Ann Earnings Call Nuggets: Operating and Gross Margins

Ann (NYSE:ANN) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Operating Margins

Lorraine Hutchinson – Bank of America Merrill Lynch: You spoke about both brands being on track to improve profitability this quarter, but it looks like the guidance implies operating margins would be down. Could you just talk about some of the challenges that you expect in the second quarter?

Michael J. Nicholson – EVP, CFO, and Treasurer: Sure Lorraine, it’s Mike. First of all, from an implied guidance perspective on the bottom line, at least in terms of through my lens, I actually see that our framework provides for an overall increase in operating profit. As Kay mentioned in her opening comments, in the month of May we started off the second quarter, very strong, positive comps at the total Company level, both brands, positive comps, as well as all channels of both brands comped positive. And I think that’s important to note that we mentioned in our pre-release that as the weather turned and the weather got warmer we did see in late April, and we transitioned throughout the month into May, a strong start. In terms of our framework, I’d also say from a gross margin rate perspective, the environment is a little uncertain and I think that we are being appropriately conservative with respect to our view of the level of promotional activity that we will need to execute in the second quarter. And then just in terms of what we’re seeing by brand, I’d ask Kay to chime in as it relates to Ann Taylor and LOFT in particular.

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Kay Krill – President and CEO: At Ann Taylor quarter-to-date we’re seeing a terrific response to our summer product offering, particularly all woven tops, dresses, pencil skirts, maxi skirt, suits and jewelry, and our Kate Hudson capital is being extremely well received. At LOFT we’re seeing a great response to all Print & Pattern across all categories. Knits and woven tops are both performing well. Denim continues its strong performance and we’re also seeing a strong response to Maxi Dresses and skirts. And importantly, I just want you all to note that our balance of color to neutral at LOFT is back on track. So we believe we’re off to a great start.

Gross Margins

Brian Tunick – JPMorgan: My congrats as well to the beginning of the quarter for you guys. Curious on the gross margin, it certainly seems like you’ve done a very nice job given the environment out there. So wondering if you could talk a little about how the supply chain has changed your ability to flow goods and how you are positioning inventory differently today versus a couple of years ago where a season like this would have had much bigger impact on your merchandised margins. And then also Mike can you talk about when you think the shipping impact will be more neutralized to the gross margin.

Kay Krill – President and CEO: Brian, let me just start first on our supply chain and lead times. We have definitely improved our speed to market dramatically over the past several years in order to primarily respond quickly to fashion trends and we have staggered lead times across categories we’ve determined the needs of the business in each channels for instance some lead times on fashion items are shortest 6 to 8 weeks and much of our product can be stores in as little as 12 to 15 weeks and we retained longer lead times on investment pieces such as suitings just to make sure that we deliver the quality that our client expects. So I feel like we’ve made tremendous progress with lead times. We’ve also come a long way in our sourcing capabilities and have managed extremely well through the difficulties of cost pressures that have impacted others in our industry. So we feel like we still see opportunity to continue to on our quest with speed and flexibility and also to manage costs.

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Michael J. Nicholson – EVP, CFO, and Treasurer: I think there were a couple of other questions in there, in terms of inventory and how we are thinking about positioning the business from an inventory perspective over the balance of the year for the second, third and fourth quarter of this year. We are positioning both brands and all channels of both brands to deliver mid-single digit comps and then finally in terms of the gross margin rate impact of shipping and handling. We did, I’ll rewind to that third quarter of last year we did talk about when we mid-quarter, third quarter, ramped up, multichannel, talk about a 50 basis point impact in Q3 of last year. On the year-end call I talked about a 100 basis point impact. First quarter of this year, there was about 100 basis point impact again, and I actually see that continuing into the second quarter. So when I think about the year-on-year gross margin rate impact, you need to think about the second quarter of 2013, assuming about a 100 bps impact to shipping and handling in year-on-year. And then as we move to the third quarter, there will be a half a quarter impact, so I think about a 50 bps impact in Q3 and then we will be neutralized or whole as we transition into Q4.

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