With a strong third quarter under its belt, Ann Inc. is moving on several fronts — from going international to downsizing Ann Taylor stores — to sustain the momentum.

This story first appeared in the November 21, 2011 issue of WWD. Subscribe Today.

The specialty retailer is also inserting more fashion items and fewer core and basic items into stores for the upcoming holiday and spring seasons. The Ann Inc. customer “has a very high appetite for fashion and less of an appetite right now for core investment pieces,” Kay Krill, president and chief executive officer, told WWD. “That’s due to the macro-environment, absolutely.”

In addition, Krill said the company will commence international distribution on e-commerce orders early next year and is “actively pursuing” an entry into Canada for late 2012, which would mark the company’s first stores outside the U.S. “We are very anxious to see demand by country. I think both brands have international legs,” Krill said, though she declined to speculate on any countries beyond Canada. English-speaking countries, such as England and Canada, are the priorities, Krill said.

On Friday, Ann Inc. posted a 33.4 percent gain in net income for the third quarter ended Oct. 29 and cited strong acceptance on a range of products, and none of the margin pressure that many other retailers are experiencing due to increased product costs, mainly due to higher cotton prices. Krill said the company foresaw cost issues and made product changes and worked with suppliers well in advance to keep costs down. “We were less promotional overall for the third quarter and a-u-c [average unit cost] was in good shape,” Krill said. In the third quarter, gross margins were up 30 basis points to 57.5 percent.

Ann Inc.’s net rose to $32.3 million, compared with $24.2 million in the year-ago period. Diluted earnings per share were 61 cents in the quarter ended Oct. 29, an increase of 48.8 percent; total sales rose to $564 million, and comparable-store sales increased 5.5 percent.

The company said all channels of selling, with the exception of Ann Taylor stores, were strong last quarter. Ann Taylor stores are generally oversized, and last quarter, didn’t stock enough fashion products but are being corrected for holiday and spring.

However, the company has been downsizing Ann Taylor stores to a 3,500- to 4,200-square-foot prototype, from an average of 6,000 to 7,000 square feet, and said the change boosts productivity without sacrificing volume. “We’ve been getting 50 percent productivity lifts,” said Michael Nicholson, executive vice president and chief financial officer. “Total volume is up with 30 to 40 percent less square footage.”

In addition, the prototype “elevates the overall brand aesthetic,” said Krill. Thirty-five prototypes were operating at the end of the third quarter; 45 more will be added in 2012.

Items infused with color and details — including animal prints, capes and cashmere ponchos — have been bestsellers and that’s where the company is putting greater emphasis for holiday and spring. The Loft division, which accounts for 60 percent of the company’s total business, is doing particularly well with tops, which this quarter represent about 50 percent of Loft’s inventory. Krill cited tops with stripes and color as very strong. So were textured, chunky sweaters and sweaters with fur or lace detail, she added.

For Ann Inc., the fourth quarter represents about 15 percent of annual earnings, which is a lower percentage than many retail peers. Total sales for the year are seen at more than $2.22 billion, an increase of 12 percent from last year.

By brand, net sales of Ann Taylor totaled $229.7 million in the third quarter, compared with net sales of $223.2 million in the third quarter of 2010. Net sales at Loft were $334.3 million, compared with $282.1 million a year ago.