This is a summary of the second quarter fiscal 2008 earnings call conducted by Ann Taylor Stores Corporation (ANN) on August 22, 2008.
Management:
–
President & CEO: Kay Krill
–
CFO: Michael Nicholson
–
IR: Maria Sceppaguercio
Key Investor Issues:
- Net income fell 7.7% from a year ago to $29.3 million in the second quarter, while earnings per share rose to 51 cents from 50 cents.
- Net sales declined nearly 4% to $592.3 million with same-store sales down 10.8%.
- Same-store sales dropped 14.3% at Ann Taylor and 8.6% at LOFT.
- The company backed its full-year earnings forecast of $1.80 to $1.90 per share.
- Sales are expected to be flat to slightly down, with same-store sales for the year down at a mid single-digit percentage rate.
Second Quarter Highlights:
The weak economy has resulted in very soft traffic that pressured top line results throughout the quarter. However, the company managed its inventories and expenses particularly well during the quarter and together with the stock repurchase program Ann Taylor Stores was able to deliver diluted earnings per share results that were above a year ago.
Gross margin for the quarter increased almost two full margin points despite the promotional stance the company took to move inventory.
Ann Taylor Stores closed the quarter with total inventory on a per square foot basis down 4% versus last year with each of the divisions in good shape heading into the fall season.
The company had planned its second half receipts and particularly its fourth quarter receipts very conservatively on the assumption of an overall negative comp. Ann Taylor Stores continues to expect the second half to remain uncertain. The management believes this cautious approach will enable the company to best preserve gross margin as in the first half.
On the strength of aggressive cost control and restructuring savings, the company held its expenses essentially flat with year ago.
This was despite an 8% increase in the store base, start-up costs associated with LOFT Outlet and an increase in performance based compensation. The company delivered a 6% increase in second quarter EPS in this environment.
Second quarter performance at the Ann Taylor division was meaningfully impacted by weak traffic which was to some degree a reflection of the macro factors and overall consumer reluctance to spend on apparel.
The company also had a product assortment that was not as modern, stylish or relevant as it should have been. Thus comps declined a 14.3% for the quarter cannot be totally blamed on economic softness. On the plus side, the division did a good job managing their gross margin although the comp shortfall caused the division to significantly de-lever SG&A.
The company had success with dresses, woven halters, feminine knit tops, and bracelets.
Items that featured print and color as well as versatile pieces with more relaxed end uses also faired relatively well. The weakest performers in the second quarter were the more serious and conservative styles and categories such as suits and pants.
The fall assortment will begin to reflect a more modern and sophisticated look in September while preserving the integrity and heritage of the Ann Taylor brand.
The company has incorporated more print, rich color and versatility into the fall assortments and the silhouettes are more modern. The company’s assortments will feature more must-have items including statement jackets, ruffle blouses, new skirt shapes, modern wide leg pants, the motorcycle jacket, and statement necklaces and bracelets.
This fall the company has significantly reduced its SKU count and will begin to rollout improvement to the in-store environment.
Whereas in the past stores appeared overly assorted, and confusing to navigate, this fall Ann Taylor is establishing key destinations in-store to simplify the shopping experience. The in-store environment will become more dynamic, modern, and reflective of the evolving brand direction and will include a significant upgrade in fall. In addition to better product and a better in-store experience, the fall marketing will also begin to reflect the company’s new brand positioning.
Top line at LOFT was also under pressure due to soft traffic and a competitive promotional environment which led to negative 8.6% comps.
However, as was the case at the other divisions, the company did a good job managing margin dollars. As a result, LOFT achieved strong gross margin improvement in the quarter.
In terms of second quarter product, tops was clearly a strong category with both sweaters and knits performing well.
In particular, Ann Taylor saw strong performance from summer must-haves like dresses, knits, cardigans, casual bottoms, soft wovens, print and pattern tops. Moreover, color was also important in the quarter and the company’s color penetration increased significantly versus the second quarter last year. On the other hand, the separates and non-apparel categories were weaker during the quarter and drove the majority of LOFT’s comp softness.
For the second quarter the company would have benefited from infusing more casual and relaxed product into its assortments.
