Ann Taylor Launches New SG&A Optimization Program

ANN INC. reported results for the fiscal fourth quarter and full year of 2014 ended January 31, 2015.  The Company also provided its outlook for the first quarter and full year of fiscal 2015.

For the fourth quarter of fiscal 2014, the Company reported earnings per diluted share of $0.01.  This includes the impact of $8.3 million, or $0.11 per diluted share, in incremental pre-tax air freight costs incurred in response to the West Coast port situation, without which, earnings per diluted share would have been $0.12, versus earnings per diluted share of $0.10 in the fourth quarter of fiscal 2013.

For the full year of fiscal 2014, the Company reported earnings per diluted share of $1.46 on a GAAP basis, which includes the $0.23 per diluted share impact of the $17.3 million pre-tax restructuring charge recorded during the first quarter of fiscal 2014; the $0.07 per diluted share impact of the $5.0 million pre-tax charge recorded during the third quarter related to the closing of Ann Taylor’s Madison Avenue store; and the $0.18 per diluted share impact of $13.3 million in incremental pre-tax air freight costs incurred during the second half of fiscal 2014 in response to the West Coast port situation.  Excluding these charges and costs, earnings per diluted share would have been $1.94, compared with earnings per diluted share of $2.19 for the full year of fiscal 2013.

Kay Krill, President and Chief Executive Officer, commented, «Despite a highly promotional and competitive environment, ANN INC. achieved positive comparable sales and effectively managed expenses in the fourth quarter, generating bottom-line results that came in slightly ahead of the outlook we provided in November.  In addition, we delivered on our commitment to clear excess inventory, entering fiscal year 2015 in a healthy position in all channels».

«While we are disappointed that we could not achieve a sixth consecutive year of EPS growth in 2014, I am pleased with how our team responded to the many challenges we faced during the year and we are fully committed to restoring positive growth and momentum over the course of 2015».

«To that end, we are highly focused on delivering outstanding product through a seamless brand experience for our clients, recapturing gross margin and driving increased profitability through careful control of our inventories and aggressive expense management.  At the same time, we expect to make continued progress on our strategic initiatives, including the successful execution of our recently-launched supply chain initiative and our new SG&A optimization program, further enhancement of our omni-channel capabilities and the continued development of our Lou & Grey concept.  Together, these initiatives give us a solid foundation on which to build as we continue our commitment to driving growth and enhancing shareholder value», Ms. Krill concluded.

Fiscal 2014 Fourth Quarter Results

Total net sales for the fourth quarter of fiscal 2014 were $647.4 million, compared with net sales of $623.3 millionin the fourth quarter of fiscal 2013.  By brand, net sales across all channels of the Ann Taylor brand totaled $249.9 million in the fourth quarter of 2014, compared with net sales of $246.2 million in the fourth quarter of 2013.  At the LOFT brand, net sales across all channels were $397.5 million in the fourth quarter of 2014, compared with net sales of $377.1 million in the fourth quarter of 2013.

Total Company comparable sales for the quarter increased 1.0% on top of an increase of 2.9% in the fourth quarter of 2013.  At Ann Taylor, total brand comparable sales declined 0.4%, reflecting flat comparable sales at Ann Taylor, which includes Ann Taylor stores and anntaylor.com, and a decline of 1.5% in the Ann Taylor Factory channel.  At LOFT, total brand comparable sales increased 1.9%, reflecting an increase of 1.0% at LOFT, which includes LOFT stores and LOFT.com, and an increase of 6.6% in the LOFT Outlet channel.  (Please refer to Table 3 for a breakdown of sales by brand and channel.)

Gross margin as a percentage of net sales was 45.8%, a decrease of 350 basis points compared with the 49.3% gross margin rate achieved in the fourth quarter of 2013.  The decrease in gross margin rate was primarily due to higher promotional activity at both Ann Taylor and LOFT compared with the fourth quarter of 2013, as well as the 130 basis point impact of $8.3 million in incremental air freight costs incurred in response to the West Coast port situation.

Selling, general and administrative expenses for the fourth quarter of 2014 were $295.2 million versus $301.5 million reported in the fourth quarter of 2013.  As a percentage of net sales, selling, general and administrative expenses were 45.6% in the fourth quarter of 2014, compared with 48.4% in the fourth quarter of 2013.   The 280 basis point improvement in SG&A rate during the fourth quarter of 2014 was primarily due to continued disciplined expense management, including the ongoing benefit of our first quarter 2014 restructuring, as well as lower marketing spend.

The Company reported operating income of $1.0 million for the quarter, including the $8.3 million pre-tax impact of incremental air freight costs incurred in response to the West Coast port situation.  Excluding these costs, operating income would have been $9.3 million, compared with operating income of $5.8 million in the fourth quarter of 2013.

Net income in the quarter was $0.3 million, or $0.01 per diluted share, including the $5.1 million, or $0.11 per diluted share, after-tax impact of costs incurred in response to the West Coast port situation, without which, net income would have been $5.4 million, or $0.12 per diluted share, compared with net income of $4.7 million, or $0.10 per diluted share, in the fourth quarter of 2013.  The tax rate used to calculate non-GAAP after-tax charges and non-GAAP net income for the fourth quarter of 2014 was based on the Company’s full year effective tax rate of 38.5%.

During the fourth quarter of 2014, the Company opened six new stores, comprised of one Ann Taylor store, one Ann Taylor Factory store, one LOFT Outlet store and three Lou & Grey stores.  The Company also closed 26 stores during the quarter, comprised of 17 Ann Taylor stores and nine LOFT stores.

Fiscal Year 2014 Results

Total net sales for the full year of fiscal 2014 were $2.53 billion, compared with net sales of $2.49 billion in fiscal 2013.  By brand, net sales across all channels of the Ann Taylor brand totaled $952.8 million in fiscal 2014, compared with net sales of $959.8 million in fiscal 2013.  At the LOFT brand, net sales across all channels were $1,580.7 million in 2014, compared with net sales of $1,533.7 million in 2013.

Total Company comparable sales for the full year of fiscal 2014 decreased 1.9%.  At the Ann Taylor brand, total comparable sales decreased 2.2%, including decreases of 0.7% at Ann Taylor and 5.2% at Ann Taylor Factory.  At the LOFT brand, total comparable sales decreased 1.7%, including a decrease of 2.4% at LOFT, partially offset by an increase of 1.3% at LOFT Outlet.   (Please refer to Table 3 for a breakdown of sales by brand and channel.)

Gross margin as a percentage of net sales was 51.0%, compared with 53.9% in fiscal 2013. The decrease in gross margin rate was primarily due to continued traffic challenges and a highly promotional retail environment throughout much of the year, soft product performance in certain categories at LOFT during the first half and at Ann Taylor during the second half of 2014 and the impact of $13.3 million in pre-tax incremental air freight costs incurred in response to the West Coast port situation.

Selling, general and administrative expenses were $1,161.8 million, including the impact of the third-quarter pre-tax charge of $5.0 million related to the closure of Ann Taylor’s Madison Avenue store, without which, selling, general and administrative expenses would have been $1,156.8 million, versus $1,173.2 million in fiscal 2013. As a percentage of net sales, selling, general and administrative expenses decreased to 45.9%.  Excluding the 0.2% impact of the aforementioned charge, selling, general and administrative expenses as a percentage of net sales would have been 45.7%, representing a 140 basis-point improvement over the 47.1% reported for 2013.  This was primarily due to lower marketing and performance-based compensation expenses as well as savings resulting from our first quarter 2014 restructuring, partially offset by an increase in occupancy costs and other variable expenses related to store growth, as well as other expenses to support the expansion of our business.

The Company recorded a pre-tax restructuring charge of $17.3 million in the first quarter of 2014 in connection with its strategic realignment.

For fiscal 2014, the Company reported operating income of $111.8 million on a GAAP basis.  Excluding the aforementioned $17.3 million pre-tax restructuring charge, the $5.0 million pre-tax charge associated with the aforementioned closure of Ann Taylor’s Madison Avenue store and $13.3 million in incremental air freight costs incurred in response to the West Coast Port situation during the second half of 2014, operating income for the full year of fiscal 2014 would have been $147.4 million, compared with operating income of $170.1 million in fiscal 2013.

Net income for fiscal 2014 was $68.0 million, or $1.46 per diluted share, on a GAAP basis.  Excluding the $10.6 million, or $0.23 per diluted share, after-tax impact of the above-mentioned restructuring charge, the $3.1 million, or $0.07 per diluted share, after-tax impact of the third quarter charge related to the closure of Ann Taylor’s Madison Avenue store and the $8.2 million, or $0.18 per diluted share, after-tax impact of the incremental air freight costs discussed above, net income would have been $89.9 million, or $1.94 per diluted share, in fiscal 2014, compared with net income of $102.4 million, or $2.19 per diluted share, in fiscal 2013.

The Company ended the year with approximately $208 million in cash.  During fiscal 2014, the Company repurchased approximately 1.3 million of its outstanding shares at a total cost of $50 million.

Total inventory per square foot at the end of fiscal 2014 increased approximately 11% versus fiscal 2013, reflecting increases of 6% at Ann Taylor and 24% at LOFT, partially offset by a 2% decrease in the factory/outlet channel.  The increases at Ann Taylor and LOFT were primarily driven by a change in the timing of Spring receipts versus last year, as well as changes in merchandise mix.  Excluding the impact of receipt timing, inventory per square foot at Ann Taylor and LOFT were up by 3% and 7%, respectively, as compared to fiscal 2013.

During fiscal 2014, the Company opened 50 stores, comprised of three Ann Taylor stores, eight Ann Taylor Factory stores, 17 LOFT stores, 17 LOFT Outlet stores and five Lou & Grey stores.  The Company also closed 45 stores during the year comprised of 26 Ann Taylor stores and 19 LOFT stores.  The total store count at the end of fiscal 2014 was 1,030, comprised of 245 Ann Taylor stores, 116 Ann Taylor Factory stores, 537 LOFT stores, 127 LOFT Outlet stores and five Lou & Grey stores.

Outlook for Fiscal First-Quarter and Full-Year 2015 

For the fiscal first quarter of 2015, the Company expects:

• Total net sales to be $605 million, reflecting total Company comparable sales that are slightly positive compared to the fiscal first quarter of 2014;
• Gross margin rate performance to be 53.0%;
• Selling, general and administrative expenses to be $295 million;
• The estimated effective tax rate to be 40.5%; and,
• Weighted average diluted shares outstanding for the quarter of approximately 46.2 million, which includes the effect of participating securities, but excludes any potential impact of future share repurchases.

In terms of the full year fiscal 2015, the Company currently anticipates:

• Total net sales to be $2.565 billion, reflecting a total Company comparable sales increase in the low-single digits;
• Gross margin rate performance to be 52.0%;
• Total SG&A expenses to be $1.175 billion, including approximately $20 million of targeted savings in fiscal 2015 associated with the Company’s aforementioned SG&A optimization program;
• An effective tax rate of 40.5%;
• Weighted average diluted shares outstanding for the year of approximately 46.5 million shares, which includes the effect of participating securities, but excludes any potential impact of future repurchases;
• Capital expenditures to be approximately $85 million.
• Total weighted average square footage for fiscal 2015 is expected to remain approximately flat with 2014, reflecting the opening of approximately 40 new stores, offset by the impact of approximately 35 store closures. The Company expects to have approximately 1,035 stores at fiscal year-end.

The Company expects to maintain its healthy balance sheet, including a conservative approach to inventory management throughout Fiscal 2015. AnnTaylor is a NYSE Company Listed NYSE: ANN.