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Executives

Maria Sceppaguercio –IR

Kay Krill – President & CEO

Michael Nicholson – CFO

Analysts

Lorraine Maikis – Merrill Lynch

Kimberly Greenberger – Citigroup

Jennifer Black – Jennifer Black & Associates

Jeff Black – Lehman Brothers

Dana Telsey – Telsey Advisory Group

Dana Cohen – Bank of America

Brian Tunick – JP Morgan

Tracy Kogan – Credit Suisse

Adrienne Tennant – Friedman, Billings, Ramsey

Michelle Tan – Goldman Sachs

Samantha Panella – Raymond James

Ann Taylor Stores Corporation (ANN) Q2 2008 Earnings Call August 22, 2008 8:30 AM ET

Operator

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

Maria Sceppaguercio

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 second quarter of fiscal 2008.

As indicated in our release diluted EPS excluding restructuring charges was $0.54. This compares to $0.51 in EPS on the same basis that we recorded last year representing a 6% increase in a very difficult environment. On a year to date basis, EPS was up 4% to $1.01 versus $0.97 last year.

For the year we continue to expect EPS in the range of $1.80 to $1.90 excluding restructuring charges. For the second half we expect EPS excluding restructuring in the range of $0.80 to $0.90 compared with $0.87 in the second half last year. Michael will take you through the details of our second half expectations shortly.

Turning to our share repurchase program, during the quarter we repurchased approximately 2.6 million shares at a total cost of $66 million. This brings our share repurchase activity to date this fiscal year to $101 million or 4.1 million shares. At the end of the second quarter we had approximately $159 million available under our $300 million share repurchase authorization.

Also this quarter as planned we launched LOFT Outlet with the opening our first 10 stores in the factory channel in July.

Before I turn the call over to Kay I would like to remind you that our discussion this morning may includes forward-looking statements which are subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements reflect the company’s current expectations 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 will hand it over to Kay.

Kay Krill

Good morning and thank you for joining us today. Let me start my remarks by stating that all things considered we are pleased with our financial results in what proved to be a very difficult macro and consumer environment. As you know the weak economy has resulted in very soft traffic that pressured our top line results throughout the quarter.

However the positive news is that we managed our inventories and expenses particularly well during the quarter and together with our stock repurchase program we were able to deliver diluted earnings per share results that were above a year ago.

Our gross margin for the quarter increased almost two full margin points despite the promotional stance we took to move inventory. We closed the quarter with total inventory on a per square foot basis down 4% versus last year with each of the divisions in good shape heading into the fall season.

You may recall our discussion last quarter regarding our inventory buy for fall. We have planned our second half receipts and particularly our fourth quarter receipts very conservatively, in fact, on the assumption of an overall negative comp.

We continue to expect the second half to remain uncertain. We believe this cautious approach will enable us to best preserve gross margin as we did in the first half. Turning to SG&A, on the strength of aggressive cost control and restructuring savings, we held our expenses essentially flat with year ago.

This was despite an 8% increase in our store base, start-up costs associated with LOFT Outlet and an increase in performance based compensation. Michael will take you through the detailed financials for the quarter but let me just state that I am pleased we delivered a 6% increase in second quarter EPS in this environment.

Let me jump right into the performance and outlook for each division, including the very important work we’re doing to evolve and modernize the Ann Taylor brand.

Starting with Ann Taylor, second quarter performance at the Ann Taylor division was meaningfully impacted by weak traffic which was to some degree a reflection of the macro factors and overall consumer reluctance to spend on apparel.

However, we also had a product assortment that was not as modern, stylish or relevant as it should have been. Thus our comp declined a 14.3% for the quarter cannot be totally blamed on economic softness. However on the plus side, the division did a good job managing their gross margin although the comp shortfall caused the division to significantly de-lever SG&A.

In terms of second quarter product, we had some success with dresses, woven halters, feminine knit tops, and bracelets; items that featured print and color as well as versatile pieces with more relaxed end uses also faired relatively well.

Not surprisingly our weakest performers in the second quarter were the more serious and conservative styles and categories such as suits and pants. Before getting into specifics on fall, I’d like to spend a moment on our recent progress to strengthen the Ann Taylor brand.

First you will recall that following extensive research into the brand and its positioning, we confirmed that clients continue to have a natural affinity for Ann Taylor and they want us to be their destination of choice. Ann Taylor has great brand loyalty which we believe will translate into significant potential as we evolve this business to be more exciting, and relevant with a modern chic and sophisticated positioning.

So with this as the foundation, we set out to develop the strategy that we believe will unlock the potential of the brand. To do this, I engaged Christine Beauchamp, a seasoned retail executive and the newly appointed President of Ann Taylor stores to partner with me and the team earlier this year to evolve and modernize our brand positioning.

A good deal of progress has been made over the past six months. Clearly it will take some time to fully realize our brand vision but I am confident that we’re making the changes needed and that Christine is the right leader for the brand at this pivotal time in our evolution of Ann.

Turning now to fall product at Ann Taylor, our fall assortment will begin to reflect a more modern, chic and sophisticated look in September while still preserving the integrity and heritage of the Ann Taylor brand.

Our clients’ apparel needs have clearly evolved requiring us to be more stylish, on trend and versatile. She wants our product assortments to be more focused on fashion must-haves that are relevant today for her wardrobing needs.

We have incorporated more print, rich color and versatility into our fall assortments and our silhouettes are more modern then they have been. We will be more wear-now and our assortments will feature more must-have items including statement jackets, ruffle blouses, new skirt shapes, modern wide leg pants, the motorcycle jacket, and statement necklaces and bracelets.

Also this fall we have significantly reduced our SKU count and we will begin to rollout improvement to the in-store environment. Whereas in the past stores appeared overly assorted, and confusing to navigate, this fall we are establishing key destinations in-store to simplify the shopping experience.

The in-store environment will become more dynamic, modern, and reflective of our evolving brand direction and will include a significant upgrade to our windows in fall. In addition to better product and a better in-store experience, our fall marketing will also begin to reflect our new brand positioning. In fact, look for the September issue of In Style magazine for our five page [gate fold].

We believe we have made progress for fall in evolving to a more modern and chic Ann. We are also excited about our holiday offering which represents new design direction, and features a greater selection of categories and items that are trending well and are expected to be strong for holiday.

Overall we have more newness in our product, our in-store environment, and our marketing then in prior years. We clearly have more work to do to meaningfully modernize the brand but we are on our way.

Turning now to LOFT, our top line at LOFT was also under pressure due to soft traffic and a competitive promotional environment which led to our negative 8.6% comp. However, as was the case at our other divisions, we did a good job managing margin dollars. As a result, LOFT achieved strong gross margin improvement in the quarter.

In terms of second quarter product, tops was clearly a strong category with both sweaters and knits performing well. In particular we saw strong performance from summer must-haves like our dresses, knits, cardigans, casual bottoms, soft woven’s, and print and pattern tops.

Moreover color was also important in the quarter and our color penetration increased significantly versus Q2 last year. On the other hand, the separates and non-apparel categories were weaker during the quarter and drove the majority of LOFT’s comp softness.

For Q2 we believe we would have benefited from infusing more casual and relaxed product into our assortments as this is clearly what she is looking for from us. For fall the product offering is more on trend with what we believe she is seeking.

Our assortments are well balanced and focused on fashion items as well as key wardrobe essentials. We have reduced our SKU count to support this key item focus. We will be offering an expanded assortment of soft blouses, new cardigan silhouettes, a powerful denim presentation, shaped jackets, and new fall dresses.

In addition we are more aware now then we were last year and we have increased our color penetration significantly and added more print to our assortments. Our fall product hits stores beginning in mid September and I expect it to be well received.

I am particularly excited about our holiday assortment this year which features giftable sweaters, tops and accessories as well as great dresses.

Turning to factory, this business continues to deliver strong bottom line results. Despite the soft traffic the division managed its inventories and expenses very well to deliver an impressive increase in gross margin. In addition we launched LOFT Outlet in July in 10 locations and while we’re still very early initial indications are very favorable.

We plan to open another four LOFT Outlet stores in the second half and expect this business to represent significant future growth for us.

Finally our internet business continues to perform well and despite the weak economy registered double-digit sales growth in the quarter. In addition this channel is becoming and increasingly important marketing driver for us as it represents a cost effective way of reaching our clients and advertising our brands.

With that I’d like to turn it over to Michael who will take you through the financial details of the quarter and our outlook for the balance of the year.

Michael Nicholson

Thanks Kay and good morning everyone. This morning I’ll start with a review of our results for the second quarter, then I’ll provide you with an update on our strategic restructuring program and then wrap things up with our outlook for the second half. So let’s get started with our second quarter results.

Starting with net sales, for the second quarter net sales declined 3.6% versus year ago to $592.3 million reflecting our overall comp store decline of 10.8% partially offset by growth from new stores and our internet channel.

By division net sales at Ann Taylor declined 14.4% to $185.7 million on a comp store decline of 14.3%. At LOFT net sales declined 3.5% to $299.1 million on a comp store decline of 8.6%.

Turning to margins, gross margin in the quarter improved 180 basis points to 52.4% versus 50.6% in Q2 last year. This improvement was achieved despite the very difficult macro and consumer environment. Importantly all three divisions posted solid margins with LOFT and factory up significantly versus year ago.

Our SG&A spending for the quarter at $261 million was less than 1% above last year, despite the 8% increase in our store base, higher performance based compensation expense and planned investments in LOFT Outlet. This was due to aggressive expense management and restructuring program savings.

During the quarter restructuring program charges impacted pre-tax income by $3.1 million and net income by $2 million or $0.03 per diluted share. In the second quarter last year, we incurred $900,000 in restructuring costs which amounted to $500,000 on an after-tax basis or less then $0.01 per diluted share.

Excluding these restructuring costs operating income in the quarter was $49.7 million compared to $51.9 million last year. Net income on the same basis was $31.2 million or $0.54 per diluted share compared with net income of $32.2 million or $0.51 per diluted share in the second quarter of 2007.

Our weighted average diluted shares outstanding for the quarter declined 9% to 57.6 million shares versus 63.4 million shares in the second quarter last year.

Our effective tax rate for the quarter was 37.4% versus 39.4% in Q2 last year and for the full year we now expect our effective tax rate to be approximately 38.5%.

Depreciation and amortization in the second quarter totaled $30 million versus $29 million in the prior year. Capital expenditures for the second quarter totaled $39 million versus $42 million in the prior year.

Our total store square footage at the end of the second quarter totaled 5.6 million square feet, an 8.3% increase versus the 5.2 million square feet at the end of the second quarter 2007.

During the second quarter we opened 23 new stores and closed five ending the quarter with 959 stores. The LOFT division opened nine stores and closed three, Ann Taylor factory opened four new stores and LOFT Outlet opened 10 new stores. We did not open any Ann Taylor stores but closed two during the quarter.

Turning now for a moment to LOFT Outlet, as you may know we launched this business in late July with the opening of 10 stores in the outlet channel. While it’s still very early initial indications are quite positive and we’re pleased with our results to date. We are also planning to open four additional LOFT Outlet stores in the second half bringing our LOFT Outlet store count to 14 by year end.

The net investment behind the launch of this business in 2008 is expected to be approximately $10 million.

Let me turn now to an update on our strategic restructuring program, we continue to make very good progress on our restructuring program which is benefiting our results this year. As a reminder we expect the program to generate at least $50 million in ongoing annualized pre-tax savings by fiscal 2010 and for 2008 we expect ongoing annualized savings to be in the range of $20 million to $25 million excluding the $10 million in restructuring program costs that we anticipate this year.

You’ll recall that a key element of our restructuring program involves optimizing our store portfolio including the closure of 117 stores over the next three years. In 2008, 64 of these stores will be closed with 25 Ann Taylor closing and 39 LOFT stores closing.

Year to date we’ve closed 18 stores, eight of which were Ann Taylor stores and 10 of which were LOFT stores. And we expect to close the remaining 46 stores during the second half of fiscal 2008 with the majority of these stores closing at the very end of the fiscal year.

And finally as a reminder the sales impact of these 2008 closures is expect to total approximately $35 million. Turning the P&L impact of our restructuring, for the second quarter we incurred approximately $3.1 million in pre-tax restructuring costs comprised of $2 million in cash charges related to planned store closures and other restructuring costs, and $1.1 million in non-cash costs related to the additional write-down of assets associated with these planned closures.

In the second quarter last year we incurred $900,000 in pre-tax cash charges related to consulting services to support the launch of the program. For the first half our pre-tax restructuring program costs totaled $6.9 million in 2008 versus $900,000 in 2007.

Moving on now to our outlook for the balance of the year, as Kay stated earlier we have planned our second half very conservatively with inventory receipts down significantly versus last year and importantly aligned with our expectations that the macro and consumer environment will remain challenging.

We expect our defensive positioning during this period to enable us to maximize gross margin dollars as we did in the first half. In addition aggressive cost containment and restructuring program savings are also expected to benefit us throughout the balance of the year.

So for the second half, we anticipate earnings per diluted share excluding restructuring costs to be in the range of $0.80 to $0.90 and this compares to the $0.87 per share we recorded in the second half of 2007.

Breaking this down by quarter, we expect third quarter EPS to be in the range of $0.50 to $0.55 which is below year ago. This performance incorporates not only our outlook for a continued weak economy but also the impact of higher performance based compensation expense versus Q3 last year. We reduced our performance expectations and therefore our accrual for performance based comp.

Also impacting results in Q3 are start-up costs associated with LOFT Outlet, and you’ll also recall that the third quarter last year was by far our strongest of the year so we’re up against our toughest compare of the year in the coming quarter.

For the fourth quarter we expect earnings per diluted share excluding restructuring costs, to be in the range of $0.30 to $0.35. This anticipates that the economy will continue to be tough and also factors in the expectations for higher performance based comp expenses and LOFT Outlet start-up costs.

However it also factors in the benefits of a tight inventory receipt plan that is very focused on categories that have been trending well and that are expected to be strong for holiday. It also recognizes that the fourth quarter last year was a very soft quarter for us, with an inventory buy that was in hindsight much greater then the demand we experienced in a rapidly deteriorating economy.

So for the year we continue to expect EPS excluding restructuring costs to be in the range of $1.80 to $1.90 per share and this full year guidance anticipates the following factors.

We expect total net sales to be flat to down slightly with the comparable store sales down in the mid single-digit range for the year. We expect total square footage growth of approximately 1% driven by a significant increase in 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 which is partially offset by new store openings.

We plan to open approximately 66 new stores in 2008 with 25 LOFT stores, four Ann Taylor stores, 23 Ann Taylor factory stores, and 14 LOFT Outlet stores planned. We expect the net cost of launching LOFT Outlet to approximate $10 million in fiscal 2008.

We anticipate restructuring program savings of approximately $20 million to $25 million excluding anticipated restructuring costs of approximately $10 million. We continue to expect gross margin improvement for the year although we expect our SG&A rate to be under pressure due to negative comps, costs associated with the launch of LOFT Outlet and an expected year-over-year increase in performance based compensation.

We expect to close the year with inventories down in the low to mid single-digits compared to year end 2007. We expect capital expenditures to total approximately $125 million to $130 million. And finally we expect to continue to repurchase shares under the company’s existing share repurchase authorization.

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

Kay Krill

Thanks Michael, before we go to your questions, I’d like to leave you with these thoughts. In terms of Q2 we delivered a very respectable performance in a very difficult environment. We did this on the strength of aggressive inventory management, and expense control, as well as restructuring program savings, each of which we expect to continue to benefit us in the back half.

We are planning for the fall season to remain challenging, although we expect to deliver EPS in the range of last year. In this environment we will continue to manage the business aggressively to maximize profitability as we did in the first half. As Michael indicated, Q3 is our toughest comparison of the year and Q4 is our easiest and we believe that our much tighter inventory buy this year, particularly in the fourth quarter will benefit us in the back half.

Finally we continue to be very focused on strengthening our brands and positioning the company for long-term success. We believe we have a significant opportunity to modernize the Ann Taylor brand and we are excited about our plans to do this.

For LOFT we continue to focus on strengthening the brand and maximizing its potential and we believe this business is well positioned in the current soft economy given the quality and style the brand offers at great value.

For both brands our product gets increasingly better as the fall season progresses, and we believe our holiday offerings are on trend and significantly better then last year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Lorraine Maikis – Merrill Lynch

Lorraine Maikis – Merrill Lynch

On inventory, it looks like inventory down 4% versus a significantly lower run rate for your comp, can you just reconcile that on how you’re planning your back half buys?

Michael Nicholson

First let me talk about our second quarter ending inventory position, so you mentioned in total down 4%, and if you strip out the impact of beauty and Ann Taylor, we’re actually down 5%. Then when you take a look at it by division, actually Ann Taylor finished the quarter with total inventory excluding the impact of beauty down 17% with LOFT up 4%.

And then when you further look at the composition of our inventory the spring carryover year on year at Ann Taylor is down more than 20% and within LOFT its down in the high single-digit range so in term of our composition of our inventory that we’re heading into fall with we are very comfortable and as it relates to our inventory receipt plan, it is in fact very closely aligned with the current run rate of the business.

Lorraine Maikis – Merrill Lynch

Could you just an update on how much of the $10 million you’ve spent already on LOFT and where you are on garnering your cost savings? Do you think you’ll be at that $25 million run rate by the fourth quarter?

Michael Nicholson

First in terms of LOFT and the $10 million impact for 2008, it’s about a one-third, two-thirds split for the year and then as it relates to the restructuring program, $20 million to $25 million and from where I sit today we are very comfortable that we will hit that objective.

Operator

Your next question comes from the line of Kimberly Greenberger – Citigroup

Kimberly Greenberger – Citigroup

Could you comment on the gross margin comparisons as we go through the second half of the year, I think you indicate here in the second quarter LOFT and factory had real meaningful increases in their gross margin performance, as we get into third and fourth quarter are there specific divisions that have easier comparisons then others? And then it looks like the negative mid single-digit comp guidance for the full year would imply third and fourth quarter comps not worse then down 4% to 5% and I think the comparisons get slightly more difficult relative to the second quarter, I’m trying to reconcile your comments on the tough economy with the idea that same store sales will get better from here.

Michael Nicholson

As I think about the gross margin rate moving into the back half of the year, we mentioned in the third quarter that we’re up against a very difficult compare so as I think about modeling you just need to take into account that we had a very strong third quarter last year and actually a very strong gross margin so the year on year compare difficult in the third quarter, much easier as we move into the fourth quarter.

And then as you mentioned just in terms of our expectations for the back half of the year, you’re absolutely correct, that we are looking at a mid single-digit negative comp for the back half of the year.

Kimberly Greenberger – Citigroup

Is there anything that you’re doing to help improve the run rate on comp or do you think it will be really product driven?

Kay Krill

I believe it will be product driven and definitely what we have done is invested in categories that have been trending well thus far this year. We were able to chase and change into the September and October assortments in both divisions so we feel far better about September and October then we do August at this point.

Operator

Your next question comes from the line of Jennifer Black – Jennifer Black & Associates

Jennifer Black – Jennifer Black & Associates

Could you talk about raw material costs and your ability to eventually raise prices, is that something you’ve thought about?

Michael Nicholson

Our sourcing strategies to date as it relates to supplier and factory rationalization as well as efforts to drive costs out of the product, we have been able to successfully mitigate the pressures of cost increases to date and we actually believe as we move through the back half of the year that we have successfully mitigated that pressure.

As we move forward into 2009 it’s an issue that’s on our radar that we continue to aggressively go after.

Kay Krill

We have not had to raise prices in either division thus far.

Jennifer Black – Jennifer Black & Associates

I’m thinking of nine months from now because leather prices have practically doubled and everything has gone up.

Kay Krill

Through 2008 and obviously we’re only through the first part of 2009 right now and we are in good shape. We’re just beginning to start fall right now.

Jennifer Black – Jennifer Black & Associates

Could you talk about what kind of progress you’ve made on the casual side of the business, I did see some denim tops, a little more denim in the store? In the Ann Taylor division.

Kay Krill

That has been a goal for us to improve the casual assortment in that division and I feel like we now have a pretty good template of what that needs to look like and it needs to be more chic and more sophisticated then LOFT and I think we’re on the right track. We have a very strong denim assortment coming into the stores actually in a week through September and October for Ann Taylor and I think we have a little bit more modernity in the tops assortment also going back to that as well as the trophy jacket which we’re standing behind.

So we’re really trying to not have a dedicated casual section in the store like we used to, but actually have it throughout the store because we believe that’s how she’s buying it and she wants that versatility.

Operator

Your next question comes from the line of Jeff Black – Lehman Brothers

Jeff Black – Lehman Brothers

I was hoping to get more color on the expense rates in the back half, in 3Q and 4Q and just get an understanding of what we’re anticipating in terms of start-up costs and comp costs, do you think we’ll be able to hold these levels flat to last year and then in 2009 what kind of flow-through do we expect from the restructuring in terms of ongoing benefits?

Michael Nicholson

In terms of SG&A dollars as we move into the back half of the year, first on rate basis, obviously because of the negative comp the rate will be pressured. We did a fantastic job in the second quarter of essentially holding our costs year on year and that will continue to be our goal as we move forward into the back half of the year and it will be challenging but that is the goal.

As it relates to the incremental flow-through of restructuring into 2009, at this point I feel it’s premature to specifically talk about the 2009 impact. What I’d say at this point is we are very comfortable with the $20 million to $25 million for 2008 and we are very comfortable that we’re on target to deliver our $50 million component by 2010.

Operator

Your next question comes from the line of Dana Telsey – Telsey Advisory Group

Dana Telsey – Telsey Advisory Group

Can you talk about the Outlet division, how that contribution to margin differs at all from the full price stores and what you’re seeing in the rent structures at outlet stores versus the others and as you think about LOFT and Ann Taylor and the outlet malls, is the differentiation as you see going forward as clear as it is in the regular malls and any other elements of the merchandising that we should be aware of?

Kay Krill

The factory division is doing very well on the bottom line and we’re very pleased with its contribution and as far as the LOFT Outlet vis-à-vis Ann Taylor factory stores, we are watching that very closely and as a matter of fact we have some stores in the same center and we’re seeing virtually no cannibalization. We will be watching that as we continue to rollout LOFT Outlets but we’re very pleased with that outcome.

Dana Telsey – Telsey Advisory Group

On the merchandise margin overall, what do you see as the opportunities for the merchandise margin go forward, is there more merchandise margin improvement to come and if so is it from product cost or is it from pricing?

Kay Krill

I think it’s from full price selling, that is really our goal right now. This is not an IMU story and I don’t think any of us anticipate IMU to get much stronger in the future especially in this economy. I think right now all of our focus is on tighter inventory buys, which will allow us to sell more full price.

Operator

Your next question comes from the line of Dana Cohen – Bank of America

Dana Cohen – Bank of America

Gross margin dollars were flat in the quarter and I was wondering if you could give us any sense by division, was that about the same by the two divisions or was it different?

Michael Nicholson

What I’d say is that LOFT and factory, there was meaningful expansion year on year and Ann Taylor was essentially inline with the prior year on a rate basis.

Dana Cohen – Bank of America

I was talking more dollars because the dollars come in, so if something was up something else had to be down.

Michael Nicholson

I think with LOFT and the margin rate expansion as well as factory, what that infers is that dollars were up and with Ann Taylor and the pressure on the top line margin dollars were down year on year.

Dana Cohen – Bank of America

I just wanted to confirm your comments from before it sounds like what you’re saying is that SG&A dollars would be flat in the back half of the year as there were in the second quarter?

Michael Nicholson

They were flat in the second quarter; they were up for the spring season. We did a terrific job in managing our expenses in the second quarter. That is the goal going into fall season but there’s pressure with new store growth in terms of dollar growth year on year.

Dana Cohen – Bank of America

So more likely they’ll be up a bit in the back half of the year?

Michael Nicholson

I think that’s a fair assumption. Also taking into consideration the ongoing investment in LOFT Outlet, higher performance based compensation so in terms of dollars, there’s pressure on dollar growth as we move to the back half of the year.

Dana Cohen – Bank of America

Any sense on the cadence of the comp over the quarter, was it even, were there any nuances there?

Michael Nicholson

I would say that we’ve moved away from the measurement of monthly comp and we’re really taking a longer term view at this point.

Dana Cohen – Bank of America

On LOFT, understand the gross margin dollars being up but any clarity or nuance you can give us where LOFT’s been holding extremely well here both in terms of comp and margin through the first quarter, second quarter comps were more under pressure, in your view what was the rate of change Q1 to Q2?

Kay Krill

As far as Q2 goes, I think definitely we had too much in the refined separates area that we should have infused the assortments more with casual and relaxed separates because that’s really what performed in the second quarter. I think also in hindsight dresses were phenomenal particularly knit dresses and dresses that were under $50 and we did not have enough investment in that category.

Also the non-apparel whole bucket did not perform as well in the second quarter as the first quarter. So as we head into the fall season though I really feel like the product gets much better in September and really reflects the influence of the new design direction at LOFT and is much better then the August product which is really a transitional month for us.

I feel like we’ve invested in the third quarter in the categories that did perform well in the second quarter such as feminine casual separates and denim and soft blouses, there’s a lot more categories that we obviously invested behind in the third quarter but I feel like we’re on track and there’s no emphasis on refined separates in the back part of the year which is really what we should be focused on is casual. And I also think that the holiday assortment is far better this year then it was last year in LOFT.

So I’m more hopeful for September forward in LOFT then the second quarter and the month of August.

Operator

Your next question comes from the line of Brian Tunick – JP Morgan

Brian Tunick – JP Morgan

It feels like we’ve seen a lot of friends and family coupons or 25% off the entire store, are you seeing the benefit on the top line that you’re expecting those days or do you worry about training your customer not to pay full price longer term. On tailored and suiting’s they continue to struggle worse then the chain, what is a percentage of the business right now and where do you think you can shrink that to? And then can you talk about the marketing spend for the back half of the year either in dollars or in rates?

Kay Krill

We definitely have been approaching this from a quarterly perspective and we are seeing some benefit on the top line and we really feel like right now in this environment it is about the deal but its not going to hurt the full price business during the entire quarter because these are limited days that we’re doing this.

Regarding the tailored suiting, absolutely it is not something that she is wanting right now and in the Ann Taylor division, that particularly hurt us for the first half of the year and as you can imagine going into the back half of the year we’ve taken that category down substantially and we’re focused more on versatile separates and dresses and non-apparel and great tops, rather then the suit business.

I think that the separate jacket category is going to be more meaningful as we head into the back half of the year but serious suitings is definitely not something she wants right now and we have not invested in that.

Michael Nicholson

For competitive reasons we’re not going to specifically discuss dollars or rate as it relates to marketing but I think if you go back to Kay’s comments our expectations as it relates to the quality of marketing as we move into the back half of the year, we’re very confident that we will see an improvement in the quality of the marketing and the message and the messaging in the marketing year on year.

Kay Krill

If you compare our windows in the back half of the year which is a significant marketing type vehicle for us, versus where we’ve been you’re going to see a significant upgrade in our windows and in the in-store environment which is also something that we think is going to benefit the back half.

Operator

Your next question comes from the line of Tracy Kogan – Credit Suisse

Tracy Kogan – Credit Suisse

Could you talk preliminarily about what you’re thinking for 2009 in terms of store growth and CapEx and then secondly can you talk a bit about the strategy at LOFT and Ann Taylor to bring in product from outside designers into the assortment and how you build assortments around this product if you do and how big it is as a part of the assortment?

Michael Nicholson

I think it’s a little too early to talk 2009 but would be happy to engage in that conversation in another six months.

Kay Krill

Regarding outside vendors, it’s a very, very small percentage of what we’re doing right now and as a matter of fact in LOFT we have just delivered tops, very few tops across the chain. They definitely have performed well and it’s something that we have been chasing fashion but it’s a very small percentage of the business and in Ann Taylor we have tried some outside resources, brands in the store and its limited to about 20 to 25 stores so it’s very insignificant right now.

We’re still focused primarily on our design and our proprietary brand.

Tracy Kogan – Credit Suisse

So it’s not something that you’re seeing growing significantly in the next 12 months?

Kay Krill

No, no we’re not.

Operator

Your next question comes from the line of Adrienne Tennant – Friedman, Billings, Ramsey

Adrienne Tennant – Friedman, Billings, Ramsey

Can you talk about the 117 stores that are slated for closure over the next three years; can you give us any color about the sales productivity levels, gross margin impact to the whole or four wall and how we might think about that as they come out of the total store pool?

Michael Nicholson

In terms of the total annualized impact of the 117 in terms of total top line, that approximates $210 million to $220 million in volume. In terms of the 64 that will come out of the fleet during fiscal 2008, the annualized impact of the 64 approximates $110 million and when you think about the calendarization of when these stores will close, the 64, the impact on 2008 is about $35 million.

I think we’ve previously stated that the operating income contribution on a dollar basis of these stores was negligible so essentially what we’re suggesting is $200 million comes out of the top line with no impact on the bottom line.

Adrienne Tennant – Friedman, Billings, Ramsey

So the thought there was that those would never be more than breakeven to the bottom line, is that the thought?

Michael Nicholson

There was an assessment that we performed literally store by store, market by market to assess where they have been historically and what we thought we could realize from these properties going forward also taking into consideration new malls within the local markets and made a strategic decision to edit these locations.

Adrienne Tennant – Friedman, Billings, Ramsey

Is there anything that’s consistent about them, whether it’s a C mall or street locations or anything like that?

Michael Nicholson

As it relates to the LOFT component of the store closures, many of those stores were some of the earlier openings in the life of LOFT.

Adrienne Tennant – Friedman, Billings, Ramsey

Did you give us the breakdown of the 117 between the two?

Michael Nicholson

We’ll get back to you on that.

Adrienne Tennant – Friedman, Billings, Ramsey

Can you talk about some of the changes that you’re doing to the marketing for the back half of fall, when you talk about modern are you going after a different target age range as well?

Kay Krill

I don’t think this is as much about age as it is about a style. I think the marketing definitely in Ann Taylor is just more modern and more sophisticated then we have been in the past especially vis-à-vis last year. Last year was not a good marketing moment for us. So I think that this year we definitely look more relevant and we look more stylish and it’s exactly who we’re going after from a client perspective.

Operator

Your next question comes from the line of Michelle Tan – Goldman Sachs

Michelle Tan – Goldman Sachs

Could you fill us in on some of the open positions that are still there at the two divisions, and then any key ones that have been filled in the meantime? Also on the penetration of dresses and the assortments versus last year at both divisions?

Kay Krill

The key positions that we really have open right now that we will be filling shortly is the Head of Design for Ann Taylor which we’re making very good progress and I think we’ll have an announcement shortly. The Head of Stores for the Ann Taylor division is open but our Head of Stores for LOFT is overseeing both brands right now. And we will be announcing a new Chief Supply Chain Officer very, very shortly. So those are the key positions that are open right now.

Michelle Tan – Goldman Sachs

What is the penetration of dresses and assortments for fall relative to where it was last year?

Kay Krill

Relative to where it was last year, we’re definitely up ticking it from last year. It’s been very meaningful in both divisions for the whole first half of the year. As a matter of fact I think it was a missed opportunity in both brands. We should have had more and definitely we are ramping it up for fall. We did not have much of a dress assortment in either division last year.

Michelle Tan – Goldman Sachs

Any magnitude that you can give me on how significant?

Kay Krill

I don’t think I want to give percentages.

Operator

Your final question comes from the line of Samantha Panella – Raymond James

Samantha Panella – Raymond James

On the businesses at Ann Taylor division, could you give us an update on where you stand with collection also how celebration and beauty both are doing?

Kay Krill

On the product extensions in really both divisions, we really are viewing beauty and celebration to be the two product extensions that we feel have the most potential and we definitely have strategies behind both of those to grow in the future.

We are folding our collection line into our overall assortment and really looking at it as a good, better, best merchandising strategy for Ann Taylor beginning this quarter so that we do have a good, better, best price point and quality and selection in all stores. And we’re still testing our maternity offering at LOFT and will be continuing to monitor its performance and determine if we’re going to stay in that business or exit that business.

Samantha Panella – Raymond James

I thought originally with the 64 closings in 2008, I though we were expecting about half in the first half of the year and then the remainder in the second half, what changed with the closing plans?

Michael Nicholson

Actually nothing changed, what we’ve executed year to date is essentially in line with our original plan.

Operator

There are no further questions at this time.

Kay Krill

Thank you for joining us this morning and have a great weekend.

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Source: Ann Taylor Stores Corporation F2Q08 (Qtr End 08/02/08) Earnings Call Transcript
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