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| ANN > SEC Filings for ANN > Form 10-Q on 21-Aug-2009 | All Recent SEC Filings |
21-Aug-2009
Quarterly Report
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 August 1, 2009, we operated 933 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 macroeconomic pressure and the resulting weak consumer spending environment that began last Fall continued to impact our sales performance throughout the second quarter of Fiscal 2009. We anticipated much of this, and managed our business conservatively through lean inventories, solid expense control and a focus on maximizing gross margin performance. As a result of this strategy, and somewhat better-than-anticipated sales results at LOFT, we were able to deliver bottom-line performance that was ahead of our expectations. While these results and the progress we are making at the brands in preparation for Fall are encouraging, we were not satisfied with the overall sales performance during the quarter. Sales for the second quarter of Fiscal 2009 decreased 20.6% to $470.2 million, with comparable store sales decreasing 22.5%.
Savings generated under our multi-year strategic restructuring program, along with other expense reductions, helped to mitigate some of the top-line softness we experienced in the second quarter. During the quarter, we further expanded our restructuring initiatives through incremental workforce reductions in our corporate and divisional organizations, changes to our field staffing model, further optimization of our real estate portfolio and expansion of our strategic non-merchandise procurement initiative. These actions, together with previously announced restructuring initiatives, are now expected to generate a total of $125 million in ongoing annualized savings by Fiscal 2010. During the second quarter, we recorded pre-tax restructuring charges of $31 million associated with our restructuring initiatives.
At Ann Taylor, net sales during the second quarter declined 41.4%, driven by a 38.0% decline in comparable store sales. This performance reflected the continued disproportionate impact of the current recession on the aspirational luxury sector in general and, more specifically, on women's wear-to-work attire, a core offering of the Ann Taylor brand. Consumers also remained cautious and selective in their purchases, updating their wardrobes with fewer pieces and seeking incentives for purchase. In addition, our Spring product assortment should have offered more versatility and wardrobability, and did not yet reflect the evolution of the brand that begins in the Fall season to a more modern, chic and sophisticated viewpoint. During the quarter, we took a highly promotional stance to clear through Spring product and, as a result of these efforts, Ann Taylor stores ended the second quarter with inventory down 30% on a per square foot basis compared to last year. As earlier anticipated, Ann Taylor's second quarter gross margin performance was pressured by our highly aggressive promotional stance. However, this strategy also successfully positioned Ann Taylor stores to begin the third quarter with a clean in-store environment in preparation for the gradual introduction of our new Fall season product.
LOFT achieved a solid second quarter. LOFT product resonated well with consumers and sales trends improved over the first quarter of Fiscal 2009. Net sales declined 16.3% and comparable store sales declined 15.4%, reflecting the continued negative impact of the recession on women's apparel. We achieved a solid gross margin rate during the quarter as a result of our disciplined inventory management and greater product acceptance, the latter of which also led to an improved conversion rate. LOFT also entered the third quarter with total inventory per square foot down 30% versus last year, which is expected to support a continued focused, strategic promotional stance and a strong gross margin rate in the third quarter.
Our Factory and internet businesses were also impacted by the soft consumer environment, although the overall sales impact was less significant and gross margin rates remained solid.
During the quarter, we opened two LOFT stores, one Ann Taylor Factory store and one LOFT Outlet store. We also closed three Ann Taylor stores and seven LOFT stores during the quarter in connection with the real estate component of our restructuring initiatives and plan to close an additional 38 stores during the remainder of Fiscal 2009. At the end of the second quarter, the total store count was 933, comprised of 315 Ann Taylor stores, 508 LOFT stores, 92 Ann Taylor Factory stores and 18 LOFT Outlet stores.
In addition to our ongoing focus on reducing our cost structure and conservatively positioning inventory levels, we also aggressively and effectively managed cash. During the second quarter, we paid down $50 million in revolver borrowings and ended the quarter with $204 million in cash, including the $75 million in remaining revolver borrowings.
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 Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 47.6 47.6 46.1 47.2
Gross margin 52.4 52.4 53.9 52.8
Selling, general and administrative expenses 51.1 44.0 53.4 44.8
Restructuring charges 6.6 0.5 3.6 0.6
Operating (loss)/income (5.3 ) 7.9 (3.1 ) 7.4
Interest income 0.1 0.1 0.1 0.1
Interest expense 0.2 0.1 0.2 0.1
(Loss)/income from before income taxes (5.4 ) 7.9 (3.2 ) 7.4
Income tax (benefit)/provision (1.6 ) 3.0 (0.9 ) 2.7
Net (loss)/income (3.8 )% 4.9 % (2.3 )% 4.7 %
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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 Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
increase (decrease) increase (decrease)
Net sales (20.6 )% (3.6 )% (24.2 )% (0.9 )%
Operating (loss)/income (154.1 )% (8.9 )% (131.8 )% (12.8 )%
Net (loss)/income (161.6 )% (7.7 )% (136.8 )% (12.7 )%
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Sales and Store Data
The following table sets forth certain sales and store data:
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Net sales (in thousands)
Total Company $ 470,229 $ 592,315 $ 896,976 $ 1,183,978
Ann Taylor 108,865 185,735 216,298 383,337
LOFT 250,532 299,144 473,762 594,101
Other 110,832 107,436 206,916 206,540
Comparable store sales percentage
increase/(decrease) (a)
Total Company (22.5 )% (10.8 )% (26.6 )% (7.7 )%
Ann Taylor (38.0 )% (14.3 )% (40.4 )% (12.8 )%
LOFT (15.4 )% (8.6 )% (19.8 )% (4.3 )%
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Sales and Store Data (Continued)
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Average dollars per transaction
Total Company $ 60.26 $ 68.90 $ 65.02 $ 75.38
Ann Taylor 65.89 78.30 71.40 85.88
LOFT 55.61 62.16 60.54 67.79
Average units per transaction
Total Company 2.40 2.37 2.40 2.43
Ann Taylor 1.95 2.00 1.99 2.08
LOFT 2.40 2.39 2.41 2.45
Average unit retail sold
Total Company $ 25.11 $ 29.07 $ 27.09 $ 31.02
Ann Taylor 33.79 39.15 35.88 41.29
LOFT 23.17 26.01 25.12 27.67
Net sales per average gross square foot
(b)
Total Company $ 86 $ 107 $ 163 $ 215
Ann Taylor 64 100 126 207
LOFT 83 98 158 195
Total store square footage at end of
period (in thousands) (b)
Total Company 5,486 5,609
Ann Taylor 1,700 1,846
LOFT 2,995 3,070
Number of:
Stores open at beginning of period 939 941 935 929
New stores 4 23 13 48
Closed stores (10 ) (5 ) (15 ) (18 )
Stores open at end of period 933 959 933 959
Expanded stores - 3 1 8
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(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 20.6% and 24.2% during the quarter and six months ended August 1, 2009, respectively, over the comparable 2008 periods. The decrease in net sales for both periods was primarily due to lower traffic and the resulting impact on transactions combined with lower AURs and DPTs. These results reflect the current recessionary environment and its impact on discretionary retail spending, particularly for women's specialty retailers, as well as product misses at Ann Taylor. The decrease in net sales was also consistent with the decrease in comparable store sales for the quarter and six months ended August 1, 2009. By division, Ann Taylor's net sales decreased $76.8 million, or 41.4%, and $167.0 million or 43.6% for the quarter and six months ended August 1, 2009, respectively. At LOFT, net sales decreased $48.6 million, or 16.3%, and $120.3 million or 20.3% for the quarter and six months ended August 1, 2009, respectively.
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 and six months ended August 1,
2009 and August 2, 2008:
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
(dollars in thousands) (dollars in thousands)
Cost of sales $ 224,056 $ 282,113 $ 413,945 $ 558,851
Gross margin $ 246,173 $ 310,202 $ 483,031 $ 625,127
Gross margin as a percentage of net sales 52.4 % 52.4 % 53.9 % 52.8 %
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Gross margin as a percentage of net sales for the quarter ended August 1, 2009 was consistent with the prior year. The benefit of higher full price sales as a percentage of total sales at LOFT due to a product offering that resonated with clients was offset by lower gross margin rates on markdown sales at Ann Taylor. This solid gross margin performance was also due to improved inventory management across all divisions.
The increase in gross margin as a percentage of net sales for the six months ended August 1, 2009 as compared to the comparable 2008 period primarily reflected higher full price sales as a percentage of total sales across all divisions and lower inventory levels throughout the period 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 and six months ended
August 1, 2009 and August 2, 2008:
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
(dollars in thousands) (dollars in thousands)
Selling, general and administrative expenses $ 240,208 $ 260,552 $ 478,819 $ 530,521
Percentage of net sales 51.1 % 44.0 % 53.4 % 44.8 %
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The decrease in selling, general and administrative expenses for the quarter and six months ended August 1, 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 and tenancy related, partially offset by increased costs related to LOFT Outlet, which were not significant in the comparable prior year period. The increase in selling, general and administrative expenses as a percentage of net sales for the quarter and six months ended August 1, 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 restructuring charges in dollars and as a
percentage of net sales for the quarters and six months ended August 1, 2009 and
August 2, 2008:
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
(dollars in thousands) (dollars in thousands)
Restructuring charges $ 31,128 $ 3,146 $ 32,092 $ 6,868
Percentage of net sales 6.6 % 0.5 % 3.6 % 0.6 %
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During the quarters and six months ended August 1, 2009 and August 2, 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 5, Restructuring Charges, 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 and six months ended August 1, 2009 and August 2, 2008:
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
(dollars in thousands) (dollars in thousands)
Interest income $ 291 $ 469 $ 564 $ 1,261
Percentage of net sales 0.1 % 0.1 % 0.1 % 0.1 %
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Interest income decreased for both the quarter and six months ended August 1, 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 during the six months ended August 1, 2009.
Interest Expense
The following table shows interest expense in dollars and as a percentage of net
sales for the quarters and six months ended August 1, 2009 and August 2, 2008:
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
(dollars in thousands) (dollars in thousands)
Interest expense $ 1,031 $ 277 $ 1,810 $ 701
Percentage of net sales 0.2 % 0.1 % 0.2 % 0.1 %
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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 and six months ended August 1, 2009 compared to the prior year periods is due primarily to interest on borrowings under the Credit Facility. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $15.1 million, $33.8 million and $52.5 million as of August 1, 2009, January 31, 2009 and August 2, 2008, respectively. There were no borrowings outstanding under the Credit Facility at January 31, 2009, or at any point during Fiscal 2008. We repaid $50 million of these revolver borrowings in July 2009, reducing the outstanding balance to $75 million at August 1, 2009, and as of the date of this filing. The remaining $75 million approximates fair value since the interest rates are periodically adjusted to reflect current market rates. We have no immediate plans to utilize the remaining borrowings under our Credit Facility and will continue to evaluate opportunities for future repayment of the remaining balance. See "Liquidity and Capital Resources" and Note 8, 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 and six
months ended August 1, 2009 and August 2, 2008:
Quarters Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Effective income tax rate 30.5 % 37.4 % 30.2 % 37.5 %
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Our effective income tax rate decreased for the quarter and six months ended August 1, 2009 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 for both periods.
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:
August 1, January 31, August 2,
2009 2009 2008
(dollars in thousands)
Working capital $ 136,538 $ 118,013 $ 158,692
Current ratio 1.39:1 1.39:1 1.51:1
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Operating Activities
Cash provided by operating activities was $44.4 million for the six months ended August 1, 2009, compared with $115.4 million for the six months ended August 2, 2008. The decrease in cash provided by operating activities for the six months ended August 1, 2009, compared with the six months ended August 2, 2008, was primarily due to the net loss in the current period compared to net income in the comparable prior year period. This, combined with an increase in cash used for accounts payable and lower inventory purchases, the latter of which had a less favorable impact on cash as compared to the prior year, were offset by cash received in the current year period for income tax refunds. Merchandise inventories on a per square foot basis decreased approximately 28% as compared to the prior year.
Investing Activities
Cash used for investing activities was $26.6 million for the six months ended August 1, 2009, compared with $45.8 million for the six months ended August 2, 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 period of liquidating $9 million in auction rate securities.
Financing Activities
Cash provided by financing activities was $73.8 million for the six months ended August 1, 2009, compared with cash used of $95.8 million for the six months ended August 2, 2008. The change in cash provided by financing activities was primarily due to cash borrowings under our Credit Facility, net of repayments, and a decrease in stock repurchase activity for the six months ended August 1, 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 . . .
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