By and  on March 18, 2005

NEW YORK — Ann Taylor Stores Corp., which released disappointing fourth-quarter financial results on Thursday, said company president Kay Krill will take over as chief executive officer in October from chairman and ceo J. Patrick Spainhour, who is retiring.

“It’s a transition that makes a lot of sense,” Spainhour said in an interview. “It allows Kay to work on the Ann Taylor turnaround and continue to work on the growth strategies for Ann Taylor Loft while we look for a chief operating officer.”

Krill was named president of Ann Taylor in November. She first joined the company in 1994 and was chief of the management team of the Loft division. Krill, who led a recent off-site meeting to redefine the Ann Taylor customer, said her median age is 35. She is emphatic that returning to Ann Taylor’s roots is the right move.

“There’s really nobody addressing the wardrobing needs of the updated classic consumer,” she said.

“As women’s wardrobes have evolved over the years, we have not evolved with them,” Krill said. “We need a good balance in our offerings, including wear-to-work clothes, separates and casual and special occasion wear. We disappointed the customer with the work and casual component. Our first order of business is getting the suit business up on its feet.”

Ann Taylor’s pricing had also gotten too high. “We’ll be pricing ourselves in a more competitive way,” Krill said. Retail analysts also pointed out that Ann Taylor and Loft have become too similar.

The company’s stock gained nearly 5 percent, to close at $26.43, rising $1.16 in New York Stock Exchange trading Thursday. In February the stock spiked amid rumors of a takeover bid as well as buzz that Spainhour might leave the company. The takeover talk has since died down.

Recently, Adrienne Lazarus was named executive vice president of merchandising and design at Ann Taylor and Donna Noce was promoted to the same post at Ann Taylor Loft. Both report to Krill. Ann Taylor hasn’t determined what it will do with the chairman’s title, a spokesman said.

The firm on Thursday reported a fourth-quarter loss from a profit a year ago as markdowns took a toll on margins and higher severance costs and rent expenses pulled down earnings. Profits in fiscal 2004 dropped 37.2 percent.For the quarter ended Jan. 29, Ann Taylor had a loss of $12.5 million, or 18 cents a diluted share, wider than analysts’ estimates for a loss of 7 cents. Results in the latest quarter included $5.7 million in severance and pension expense and $7 million in rent expense for its corporate office in Times Square. Comparatively, the company had a profit of $31.8 million, or 43 cents, a year ago.

Total revenues were $487.3 million, up 8.6 percent from $448.7 million last year, as same-store sales dropped 4 percent. By division, sales at Ann Taylor were $220.2 million, down 9.6 percent, and sales at Ann Taylor Loft rose 26.4 percent to $217.2 million.

Spainhour’s performance during his nine years at the helm of Ann Taylor Stores Corp. has been somewhat inconsistent with earnings declines during much of 2000 and 2001. An operations executive, he became president and chief operating officer of Ann Taylor Stores in February 1996. When Sally Frame Kasaks resigned in August of that year after four and a half years, he was named chairman.

“When you lose money in the fourth quarter, which is supposed to be the best month of the year and have a revolving front door, you’re not going to be popular,” said a retail analyst.

Spainhour on Thursday said the company lost its focus in the third and fourth quarters. The main problem was Ann Taylor’s move away from its wardrobing heritage, he said.

Gross margin as a percentage of sales fell to 43 percent in the quarter from 54.8 percent in the same quarter last year. The company cited higher average unit costs, lower full-price sales and lower margin rates on both full price and promotional merchandise, especially at Ann Taylor.

The company confirmed its first-quarter earnings expectation of 27 to 30 cents a share, with same-store sales expected to be down in the low-single digits to flat. Analysts are calling for 25 cents in the first quarter.

In the full year, net earnings at Ann Taylor were $63.3 million, or 88 cents a diluted share, versus $100.7 million, or $1.42, in fiscal 2003. Revenues rose 16.7 percent to $1.9 billion.The firm plans to open 70 to 75 Loft stores, 10 Ann Taylor units and 26 separate petite entrances. Existing stores will get minor facelifts while the company designs a new store prototype. The new units will be 10 to 12 percent larger to accommodate new products such as sleepwear in Loft, and kids clothing at Ann Taylor.

Spainhour hinted that other sizes could be given the freestanding treatment. “We’ve been in the petites business for over 10 years,” he said. “We feel that for sure there are other sizes down the road.”

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