- Ann Taylor expects capital expenditures to total approximately $125 million to $130 million.
- The company expects to continue to repurchase shares under the company’s existing share repurchase authorization.
Key questions and answers from the second quarter fiscal 2008 earnings call conducted by Ann Taylor Stores Corporation (ANN) on August 22, 2008.
Lorraine Maikis (Merrill Lynch):
Inventory was down 4% versus a significantly lower run rate for your comp. How are you planning your back half buys?
Michael Nicholson: If you strip out the impact of beauty and Ann Taylor, we’re actually down 5%. Then when you take a look at it by division, Ann Taylor finished the quarter with total inventory excluding the impact of beauty down 17% with LOFT up 4%. When you further look at the composition of our inventory the spring carryover year on year at Ann Taylor is down more than 20% and within LOFT its down in the high single-digit range so in term of our composition of our inventory that we’re heading into fall and as it relates to our inventory receipt plan, it is in fact very closely aligned with the current run rate of the business.
Lorraine Maikis (Merrill Lynch):
Could you update us on how much of the $10 million you’ve spent already on LOFT and where you are on garnering your cost savings? Do you think you’ll be at that $25 million run rate by the fourth quarter?
Michael Nicholson: In terms of LOFT and the $10 million impact for 2008, it’s about a one-third, two-thirds split for the year and then as it relates to the restructuring program, $20 million to $25 million and from where I sit today we are very comfortable that we will hit that objective.
Kimberly Greenberger (Citigroup):
Could you comment on the gross margin comparisons as we go through the second half of the year. In the second quarter LOFT and factory had real meaningful increases in their gross margin performance, as we get into third and fourth quarter are there specific divisions that have easier comparisons then others? It looks like the negative mid single-digit comp guidance for the full year would imply third and fourth quarter comps not worse then down 4% to 5% and the comparisons get slightly more difficult relative to the second quarter.
Michael Nicholson: As I think about the gross margin rate moving into the back half of the year, we mentioned in the third quarter that we’re up against a very difficult compare so you just need to take into account that we had a very strong third quarter last year and actually a very strong gross margin so the year on year compare difficult in the third quarter, much easier as we move into the fourth quarter. As you mentioned just in terms of our expectations for the back half of the year, you’re absolutely correct, that we are looking at a mid single-digit negative comp for the back half of the year.
Kimberly Greenberger (Citigroup):
Is there anything that you’re doing to help improve the run rate on comp or do you think it will be really product driven?
Kay Krill: I believe it will be product driven and definitely what we have done is invested in categories that have been trending well thus far this year. We were able to chase and change into the September and October assortments in both divisions so we feel far better about September and October then we do August at this point.
Jennifer Black (Jennifer Black & Associates):
Could you talk about raw material costs and your ability to eventually raise prices?
Michael Nicholson: Our sourcing strategies to date as it relates to supplier and factory rationalization as well as efforts to drive costs out of the product, we have been able to successfully mitigate the pressures of cost increases to date and we actually believe as we move through the back half of the year that we have successfully mitigated that pressure. As we move forward into 2009 it’s an issue that’s on our radar that we continue to aggressively go after.
Kay Krill: We have not had to raise prices in either division thus far. We’re only through the first part of 2009 right now and we are in good shape.
Jennifer Black (Jennifer Black & Associates):
Could you talk about what kind of progress you’ve made on the casual side of the business? I did see a little more denim in the Ann Taylor division.
Kay Krill: That has been a goal for us to improve the casual assortment in that division and I feel like we now have a pretty good template of what that needs to look like and it needs to be more chic and more sophisticated then LOFT. We have a very strong denim assortment coming into the stores actually in a week through September and October for Ann Taylor and I think we have a little bit more modernity in the tops assortment also going back to that as well as the trophy jacket which we’re standing behind. So we’re really trying to not have a dedicated casual section in the store like we used to, but actually have it throughout the store because we believe that’s how she’s buying it and she wants that versatility.
Jeff Black (Lehman Brothers):
I was hoping to get more color on the expense rates in the back half and just get an understanding of what we’re anticipating in terms of start-up costs and comp costs. Do you think we’ll be able to hold these levels flat to last year and then in 2009 what kind of flow-through do we expect from the restructuring in terms of ongoing benefits?
Michael Nicholson: In terms of SG&A dollars as we move into the back half of the year, first on rate basis, because of the negative comp the rate will be pressured, we did a fantastic job in the second quarter of essentially holding our costs year on year and that will continue to be our goal as we move forward into the back half of the year and it will be challenging but that is the goal.
As it relates to the incremental flow-through of restructuring into 2009, at this point it’s premature to specifically talk about the 2009 impact. We are very comfortable with the $20 million to $25 million for 2008 and we are very comfortable that we’re on target to deliver our $50 million component by 2010.
Dana Telsey (Telsey Advisory Group):
Can you talk about the Outlet division and how does that contribution to margin differ at all from the full price stores and what are you seeing in the rent structures at outlet stores versus the others and as you think about LOFT and Ann Taylor and the outlet malls, is the differentiation as you see going forward as clear as it is in the regular malls and any other elements of the merchandising that we should be aware of?
Kay Krill: The factory division is doing very well on the bottom line and we’re pleased with its contribution and as far as the LOFT Outlet vis-à-vis Ann Taylor factory stores, we are watching that closely and as a matter of fact we have some stores in the same center and we’re seeing virtually no cannibalization. We will be watching that as we continue to rollout LOFT Outlets but we’re very pleased with that outcome.
Dana Telsey (Telsey Advisory Group):
On the merchandise margin overall, what do you see as the opportunities for the merchandise margin go forward, is there more merchandise margin improvement to come and if so is it from product cost or is it from pricing?
Kay Krill: I think it’s from full price selling, that is really our goal right now. This is not an IMU story and I don’t think any of us anticipate IMU to get much stronger in the future especially in this economy. Right now all of our focus is on tighter inventory buys, which will allow us to sell more full price.
Dana Cohen (Bank of America):
Gross margin dollars were flat in the quarter and I was wondering if you could give us any sense by division, was that about the same by the two divisions or was it different?
Michael Nicholson: In LOFT and factory, there was meaningful expansion year on year and Ann Taylor was essentially inline with the prior year on a rate basis. With LOFT and the margin rate expansion as well as factory, dollars were up and with Ann Taylor and the pressure on the top line margin dollars were down year on year.
Dana Cohen (Bank of America):
Is it correct that SG&A dollars would be flat in the back half of the year as there were in the second quarter?
Michael Nicholson: They were flat in the second quarter; they were up for the spring season. We did a terrific job in managing our expenses in the second quarter. That is the goal going into fall season but there’s pressure with new store growth in terms of dollar growth year on year.
Dana Cohen (Bank of America):
So more likely they’ll be up a bit in the back half of the year?
Michael Nicholson: I think that’s a fair assumption. Also taking into consideration the ongoing investment in LOFT Outlet, higher performance based compensation so in terms of dollars, there’s pressure on dollar growth as we move to the back half of the year.
Dana Cohen (Bank of America):
Any sense on the cadence of the comp over the quarter, were there any nuances there?
Michael Nicholson: I would say that we’ve moved away from the measurement of monthly comp and we’re really taking a longer term view at this point.
