Ann Taylor Stores Corp. Q1 2008 Earnings Call Transcript

Ann Taylor Stores Corp. (ANN)

Q1 2008 Earnings Call

May 22, 2008 8:00 am ET

Executives

Maria Sceppaguercio – Senior Vice President Communications and Investor Relations
Kay Krill – President, Chief Executive Officer

Michael Nicholson – Chief Financial Officer

Analysts

Kimberly Greenberger – Citigroup

Lauren Levitan – Cowen & Co.

Dana Cohen – Bank of America

Jennifer Black – Jennifer Black & Associates

Jeff Black – Lehman Brothers

Tracy Kogan – Credit Suisse

Liz Dunn – Thomas Weisel

Betty Chen – Wedbush Morgan

Robin Murchison – Suntrust

Barbara Wyckoff – Buckingham Research

Lorraine Maikis – Merrill Lynch\

Michelle Tan – Goldman Sachs

Presentation

Operator

Good morning ladies and gentlemen and welcome to Ann Taylor Stores Corporation’s first quarter 2008 earnings conference call. (Operator instructions) I would now like to turn the call over to Maria Sceppaguercio, Senior Vice President of Communications and Investor Relations.

Maria Sceppaguercio

Thank you and good morning everyone. Here with me today to discuss our results is Ann Taylor President and CEO, Kay Krill and our CFO Mike Nicholson. As you know earlier this morning we issued our results for the first quarter of fiscal 2008 following our pre-announcement of the quarter last week.

As indicated in our actual results reported this morning, diluted EPS excluding charges associated with our strategic restructuring program announced in January were $0.47 which was in line with the $0.45-$0.47 guidance range we provided last week. This performance reflects a 2% increase versus the $0.46 we reported in Q1 last year.

During the quarter we recorded $3.7 million in pretax restructuring charges. On an after tax basis this amounts to $2.3 million or $0.04 per diluted share resulting in GAAP EPS of $0.43. In our announcement this morning we also provided guidance for the second quarter diluted EPS, excluding restructuring costs in a range of $0.42 to $0.47 and we reiterated our full year diluted EPS outlook of $1.80 to $1.90.

Turning to our share repurchase program, during the quarter we repurchased approximately 1.5 million shares at a total cost of $35 million leaving us approximately $225 million available under our current $300 million share repurchase authorization at the end of Q1.

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 I’ll hand it over to Kay.

Kay Krill

Good morning and thank you for joining us bright and early today. As we indicated in our release, the first quarter was a good one for us, particularly in the context of the difficult macro and consumer environment right now. Despite the highly promotional nature of the sector this quarter, we successfully managed our business to deliver a gross margin that was only 40 basis points below a year ago and inventories that were significantly below a year ago.

From my perspective, this quarter was all about controlling what we could control and driving down our cost of doing business. By division, Loft was the standout, achieving solid sales growth and a significant increase in gross margin while holding the line on expenses.

The division delivered a double digit increase in operating profit for the quarter. More on the divisions in a moment. Our focus during the quarter was consistent with the two-pronged strategy we laid out last quarter. That is, an unwavering focusing on strengthening our core businesses and reducing our cost structure.

I am pleased with the results we achieved during the quarter and I am confident that continuing to execute against this strategy is the right course of action for these uncertain times. In fact, we are planning to deploy the funds previously targeted for the new concept to the core businesses in the back half of this year.

We will continue to pursue growth in 2008 via new Loft stores and the accelerated expansion in the factory channel, including the launch of Loft outlet this summer. So as we look ahead to Q2 and the balance of the year, we remain cautious due to the macroeconomic environment and the growing need for us to ramp up promotional activity to compel her to make a purchase.

To this latter point, during the early part of Q1, our clients responded to very targeted promotions but she has since become more resistant and is increasingly seeking storewide incentives to purchase. As a result we have planned Q2 with these trends in mind.

Clearly we are hopeful that as we enter Q2, warmer weather and increasingly better product at Loft will create some excitement and improve our overall traffic patterns. But importantly, we are not counting on that to happen.

So with that, let me turn to a brief discussion of the divisions. Starting with Ann Taylor, as expected Ann Taylor had a tough first quarter. The changes that we believe are required to reinvigorate the business were not yet in place and in fact will not begin to become evident to you until the fall season as we’ve previously discussed.

For the quarter, net sales at Ann Taylor declined 11% with comp store sales down 11.5%. Notwithstanding this softness, we managed our inventory levels well and ended the quarter with an in store inventory per square foot excluding beauty, down 23%. As you would expect, margins were under pressure and ended the quarter below year ago.

On the product side, we continued to work through assortments that are too serious and not as compelling, modern or versatile as they need to be. Where we did offer more relaxed and fashionable products, she responded. Categories like dresses and knit tops.

On the other hand, the suit business continues to be under pressure. This reflects reduced interest in classic professional business attire in favor of more modern, sophisticate and versatile items that can take her from day into evening and across various end uses.

She is not looking for what is currently in her closet and the economy is playing a role in this as well. In fact, our research has clearly indicated that our clients are pulling back on apparel purchases overall. The good news is that she continues to have a natural affinity for the brand and wants us to be her destination of choice.

Ann Taylor has great brand loyalty which we believe will translate into significant potential as we evolve this business. Our strategy for Ann Taylor is directed on multiple fronts. First and foremost, we are focused on the product which we are evolving to be more modern and sophisticated and importantly more relevant to her current wardrobing needs.

We’ve infused more style into our assortments for the back half of the year and we are hyper focused on creating an awesome product, especially in the categories that we know she wants right now. We believe that we have not been authoritative enough in key categories. We are addressing this by scaling back our SKU choices by approximately 30% in the third and fourth quarters of this year in order to send a clear, more authoritative message in store.

Second, we have dramatically upgraded our marketing for fall. We have created imagery that is far more compelling and aspirational. You will definitely notice the difference. And finally, we believe we have a significant opportunity to elevate and energize our in store environment.

We believe our current in store experience is not as exciting or clear as it should be. It is not easy to navigate and not authoritative enough in telling our fashion messages. Without getting into too much detail about our plans in this area, in addition to reducing our SKUs, we are also working on improving our window messaging and better highlighting our fashion statements in the store so clients will definitely know what we believe will be important for her to buy for fall.

You will begin to see some of these improvements in the third quarter. Moreover, filling and open Director of Stores position with the level of talent that can partner with Visual and Marketing to drive the changes we require in store is a big opportunity for us.

Let me just make one final point before turning to Loft. While we are clearly moving the dial on Ann Taylor, you should know that we are very mindful of the guardrails of the brand. Now, turning to Loft.

Loft had a very good quarter, clients are clearly responding to the product and the division achieved a 7.5% increase in sales on a 0.7% comp gain in a very difficult environment. With the exception of traffic which was down high single digits for the quarter, Loft’s in store metrics were all strong.

The division delivered a gross margin significantly above year ago and effectively managed expenses to drive an impressive improvement in operating profit for the quarter. Notably, Loft ended the quarter with an in store inventory per square foot down 22%. In terms of product, color, novelty and fashion newness drove business.

Relaxed, separates, knit and woven tops, dresses and cardigan sweaters were standouts. On the other hand, accessories and shoes struggled a bit. Finally, a point worth noting is the management team transformation we have affected at Loft. While we don’t issue press releases every time we hire talent, virtually the entire Loft senior leadership team is new, including the Lead Merchant and the Heads of Design, Stores, Marketing, Planning and Finance.

They have great chemistry as a team and are collaborating well to make smart business decisions that are already positively driving the business. They are also building their teams beneath them with people that have the experience and capabilities to run a billion dollar plus and growing business.

I am very pleased with the progress we have made to position Loft for future growth. This type of evolution that we successfully affected at Loft is an ongoing area of focus for us across the entire company. Now, turning to our factory division.

Factory also had a very good quarter despite some slowing traffic during the period at the outlet centers. We believe the general economic softness is having some impact on this price sensitive consumer. Nevertheless, factory achieved a strong gross margin for the quarter and we continue to view this business as an important growth driver for us.

In fact, this coming July, we are planning to open ten Loft outlet stores and we believe this business will be every bit as successful as our existing Ann Taylor factory stores. Finally, our internet channel continues to deliver strong top and bottom line results for the company.

This channel is not only a successful business but it is also becoming a meaningful and effective marketing vehicle for both brands. With that, I’ll turn it over to Mike for a discussion of the financials.

Michael Nicholson

Thanks Kay and good morning everyone. This morning I’ll start with a summary of our first quarter results then I’ll provide you with an update on our strategic restructuring program and then wrap things up with our outlook for the second quarter and the full year fiscal 2008.

So let’s get started with our first quarter results, starting with net sales. Net sales for the quarter were $591.7 million, an increase of 2% versus the prior year. By division, net sales at Ann Taylor declined 11.1% to $197.6 million and at Loft net sales advanced 7.5% to $295 million. Comp store sales for the quarter decreased 4.3% with Ann Taylor down 11.5% and Loft up 0.7%.

Turning to margins, gross margin at 53.2% of net sales was only modestly below the 53.6% we reported in the first quarter last year despite the very difficult environment. Both Loft and Factory achieved strong gross margins while Ann Taylor was below year ago.

SG&A as a percentage of net sales increased 60 basis points to 45.6% and that’s primarily due to the negative impact of deleveraging during the quarter, higher performance based compensation expense and planned investments in Loft outlet, all of which were partially offset by restructuring program savings.

Restructuring program costs impacted operating income by $3.7 million in the quarter and net income by $2.3 million or $0.04 per diluted share and I’ll talk more about the strategic restructuring program in a moment.

Excluding the restructuring costs, operating income in the quarter was $44.9 million compared with $49.6 million last year. Net income on the same basis was $28.2 million or $0.47 per diluted share compared with net income of $35.1 million or $0.46 per diluted share in the first quarter of 2007.

For the quarter, weighted average diluted shares outstanding declined by 12% to 59.9 million shares versus 68.4 million shares in the first quarter last year. Our effective tax rate for the quarter was 37.8% versus 39.7% in the first quarter of last year. The effective tax rate for the first quarter of this year includes 2% of favorable impact due to a onetime discrete item.

For the remainder of fiscal 2008, we expect our effective tax rate to be approximately 39.5%. Depreciation and amortization in the first quarter totaled approximately $31 million versus $28 million in the prior year. Capital expenditures for the first quarter totaled $26 million versus $15 million in the prior year.

Our total store square footage at the end of the first quarter totaled 5.5 million square feet, a 6.9% increase versus the 5.1 million square feet at the end of the first quarter 2007. And finally during the first quarter we opened 25 new stores and closed 13 ending the quarter with 941 stores.

The Ann Taylor division opened 4 new stores during the quarter and closed 6, while Loft opened 8 new stores and closed 7, while Factory opened 13 new stores. Now let me turn to our strategic restructuring program.

As you will recall, this program was announced last January and is designed to increase the efficiency, effectiveness and profitability of our company over the next three years. We incurred the lion’s share of the onetime costs associated with this plan in fiscal 2007 and as previously communicated, we expect to incur an additional $7 to $10 million in restructuring costs in 2008.

On the savings side we continue to expect to generate ongoing annualized savings for approximately $20-$25 million this year. A key element of our restructuring program involves the optimization of our store portfolio, including the expected closure of some 117 stores over the next three years.

In 2008, 64 of these stores will be closed with 25 Ann Taylor stores closing and 39 Loft stores closing. And all 13 stores closed in the first quarter were part of our restructuring program.

Turning to the P&L impact of our restructuring for the first quarter, we incurred approximately $3.7 million in pretax restructuring costs of which approximately $2.2 million were noncash costs related to the additional write down of assets associated with planned store closures and $1.5 million were cash charges.

On the savings side, we’re making good progress and we’re beginning to realize some savings in SG&A largely due to the workforce reduction initiative that was implemented in January as well as some early results from our strategic procurement initiatives.

At this early stage in the program, we’re tracking on plan for 2008 and our outlook for the total program savings of approximately $20-$25 million for the year remains on target. And, by 2010, we expect to recognize ongoing annualized pretax savings in the range of $50 million.

Turning now to growth, as we announced last week, we will not be pursuing our new concept, although we will be proceeding with the launch of Loft outlet later this summer. Costs related to Loft outlet are expected to be approximately $10 million in 2008.

We had previously expected to invest approximately $5 million behind the new concept in the back half of this year and our current plan is to redeploy that investment against our core businesses, either in the form of incremental marketing or more aggressive promotional activity to drive purchase during what is likely to be a very competitive promotional period.

Now before I discuss our outlook, I did want to take a moment to quickly tough upon some recent changes we made to our credit facility. Late last month we increased and renegotiated on more favorable terms our existing senior secured revolving credit facility in a transaction that was significantly over subscribed.

Our new facility which was led by Bank of America replaces and renews the prior one and was upsized from $175 million to $250 million. Among the benefits of the renewed facility are the additional $75 million in liquidity, the opportunity to further upsize the facility by an additional $100 million, favorable pricing and a five year extension.

Now in keeping with our past practice, we do not anticipate borrowing against the facility to fund working capital needs of the business as our operating cash flow remains very strong. Nevertheless, we believe having access to additional liquidity is prudent for a company of our size. It gives us the opportunity to be less conservative than we have previously with regard to the amount of cash we maintain on our balance sheet at any given point in time.

And in this regard, our view of total liquidity has broadened to include not only cash but also availability under our revolver. Now let’s turn to our outlook for 2008. For the second quarter we expect earnings per diluted share excluding the impact of restructuring costs to be in the range of $0.42 to $0.47.

Traffic trends in the past few weeks at all divisions have become even more volatile and we are seeing that clients are expecting broader incentives than in the past to purchase and I expect that this will put additional pressure on us as we navigate through the second quarter.

We’ve built this cautious perspective into our guidance for the second quarter and while we are hopeful that trends will improve, we are not banking on that to happen and if it does, we will revisit our outlook for the year but at the present time we are comfortable with our previous EPS guidance of $1.80 to $1.90 for the year.

And our full year guidance now anticipates the following key factors: we expect total net sales growth in the low single digits with comparable store sales slightly negative for the year. Total square footage is expected to grow by approximately 1% driven by a significant increase in square footage for the factory channel, including Loft outlet, almost entirely offset by a decline in square footage at both Ann Taylor and Loft.

And this decline reflects the reduction in square footage associated with the restructuring program, partially offset by some new store openings. We now plan to open approximately 66 new stores versus our previous expectations to open 50-55 new stores and this change in outlook reflects our intention to expand even more aggressively in the factory channel and the pull forward of some projected fiscal 2009 Loft store openings.

So the 66 new stores for 2008 break out as follows, 25 Loft stores, 4 Ann Taylor stores, 23 Ann Taylor factory stores and 14 Loft outlet stores. We expect the 64 stores that are being closed this year to reduce net sales by approximately $35 million in fiscal 2008 with minimal operating income impact. We also expect net investment costs of approximately $10 million associated with the launch of Loft outlet.

Our full year guidance also includes restructuring program savings which are estimated to be approximately $20-$25 million excluding anticipated restructuring costs of approximately $7-$10 million.

We expect to achieve gross margin improvement for the year with our SG&A rate expected to be under pressure due to slightly negative comps, costs associated with the launch of Loft outlet and an expected year over year increase in performance based compensation.

Capital expenditures are forecasted at approximately $125 to $130 million for the year. 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. We are pleased with the results for the quarter that Mike [inaudible]. Aggressively managed our inventories and expenses to achieved results that exceeded our own expectations. Loft was clearly the standout this quarter and I am very pleased with how much progress that division has made.

I believe that our strategy to focus on strengthening our core brands and reducing costs is the right one in this environment. I also believe that the simplicity of this focus reduces distractions and rallies the organization around what is proving to be a winning strategy. With that, I’d like to open it up to your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Kimberly Greenberger – Citigroup.

Kimberly Greenberger – Citigroup

I was hoping you could provide some color in Q1 gross margin was a bit better than we had been looking for, it appeared that the stores were more promotional and I’m wondering if you could talk about the promotional activity in Q1 at both brands and how it came in relative to your expectation. And then just secondarily talk about your inventory management strategy for third and fourth quarter.

Kay Krill

The gross margin obviously varied by division. In Loft’s case, we were less promotional this year versus last year and the margin was significantly above last year. In Ann’s case, we were definitely more promotional than last year and the gross margin was below year ago.

Michael Nicholson

From an inventory management perspective and we talked about this on the year end call, at that point and from where we sit today, as we progress throughout the year we have continued to tighten our buys to be more closely aligned with the trends that we see within the business, the traffic trends as well as the in store metrics.

And we believe that the gross margin opportunity that we realized in the first quarter that that opportunity will continue to be there as we progress throughout the year hence our assumption as it relates to our guidance that we believe that we are going to be able to maintain and in fact grow our gross margin rate quarter over quarter as we move through the balance of the year.

Kimberly Greenberger – Citigroup

On the promotional activity, at Loft it was very clear that the clearance markdowns were meaningfully below last year, were the planned promotions throughout the quarter also below last year and then the same question for Ann Taylor, although it appears the clearance activity there was somewhat higher.

Kay Krill

Definitely the clearance markdowns and the planned promotions were lower in Loft versus first quarter last year. As you recall, Loft had a very tough quarter last year and we were very promotional the majority of the quarter.

And Ann Taylor, we did both targeted promotions and storewide promotions throughout the quarter to liquidate the inventory to get in a good place going into second quarter. We also utilized our online channel to email more promotional messages far more this year than we did last year.

Kimberly Greenberger – Citigroup

Is that a strategy you hope to pursue throughout the year this year?

Kay Krill

Absolutely, it’s working.

Operator

Your next question comes from Lauren Levitan – Cowen & Co.

Lauren Levitan – Cowen & Co.

I was hoping you could give us some additional thoughts related to this comment that the customer is demanding a higher level of all store promotion versus the more targeted promotions you were able to excite her with in the first quarter. What implications do you think that has as you go into the back half of the year, can you give us some sense as to what implications that has for the gross margin.

And then since we’ve seen such variability between Loft and Ann over the last couple of years I’m wondering if there’s any consideration to giving better transparency into the segment performance at the EBIT margin level so that we can better understand what’s really driving the business as you work through some of the changes at Ann Taylor stores.

Kay Krill

First the more targeted promotions versus storewide, at the very beginning of Q1 we were more successful with targeted promotions overall in both divisions such as a tops promotion or a dress promotion that were planned in the business.

But as we progressed through the first quarter, we saw that those were not as effective, especially the latter part of April that we needed more storewide incentive to get her in the door and once that got her in the door she definitely purchased. So we are being more planful about those for the remainder of the year knowing that we most likely will have to count on those as we progress through the back half of the year. Hopefully we will not have to but we’re planning our business that way.

Michael Nicholson

And from a segment basis, at this point, there are no plans to provide or breakout further the segment information across Ann, Loft, Factory and the Internet division. But as it relates to our quarterly earnings call we will begin to talk directionally about performance on both the top line gross margin basis and a bottom line basis consistent with what we did during our speaking points today.

Lauren Levitan – Cowen & Co.

Mike you talked about the way you’re going to think about your liquidity. Can you give us some sense as to if there’s a minimum cash balance that you want to maintain on the balance sheet relative to your seasonal needs and to your cash, share repurchase plans?

Michael Nicholson

Historically we operated in the range of anywhere between $100-$150 million and as we sit here today, we think that there’s an opportunity to operate the business with less cash in the balance sheet and I would suggest that we believe that we can operate in the range of $50-$75 million going forward. Our business is pretty predictable in terms of the cash flow patterns, we’ve studied the historical cash flow generation and we believe now we can manage the business with a tighter band of cash.

Operator

Your next question comes from Dana Cohen – Bank of America.

Dana Cohen – Bank of America

First of all on Ann division, what was the inventory if you add back beauty?

Kay Krill

The difference was about a point higher.

Dana Cohen – Bank of America

So minus 22 versus minus 23.

Kay Krill

It was not a big difference.

Dana Cohen – Bank of America

And then how should we be thinking about SG&A dollar growth for the rest of the year, is the first quarter going to be the trend and then also help us to think about just sort of what are the hurdles for the bonus pools in light of the quarter was down, so what are the metrics that management has to clear here?

Michael Nicholson

From an SG&A dollar basis, as we continue to layer in more stores over the balance of the year I would expect to see some growth in absolute dollars period on period as we work through the balance of the year. As it relates to the bonus hurdles, I would suggest that the annual earnings guidance that we have provided represents sort of our baseline hurdle in terms of performance based compensation that we have incorporated into our financial projections for the year.

Dana Cohen – Bank of America

And then, when you say that the dollars will grow, are you talking growth faster than Q1?

Michael Nicholson

To some degree a bit as we begin to layer on those incremental stores over the balance of the year.

Operator

Your next question comes from Jennifer Black – Jennifer Black & Associates.

Jennifer Black – Jennifer Black & Associates

I wondered if you could talk about how you are evolving the casual side of the business at the Ann Taylor division and if you could talk a little bit about the tops to bottoms ratio, it just seems like that customer like you said is not buying suiting so how do you evolve the business?

Kay Krill

Well the casual part Jennifer is really, we need to elevate it more throughout the entire store. One of our primary challenges and what we’re working on for the back half of the year is to dramatically modernize and evolve the Ann Taylor product to be more modern and sophisticated.

And that really holds true across the store. I don’t think the Ann Taylor casual assortment looks as modern or sophisticated today than it will look like in the back part of the year. We know that’s an important element for us, we know that our clients definitely want that from us.

But we also have to be very mindful that we differentiate it dramatically from what the Loft assortment looks like because she expects more elevation and more contemporary product in the Ann Taylor store and we’ve got to provide that for her.

Tops to bottoms, we are definitely, our tops business is much stronger right now than our bottoms business and we think that really has a lot to do with the economy that people actually don’t need a new pair of pants unless they change size and if they want something new and emotional, a top definitely is the way to go. So our tops business is stronger than the bottoms right now.

Jennifer Black – Jennifer Black & Associates

And looking at the casual business, about what percent would you say is denim?

Kay Krill

Well it really varies by division, it’s about 20% in Loft, it’s probably only about 5-6% in Ann Taylor.

Jennifer Black – Jennifer Black & Associates

And then lastly, can you talk about Collection and the Celebrations line?

Kay Krill

The Collection line is we have been testing it in 24 stores for this season and the business has performed better in some locations than other locations. But as you can imagine, the suit and more classic separates piece of it did not do well this quarter or last quarter for that matter.

Dresses and select tops and accessories did better. So we’re really baking these learnings into our go forward approach. And Celebrations, we still believe is a really attractive product extension for us and I also feel that we need to modernize this product offering as well. It’s been a little of the same for the past year and we really need to be more exciting and special. And we have some new partnership with an outside vendor to help reinvigorate that product line in the back part of the year.

Operator

Your next question comes from Jeff Black – Lehman Brothers.

Jeff Black – Lehman Brothers

On the inventory, inventory just came in really good shape and the last time we were down this low we were generating gross margins, more specifically, meaningfully higher than what it seemed like you’re guiding to.

I mean where do we feel bad about what needs to happen in terms of clearances, is that what you’re saying or do you think the degree of promotions in 2Q is just going to be meaningfully higher and can you sort of framework that for us? And meaningfully higher than 1Q because I’m just trying to get to the, what appears, it appears to us again that inventory would really be set up for better gross margin than you’re talking about.

Michael Nicholson

As Kay mentioned just in terms of the consumer and what we’ve seen over the course of the last few weeks and the customer now really requiring storewide promotional activity in order to drive purchase, we are anticipating pressure on AUR as we move from the first to the second quarter and as we mentioned, we have incorporated that thinking and that latest view of trend into our guidance assumption as we move into the second quarter and the back half of the year.

Should the retail and macro environment turn a bit and or the consumer feel a little bit better about her wallet, then there potentially could be some AUR upside. But at this point and stage of the game, we don’t feel it’s prudent to plan on that happening.

Kay Krill

We feel it’s less clearance oriented and more storewide incentives in order to get her in the door.

Jeff Black – Lehman Brothers

When you talk about taking the SKU or altering those and moving those down, can you just give us a little bit more insight into what you’re doing there and how does that impact the inventory levels in the back half? Where do we see inventory on a per square foot level in the year?

Kay Krill

On the SKU choices, one of the things that we feel as a company and we also have gotten some external feedback from our client base is that the Ann Taylor assortments specifically are far too broad and too many choices. And as she walks in the door she gets overwhelmed and doesn’t know how to navigate the store.

So what we have done for the back part of the year is specifically reduce the SKUs about 30% each month, so we can be more authoritative and stand behind key fashion messages that we believe in because as people walk in the door now, they don’t know what we believe in.

So this is a huge opportunity for us to really highlight what the must-haves are for fall, be very clear with our setup and very clear to her as to what she has to have for fall. Because we still believe the back part of the year, people really don’t need anything, they’ve got to be hit over the head with what are the emotional must have items of the season are.

So that’s really our strategy and we think the store will look better, we think it will be easier to navigate and we will have clear messages from window through the throat of the store.

Michael Nicholson

And from a dollars per square foot basis, we’re targeting mid to high single digit declines across all divisions as we work our way from the first quarter to the back half of the year.

Kay Krill

Also, let me just jump right in, I failed to say is that we do have more key items also within the Ann Taylor assortments that we lacked for the spring assortment and we’re buying those deeper. So it’s less about, you know inventory will be down but the mix of the store will change. There’ll be more depth in certain categories and less breadth in others.

Operator

Your next question comes from Tracy Kogan – Credit Suisse.

Tracy Kogan – Credit Suisse

I had a follow up on an earlier question about SG&A dollars. I was wondering if you could update us, I know you said the new stores would be flowing into SG&A but how about the timing of the expense savings, are you still feeling like that’s going to be one-third in the first half and the rest in the back half?

Michael Nicholson

Yes so for 2008 in terms of savings at this point, we believe that there’s a $20-$25 million opportunity. As I sit here today we could be moving from a one-third, two-third to a 40, 60 to a 50/50.

So like I said, in terms of the first quarter, the bulk of the savings relate primarily to the organization realignment initiative that we affected in January as well as we’re starting to see some savings come online related to our strategic procurement initiative.

And if we are even more successful and able to accelerate those savings, we’ll sort of see us be able to pull in a half of those savings in the first half of the year. So overall we’re very pleased with what we see three months into the year. We still believe there’s a $20-$25 million opportunity out there for the full year 2008.

Kay Krill

One thing that I would add to that too is that as we launch Loft outlet you will start to see the ramp in SG&A associated with that. So that will build as the year progresses. At the same time we’re going to be reducing costs, so you have some competing elements going on at the same time. But as those quarters come we will explain o you what’s going on.

Tracy Kogan – Credit Suisse

Are you still expecting to open the majority of your stores in the first half and close the majority in the second half?

Michael Nicholson

From a closure perspective, absolutely. In terms of an opening perspective, it’s fairly equally weighted. So the majority of the 64 closures back half of the year, from a store opening perspective, I’d say it’s equally weighted.

Kay Krill

And Loft outlet specifically is 10 are in July and then 4 are later in the third quarter.

Operator

Your next question comes from Liz Dunn – Thomas Weisel.

Liz Dunn – Thomas Weisel

I’m curious why is now the right time to get a little more aggressive with the store opening plan for the Loft outlet and also the comments about cash, I understand that you have the available liquidity but given the environment, can you just help us understand your thought process for getting more aggressive in these two areas given how difficult things are out there.

Michael Nicholson

In terms of Loft outlet, this is a concept that we believe to some degree we’ve tested with the factory concept. We believe it’s a very, very profitable business model and we really deem it to be a low risk investment with a higher return proposition.

There are a few stores, a handful of stores related to Loft that three months ago we thought we were going to be able to defer those openings to 2009 and as a result of ongoing landlord negotiations and the dynamics of the marketplace, there were opportunities to pull some stores that were deferred from 09 back into 08 at very favorable pricing.

From a cash and liquidity perspective, really the renewal and upsizing of the revolver was the business really capitalizing on an opportunity with one of our more significant business partners. And again from a cash perspective, from where we sit today, if we look back historically, we now believe that we probably were a little bit too conservative in terms of the amount of cash and the cash that we thought that we needed to run the business.

And again as we look back, our cash flow generation patterns are pretty predictable and we believe within a $50-$75 million range or band, that we can continue to manage the business much more effectively with a lower cash balance.

Liz Dunn – Thomas Weisel

Is it all related to the fact that your first quarter performance was a little better than expected?

Michael Nicholson

Not at all, absolutely not. This was ongoing dialogue that I really began to engage in with the leadership team and the Board when I first stepped into the business in the third quarter of last year.

Liz Dunn – Thomas Weisel

Okay so you’ve gotten your hands dirty a little bit and really gotten into the numbers, you feel more confident.

Michael Nicholson

Absolutely.

Operator

Your next question comes from Betty Chen – Wedbush Morgan.

Betty Chen – Wedbush Morgan

I was wondering if you could talk a little bit more about the direct marketing. It sounds like as you mentioned earlier that it is proving to be very effective. Could you remind us the number of names on the database that you’re reaching now, either in total or by concept? And then secondly, I was wondering if you could talk about the beauty business and how that’s been trending so far.

Kay Krill

As far as the direct marketing aspect of our business, you know that is still a viable part of our business but what has been more viable this past first quarter has been our email activity versus last year. We virtually had hardly anything last year and this year we are emailing more.

Our offers that would have been on an easel last year per se and we emailed to the entire database. And I’m not going to get into the number of names that we have on our database because I think that’s proprietary information. The beauty business, definitely we are taking this year as a learning year for beauty.

We launched it in fourth quarter of last year which was not an ideal time in the economy to launch a new product line like that. But having said that, our fragrance business is much stronger than the body care component of the beauty business, so we are proceeding with fragrance and really kind of re-hauling how we do body care before we go into the other divisions.

We also have hired a very small seasoned team in beauty that come with great expertise from our competitors. So we’re very happy to have their knowledge on board now to take us forward.

Betty Chen – Wedbush Morgan

Mike could you remind us the breakout of the cap ex, how much is for store openings and IT and other initiatives?

Michael Nicholson

So for the year a range of $125-$130 million. New store capital is in the range of about $70 million and about another $30 million of IT spend.

Operator

Your next question comes from Robin Murchison – Suntrust.

Robin Murchison – Suntrust

One, is there any new merchandise and design talent at core Ann Taylor or are there slots available to be filled and secondly, I wanted to just get you to update or reiterate the Loft outlet, the difference between the price points core Loft outlet. And then lastly if you could speak to any cost side, what do you see happening on the costs side, any pressures.

Kay Krill

As far as the openings in the Ann Taylor division, we have two senior level positions open, their Head of Design and the Head of Stores and we are progressing very nicely and hopefully we’ll be close on those in the next month. Regarding the Loft outlet, what the difference is in prices is about 25-30% less in retail price from Loft to Loft outlet which is pretty similar to where we sit with Ann Taylor to Ann Taylor factory.

Michael Nicholson

From a product pricing or cost perspective and we talked about this on the call the last yearend and third quarter of last year that there are a number of sourcing initiatives that are underway within the enterprise that we believe will help us mitigate increases in global pricing in 2008.

So it runs the range from vendor consolidation working with our fewer more important vendors as well as value engineering efforts underway within the business units, the merchants and the designers. And I would say one of the more recent headlines is oil prices and that’s an area that we’re keeping an eye on and there will be some pressure but we don’t believe it to be a material risk or a material pressure to the business the balance of the year, but we’re keeping our eye on it.

Robin Murchison – Suntrust

As you think about it today, what do you think the ultimate unit count is for core Ann and Loft? How many can you have as you ratchet down the, how many stores.

Kay Krill

We are thinking we still are in the 300-350 range for Ann Taylor and we’re still in the 700-800 range for Loft. And Ann Taylor factory we have said that we still believe it’s about a 125 store opportunity and we believe the same thing for Loft outlet.

Operator

Your next question comes from Barbara Wyckoff – Buckingham Research.

Barbara Wyckoff – Buckingham Research

Consistency has been a big problem over the years, getting both divisions moving forward. You talked a little bit about the big picture, but what’s happening to get this going and then where can operating margins go over time? And is there anything that would stand in the way of Loft and Ann margins, Ann Taylor stores being at similar levels assuming sales trends are consistent.

Second is given the demise of the bridge market do you see an opportunity for Ann Taylor stores to go after this customer and perhaps a little older customer perhaps in the Collection area. And then with regard to Loft, in the past you tooled around with girls and maternity in the Loft division, what’s your feeling these days on these brand extensions?

Kay Krill

The notion that Ann Taylor got soft because I was supporting the Loft team is really a completely inaccurate comment and as CEO of the company, I have to spend my time on many things and if one of our businesses is softening in any way, I will focus extra time on it.

And the product at Ann Taylor was appropriate for the brand the back part of the year but the team was really slow to respond to all the rapid changes that were taking place in our client base. And as a result, the assortment became less than compelling and was definitely not fashionable for much of the second half or the first quarter of this year.

So I have now jumped in and tried to help them to reinvigorate the Ann Taylor product and absolutely try to evolve and modernize the Ann Taylor brand because I think that was the major problem. Loft I feel like is in a good place, they have a new team, they’re marching forward on the brand promise and I don’t see any issues there.

Michael Nicholson

Over time we believe that we can move the entire enterprise back to a double digit range and at this point, our goal looking at assessing everything we see inclusive of our strategic restructuring initiative, we believe that there’s an opportunity looking at 2006 as our baseline to get back to 12-14% operating profit range over time.

Barbara Wyckoff – Buckingham Research

Okay and then by division just is there anything that would stand in the way of the two divisions being somewhat the same?

Michael Nicholson

Well to some degree because of the size of Loft’s business, there’s an opportunity to further leverage their infrastructure. So as I look at the 12-14% range because of the size and scope of the Loft business, there’s clearly an opportunity for them to further leverage their cost structure.

Kay Krill

Absolutely, I think differentiation is really a key part to having us be more consistent and have consistent performance and as we are rapidly trying to modernize and elevate the Ann Taylor brand, we are looking to that product to be more sophisticated and modern and elevated while Loft will always be the more spirited and fun and casual and relaxed component.

And I feel like they are in a good place and we want to keep them marching as to how they’ve been marching for the past six months and then Ann Taylor is really the opportunity. And as we further differentiate, I think that the performance will be more consistent.

Barbara Wyckoff – Buckingham Research

You had said in the past that maternity and little girls, are you vacating, just not thinking about those businesses anymore, focusing on Loft adult?

Kay Krill

We definitely have vacated the little girls, we haven’t done that for about a year and maternity is in very select stores and in the online business and we’re still really looking at the potential of that right now.

Operator

Your next question comes from Lorraine Maikis – Merrill Lynch.

Lorraine Maikis – Merrill Lynch

You talked about some change in the store environment in the back half and I was just curious as to the cost associated with that and is that a refresh program for the stores or are you just thinking of tweaking windows and fixtures and things of that nature?

Kay Krill

It’s not as much of a refresh or a remodel program, it’s more about how do we have a more exciting and energizing environment in the stores so the client has a better experience.

And it really starts with the reduced SKUs and making the store easier for her to navigate through, be more authoritative on key messages and fashion messages and to have more exciting windows in the entryway into the store to be more compelling. And this is not necessarily going to cost us more overall, we’re going to divert some marketing dollars into the visual world, the in store world in order to do so.

Kay Krill

The decision to reinvest the $5 million that you had planned to use for the new concept, will that specifically be marketing or do you think you’ll have to absorb that in promotions in the back half?

Michael Nicholson

At this point it really depends upon the trend of the business and the overall dynamics of the marketplace. It could be marketing or we may find ourselves having to reinvest that $5 million in promotional activity in order to drive units and volume.

Operator

Your final question comes from Michelle Tan – Goldman Sachs.

Michelle Tan – Goldman Sachs

You talked about the strength of the online business earlier on, can you give us a sense of where the penetration of that business is now and kind of I know you don’t give specific profitability by segment but just a sense on a relative basis where online stands versus factory and retail today and where it could go.

Michael Nicholson

Internet is a very profitable business segment for us. Within the Ann Taylor division it represents about 10% of the total division’s sales and something less than that for Loft.

The business has been growing over the last few years at double digit rates and we continue to believe that that’s an area we should continue to invest to not only drive new customers to the website but as well as an opportunity for us to communicate with our existing customer base. And we’ve seen great success with that strategy in the first quarter of this year.

Michelle Tan – Goldman Sachs

Is it your most profitable channel at this point yet or is it still ramping up in terms of.

Michael Nicholson

I think it’s early and the segments are very different and the infrastructure required to run online versus a factory versus an Ann versus a Loft are very different. So to some degree, they’re really not comparable as it relates to the infrastructure required to run the business.

Michelle Tan – Goldman Sachs

Just on the mix of where you stand today versus the more serious traditional looks at Ann Taylor versus the more casual or updated styling that you’re trying to expand, where is the penetration today and where are you looking to take it to?

Kay Krill

The penetration of the professional aspects of Ann or go to work aspect of Ann is about 40% of the business. And we really feel it is much less at Loft, it’s like 5%. So that’s why Loft has definitely not been as hurt in this first quarter as Ann has.

But what we’re trying to do is we definitely are known as professional, the Ann Taylor brand, top of mind, the first word that comes out of her mouth is professional. And we really want to embrace that right now and really show her a more modern way to go to work.

We think that’s the opportunity after having many focus groups across the country and talking to our external panel, that’s what she’s looking for us. She’s still going to work but she’s going to work in a more modern way. She’s wearing dresses, she’s wearing pants with sweaters, pants with blouses, jeans with jackets, she’s definitely wearing more relaxed clothing to work. So that is our strategy for the back half of the year to just make the overall assortment more modern and sophisticated.

Operator

This ends the question and answer session of today’s call.

Kay Krill

Thank you everyone for your participation and interest in Ann Taylor and have a great day

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