General

AnnTaylor Stores Corporation (the "Company", "we", "us" and "our"), through its wholly owned subsidiaries, is a leading national specialty retailer of women's apparel, shoes and accessories sold primarily under the "Ann Taylor", "LOFT," "Ann Taylor Factory" and "LOFT Outlet" brands. The Ann Taylor brand is focused on offering chic, sophisticated and feminine clothing across her lifestyle needs, from modern wearable separates for every day, to powerful pieces for big days, to the perfect item to wear for special events and a casual chic for relaxing with friends and family. LOFT is the ultimate casual, fashionable and fun retail destination for women. LOFT offers women's clothing that is feminine and on-trend as well as versatile clothing staples in the latest colors and styles, all at unexpected prices. Our Ann Taylor Factory and LOFT Outlet businesses offer past season best sellers from the Ann Taylor and LOFT merchandise collections and are natural extensions of those brands in the outlet environment. As of May 2, 2009, we operated 939 stores in 46 states, the District of Columbia and Puerto Rico, and also Online stores at www.anntaylor.com and www.anntaylorLOFT.com. Unless the context indicates otherwise, all references herein to the Company, we, us and our include the Company and its wholly owned subsidiaries.

Management Overview

The first quarter of fiscal 2009 continued to reflect a challenging macroeconomic and consumer environment, which impacted discretionary sectors, including women's apparel. Our top-line results remained under significant pressure during the quarter, although we anticipated much of this softness and bought our inventories conservatively, which enabled us to achieve a strong gross margin rate as a percent of net sales during the quarter. In addition, we generated significant savings from our ongoing restructuring program and other expense reduction activities, which helped to further mitigate the top-line softness we experienced.

Net sales for the quarter declined 27.9% to $426.7 million, primarily reflecting a 30.7% decline in overall comparable store sales. At Ann Taylor, net sales declined 45.6%, driven by a 42.7% decline in comparable store sales. This performance reflected the disproportionate impact the current recession is having on the women's apparel sector - particularly the aspirational luxury sector and apparel for professional working women. In addition, Ann Taylor's results continued to reflect an assortment that has not yet been repositioned to the modern, chic and sophisticated point of view that will be launched this Fall. At LOFT, net sales declined 24.3% and comparable store sales declined 24.2%, reflecting the impact of the recession on women's apparel, and LOFT's strategy to maintain significantly lower inventories - particularly of markdown product. This strategy pressured comparable store sales results at LOFT, but maximized gross margin for the quarter. Importantly, comparable store sales trends at LOFT improved as the quarter progressed, reflecting both improved product assortments and an increasing client response to the unique combination of fashion, quality and value that LOFT offers - particularly in this recessionary environment.

In terms of overall performance, as expected, Ann Taylor experienced a very difficult quarter. We continued to work through assortments that were too serious and not as compelling, modern or versatile as needed to meet the more fashionable and stylish apparel needs our clients now demand. However, despite very soft sales, we effectively managed inventory levels and, as a result, achieved a strong gross margin rate for the quarter. In addition, during the quarter we continued to prepare for the evolution and repositioning of the brand that begins in the Fall, including enhancements to our product offering, our marketing and our in-store experience. Ann Taylor entered the second quarter of 2009 with inventory per square foot down 28% versus last year, which is expected to support a solid gross margin rate performance in the second quarter and position the division to enter the third quarter with a clean inventory position.

Overall performance at LOFT also reflected the impact of the recession. In addition, LOFT's strategy to limit carryover inventory of markdown product entering the quarter pressured comparable store sales results but maximized gross margin performance, while also minimizing risk. Importantly, LOFT's comparable store sales results improved as the quarter progressed, as full-price inventory built and LOFT's improved product assortments and value message resonated with clients. LOFT entered the second quarter with total inventory per square foot down 16% versus last year, which is expected to support a focused, strategic promotional stance and a strong gross margin rate for the second quarter.

Our Factory and internet businesses were also impacted by the recessionary slowdown, though the overall sales impact was less significant and gross margin rates remained strong.

For the quarter, we opened 6 LOFT stores and 3 LOFT Outlet stores. We closed 2 Ann Taylor stores and 3 LOFT stores during the quarter related to restructuring and plan to close an additional 32 stores during the remainder of Fiscal 2009. The total store count at the end of the quarter was 939, comprised of 318 Ann Taylor stores, 513 LOFT stores, 91 Ann Taylor Factory stores and 17 LOFT Outlet stores.

In addition to our ongoing focus to reduce our cost structure and conservatively position inventory levels, we also aggressively managed cash during the quarter. As a result of these efforts, we ended the quarter with $199 million in cash, including the $125 million we accessed from our revolving credit facility, which, as we expected, we did not use during the quarter.

Key Performance Indicators

In evaluating our performance, senior management reviews certain key performance indicators, including:

Comparable store sales - Comparable store sales provide a measure of existing store sales performance. A store is included in comparable store sales in its thirteenth month of operation. A store with a square footage change of more than 15% is treated as a new store for the first year following its reopening.

Gross margin - Gross margin measures our ability to control the direct costs of merchandise sold during the period. Gross margin is the difference between net sales and cost of sales, which is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third-party suppliers to our distribution center. Buying and occupancy costs are excluded from cost of sales.

Operating income - Because retailers do not uniformly record supply chain costs as a component of cost of sales or selling, general and administrative expenses, operating income allows us to benchmark our performance relative to other retailers. Operating income represents earnings before interest and income taxes and measures our earnings power from ongoing operations.

Store productivity - Store productivity, including sales per square foot, average unit retail price (AUR), units per transaction (UPT), dollars per transaction (DPT), traffic and conversion, is evaluated by management in assessing our operating performance.

Inventory turnover - Inventory turnover measures our ability to sell our merchandise and how many times it is replaced over time. This ratio is important in determining the need for markdowns, planning future inventory levels and assessing client response to our merchandise.

Quality of merchandise offerings - To monitor and maintain client acceptance of our merchandise offerings, we monitor sell-through levels, inventory turnover, gross margin, returns and markdown rates at a class and style level. This analysis helps identify merchandise issues at an early date and helps us plan future product development and buying.

Results of Operations

The following table sets forth data from our consolidated statement of
operations expressed as a percentage of net sales:



                                                          Quarters Ended
                                                   May 2, 2009      May 3, 2008
    Net sales                                            100.0 %          100.0 %
    Cost of sales                                         44.5             46.8

    Gross margin                                          55.5             53.2
    Selling, general and administrative expenses          56.1             45.6
    Restructuring charges                                   -               0.6

    Operating (loss)/income                               (0.6 )            7.0
    Interest income                                        0.1              0.1
    Interest expense                                       0.2              0.1

    (Loss)/income from before income taxes                (0.7 )            7.0
    Income tax (benefit)/provision                        (0.2 )            2.6

    Net (loss)/income                                     (0.5 )%           4.4 %

The following table sets forth selected data from our consolidated statements of operations expressed as a percentage change from the comparable prior period.

                                            Quarters Ended
                                     May 2, 2009      May 3, 2008
                                         increase (decrease)
                 Net sales                 (27.9 )%           2.0 %
                 Operating income         (106.6 )%         (16.9 )%
                 Net (loss)/income        (108.9 )%         (17.7 )%

Sales and Store Data

The following table sets forth certain sales and store data:



                                                                  Quarters Ended
                                                         May 2, 2009          May 3, 2008
Net sales (in thousands)
Total Company                                           $     426,747        $     591,663
Ann Taylor                                                    107,433              197,602
LOFT                                                          223,230              294,957
Other                                                          96,084               99,104

Comparable store sales percentage
increase/(decrease) (a)
Total Company                                                   (30.7 )%              (4.3 )%
Ann Taylor                                                      (42.7 )%             (11.5 )%
LOFT                                                            (24.2 )%               0.7 %

Average dollars per transaction
Total Company                                           $       71.31        $       82.79
Ann Taylor                                                      77.96                94.92
LOFT                                                            67.26                74.57

Sales and Store Data (Continued)



                                                                  Quarters Ended
                                                          May 2, 2009         May 3, 2008
Average units per transaction
Total Company                                                     2.40                2.49
Ann Taylor                                                        2.04                2.18
LOFT                                                              2.42                2.52

Average unit retail sold
Total Company                                            $       29.71       $       33.25
Ann Taylor                                                       38.22               43.54
LOFT                                                             27.79               29.59

Net sales per average gross square foot (b)
Total Company                                            $          78       $         109
Ann Taylor                                                          62                 106
LOFT                                                                74                  97

Total store square footage at end of period (in
thousands) (b)
Total Company                                                    5,515               5,487
Ann Taylor                                                       1,714               1,851
LOFT                                                             3,023               3,036

Number of:
Stores open at beginning of period                                 935                 929
New stores                                                           9                  25
Closed stores                                                       (5 )               (13 )

Stores open at end of period                                       939                 941

Expanded stores                                                      1                   5

(a) A store is included in comparable store sales in its thirteenth month of operation. A store with a square footage change of more than 15% is treated as a new store for the first year following its reopening.

(b) Net sales per average gross square foot is determined by dividing net sales for the period by the average of the gross square feet at the beginning and end of each period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space.

Net sales decreased 27.9% during the quarter ended May 2, 2009 over the comparable 2008 period. This decrease was primarily due to lower traffic and lower UPT's, which is consistent with the current recessionary environment. In addition, AURs also decreased, particularly at Ann Taylor, and all of these factors contributed to an overall 30.7% decrease in comparable store sales. By division, Ann Taylor's net sales decreased $90.2 million, or 45.6%, for the quarter ended May 2, 2009. At LOFT, net sales decreased $71.7 million, or 24.3%, for the quarter ended May 2, 2009.

Cost of Sales and Gross Margin

The following table shows cost of sales and gross margin in dollars and the
related gross margin percentages for the quarters ended May 2, 2009 and May 3,
2008:



                                                         Quarters Ended
                                                  May 2, 2009       May 3, 2008
                                                     (dollars in thousands)
     Cost of sales                               $     189,889     $     276,738
     Gross margin                                $     236,858     $     314,925
     Gross margin as a percentage of net sales           55.50 %           53.20 %

The increase in gross margin as a percentage of net sales for the quarter ended May 2, 2009 as compared to the comparable 2008 period primarily reflected higher full price sales as a percentage of total sales at both Ann Taylor and LOFT, and lower inventory levels entering the quarter that led to lower markdown goods for sale.

Selling, General and Administrative Expenses

The following table shows selling, general and administrative expenses in
dollars and as a percentage of net sales for the quarters ended May 2, 2009 and
May 3, 2008:



                                                           Quarters Ended
                                                    May 2, 2009       May 3, 2008
                                                       (dollars in thousands)
    Selling, general and administrative expenses   $     239,390     $     269,968
    Percentage of net sales                                56.10 %           45.63 %

The decrease in selling, general and administrative expenses for the quarter ended May 2, 2009 as compared to the comparable 2008 period primarily reflects the benefit of our restructuring program and cost savings initiatives, with the majority of the savings being payroll related, partially offset by increased costs related to LOFT Outlet, which did not have significant costs in the comparable prior year period. The increase in selling, general and administrative expenses as a percentage of net sales for the quarter ended May 2, 2009 as compared to the comparable 2008 period was primarily due to the impact of fixed cost deleveraging resulting from lower net sales.

Restructuring Charges

The following table presents the restructuring charges in dollars and as a
percentage of net sales for the quarters ended May 2, 2009 and May 3, 2008:



                                                Quarters Ended
                                         May 2, 2009       May 3, 2008
                                            (dollars in thousands)
              Restructuring charges     $         185     $       3,723
              Percentage of net sales            0.04 %            0.63 %

During the quarters ended May 2, 2009 and May 3, 2008, we recorded restructuring charges related to the non-cash write-down of store assets, severance and other costs incurred during the periods. See "Liquidity and Capital Resources" and Note 4, "Restructuring" in the Notes to Condensed Consolidated Financial Statements for further discussion.

Interest Income

The following table shows interest income in dollars and as a percentage of net
sales for the quarters ended May 2, 2009 and May 3, 2008:



                                                Quarters Ended
                                         May 2, 2009       May 3, 2008
                                            (dollars in thousands)
              Interest income           $         273     $         792
              Percentage of net sales            0.06 %            0.13 %

Interest income decreased for the quarter ended May 2, 2009 due to lower interest rates and less cash provided by operating activities over the past year, partially offset by higher average cash balances due to our borrowings under our Credit Facility in the current quarter.

Interest Expense

The following table shows interest expense in dollars and as a percentage of net
sales for the quarters ended May 2, 2009 and May 3, 2008:



                                                Quarters Ended
                                         May 2, 2009       May 3, 2008
                                            (dollars in thousands)
              Interest expense          $         779     $         424
              Percentage of net sales            0.18 %            0.07 %

Interest expense includes various charges, the largest of which are interest and fees related to our Credit Facility. The increase in interest expense for the quarter ended May 2, 2009 compared to the prior year period is due primarily to increases in borrowings under the Credit Facility. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $18.8 million, $33.8 million and $57.2 million as of May 2, 2009, January 31, 2009 and May 3, 2008, respectively. There were no borrowings outstanding under the Credit Facility at January 31, 2009, or at any point during Fiscal 2008. On March 5, 2009, the Company accessed $125 million from its Credit Facility. The Company intends to hold these proceeds in the event they are required for near-term liquidity needs or seasonal working capital requirements. All $125 million remained outstanding as of May 2, 2009 and as of the date of this filing. See "Liquidity and Capital Resources" and Note 7, "Debt and Capital Leases" in the Notes to Condensed Consolidated Financial Statements for further discussion of our Credit Facility.

Income Taxes

The following table shows our effective income tax rate for the quarters ended May 2, 2009 and May 3, 2008:

Quarters Ended May 2, 2009 May 3, 2008 Effective income tax rate 28.2 % 37.8 %

The decrease in the effective income tax rate is due to the impact of permanent items in a period of net loss versus a period of net income and a change in the mix of earnings in various state taxing jurisdictions, as well as certain discrete items in the quarter.

Liquidity and Capital Resources

Our primary source of working capital is cash flow from operations. The
following table sets forth material measures of our liquidity:



                                              Quarters Ended
                              May 2, 2009    January 31, 2009     May 3, 2008
                                          (dollars in thousands)
           Working capital   $     123,541   $         118,013   $     194,684
           Current ratio            1.31:1              1.39:1          1.67:1

Operating Activities

The decrease in cash provided by operating activities for the quarter ended May 2, 2009, compared with the quarter ended May 3, 2008, was primarily due to the net loss in the current period compared to net income in the first quarter of Fiscal 2008 combined with increases in cash used for the purchase of merchandise inventories and cash used for accounts payable, offset by cash received in the current quarter for income tax refunds. Merchandise inventories on a per square foot basis decreased approximately 16% as compared to the prior year.

Investing Activities

Cash used for investing activities was $11.5 million for the quarter ended May 2, 2009, compared with $17.0 million for the quarter ended May 3, 2008. The change in cash used for investing activities was primarily due to less cash used to purchase property and equipment, and the impact during the prior year quarter of liquidating $9 million in auction rate securities.

Financing Activities

Cash provided by financing activities was $123.5 million for the quarter ended May 2, 2009, compared with cash used of $36.9 million for the quarter ended May 3, 2008. The change in cash provided by financing activities was primarily the result of cash borrowings under our Credit Facility and a decrease in stock repurchase activity for the quarter ended May 2, 2009.

On April 23, 2008, our wholly owned subsidiary AnnTaylor, Inc. and certain of its subsidiaries entered into a Third Amended and Restated $250 million senior secured revolving credit facility with Bank of America N.A. and a syndicate of lenders (the "Credit Facility"), which amended its then existing $175 million senior secured revolving credit facility which was due to expire in November 2008. At AnnTaylor, Inc.'s option, the Credit Facility provides for an increase in the total facility and the aggregate commitments thereunder up to $350 million, subject to the lenders' agreement to increase their commitment for the requested amount. The Credit Facility expires on April 23, 2013 and may be used for working capital, letters of credit and other general corporate purposes. The Credit Facility contains an acceleration clause which, upon the occurrence of a Material Adverse Effect, as defined in the Credit Facility, may cause any borrowings outstanding to become immediately due and payable.

The maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified advance rates against certain eligible assets. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $18.8 million, $33.8 million and $57.2 million as of May 2, 2009, January 31, 2009 and May 3, 2008, respectively, leaving a remaining available balance for loans and letters of credit of $50.5 million, $115.0 million and $162.7 million, respectively. There were no borrowings outstanding under the Credit Facility at January 31, 2009, or at any point during Fiscal 2008. On March 5, 2009, we accessed $125 million from our Credit Facility. We intend to hold these proceeds in the event they are required for near-term liquidity needs or seasonal working capital requirements. All $125 million remained available for use as of May 2, 2009 and as of the date of this filing. The Credit Facility contains financial and other covenants, including limitations on indebtedness and liens, and a fixed charge coverage ratio covenant that is triggered if certain liquidity thresholds are not met.

The Credit Facility permits us to pay cash dividends (and permits dividends by AnnTaylor, Inc. to fund such cash dividends) subject to certain Liquidity requirements (as defined in the Credit Facility) and other conditions as set forth in the Credit Facility. Certain of our subsidiaries are also permitted to:
pay dividends to us to fund certain taxes owed us; fund ordinary operating expenses not in excess of $500,000 in any fiscal year; repurchase common stock held by employees not in excess of $100,000 in any fiscal year (with certain stated exceptions); and for certain other stated purposes (subject to certain exceptions).

Other

The recent distress in the financial markets has caused declines in consumer confidence and spending, extreme volatility in securities prices, diminished liquidity and credit availability and declining valuations of certain investments. We have assessed the implications of these factors on our current business and have responded with our expanded strategic restructuring program, scaled back planned capital expenditures in Fiscal 2009 and have implemented a conservative approach to discretionary spending, including our stock repurchase program. If the national, or global, economies or credit market conditions in general were to deteriorate further in the future, it is possible that such deterioration could put additional pressure on consumer spending and negatively affect our cash flows. Although we have available borrowing capacity under our Credit Facility, tightening of the credit markets could also make it more difficult for us to access these funds, enter into agreements for new indebtedness or obtain funding through the issuance of our securities. The effects of these changes could also require us to make additional changes to our current plans and strategy. Additionally, although our levels of net cash provided by operating activities may be negatively affected by general economic conditions, we believe that we will continue to generate positive cash flow from operations, which, along with our available cash and borrowing capacity under our Credit Facility, will provide the means needed to fund our operations for the foreseeable future. At May 2, 2009, substantially all of our cash was invested in money market funds. These money market funds invest substantially all of their assets in U.S. Treasury Securities.

. . .