Key questions and answers for the second quarter fiscal 2007 earnings call, conducted by Ann Taylor Stores Corp (ANN: chart) on August 24, 2007

Jeff Black: On the expense rate, are we getting traction?

Jim Smith:With the tough spring season we have, there were not large accruals and there was not a large payout as apposed to last spring season when we had a stellar spring season and we had higher accruals for our performance-based compensation. We are expecting in the fall season this year that we will have performance-based compensation which is embedded in the guidance we gave.

Jeff Black: And what are costs for this year and for next year from the new concept?

Jim Smith: We have not broken them about. There are some incremental costs in the fall but we have not talked about them specifically. And we are not going to get until 2008 at this point.

Kimberly Greenberger: On the bonus accrual, could you quantify the basis point impact, the benefit to Q2, and looking back to last year, what sort of benefit did you realize from the reversal of that bonus accrual?

Jim Smith: As far as the second quarter, our de-leveraging cost is between a 100 and 130 basis points due to the comp sales increase, and I do not have what the impact was last fall.

Kimberly Greenberger: Do you think that the in-store merchandise assortment that we saw towards the end of August, is fully reflective of where you like it to be?

Kay Krill: August is trending much better than July, and I am pleased that LOFTs new store set is being well received. We have another store set being set this weekend for both divisions as we had into the September month; mid-month will be our true fall delivery.

Jennifer Black: Discuss your luxury line in terms of color, competition, prospects, a little bit more?

Kay Krill: It is a higher end fabric assortment, primarily wear-to-work focus not casual focus, and it consists of suits, jackets, pants, skirts, dresses, cashmere sweaters, handbags and more elevated shoe assortment. And it is in 24 stores, and we fully expect this to appeal to our current client base that wants a higher quality product, as well as attracting new clients. It is about 40% higher per category than our existing Ann Taylor assortment.

Jennifer Black: And are the margins similar to that of Ann Taylor?

Kay Krill: Yes, they are.

Jennifer Black: Elaborate your accessory and footwear businesses at both of your brands?

Kay Krill: Well the accessories and shoe businesses are going to remain about a similar penetration of the business that we had for the spring and summer season. We are seeing a little bit more strength in the accessories end, and the shoe end at this point in time.

Brian Tunick: Regarding your cash balance or potential, leverage, are you going to be drawing down your revolver and is that something that the Board will be comfortable with?

Jim Smith: We just completed the $300 million program, and we have cash on our balance sheet of about a $115 million. When we announced the program we had about $315 million cash on our balance sheet, so we had adequate resources there to cover it up immediately.

We are looking at our total capital structures, and understanding that we have a $1.5 billion of debt out there due to our leases that are not on our balance sheet.

Lorraine Maikis: As you are building your third and fourth quarter margin guidance, what type of macroeconomic climate have you included in that?

Brian Tunick: From a markdown point of view, you can see on LOFT being very promotional throughout the whole spring season. We are hedging the third quarter down 8% to last year on top of being down 25% the year before. So we feel good about our inventory levels as we go in; and we expect them to continue to be down throughout the season.

Kay Krill: And the fourth quarter as well, our inventory levels for the fourth quarter in both divisions will be down substantially as well.

Lauren Cooks Levitan: Could you elaborate in terms of what you are assuming about the macro and the back half?

Kay Krill: What we have seen in the second quarter is slowdown in traffic. Ann was down 5.3%, and LOFT was down 5.3% for the second quarter and national mall traffic was down 5.6%. And at LOFT, it is better, and that is a big factor from a comp perspective. LOFT was a big drag last year in the entire back half of the year, especially, the fourth quarter.

Lauren Cooks Levitan: With the inventories up at Ann Taylor stores, is there any impact on the Beauty launch included in there?

Kay Krill: Ann was also soft due to the penetration in weather-sensitive merchandise, as we had those warm temperatures throughout December and January. But as a result, while we had a good third quarter, we had a soft fourth quarter.

We expect, Beauty to be incremental and the third quarter will be a solid quarter based on our better product assortments, more color, more novelty, better marketing initiatives, and our fourth quarter should be better based on our product assortments for this year, and everything we have done to get us in a better position from a gifting perspective since last year.