Ann Taylor Stores Corporation (ANN)
Q3 2008 Earnings Call Transcript
November 21, 2008 8:30 a.m. ET

Executives

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

Analysts

Kimberly Greenberger - Citigroup
Tracy Kogan - Credit Suisse
Adrienne Tennant - Friedman, Billings, Ramsey & Co.
Liz Dunn - Thomas Weisel Partners
Dana Cohen - Banc of America Securities
Robin Murchison - SunTrust Robinson Humphrey
Roxanne Meyer - UBS
Barbara Wyckoff - Buckingham Research Group
Michelle Tan - Goldman Sachs
Jeff Black - Barclays Capital
Brian Tunick - JP Morgan
Lorraine Maikis - Merrill Lynch

Presentation

Operator

Good morning ladies and gentlemen and welcome to Ann Taylor Stores Corporation third quarter 2008 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. Please go ahead.

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 Chief Financial Officer, Mike Nicholson. As you know, earlier this morning we issued our results for the third quarter of fiscal 2008. As indicated in our release, we recorded breakeven results on a diluted EPS basis, excluding restructuring charges. This compares with EPS on the same basis of $0.67 last year.

In terms of our share repurchase activity for the quarter, as we stated in our release on November 6th we did not repurchase any shares during the third quarter in keeping with our objective to preserve cash in this uncertain environment.

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 provision 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.

Katherine Lawther Krill

Good morning and thank you for joining us today. Let me open up my remarks this morning by first acknowledging the unprecedented nature of today’s economic and consumer environment. Clearly the effects have been deep and far ranging. Many months before the nation officially entered a recession, the retail sector was experiencing recessionary conditions and in light of the slowdown in consumer spending Ann Taylor moved proactively to protect our strong balance sheet, reduce our cost structure, manage inventory levels and ensure that we were appropriately sized and well positioned for what we believed would be a challenging macroeconomic climate.

With current economic forecasts calling for recessionary conditions to persist throughout much of 2009, it is clearly more important than ever to maintain a healthy balance sheet and strong liquidity position. In this regard, we are very well positioned. We closed the quarter with more than $80 million in cash and we have no debt. In fact, our cash balance has grown since quarter end and we are very comfortable with our liquidity position.

Earlier, this year as we started to restructure our company’s operations, cut back on capital plan and delay indefinitely plans for a new retail concept, all of which we announced last January, we did not envision the kind of downturn we are now experiencing. In fact, it is remarkable how well we managed through the softening environment in the first half of this year, and we made significant progress on our restructuring program. But as you know, during the latter part of the third quarter the economic situation and consumer confidence took a dramatic turn for the worse.

As a result, we recently took additional, more dramatic steps in order to preserve cash and keep our balance sheet strong so that we could deal with the current and near-term economic crisis. Specifically, we moved very aggressively to expand our restructuring efforts already under way and we took decisive action to ensure our organization is structured and sized for what may be a prolonged recessionary environment.

I am convinced that the steps we are taking to reduce our cost structure and implement a strategy that is designed to protect the foundation of our business and our brand will not only enable us to continue to manage successfully through this downturn, but will also position us to emerge as a more nimble, efficient and effective organization, well positioned for growth when the economy turns. With that as a backdrop, let me turn to our results for the quarter and a discussion of each of our businesses.

In line with what we announced a couple of weeks ago, we reported breakeven EPS for the quarter, excluding restructuring charges. These results reflected a very soft top line and gross margin weakness, primarily reflecting aggressive promotional activity to move through inventories. We purchased inventory for the quarter quite conservatively on expectations of a negative mid-single digit comp decline. As it turned out, sales were much weaker particularly in the last several weeks of the third quarter. We aggressively cleared through much of our inventory and finished the quarter with total inventory on a per square foot basis down 10% versus last year.

Looking ahead to the fourth quarter, we expect these very soft sales trends to continue. As a result, because we bought inventory to the expectation of a mid-single digit comp decline, we expect gross margin to continue to be under significant pressure. Turning to SG&A we have been very focused on tightly managing all of our expenses and accelerating wherever possible restructuring initiatives already underway. This focus on reducing costs resulted in a $12 million decline in SG&A in the quarter, despite a 5% increase in our store base and we continue to aggressively go after cost reduction opportunities.