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Ann Taylor Stores Corporation (NYSE:ANN)

Q4 2007 Earnings Call

March 14, 2008 8:30 am ET

Executives

Maria Sceppaguericio – Sr. VP, Communications and IR

Kay Krill – President & CEO

Michael Nicholson - CFO

Analysts

Kimberly Greenberger - Citigroup Global Markets

Tracy Kogan - Credit Suisse First Boston

Lorraine Maikis - Merrill Lynch

Dana Cohen - Banc of America Securities

Liz Dunn - Thomas Weisel Partners

Jeff Black - Lehman Brothers

Jennifer Black - Jennifer Black & Associates

Dana Telsey - Telsey Advisory Group

Michelle Tan – UBS

Sam Panella - Raymond James & Associates

Operator

Good morning ladies and gentlemen and welcome to Ann Taylor Stores Corporation fourth quarter and year end 2007 earnings conference call. (Operator Instructions) I would now like to turn the call over to Maria Sceppaguericio, Senior Vice President of Communications and Investor Relations.

Maria Sceppaguericio

Thank you and good morning everyone. Here with me today to discuss our results is Ann Taylor’s President and CEO, Kay Krill and our CFO, Michael Nicholson. As you know earlier this morning we issued our results for the fourth quarter and full year fiscal ’07. We also provided our outlook for fiscal ’08. Significantly impacting results in both years are expected one time costs and ongoing savings of our recently announced restructuring program. Mike will be taking you through some details of the restructuring a little later in the call. But let me quickly recap the impact the restructuring had on our 2007 actual results.

In the fourth quarter we took a $30 million pre tax restructuring charge which reduced our reported or GAAP EPS in the quarter by $0.30 resulting in a loss per share of $0.11. Excluding the restructuring charge EPS was $0.19 in the quarter versus $0.31 in Q4 last year. For the year total pre-tax restructuring charges totaled approximately $32 million with the additional $2 million related to costs to implement the program that were incurred earlier in the year. This charge reduced full year EPS by $0.31 resulting in diluted EPS for the year of $1.53 on a GAAP basis. Excluding the restructuring EPS was $1.84 compared with EPS of $1.98 last year.

Turning to our share repurchase program, during the quarter we repurchased approximately 900,000 shares at a total cost of $26 million. For the year we repurchased a total of 9.3 million shares at a total cost of $340 million. As we entered fiscal 2008 we had approximately $260 million available under our $300 million share repurchase authorization.

I’d like to point out that due to the timing of our fiscal calendar our fourth quarter and full year 2007 results included one less week than fiscal 2006. The sales impact of this extra week in the fourth quarter and full year was $31 million benefit to both periods in 2006.

Finally you may have seen in our press release this morning that we have made the decision to discontinue reporting monthly sales due to the volatility associated with calendar shifts and promotional timing that distort a true picture of performance. Our focus will continue to be on margin enhancements and driving long term profitable growth and we believe this decision is consistent with those objectives.

In our release this morning we also indicated that due to the unpredictable nature of the current environment for fiscal 2008 we will be providing quarterly earnings guidance on a quarter by quarter basis. We believe this is appropriate for the next few quarters as macro economic factors such as rising fuel prices, the situation in the housing and mortgage markets and the recent economic stimulus package among other things, makes forecasting this year particularly difficult.

Before I turn the call over to Kay, I would like to remind you that our discuss this morning may include 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 concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company’s filings with the SEC. With that, let me hand it over to Kay.

Kay Krill

Thank you Maria and good morning everyone. Before getting into the results for the year, I’d like to provide my perspective on the overall state of our business and what we are seeing in the market. I’ll also quickly touch on how we are approaching 2008 given where we are today and our outlook for long term growth.

So starting with our business, the macro environment has certainly had a major impact on our traffic trends as well as the level of promotional activity required to motivate clients to make a purchase. That being said, clients have demonstrated a willingness to purchase items perceived as compelling and new, meaning something that isn’t already in her closet; like a new hot color or new silhouettes or any must-have item. As I reflect on the assortments we offered this past year we could and should have been more stylish and fashionable at the Ann Taylor division. At LOFT our product in the second half was clearly better than the first half but I am confident we can continue to evolve both brands to be more exciting, fashionable and modern.

This includes not only the product but the in-store experience and the marketing. Let me assure you that we are all over it and we have some of the brightest talent in our industry committed to significantly elevating and evolving both brands this year. An important factor in retail this past year was inventory management. As consumers slowed down the ability to affectively manage inventory levels through this period was extremely important. I am pleased to report that we did a good job all year on this front and we will continue to make this a critical area of focus and differentiation for our company in 2008 and beyond.

Turning quickly to our approach in 2008, we have developed what we believe is an appropriately conservative plan. As you know it is virtually impossible to predict with any level of precision the extent or duration of the slow down that all agree is upon us. What I do know is what my team and I can control and on that front we have been very thoughtful about how we will manage the business in 2008.

Key priorities include evolving and strengthening our brands, tightly managing inventory levels, including conservatively planning comps and inventory buys, successfully launching LOFT outlets, achieving the restructuring benefits we have identified and continuing to repurchase our stock. We expect this strategy to deliver diluted EPS in fiscal 2008 excluding one time restructuring costs in the range of $1.80 to $1.90 and beyond 2008, we believe we are well positioned for growth and success as the economy improves.

So with that as overall context let me now turn to some specifics on our 2007 performance. Net sales totaled $2.4 billion which excluding the extra week last year were up 3.7% versus 2006. Our comp store sales for the year were down 3.3%. At Ann Taylor our comps were down for the year and while we affectively managed our inventories throughout the year our margin was down versus last year reflecting particular softness in the fall season.

At LOFT our margin was also down for the year but this was entirely due to the first half softness. You’ll recall that the spring season reflected fashion decisions that were made in the back half of 2006 which we were transitioning our way out of in the first half of 2007. I am pleased to report that our business improved significantly in the second half and our margins were up meaningfully and this is during the very difficult traffic environment we discussed earlier.

Overall our gross margin for the year was 52.2% versus 53.7% in fiscal 2006. We were promotionally aggressive during much of 2007 to keep our inventory turning and during the first half we were successful with more surgical actions rather than the entire store type of promotions that we ran during much of the second half in response to traffic weakness. Our inventories were well managed throughout the year and we entered fiscal 2008 in excellent shape.

SG&A as a percentage of sales was up slightly for the year largely due to the benefit in 2006 related to the extra week of sales as well as the impact of deleveraging, almost entirely offset by reduced performance based compensation costs. If you exclude the impact of the extra week in fiscal 2006 SG&A as a percentage of sales was down slightly for the year. As you know we are aggressively pursuing reducing our SG&A.

Operating income excluding the impact of restructuring was $188 million compared with $224 million last year. In terms of EPS excluding restructuring we’ve delivered $1.84 per share. This compares with the record $1.98 per share we achieved last year and $1.13 we delivered in 2005. In fact our bottom line performance in 2007 while below a year ago and our initial expectations for the year represented the second best performance in our company’s history.

Finally as Maria mentioned earlier we repurchased over 9 million shares of our stock at a total cost of $340 million during 2007. We intend to continue to use our share repurchase program as one of the ways in which we return value to shareholders. Let me quickly turn to the performance of each division before I turn it over to Mike to take you through the numbers and detail.

Starting with Ann Taylor, our Ann Taylor division had a tough year. Net sales on a 52-week basis declined 3.6%, comp store sales declined 3.7% and margins for the year were below 2006. The division had some success throughout managing its in-store metrics which helped to offset some of the softness we experienced related to the macro environment. Inventories were well managed throughout the year and we entered fiscal 2008 with total inventory per square foot excluding beauty, up 4% due entirely to the timing of inventory in-transit. This timing relates to the impact of an earlier Easter and Chinese New Year this year. On an in-store basis inventory per square foot was down 7%. On the product side our overall assortments throughout the year were brand-appropriate but not compelling. We were slow to respond to how our clients’ wardrobing needs have evolved. There was little demand for suits and classic separates and it is critical that we reinvent go-to-work product in a modern and stylish way. We are already on it.

Our assortments also lacked enough depth in the vibrant color and more modern silhouettes that our clients now want. When we had more style and color she clearly responded. A good example is our fourth quarter cashmere offering which was very colorful and which did very well. Another example is our special occasion offering this past holiday which featured modern silhouettes and sequins and sparkles. But we clearly have much work to do and we have made good progress over the past few months. We recently completed an exhaustive internal and external diagnostic of the Ann Taylor business to identify opportunities not only in product but also in marketing and the in-store experience. We know we have significant opportunities to dramatically evolve and modernize this brand in a way that addresses the changing needs and preferences of our clients and our overall target audience.

Our review involves shopping with our clients, individual client interviews and focus groups. We learned a lot from this work. We know that our clients are continually evolving and her apparel wants have changed and now we have first hand insight on how they have recently evolved so rapidly. For us to stay relevant and compelling and capture a greater share of wallet we must move quickly and we have. We have begun to affect the second half of 2008 in a meaningful way. I will share more on this with you as the year unfolds.

Our focus for this spring involves significantly increasing our color penetration versus spring last year and ramping up our focus on dresses which continues to be a hot category. We have added more fashion into our assortments for the back half of the year. So from an overall standpoint we are working hard to evolve and elevate the Ann Taylor brand from product to marketing to the in-store experience. I believe we are well positioned today to reinvigorate the brand and move the business forward in an exciting way.

Let’s turn to LOFT. Let me start by stating that I am pleased with the progress we have made in getting LOFT back on track. Our fall and holiday assortments were brand appropriate and our clients responded favorably to the changes we made as evidenced by the strong in-store metrics the division achieved throughout the fall season.

In terms of results net sales at LOFT advanced 3.6% for the year excluding the extra week in 2006. Comp store sales declined 5.4% reflecting the 10% comp decline we experienced in the first half of 2007 as we were transitioning through the product issues that began in last 2006. LOFT’s comp performance improved dramatically in the second half and the margin performance also improved significantly in fall. We are definitely pleased with the improvement of the business heading into 2008. Inventories were well managed throughout the year and we entered 2008 with inventory per square foot down 7% on a total basis and down 34% on an in-store basis. Like Ann Taylor in-transit inventory was up at year end due to the earlier timing of both Easter and Chinese New Year.

On the product side our assortments over the course of the year got much more stylish with the fall season representing the beginning of LOFT’s return to brand appropriate product. Our fall assortments were well balanced, had more color and novelty and had a more appropriate mix of updated classics versus fashion. Our tops business was very strong in fall with sweaters particularly so due to having a lot more color and more seasonalish yarns versus the heavy wools we offered in fall 2006.

Other strong categories in fall included wovens, knit dressing, sleepwear and outerwear. On the other hand our separates business was soft in fall due to too much breadth and lack of category must-haves this year. For the spring our assortments offer significantly more color and novelty than last year and we have increased our penetration in tops which has been a strong category for us. Must-have items include sheet dresses, colorful jeans, patent and colorful accessories, knit jackets and new cardigan silhouettes. We believe LOFT is definitely on the right track and represents tremendous style and value in the market place which we expect to be especially by clients during a tough economy.

Turning to our Factor business, Factory delivered another strong year and was a positive contributor to our overall sales and margin performance. We believe this business will continue to offer attractive growth for the company and we are excited about our upcoming launce of LOFT Outlet this summer.

Our online business continues to grow rapidly and was another positive contributor to our overall growth this year. I am very pleased with the progress we have made in this channel and expect it to continue to deliver strong growth for us.

And finally our new concept, as you know we decided to delay the test of this business given the current macro softness and related difficulties in reading test results in this environment. We believe it is far more prudent to focus our resources against the base business right now.

So as we look to 2008 we are relentlessly focused on strengthening our business, improving our gross margins with tight inventory management, executing our restructuring program with excellence and pursuing growth in a measured and prudent manner. We believe 2008 will be challenging but we also believe that we have positioned the company well to succeed in this environment.

At this point I want to turn it over to Mike to take you through the financials for the quarter.

Michael Nicholson

Thanks Kay and good morning everyone. First I’ll start with a quick summary of the results for the fourth quarter and the full year and then turn to our restructuring program and wrap things up with our outlook for fiscal 2008.

So let’s get started with net sales. Net sales for the fourth quarter were $601 million, an increase of 3.7% versus the prior year, when excluding the $31 million associated with the extra week in 2006. By division excluding the impact of the extra week in 2006 net sales for the quarter at Ann Taylor declined 7% and at LOFT net sales advanced 8%. Comp store sales for the quarter decreased 3.2% with Ann Taylor down 7.8% and LOFT down 0.5%.

Turning to margins, gross margin as a percentage of net sales increased 110 basis points to 48.7% in the quarter versus a gross margin of 47.6% in the fourth quarter last year. This increase was entirely driven by strength at LOFT due to positive client response to the division’s product offering versus last year, partially offset by weakness at Ann Taylor.

SG&A as a percentage of net sales increased 300 basis points to 45.6% compared to 42.6% of net sales in the fourth quarter of last year largely reflecting the impact of the extra week in fiscal 2006 which benefited the SG&A rate in the year ago period as well as the impact of deleveraging due to the lower comp store sales in the fourth quarter.

As you know a significant factor in our results for the quarter and the year was the restructuring program that we launched at the end of 2007. This impacted two four operating profit by $30 million and net earnings by $18 million or $0.30 per diluted share. Excluding the restructuring charge operating income in the quarter was $18.2 million compared with the $30.5 million in operating income that we reported last year. On this same basis net income was $11.5 million or $0.19 per diluted share compared with net income of $21.5 million or $0.31 per diluted share in the fourth quarter of 2006.

Our weighted average diluted shares outstanding for the quarter were 60.1 million shares versus 70.4 million shares in the fourth quarter last year largely reflecting the benefit of our share repurchase program.

Our affective tax rate for the quarter was 38.3% versus 37.9% in Q4 of last year. And during the quarter we repurchased approximately 900,000 shares at a total cost of $26 million.

Turning now to the numbers for the full year period, net sales for the 52 weeks of fiscal 2007 were $2.4 billion which were up 3.7% versus 2006 when we adjust for the extra week last year. By division on an equivalent week basis, net sales at Ann Taylor declined 3.6% and at LOFT net sales grew 3.6%.

Turning to comps, comparable store sales decreased 3.3% in fiscal 2007. By division comparable store sales at Ann Taylor decreased 3.7% in fiscal 2007 and at LOFT comparable store sales decreased 5.4%. As Kay mentioned this decrease for the year at LOFT was entirely due to the 10% comp store decline that we experienced in the first half of the year.

Gross margin as a percentage of net sales decreased 150 basis points to 52.2% in fiscal 2007 versus 53.7% in fiscal 2006. The reduction in gross margin largely reflected lower margins at both Ann Taylor and LOFT for the year partially offset by strength at our Factory division. It is worth noting however that LOFT’s margins were very soft in the first half but fully recovered and were significantly above year-ago in the second half of the year.

SG&A expenses totaled $1,064 million or 44.4% of net sales compared to $1,033 million or 44.1% of net sales in fiscal 2006. This performance largely reflected the negative impacts of the extra week of sales in 2006 as well as deleveraging, almost entirely offset by lower performance-based compensation costs. Excluding the impact of the extra week, our SG&A rate for the year was slightly better than 2006.

In terms of the restructuring impact on the full year, the program impacted fiscal 2007 operating profit by $32 million and net earnings by approximately $20 million or $0.31 per diluted share. Excluding the restructuring operating income in fiscal 2007 was $188 million as compared to operating income of $224 million in fiscal 2006.

On the same basis net income was $117 million or $1.84 per diluted share versus net income of $143 million or $1.98 per diluted share in fiscal 2006.

Capital expenditures for the year totaled $146 million versus approximately $165 million in the prior year. Depreciation and amortization in 2007 totaled approximately $117 million versus the $106 million in 2006. Our total store square footage at year end 2007 totaled 5.4 million square feet, a 7% increase versus the 5.1 million square feet at year end 2006.

During the year we opened 77 new stores and closed 17 ending the year with 929 stores. The Ann Taylor opened 14 new stores in 2007 and closed 13 older ones while LOFT opened 52 new stores and closed four and Factory opened 11 new stores.

Let me now turn to our strategic restructuring program. As you know the program which we announced in January is designed to increase the efficiency, effectiveness and profitability of our company. We expect to deliver $50 million in ongoing annualized pre-tax savings by 2010 of which approximately $40 million is expect to be a cash benefit. We expect this to translate into operating margin improvement of at least 200 basis points at the end of the program. The anticipated pre-tax cost of the three year program is approximately $40 million to $45 million with $15 million to $20 million of the cost representing cash costs. We incurred $32 million in restructuring costs in 2007 with $25 million of this cost representing non cash charges associated with the write-down of assets. This asset write-down relates to all 117 of the stores slated for closure as part of this three year program.

At this point let me spend a moment on the impact of this program that we expect in fiscal 2008. Starting with the costs, we expect to incur one-time restructuring costs of $7 million to $10 million in fiscal 2008 all of which is expected to be cash. On the savings side, we expect to generate ongoing annualized savings of approximately $20 million to $25 million this year. More than half of the targeted savings for 2008 relate to the 13% reduction in corporate workforce that occurred in January and the balance is expected to be achieved through strategic procurement of non merchandise goods and services across the organization. We have centralized our procurement organization which now enables us to better leverage our scale in negotiations ranging from the maintenance; repair and cleaning services for our 900 store fleet to print marketing for window vinyl, or the cash wrap process for example.

Another key element of our restructuring program involves optimizing our store portfolio including the expected closure of 117 stores over the next three years. Sixty-four of these stores are slated for closure in fiscal 2008, of these 25 will be Ann Taylor stores and 39 will be LOFT stores. Roughly half of these closures will occur in the first half of 2008 with the remainder closing toward the end of the fiscal year. These estimated impacts of store closings in 2008 is approximately $35 million in sales with negligible bottom line impact and the annualized impact from these 64 stores is about $110 million in sales and again a negligible bottom line impact.

Turning now to our outlook for 2008, as Maria noted earlier in the call, due to the lack of longer term visibility in this uncertain macro environment we will now be providing quarter by quarter guidance throughout fiscal 2008. For the first quarter which we anticipate will be the most challenging quarter of the year, we expect earnings per diluted share in the range of $0.35 to $0.40. And for the full year we expect earnings per diluted share excluding one-time restructuring costs to be in the range of $1.80 to $1.90.

This full year guidance anticipates the following:

total net sales growth in the low single-digits with comparable store sales flat to slightly negative for the year,

total square footage down approximately 2% at year end reflecting a reduction of square feet associated with the 64 stores being closed in fiscal 2008 related to restructuring partially offset by opening 50 to 55 new stores,

by division, we plan to open approximately four Ann Taylor stores, 15 LOFT stores, 20 to 25 Ann Taylor Factory stores and 10 LOFT Outlet stores,

It is worth noting that the majority of our new store openings are expected to occur in the first half of 2008. Conversely only half of the closings are planned to occur in the first half with the balance weighted toward the end of the year.

Our full year guidance also incorporates costs totaling approximately $15 million associated with the launch of LOFT Outlet this summer and the new concept launch in 2009. Our restructuring program is expected to yield savings of approximately $20 million to $25 million excluding one-time costs of $7 million to $10 million. These one-time costs are not included in our $1.80 to $1.90 guidance for the year. We expect gross margin improvement for the year in part due to much tighter inventory buys in the back half of the year. We do expect our SG&A rate for the year to be under pressure despite the $20 million to $25 million in restructuring savings that we anticipate due to flat to slightly negative comps the $15 million in costs related to our growth initiatives and expected year over year increases in performance-based compensation.

It is our expectation that over the three year period ending 2010 that the 200 basis point benefit we expect from restructuring will be evident in our consolidated results. Capital expenditures for the year are expected to be approximately $125 million versus $146 million in 2007. And finally we expect to continue to repurchase our shares under the company’s existing share repurchase authorization.

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

Kay Krill

Thanks Mike, before we move to Q&A, I’d like to leave you with a few thoughts. Much of what you heard today from us was about how we have planned 2008 conservatively and cautiously which we have and which I believe is very important during this uncertain time. However our focus is certainly not limited to managing the business tightly in this environment. Clearly we are all over that. But even more importantly is the focus we have on moving the company forward aggressively in the number of areas like we discussed today and that we expect to deliver significant value, like our work to totally evolve Ann Taylor. This is extremely important to our long term outlook for growth and the upside associated with getting this right, which we will, is meaningful.

LOFT is another important area of growth for us. We’re pleased with LOFT’s recent performance and believe the business is moving forward in a very positive direction. Other areas to drive value include our restructuring program where we know we have tremendous expense savings opportunity and the expansion of our Factory channel including the launch of LOFT Outlet which we’re very excited about. We’ll also continue to invest in our internet channel due to the tremendous growth we have experienced there. In addition our share repurchase program also represents and excellent way for us to deliver real value to our shareholders. As I said earlier, we believe we are well positioned on multiple fronts for growth and success as the economy improves.

So with that, let’s open it up to your questions.

Question-and-Answer Session

Operator

Your first question comes from Kimberly Greenberger - Citigroup Global Markets

Kimberly Greenberger - Citigroup Global Markets

Good morning Kay, I was very interested in your comments about reinventing the Ann Taylor division in a modern way and I was hoping you could just help us understand in a little bit more detail what that means and then just a follow-up for Mike, I’m not sure I heard you right, I think you said that performance compensation would be up in ’08 and I just was trying to reconcile that with the flat EPS guidance in ’08, thanks.

Kay Krill

Our strategy really has been directed on multiple fronts and first of all as I said earlier, we’ve been doing focus groups, client interviews and in-store feedback sessions and we’ve learned a tremendous amount that’s either validated our thinking or helped focus our efforts, but first and foremost product. Our clients’ product preferences have definitely evolved and we did not keep pace with her wants. She wants more modern and fashionable product that is versatile and current and we are all over that. We’ve infused more style into our assortments for the back half of the year and are going to continue to hyper focus on creating awesome assortments, especially in the categories that she loves and expects from us.

Second is our in-store environment. We feel like we’re not as clear or exciting in-store and we have too many SKUs or choices for her to wade through and she clearly told us that. We had already embarked on reducing our choices for fall but we’ve recently, more significantly scaled back for third and fourth quarters our SKUs and overall choices. We also feel like we have to be more authoritative and stand for key categories and market a new and evolved look for Ann. We have a clear action plan that we’ve already begun and we’re making progress in testing different elements and initiatives in a select group of stores.

And thirdly our marketing, our marketing in 2007 was not memorable to her and not compelling at all. She did not think it was modern. So we’re driving towards creating a more holistic campaign that are modern, chic and sophisticated and more aspirational overall. We have new creative talent at the company now and I am confident that they will significantly evolve our marketing efforts. So it’s really a three-prong approach. It’s not just about product and not just about the in-store environment. We’re taking a more holistic approach to evolving and elevating and modernizing the Ann Taylor brand definitely keeping within the guardrails of the updated classic umbrella. I don’t want any of you to think that we’re going off the deep end here. There is definitely a sandbox that we’re playing in; we’re just going to go up more towards the edge of that sandbox. So we’re all over it. We’ve heard from our clients and we’re actually, the good news is what we heard was she still has a tremendous affinity for the Ann Taylor brand and wants us to get it right and that is very positive news. So we are all over it and I think you’ll see more meaningful change in the back half of the year.

Michael Nicholson

Kimberly in terms of the performance-based compensation as you know 2007 we missed our plans so as a result the P&L did not include a performance-based compensation costs. At this point we are very focused on hitting our plan for 2008 and as a result our guidance does incorporate the related performance-based compensation expense.

Kimberly Greenberger - Citigroup Global Markets

Thanks Kay, we’ll look forward to monitoring the progress.

Operator

Your next question comes from Tracy Kogan - Credit Suisse First Boston

Tracy Kogan - Credit Suisse First Boston

Good morning, Mike or Kay, you guys mentioned that first quarter would be the most challenging so as we think about your guidance for the year, and the improvement your expecting after first quarter, is the improvement more based on what you think will be an improvement in the macro environment or is it that you expect your product to be better or that more of the expense savings will be coming in, in the later part of the year, thanks.

Michael Nicholson

It really isn’t related to our view on macro trend improvement, it really relates to (a) focused sharp control of inventory. To some degree we will have some pressure in the first quarter but once we move to the second quarter and the back half of the year our inventory buys are much more closely aligned to the trend of the business as well as we anticipate product improvement as we move into the back half of the year.

Kay Krill

And significantly too, I just want you to know that Ann Taylor’s assortment will improve meaningfully in the back half of the year. We feel like LOFT is definitely back on track and we’re very pleased with the results so far this year and the reaction from our clients to that brand. So I think that LOFT is going to have a solid and more consistent performance and Ann Taylor will be more back-ended.

Tracy Kogan - Credit Suisse First Boston

And just one follow-up Mike, on the expense savings, is more of that kicking in in the back half or is that also pretty equally weighted through the year.

Michael Nicholson

So here’s how I think about the three components in 2008. In terms of restructuring savings, I think about that in terms of a one-third, two-thirds split between first half and back half. As it relates to the one-time restructuring costs, I think about that as equally weighted between the first half and the second half. And then in terms of the $15 million worth of investment in growth initiatives I think about that as a one-third, two-thirds split between the first half and second half of the year.

Tracy Kogan - Credit Suisse First Boston

Thank you, good luck.

Operator

Your next question comes from Lorraine Maikis - Merrill Lynch

Lorraine Maikis - Merrill Lynch

Good morning, could you just share your inventory buying plans, how are you planning inventory, what are you expecting for comps in the back half of the year and do you think you’ve taken enough of a conservative view on that front.

Michael Nicholson

We are not going to disclose our quarter to quarter comps assumptions, what I will say is that from where we sit today there is a bit of pressure on the first quarter, as we move into the second quarter and the back half of the year, our inventory buy plan is very closely aligned with what we view to be the trend of the business.

Lorraine Maikis - Merrill Lynch

And that’s what’s responsible for the expectations for higher gross margins?

Michael Nicholson

That is a contributing factor.

Kay Krill

It is a contributing factor and also contributing Lorraine is far less SKUs in the Ann Taylor division heading into the back half of the year. There are more choices and more depth around key categories so I think that that will be beneficial as well.

Lorraine Maikis - Merrill Lynch

Thank you.

Operator

Your next question comes from Dana Cohen - Banc of America Securities

Dana Cohen - Banc of America Securities

Good morning everybody, a couple of questions, just following up on the last one are you saying you think gross margin will be down in the first half despite the performance of LOFT in the fourth quarter. Kay what percent of the assortment do you think you’ve impacted for spring and how much can you impact for fall. And then on a longer term basis, as you look back and you say what didn’t I see for ’07, I didn’t see the customer changing, how do you prevent that from happening in the future?

Michael Nicholson

As I look at the rate for 2008 on a quarter by quarter basis, at this point I see pressure in the first quarter and improvement from that point as we move through the second, third and fourth quarter of 2008.

Kay Krill

And Dana the Ann Taylor division, I have been very involved with them for the back half of the year assortments. So clearly I’ve been more involved in the back half. I think that, we did a lot of our focus groups starting last November when it was clear to us that Ann Taylor was starting to falter more than just in traffic and our core clients and the people that we talk to across the country clearly have evolved past us and that they are wanting more fashionable and stylish and more modern choices. They also too, in this economic environment I think it’s really important for us to realize that people are pulling back on their spending and they’re only going to spend on things that are not in their closet. They’re not buying a new suit. They’re not buying new grey pants. They’re buying items that they’re emotionally attracted to and things that will definitely add to their wardrobe and perk them up. So that’s what we’re focused on right now.

In LOFT right now for example, the great color she’s responding to tremendously, any novelty items that are fresh and new, so that’s what we’re trying to infuse in the Ann Taylor division in the back half of the year is to get that more, while reducing our SKUs make it more exciting, more compelling and more colorful and novel instead of too safe where we’ve been.

Dana Cohen - Banc of America Securities

Great, thank you.

Operator

Your next question comes from Liz Dunn - Thomas Weisel Partners

Liz Dunn - Thomas Weisel Partners

Good morning, I was interested in a little bit more on the Outlet business, I noted in your comments that you said that that was, that added to the operating margin in 2007 and I know you’ve lapped the change in your strategy for the Factory business, so could you just tell us how that’s proceeding. Do you think that there are further margin gains from the Factory business and what will the LOFT Factory business do to overall operating margins as that ramps up?

Michael Nicholson

You know as I look at the fourth quarter and the full year, clearly 2007 was a success for Factory as it relates to comp performance as well as total top line growth. In addition that business model does offer us a very healthy margin and we clearly see moving into 2008 an ability to continue to enhance and drive the profitability within that segment of the business.

Kay Krill

And as we continue to grow that division and add more stores you can imagine it will provide additional attractive operating growth for us.

Maria Sceppaguericio

The other thing that I would add to that Liz is that in the current environment it is an attractive alternative given the price positioning of that business relative to the others.

Liz Dunn - Thomas Weisel Partners

But some other retailers are noting the slow down in Factory business, you haven’t seen that same sort of slow down?

Michael Nicholson

That’s the extent clearly that we have in the other two segments of the business from a traffic perspective. Clearly in the fourth quarter there was a change in trend from what we did experience in the first nine months of the year, but looking here the first couple of months of 2008 the traffic trends are positive year on year so that’s encouraging.

Liz Dunn - Thomas Weisel Partners

Okay great, thanks.

Operator

Your next question comes from Jeff Black - Lehman Brothers

Jeff Black - Lehman Brothers

Good morning everybody, Kay I guess to follow-up on an earlier question, it just seems like it’s a struggle to get both of these divisions firing on all cylinders at the same time and you know as we look at you guys, can you just give us some assurance that we’re making operational changes that would ultimately result in more consistency year in, year out at both of these places so we’re always not remaking ourselves?

Kay Krill

Let me just say this Jeff, 2007 was a tough beginning for LOFT because we had product that was very, it was not desirable at all from previous leadership and design that are no longer with us. And we worked very hard to get LOFT’s product back in line with what it should have been and could have been. So we are very excited about where we are going and we have accomplished that nicely. Ann Taylor was primarily affected in the fourth quarter due to the economy coupled with the product offering that was too safe and classic. Our client definitely wanted more style. So to answer you directly I’m putting, I am putting much of my time and effort into both divisions right now to ensure that we’re focused on creating exciting, fashionable assortments and in-store environments that will compel our clients to buy more. It is absolutely my number one priority for 2008 and I’m all over it. We will have more consistency.

Jeff Black - Lehman Brothers

All right, great, thanks. Good luck.

Operator

Your next question comes from Jennifer Black - Jennifer Black & Associates

Jennifer Black - Jennifer Black & Associates

Good morning, Kay in total beyond color you’ve had difficulty with casual wear; suits have been your strength. You talked about modernizing your product, can you talk about casual wear. It doesn’t seem your customers ever responded to your casual offerings, thanks.

Kay Krill

Are you talking about Ann Taylor Jennifer?

Jennifer Black - Jennifer Black & Associates

Yes, I am.

Kay Krill

Okay, we are seeing definitely pockets of improvement in the casual part of the business primarily in the tops area more so than in the bottoms area. We’re struggling with pants right now. We also have a denim initiative that we’re highly focused on because I don’t think our denim is as right as it should be for the brand. We are working on that right now and we have some better choices for the fall season. But I think that the whole casual component of the business really plays into denim and more going out tops and I think we’ve got part of that right and part of it is work in progress for the back half of the year.

Jennifer Black - Jennifer Black & Associates

Great, thank you.

Operator

Your next question comes from Dana Telsey - Telsey Advisory Group

Dana Telsey - Telsey Advisory Group

Good morning everyone, can you talk a little bit about raw material cost increases, what you’re seeing for the second half of the year and how you see your IMU developing in each business particularly as you move on to the LOFT Outlook business which should that have a higher IMU than full price, thank you.

Kay Krill

Dana, we are definitely have a lot of sourcing initiatives in play right now to help us mitigate the global pricing pressures that are really stemming from inflation and currency fluctuation, and raw material price increases. We are definitely working with the merchandising and design teams to better value engineer our product and to position more raw materials in certain key categories and fabrics and yarns, more up front to help mitigate that. So we are all over it but we are absolutely not going to sacrifice our quality levels so it’s definitely a fine balance. But we’re making nice progress. We don’t see it as an issue thus far. And as far as the IMU goes, we are not out to obviously improve the IMU this year, that would be a very tough challenge. What we’re focused on is tightly controlling our inventories and getting better full price selling to improve our gross margin rather than our IMU.

Dana Telsey - Telsey Advisory Group

Thank you.

Operator

Your next question comes from Michelle Tan – UBS

Michelle Tan – UBS

I was wondering on the 53rd week impact to the quarter if you could quantify for us what it meant for SG&A in the fourth quarter and then also whether there was any gross margin benefit to anniversarying the 53rd week last year.

Maria Sceppaguericio

The impact on sales as we indicated was $31 million. The impact on SG&A was far less significant, it’s only a few million dollars. But if you adjust the sales number and then you adjust the SG&A number for a few million dollars, you come up with a very different margin picture.

Michelle Tan – UBS

Sure, I was wondering too though is it not a lower gross margin week last year as well, is there a positive benefit to gross margin that you got in the fourth quarter?

Maria Sceppaguericio

Not associated with the complexion of the week, just the fact that the week gave us an incremental $31 million and most of it falls through. Most of it is purely incremental.

Michael Nicholson

So for the quarter on a reported basis there was a 300 basis point change and when you adjust for that extra week as well as the expenses associated with that extra week, it’s about 150 basis point change quarter on quarter.

Michelle Tan – UBS

Okay great but no real impact on the gross margin line from it.

Michael Nicholson

No.

Michelle Tan – UBS

Okay, thanks.

Operator

Your final question comes from Sam Panella - Raymond James & Associates

Sam Panella - Raymond James & Associates

Good morning, I was wondering if you could give us an update on the collection business at Ann Taylor and then also how beauty did relative to your plan in the fourth quarter, thank you.

Kay Krill

Okay, the collection business continues to be okay in the stores that it’s in. As you can imagine with the slow down in the suit business and the demand for suits that part of the collection business did not do as well, but the dresses and tops did better. So we are taking this as you know, day by day and really looking at building on the successes that we had in the fall season.

Regarding beauty, our beauty initiative was really launched at a very difficult time in the fourth quarter and we believe that that played a factor in the business not meeting our expectations but having said that, the fragrance offering is performing better than the body tier line and we’re continuing to learn a lot about this business and continue to believe that it’s a good product extension for us but probably more so in the fragrance area.

Sam Panella - Raymond James & Associates

Okay, thank you.

Operator

At this time I would like to turn the floor back to management for closing remarks.

Kay Krill

Okay, thank you everyone for your participation and interest in Ann Taylor and have a great day and weekend.

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Source: Ann Taylor Stores Corporation, Q4 2007 Earnings Call Transcript
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