Ann Taylor Stores Third Quarter Earnings Call

Market Update Analysis:

Author: Rozalina Destanova
123jump.com
Last Update: 6:34 AM EST November 21 2007

Women''s apparel retailer’s revenue rose 6% to $600.9 million from $566.3 million a year ago. Net sales at Ann Taylor-brand stores fell 4.4%, to $213.5 million, while Ann Taylor Loft sales rose 8.9% to $296.9 million. Same-store sales fell 0.4%, including a 4.4% drop at Ann Taylor stores and a 0.3% drop at Loft stores. The company blamed weak traffic and unseasonably warm weather. Ann Taylor expects profit of $2.05 to $2.15 per share versus previous guidance of $2.15 to $2.25 per share.

This summary is based on the third quarter fiscal 2007 earnings call conducted by Ann Taylor Stores Corp. (ANN: chart) on November 16, 2007.

Management:

President, CEO: Kay Krill
CFO: Michael Nicholson
Senior VP Communications Inventor Relations: Maria Sceppaguercio

Key Investors Issues

- EPS were 66 cents per share compared to 54 cents a year ago.
- Net income rose to $40.8 million, from $39.3 million last year.
- Revenue rose 6% to $600.9 million from $566.3 million a year ago.

Third Quarter Highlights

Net sales advanced 6.1% to $600.9 million versus $566.3 million in the third quarter of last year.

This growth largely reflected the expansion of store base versus last year and the continued growth of factory and internet businesses partially offset by the modest decline in comparable store sales.

- By division, net sales of Ann Taylor stores declined 4.4% versus year ago $213.5 million and net sales at Loft were up 8.9% to $296.9 million.
- Comparable store sales decreased 0.4% with Ann Taylor stores down 4.4% and Loft down 0.3%.
- October results were unfavorably impacted by timing associated with a promotional program that spanned two quarters. The impact in the month of October was a negative 1.3 comparable store sales points for the company and a more significant 2.9 comparable store sales points for Ann Taylor. The impact was a far less significant 0.4 comparables tore sales points for the total company and about one comparable store sales point for the Ann Taylor division.

Gross margin, as a percentage of net sales, decreased by 50 basis points to 56.1% versus the gross margin of 56.6% in the third quarter last year.

This decline largely reflected the impact of aggressive promotional activity throughout the quarter at the Ann Taylor division in response to slow traffic and a highly promotional retail environment.

SG&A improved by 70 basis points to 45% of net sales compared to 45.7% of net sales in the third quarter last year despite soft comparable store sales performance.

This improvement primarily reflected lower performance based compensation expense and reduced long term benefit costs associated with the modification of certain long term benefit plans partially offsetting these positive factors was the impact of the de-leveraging in the quarter.

The company is in the process of evaluating entire cost structure with the goal to reduce SG&A as a percentage of sales by approximately 200 basis points over the next few years. Since last quarter the company has undertaken an exhaustive review of entire cost structure and is currently in the process of evaluating and prioritizing the various opportunities it has identified to improve profitability.

Operating income increased 7.9% to $66.6 million versus $61.7 million last year.

- Operating margin expanded 20 basis points to 11.1% of net sales versus the 10.9% in the third quarter of last year.
- Net income grew 3.8% to $40.8 million or 66 cents per share compared to $39.3 million or 54 cents per share last year.
- Weighted average shares outstanding were 61.5 million shares versus 72.4 million shares in the third quarter of last year, largely reflecting aggressive repurchase activity over the past year. This activity benefited EPS by approximately 7 cents per share.

Effective tax rate was 39.5% versus 40.2% last year and the company expects the full year 2007 rate to come in at 39.5%.

- Total inventory per square foot at the end of the third quarter including the impact of Beauty was down 4% on top of a 3% decline last year. Excluding Beauty the decline was 5% in the quarter.
- At Ann Taylor excluding Beauty total inventory per square foot at the end of the quarter declined by about 1% on top of a 13% reduction achieved last year. At Loft total inventory per square foot declined 12% versus the 8% increase reported last year.
- Capital expenditures totaled approximately $51 million and related primarily to new store openings.
- Depreciation and amortization totaled approximately $30 million compared to approximately $26 million in 2006.

The company repurchased approximately half a million shares for almost $15 million.

Under $300 million share repurchase program authorized by the board in August. Taken together with the 8 million shares purchased in the first half of this year the company has bought back a total of approximately 8.4 million shares so far this year at a total cost of just under $315 million.

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