ANN INC Management Discusses Q1 2012 Results - Earnings Call Transcript

| About: Ann, Inc. (ANN)

ANN INC (NYSE:ANN)

Q1 2012 Earnings Call

May 18, 2012 8:30 am ET

Executives

Judith Lord

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

Janet Kloppenburg

Roxanne Meyer - UBS Investment Bank, Research Division

Jennifer Black

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

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

Marni Shapiro - The Retail Tracker

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

Betty Y. Chen - Wedbush Securities Inc., Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the ANN INC.'s First Quarter 2012 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, and good morning, everyone. We're pleased you could join us to review our results for the first quarter of fiscal 2012. 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 a brief update on our strategic initiatives, followed by Mike who will discuss our financial results and outlook. After that, we'll open it up for your questions.

Before turning it over to Kay, we would like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations as of May 18, 2012, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that, I'd like to hand it over to Kay.

Katherine Lawther Krill

Good morning, everyone, and thanks for joining us to review ANN INC.'s results for the first quarter of fiscal year 2012. We are very pleased that the year is off to a strong start overall, and we are well positioned to deliver on our strategic and financial objectives.

For the quarter, we achieved increases in both sales and net income. Sales reached $560 million, up 7%, while comparable sales increased 4%. Gross margin was a strong 56.6%, showing significant improvement from the fourth quarter of 2011 and driven by strong margin rate performance at both brands. Diluted earnings per share were $0.58, up 14% from $0.51 a year ago.

Let's now turn to the brands. First, Ann Taylor. At the Ann Taylor brand, we continue to deliver top-line growth in our online and outlet channels. In the stores channel, we significantly reduced promotional activity as we focus on reinforcing the aspirational nature of the brand. This resulted in a higher gross margin rate and lower comp sales in the stores channel compared with the first quarter of 2011. For the brand, comparable sales decreased by 7%. This reflected an increase of 10% in the e-commerce channel and a 1% increase in Ann Taylor Factory, offset by a decline of 16% in the Ann Taylor stores channel.

On our call in March, we outlined a number of initiatives we have underway to drive higher sales, productivity and profitability in the Ann Taylor stores channel this year. The team is highly energized and is making significant progress on many fronts.

For example, we are continuing to evolve the assortment to provide her more selection in the categories she wants and a broader, more balanced assortment. This includes evolving our allocation strategy to ensure that all stores across the chain receive more depth and breadth of product, a strategy that has worked very well in our new concept stores. We expect our assortments for the back half of the year to increasingly reflect this strategy.

From a pricing perspective, beginning in the second quarter, we have invested more in opening price points in select categories and are seeing great success, though, so far. For fall, we have rebalanced the assortment to focus more on opening and good price points versus better and best across all merchandise categories. We know that this is a significant opportunity for us going forward, and we are pleased with the initial client response.

Also, another key priority during the first quarter was to begin to scale back Ann Taylor's promotional strategy and reinforce the aspirational nature of the brand. As I noted earlier, we have begun to make some inroads here and improve the brand's gross margin rate significantly compared with the fourth quarter of 2011.

Going forward, we are continuing to focus on a more targeted promotional strategy with a clear objective of driving higher AURs and a healthier full-priced business. The team is also focused on delivering a more engaging, client-focused experience in all stores. We need to replicate the successes we have achieved in our new concept stores and drive higher productivity levels across the entire fleet. By continuing to execute on these strategies, we expect to deliver improved sales, comps and gross margin rate in the Ann Taylor stores channel as the year progresses.

During the first quarter, our new concept stores, once again significantly outperformed, delivering in excess 50% higher productivity than the balance of the chain. We opened 2 new concept stores during the quarter and downsized or relocated 3 existing stores to the new format, giving us a total of 49 new concept stores at quarter-end.

Among the highlights of the quarter, we opened new concept stores on Michigan Avenue in Chicago and at the Prudential Center in Boston, and both are off to an outstanding start.

Turning now to our e-commerce and factory channels. In e-commerce, Ann Taylor achieved a 10% comp for the quarter on top of last year's 43% increase. In support of the Ann Taylor's brand strategy, AnnTaylor.com also reduced its level of promotional activity compared to the fourth quarter of 2011, resulting in some constraint on comp sales performance during the quarter. Nevertheless, this channel achieved a strong double-digit increase in traffic and higher conversion as well. Clients responded to the broader product assortment online, and we continued to be successful with our online exclusives. As part of our strategy, we are continuing to enhance the online experience and position this business for significant further growth. Ann Taylor Factory delivered a 1% comp sales increase, driven by higher conversion and UPT. This marks its 10th consecutive quarter of positive comps.

Turning to marketing. Ann Taylor continues to focus on increasing the visibility of the brand and further elevating its aspirational appeal. As part of this strategy, the team is also focused on establishing a stronger and more personal connection to our client through direct outreach, special events and online marketing.

Looking ahead to the second quarter in Ann Taylor stores channel, we are anticipating sequential comp improvements as we continue to focus on driving higher full-priced sales and realizing a strong gross margin rate. And we are off to a good start in May.

From a product perspective, our second quarter features a strong offering in dresses, skirts and more color across the assortment than last year. The suit category, historically, represents a small percentage of the mix in the second quarter and, in fact, is less than 10% of the assortment for the balance of the year. We also have a greater offering of opening price points across select categories.

In summary, the Ann Taylor team is definitely making progress. We fully anticipate the Ann Taylor stores channel, which accounts for approximately 20% of our annual revenue base, to become a more meaningful contributor to our top and bottom line results as we progress through 2012.

Overall, we expect every channel of the Ann Taylor brand to show stronger performance for each quarter as compared with last year. In fact, the Ann brand is now comping positive May to-date.

Turning now to LOFT. LOFT achieved another outstanding performance this quarter, driven by strong results in all channels of the brand. Clients responded positively to LOFT's entire product offering, it's compelling value proposition and engaging in-store experience, all of which contributed to very strong conversion and higher DPT. Traffic was also positive. Geographically, all regions delivered a strong positive comp. In addition, the brand delivered a very strong gross margin rate.

The brand's 11% comp sales increase reflected increases of 10% in the LOFT stores channel, 29% in e-commerce and 6% in LOFT Outlet. The results demonstrate the strength of LOFT's offering this season. In fact, we achieved sales increases in every product category. Among the highlights, woven and knit tops delivered very strong results. Pants, shorts, skirts, dresses, accessories and shoes were also exceptionally strong. Color worked across all categories. And LOFT's print and pattern offerings was also very successful, with stripes being a standout.

LOFT has definitely benefited from having the right fashion, and the team is doing a great job merchandising our product in a compelling way in-store, including flowing product more frequently. In addition, the fashion, quality and incredible value that LOFT offers continues to be a powerful draw. During the quarter, approximately 70% of the assortment was priced under $50.

Overall, we are thrilled with the performance at LOFT stores. The brand's successful strategy is delivering excellent results, and there are exciting opportunities ahead to build on LOFT's momentum.

Turning now to our online channel. LOFT.com has continued its significant growth, with this quarter's 29% comp increase coming on top of a 33% increase in the first quarter last year. Traffic and conversion were both up, driven by excellent client response to the assortment across all categories.

We also achieved strong performance in our online exclusives, including our expanded assortment of petite shoes and dresses. E-commerce remains an important growth platform for the company, and we look forward to continuing to capitalize on the significant potential in this business.

Turning to LOFT Outlet. LOFT Outlet also delivered significant growth this quarter, with nearly 50% revenue growth driven by new stores, as well as strong comp growth. Comparable sales were up 6%, driven by increases in conversion and UPT, marking the 11th consecutive quarter of comp growth in this channel. We are very pleased with the progress and performance in this highly profitable business. Even after doubling the size of the store fleet in 2011, we see the potential to, again, double the store base to approximately 150 locations over the next few years.

From a marketing perspective, we are pleased with the results of LOFT's strategy and also see significant opportunity to continue to expand the brand's base of loyal clients. LOFT appeals to women of all ages, and we have identified a broad universe of potential clients who share the brand's values. A key element of our strategy will focus on introducing these women to LOFT while continuing to engage our existing clients through our direct outreach, online marketing and special events.

Overall, it was another outstanding quarter for LOFT. The brand has delivered on its successful formula of fashion, quality and value, with compelling products, engaging service and a positive client experience. We fully expect the brand's strong momentum across all of its channels to continue in the second quarter and for the remainder of the year.

Before I turn it over to Mike, I want to briefly recap our strategic priorities for 2012 and beyond: to profitably grow the business and enhance value for our shareholders. As I noted on our last call, our overarching objective in 2012 is to strengthen our connection to our clients. With our 2 differentiated brands, we want to be there for her, whenever and wherever she chooses to shop. This starts with offering great fashion, service, quality, value and personalization through an engaging client experience.

With that as our foundation, we focused on a number of strategic growth opportunities, including continuing to enhance the online shopping experience in both brands. We are integrating new capabilities and services and, during the first quarter, added customer comments. We are also working towards the addition of mobile, personalization and international shipping. We continue to achieve strong results from our online marketing and expect e-commerce to be a key driver of future growth. We are also focused on implementing a multi-channel experience for our client, so she has access to all of our inventory no matter where it sits. We are on track to roll out this capability in the latter part of 2012.

Another key priority is to expand and improve our store fleet and optimize its productivity and profitability. At Ann Taylor, this means continuing to downsize existing locations in addition to selective new openings, with a focus on urban locations. We are highly focused on achieving meaningful improvements in sales, comps, gross margin rate and profitability of the balance of the Ann Taylor stores fleet.

At LOFT, we are continuing to expand on the brand's broad appeal by adding stores in small to mid-size markets, which have been very successful for the brand and are currently underserved. LOFT is also completing a number of relocations and remodels, especially in key markets such as New York, L.A. and Chicago.

In the outlet channel, we are continuing to grow our presence through further expansion of LOFT Outlets and select new stores in Ann Taylor Factory. In addition, we are very excited to expand our reach beyond the U.S. by entering Canada in late 2012. Plans are underway for the opening of a small number of locations in Toronto, where there is already strong brand awareness for both Ann Taylor and LOFT.

We are very excited about the potential to reach new clients in this market and view Canada as another exciting growth opportunity. Overall, we look forward to continuing our progress in each of these areas while remaining focused on our client and continuing to meet her needs by providing great style, high quality and terrific value.

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

Michael J. Nicholson

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

Beginning with net sales. Net sales for the first quarter were $560.4 million, an increase of approximately 7% versus the $523.6 million in net sales reported in the first quarter of 2011. By brand, net sales at Ann Taylor were $212.4 million, down 4.7% versus $222.9 million reported last year. At the LOFT brand, net sales were $348 million, reflecting growth of 15.7% versus $300.8 million reported last year.

Moving on to comps. Total company comparable sales for the quarter increased 3.8%. At the Ann Taylor brand, total brand comps were down 6.9%, reflecting a decrease of 15.5% at stores, partially offset by increases of 9.6% in the online business and 0.7% in the factory channel. At the LOFT brand, total brand comps were up 11.3%, reflecting increases of 10% at stores, 29.1% at LOFT.com and 6.1% at LOFT Outlet.

Turning to margin. We reported a first quarter gross margin rate of 56.6%, approximately 70 basis points below the very strong rate of 57.3% achieved in the first quarter of 2011. Although slightly lower than last year, this strong gross margin performance in the first quarter was consistent with our plans for each brand for the quarter.

At LOFT, we were focused on increasing comparable gross margin dollar delivery through continued top line momentum and enhanced productivity, supported by higher levels of inventory versus the constrained inventory LOFT had during the first quarter of last year.

By contrast, at Ann Taylor, the brand was focused on generating a higher gross margin rate in stores relative to both the fourth and first quarters of 2011, supported by a very conservative inventory position and a focus on higher full-priced sales during the first quarter of 2012. And we delivered on both of these brand objectives for the quarter.

Turning now to SG&A. SG&A expenses in the first quarter were $272.0 million, an increase of approximately $18 million compared to the first quarter of 2011. SG&A, as a percentage of net sales, was flat with first quarter of 2011 at 48.5%. This rate reflected the benefit of increased cost leverage as a result of higher net sales compared with the first quarter of fiscal 2011, offset by an increase in expenses associated with our year-over-year store growth and other expenses supporting the expansion of our business.

Moving down the P&L. Operating income for the quarter was $45.4 million, virtually flat with the $45.9 million reported in the first quarter of 2011. First quarter net income was $28.7 million or $0.58 per diluted share compared with net income of $27.3 million or $0.51 per diluted share achieved in the first quarter of 2011.

Weighted average diluted shares outstanding for the quarter decreased 8.3% to 48.7 million shares versus 53.1 million shares in the first quarter of 2011. The decline in weighted average diluted shares in 2012 was primarily related to our share repurchases of approximately 7.3 million shares in 2011 and the additional 1.5 million shares that were purchased during the first quarter of 2012.

Our effective tax rate for the quarter was 37% versus 40.5% in the first quarter of 2011, resulting in an incremental $0.03 to our EPS for the quarter versus the first quarter of 2011. For 2012, we expect our effective tax rate in the coming periods to reflect our normalized annual effective tax rate of approximately 40%.

Depreciation and amortization in the first quarter totaled approximately $23 million, in line with the first quarter of 2011. And capital expenditures in the first quarter totaled $27.9 million compared with $27.6 million in the first quarter of 2011.

Moving on to inventory. For the company, total inventory per square foot increased approximately 3% versus year ago, excluding e-commerce. Drilling down to the stores channel, total inventory per square foot at Ann Taylor was up 3%. The increase in the Ann Taylor stores channel was the result of timing related to goods in transit relative to last year. Excluding this timing shift, inventory per square foot was actually down 5%. And in fact, if we look at Ann Taylor inventory on an average store basis, a metric that we believe better captures the changing complexion of the Ann Taylor store fleet, inventories per store, excluding the timing shift, were down 10%. At LOFT stores, total inventory per square foot was up approximately 7% at the end of the first quarter, aligned with our comp performance. And finally, in our factory outlet channel, total inventory per square foot declined 6% compared with last year.

I'm also pleased to report that both the Ann Taylor and LOFT store channels entered the second quarter with approximately 90% of their inventory representing fresh products.

Now to update you on our progress in real estate. As we mentioned on our fiscal year-end call, we are pursuing a real estate growth strategy for our Ann Taylor and LOFT brands with a goal to enhance both sales and productivity at stores in 2012. Overall, we expect to open approximately 65 new stores this year, including our first openings in Canada later this year.

From a timing standpoint, approximately 1/3 of these 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 approximately 30 stores during the fiscal year.

During the first quarter, the company opened 7 new stores comprised of 2 Ann Taylor stores, 4 LOFT stores and 1 LOFT Outlet store. In addition, we closed a total of 13 stores, comprised of 8 Ann Taylor stores, 4 LOFT stores and 1 LOFT Outlet store, resulting in a total store count at the end of the fiscal first quarter of 947 stores, comprised of 274 Ann Taylor stores, 500 LOFT stores, 99 Ann Taylor Factory stores and 74 LOFT Outlet stores.

Now turning to our square footage. Total company square footage at the end of the quarter was approximately 5.5 million square feet, representing a 1% increase from the square footage total reported at the end of the first quarter of 2011 and a 3% increase over the same period on a weighted average basis.

In terms of our strong balance sheet, after our repurchase of approximately 1.5 million shares at a cost of $35 million in the first quarter of fiscal 2012, we ended the quarter with cash of $106 million and no bank debt. And we remain committed to using our strong balance sheet and free cash flow to further enhance shareholder value.

Now turning to our outlook for the second quarter and the full fiscal year 2012, beginning with the second quarter of 2012. We expect total net sales to be $585 million, reflecting a total company comparable sales increase in the mid-single digits. Our gross margin rate performance is expected to approach 55%. And our selling, general and administrative expenses are estimated to approach $280 million.

In terms of the full year, our outlook 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 approach $1,140,000,000 compared to SG&A expenses of approximately $1,063,000,000 in fiscal 2011. The increase is driven by the following: 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 2012 new store growth; third, $10 million associated with merit increases and performance-based compensation; and finally, $5 million in incremental marketing investment to drive growth in our e-commerce channels.

Our 2012 effective tax rate is expected to be approximately 40%. Capital expenditures are expected to be approximately $150 million, reflecting 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 store 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

Thanks, Mike. In closing, we are pleased to be off to a strong start for fiscal year 2012. Our team is focused on our strategic initiatives to drive long-term growth, and we are very excited about the opportunities ahead to deliver higher sales and profitability in both brands.

With that, let's open it up to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Kimberly Greenberger of Morgan Stanley.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Kay, your stores have had some of the best color that we've seen in the mall this year. I would imagine, however, that the trends change throughout the year. And without discussing, perhaps, your approach to fashion, I'm wondering if you can maybe just talk about your expectations for both the Ann Taylor and the LOFT brands here over the next 3 quarters. If we're sitting here at the end of the year and both have had a successful year, what will they have achieved, in your mind?

Katherine Lawther Krill

Well, I will address the color question, first, Kimberly. Absolutely, we are seeing color selling across both brands, all channels. And in fact, LOFT really stepped out with great conviction and bought far more color than they ever had and are seeing great success because of it. Ann Taylor did double their color investment from last year, and actually, we could have used more. So we sold color in every product category that we added it. I fully expect color to continue trending throughout the year in both brands. And we fully expect improvement in comp sales in Q2 and for the remainder of the year in both brands. LOFT has strong momentum so far. And Ann Taylor stores' performance has dramatically improved from first quarter. In fact, the Ann Taylor brand is positive comp May to-date, and our e-commerce business is significantly stronger than first quarter. So we fully expect to deliver positive comps for both brands for the second quarter and the remainder of the year.

Kimberly C. Greenberger - Morgan Stanley, Research Division

Is it possible that you could actually see the Ann Taylor division accelerate more than LOFT just because the Ann Taylor division has the easier comparisons as we work our way through the year?

Katherine Lawther Krill

I think that we are seeing continued strong momentum at LOFT in all channels, and we are beginning to see the positive momentum in Ann Taylor and are actually very encouraged with our store performance May to-date.

Operator

Janet Kloppenburg of JJK Research.

Janet Kloppenburg

Kay, just to keep talking about Ann Taylor for a minute, I'm interested in your reduced promotional cadence at the brand. I'm wondering if that hurts traffic in the quarter, and if you think the infusion of more appropriate opening price points could help offset traffic decline going forward? And just on the note about the May business, I'm wondering if your promotional cadence in May has been lower than last year despite the fact that the business has accelerated.

Katherine Lawther Krill

Oh my goodness, Janet, those are lots of questions. Let me just address like multiple issues with Ann Taylor to try to answer some of those questions because we're moving forward with many initiatives to increase sales and productivity in the Ann Taylor stores channel. We are definitely improving our product assortment by offering a greater selection in key categories, in tops, dresses and skirts, in all stores. We were just too narrow in our assortment, especially at the majority of our stores. We're also increasing the offering and opening good price points to offer the client even greater value at full price. And we are definitely seeing success thus far in Q2 with this strategy. And we were already on it for Fall 2012 for third and fourth quarter, so we're really pleased that, that was the right strategy. We definitely have become more surgical in our approach to markdowns and promotions in the channel. And we have definitely improved our gross margin rate, and we will continue to be surgical in our approach as well. And we're also really excited about rolling out our new concept stores as we downsize and open selectively new stores. We also have one more strategy too, and that is we're working on a capital-light refresh strategy for the balance of the chain, other than the new concept stores, because we really feel like every store needs to look modern and up-to-date. So I'll say that the team is highly focused on winning again, and we are all crystal clear on what needs to be accomplished. And as you can hear, we have several things that I think we've made meaningful progress on so far. And we're thrilled to see the comp improvement so far in May and expect to see continued improvement with each quarter.

Janet Kloppenburg

Even though the promotional activity will be lower than last year?

Katherine Lawther Krill

Yes. We're seeing the opening price points, Janet, really resonate with her, that she is willing to pay full price when the price is right. As a matter of fact...

Unknown Executive

We're going to shop [ph] it?

Katherine Lawther Krill

With the AUR?

Michael J. Nicholson

Actually, I'd say a couple of things. One, in terms of the first quarter, we saw no impact on traffic patterns in stores...

Katherine Lawther Krill

No, no.

Michael J. Nicholson

So I think that's a good indicator in terms of the trend in where we're headed. AUR was stronger year-on-year, and we're seeing that trend continue into Q2, so we continue to drive higher gross margin rates on a year-on-year basis, consistent with what we experienced in Q1.

Operator

Roxanne Meyer of UBS.

Roxanne Meyer - UBS Investment Bank, Research Division

I'm just wondering if you could discuss the -- your guidance. It seems like you've reiterated your full year numbers despite the 1Q fee[ph]. I'm just wondering how you're thinking about some of the line items in the back half and maybe how that shifted. And then can you just share what the ending share count was at the end of 1Q?

Michael J. Nicholson

Okay, a couple of things. One, in terms of the full year outlook, I actually think there was a change with respect to our view of SG&A for the full year. So I think in March, we talked about a very precise outcome, and now we believe that the expense savings that we realized in Q1 will actually flow-through through the balance of the year. And then in terms of the EPS benefit in Q1 related to the tax rate, at this point in time, we are effectively maintaining our initial full year tax rate perspective that we shared in March. And then your third question, Roxanne, I'm sorry?

Roxanne Meyer - UBS Investment Bank, Research Division

Share count.

Michael J. Nicholson

Share count. So going forward in terms of share count for fully diluted EPS calculation purposes, taking into consideration the participating securities, I think about 50 million is a good proxy to utilize going forward, 50 million outstanding.

Roxanne Meyer - UBS Investment Bank, Research Division

Great. And how do you think about using cash for repurchases as we move forward?

Michael J. Nicholson

Listen, I think our history demonstrates that we do return value to shareholders. I think if you look back, since the third quarter of 2010, we repurchased 13 million shares, 25% of our outstanding stock. We also have very strong conviction in terms of our business and our bias is to continue to invest in the business and generate healthy returns for our shareholders. But returning cash to shareholders and continuing to buy back shares will likely be part of the strategy going forward.

Operator

Jennifer Black with Jennifer Black & Associates.

Jennifer Black

I know at the Ann division, you wanted more versatility in jackets as far as suiting is concerned. And I wondered where you feel you are with this initiative for the back half of the year. And also any comments about jackets at LOFT? And then I was curious about your thoughts on pant silhouettes at both divisions, excluding jeans.

Katherine Lawther Krill

Okay, let me just address the pants first, Jennifer. As you know, what's really selling right now is colored denim, so that is really what she's after first in both divisions, and we don't really see that stopping for the year. We'll have new fabrics and 5-pocket silhouettes. But that is really what she's after. The other thing in pants that definitely trended very well is the skinny and the slim leg, and we don't see that stopping for the rest of the year either. Regarding jackets, we definitely have a broader assortment coming in for fall of more separate jackets because that's typically when we sell them better is in third quarter. And I think I would tell you they were -- are going to be more feminine and more special and better-priced.

Jennifer Black

Okay. At both divisions or are you just referring to Ann?

Katherine Lawther Krill

I'm just referring to Ann. And LOFT really has more of a casual jacket assortment under $100, and that's always successful, really, every quarter, so we'll continue that strategy. Color being important in jackets as well.

Jennifer Black

Okay, great. Right now, you have -- it seems like you have a lot of wide legs in your suiting selections that we're going to see that change at the Ann division?

Katherine Lawther Krill

Yes, things are getting slimmer and skinnier. Yes.

Operator

Lorraine Hutchinson of Bank of America.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

Back to the Ann Taylor division, you talked a little bit about adding breadth and depth to your product assortment in all stores. Then you also talked about being less promotional, having less markdowns. So I guess, just hoping to get a little of clarity on how you balance your inventory buys and how you're planning inventory for the rest of the year.

Katherine Lawther Krill

Okay, I'll jump in on the first part then, Michael, jump in on the second part. What I meant, Lorraine, is that we are going to offer more selection, more styles, more SKUs for the back part of the year. In Ann Taylor, we felt like our assortment was far too narrow in all stores. While we definitely enjoyed a broader assortment in our new concept stores, once you got beyond Tier 1 and new concept stores, we narrowed the assortment, and it was too narrow. So we are building back up a broader, broader selection; not depth across the board at all, more of a selection.

Michael J. Nicholson

And then just in terms of mix of inventory and our confidence with respect to the assortment, we are positioning Ann Taylor stores to comp positive in the back half of the year.

Operator

Paul Lejuez of Nomura.

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

Sorry if I missed this guys, but in what businesses were -- was gross margin down this quarter? And is there a quarter we should look towards, where all are moving higher from a gross margin prospective? And then just second, just want to make sure I understood, was traffic down at both Ann Taylor Factory and LOFT Factory? And if so, what -- just wondering what was behind that, what drove lower traffic in that channel?

Michael J. Nicholson

Okay, Paul, it's Mike. I'll try to handle your questions. So in terms of the gross margin rate performance, Ann Taylor stores in Q1 was up significantly off our fourth quarter performance and up slightly to last year. That was offset by a slight decline at LOFT stores, as our strategy going into the quarter was to fuel the top line, drive comps store performance, as well as comp gross margin dollar generation. In terms of traffic, factory -- the factory channel was down slightly, and it's something that we're keeping our eye on. We don't anticipate it's going to be a significant challenge going forward, but it is something we're keeping our eye on.

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

Did you pull back on promotions in the factory channel as well?

Michael J. Nicholson

I would say, generally speaking, today, we are less promotional than the competitive set in the factory environment. We're managing our inventory a heck of a lot tighter.

Katherine Lawther Krill

Definitely.

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

Is that the case in 1Q as well?

Michael J. Nicholson

Yes.

Katherine Lawther Krill

Yes.

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

You said Ann Taylor gross margins were up only slightly versus last year [indiscernible]

Michael J. Nicholson

They were up slightly to last year. But up significantly, importantly -- I think the important point here is up significantly off the fourth quarter.

Operator

Marni Shapiro of The Retail Tracker.

Marni Shapiro - The Retail Tracker

At this point, you guys are on very solid ground with LOFT, and Ann is well on its way to fixing some of the smaller merchandise issues. So I guess, as I think out over the next, say, 2, 3 and 4 years, what are the next steps for the company? Are you thinking about a new brand or an acquisition? And I know you've been pretty keen on investing in e-com, so if you can talk about opportunities to maybe test new brands through your e-com space or something in that regard.

Katherine Lawther Krill

Let me just tell you, top line, Marni, that we -- the first priority for sure is continued top-line and productivity growth at both brands. And we are constantly testing new product categories, particularly online, and then rolling them out in stores as we see success. Swimwear and beach would be definitely one to point out for LOFT. Yes, deliver e-commerce enhancement to continue to grow this important channel is a definite top-of-the-list strategy for us for this year and beyond. And we have a number of initiatives teed up to continue to hopefully keep doubling this business. And another strategy is our real estate strategy, which I outlined in my remarks, which includes continued factory outlet expansion very aggressively for LOFT Outlet and the rollout of Ann Taylor new concept stores with the downsize strategy and selective new openings and capital refreshes. And then LOFT full-price store expansions in small to mid-size markets. We have always been successful in small to mid-size markets. So we are definitely going to be more surgical and really open stores in that area.

Marni Shapiro - The Retail Tracker

I guess, [indiscernible]

Katherine Lawther Krill

Hold on, I'm not finished. We have a lot of things. Other thing are our multichannel selling initiatives, we are going to be -- that capability will be for the back part of this year, and that is definitely going to be a huge game changer, I think, for the company because she will be able to get whatever she wants, wherever she is because the inventory will be pooled. The other thing is that we are expanding internationally with the entry into Canada in late 2012. So those are our top priorities right now, which I think is a lot of priorities. We're very focused on them, and we believe each initiative is going to drive meaningful long-term growth.

Marni Shapiro - The Retail Tracker

I agree, and I think that's what I'm thinking beyond this year and next year, in order to do something in late 2013, 2014, the company is thinking about it today. And I guess, I'm wondering -- you have 2 great teams here, 2 strong businesses. You have success in a part of the mall stratosphere, women's apparel. What's the next step for ANN INC. as a company beyond these 2 brands because it would make sense to leverage...?

Michael J. Nicholson

So Marni, it's Mike. I think it's as simple as this. I think we've got a heck of a lot of runway for the next few years, and we're open to ideas, so feel free to give me a call after the call and let's chat about your ideas.

Katherine Lawther Krill

But we're not going to share our thinking, Marni, online for our competitive -- competitors to hear. You can appreciate that.

Operator

Brian Tunick of JPMorgan.

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

I guess maybe, Kay, for you, if you could maybe give us some insight on maybe how Brian is looking at history channels maybe today working through the merchandising, planning, allocation, and maybe what's left to come, what sort of comes in the back half as he gets more tenure looking at the 3 channels. And then maybe, Mike, on the remodels, maybe can you still remind us, are they still nicely outpacing the non-remodeled stores? And any learnings from that first or, I guess, second class of remodels now that you can further enhance productivity or profitability?

Michael J. Nicholson

So I'll take the second question first. The good news is trend continues there. They are significantly outpacing the balance of chain in terms of productivity, as well as profitability performance. We believe that represents a big opportunity moving forward over the next couple of years, and we're going to continue to aggressively pursue that strategy. I'd also say that in terms of early days with Brian, he sees significant opportunities in terms of learnings from the new concept stores and taking those learnings to the balance of the chain, so big productivity opportunity in terms of balance of chain productivity improvements as well.

Katherine Lawther Krill

And above and beyond that, Brian, I think that -- I articulated some of these, but I think that one of the main strategies is offering more selection in all stores. He's very focused on the balance of the chain because new concepts are doing great. We've got that figured out. It's more the balance of the chain, which is 230 stores, so he's highly focused on that. I think the better allocation strategies to those stores, and I think that -- we said it, but I'll say it in another way -- more approachable price points is definitely one of the things that we are working on, and this really began in the fall season as we looked at Fall '13 -- I mean Fall '12 and what we thought the opportunities were. So more approachable pricing, more selection, new concepts and capital-light refresh plan, which I think definitely is needed. We want every store in the Ann Taylor fleet to look modern and up-to-date. So I think that our focus is clear, they know what they need to do, his team is really engaged, and I think they have made a lot of progress thus far. We're thrilled with it.

Operator

Betty Chen of Wedbush Securities.

Betty Y. Chen - Wedbush Securities Inc., Research Division

I was wondering, Kay, if you can talk a little bit about the products. We were quite pleased to see that Ann Taylor, for example, had offered colored denim, and as you mentioned, that was a strong category. And it appears that it had sold out very quickly. I know that Q1 was a period of inventory transition as you try to evolve the brand for more aspirational and full-priced selling. But how is Brian and his team using some of those learnings from Q1, especially in categories like colored denim and maybe more casual items, into some of the Q2 and second half buys? And also related to that, as the brand continues to offer more opening price points that has resonated with the customers, how is that team trying to balance those price points to make sure that it remains compelling and differentiated from what that LOFT customer may be used to seeing at the LOFT brand?

Katherine Lawther Krill

Okay, let me address the last part of that first. As we have just -- we have recently, corporately completed a comprehensive competitive pricing study for each brand, and we are adjusting Ann in some areas in order to gain share and drive sales. We obviously are investing more in opening price points, where we've seen success. So it's 2 things, where we're seeing success and we're creating new opening price points in categories where we felt like we were too expensive and missed business. LOFT has not or will not change their price points. They've been always that way since the beginning of the brand, and they are in a very good place. And I will say that I have been part of this work with Brian and Gary and can confirm that we still have a 25% to 40% spread between the 2 brands, so we are very comfortable.

Operator

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

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

I actually -- it's sort of a basic question. Mike, just trying to figure out -- I mean, when I'm playing with the model and putting in a 4% or 5% comp, I almost can get to the $585 million with just the comp performance. And I know there are some closures over the trailing 4 quarters offset by new store openings. I'm just wondering, it seems like my non-comp productivity come in, I'm just wondering what I'm doing wrong because I feel like the guidance on the top line might be a little bit conservative.

Michael J. Nicholson

Sure. So our view as of today is $585 million and a mid-single-digit comp performance. I think Kay indicated earlier on that the early quarter trends look encouraging. And beyond that, I'm not going to comment.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay, great. Can you comment on, similarly, to how you did on stores, whether LOFT has also seen the acceleration, benefiting from, perhaps, Mother's Day?

Katherine Lawther Krill

I would say Mother's Day is strong for both brands, Adrienne. It always has been. And LOFT's momentum is continuing, and we are encouraged by Ann's momentum getting stronger.

Great, thanks a lot, and thank you all for your interest in ANN INC., and have a great day and a great weekend.

Operator

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

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