AnnTaylor Stores Corp. managed a third-quarter profit despite a double-digit sales decline, and the women’s apparel retailer projected a promotional fourth quarter in which sales would come in “slightly below” those of the most recent period.

This story first appeared in the November 23, 2009 issue of WWD. Subscribe Today.

Nonetheless, the results fueled management’s confidence in the ongoing repositioning and restructuring efforts.

“I feel very good going into the holiday period,” Kay Krill, Ann Taylor Corp.’s president and chief executive officer, told WWD. “We definitely saw some traction heading into October and what was exciting at Ann Taylor was that as inventories built through September and October, we saw comp sales improve dramatically,” by 25 points.

The trend, Krill continued, “is even better in November than October.”

But on a conference call with analysts, Krill said she expects a “higher level of promotional activity” in the fourth quarter which, despite inventory discipline, would bring margins below the third quarter’s, though they still are expected to be above last year’s fourth quarter.

For the quarter ended Oct. 31, net income was $2.1 million, or 3 cents a diluted share, versus last year’s loss of $13.4 million, or 24 cents. The improvement was driven by fewer promotions, sharp inventory reductions and cost controls.

Excluding restructuring and impairment charges, earnings totaled 20 cents a share, beating Wall Street’s 7 cent prediction.

Revenues fell 12.3 percent to $462.4 million from $527.2 million as comparable-store sales fell 13.7 percent.

By division, net sales at Ann Taylor were $112.3 million, compared with $159.5 million in the year-ago quarter, with comps dropping 25.8 percent. Loft’s net sales were $234 million compared with $263 million in the third quarter of 2008, with comps down 9.7 percent.

Asked what women are shopping for, Krill replied: “Versatility and value are really the two things. She is buying items that work very hard for her and she also wants to feel very smart about her purchases.”

Lower inventories and fewer promotions drove the retailer’s gross margin rate to 57.3 percent from 48.8 percent.

“The promotional stance for the third quarter was much different than the second quarter,” Krill said. “The focus shifted to drive more profitable traffic and conversion was highly focused on versatility, from desk to dinner. Last year, the assortment was much more occasion-driven.”

Repositioning and restructuring efforts over the last several seasons have included high-level management changes, store closings, instilling more style and value to the collections, more sharply differentiating Ann Taylor from Loft, and bolstering underplayed categories.

“Overall, our company is operating more efficiently today and that is translating into higher levels of profitability,” Krill said.

She cited jewelry, specifically bracelets and necklaces and anything with sparkle; pencil skirts; “core essentials,” including tropical wool pants, skirts and jackets; black dresses; shoes, and belts, as recent best-sellers. However, tops were difficult and too weighted with neutral colors, wool and fashion looks as opposed to more basic looks. Next year, Krill said, there will be a stronger array of color and core pieces. Ann Taylor also missed the skinny-leg trend in pants last quarter, but is adjusting the mix. Also needed are more opening price points in certain categories at Ann Taylor, such as suitings, pants and sweaters.

At Loft, boyfriend and skinny jeans, knit tops with embellishment, dresses, jewelry and loungewear generated strong response in the last quarter.

The company ended the quarter with $134 million in cash and no outstanding debt, having repaid $75 million in revolving credit.

Krill said the company is in the process of “a rigorous portfolio analysis,” involving 11 conversions of Ann Taylor units to Lofts, and 45 closings through fiscal 2009, including 28 in January. A comprehensive plan will be revealed during the year-end call in March.

For the fourth quarter, total sales are seen as slightly below the third quarter’s, with sequential comp-store improvement. Fourth-quarter comp sales at Ann Taylor are seen in the negative low- to midteens, while Loft’s comps are projected to be flat to slightly positive.

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