to increase slightly, reflecting the opening of approximately 65 new stores, partially offset by the impact of downsizes at Ann Taylor stores and approximately 30 closures. We expect to have approximately 985 stores at fiscal year-end. And finally, we expect to continue to maintain our healthy balance sheet, including a disciplined approach to inventory management throughout the fiscal year.

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

Katherine Lawther Krill

Before opening the call to your questions, I wanted to briefly thank our clients and our associates for their generosity in helping us raise more than $4 million for St. Jude Children's Research Hospital during the holiday season. As a company committed to helping women put their best selves forward every day, ANN INC. is extremely pleased to be making a difference in the lives of women and children in need through our Ann Taylor Cares initiative.

Operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] Kimberly Greenberger of Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Kay, the stores look fantastic. And in particular, the LOFT division feels like it's really going in the right direction from a color and style perspective. Could you just talk about the evolution of the merchandising strategies there? And as Brian takes over at the Ann Taylor division, are there any overarching strategies from a merchandising point of view that you expect to see from that brand over the course of the year?

Katherine Lawther Krill

Okay, let me just start with LOFT real quick, Kimberly. We are absolutely well positioned in inventory and our balance of fashion versus core basics in the LOFT division. We're seeing strength virtually in every product category, in stripes and prints and colors. And interestingly, for the first time ever, close to 70% of our business right now is in colors, stripes, prints and patterns, which we have never seen before. So the LOFT team had a lot of courage and conviction in stepping out on those products and has proved to be very, very successful. Sweaters has turned the corner in February. That was the only category that was soft in the fourth quarter due to the heavy nature of the sweaters. Now they're more seasonally appropriate, and they have turned the corner. We're also have planned more frequent product flows during the whole spring season, featuring more newness in the store every couple of weeks, and that strategy has been working. So we're definitely off to a great start in LOFT, and I think the team has done a fantastic job. In Ann Taylor, we're focused on improving the product assortment by offering a better balance of merchandise within each category and greater versatility in the wear-to-work separates and dresses. So it's not just about suits. It's really about versatility within the separates category and maximizing our dress business, which has really been successful. We're also reducing our overarching store promotions to drive more full-priced sales, and we've seen significant improvement in our gross margin rate spring to date on that strategy. We are lean in inventory right now. We're down about 19% in-store for the month of February and into March, and we are anticipating being in better -- more appropriate levels as of May. We're also adding more depth and breadth in opening price points to offer our client even greater value. This is very important for us to do, and you will see this strategy take effect for Q2 and beyond. We're offering greater depth in key fashion items, especially marketing and window looks. We have seen that all of our marketing looks have really sold out immediately, and we feel like we can offer much greater depth in this category. We're going to increase our investment in color, print and pattern in virtually every category. We're also highly focused on creating a more engaging and personalized client experience in-store, and Brian is very much focused on superior service in the Ann Taylor stores channel. We're also continuing to roll out additional new concept stores, which are driving increased sales and profitability, as well as focus on the balance of our stores. That's definitely a key priority for us, not just the new concept platform but all the balance of the stores. So beginning in the second quarter, we expect sales, comp, gross margin rate and profitability to improve every quarter over the year-ago period, and I'm confident that we are making great progress and the team is highly, highly focused on winning again.

Operator

Brian Tunick of JPMC.

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Question, Mike. I guess on the real estate side, just trying to get a little more clarity. So between the outlet and I guess the remodels, because it sounds like that's the majority, can you maybe talk on the outlet first? What's been happening here in terms of the economics of the new stores, and how the Liz Claiborne locations have been doing? And maybe give us some kind of idea about the 4 walls of the outlets maybe versus your full price stores? And on the remodels, anything you could share there from the first class of remodels to today, how you're enhancing productivity or profitability? And are you still getting a decent lift in the remodels versus your prior store base?

Michael J. Nicholson

Sure Brian, I'll make every effort to answer the 10 questions all wrapped into one. So first, in terms of capital, I want to make sure that we're all clear with respect to the capital in the new store growth that we're planning for in 2012. So in terms of the $150 million of capital, I talked about $55 million being attributed to 65 new stores, 15 at Ann Taylor, 25 at LOFT, 20 at LOFT Outlet, so 20 at LOFT Outlet and another 2 at Ann Taylor Factory. In terms of the outlet expansion strategy in 2011, it was a home run, a grand slam, quite frankly. And Brian, we've talked about this in the past, the economics of the outlet channel in terms of incredibly high levels of productivity, very predictable gross margin rates, a lower expense structure and, therefore, a 4-wall flow-through that is much higher than the company average. I think Kay talked about this in her comments that we see LOFT Outlet, the opportunity over the next few years, to double the store count from where we are today. And as we look at Ann Taylor Factory, we think that there's an opportunity to increase our current store count by at least 1/3. In terms of the Ann Taylor downsize and remodel strategy, we've consistently, over the course of 2011, been talking about productivity lifts that are in excess of 50%. And as a result of those learnings, we're going to continue to rapidly pursue that strategy over the next few years and fill in with new stores for Ann Taylor in urban locations. And then in terms of LOFT, the LOFT growth strategy, we see the opportunity for at least 100 incremental stores moving forward over the next few years, with a particular focus on mid, small-sized markets. Those are stores or locations where we might have to be willing to give up a little bit in terms of per-store volume or per-store productivity. But again, the 4 wall and profitability flow-through is a significant opportunity to -- for us.

Operator

Michelle Tan of Goldman Sachs.

Michelle Tan - Goldman Sachs Group Inc., Research Division

[Technical Difficulty]

So I was wondering if you could help us understand, I guess, where the pressure point is coming on gross margin in the first quarter. It sounds like the Ann Taylor division is being significantly less promotional, has really tight inventories. So it sounds like you guys are seeing year-over-year improvement in gross margin in the Ann Taylor division. Is the 80 basis points of reduction coming on the LOFT side, or what's happening there?

Michael J. Nicholson

No, I think the important point of clarity regarding the gross margin rate performance for Ann Taylor in Q1 and what we're seeing quarter-to-date is a significant improvement off of Q4's results. However, we need to be prudent in terms of maintaining promotional flexibility as we move through the first quarter. You're absolutely right, Michelle, in terms of our first quarter outlook on a rate basis, we're looking at slight compression in rate on a year-on-year basis. And moving forward over the balance of the year, second, third and fourth quarter, we're anticipating our rate to be approximately equivalent to last year, a slight improvement in Q3 year-on-year, and the balance or the majority of the gross margin rate improvement is anticipated to come in Q4 in 2012.

Michelle Tan - Goldman Sachs Group Inc., Research Division

Okay, great. That's really helpful. And so the LOFT division is still seeing improvement or at least stability in the gross margins...

Michael J. Nicholson

What I say is absolute stability. LOFT has been less promotional and their rate continues to be very strong.

Operator

Jennifer Black of Jennifer Black & Associates.

Jennifer Black

I wondered if you could talk about your dress penetration at both brands, your assortment -- the 2012 versus 2011 in both spring and summer seasons. I know how important that is. And then I also wondered if you could talk about pants as a category of both brands. Are you happy with the fits and silhouettes, and will you be offering additional choices in suiting at the Ann division, like a more tapered leg?

Katherine Lawther Krill

Okay, let me just start out with dresses, Jennifer. As you know, dresses are incredibly important to the Ann Taylor brand, and they represent close to about 15% of the business and a little less in LOFT, because Ann Taylor's dresses are more refined and more go-to-work. LOFT's dresses are a little bit more playful, but I would say, in total, about 15% for Ann and slightly less for LOFT. They are absolutely an area of focus for us, and we are chasing them. We seem to be selling out. Every dress is a bestseller.

Jennifer Black

Is that up from last year?

Katherine Lawther Krill

Yes, definitely. And we put more emphasis on dresses as the year goes on. We have a significant amount of dresses now. We'll have even more as we head into Easter and more as we head into May. Every month, we've been chasing dresses. Pants, on the other hand, what has been successful in pants is really colored bottoms in both divisions. We've seen great success in colored corduroys in LOFT for the fourth quarter, colored denim in both brands as we progressed through the spring season; I wish we had more, actually. And where we're seeing softness is in the more refined pant category. And as I like to say, it's already in her closet. So really where we see heavy purchasing is in the colored area. As far as suiting goes, we are really focused on continuing to feminize our suits as the year goes on because I think that is really one of the biggest callouts, and actually, we're seeing skirts emerge as a very important piece to the suit, the pencil skirt. So I would say dresses and skirts have emerged as 2 really important categories, and we see that continue throughout the year. And pants, as far as that goes, it's really more about color.

Operator

Robin Murchison of SunTrust.

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

When you talk about the redistribution of opening price points in the New Year, is that across-the-board, apparel and accessories or skewed to particular categories?

Katherine Lawther Krill

It's in the Ann Taylor division, Robin, specifically, because LOFT, we are not changing our pricing strategy in LOFT, because as you know, about 70% of the assortment consistently is under $50, and that has absolutely worked for us. So we are not touching that strategy. It's really in the Ann Taylor division, and it's virtually in every product category. We feel like we over-skewed the assortment to best and better price points, and we are re-skewing it back to opening in good to be a little bit stronger so we can add even greater value for the Ann Taylor consumer. We have seen that strategy work for us.

Operator

Neely Tamminga with Piper Jaffray.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

So I'm just trying to understand a little bit more, Kay, on the current trends. It seems like, broadly, within retail, the color has been very helpful for everybody in terms of driving comps to be at least in line with the Q4 trend, if not better in Q1. But it seems like you guys are seeing some deceleration. Is it both division? Is it one division?

Katherine Lawther Krill

Neely, I'm sorry, I can barely hear you. Can you speak a little bit louder?

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Sure, I'm just trying to understand a little bit more about the quarter-to-date trends. So we've heard from a lot of other retailers that color has been helping them either put up Q1 quarter-to-date trends relative to Q4, either stable if not better. And so I was just wondering, with your guidance kind of decelerating from the trends that you saw in Q4, is it Ann? Is it LOFT? Is it a channel? Help us understand why we're seeing the deceleration from the Q4 to the Q1.

Katherine Lawther Krill

Are you talking about the Ann Taylor division specifically?

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

I'm talking about the overall comp trend for low single...

Michael J. Nicholson

So Neely, let me take the overall comp trend, and then I'll let Kay speak specifically to her early observations in spring for ANN and LOFT. So our $560 million outlook for Q1 assumes a comp increase in the low-single digits. I think, importantly, what we said was at Ann Taylor, in Q1, we fully expect the trend, from a top line perspective, that we experienced in Q4 to continue into Q1, and in particular, we feel very strongly that inventory is constraining the top line as we sit here today early in Q1. We're seeing very strong gross margin rate performance, but the reality is we're light on inventory in-store. And we felt that was appropriate and prudent as we transitioned through the fall season to pull back a bit. Given that we see some -- the consumer response positive to the color in store, we are better positioning the inventory as we transition through the quarter, and we'll be much better positioned to deliver an improved performance and, in fact, comp store growth as we transition into the second quarter. At LOFT, we fully expect what we experienced in Q4 to continue into Q1. I think you also have to look at the prior year compares as well.

Operator

Our last question comes from Paul Lejuez from Nomura.

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

In the past, you've talked about percentage of product below $50 at LOFT and how that's changed. Can you maybe talk about how we should think about the greater focus on opening price points at Ann Taylor? And maybe if you can frame that around a percentage of items under certain price points and how that may change with the new pricing strategy.

Katherine Lawther Krill

I really cannot frame that as far as under -- for Ann Taylor like under a certain price point. But what I can say to you is that we are gradually adding more of a percentage to our opening and good price points as we progress through the year. What we really saw in the back part of 2011 is we over-skewed to higher price points in -- because suiting and certain categories, outerwear, certain categories were higher receipts in the back part of the year. For 2012, as we progressed through the year, primarily in second quarter and beyond, over half of our assortment will be in opening and good price points, which is where we have seen historical success.

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

And what are the expectations in terms of the AUR that you expect out of the Ann Taylor division?

Michael J. Nicholson

In terms of realized AUR? What I'd say on an overall basis, we'd expect to realize improvement in realized AUR, it's the initial ticket in terms of mix of product and availability in-store that you'll see a bit of a shift.

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

So even with the greater emphasis on lower opening price points you still expect AUR to...

Katherine Lawther Krill

We have pulled back promotions of spring to date. We have been able to successfully do that, and we're really seeing positive response to our full price assortment. So we see that continuing. So the AUR should go up.

Okay, that concludes today's conference call. Thank you for your participation. Have a great weekend.

Operator

That concludes today's conference call. You may now disconnect at this time.

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