Ann Taylor Stores Q1 Earnings Call Transcript

123jump.com Staff
24 May, 2009
New York City

The women''s apparel retailer net quarterly sales decreased 28% to $426.7 million on comparable store sales decline of 30.7%. Net loss incurred was $2.3 million in the quarter. The company lost 4 cents a share compared to earnings of 43 cents a share a year-ago quarter.

Ann Taylor Stores Corp. ((ANN))
Q1 2009 Earnings Call Transcript
May 20, 2008 8:30 a.m. ET

Executives

Maria Sceppaguercio - Senior Vice President of Finance, Communications, and Investor Relations
Kay L. Krill – President, Chief Executive Officer & Director
Michael J. Nicholson – Executive Vice President, Chief Financial Officer & Treasurer

Analysts

Lorraine Hutchinson – Bank of America/Merrill Lynch
Tracy Kogan - Credit Suisse
Neely Tamminga - Piper Jaffray & Co.
Jennifer Black - Jennifer Black & Associates
Stacy Pak – SP Research
Betty Chen - Wedbush Morgan
Kimberly Greenberger - Citigroup
Laura Champine - Cowen & Company
Adrienne Tennant - Friedman, Billings, Ramsey
Michelle Tan – Goldman Sachs
Janet Kloppenburg - JJK Research
Liz Dunn - Thomas Weisel Partners
Robin Murchison - SunTrust Robinson Humphrey
Dana Telsey - Telsey Advisory Group

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Ann Taylor Stores Corporation’s first quarter 2009 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 prepared remarks by the company you will have the opportunity to ask questions. I would now like to turn the call over to Maria Sceppaguercio, Senior Vice President of Finance, Communications, and Investor Relations. Ma’am, you may begin.

Maria Sceppaguercio

Thank you and good morning everyone. Here with me today to discuss our results is Ann Taylor President and CEO, Kay Krill, and our CFO, Mike Nicholson.

As you know earlier this morning, we issued our results for first quarter of fiscal 2009. Last quarter we discussed with you our belief that the first half of 2009 would be all about maximizing gross margin dollars and reducing expenses as the macro and consumer environments were expected to remain weak.

So far our outlook for the economy is playing out as expected and we are pleased that by executing on this view we achieved a significant improvement in our bottom line performance versus the fourth quarter of last year.

In addition, our restructuring program and focus on reducing expenses have been successful in driving down our cost of doing business. For the quarter, excluding pre-tax restructuring expenses, which were less then $200,000 in the current quarter compared with $3.7 million in the first quarter of last year, we generated a loss per diluted share of $0.04 versus earnings per diluted share of $0.47 last year.

Now before I turn the call over to Kay, I 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 concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company''s filings with the SEC.

With that, I will hand it over to Kay.

Kay L. Krill

Good morning everyone and thank you for joining us. This past quarter as we discussed on our last call, was focused on controlling inventories and expenses to minimize risk. On that front I am pleased with the progress we made. We achieved a 55.5% gross margin rate in the quarter which exceeded year ago and was dramatically higher than the fourth quarter last year.

In addition, we reduced SG&A by $31 million or 11% despite a 1% increase in square footage for the quarter. Our strategy to conservatively plan inventory levels is clearly working in this environment and the results of our restructuring and cost reduction programs continue to exceed our expectations.

At the same time, our top line was under significant pressure in the quarter especially at the Ann Taylor division. As you know, this business is being repositioned so the spring season does not yet reflect Ann’s evolution.

However, beginning in fall you will see Ann Taylor’s product offering, marketing and in-store environment begin to evolve to a far more modern, relevant, and compelling point of view. We believe existing and new clients will respond favorably to the brand’s new direction.

In terms of inventory, we ended the quarter with total inventory per square foot down 16% driven by Ann Taylor which was down 28%. In addition, our balance sheet and cash position remained very strong. Mike will take you through the details of our financials in a few moments.

Turning now to the brands. Starting with Ann Taylor. As we have discussed previously this division’s performance reflects both external factors as well as internal ones. From an external perspective we continue to be challenged by the ongoing major market disruption in the aspirational luxury market for women’s apparel, particularly apparel for professional working women as our client continues to pull back significantly on apparel purchases for herself.

From an internal perspective the product assortment was not compelling or relevant for her and the aesthetic and inventory buy for the quarter did not support as cohesive a story in-store as we would have liked.

Notwithstanding these issues, I do want to point to a few encouraging factors underneath the disappointing top line performance.

First, we did intentionally limit our promotional or markdown sales by entering the quarter with cleaner inventories than we have historically and by focusing on more full priced, higher margin sales. In fact, our markdown business was down more than 50% which led to a higher gross margin rate versus year ago for the division.

We remained highly focused on inventory disciplines and gross margin improvement as we worked towards greater full price integrity for this brand. In addition, when we did present compelling product it consistently performed well and oversold our expectations at full price. This does provide us important feedback on our clients’ full price appetite for compelling fashion and her Call to Action to the brand to offer a more relevant and unique fashion assortment.

And finally, our traffic significantly outperformed our comps. The good news is that we have a loyal client who wants Ann Taylor to win and who willingly returns to shop the brand.

We believe that with a more exciting and stylish assortment we can convert our existing client with greater success and capture new clients.

Looking ahead to the second quarter for Ann Taylor, we remain highly focused on inventory management and on maximizing the more modern fashionable elements of the assortment, while we continue to work our way through the pipeline of prior product.

On a positive note as part of our May store set, we did fast track a handful of items that are indicative of the direction we are taking the brand in fall. Those pieces sold out in the majority of our fleet within a couple of weeks and give us greater confidence in the assortment we have for the upcoming season.

In addition we recently hosted a fall fashion preview for the fashion community for both Ann Taylor and LOFT and the response was very encouraging. I would note that we have again positioned our inventories conservatively for fall as we test and learn our way to a more robust performance in the Ann Taylor division and invest behind success rather than ahead of it.

Now turning to LOFT, LOFT entered the first quarter with an exceptionally clean inventory position and purchased inventories for the first quarter very conservatively. This limited sales of markdown goods and supported our strategy to maximize gross margin while minimizing risk. As a result, our non-full price selling was down nearly 50% but our full price selling was much stronger for the quarter.

Importantly, LOFT’s overall comp performance improved as the quarter progressed as our full price inventory built. In addition improved product assortments coupled with a positive response to the value that LOFT represents positively impact the division’s results.

With in-store inventory per square foot at LOFT down 23% at the end of the first quarter, we are well positioned to support a focused, strategic promotional stance for the second quarter. We expect this will enable LOFT to again achieve a strong gross margin rate in Q2.

Turning to products, during the first quarter our client reinforced for us how important it is that we offer affordable fashion that is both feminine and casual. Our knit tops, casual bottoms, and dresses performed well while we experienced softness in the refined and relaxed separates business.

In knits, results were strongest in items that we added embellishment or feminine details to and fashion bodies and great colors. Our basics business in Ts and camis also performed well and will continue to be a growth opportunity for us each season as we infuse these styles with novelty trims and fashion details.

Casual bottoms turned in strong results for the quarter with successes in cotton pants and denim where she responded positively to our variety of lengths across crop, capris, and shorts. In dresses we experienced success in our weekend category where she found our opening price points compelling and where our color offering was very well accepted.

On the other hand, the work component of the business was challenging in the first quarter on a year-over-year basis. Although our inventory was positioned more conservatively than in years past, there remains an opportunity to further downplay this category in the future while adding more versatility into the assortment.

Specifically, in separates we are updating our fabrications and modernizing our silhouettes and styling. We continue to make great progress in reducing the number of SKUs that we offer so that our assortments are more cohesive and focused.

Overall, we made good progress during the quarter at LOFT delivering our unique value message with more concise value messaging in our windows, and in our e-mail outreach. In this environment we believe that LOFT’s high quality at surprising prices is a key differentiator.

Let me spend a moment talking about the differentiation of the brands and how we’re positioned heading into fall. The upcoming third quarter is by far the most differentiated that Ann Taylor and LOFT have ever been. LOFT is decidedly casual emphasizing a fashionable and feminine aesthetic while Ann Taylor speaks to a more refined and sophisticated client.

This differentiation will be very apparent to you with the fall assortments which are more authoritative and highly focused on the DNA of each brand.

Before turning the call over to Mike, let me spend a moment on our factory and our Internet businesses.

Starting with factory the recessionary environment also impacted this channel with comp traffic down in the double-digits. In addition, consumer reluctance to spend was evident as most other in-store metrics were also soft which drove top line weakness for the quarter.

However the factory channel was very successful in maintaining a strong gross margin rate for the quarter.

Finally, our Internet business continued to experience healthy double-digit traffic growth for the quarter although sales were pressured by the recessionary environment as consumers were generally more selective about spending.

We are pleased that traffic growth is healthy which is a sign that our client remains engaged. We continue to view the Internet as this highly scalable and cost effective growth channel which is also a critical cost effective marketing tool.

With that let me turn it over to Mike for a review of the financial performance.

Michael J. Nicholson

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

Beginning with net sales, net sales for the quarter were $426.7 million, a decline of 28% versus the $591.7 million in net sales reported in the first quarter of last year. By division net sales at Ann Taylor were $107.4 million versus $197.6 million in Q1 last year.

At LOFT, net sales were $223.2 million versus $295 million reported last year. Comp store sales for the quarter decreased 30.7% with Ann Taylor down 42.7% and LOFT down 24.2%.

Our strategy to maximize gross margin in 2009 while minimizing inventory risk involved limiting the amount of prior-year product entering the quarter and buying the first quarter very tight. This strategy was very successful in driving strong gross margin rates but it did have an impact on comp store sales results as we expected it would. We anticipate that much of this comp softness will continue in the second quarter with some improvement in trend at both brands expected in the third quarter.

Turning now to margins. As Kay mentioned we were highly focused on delivering gross margin in the first quarter. Our first quarter rate of 55.5% was 230 basis points above the 53.2% rate we reported in the first quarter of 2008, versus the 35.7% gross margin rate reported in the fourth quarter of 2008 our performance in Q1 of this year was particularly noteworthy. And all three divisions did achieve strong gross margin rates for the quarter.

Total inventory per square foot declined 16% versus year ago and in-store inventory for the quarter was also down 16%. At the Ann Taylor division, total inventory per square foot declined 28% while in-store inventory declined only 16%. This more modest in-store decline reflected a strategy shift to seasonal versus monthly product flows for a portion of the assortment that will now live throughout the season. Adjusting for this change in product flow strategy, Ann Taylor’s in-store inventory would be down about 25% to 30% for the quarter.

Now while this inventory position will likely put some pressure on the division’s gross margin rate in the second quarter we nevertheless expect the division to achieve a solid gross margin rate for Q2 and enter the third quarter cleaner than we’ve ever been from an inventory standpoint.

At LOFT, total inventory per square foot declined 16% and on an in-store basis inventory declined 23% in line with our comp store performance. For the total company we bought our inventories for the second quarter down in the 20% to 25% range which we expect to support a solid gross margin performance but below the very strong performance we achieved in the first quarter.

Turning now to SG&A. As Kay stated earlier SG&A declined $31 million versus the prior year despite a 1% increase in square footage. This decline reflects restructuring program savings and other cost reduction activities in the areas of store payroll, tenancy, and depreciation.

Turning to our restructuring program. We now expect incremental savings in 2009 to total $40 million to $45 million versus the $35 million to $40 million previously communicated. As a result, total ongoing annualized savings are now estimated at $85 million to $95 million by year end fiscal 2010.

In terms of restructuring program costs, we continue to anticipate total costs for fiscal 2009 to be approximately $5 million. First quarter pre-tax restructuring costs were minimal at less than $200,000. The net income impact was less then $0.01 per share. Excluding restructuring, we reported an operating loss of $2.5 million during the quarter compared to operating income of $44.9 million last year.

On a same basis, we reported a first quarter net loss of $2.2 million or $0.04 per diluted share compared with net income of $28.2 million or $0.47 per share in the prior year. Weighted average diluted shares outstanding for the quarter declined 5.4% to 56.6 million shares versus the 59.8 million shares in the first quarter of 2008.

Our effective tax rate for the quarter was 28.2% versus 37.8% in the first quarter of last year. This decrease primarily reflected the impact of the minimal net loss this year versus a period of substantial income last year.

Depreciation and amortization in the first quarter totaled approximately $27 million versus $31 million in the prior year. Capital expenditures for the first quarter totaled $12 million versus the $26 million in the first quarter of 2008. And for the year we continue to expect CapEx to be approximately $35 million, a 65% reduction versus 2008.

Our total square footage at the end of the quarter totaled 5.5 million square feet, up approximately 1% from the prior year. During the first quarter, we opened nine stores and closed five, ending the quarter with 939 stores. The LOFT division opened six new stores and closed three, while Ann Taylor closed two stores. We also opened three LOFT outlet stores during the quarter.

Turning now to our balance sheet, we ended the quarter with $199 million of cash and cash equivalents of which $125 million reflected the cash drawdown under our $250 million revolver. As you will recall in early March, we made the decision to drawdown half of our revolver as a precautionary measure in what was a very uncertain credit market environment.

As we indicated at the time we did not intend to use the cash but to keep it in reserve and in fact we haven’t used it. We will continue to monitor financial market conditions and as the year progresses and we build our cash position, we may choose to pay down all or a portion of the revolver before year end.

In terms of operating cash flow during the quarter we used $26 million of cash including the benefit of a $34 million income tax refund we had been expecting this spring. We also spent $12 million on capital in the quarter. As you know, we typically generate cash in the second quarter of the year and we do expect to do so again this year.

Looking ahead to the second quarter, while we’re not providing specific guidance, we wanted to provide some insight on how we are thinking about our expected performance. As we stated in our release this morning, we remain focused on managing the business conservatively through the current recessionary environment, while simultaneously positioning both brands, particularly Ann Taylor for an improved second half of 2009.

We expect the top line to remain under significant pressure in the quarter primarily at the Ann Taylor division. As a result we expect our top line trend for the company to improve only modestly for the second quarter.

We expect to achieve a solid gross margin rate in the second quarter that is in line with the 52.4% we achieved in the second quarter of 2008. And finally, SG&A expenses in the second quarter are estimated to be approximately $245 million.

Turning now to the full year. We anticipate that the macro environment will remain difficult and that our top line will continue to be under pressure. However, we do expect our sales trends at both brands to improve in the second half.

We expect total square footage to decline approximately 2% for the year reflecting the impact of the 37 stores planned for closure this year, partially offset by the planned opening of 14 new stores in fiscal 2009.

We expect our gross margin rate for the year to improve versus year ago, due to continued aggressive inventory management, improved product at both brands, and our expectation for a gradual return to more rational promotional activity in the sector.

We expect SG&A for the year to be below year ago reflecting restructuring savings and our ongoing focus on cost reduction. And finally, we will continue to be highly focused on maintaining a healthy balance sheet and building cash throughout the balance of the year.

We expect our year end cash position to be in excess of the cash position we reported at year end fiscal 2008 excluding any borrowings under the revolver. And with that, I’ll turn it back to Kay.

Kay L. Krill

Thanks Mike. Before we go to your questions I’d like to leave you with these thoughts. This past quarter for us was all about maximizing gross margin and reducing expenses, while we continued the important work of positioning both brands, particularly Ann Taylor for the fall season. In each of these areas of focus we made good progress in the first quarter. For the second quarter we do not expect to see improvement in the macro environment and we expect our top line results to again be under pressure primarily at Ann Taylor.

Our focus for Q2 will again be on aggressively managing inventories and expenses to deliver a gross margin rate in line with the second quarter last year. At the same time, we are all very excited about the work we’re doing to position both brands for the fall season.

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

Question-and-Answer Session

Operator

Once again, I would like to remind everyone in order to ask a question, press “*1” on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Lorraine Hutchinson, Bank of America/Merrill Lynch.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Thank you. Good morning. Just wanted to follow-up on your SG&A expectations, you made great progress this quarter cutting $30 million or so, can you put that into context with the new restructuring savings and then maybe talk about the pluses and minuses outside the restructuring program, where you’re saving and where you expect inflation on that SG&A line.

Michael J. Nicholson

Sure, Lorraine. In terms of the quarter as I mentioned in my opening comments, overall we were successful in reducing SG&A by about $30 million versus the prior year, 20 of the 30 comes out of four wall and the balance of it comes out, half of it with home office overhead and marketing.

In terms of restructuring savings for the quarter, we realized about $10 million of restructuring savings that’s reflected in the $30 million year-on-year reduction. In terms of how we’re thinking about SG&A for the second quarter, the $245, what I’d say is we are anticipating some incremental variable four wall expenses associated with a higher top line as well as some incremental marketing expenses in the back half of the second quarter as we position the brands as they move into the third quarter and fall season.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Thank you and then just a quick follow-up on inventory, you sound really excited about the product coming into the stores in the second half. How are you thinking about ordering inventory and making sure that you’re still conservative enough in your plans?

Kay L. Krill

Well, let me address the inventory right now, Lorraine. It’s really different by brand and at LOFT for example, our markdown inventory was particularly light entering Q1 and we saw very soft comps in the non-full price product and much better comps in the full price product. And we really think that in carrying more inventories in LOFT could have improved our comps somewhat, but for Ann Taylor the comp benefit of carrying more inventory would have really been less significant and actually more risky because the product was not as compelling.

Going into the third quarter we have bought a little bit more in both divisions anticipating that we still will have a double-digit comp decline in the third quarter but not as significant as we’re experiencing the first quarter because we’re up against easier comps. So, we have bought the second half lightly and conservatively but more than we bought the first half.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Thank you.

Operator

Your next question comes from Tracy Kogan, Credit Suisse.

Tracy Kogan - Credit Suisse

Thanks. Two questions, the first is a follow-up to the question on SG&A, in the first quarter I think you had guided to a level that was maybe $10 million more than where you came in and just wondering if that incremental savings was related to this new cost savings program and then, the second question is, Kay, can you talk about the rationale behind the change in the product flow strategy at Ann Taylor stores and maybe it’s just something that you’re only doing until you get the new product in, but if you could just give a little more detail there. Thanks.

Michael J. Nicholson

Sure, Tracy. Just in terms of SG&A, so our revised update or our guidance for the full year, we’ve increased our outlook for the full-year savings by about $5 million. So yes, some portion of the $11 million improvement versus our going in guidance was attributable to incremental restructuring savings as well as our ability to flex down variable expenses in the store in light of a tough top line trend.

Kay L. Krill

And regarding the inventory flow, we’re really shifting our strategy to incorporate a more layered approach to the assortment. We’ll be offering a small core foundational assortment that we’re really calling the perfect pieces of Ann that consist of the perfect pencil skirt, perfect pants, perfect jacket, perfect dresses, that will live throughout the season. And layered on that will be more fashionable key items as well as a constant flow of fashion newness beginning like the middle of August through the season.

Tracy Kogan - Credit Suisse

Great. Thank you.

Operator

Your next question comes from Neely Tamminga, Piper Jaffray.

Neely Tamminga - Piper Jaffray & Co.

Great. Congratulations on that gross margin. Kay, can you balance a little bit here for fall the dance between pricing and fashion and maybe in relation to where you fast tracked the items in May. Are you seeing a pretty decent sell through on those fashion items regardless of pricing, maybe help us figure that out in this environment?

Kay L. Krill

Yes, Neely, fortunately the items that we fast tracked for the May season were predominantly marketing looks, the boyfriend jacket, the tiered skirts, some of the more fashionable dresses, and bottoms and white jeans and they definitely sold at full price and we were very, very encouraged by that.

For example, the boyfriend jacket was over $200 and the tiered skirt was $139 I believe and both of them sold significantly higher APSs than we have seen in a long time at Ann Taylor. So our feeling is that when we get the fashion right she’s definitely paying full price for it but having said that I think that Ann Taylor still represents a tremendous value in the marketplace, when you compare us to other aspirational brands and stores.

I think that our quality levels are definitely higher than a lot of those and we have paid special attention as we go into the fall season on our fabric choices and I think you will see that when you feel the fabrics they are softer to the touch, they are better quality, and they’re definitely more flattering.

We have tweaked, and I say tweaked, the fit to make it more flattering for the fall season. So, I think that what we have seen in May albeit very selective and very small, has been very encouraging for us for the fall season.

Neely Tamminga - Piper Jaffray & Co.

Best of luck.

Operator

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

Jennifer Black - Jennifer Black & Associates

Good morning. I wondered if you could talk about the progress Paula and her team have made in regards to sourcing and what changes do you see over the next year and can you also talk about any differences in the way you flow goods at both divisions as a follow-up to this last question. Thanks a lot.

Michael J. Nicholson

Jennifer, it’s Mike. I’ll take the first part of the question. Just in terms of the progress that Paula and her team have been making as it relates to product cost and IMU, what I’d say is on a macro level that we are as many other of our competitors are benefiting from this deflationary environment as well as the increased bargaining power that we have on the sourcing end. And we expect that this benefit will continue at least through the back half of 2009.

I’d also say that internally Paula and her team is working with our designers and the merchants across all of our business units focusing on value engineering our product without sacrificing product quality. And, in addition, Paula is very focused on consolidating our vendor base and we have essentially gone from some 100 apparel vendors, at the end of 2008 to about 75 in the first quarter and we’ll continue to drive that initiative as we move forward over the balance of 2009.

So together these actions are expected to positively impact our product costs this year.

Kay L. Krill

And Jennifer, regarding the product flow, I would say both divisions are definitely approaching this in the same vein albeit Ann has the core assortment of about 20% of their assortment that will live throughout the season and probably 30% to 40% of it will be key item driven and then the remainder will be fashion flowing in.

In LOFT they have less of a core except for in the casual bottom area, the casual bottoms and denim assortment will definitely live for the season adding on to it probably a little bit more, they’re probably on the 40% key item range and Ann’s probably on the 30% with fashion newness flowing in on a monthly basis. So, we’re hoping that that will help strengthen the gross margin as the team has really paid a lot of attention as to what those seasonal items will be.

Jennifer Black - Jennifer Black & Associates

Okay. And just one other follow-up, on the sourcing side, are there further changes to the lead times.

Kay L. Krill

We are constantly working on that, Jennifer. Paula and her team are really focused on improving that and we have definitely taken out four to five weeks thus far and Paula and I have committed to really work on taking another four weeks out. And she’s in Asia right now trying to accomplish just that and I think we’re making great progress but as you know it takes great discipline on everybody’s part to stay on calendar and adhere to all the processes in order to achieve that next four weeks. The next four weeks are not going to be as easy as the first four weeks taken out, but we’re all committed to doing so.

Jennifer Black - Jennifer Black & Associates

Great. Thanks a lot. Good luck.

Operator

Your next question comes from the line of Stacy Pak, SP Research.

Stacy Pak – SP Research

Hi. A couple of questions, I was wondering if you could give us a sense of the level of improvement that LOFT achieved in their comp during the quarter. Also, Kay, can you give us some evidence, obviously I heard what you said about the fast tracking in May, but evidence that Ann Taylor stores and LOFT product is going in the right direction for fall, maybe conversion increasing or something like that and then finally, Kay, I was hoping you could comment on your thoughts about color for fall. Is that going to be important for Ann Taylor stores and where does color come in for you? Thanks.

Michael J. Nicholson

Stacy, in terms of LOFT’s performance for the quarter, as we mentioned for the quarter their comps were down 24% and while we don’t report monthly comps, what I would say is that April was about ten points better than our quarterly performance.

Kay L. Krill

Okay and Stacy, I think for the back half of the year, our expectation for both brands is really an improvement driven by really two things. First of all, I think our new leadership at both brands did not influence the product in the spring season and I do expect them to have a positive influence beginning in the fall and they definitely own the fall season and I think both brands look terrific.

And the second is the evolution of the Ann Taylor brand has really been a significant initiative and we do expect consumers to respond favorably to the brand’s new direction. I really believe that Ann Taylor is about to turn the corner as we head into the third quarter.

And regarding color I do think that color continues to be important in both brands for the fall season. It’s not as bright obviously as we have been and fashion trends would indicate that it shouldn’t be. I think it’s more flattering, beautiful, mid-range colors of pinks and berries and blues and purples that are softer and a mix of soft and medium tones. The color assortment in both divisions still approaches 30% to 40% of both fall assortments so I think we’re in a good place and we get a little bit more colorful as we head into holiday.

Stacy Pak – SP Research

Thank you.

Operator

Your next question comes from the line of Betty Chen, Wedbush Morgan.

Betty Chen - Wedbush Morgan

Thank you. Good morning and congratulations on managing in this tough environment everyone. I was wondering, Kay, if you can talk a little bit about the component of the comp store sales because I know you had mentioned earlier that traffic was good, so could you talk a little bit about was it the AUR under pressure, but it sounds like we actually saw some good full price selling, so if you can talk about that by division, that would be helpful. And then how should we expect that to evolve into the back half and potentially help drive better merchandise margin.

Kay L. Krill

Let me just take that first and then Mike can pipe in. For the Ann Taylor division I think about a third of our comp issue was really self-inflicted with a product assortment that was not as compelling or relevant as it needed to be. There were some styles that were strong and those items were clearly more fashionable.

As far as the AUR it was down in the quarter in both divisions really largely reflecting a shift in mix. In the Ann Taylor division what performed was clearly more in the tops and a little bit more relaxed segment which is a lower AUR than the suits and more refined separates.

And in LOFT, AUR was also lower due to mix because the casual product, be it bottoms and tops and the more weakened category of dresses were lower AUR products that sold better. As we head into the back half of the year, I expect the AUR to be more positive because we are up against a highly promotional environment in the back half of last year where the AURs were significantly depressed and we are not buying our inventory and we’re not planning the AURs at all to be that depressed going into the back half.

Michael J. Nicholson

In terms of the metrics by division, in terms of traffic, how I’d think about it is Ann’s traffic was down in the high teens and LOFT’s traffic was down about 10% year on year and then, if you look under the covers at Ann during the quarter there was more pressure on transactions than there was on DPT. At LOFT, I would say transactions were down in the low to mid-teens with DPT down about 10%.

Betty Chen - Wedbush Morgan

That’s very helpful. Thank you. And then I was wondering if you can a little about the LOFT factory stores, how they’ve been trending so far, any sort of early learnings that you can gauge from how they’re tracking with the customers.

Kay L. Krill

The new business has really done fairly well in this environment and we’re monitoring it closely. I will say that what it started out to be was more of a balance between relaxed business and casual and we have seen the casual component of it to be much stronger and we have evolved the assortments accordingly and that has helped the business dramatically.

So we are still monitoring the concept and we’re pleased with the results.

Betty Chen - Wedbush Morgan

Best of luck.

Operator

Your next question comes from the line of Kimberly Greenberger, Citigroup.

Kimberly Greenberger – Citigroup

Great. Thank you. Good morning. Kay, I think I heard Mike say that maybe marketing expense would be up in the second half of the year, can you just talk to us about how you’re going to get the message out on the assortment improvement that you’re seeing for both brands going into the second half of the year and then, I just had an inventory follow-up question for Mike. Can we assume that the differential between the total inventory per square foot decline at negative 16% and then the two divisions, Ann Taylor down 28% and LOFT down 16%, the differential to get us to that total number would come in the factory channel?

Michael J. Nicholson

Okay Kimberly, I’ll take the first part of your question regarding marketing just to provide some clarity. What I said was I anticipate that our marketing expense in the second quarter will be up slightly as compared to the first quarter as we invest in the back half of the second quarter to support the brands as we move into the third quarter and the fall season.

I’ll also take your inventory question and then just pass it off to Kay. In terms of, like I said at the total company level, inventory was down 16%. Total inventory at Ann down 28% and LOFT down 16% and I did want to take this opportunity to just provide some perspective as it relates to both divisions under the covers and the composition of the inventory and Ann’s down 28%, when I look at it in terms of carryover or carry in to Q2, Ann Taylor’s carryover inventory which I defined as April store set and prior is down more than 30% and at LOFT their April store set and prior carryover is down 40%.

The factory channel ended the quarter with inventory essentially flat to last year on a dollars per square foot basis and we fully expect to have factory inventory levels back in line with the trend of the top line as well as all divisions by the end of the second quarter.

Kay L. Krill

And Kimberly, I just want to pipe in on the marketing for the fall season, without getting into any specificity for competitive reasons, so I’m not going to go there, we’re definitely going to have a combination of some pretty robust PR, media, and direct as well as using our Internet channel to really get the message out. So, I think it’s a pretty good plan from a comprehensive perspective but obviously you can understand I don’t want to get out there with specifics.

Kimberly Greenberger – Citigroup

Understood. Thanks, Kay.

Operator

Your next question comes from the line of Laura Champine, Cowen & Company.

Laura Champine - Cowen & Company

Good morning. We were particularly impressed with your gross margin performance given the level of markdowns that we saw visibly in the stores, and then to hear that your AUR was down too on mix. Can you quantify and I appreciate what you said about sourcing, but can you quantify the reductions in product costs you’re seeing or is there anything else that’s particularly driving gross margin expansion in the face of such weak top line?

Michael J. Nicholson

What I would say is I’m not in a position to specifically quantify for you in dollar terms the impact on the cost reduction activities to gross margin in the first quarter. What I would say is that the overall improvement in the rate and our rate performance has more to do with our overall level of inventory starting with our carry in position from Q4 as well as a very conservative receipt plan, as well as the mix of business between full price and non-full price for the quarter.

Laura Champine - Cowen & Company

Still pretty phenomenal performance on the, given the trends on AUR but is there, and you mentioned the mix shift, is there a mix towards the accessories or any sort of higher margin. Are tops typically higher margin than your suits and bottoms, or anything else I can think about the mix that it might be lower price but higher margin?

Kay L. Krill

Yes, let me just jump right in. As far as LOFT goes, their tops business as well as their casual business was stronger in full price and that helped their margin significantly because they did not invest very much in the refined and relaxed category. And in the Ann Taylor business I would say definitely tops is a higher gross margin business, as is dresses.

Laura Champine - Cowen & Company

Thank you.

Operator

Your next question comes from Adrienne Tennant, FBR.

Adrienne Tennant - Friedman, Billings, Ramsey

Good morning. Mike, I have a question on the gross margin, up 230 basis points, can you help us kind of with a break down of that, the deleverage versus the merch margin improvement. And then secondly, on IMU, can you give us a little color on IMU current quarter and then as we go through the back half of the year, we’re hearing a lot of people talk about IMU improvement from sourcing in the back half of the year. Thanks.

Michael J. Nicholson

So the first question, what I prefer to do, I’m happy to follow-up with you offline and provide you the perspective on merch margin versus other margin items after the call. In terms of IMU what I’d say is as we move into the second quarter our IMU rate is fairly consistent with Q1 and where we begin to see some benefits with respect to cost reduction is when we move into the third quarter and beyond.

Adrienne Tennant - Friedman, Billings, Ramsey

Okay, wonderful. And then Kay, you mentioned that the macro viewpoint was unfolding as you had expected, can you kind of give us a little of the macro backdrop that you’re working with for Q2 and then the back half, please.

Kay L. Krill

We’re really not expecting the macro environment to significantly get better for the second quarter or the back half and we’re really positioning our inventories still conservatively although as I said going into the second half of the year, the fall season, we did buy a little bit more because we are up against very depressed comp sales last year and we’re planning Ann Taylor to be more positive for the back half of the year. So our inventories are not as depressed as they were the first half.

Adrienne Tennant - Friedman, Billings, Ramsey

Okay, great. Thank you very much and good luck.

Operator

Your next question comes from Michelle Tan, Goldman Sachs.

Michelle Tan – Goldman Sachs

Great. Thank you. Just a follow-up on the traffic comments you made earlier, can you give us a sense of how that trend of traffic that you gave for first quarter compares with the last several quarters. And then I have a follow up after that.

Michael J. Nicholson

In terms of last several quarters what I would say is that the overall level of traffic was fairly consistent with what we saw in the fourth quarter but as it relates to the year-on-year change; just keep in mind as we moved through the quarters of 2008 obviously there was a decline quarter over quarter. So when we look at it versus the prior-year quarter, rate of change is more significant but it’s essentially in line with what we experienced in the fourth quarter.

Michelle Tan – Goldman Sachs

Okay, great. That’s helpful. And then my follow-up is also on the inventory question for the second half, given that in the second half of last year the inventory buy ended up being well ahead of where you would have ideally liked it to be, would that suggest that relative to where you are in the first half or you’re even a little more aggressive than it looks on the surface in the second half.

Kay L. Krill

We’re not aggressive in the second half at all. We will still be below last year’s levels, absolutely. We just have opened it up a little bit compared to the first half of this year when we were down significantly. I don’t want anyone to think that we are definitely going to be higher in the back half of the year. We’re going to be double-digit negative for sure.

Michelle Tan – Goldman Sachs

Okay, great. Thank you and good luck.

Operator

Your next question comes from Janet Kloppenburg, JJK Research.

Janet Kloppenburg - JJK Research

Hi, everybody. A couple of questions. Kay, I’m hearing a lot about the repositioning of Ann Taylor and the new fashion styling there, I was wondering if you could elaborate a little bit more on LOFT and what changes we expect to see there. And also, just to go back to Ann Taylor if you expect the refined business to begin to improve in the back half of the year. And for Mike, I was wondering your guidance on SG&A for the first quarter was 250, you came in much below that. We have new guidance. I’m just wondering in light of, if top line becomes more difficult again in the second quarter, are there opportunities for you to sharpen that number as well. Thank you, guys.

Kay L. Krill

Okay, Janet, I am going to jump in right now. Let me just start with Ann and I’ll go to LOFT. I think that the fall product is much improved on many fronts and especially the style. I think it’s definitely distinctly more modern and compelling and the fabrics I’m very excited about because I think they’re softer to the touch and the feel which I think we have not had in the store for quite a while.

And as I said the fit has been tweaked to be more flattering overall. I think that the Ann Taylor product is exactly what it should be. It’s a good combination of refined and relaxed with a little casual chic area in the back of the store so I think we’re addressing her entire lifestyle but obviously focusing more on versatile separates that are just more modern in feeling.

I think as far as LOFT goes, it is less of an evolution than it is in Ann because LOFT’s full price business for the first quarter was really healthy and I think that as we go into the back part of the year what Gary and his team have done is really honed in on the feminine casual component of the brand because that’s really the heart and soul of LOFT and they have really backed away from the wear to work category pretty much altogether.

So I think that the DNA of LOFT is going to come alive in the back part of the year and I’m expecting very positive results for the back half of the year as far as full price selling.

Janet Kloppenburg - JJK Research

Great. Thanks so much, Kay.

Michael J. Nicholson

Janet, just in terms of SG&A to clarify, the 245 is a perspective, it’s my perspective, it doesn’t necessarily represent specific guidance. What I’d say is that in terms of the top line, what we’ve said is we do expect the top line will continue to be under significant pressure in the second quarter, specifically at the Ann division. However, we do expect the top line to improve modestly in Q2 versus Q1. And so the perspective of 245 reflected in that thinking is a flex up on the incremental sales. What I would say is that if the top line is not there, we will clearly continue to go after opportunities to flex down variable store expenses.

And then more holistically, more broadly we are always looking at opportunities to manage this business more efficiently and where there are opportunities to go further after costs we absolutely will.

Janet Kloppenburg - JJK Research

Great. Thanks so much and good luck.

Operator

Your next question comes from Liz Dunn, Thomas Weisel Partners.

Liz Dunn - Thomas Weisel Partners

Hi. I had a question related to the store closures. Are you continuing to evaluate your store base for potential closures and what’s the differential between the stores that you’re closing and the stores that are remaining open in terms of productivity, so that we can model it out? Also, any update on lease negotiations.

Michael J. Nicholson

So, what I would say is that consistent with where we were in mid-March, under the terms of the current program we’re looking at about 163 store closures, 60 of which we completed last year. In the current year, we’re looking at about 35 to 40 stores. The majority of these locations, well let me step back and say all of these locations, clearly were underperforming locations and the majority of these locations were lease events either at the end of a lease life or there was an opportunity for us under the terms of the lease to kick the property back to the landlord.

This is really sort of an ongoing process and an every day activity within the business where we continue to evaluate at the store level operating performance and in the event where stores aren’t performing, we will engage in conversations with the landlord to see if we can find a solution to make that property work for both parties.

Liz Dunn - Thomas Weisel Partners

Is there anything, are you finding that on the stores that you had slated for closure or is this like the stores that maybe are on the fence and as you think about lease negotiations?

Michael J. Nicholson

What I would say is that we are as well as the landlord interested in engaging in conversation with respect to opportunities across the entire portfolio.

Liz Dunn - Thomas Weisel Partners

Okay. Thanks.

Operator

Your next question comes from Robin Murchison, SunTrust.

Robin Murchison - SunTrust Robinson Humphrey

Good morning and thanks for taking my question. Kay, on the back half merchandise that, core Ann Taylor, would you comment on the price points. It looks like they’re edging up.

Kay L. Krill

The price point strategy in Ann Taylor is really not going to change going into the back part of the year. In the fall our mix is going to shift a little bit more towards the better separates categories and we’re going to more natural yarns in the tops world but we expect a slight average ticket increase because of mix but item for item, Robin, we are really not taking the prices up at all. But what we are going to be offering, that’s why I’m so excited about the value component is the fabrics are far superior to what we had before and we have as Mike said, really value engineered them in a more meaningful way to be more relevant and for the same price.

For example, I’ll just give you an example, pants we took the linings out because clearly that was a dated thing to have linings in your pants and so we were able to save money there but we were able to put a pant curtain on and offer a better fabric in some instances. So, the average, the retails are not going to have an uptick but the value will be even more pronounced.

Robin Murchison - SunTrust Robinson Humphrey

It looks like you’re integrating more of that collection look that you had in past seasons, I don’t think you’re doing so much anymore, but taking that look and making it more representative of the entire mix.

Kay L. Krill

Yes, the whole entire, are you referring to the PR book that you got?

Robin Murchison - Sun Trust Robinson Humphrey

Right.

Kay L. Krill

Yes, the assortment is definitely more modern and has a better hand than the Ann Taylor core assortment has had in a long time, so you’re absolutely correct.

Robin Murchison - SunTrust Robinson Humphrey

Thank you very much and good luck.

Operator

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

Dana Telsey - Telsey Advisory Group

Hi, good morning, everybody. Can you talk a little bit about how you envision the box, Kay, in terms of the split between whether its accessories, petites, casual, wear to work? How do you want the complexion to be in each division, what does it mean for margins, and also what does it mean for sourcing? Thank you.

Kay L. Krill

Dana, as far as the box, let me just take Ann Taylor for a minute, I think that as I said, it’s going to be, we’re going to establish enduring zones in the box and we will specify the casual chic area and the wear to work area, the accessories area, so we are going to make it easier for her going into the back part of this year to shop in a more expedient way.

As far as the proportions, it’s going to change really by month, what the emphasis is. But I would say that in the division we’re definitely down playing casual as we should because that’s really what LOFT stands for, and really building up the versatile separates aspect of the Ann Taylor brand which is what our heritage is and where we should have been all along.

In the LOFT, having said that, we all definitely realize that accessories is a huge opportunity for us and we’re definitely planning on making that more relevant and more compelling for the back half of the year. And LOFT, it’s really the opposite. What Gary and his team are focused on is really building up the casual component and having that be a greater percentage of the box at all times and really down playing and really attributing the go to work piece of it more selectively for the back part of the year. His team has also realized the opportunity that they have in accessories and are definitely I would say the company is going after that business for the back part of the year.

Dana Telsey - Telsey Advisory Group

Thank you.

Operator

This ends the question-and-answer session of today’s call. We will now turn it back over to Ms. Krill for any closing remarks.

Kay L. Krill

Okay, thank you for joining us this morning and have a great day everyone.

Operator

This concludes today’s conference call. You may now disconnect.