AnnTaylor Q3 Earnings Call Transcript

123jump.com Staff
14 Dec, 2010
New York City

The women''s specialty retailer net quarterly sales increased 9% to $505.28 million on comparable-store sales rise of 11.7%. Net income in the quarter surged 1069% to $24.20 million. Earnings soared to 41 cents per share compared to 3 cents per share in the prior-year quarter.

AnnTaylor Stores Corp. ((ANN))
Q3 2010 Earnings Call Transcript
November 19, 2010 8:30 a.m. ET

Executives

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

Analysts

Lorraine Hutchinson – Bank of America/Merrill Lynch
Kimberly Greenberger – Morgan Stanley
Liz Dunn – FBR Capital Markets
Betty Chen – Wedbush Securities Inc.
Neely Tamminga – Piper Jaffray
Janet Kloppenburg – JJK Research
Robin Murchison – SunTrust Robinson Humphrey
Jennifer Black – Jennifer Black & Associates
Roxanne Meyer – UBS
Michelle Tan – Goldman Sachs
Paul Lejuez – Nomura Securities
Brian Tunick – J.P. Morgan
Marni Shapiro – The Retail Tracker
Dana Telsey – Telsey Advisory Group

Presentation

Operator

Good morning, ladies and gentlemen and welcome to Ann Taylor Stores Corporation Third Quarter 2010 Earnings Conference Call. At the request of the company, today''s conference is being recorded. If you have any objections, you may disconnect at this time. Following the prepared remarks for the company, we will have an opportunity to ask questions.

I would now like to turn the call over to Judy Lord, Vice President, Investor Relations. Please go ahead.

Judith A. Lord

Thank you, Candy [ph] and good morning, everyone. We are pleased you could join us to review our results for the third quarter and nine month period of fiscal 2010. I''m here with Kay Krill, Ann Taylor''s President and CEO and Mike Nicholson, our CFO. Kay will begin with an overview of the quarter and our outlook for the balance of the fiscal year and then Mike will review the financials in more detail. After that, we will 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 November 19, 2010, concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. With that, I''d like to hand it over to Kay.

Kay Krill

Good morning, everyone and thanks for joining us. I am extremely pleased to report this morning on the strong performance for the third quarter and provide an update on our progress year-to-date and our outlook for the balance of the fiscal year.

Earnings per share for the quarter, excluding charges, reached $0.42, more than double the year-ago period, driven by higher sales and a near-record third quarter gross margin rate of over 57%. Net sales for the quarter reached $505 million, up more than 9%.

Our double digit comparable sales of approximately 12% represented our third consecutive quarter of positive comps. This strong performance was driven by an exceptional 22% increase at the Ann Taylor brand and a solid 5% increase at the LOFT brand.

Looking at the components of our third quarter, you will see that the Ann Taylor brand had another standout quarter, showing meaningful gains across all channels. Our momentum continued on the top line, with clients responding enthusiastically to the product line and the compelling fashion, quality and value we offer.

As a result, we were able to be very strategic in our promotional activity during the quarter, with a focus on driving profitable sales growth. We also showed progress at the LOFT brand, with outstanding performance in the e-commerce and outlet channels and steady comp improvement in the stores channel. As expected, we experienced stronger sales in our stores as we received new product deliveries in September and October.

As you know, at the end of October, we announced plans to accelerate our expansion in our highly productive factory outlet channel by opening approximately 40 new stores at leading factory outlet centers in locations formerly occupied by Liz Claiborne. We expect to add approximately 35 LOFT Outlet stores and five Ann Taylor factory stores in the second quarter of 2011.

This is a terrific opportunity for us to accelerate our planned expansion of LOFT Outlet, which has generated 15 consecutive months of positive comp growth. The new stores are expected to deliver incremental sales of approximately $75 million in 2011 and be accretive to our earnings per share next year. We are also pleased that this opportunity is expected to create approximately 1,000 new jobs across the country.

From a financial perspective, we remain in excellent shape. Our balance sheet continues to be extremely strong with nearly $225 million in cash at quarter end and no debt.

Let''s now take a closer look at each of the brands. First, Ann Taylor. The Ann Taylor brand delivered strong results in both sales and profitability for the quarter. The comp sales growth of 22% for the brand was driven by double digit increases in all channels, including a 23% increase in the stores channel, a 57% increase in the online channel and an 11% increase in the factory channel.

Ann''s full price business was especially strong, driving a substantially higher gross margin rate for the brand. Conversion was also up, driven by significantly higher DPTs and AURs.

We are pleased to note that our client is responding positively to the fashion and outstanding quality of the product. We also believe a key differentiator has been our compelling opening price points and the tremendous value we are offering. We are pleased to be earning more of our client spend and will continue to focus on expanding our share of her wallet, while marketing to potential clients to drive new interest in the brand.

From a product perspective, Ann Taylor''s wear-to-work offering, including suiting, dresses, skirts and related tops, delivered stellar performance. Wear-to-work has always been the cornerstone of the Ann Taylor brand. And I am pleased she is responding so enthusiastically to the brand''s fresh offering that is both stylish and versatile.

We also saw outstanding performance in our pant business, driven by the successful re-launch of our pants offering beginning in August. The re-launch incorporated feedback from clients in terms of fit, fabric, style and price and was supported by strong messaging in store. The response has been well beyond our expectations.

In addition, fashion accessories, especially our jewelry assortment, continued to be a standout. In fact, across the entire Ann brand, virtually every category delivered positive comp performance.

With respect to marketing, Ann Taylor''s multi-prong strategy continues to successfully support our objective of delivering profitable sales growth. We are gaining share of our existing client''s wallet as well as attracting new customers to the brand, utilizing a combination of direct outreach, advertising and PR to enhance the brand''s visibility, drive traffic and incent purchase.

Our fall campaign with Naomi Watts was extremely well received. And we are excited about our holiday campaign, which will once again feature Heidi Klum.

Turning to real estate, we are delighted with the performance of our new stores in Lenox Mall in Atlanta and in Bellevue, Washington, both of which are delivering a much higher level of sales and profitability from a smaller store footprint. This week, we are opening a new location in Aventura Mall in Miami and in addition, we converted our Flatiron’s store in New York to the new prototype on Wednesday and it looks amazing.

Based upon the strong initial performance of the new stores, we have identified opportunities for further rollout of the new prototype in 2011. Ann Taylor''s e-commerce business has performed exceptionally well. The 57% sales comp in this channel reflects increased conversion, higher average order value and continued strong selling of our online exclusives. We continue to achieve steady traffic growth and we are pleased to see more of our clients shopping across our multiple channels.

We view e-commerce as a high growth opportunity for us and our team is continuing to focus on driving increased traffic, sales and profitability. Ann Taylor Factory achieved another strong quarter, with double digit comparable sales increases driven primarily by strong conversion and higher AURs.

Gross margin in this channel was very strong and reflected an improvement over last year''s levels, driven by higher full priced selling during the quarter. We are very well positioned as we enter the holiday season.

In summary, it was an excellent third quarter for the Ann Taylor brand. Compelling product, well managed inventories, effective marketing and planned promotional strategies enabled us to deliver significant sales and margin growth.

Looking ahead, we entered the fourth quarter with strong momentum and are extremely excited about the opportunities to continue our progress in building the sales and profitability of the Ann Taylor brand into next year and beyond. We feel good about the brand''s position for the holiday season and believe we have the right selection of products, both for self purchase and gifting at tremendous value.

Now, turning to LOFT. Overall, the business became stronger over the course of the quarter as the store''s channel achieved improved results. The brand achieved a 5% comp sales increase for the quarter. The stores channel was essentially flat but as expected comps at stores showed month-over-month improvement during the quarter, as we received new product in September and October.

We achieved outstanding comp increases at LOFT.com, which was up 65% and at LOFT Outlet where comps were up 22%. Gross margin performance across all channels of the LOFT brand was solid throughout the quarter and traffic trends also remain strong in store and online.

As you know, the LOFT client tends to be more casual and has a different demographic profile than the Ann client. Therefore, her wardrobing needs are different as well. And she remains highly selective in her purchases and responds strongly to incentives and great value.

From a product perspective, pants were especially strong from trousers to leggings. Pencil skirts were also a standout. We also generated good success with sweater dresses, LOFT lounge, woven tops and cardigans. She also continued to love our jewelry, which had another exceptional quarter. However, we did experience some softness in the stores channel in the knit and denim categories, especially earlier in the quarter.

Our loft.com business was outstanding for the quarter, delivering a 65% comp increase. We are very excited that our marketing strategies are driving more traffic to the site, resulting in significant sales increases. As was the case with Ann, our online exclusives also performed very well.

We see tremendous potential for further growth in this channel. And as an aside, I''m pleased to report that we now have ownership of the loft.com URL, so clients are able to find us more easily on the web.

Turning to our LOFT Outlet business, we finished the quarter with same store sales, up 22%. And as I mentioned earlier, this performance follows 15 months of positive comps. Sales in the quarter were primarily driven by increased AUR and UPTs and the channel delivered very strong gross margin results. As with Ann Taylor Factory, our LOFT Outlet business is positioned to have a strong holiday season.

From a brand marketing perspective, we continue to be pleased with the results of LOFT''s marketing strategy, which is sharply focused on strengthening relationships with existing clients, attracting new clients and delivering overall traffic growth.

The brand has been innovative in using online and event marketing as a complement to our direct mail, advertising and PR initiatives. We had a positive response to LOFT''s fall advertising campaign and have been successful in generating increased editorial coverage in key media.

For holiday, we are continuing to implement our multi-pronged strategy with a bit more emphasis on our successful targeted outreach.

Turning to real estate, we are continuing to move forward with the 2010 expansion of our LOFT brand store fleet. During the quarter, we opened five new LOFT stores and remain on track to add a total of 10 stores in 2010.

At LOFT Outlet, we opened 11 new stores and converted four LOFT full priced stores to LOFT Outlet during the third quarter and remain on track for a total of approximately 20 openings this year.

In summary, LOFT delivered an excellent performance in its online and outlet channels during the third quarter and generated improved results in the stores channel as the quarter progressed.

Looking ahead to the holiday season, LOFT is well positioned with an appropriately balanced offering of wear-now product for self purchase as well as a strong gift assortment. The LOFT holiday store offering will be fully set today throughout the country in preparation for Thanksgiving week.

We are prepared for a competitive promotional environment and in fact have seen evidence that many retailers, particularly those serving the middle income consumer, are already getting aggressive. Our goal is to gain our fair share of her spend, while at the same time preserving margin, a stance that is supported by our conservative inventory positioning and our planned promotional strategy for the holiday season.

In summary, this was an outstanding quarter for the company. While we anticipate a promotional environment in the upcoming months, we feel good about our overall business as we enter the fourth quarter. We believe we are well-positioned in terms of our product, inventories, marketing and planned promotional strategies for the holiday season.

Before I turn it over to Mike, I would like to take a moment to recognize our thousands of associates and millions of clients for the amazing work we have done together to raise funds for breast cancer research through our Ann Care''s charitable initiative. Through the support of our associates and clients, the company has raised nearly $3 million for this effort, which is more than double what we contributed last year.

As a company that is committed in helping women, we thank all of our associates and our clients for their contributions. I am extremely proud of this initiative.

Let me now hand it over to Mike to review the financials. Mike.

Michael J. Nicholson

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

Beginning with net sales, net sales for the quarter were $505.3 million, an increase of approximately 9%, versus the $462.4 million in net sales reported in the third quarter of 2009. By brand, net sales at Ann Taylor were $223.2 million, up 14% versus $195 million reported last year. At the LOFT brand, net sales were $282.1 million, up 5%, versus $267.4 million reported last year.

Moving on to comps, total company comparable sales for the quarter increased 11.7%. At the Ann Taylor brand, total brand comps were up 21.9%, reflecting increases of 23.4% at stores, 57% in the online business and 11.3% in the factory channel.

At the LOFT brand, total brand comps were up 4.5%, reflecting a decrease of 0.6% at stores, that was more than offset by an increase of 64.6% at LOFT.com and 22% increase at LOFT Outlet. As Kay noted, our performance at LOFT stores improved as we moved through the quarter.

Turning to our margin discussion, overall, we reported a strong third quarter gross margin rate of 57.2%, versus the third quarter 2009 performance of 57.3%, which as you may recall, was on a much leaner inventory position. Our performance during the quarter was primarily a result of improved product offerings and higher full price selling at the Ann Taylor brand and effective marketing initiatives. Our gross margin performance was further supported by an appropriate balance of inventory to sales at both brands, which allowed us to be strategic in our promotional activity.

Moving on to the details of our third quarter inventories. Total inventory per square foot, excluding e-commerce, increased 8%, reflecting a 16% increase at Ann Taylor stores and a 1% increase at LOFT stores. Both Ann Taylor and LOFT stores closed the quarter with inventories in line with our sales performance and as a result, we entered the fourth quarter very well positioned from a composition standpoint, with very low levels of carryover. In addition, our overall inventory levels are positioned to support our planned promotional activity while maximizing gross margin in what we believe will be a highly promotional environment.

Turning now to SG&A. SG&A remained virtually flat with last year''s third quarter, increasing only $1 million despite a $5 million increase in marketing spend and more than $40 million in incremental sales compared with the third quarter of 2009. SG&A as a percentage of net sales was 49% in the third quarter, reflecting a 420 basis point improvement over the same period last year. This rate improvement reflects leverage on higher net sales as well as the benefits of our ongoing restructuring program and our continued focus on controlling expenses.

Moving down the P&L, operating income, excluding pre-tax restructuring charges of approximately $600,000, was $41.4 million during the quarter. This compares with operating income of $18.7 million last year, excluding restructuring and asset impairment charges.

On the same basis, we reported third quarter net income of $24.5 million or $0.42 per diluted share, more than double the net income of $12 million or $0.20 per share achieved in the third quarter of 2009. Weighted average diluted shares outstanding for the quarter were 58.3 million shares, versus the 58 million shares in the third quarter of 2009.

Our effective tax rate for the quarter was 40.6% versus 1.7% in the third quarter of last year. Depreciation and amortization in the third quarter totaled approximately $24 million versus $26 million in the prior year.

Capital expenditures for the third quarter totaled $18 million versus $3 million in the third quarter of 2009. Our square footage at the end of the quarter totaled approximately 5.3 million square feet, down approximately 3% from last year''s third quarter on both an end of period and weighted average basis.

Now, I would like to spend a moment to update you on our strategic restructuring program. This year''s fourth quarter will mark the last period of our very successful three-year restructuring program that began in January of 2008.

By the end of this fiscal year, we expect to have generated a total of $125 million in ongoing annualized savings during the three-year period. However, the end of our formal restructuring program does not signal pencils down at the company. We have changed the way we work and think about our business, introducing new efficiencies and disciplines that will carry forward and benefit our company for years to come.

During the third quarter, we recorded pre-tax restructuring costs of approximately $600,000, with an EPS impact of $0.01 per share. Looking ahead, we anticipate the final costs associated with the program in the fourth quarter to be in the range of $5 million to $8 million.

As you may know, a critical component of our strategic restructuring program involves the closure of underperforming stores across our fleet at both brands. To date, we have closed 118 such stores under the program.

I''m pleased to report, due to the progress we have made towards enhancing store productivity, a select number of Ann Taylor and LOFT stores previously slated for closure under the restructuring program, are now meeting our performance expectations and will remain open in 2011.

As a result, we have reduced the number of planned 2010 closures from 56 to 43. Of these, 16 were closed in the first three quarters of 2010, and we expect the remaining 27 will be closed at the very end of the fiscal fourth quarter. Store closures currently anticipated under the three-year program now stand at a total of approximately 145 stores. Moving forward into 2011, the rigorous assessment of our real estate portfolio will continue, with a focus on continuing to enhance the overall productivity of our store fleet.

Now to summarize our store counts. During the third quarter, we closed two Ann Taylor stores, and one LOFT store and converted four LOFT stores to LOFT Outlet. In addition, we opened five new LOFT stores and 11 new LOFT Outlet stores and ended the quarter with 907 stores in total.

As Kay mentioned, we anticipate the opening of 35 LOFT outlet stores and five Ann Taylor Factory stores during the second quarter of 2011, in locations formerly occupied by Liz Claiborne. However, as has been our practice in the past, our full real estate plan for the upcoming year will be provided to you during our year end call in March.

Turning now to our balance sheet. We closed the quarter with approximately $224 million in cash on the balance sheet and no bank debt. Under our $400 million share repurchase authorization, we repurchased approximately 1.2 million shares, at a total cost of $19.8 million during the quarter.

At the close of the third quarter, we had approximately $239 million remaining under our existing share repurchase authorization. And we will be repurchasing shares during the remainder of the year.

Now, I would like to provide you with a brief snapshot of our progress to date in 2010. For the first nine months of this year, we reported operating earnings per share of $1.12 versus $0.25 for the same period last year on more than $100 million in incremental sales. This represents a comparable sales increase of more than 10%.

We are proud of our progress thus far. And as we look forward to our fourth quarter, we are clearly expecting strong results for that period, as well.

Now, in terms of our outlook, for the fourth quarter, we expect total net sales to approach $500 million, reflecting mid to high single digit comparable sales performance at the company, including double digit comparable sales growth at the Ann Taylor brand and a low single digit comparable sales increase at the LOFT brand.

We are expecting our fourth quarter gross margin rate to approach the gross margin rate of 52.5% achieved in the fourth quarter of 2009. SG&A expenses are estimated to be approximately $250 million, including approximately $5 million of incremental marketing investments versus the fourth quarter of last year.

In terms of the full year, our outlook calls for 2010 total net sales to approach $1.965 billion, representing a comparable sales increase of 10%. In addition, we expect to achieve positive comp increases at both brands.

Our full year gross margin rate performance is expected to reflect a nearly 150 basis point improvement from the 54.4% rate achieved in fiscal 2009. SG&A expenses for the year are expected to be approximately $975 million, representing an $8 million increase in SG&A from 2009 levels.

Bear in mind that this is relative to an anticipated $140 million increase in net sales and incremental marketing investments of approximately $20 million for fiscal 2010. We expect a full year 2010 effective tax rate of approximately 40%. Incremental restructuring savings for the year are expected to total approximately $20 million and one-time restructuring costs are estimated to be in the range of $7 million to $10 million.

Our total weighted average square footage is expected to decline approximately 3% by year end, reflecting the impact of 43 store closures in fiscal 2010, partially offset by the opening of approximately 30 stores to support the continued growth of the LOFT brand.

Capital expenditures are expected to be approximately $70 million. We are committed to maintaining our healthy balance sheet, including a disciplined approach to inventory management. And finally, as I stated earlier, we will be repurchasing shares under our existing $400 million share repurchase authorization. And with that, I will turn it back to Kay.

Kay Krill

Thanks, Mike. As you can see, it was an outstanding quarter for the company. Our entire team is energized and focused. We are very excited about the opportunities ahead for both brands to drive increased sales and profitability.

Operator, we are now ready for our first question.

Question-and-Answer Session

Operator

Thank you. At this time, please press star one on your touchtone 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. Thank you. One moment for your first question. Thank you. Lorraine Hutchinson, your line is open and state your company.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Thank you, Bank of America/Merrill Lynch. Good morning.

Kay Krill

Morning.

Lorraine Hutchinson – Bank of America/Merrill Lynch

I was just hoping to maybe get some commentary on trends so far in November. And then also on LOFT, I was just curious what types of products did you bring in as the quarter went by and do you feel the assortment is right and correctly balanced for holiday? Thank you.

Kay Krill

Okay. Thanks, Lorraine. We are off to a good start overall with the company positive comping so far in November. Ann Taylor''s performance is extremely strong and the momentum we achieved in the third quarter has definitely continued into November in the same categories virtually, with the exception of sweaters are even stronger now in November than they were in the third quarter.

At the LOFT brand, we are pleased with our online and LOFT Outlet channels performance thus far but the store''s channel continues to be a bit more challenged month to date. Our holiday store set for LOFT will be complete today so LOFT stores will be in good shape for Thanksgiving week.

As far as categories there, the sweater category has definitely gotten healthier as we progressed through into the fourth quarter. And I think I have said on the third -- on the second quarter call, that those deliveries were the ones that were coming in throughout September and October. So that is really what has gathered strength and momentum.

The categories that were soft in LOFT for the third quarter were knits and denim and, interestingly, those two categories have gotten stronger for the fourth quarter. They are no longer an issue. So overall, we are on track to deliver double digit comps in the Ann Taylor brand and a low single digit comp for the LOFT brand for the fourth quarter. So all in all we are pleased with the company results so far this quarter.

Operator

Thank you. Next question, Kimberly Greenberger, your line is open and state your company.

Kimberly Greenberger – Morgan Stanley

Great. Thank you. Good morning. Morgan Stanley. Congratulations on a great quarter.

Kay Krill

Kimberly Greenberger – Morgan Stanley

Kay, I was wondering if you could share with us how you''re strategizing through holiday. You''ve obviously planned for some promotions and I guess as you monitor your business you will either decide to use those promotions or pull back on them. Is that a dynamic process? Maybe you could just share with us how you are thinking about it.

Kay Krill

Sorry, sorry. Go ahead.

Kimberly Greenberger – Morgan Stanley

I just had a follow up for Mike. You mentioned the plans to repurchase shares here, you''ve got a lot of money left on that $400 million authorization. How should we be thinking about shares in the fourth quarter and going into 2011? Thanks.

Kay Krill

I will jump in first, Kimberly. It''s absolutely a dynamic process, it is a week-to-week process. And as I said to Lorraine, we absolutely feel good about the business as we enter the fourth quarter and are positive comping so far in November. However, we do believe that it could ramp up to be a little bit more intense promotionally. So we want to be prepared with our promotional strategies, some which were absolutely planned and to be reactive in order to get our share of her wallet during this holiday season.

So definitely it''s going to be a dynamic process, it''s going to be a week-to-week event that we will discuss this and our goal is to absolutely maintain top line but preserve margin as much as possible.

Michael J. Nicholson

Kimberly, your question regarding share purchase, just let me remind you, back in August that the Board approved $100 million expansion of the program. So the total program now sits at $400 million. During the third quarter, we repurchased a little more than one million shares at a total cost just shy of $20 million. I do think it is important to note, with respect to our third quarter activity that our ability to repurchase additional shares during the quarter was somewhat restricted while we were in the process of negotiating the details of the Ann Taylor Outlet transactions.

In terms of the fourth quarter, while we are not giving any specific guidance on the timing or actual numbers that we expect to purchase, I think a way to think about it would be in a framework that, a, as we''ve stated in the past, we feel comfortable in this environment maintaining a cash cushion in the range of $150 million to $200 million. And, second, you need to think about our seasonal working capital build and de-build and recall that in the first quarter typically we use cash to fund our second quarter business.

So all in all, like I said in my opening comments, we do expect to be repurchasing shares in the fourth quarter. And we expect to be repurchasing shares more aggressively than we did in Q3.

Kimberly Greenberger – Morgan Stanley

Fantastic. Good luck here for holiday.

Kay Krill

Thank you.

Michael J. Nicholson

Thank you.

Operator

Thank you. Next question, Liz Dunn, your line is open, state your company, please.

Liz Dunn – FBR Capital Markets

Hi. Good morning. FBR. I guess, a couple of questions. What do you think your long-term opportunity is to return to near-peak productivity or where do you think productivity can get back to? And then just one quick one for Mike, will the tax rate remain in this 40% range?

Michael J. Nicholson

Sure. I''ll take both. I think I''ve stated on previous calls our mid-term goal is $400 a square foot at the total company level. So over the next couple of years, that is the goal that the management team is focused on and I''ve said achieving that goal will enable us to get back into that 10% to 12% range.

In terms of the tax rate, we are looking at about 40% this year and in the range of 39% to 40%, that''s a good way to think about it on a long-term basis assuming that our profitability continues to improve year after year after year.

Liz Dunn – FBR Capital Markets

Thank you.

Michael J. Nicholson

Thank you.

Operator

Thank you. Next, Betty Chen, your line is open and state your company.

Betty Chen – Wedbush Securities Inc.

Wedbush Securities. Good morning and congratulations on a great quarter.

Kay Krill

Thanks.

Betty Chen – Wedbush Securities Inc.

Kay, I was wondering if you could talk a little bit about LOFT and what is going on in your sub channels? It seems like Outlet and e-commerce are so strong. Is it primarily different merchandise, different marketing or versus the retail that is alluding to the different performance? And how should we think about that going forward, potential opportunities or changes that could happen and timing of that? Thank you.

Kay Krill

Okay. First of all, we said on the second quarter call that August was starting off slower in LOFT, in the LOFT stores channel, due to delivery issues. And we expected the performance to improve as we got into September and October and, in fact, that is what happened.

As far as, we had a couple of tough categories in the LOFT store channel in knits and denim and that definitely affected them. As far as the online business, they bought the quarter very well and they had a very balanced assortment. I think they rounded out their assortment with online exclusives, which has been very successful for us. And they drove traffic, tremendous traffic gains, through the overall LOFT marketing strategy as well as strategies for the online customer.

So I think also we saw a trend during the third quarter of store customers migrating to be more multi-channel shoppers, which I think is a trend that we probably are going to continue to see. And then the LOFT outlet business has been successful from the get go. It represents tremendous value in that channel of business and it really focuses primarily on casual wear-to-work that is 30% less than the LOFT regular stores.

So I think that each channel, the online and the outlet obviously have had two consecutive quarters of outstanding results and the store''s channel did get better as we progressed through the quarter.

Betty Chen – Wedbush Securities Inc.

Just a quick follow up. What percent of the online business is exclusive or merchandise mix?

Kay Krill

Between the two, it''s about 20% to 30%. It''s a little lower in LOFT, probably around the 20% range and higher in Ann because the wedding category is carried primarily online. So it''s a little higher, about 30% in Ann and 20% in LOFT.

Operator

Thank you. Next question, Neely Tamminga, your line is open, state your company please.

Neely Tamminga – Piper Jaffray

It''s Piper Jaffray and congratulations on a great quarter. Just a little bit in terms of peeking into next year with respect to some of your strategies on e-com, could you just remind us where you are headed in terms of some of the more nuts and bolts of the fulfillment in e-com hosting and maybe the email marketing aspects. But then also maybe some of the more strategic, the real-time inventory aspects of what the e-com business can offer. That would be really helpful?

Kay Krill

Okay. First of all, for next year, Neely, we are going to continue to expand our exclusive online assortments because that has been a successful strategy for us. We absolutely know the optimum inventory levels to have in order to achieve the results that we are now experiencing. And we are also increasing our investment in digital media and other forms of online marketing to drive traffic.

I think that''s a very important strategy for us that we have just tapped into a little this year and it will become more meaningful next year. And we are making long-term investments to foster a seamless multi-channel experience for our client. As you know, we are getting ready, next year we are going to be launching our new e-commerce platform and the technology enhancements that go along with that are a simpler and quicker checkout process, which I think will be meaningful for conversion and the capability for clients to post reviews and comments on the products which we hear has been very successful in the apparel online market so far.

We will mobile-enable our site. We will be able to personalize and segment our message to our clients which I think will be definitely great for conversion. And we will be able to ship internationally. We don''t have those capabilities today and we will be able to do that, as well as pooled inventory, which we also think is a very important strategy in order to become a true multi-channel company.

Neely Tamminga – Piper Jaffray

Absolutely. Thank you and congratulations and good luck.

Kay Krill

Thanks Neely.

Operator

Thank you. Next Janet Kloppenburg, your line is open and state your company.

Janet Kloppenburg – JJK Research

Hi, everybody. Congratulations on a nice quarter.

Kay Krill

Thanks Janet.

Janet Kloppenburg – JJK Research

Okay. A lot of my questions have been answered but you launched the LOFT brand and you understand the DNA of that brand better than most. So my question to you is, on the store front, when you look at the holiday line, is it strong enough to turn the comps into solidly positive territory? I mean, obviously, e-commerce and outlets will offset some weakness if it doesn''t. I''m not worried about that. I just wonder how you think about the brand''s assortments, their strengths and weaknesses and whether we need to wait another quarter or so before the stores are better positioned for comp store growth? Thanks.

Kay Krill

Janet, first of all, I want to reiterate what I said. I don''t know if I said it during my script or Q&A but that we just completed the holiday store set today. In hindsight, I wish it was a week ago but it was today. I was down, I was in Times Square yesterday afternoon after it had been set there and I think it looks really good. I think that we did not have all of the categories in place until yesterday, today, across the country. So we''ll see, but I think it looks good so far.

Janet Kloppenburg – JJK Research

Okay. Lots of luck and best wishes for a great holiday season.

Kay Krill

Thanks Janet.

Operator

Thank you. Next Robin Murchison, your line is open and state your company.

Robin Murchison – SunTrust Robinson Humphrey

Good morning. SunTrust Robinson Humphrey. Kay, you just mentioned international, and I know it''s early, but where is the international interest coming from and would pricing be the same? Anything you can tell us on that.

Kay Krill

Robin, I said that when we launched the new platform next spring we will have international capabilities. So we don''t today. We don''t today but we will next spring and we look forward to that.

Operator

All right. Thank you. Next, Jennifer Black, your line is open, state your company please.

Jennifer Black – Jennifer Black & Associates

Jennifer Black & Associates and let me add my congratulations.

Kay Krill

Thank you.

Jennifer Black – Jennifer Black & Associates

Are there any other accessory categories that you would consider at both the Ann vision as well as LOFT? And I wondered what kind of growth opportunities lie ahead at both divisions. You''ve done so well at jewelry, especially at Ann Taylor. So if you could comment on that, that would be great.

Kay Krill

Jennifer, you know what, I think we don''t know how high is high in the jewelry category in either brand. Every time we up the ante in both brands in jewelry it just never seems to be enough. We''re turning it really fast. But what I will say is for next spring and all of 2011, the Ann brand jewelry assortment will not just be sparkly, not just be the sparkly. We are going into burnished tones of gold, we''re going into burnished silver. We''re going to round it out more as we head into 2011 and I think that''s definitely going to be meaningful.

And the LOFT brand continues to hit on all cylinders on jewelry because I think it''s priced extremely well. So I think from that perspective, having more inventory is really going to help them. As far as other categories go, I think that we definitely have opportunity in expanding the fashion component of the shoe assortment in both brands because the over-the-knee boot in LOFT is basically sold out.

So I think there is opportunity to be a little bit more fashionable there, as well as in the Ann brand. I think the pumps are still selling fine but I think that the fashionable shoes definitely exceeded our expectations. So I think accessories all in all just needs to up the fashion ante.

Jennifer Black – Jennifer Black & Associates

Great. Thanks and good luck.

Kay Krill

Thank you.

Operator

Thanks. Next, Roxanne Meyer, your line is open, state your company.

Roxanne Meyer – UBS

UBS. Good morning and congratulations on a fantastic quarter.

Kay Krill

Thank you.

Roxanne Meyer – UBS

Two questions. One, as Christine and Gary reflected on holiday last year, I''m just wondering, maybe in particular, especially for LOFT, what were the big opportunities that were left on the table last year that they are able to really get into this year? And then, secondly, how are you planning inventory for the fourth quarter and into the spring? Thank you.

Kay Krill

I will just take the Gary’s brand planning the holiday. I think that one of the callouts, let me just take the Ann brand first, one of the callouts from last year is that, as you know, in the Ann Taylor overall business, fourth quarter is still a self purchase business for our brand. I mean, we do have strong gifting assortments but it is really primarily self purchase.

So the callout last year was to stay in business in the wear-to-work assortment during the fourth quarter and invest in suits and invest in those key categories that are typically wear-to-work categories. So that was a big callout, we did that and it has been extremely successful thus far in the fourth quarter. So I think that''s definitely a home run for Ann.

The other thing that was a callout is that cashmere has become such a commodity business at all different price points, virtually in every company in America. So we pulled back the cashmere assortment to top-tier stores and have a cashmere shop in those stores. And I think from a margin perspective that''s going to be a huge win for the Ann Taylor business.

In LOFT, one of the callouts last year is we did not have enough sweaters. And LOFT sweaters is at least one-third to 40% of the business going into fourth quarter. So we have positioned ourselves strongly in the sweater category in all different silhouettes and price points, particularly opening price points and we''re in far better position this year than last year. So I would say those are the big callouts.

Michael J. Nicholson

And for your inventory question, we positioned the business in the fourth quarter to support a double digit comp increase at the Ann brand and a low single digit comp increase at the LOFT brand. In terms of our end of year inventory position and/or how we bought and positioned the business transitioning into the first quarter of 2011, I would expect the total company to end the year somewhere in the mid single digit range on a dollars per square foot basis, with the Ann brand slightly higher and the LOFT brand slightly lower. In addition, factory outlet will likely be up double digits as we position inventory to support the rapid acceleration in the second quarter of 2011.

Roxanne Meyer – UBS

Great. Thanks much and best of luck.

Michael J. Nicholson

Thank you.

Operator

Thank you. Next, Michelle Tan, your line is open and state your company.

Michelle Tan – Goldman Sachs

Great. Thanks. It''s Goldman Sachs. Mike, I was wondering if you could give us some additional color on some of the incremental allocation initiatives you have planned for next year. Just remind us of the time line of that and some of the new capabilities that you are expecting to roll out.

Michael J. Nicholson

Sure. Kay mentioned pulled inventory. I think about these initiatives as lots of learning in the first half of ''11 with a ramp up in the back half of ''11. So we have pulled inventory, we have markdown optimization tools. In addition, we will be holding and flowing more frequently, so more replenishment and allocation. So, as I think about those three initiatives, those are the more significant activities that we have underway from a supply flow, planning and allocation perspective.

Michelle Tan – Goldman Sachs

And timing seized the second half more than the first half?

Michael J. Nicholson

The way to think about it is, lots of learning first half of 2011 and more of a ramp up in terms of the activity and opportunity and realization of benefits in the back half of 2011 and into 2012.

Michelle Tan – Goldman Sachs

Great. Thanks so much.

Operator

Thank you. Next, Paul Lejuez, your line is open and state your company.

Paul Lejuez – Nomura Securities

Thanks, Nomura. Just following up on a question from earlier. Can you talk about how much of the increase that you saw at each brand online was driven by exclusive product versus product that you also sell in stores? And then just thinking a little bit longer term, where do you see each business going in terms of e-com as a percentage of total sales? Thanks.

Kay Krill

Well, e-commerce as a percentage of total sales right now is approximately 10%, which is up significantly from the past couple of years. As far as the online exclusives go, it was about 20% of LOFT -- actually a little bit less than that, probably about 15% to 18% of LOFT and close to 30% of Ann, generally because of the wedding categories that''s carried online.

But we continue to see significant growth in this channel. We are very pleased with the results that we are seeing, north of 50% increases in growth. We don''t see that stopping.

Operator

All right. Thank you. Next, Brian Tunick, your line is open, state your company, please.

Brian Tunick – J.P. Morgan

Thanks. J.P. Morgan. Congrats again.

Kay Krill

Thanks.

Brian Tunick – J.P. Morgan

I guess, first question is for Mike and then one for Kay. Mike, on the gross margin rate, do you think despite rising sourcing costs, can a positive mix of e-commerce and factory next year drive gross margins higher, in your view? Maybe give us a sense of where you think Ann is right now on the sourcing and procurement front.

And then Kay, curious, obviously a lot of the growth is going to come in the outlet and factory channel and have you looked at what the shopper looks like? Is this a new customer to the Ann or LOFT brands? Thanks very much.

Michael J. Nicholson

So Brian, I will start. I think the short and simple answer to your question is absolutely yes. First, just in terms of the sourcing area. I think I want to first start with the first half of 2011. I think it''s important to note that overall our cost mitigation strategies, particularly our decision to pre-position core fabrics early, has ensured that we will be able to maintain IMU in the same period as 2010. So the fist half of 2011 we have successfully navigated through the pressure.

In terms of the second half, Paula is working hard, Paula and her team are working very hard with the merchants and the design team to mitigate costing pressure. They''re numerous -- labor wage rates in China, weaker dollar, commodity costs, particularly cotton. But we have a number of strategies underway in the business that give us some optimism that we will be able to successfully navigate through this crisis.

First, as it relates to advanced commitments, consistent with the fist half activity, we are making meaningful commitments on a significant portion of our key core fabrics. Second thing is we are aggressively looking at opportunities to procure off peak production. That''s a strategy that we have historically utilized within the factory outlet channel and we are rapidly expanding that across the full price channels.

Third, strong vendor partnerships. I cannot emphasize that enough. It''s a tremendous benefit to us as we manage through these challenges. And then also just value engineering the product where it makes sense. We have our designers and our merchants on the ground in Asia working directly with our vendors and our factories and we continue to strengthen our raw materials trim staff in Asia to ensure that we have flawless execution in this area.

From a costing perspective, while we know the situation is clearly more challenging than we''ve seen, we believe we are approaching this in the right way and that we are doing everything in our power to mitigate the costing pressures for the back half of 2011.

Kay Krill

Okay. And Brian, regarding your factory question, we believe that the customer already exists in that channel and she shops that channel. So it is a new customer for us and we are now getting part of her spend because we are there. I just want to be clear, though, that our focus is not only on the growth of factory, we are very excited about that growth but we are also very excited about the growth of our full price Ann brand and our LOFT brand through in store and online. So we continue to see opportunities in all channels.

Brian Tunick – J.P. Morgan

Terrific. See you in a few weeks and good luck for holiday.

Kay Krill

Thank you.

Michael J. Nicholson

Thank you.

Operator

Thank you. Next question, Marni Shapiro, your line is open and state your company.

Marni Shapiro – The Retail Tracker

Hi, congratulations. The Retail Tracker. Great quarter. The stores look beautiful.

Kay Krill

Thank you.

Marni Shapiro – The Retail Tracker

As you merge to your new platform online, can you talk a little bit about how that might impact your in store capabilities as well? Any plans that you have to be able to better service the customer in stores with the use of your online abilities even?

Michael J. Nicholson

Absolutely. Longer term, it would be our aspirational goal to enable the customer to shop in store online, to enable the customer to be able to select online exclusive in store and vice versa. At the end of the day, our goal is to have a seamless, multi-channel experience that is focused on the client.

Marni Shapiro – The Retail Tracker

Brilliant. And just hypothetically, how far away are we from that? Is it a year, is it two years?

Michael J. Nicholson

What I say is, next year, mid year next year, we fully expect to have the capability to offer the customer the ability to purchase inventory, pull inventory from any store online at any particular location in the country.

Marni Shapiro – The Retail Tracker

Excellent. Congratulations. Good luck for holiday.

Kay Krill

Thanks, Marni.

Operator

Thank you. Our final question comes from Dana Telsey, your line is open and state your company.

Dana Telsey – Telsey Advisory Group

Telsey Advisory Group. Good morning, everyone and congratulations.

Kay Krill

Thanks, Dana.

Dana Telsey – Telsey Advisory Group

As you think of the past when the business at one point had a 10% type of operating margin, opportunities to get back there, could that happen? What do you need to happen to get there or is the cost structure or pricing structure such that it wouldn''t allow for it?

Michael J. Nicholson

Dana, we can absolutely get back to our historical levels of peak performance. It''s simple. It''s sales productivity, it''s gross margin rate improvement and it''s holding expenses. And that''s exactly what we are all focused on.

Dana Telsey – Telsey Advisory Group

Thank you.

Operator

Thank you. This concludes the question-and-answer session for today. I would now like to turn the call over to Judy Lord.

Judith A. Lord

Thank you, everyone, for your time and your questions. As always, I will be available throughout the day today to address any follow-ups you may have. And I hope you all have a great day. Thanks.

Kay Krill

Thank you.

Operator

Thank you. That does conclude today''s conference. You may disconnect at this time.