AnnTaylor Q2 Earnings Call Transcript

123jump.com Staff
30 Aug, 2010
New York City

The women''s specialty retailer quarterly sales grew 3% to $483.47 million on comparable sales rise of 6.1%. Net quarterly income was $18.61 million. The company earned 31 cents a share versus a loss of 32 cents a share in the year-ago quarter and estimates third quarter sales to be $495 million.

AnnTaylor Stores Corp. ((ANN))
Q2 2010 Earnings Call Transcript
August 20, 2010 8:30 a.m. ET

Executives

Judith Pirro – Vice President, Investor Relations
Kay Krill – President and Chief Executive Officer
Michael J. Nicholson – Executive Vice President and Chief Financial Officer

Analysts

Jennifer Black – Jennifer Black & Associates
Lorraine Hutchinson – Bank of America/Merrill Lynch
Neely Tamminga – Piper Jaffray
Michelle Tan – Goldman Sachs
Brian Tunick – J.P. Morgan
Roxanne Meyer – UBS
Marni Shapiro – The Retail Tracker
Laura Champine – Cowen and Company
Stacy Pak – SP Research
Samantha Panella – Raymond James
Janet Kloppenburg – JJK Research
Dana Telsey – Telsey Advisory Group

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Ann Taylor Stores Corporation''s second quarter 2010 earnings conference call. At the request of the company, today''s conference call is being recorded. If you have any objections, you may disconnect at this time. Following the prepared remarks by the company, you will have the opportunity to ask questions. I would now like to turn the call over to Judith Pirro, Vice President, Investor Relations. Please go ahead.

Judith Pirro

Thank you, Tammie and good morning everyone. We''re very pleased you could join us to review our results for the second quarter and first half of fiscal 2010. I''m here this morning with Kay Krill, Ann Taylor''s President and CEO and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter and provide an update and then Mike will review the financials in more detail. After that, we''ll open it up for your questions.

Before turning it over to Kay, we would like to remind you that our discussion this morning includes forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company''s current expectations as of August 20, 2010, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially.

With that, let me hand it over to Kay.

Kay Krill

Good morning, everyone. Thanks for joining us today to hear more about our second quarter and the initiatives we have under way to build on our progress in the second half of the year and beyond. For the second quarter, the company delivered substantially stronger earnings over the second quarter of last year.

Our EPS of $0.32 excluding charges and our sales and operating margins as well underscore the significant progress we have made over the past year. In fact, our more than five-fold increase in operating profit was driven both by higher sales and a 260 basis point gross margin improvement, reflecting higher full priced selling, especially at the Ann Taylor brand.

We have also continued to be extremely disciplined in managing our expenses. Overall, sales for the company increased to approximately $484 million, compared to $470 million in the second quarter last year. Total comparable sales increased more than 6%.

Our strategy of focusing on delivering top-line growth while maximizing gross margin and carefully managing inventory levels has delivered and continues to deliver strong results. Our gross margin rate was 55%, a record for a second quarter period, driven by significant improvement at the Ann Taylor brand and a solid performance from LOFT.

We have entered the third quarter with clean inventories at levels which we believe position the company for profitable top-line growth in the fall season. Our balance sheet continues to be exceptionally strong with more than $260 million in cash at quarter end. This represents an increase of more than $55 million since the end of the first quarter and approximately double the cash that we had at quarter end, a year ago and we have no debt.

We continue to look at ways to use our strong balance sheet and free cash flow to further enhance shareholder value. To that end, I''m pleased to report that our Board has voted to expand our existing share repurchase authorization to $400 million. We now have approximately $260 million currently available under this authorization to repurchase our shares.

Now, let''s turn to the brands. Ann Taylor, the Ann Taylor brand achieved outstanding results as the earlier momentum continued to accelerate throughout the quarter. Comparable sales for the brand increased more than 15%.

By channel, this includes a 20% increase at Ann Taylor Stores, a 29% increase in the online business and a more than 6% increase in our factory stores. Notably, the comparable sales trend for the brand became stronger each month over the course of the quarter.

Importantly, the brand''s gross margin rate was also significantly higher across all three channels, reflecting strong full priced sales. In fact, all of our comp growth at the Ann Taylor brand was driven by full priced sales. And our gross margin comp once again dramatically outpaced our sales performance due to the strength of the full priced offering.

We were pleased that our merchandise offerings were compelling and drove her to purchase in spite of the competition on price available to her. Clearly, our client continues to demonstrate a strong desire for our feminine and versatile fashion that is the hallmark of the iconic Ann Taylor brand.

Turning to product. Our go-to-work categories that include suiting, separates and dresses performed exceptionally well. And in tops, momentum in cardigans, knits and wovens continued. Jewelry remains a standout.

From a marketing perspective, our team has continued its heightened focus on getting the word out about the new Ann and we are seeing the results. As you know, we''ve been utilizing a multi-touch but cost effective strategy to highlight the new design aesthetic, generate greater overall buzz for the brand and drive traffic in store and online. As a result, we''ve seen good success in re-engaging lapsed clients, attracting new customers and driving the overall momentum of the business.

For fall, we are continuing with the same strategy and are investing in direct mail programs, select advertising, PR and heavy up-marketing in a limited number of urban markets. We also continue to expand our use of digital and social media as a tool for engaging our clients. Finally, we are very excited that Naomi Watts is featured in our fall campaign and is creating a nice buzz for the brand.

Turning to real estate. We are excited about the opening today of our new Ann Taylor concept store in Lennox Mall in Atlanta. As you recall, this new design captures the updated brand aesthetic in an environment that is approximately 40% smaller than our current average. We''ll be testing the concept for consumer acceptance in Lennox and adding a couple of additional locations during the fall.

During 2010, our focus remains on improving the in-store experience and productivity of our existing fleet and evaluating how and when to move forward with additional real estate opportunities for the Ann Taylor brand.

In the e-commerce channel, we continue to be pleased with the results we''re achieving at anntaylor.com, including the 29% sales increase, coupled with substantial gross margin improvement. The performance reflects strong response online to the new Ann Taylor collections and the success of our expanded online assortment, featuring a broader size range and exclusive colors and styles.

We''re excited about the initiatives we have under way to further capitalize on the potential for growth in this channel. At Ann Taylor Factory, we achieved another strong quarter, delivering a 6% comp increase, which was driven by improved conversion and higher AURs.

Our gross margin rate also improved significantly over last year''s second quarter level, generated by higher full priced selling. All in all, it was a terrific quarter for the Ann Taylor brand. We had strong momentum entering the fall season. And we are seeing our improved product and marketing strategies translate into significantly higher sales and profitability. The team has done an excellent job in the evolution of Ann.

Turning now to LOFT. On the top line, comparable sales for the brand were flat, including a 3% decrease at LOFT stores, offset by a significant 55% increase at the e-commerce channel and a 13% increase at LOFT Outlet. The gross margin rate was up significantly in LOFT''s online and Outlet channels, but under some pressure in the stores channel as we took action to clear slower moving product categories prior to the fall season.

There were two primary factors that contributed to LOFT''s performance in the stores channel. First, we experienced some softness in the knit and dress categories, which together represent about a third of the offering. In knits, we would have benefited from more core feminine basics, which were carried online in more depth and were very successful. In dresses, we needed a stronger offering in-store at opening price points.

Second, in an effort to respond to our clients'' strong appetite for fashion and newness, we increased the fashion penetration in the stores channel. In hindsight, we didn''t have enough depth or choices in her core essentials that she''s used to purchasing at LOFT.

Across all channels, we did have great success this quarter with shorts, cargo pants, woven tops and accessories including jewelry. And our LOFT Lounge collection also did very well.

Turning to online, the dot-com business delivered excellent results for the quarter in sales and gross margins. Our core assortments were well-received and our growth was further supported by strong performance of our online exclusives.

The e-commerce channel has also benefited from dramatic growth in traffic as we have invested in more online marketing. We also continue to leverage online as a testing ground, running successful tests of swimwear this quarter. Looking ahead, we believe this channel is positioned to deliver continued comp sales growth.

Turning to LOFT Outlet. This quarter marked this channel''s second full year of operation, having comped positively for 12 straight months in a row. LOFT Outlet''s 13 comp was driven by increases in AUR and DPTs. Gross margin rate performance reflected a dramatic improvement over the second quarter of last year, driven by higher AURs.

With respect to marketing for LOFT, we are continuing to see positive results from our initiatives, including solid increases in traffic in store and online. Online and social media are playing an increasing role in complementing our direct mail outreach, advertising and PR.

In addition, we continue to see strong results from our in-store style events. Looking ahead, we''re excited about the fall campaign which is designed to enhance LOFT''s visibility and capture the attention of existing clients as well as potential new customers.

In terms of real estate, we are on track with our plans of adding approximately 10 new LOFT stores in 2010, all of which will be in the new store prototype. At LOFT Outlet, as you know, our plan is to add approximately 20 new locations in the second half of the year.

In summary, while we had good success at LOFT this quarter in the e-commerce and Outlet channels, we did experience softness in the stores channel. We are highly focused on driving improved performance and continue to see excellent long-term potential to grow the LOFT brand.

Overall, as a company, we are pleased with our performance in the second quarter versus last year and are excited about our prospects for the balance of the year. We do, however, expect the environment to remain challenging in the near term with continued pressure on consumer spending. Accordingly, we remain highly focused on our disciplined inventory management and expense control.

In closing, our team remains committed to executing on our strategic priorities for the year. To increase top-line sales and productivity, to invest in the growth of our successful e-commerce business, to continue to elevate the client experience across all of our channels through consistent delivery of high quality fashion at compelling value, to remain disciplined in our approach to maximizing gross margin, managing inventory and controlling expenses and to utilize our strong balance sheet and free cash to further enhance shareholder value.

With that, let me turn it over to Mike.

Michael J. Nicholson

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

Beginning with net sales, net sales for the quarter were $483.5 million, an increase of 3% versus the $470.2 million in net sales reported in the second quarter of 2009. By brand, net sales across all channels at the Ann Taylor brand improved 8% to $207.2 million, versus the $191.8 million reported in the second quarter of last year.

At the LOFT brand, net sales were $276.2 million, down less than 1% from the $278.4 million reported last year.

Moving on to comps. Comparable sales for the quarter increased 6.1% with comps at the Ann Taylor brand up 15.2%, while LOFT brand comps were flat with last year. Details for sales and comps by channel can be found on table three of this morning''s press release.

At a high level, Ann Taylor Stores clearly outperformed, while LOFT stores fell short of our expectations. We also delivered exceptional performance in the e-commerce channels for both brands and the factory Outlet channels also performed well.

Turning now to gross margin. Overall, we reported a 55% gross margin rate, a record for a second quarter period, which was approximately 260 basis points ahead of the same period last year. The Ann Taylor brand delivered strong margin results across all channels and LOFT delivered solid gross margin results across all channels, including stores.

Moving on to inventory. At the company, total inventory per square foot increased approximately 8% versus year ago, excluding e-commerce. This was driven by an increase of 14% at the Ann Taylor brand and a 4% increase at the LOFT brand versus year ago.

Drilling down by brand, at Ann Taylor Stores, total inventory per square foot was up approximately 25%. The majority of the inventory increase in Ann Taylor Stores is related to the planned earlier receipt of our seasonal core wardrobe essentials relative to last year.

Excluding this timing shift, inventory per square foot at Ann Taylor Stores would have reflected an increase of approximately 10%, well below our second quarter comp growth of nearly 20%. We believe the current inventory level at Ann is aligned to support our comp expectations for the third quarter.

In addition, our carryover inventory at Ann remains very low with approximately 90% of our assortment reflecting fresh fall inventory. At LOFT stores, total inventory per square foot was up approximately 2% at the end of the second quarter. And we believe inventory is appropriately positioned to support our expectations for the third quarter. In addition, carryover in the LOFT stores channel is very light with more than 95% of merchandise in store reflecting fresh fall product.

Turning now to SG&A. We reported SG&A of $235 million in the second quarter of 2010, compared to $240 million reported in the second quarter of 2009. Our lower SG&A primarily reflects the cumulative benefit of our ongoing restructuring program, particularly in the areas of store payroll, benefits and tenancy, as well as other cost reduction activities, which were partially offset by an incremental marketing spend of approximately $5 million versus the second quarter of 2009.

Turning now to our strategic restructuring program. As you may know, we are in the last year of the strategic restructuring program that began in January of 2008 and are on target to generate this year the remaining $20 million of the total ongoing annualized program savings of $125 million.

As a reminder, our stated restructuring program savings do not contemplate expense reductions related to the store closures associated with the program. Store closures currently anticipated under the program stand at a total of 158 stores during the three-year period.

Currently, the majority of the 56 stores slated for closure in fiscal 2010 are expected to occur in the last few weeks of this fiscal year. However, we will continue to evaluate the performance of these stores planned for closure and make strategic adjustments where appropriate.

In terms of restructuring program costs, we anticipate a total of $2 million to $12 million in fiscal 2010. In the second quarter, pre-tax restructuring costs were $800,000, with an EPS impact of a penny per share.

Excluding restructuring, we reported operating income of $30.7 million during the quarter, compared with operating income of $6 million last year. On the same basis, we reported second quarter net income of $19.1 million or $0.32 per diluted share compared with net income of $3.6 million or $0.06 per share in the prior year.

Weighted average diluted shares outstanding for the quarter increased 3.6% to 58.8 million shares versus the 56.8 million shares in the second quarter of 2009. Our effective tax rate for the quarter was 37% versus 30.5% in the second quarter of last year.

Depreciation and amortization in the second quarter totaled approximately $25 million versus $27 million in the prior year. Capital expenditures for the second quarter were approximately $11 million versus the $15 million in the second quarter of 2009, and for the year we continue to expect our CapEx to be approximately $70 million.

Our square footage at the end of the quarter totaled nearly 5.3 million square feet, down approximately 4% from the prior year on an end of period basis and down approximately 3.7% on a weighted average basis. During the second quarter, we closed a total of nine stores, four of which were Ann Taylor Stores and five of which were LOFT stores and we converted one Ann Taylor to LOFT, ending the quarter with a total of 894 stores.

Turning now to our balance sheet. We ended the quarter with $263 million of cash and cash equivalents and we have no bank debt. In terms of operating cash flow, we generated approximately $54 million during the quarter.

As you can see, we have a very healthy balance sheet and cash flows have been strong. The company is committed to delivering shareholder value and we clearly have the strong balance sheet to do so.

Today''s announcement increases our original share repurchase program by an additional $100 million. We now have approximately $259 million currently available under the authorization to repurchase our shares.

Now, turning to our outlook for the third quarter and the remainder of the year. First, we will continue to prudently manage the business for what we believe will be a choppy macroeconomic environment and somewhat unpredictable levels of consumer spending throughout the remainder of 2010.

Our results for this quarter and our outlook for the year reflect our commitment to tightly manage our expenses while making prudent investments in inventory, marketing and store growth during the fall season. For the third quarter, we expect sales to approach $495 million, reflecting strong double-digit comps at the Ann Taylor brand and low single digit comps at the LOFT brand.

We anticipate a gross margin rate that is slightly better than 56% in the third quarter. This incorporates continued strong performance at the Ann Taylor brand and softer gross margin performance results at LOFT versus LOFT''s record gross margin performance in the third quarter of last year. Our gross margin expectations also incorporate compelling promotional activity at both brands to fuel top-line results for the quarter.

SG&A expenses in the third quarter are estimated to be approximately $245 million, which reflects the cumulative benefits of our ongoing strategic restructuring program and continued stringent expense management, offset by the opening of approximately 20 stores during the quarter and approximately $5 million in incremental marketing expense versus last year''s third quarter.

Looking ahead to the full year, we expect full year sales to approach $1.95 billion. We expect the weighted average total square footage to decline approximately 3% by year end, reflecting the impact of the 56 stores planned for closure in fiscal 2010, under our restructuring program. The closures will be partially offset by the anticipated opening of approximately 30 stores, of which 10 are new LOFT stores, 15 are new LOFT Outlets and five are conversions of LOFT to LOFT Outlet.

Our gross margin rate for the year is expected to improve by approximately 100 basis points versus year ago, due to continued disciplined inventory management, a highly effective planned promotional strategy and sourcing costs that have already been locked in for the third and fourth quarters of 2010.

Selling, general and administrative expenses are expected to be essentially flat to the $967 million we reported in 2009, despite an anticipated increase of approximately $120 million in net sales and incremental marketing spend of $15 million to $20 million for fiscal 2010, reflecting the benefits of the ongoing strategic restructuring program as well as our efforts to aggressively manage our expenses.

The company will continue to focus on maintaining a healthy balance sheet. And finally, we intend to repurchase shares under the increased share repurchase authorization announced today.

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

Kay Krill

Thanks, Mike. We''re ready now to open up the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. At this time, please press star one on your touch-tone phone if you have a question for the company. In order to reach the majority of today''s call participants, the company has asked if you would limit yourself to one question each. One moment for our first question. Jennifer Black, your line is open and please state your company.

Jennifer Black – Jennifer Black & Associates

Jennifer Black & Associates. Congratulations on making significant headway.

Kay Krill

Thank you, Jennifer.

Jennifer Black – Jennifer Black & Associates

You are stocked out in many styles constantly online especially at the Ann Taylor division. Do you have the ability to measure your missed sales due to this and I wondered what you learned about your customer at each division as far as online goes and do you have any more new enhancements coming to the site in the back half of the year? Thank you.

Kay Krill

Okay, Jennifer. I guess the first question of the stock-outs in the online division, we absolutely did not anticipate the strong unbelievable sales that we saw in the second quarter and are seeing further accelerated into the third quarter. So we are chasing that as we go and we also are seeing the strength of our online exclusives as well, in both brands on this channel.

So we will continue to monitor it. We are trying to figure out how high is high. As far as the e-commerce activity for the back part of the year, as you recall, we are launching our new platform and we''re planning to do that in mid-October at this point in time and that will entail many technology enhancements which include a simpler and quicker checkout process that is designed to make it easier to add items to her cart and enhance conversion.

We''re also going to add the capability for clients to post reviews and comments on our products, really enhancing the client-to-client sale and we''ve heard great things about that feature. We will be mobile enabling our site later in the fourth -- probably early fourth quarter, late fourth quarter. We''ll be able to personalize and segment our client base which I think is going to be an unbelievable opportunity to personalize our messages to her and enhance our international shipping capabilities which we''re very excited about.

Jennifer Black – Jennifer Black & Associates

Thank you very, very much. Good luck.

Kay Krill

You''re welcome. Thanks.

Operator

Our next question comes from Lorraine Hutchinson. Please state your company name.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Thank you. BofA Merrill. Good morning.

Kay Krill

Good morning.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Just hoping to hear a little more detail on LOFT. You talked about Ann trends getting better and staying through August. Could you talk about what''s been happening there and I guess what gives you the confidence that you can return to low-single digit comps for the back half?

Kay Krill

Okay, Lorraine. LOFT entered basically the fall season very light from a clearance perspective. In fact, as Mike said, 97% of our inventory is fresh fall product, with a level of markdown inventory that is significantly lower than last year. In addition, our early fall tops assortment and inventory is too light to meet current client demand. However, inventory levels in this core category, which you know is half the business, becomes better positioned throughout September to deliver better results.

And we really feel great about certain categories that are in the store right now that we identified as opportunities that are doing very well, such as the relaxed go to work category, including all pants and skirts, particularly trouser skirts and pencil skirts are doing well. And we also are seeing continued positive performance in LOFT Lounge, all cargo pants and accessories.

So we really feel like the inventory will continue to build as we head through the September -- the all-important September month and we feel like it was more of an inventory mix issue that we feel like has been corrected. The other thing that I just want to point out is the dramatic increase in LOFT online at 55% comp in the second quarter vis-a-vis the negative three comp in the stores channel, really points to the fact that it was a buy issue and a mix issue and we feel confident that we have corrected that as we progress through the fall season.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Thank you.

Operator

Thank you. Our next question comes from Neely Tamminga. Please state your company name.

Neely Tamminga – Piper Jaffray

It''s Piper Jaffray. Good morning to you all.

Kay Krill

Good morning.

Michael J. Nicholson

Good morning.

Neely Tamminga – Piper Jaffray

So Kay, I want to ask you a little bit here about the bottoms business. We''ve been doing some tooling around in stores as well as in the market. And it seems that denim might be on a downward cycle. Just wondering if you could assess what that risk might be to your business. Clearly, you''re not a denim dominant story but just wondering what that risk might be if that is a cycle issue. And then related to that, the Ann Taylor pants repositioning, would be great to hear your perspective on that, how well it''s doing out of the gate? Thanks.

Kay Krill

Okay. Well, let me address denim. You are absolutely correct, Neely. Denim is off to a much slower start this year versus last year and honestly as far as risk goes, in LOFT, it''s about 5% of the assortment and we are seeing strong strength in all cargo pants and lounge pants. So hopefully that will offset some of the denim softness.

In Ann Taylor, it''s less than 1%. So it really is not significant at all. The bigger issue for both brands is -- the exciting news is that pants in general, other than denim, are doing very well in both brands. In the LOFT brand, we are seeing a resurgence of pants, particularly in the $59 to $69.50 range as well as LOFT, I mean as well as Ann, our pants are doing extremely well. The go-to-work category in the Ann Taylor business of all pants, skirts, suits and dresses are a significant part of the comp increase that we saw in the second quarter and those categories have accelerated as we''ve headed into the third quarter. So we are extremely optimistic about the pant category and all the go-to-work categories.

Neely Tamminga – Piper Jaffray

Thank you and good luck.

Kay Krill

Thank you.

Operator

Thank you. Our next question comes from Michelle Tan. Please state your company name.

Michelle Tan – Goldman Sachs

Goldman Sachs. Good morning, guys.

Michael J. Nicholson

Good morning.

Kay Krill

Good morning.

Michelle Tan – Goldman Sachs

I was wondering if you could talk a little bit about the traffic trends at both of the divisions, give us a sense of where they were in the quarter and then also any color you can give us -- I know you gave us the Ann progress through the quarter and into August. Can you give us the same for LOFT, how things trended, kind of finishing out the quarter?

Michael J. Nicholson

Sure, Michelle. I''ll start it off just in terms of some perspective on traffic trends during the quarter. Within the Ann Taylor full price channel, we did experience positive mid single digit increase in terms of traffic. Factory stores was also slightly positive.

Within LOFT stores, actually even better, high single digit improvements in terms of traffic per average store and within Outlet, also positive single digit traffic growth. So all in all, we feel very good about the level of traffic that we''re driving to the stores or that we drove to the stores in the second quarter. And we would expect that to continue as we transition into the third quarter.

Kay Krill

Michelle, can you ask your second question again? I''m sorry, I didn''t get it.

Michelle Tan – Goldman Sachs

No, that''s okay. It was basically on how the trends at LOFT progressed through the quarter. I think you gave us the Ann color on kind of things strengthening and then into August. Could you give us some indication as well on LOFT?

Kay Krill

Sure. Okay. We saw strength in the second quarter in overall feminine knits and wovens and select sweaters, particularly cardigans and cargo pants and structured dresses and shorts and jewelry and lounge. Lounge also did well. All of those categories are still performing strong as we go into the third quarter. Where we''re experiencing some softness in the stores channel is due to the inventory mix issues, particularly that we entered very, very clean, significantly lower than last year''s levels, and we don''t have enough tops assortment as we entered August that that continues to build from now through September.

So we feel confident, based on what we''re seeing right now albeit with denim starting off slower, but all the other categories we''re seeing strength. And we really believe we''re on track to deliver a very strong double-digit comp at the Ann Taylor brand and a low single digit comp for LOFT in the third quarter. All in all, we''re pleased with the company''s results thus far in August.

Michelle Tan – Goldman Sachs

Okay. Great. Thank you.

Michael J. Nicholson

Thank you.

Operator

Our next question comes from Brian Tunick. Please state your company name.

Brian Tunick – J.P. Morgan

Yes. J.P. Morgan. I guess two questions for Mike. First on the expense side, you''ve done a great job on the defensive side. But what are your thoughts? What is permanent versus variable as sales have rebounded here and beyond 2010 how would you expect expenses to grow relative to sales growth?

And then the second question, Mike, is on the balance sheet, what should we assume your comfort is now with the turnaround clearly under way, would be minimum cash levels. You''re clearly stressing the commitment to returning cash to shareholders relative to buyback programs. So how much should we assume you''re comfortable holding in cash versus giving back to shareholders?

Michael J. Nicholson

Sure. Thanks, Brian. First, I''m going to address your SG&A question. In terms of our performance in the second quarter, what I''d say is our performance in relation to our expectations going into the quarter had much to do with our ability to be nimble, flexible, agile, with respect to the trend of the business and we reacted aggressively and addressed variable expenses within the store operating costs within the store during the quarter.

So I think in terms of SG&A for Q3 going forward we provided a perspective of an increase off of Q2. And we expect to drive our top-line and much of that increase relates to Q3 versus Q2 relates to incremental investment in marketing, in order to drive the top-line growth in the back half of the year.

And the other thing I''d say is as we transition to the back half of the year, is you have to think about the 30 or so incremental stores that come online or come into the chain, as well as the impact of the store closures. The majority of which occur the last two weeks of the year. Beyond 2010 at this point, I think it would be premature for me to comment with respect to our level of investment on SG&A spend but rest assured, we are committed to continue to aggressively manage our expenses appropriately moving forward.

Your second question regarding level of cash, what I''d say is from my perspective I look at a target range -- in the range of about $150 million to $200 million of cash sort of my safety net in terms of what we need to maintain in order to run the business. As it relates to the share authorization that we announced today, what I would say is that there is no specific time line associated with our share repurchase authorization. However, I do think it''s important to just keep in mind that we do intend to repurchase shares opportunistically as we believe that our shares today are undervalued.

Brian Tunick – J.P. Morgan

Terrific. Thanks and good luck with the fall season.

Michael J. Nicholson

Thanks, Brian.

Operator

Thank you. Our next question comes from Roxanne Meyer. Please state your company name.

Roxanne Meyer – UBS

It’s UBS. Thank you and congratulations on a solid second quarter.

Kay Krill

Thanks.

Roxanne Meyer – UBS

I just wanted to hear a little bit more about the -- you repositioned the accessories at LOFT. Your footwear and handbags and jewelry look terrific. How big of a business can that be in the back half and how much can it move the dial? And then how do you expect inventories to end as we move throughout the third quarter and ending third quarter?

Kay Krill

Okay. I''ll take on the footwear question and then Mike will take on the other one. Footwear, we just set up footwear in the LOFT business and it''s only in 100 stores and online and thus far the open toe shoes and flats are really doing well so far. And boots are selling well in urban locations but it''s really only about, I don''t know, maybe 3% or 4% of the business overall. But accessories is reaching -- is actually at double-digit. But from a category perspective, jewelry is still the standout within that piece of business.

Michael J. Nicholson

In terms of inventory, first let me remind you with respect to our outlook expectations as we transition from the second quarter into the third quarter, we anticipate that the Ann Taylor brand will deliver strong double-digit comps and we''re anticipating low single digit comps at the LOFT brand.

In terms of our end of third quarter inventory position at the total company level, at this point from where I sit, I expect us to finish in the mid to high single digits on a dollars per square foot basis with the Ann brand slightly higher than the company average and LOFT slightly lower and in line with the trends that we expect to deliver for the third quarter.

Roxanne Meyer – UBS

Great. Thank you.

Michael J. Nicholson

Thank you, Roxanne.

Operator

Thank you. Our next question comes from Marni Shapiro and please state your Company name.

Marni Shapiro – The Retail Tracker

Hey, guys. The Retail Tracker. Congratulations on a great quarter, particularly at Ann Taylor. Could you talk a little bit about LOFT? As you change up the product and improve product in the back half, we talked about the marketing at Ann, could you talk a little about the plans for LOFT and to make sure you''re getting her back in the store or is traffic really not an issue there, it was just converting her because the product that she wants wasn''t there?

Kay Krill

Yeah. Marni, the traffic has been in the high single digits in LOFT for a while now. We do not have a traffic issue. I think that the team''s done an outstanding job in their marketing mix, direct mail, advertising, PR, radio, social media. I think they''ve done a really good job in continuing to drive traffic. So it''s really about building these inventories and the critical tops category that I see in order for conversion to improve going into the fall season.

Marni Shapiro – The Retail Tracker

Excellent. Great, guys. Good luck.

Kay Krill

Did you have a second…?

Michael J. Nicholson

No, it was traffic. You addressed it.

Kay Krill

All right.

Operator

Our next question comes from Laura Champine. Please state your company name.

Laura Champine – Cowen and Company

It''s Cowen. My questions are about gross margins and the reduction in guidance of about 20 basis points for the full year there. Could we talk a little about product costs and the trends you''re seeing there? I''m guessing that it''s too soon to say that impacts this but is it just do you expect to have to be more promotional. Just a little more detail on what''s happening on gross margin and what your cost and pricing outlook is?

Michael J. Nicholson

Sure. So just let me talk a little bit about the second quarter and then I''ll transition to the back half of the year. In terms of our second quarter results, as I mentioned, we delivered a rate of 55%, more than a 250 basis point improvement versus last year. And when I sort of dial it down in terms of the drivers, product costs actually contributed to about 25% of the improvement in rate and the balance came from AUR.

I think I also mentioned in our opening comments is that we have fully locked down our product costs for the back half of this year. And on a year on year basis, we actually are planning and expect to see improvement in product cost flow through gross margin.

Our expectations with respect to gross margins for the third quarter and the full year, to your point, absolutely does reflect a planned higher level of promotional activity versus last year. And in addition, you need to recall that last year we were extremely tight and light on inventory and as a result the gross margin rate was a historical high level, especially at LOFT in the third quarter of last year.

Let me now just transition for a moment into 2011. Clearly, there are pressures in terms of product costs on the horizon, it''s in the news. But the reality is, Paula and her team have a number of strategies under way. And the good news is that early indications for 2011 are that at least for the first quarter our IMU and product costs are essentially in line with what we experienced this year.

Laura Champine – Cowen and Company

Great. Thank you.

Michael J. Nicholson

Thank you.

Operator

Thank you. Our next question comes from Stacy Pak. Please state your company name.

Stacy Pak – SP Research

Hi. SP Research. Kay, can you just talk a little bit more about what you''re seeing from the LOFT customer versus the Ann Taylor customer, kind of getting to why you''re seeing the weakness there. I just want you to clarify also the traffic and the low single digit numbers you''re talking about are LOFT stores and not LOFT brands and if there''s a difference there, maybe you could…?

Kay Krill

Stacy, the traffic that I said, the high single digit is LOFT stores. And we''re seeing significantly high traffic trends online as well in LOFT. So that was -- that high single digit was specifically LOFT stores.

Stacy Pak – SP Research

Okay. And what do you think is going on with that customer? Why are you seeing the weakness at LOFT? I heard what you said about inventory but it sounds like maybe something else is going on there and just kind of want to hear what you''re seeing in terms of the differences between the Ann Taylor customer and the LOFT customer. And, again, just to clarify -- an acceleration in LOFT business to get to your guidance for Q3?

Kay Krill

Okay. Well, as I mentioned in LOFT, I think entering the August period so light from a clearance perspective has definitely affected the beginning of August performance as well as not having our core essentials in tops the beginning of August. We are seeing business improve during the month of August in both channels, the stores channel and the online channel, which gives us huge confidence that our expectation for the quarter of the low double-digit comp is very achievable.

In addition to that, I''ll say that the Ann Taylor business has benefited significantly from the go-to-work category of pants and skirts and dresses and suits, which quite frankly I think we''re the destination for and not many people offer that kind of product in the second quarter and we''re seeing continued strength in that area in the third quarter.

We have talked a lot about the reasons as to why this might be happening. And I think that -- I think actually women are reentering the workforce and I think that that is going to be very important for the Ann Taylor brand. And we are top of mind for that.

Stacy Pak – SP Research

And then Mike, what are the chances you could cut back half expenses like you just did in Q2, should your sales not come through?

Michael J. Nicholson

Stacy, at this point what I would reiterate back to the conversation that I had with Brian is we really effort to be flexible, nimble and react to the trend of the business but at this point, I think you should assume that we feel comfortable with the sales volume that approaches the $495 million and at this point we''re on target to spend $245 million. Thank you.

Operator

Our next question comes from Sam Panella. Your line is open. Please state your company name.

Samantha Panella – Raymond James

It’s Raymond James. With Paula and her team, in terms of compressing your delivery calendar, can you give us an update there? Does this differ at all by division in terms of design to in store? Thank you.

Kay Krill

Our calendar historically was about a year. I think you remember that. We have gotten it down to about 42 weeks but the important thing that Paula and her team has really accomplished is that about -- it depends by brand, 15% to 20% of the assortment is chase within the season and that is -- that we''re able to get on a 12 to 15 week cycle which has really added a lot to the comp performance in both businesses that''s we''ve been able to chase back into that area.

And I just want to say that Paula and her team have done an outstanding job in flexibility and being able to chase product as well as contain costs in an environment that we''re all seeing all of the headwinds right now and she and her team have done a stellar job.

Samantha Panella – Raymond James

Great. Thanks and good luck.

Operator

Our next question comes from Janet Kloppenburg. Your line is open. Please state your company name.

Janet Kloppenburg – JJK Research

JJK Research. Hi, Kay, and congratulations on a nice quarter.

Kay Krill

Thank you.

Janet Kloppenburg – JJK Research

Kay, I just wanted to ask a couple questions I''m a little confused about. Did you say that traffic at LOFT was up high single digits currently or was that at LOFT stores or is that for the quarter that you reported, the second quarter?

Kay Krill

Janet, it''s been strong all second quarter and we''re currently seeing it high single digits.

Janet Kloppenburg – JJK Research

Okay. Great. And then on the fashion issue, which I think you said maybe in the LOFT stores you suffered from having too much fashion, not enough of the core basics.

Kay Krill

Right.

Janet Kloppenburg – JJK Research

I''m confused. Is that resolved or will that be resolved as we get into September?

Kay Krill

That was an issue in the second quarter, Janet, particularly I would say at the end of the second quarter as we got into clearance mode, we did not have enough of those essentials that she counts on at clearance prices, so definitely a second quarter issue.

Also, for third quarter, we see an imbalance right now that is really being corrected and corrects really with every delivery going through between now and September.

Janet Kloppenburg – JJK Research

Okay.

Kay Krill

Those core essentials build from now through September whereas Ann Taylor brought in their core essentials earlier and are benefiting from that.

Janet Kloppenburg – JJK Research

Great. And then at Ann Taylor, I didn''t hear you talk much about dresses. I think they look really good.

Kay Krill

Dresses are outstanding. Dresses was one of the top categories for the second quarter.

Janet Kloppenburg – JJK Research

Right.

Kay Krill

Actually, it has been the whole entire spring season. We''re seeing tremendous strength in the dress category. I thought I did say dresses. If I did not, that was my mistake.

Janet Kloppenburg – JJK Research

I might have missed it as well. For my two questions, quickly, I guess we should look for gross margins to moderate in the fourth quarter as you''re guiding for some moderation here in the third quarter versus last year. And if you could just reiterate again the new share authorization program was for how many shares and what do you have left on the outstanding? Thanks.

Michael J. Nicholson

Let me try, Janet. First, in terms of your question regarding gross margin, our full year outlook does essentially assume that gross margin will be in line with last year''s levels in the fourth quarter to your point.

To answer your question about the share authorization, essentially what we''re looking at is an additional $100 million authorization, added to an existing $300 million authorization that the Board approved back in 2007. And then in terms of what''s left, we have $259 million open and available for share repurchase activity.

Let me just remind you, I said this previously, that there is no time line associated with this authorization. However, we do intend to repurchase shares opportunistically as we believe our shares today are undervalued.

Janet Kloppenburg – JJK Research

Okay. So for the fourth quarter gross margin, we should be planning -- your outlook is for it to be flat to last year?

Michael J. Nicholson

That''s what the full year estimate would assume.

Janet Kloppenburg – JJK Research

Okay. Lots of luck. Thanks.

Michael J. Nicholson

Thank you.

Judith Pirro

Ladies and gentlemen, we have time for one more quick call.

Operator

Thank you. Our final question comes from Dana Telsey. Your line is open. Please state your company name.

Dana Telsey – Telsey Advisory Group

TAG. Good morning, everyone. I''ve seen some of the prototypes. I think one''s opening at Lennox in Atlanta. How are the prototypes for LOFT doing? What are you looking for Ann, and any differences in terms cost and sales expectations. Thank you.

Kay Krill

Thanks, Dana. One of the things that we''re seeing -- I''ll speak to LOFT first because we had our first one open in May in Paramus, and we''ve had a couple of more open, one in California and one in Bay Terrace, here. We are seeing improved productivity in the LOFT prototype, especially in the metrics, conversion and DPTs are up compared to the chain.

So we are seeing positive response to the new prototype. And you''re right, and the customer acceptance is also, I should say that too, the customer acceptance to the LOFT prototype is very strong. Ann Taylor is opening today at Lennox Square and I''ve seen pictures and look forward to getting down there. But I hear that it looks fantastic and we look forward to hearing about those results in the next week.

Michael J. Nicholson

Just from a cost perspective, what I''d say is we fully expect that both prototypes will be even more cost effective than the cost of the stores, the cost of the build-out for the chain that we have today.

Kay Krill

Absolutely.

Judith Pirro

This is Judy. I just want to thank everyone for their excellent questions today. I will be available this afternoon for follow-ups. Thank you all for joining us and have a great day.

Operator

Thank you. That concludes today''s conference. Thank you for your participation.