Attached files

file filename
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - ANN INC.dex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - ANN INC.dex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - ANN INC.dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-10738

 

 

ANNTAYLOR STORES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3499319

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

7 Times Square, New York, NY   10036
(Address of principal executive offices)   (Zip Code)

(212) 541-3300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of

November 16, 2009

Common Stock, $.0068 par value

  58,772,976

 

 

 


Table of Contents

INDEX TO FORM 10-Q

 

                    Page No.
PART I. FINANCIAL INFORMATION   
  

Item 1.

  

Financial Statements

  
        

Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended October  31, 2009 and November 1, 2008 (unaudited)

   5
        

Condensed Consolidated Balance Sheets at October 31, 2009, January 31, 2009 and November  1, 2008 (unaudited)

   6
        

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October  31, 2009 and November 1, 2008 (unaudited)

   7
        

Notes to Condensed Consolidated Financial Statements (unaudited)

   8
  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   27
  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   39
  

Item 4.

  

Controls and Procedures

   40
PART II. OTHER INFORMATION   
  

Item 1A.

  

Risk Factors

   41
  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   42
  

Item 6.

  

Exhibits

   43
SIGNATURES    44
EXHIBIT INDEX    45

 

2


Table of Contents

Statement Regarding Forward-Looking Disclosures

Certain sections of this Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may use the words “expect”, “anticipate”, “plan”, “intend”, “project”, “may”, “believe” and similar expressions. Forward-looking statements also include representations of the expectations or beliefs of AnnTaylor Stores Corporation (the “Company”) concerning future events that involve risks and uncertainties, including:

 

   

general economic conditions and the current financial crisis, including the effect on the Company’s liquidity and capital resources, and a downturn in the retail industry;

 

   

the behavior of financial markets, including fluctuations in interest rates and the value of the U.S. dollar against foreign currencies, or restrictions on the transfer of funds;

 

   

continuation of lowered levels of consumer spending, changes in levels of store traffic, lowered levels of consumer confidence and higher levels of unemployment resulting from the worldwide economic downturn;

 

   

the commercial and consumer credit environment;

 

   

continued volatility and further deterioration of the capital markets;

 

   

fluctuation in the Company’s level of sales and earnings growth and stock price;

 

   

the Company’s ability to achieve the results of its restructuring program, including the risk that the benefits expected from the restructuring program will not be achieved or may take longer to achieve than expected;

 

   

changes in management’s assumptions and projections concerning costs and timing in execution of the restructuring program;

 

   

the Company’s ability to realize deferred tax assets and the effect of external economic factors on the Company’s future funding obligations for its defined benefit pension plan;

 

   

competitive influences and decline in the demand for merchandise offered by the Company, and the Company’s ability to manage inventory levels;

 

   

the Company’s ability to manage the profitability of its existing stores, effectively renew or re-negotiate the terms of existing store leases, or locate new store sites or negotiate favorable lease terms for additional stores;

 

   

risks associated with the bankruptcy or significant deterioration of one or more of our major national retail landlords;

 

   

the Company’s ability to predict accurately client fashion preferences;

 

   

effectiveness of the Company’s brand awareness and marketing programs, and its ability to maintain the value of its brands;

 

   

the Company’s ability to successfully execute brand extensions and new concepts;

 

   

the Company’s ability to secure and protect trademarks and other intellectual property rights in the United States and/or foreign countries;

 

   

risks associated with the performance and operations of the Company’s Internet operations;

 

   

a significant change in the regulatory environment applicable to the Company’s business and the Company’s ability to comply with legal and regulatory requirements;

 

   

risks associated with the possible inability of the Company, particularly through its sourcing and logistics functions, to operate within production and delivery constraints and the Company’s dependence on a single distribution facility;

 

   

the uncertainties of sourcing associated with the current environment, including changes in sourcing patterns resulting from legislation relating to import quotas, the imposition of duties, or other possible trade law or import restrictions;

 

   

risks associated with the Company’s reliance on foreign sources of production, including financial or political instability in any of the countries in which the Company’s goods are manufactured and supplier inability to obtain adequate credit or access to liquidity to finance operations;

 

   

risks associated with a failure by independent manufacturers to comply with the Company’s quality, product safety and social practices requirements;

 

   

the potential impact of natural disasters and public health concerns, including severe infectious diseases, particularly on the Company’s foreign sourcing offices and manufacturing operations of the Company’s vendors;

 

   

acts of war or terrorism in the United States or worldwide;

 

   

work stoppages, slowdowns or strikes;

 

   

the Company’s ability to hire, retain and train key personnel;

 

3


Table of Contents
   

the Company’s ability to successfully upgrade and maintain its information systems, including adequate system security controls; and

 

   

the Company’s ability to continue operations in accordance with its business continuity plan in the event of an interruption.

Further description of these risks and uncertainties and other important factors are set forth in the Company’s latest Annual Report on Form 10-K, including but not limited to Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations therein, and in the Company’s other filings with the SEC. Although these forward-looking statements reflect the Company’s current expectations concerning future events, actual results may differ materially from current expectations or historical results. The Company does not assume any obligation to publicly update or revise any forward-looking statements at any time for any reason.

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Quarters and Nine Months Ended October 31, 2009 and November 1, 2008

(unaudited)

 

     Quarters Ended     Nine Months Ended
   October 31,
2009
   November 1,
2008
    October 31,
2009
    November 1,
2008
   (in thousands, except per share amounts)

Net sales

   $ 462,410    $ 527,216      $ 1,359,386      $ 1,711,194

Cost of sales

     197,555      270,060        611,500        828,911
                             

Gross margin

     264,855      257,156        747,886        882,283

Selling, general and administrative expenses

     246,200      254,770        725,019        785,268

Restructuring charges

     630      19,893        32,722        26,761

Asset impairment charges

     15,318      2,741        15,318        2,764
                             

Operating income/(loss)

     2,707      (20,248     (25,173     67,490

Interest income

     186      311        750        1,571

Interest expense

     788      325        2,598        1,025
                             

Income/(loss) before income taxes

     2,105      (20,262     (27,021     68,036

Income tax provision/(benefit)

     36      (6,815     (8,772     26,336
                             

Net income/(loss)

   $ 2,069    $ (13,447   $ (18,249   $ 41,700
                             

Earnings per share:

         

Basic earnings/(loss) per share

   $ 0.04    $ (0.24   $ (0.32   $ 0.71

Weighted average shares outstanding

     56,855      56,252        56,727        57,697

Diluted earnings/(loss) per share

   $ 0.03    $ (0.24   $ (0.32   $ 0.71

Weighted average shares outstanding assuming dilution

     58,037      56,252        56,727        57,861

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

 

5


Table of Contents

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

October 31, 2009, January 31, 2009 and November 1, 2008

(unaudited)

 

     October 31,
2009
    January 31,
2009
    November 1,
2008
 
   (in thousands)  

Assets

      

Current assets

      

Cash and cash equivalents

   $ 134,104      $ 112,320      $ 80,687   

Short term investments

     5,698        —          —     

Accounts receivable

     26,283        14,081        23,421   

Refundable income taxes

     7,717        35,270        —     

Merchandise inventories

     211,194        173,447        274,450   

Deferred income taxes

     28,475        25,422        33,925   

Prepaid expenses and other current assets

     62,196        63,056        61,406   
                        

Total current assets

     475,667        423,596        473,889   

Property and equipment, net

     388,370        469,687        545,958   

Goodwill

     —          —          286,579   

Deferred financing costs, net

     1,048        1,275        1,370   

Deferred income taxes

     42,082        53,253        25,840   

Other assets

     7,064        12,628        20,051   
                        

Total assets

   $ 914,231      $ 960,439      $ 1,353,687   
                        

Liabilities and Stockholders’ Equity

      

Current liabilities

      

Trade notes and accounts payable

   $ 92,228      $ 109,205      $ 118,835   

Accrued salaries and bonus

     27,426        23,883        26,103   

Accrued tenancy

     44,332        42,710        44,693   

Gift certificates and merchandise credits redeemable

     35,842        45,605        38,043   

Accrued expenses and other current liabilities

     81,861        84,180        89,698   
                        

Total current liabilities

     281,689        305,583        317,372   

Deferred lease costs

     194,864        217,614        224,646   

Deferred income taxes

     1,673        1,898        1,633   

Other liabilities

     25,271        18,832        18,560   

Commitments and contingencies

      

Stockholders’ equity

      

Common stock, $.0068 par value; 200,000,000 shares authorized; 82,476,328, 82,476,328 and 82,476,328 shares issued, respectively

     561        561        561   

Additional paid-in capital

     773,450        791,852        788,638   

Retained earnings

     414,253        432,502        808,108   

Accumulated other comprehensive loss

     (6,648     (7,702     (4,230
                        
     1,181,616        1,217,213        1,593,077   
                        

Treasury stock, 23,695,785, 25,220,809 and 25,358,195 shares respectively, at cost

     (770,882     (800,701     (801,601
                        

Total stockholders’ equity

     410,734        416,512        791,476   
                        

Total liabilities and stockholders’ equity

   $ 914,231      $ 960,439      $ 1,353,687   
                        

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

 

6


Table of Contents

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended October 31, 2009 and November 1, 2008

(unaudited)

 

     Nine Months Ended  
   October 31,
2009
    November 1,
2008
 
   (in thousands)  

Operating activities:

    

Net (loss)/income

   $ (18,249   $ 41,700   

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:

    

Deferred income taxes

     7,285        (7,626

Depreciation and amortization

     79,641        93,639   

Loss on disposal and write-down of property and equipment

     16,598        2,761   

Non-cash compensation expense

     11,526        9,023   

Non-cash interest and other non-cash items

     2,021        438   

Non-cash restructuring charges

     15,077        11,024   

Tax deficiency from exercise/vesting of stock awards

     (1,472     (512

Changes in assets and liabilities:

    

Accounts receivable

     (12,202     (6,477

Merchandise inventories

     (37,747     (23,753

Prepaid expenses and other current assets

     1,169        6,548   

Refundable income taxes

     27,553        —     

Other non-current assets and liabilities, net

     (13,868     (5,495

Trade notes, accounts payable and accrued expenses

     (24,887     (7,101
                

Net cash provided by operating activities

     52,445        114,169   
                

Investing activities:

    

Purchases of marketable securities

     (409     (927

Sales of marketable securities

     696        9,277   

Restricted cash received for sublease

     (617     —     

Purchases of property and equipment

     (29,403     (83,194
                

Net cash used for investing activities

     (29,733     (74,844
                

Financing activities:

    

Proceeds from draw down of credit facility

     125,000        —     

Repayments of credit facility

     (125,000     —     

Proceeds from the issuance of common stock pursuant to the Associate Discount Stock Purchase Plan

     1,638        2,095   

Proceeds from exercise of stock options

     93        3,864   

Excess tax benefits from stock-based compensation

     45        365   

Repurchases of common and restricted stock

     (368     (103,208

Proceeds from fixed asset financing

     —          7,578   

Repayments of fixed asset financing and capital lease obligations

     (2,336     (2,032

Payments of deferred financing cost

     —          (1,325
                

Net cash used for financing activities

     (928     (92,663
                

Net increase/(decrease) in cash

     21,784        (53,338

Cash and cash equivalents, beginning of period

     112,320        134,025   
                

Cash and cash equivalents, end of period

   $ 134,104      $ 80,687   
                

Supplemental disclosures of cash flow information:

    

Cash paid during the year for:

    

Interest

   $ 2,576      $ 758   
                

Income taxes

   $ 3,403      $ 35,541   
                

Property and equipment acquired through capital lease

   $ —        $ 1,638   
                

Accrual for purchases of property and equipment

   $ 12,662      $ 9,570   
                

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

 

7


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The Condensed Consolidated Financial Statements are unaudited but, in the opinion of management, contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated. Subsequent events have been evaluated through November 20, 2009.

The results of operations for the 2009 interim periods presented in the Condensed Consolidated Financial Statements (unaudited) are not necessarily indicative of results to be expected for Fiscal 2009.

The January 31, 2009 Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheet of AnnTaylor Stores Corporation (the “Company”).

Asset impairment charges previously included in selling, general and administrative expenses on the consolidated statements of operations for the quarter and nine months ended November 1, 2008 have been reclassified to a separate line item to conform to the presentation for the quarter and nine months ended October 31, 2009.

Detailed footnote information is not included in this Report. The financial information set forth herein should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

2. Summary of Significant Accounting Policies

Except as set forth below, there have been no material updates or changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Revenue Recognition

In October 2008, the Company launched an enhanced credit card program, which offers eligible clients the choice of a private label or a co-branded credit card. All new cardholders are automatically enrolled in the Company’s exclusive rewards program, which is designed to recognize and promote client loyalty. As part of the program, the Company received an upfront signing bonus from the sponsoring bank. The Company also receives ongoing bounties for new accounts activated, as well as a share of finance charges collected by the sponsoring bank. These revenue streams are accounted for as a single unit of accounting under Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition, and accordingly will be recognized into revenue ratably based on the total projected revenues over the term of the agreement. During the quarter and nine months ended October 31, 2009, the Company recognized approximately $8.0 million and $12.0 million of revenue related to the credit card program, respectively. No material revenue was recognized under this program during the quarter or nine months ended November 1, 2008. At October 31, 2009, January 31, 2009 and November 1, 2008, approximately $7.5 million, $8.5 million and $1.4 million, respectively, of deferred credit card income is included in accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheets. Partially offsetting the income from the credit card program are costs related to the customer loyalty program, which are included in cost of sales.

 

8


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

2. Summary of Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements

Recently Issued Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (“SFAS No. 166”). SFAS No. 166 seeks to improve financial reporting by providing a short-term solution to address inconsistencies in practice relating to the existing concepts in SFAS No. 140, such as eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance. SFAS No. 166 is effective for annual financial periods beginning after November 15, 2009, and interim periods within that annual period, and thereafter, and shall be applied prospectively. Early adoption is prohibited. The Company is in the process of evaluating SFAS No. 166 and does not expect it will have a significant impact on its Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 seeks to improve financial reporting by requiring that entities perform an analysis to determine whether any variable interest or interests that they have give them a controlling financial interest in a variable interest entity. SFAS No. 167 is effective for annual financial periods beginning after November 15, 2009, and interim periods within that annual period, and thereafter, and shall be applied prospectively. Early adoption is prohibited. The Company is in the process of evaluating SFAS No. 167 and does not expect it will have a significant impact on its Consolidated Financial Statements.

In December 2008, the FASB issued amendments to ASC 715-20, Compensation – Retirement Benefits, which require additional detailed disclosures about the assets of a defined benefit pension or other postretirement plans and are effective for fiscal years ending after December 15, 2009. The Company is in the process of evaluating the amendments to ASC 715-20, and does not expect they will have a significant impact on its Consolidated Financial Statements.

Recently Adopted Standards

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value. ASU 2009-05 amends ASC 820-10, Fair Value Measurements and Disclosures, for the fair value measurement of liabilities, and provides clarification of the accounting for circumstances in which a quoted price in an active market for an identical liability is not available. ASU 2009-05 is effective for the first reporting period (including interim periods) after its issuance. The Company adopted ASU 2009-05 during the third quarter of Fiscal 2009. The adoption of ASU 2009-05 did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles. Upon adoption, the FASB ASC established by ASC 105-10 becomes the source of authoritative generally accepted accounting principles in the United States, and supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC will become non-authoritative. The Company adopted ASC 105-10 during the third quarter of Fiscal 2009. The adoption of ASC 105-10 impacted the Company’s disclosures by eliminating all references to pre-Codification standards, excepting only pre-Codification standards that have not yet been codified.

In June 2009, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities. SAB No. 111 clarifies the SEC’s position related to other-than-temporary impairments of debt and equity securities and was issued in order to make the relevant interpretive SEC guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The Company adopted SAB No. 111 on June 4, 2009, the date of its issuance. The adoption of SAB No. 111 did not have any impact on the Company’s Consolidated Financial Statements.

 

9


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

2. Summary of Significant Accounting Policies (continued)

 

Recently Adopted Standards (continued)

 

In May 2009, the FASB issued amendments to ASC 855-10, Subsequent Events, which establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The amendments to ASC 855-10 introduce the concept of financial statements being available to be issued, and require the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The Company adopted the amendments to ASC 855-10 during the second quarter of Fiscal 2009. See Note 1, Basis of Presentation, for the disclosure required under these amendments to ASC 855-10.

In April 2009, the FASB issued amendments to ASC 825-10, Financial Instruments, which require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The amendments to ASC 825-10 also require those disclosures in summarized financial information at interim reporting periods. The amendments to ASC 825-10 are effective for interim reporting periods ending after June 15, 2009. The amendments to ASC 825-10 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. The Company adopted the amendments to ASC 825-10 during the second quarter of Fiscal 2009. See Note 3, Investments, and Note 4, Fair Value Measurements, for further disclosures required under these amendments to ASC 825-10.

In April 2009, the FASB issued amendments to ASC 320-10, Investments – Debt and Equity Securities, which impact the other-than-temporary impairment guidance in U.S. generally accepted accounting principles (“GAAP”) for debt securities to make the guidance more operational and improve the presentation and disclosure of other-than-temporary impairment on debt and equity securities in the financial statements. The amendments to ASC 320-10 do not amend existing recognition and measurement guidance related to other-than-temporary impairment of equity securities. The amendments to ASC 320-10 are effective for interim reporting periods ending after June 15, 2009. The amendments to ASC 320-10 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. The Company adopted the amendments to ASC 320-10 during the second quarter of Fiscal 2009. The adoption of the amendments to ASC 320-10 did not have any impact on its Consolidated Financial Statements.

In April 2009, the FASB issued amendments to ASC 820-10, Fair Value Measurements and Disclosures, which provide guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. These amendments to ASC 820-10 include guidance on identifying circumstances that indicate when a transaction is not orderly, and are effective for interim reporting periods ending after June 15, 2009. These amendments to ASC 820-10 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. The Company adopted these amendments to ASC 820-10 during the second quarter of Fiscal 2009. See Note 3, Investments, for disclosure required under these amendments to ASC 820-10.

 

10


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

2. Summary of Significant Accounting Policies (continued)

 

Recently Adopted Standards (continued)

 

In June 2008, the FASB issued amendments to ASC 260-10, Earnings Per Share, which require that unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) be considered participating securities and be included in the two-class method of computing earnings per share. These amendments to ASC 260-10 are effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted these amendments to ASC 260-10 on February 1, 2009. The adoption of these amendments to ASC 260-10 impacted the determination and reporting of earnings per share by requiring the inclusion of unvested restricted stock and performance restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. The amendments to ASC 260-10 also required retroactive application to previously reported earnings per share amounts. Including these shares in the Company’s earnings per share calculation during periods of net income has the effect of diluting both its basic and diluted earnings per share. However, in periods of net loss, no effect is given to the participating securities since they do not have an obligation to share in the losses of the Company. See Note 6, Net (Loss)/Income Per Share for further discussion.

In September 2006, the FASB issued amendments to ASC 820-10, Fair Value Measurements and Disclosures. Subsequently, on February 12, 2008, the portion of these amendments related to non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis was deferred by the FASB for one year. The Company adopted the partially deferred portion of the amendments to ASC 820-10 on February 1, 2009. See Note 4, Fair Value Measurements, for additional disclosures required under these amendments to ASC 820-10 for non-financial assets and liabilities recognized or disclosed at fair value in the financial statements.

3. Investments

The Company had $6.0 million invested in auction rate securities at October 31, 2009, January 31, 2009 and November 1, 2008 with a carrying value of $5.7 million, $5.8 million and $5.2 million, respectively. The approximate net carrying value represents the Company’s best estimate of the fair value of these investments based on available information on those dates. As of October 31, 2009, there was insufficient observable auction rate security market information available to determine the fair value of the auction rate securities or the right obtained in the Company’s settlement with UBS, as discussed below. As such, the auction rate securities and the right obtained in the Company’s settlement with UBS were deemed to require valuation using Level 3 inputs. Consistent with ASC 820-10, Fair Value Measurements and Disclosures, the Company valued the auction rate securities using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set).

On November 14, 2008, the Company entered into a settlement agreement with UBS AG (“UBS”), one of its investment providers, related to its $6.0 million investment in auction rate securities purchased from UBS. Under the terms of the settlement agreement, the Company received auction rate security rights that enable it to sell its auction rate securities back to UBS at par value anytime during the two year period beginning June 30, 2010. The Company recorded these auction rate security rights as a put option. The estimated fair value of the put option related to the auction rate securities was determined by taking the par value of the auction rate securities less the fair value of those securities and discounting that difference via a discount factor. The discount factor was determined using a combination of the UBS Credit Default Spread and LIBOR.

Since the Company has auction rate security rights that enable it to sell its auction rate securities back to UBS at par value anytime during the two year period beginning June 30, 2010, and because the Company intends to exercise this right as soon as practicably possible, as of October 31, 2009, the Company has classified the net carrying value of its remaining investment in auction rate securities to short-term, included in short-term investments on its Condensed Consolidated Balance Sheets.

 

11


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

4. Fair Value Measurements

ASC 820-10, Fair Value Measurements and Disclosures, establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following tables segregate all financial assets and liabilities as of October 31, 2009 and November 1, 2008 that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date:

 

     October 31,
2009
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   (in thousands)

Non-qualified deferred compensation plan assets (a)

   $ 1,688    $ 1,688    $ —      $ —  

Auction rate securities (b)

     5,681      —        —        5,681

Put option on auction rate securities (c)

     315      —        —        315
                           

Total assets

   $ 7,684    $ 1,688    $ —      $ 5,996
                           
     November 1,
2008
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   (in thousands)

Non-qualified deferred compensation plan assets (a)

   $ 1,675    $ 1,675    $ —      $ —  

Auction rate securities (b)

     5,202      —        —        5,202
                           

Total assets

   $ 6,877    $ 1,675    $ —      $ 5,202
                           

 

(a) The Company maintains a self-directed, non-qualified deferred compensation plan structured as a rabbi trust for certain executives and other highly compensated employees. The investment assets of the rabbi trust are valued using quoted market prices multiplied by the number of shares held in the trust.
(b) Auction rate securities are valued using an income-approach model (discounted cash-flow analysis). The model considers factors that reflect assumptions market participants would use in pricing, including, among others: the collateralization underlying the investments; the creditworthiness of the counterparty; expected future cash flows, including the next time the security is expected to have a successful auction; and risks associated with the uncertainties in the current market. Additionally, the Company received certain auction rate security rights from UBS under the terms of its settlement agreement with UBS dated November 14, 2008. See Note 3, Investments, for more information.
(c) The put option is valued using discounted cash-flow analysis. See Note 3, Investments, for more information.

 

12


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

4. Fair Value Measurements (continued)

 

The following tables provide a reconciliation of the beginning and ending balances for the Company’s investment in auction rate securities for the quarters and nine months ended October 31, 2009 and November 1, 2008 and the related put option for the quarter and nine months ended October 31, 2009, as these assets are measured at fair value using significant unobservable inputs (Level 3):

 

     Quarters Ended  
   October 31,
2009
   November 1,
2008
 
   (in thousands)  

Balance at beginning of period

   $ 5,993    $ 5,588   

Total gains realized/unrealized included in interest income

     3      —     

Total losses included in other comprehensive income

     —        (386
               

Balance at end of period

   $ 5,996    $ 5,202   
               
     Nine Months Ended  
   October 31,
2009
   November 1,
2008
 
   (in thousands)  

Balance at beginning of period

   $ 5,987    $ —     

Transfers in and/or (out) of Level 3 (a)

     —        6,000   

Total gains realized/unrealized included in interest income

     9      —     

Total losses included in other comprehensive income

     —        (798
               

Balance at end of period

   $ 5,996    $ 5,202   
               

 

(a) Based on the deteriorated market conditions affecting the Company’s investment in auction-rate securities, the Company changed its fair value measurement methodology from quoted prices in active markets to a discounted cash flow model during the first quarter of Fiscal 2008. Accordingly, these securities were valued using Level 3 inputs.

 

13


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

4. Fair Value Measurements (continued)

 

The table below segregates all non-financial assets and liabilities for the nine months ended October 31, 2009 that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date:

 

     Total
October 31,
2009
   Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total
Gains
(Losses)
 
  

(in thousands)

 

Long-lived assets held and used (a)

   $ 4,933    $ —      $ —      $ 4,933    $ (24,764
                                    

Total assets

   $ 4,933    $ —      $ —      $ 4,933    $ (24,764
                                    

 

(a) The Company performs impairment tests under the guidance of ASC 360-10, Property, Plant, and Equipment, whenever there are indicators of impairment. These tests typically consider which assets are impaired at a store level. The Company would recognize an impairment loss only if the carrying value of a long-lived asset or group of assets is not recoverable from undiscounted cash flows, and would measure an impairment loss as the difference between the carrying value and fair value of the assets based on discounted cash flows. Upon the adoption of ASC 820-10, the Company considered all relevant valuation techniques (e.g., market, income, and cost approaches) that could be obtained without undue cost and effort, which included the undiscounted cash flow approach, and determined that the undiscounted cash flow approach continued to provide the most relevant and reliable means by which to determine fair value in this circumstance. The range of discount rates utilized in determining fair value for this purpose was 9.36-12.50%, based upon the corresponding benchmark interest rate associated with the period of remaining cash flows for the individual stores.

During the quarter and nine months ended October 31, 2009, long-lived assets held and used with a carrying value of $18.6 million and $29.7 million, respectively, were written down to their fair value, resulting in asset impairment charges of $15.4 million and $24.8 million, respectively. Of these amounts, approximately $0.1 million and $9.5 million were included in restructuring charges for the quarter and nine months ended October 31, 2009 respectively, and approximately $15.3 million were included in asset impairment charges for both interim periods in the Company’s Condensed Consolidated Statements of Operations.

At October 31, 2009, the Company believes that the carrying values of cash and cash equivalents, receivables, and payables approximate fair value due to the short maturity of these financial instruments. See Recent Accounting Pronouncements, Recently Adopted Standards above for further discussion of the Company’s adoption of ASC 825-10, Financial Instruments.

5. Restructuring Charges

On January 30, 2008, the Company initiated a multi-year, strategic restructuring program designed to enhance profitability and improve overall operating effectiveness. This program, the result of a comprehensive review of the Company’s cost structure, included closing 117 underperforming stores over the Fiscal 2008 to Fiscal 2010 period, eliminating 180 corporate positions and initiating a broad-based productivity initiative that included, among other things, centralized procurement of non-merchandise goods and services, outsourcing certain activities and optimizing store productivity and effectiveness.

 

14


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

5. Restructuring Charges (continued)

 

During Fiscal 2008, the Company implemented additional actions that built upon this multi-year, strategic restructuring program. These actions included a further organizational streamlining, which resulted in the elimination of 260 additional corporate and divisional positions, and expansion of the Company’s store closing plans, including identification of 46 additional underperforming stores and the related non-cash write-down of store assets.

On July 30, 2009, the Company expanded its multi-year strategic restructuring program to further reduce its cost structure and improve overall efficiency and effectiveness. This included further organizational streamlining, changes to the Company’s field staffing model and further optimization of its real estate portfolio. Based on a comprehensive review of its corporate and divisional organizations, the Company eliminated an additional 160 positions in an effort designed to further increase span of control, eliminate redundancy and improve operating efficiency and effectiveness. As a result of these and earlier restructuring-related organizational streamlining efforts, the Company consolidated its New York-based corporate and divisional associates at its 7 Times Square corporate headquarters and vacated approximately 71,916 square feet of leased office space in New York City.

In addition to these actions, the Company also performed a comprehensive review of its remaining store portfolio in July 2009 and identified an additional 66 stores that failed to deliver an acceptable long-term return on investment. During the third quarter of Fiscal 2009, the Company further evaluated its store portfolio, and now expects to close approximately 180 stores in connection with its restructuring initiatives during the Fiscal 2008 to Fiscal 2010 program period and an additional 44 stores in Fiscal 2011 and beyond. The majority of these stores will be closed in accordance with termination rights in the Company’s existing leases. The Company closed 60 stores during Fiscal 2008 and an additional 17 stores during the first nine months of Fiscal 2009. The Company currently expects to close approximately 28 stores during the remainder of Fiscal 2009 and approximately 75 stores in Fiscal 2010. Of the 17 stores that were closed during the nine months ended October 31, 2009, 6 were Ann Taylor stores and 11 were LOFT stores.

The Company expects total pre-tax expenses associated with its restructuring initiatives in the range of $130 to $140 million. These costs and charges are estimates and may vary materially based on various factors, including, among other things, timing in execution of the restructuring program, outcome of negotiations with landlords and other third parties and changes in management’s assumptions and projections. An aggregate of approximately $92 million in restructuring costs were recognized during Fiscal 2007 and Fiscal 2008.

During the third quarter of Fiscal 2009, the Company recognized pre-tax charges of approximately $0.6 million in connection with its restructuring initiatives. Of this amount, approximately $0.7 million were costs associated with the optimization of the Company’s real estate portfolio and approximately ($0.1) million were net adjustments to the restructuring accrual related to changes in estimates.

 

15


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

5. Restructuring Charges (continued)

 

The following tables detail information related to restructuring charges recorded during the quarters ended October 31, 2009 and November 1, 2008:

 

     Quarter ended October 31, 2009  
   Asset
Impairment (1)
    Severance
and Related
Costs
    Other
Restructuring
Costs (2)
    Total  
   (in thousands)  

Balance at August 1, 2009

   $ —        $ (12,109   $ (6,657   $ (18,766

Restructuring provision

     (75     387   (3)      (942     (630
                                

Subtotal

     (75     (11,722     (7,599     (19,396
                                

Cash payments

     —          7,220        2,285        9,505   

Non-cash adjustments

     75        —          (25     50   
                                

Balance at October 31, 2009

   $ —        $ (4,502   $ (5,339   $ (9,841
                                
     Quarter ended November 1, 2008  
   Asset
Impairment (1)
    Severance
and Related
Costs
    Other
Restructuring
Costs
    Total  
   (in thousands)  

Balance at August 2, 2008

   $ —        $ (1,649   $ (1,869   $ (3,518

Restructuring provision

     (7,766     (11,128     (999 (4)      (19,893
                                

Subtotal

     (7,766     (12,777     (2,868     (23,411
                                

Cash payments

     —          916        193        1,109   

Non-cash adjustments

     7,766        —          (105     7,661   
                                

Balance at November 1, 2008

   $ —        $ (11,861   $ (2,780   $ (14,641
                                

 

(1) Includes asset impairment charges related to the write-down of store assets to their estimated fair value for store locations identified for closure under the Company’s restructuring program.
(2) Other restructuring charges include the write-down of corporate assets disposed of in connection with the sublet of the Company’s excess corporate office space in New York City, as well as the estimated loss, net of sublet income, associated with that same sublet of excess office space in New York City.
(3) Represents an adjustment to the severance accrual resulting from a change in accounting estimate.
(4) Included in this amount is $0.6 million of costs related to consulting services. The consulting services are a direct result of executing the Company’s strategic plan to streamline operations and rationalize its cost structure.

 

16


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

5. Restructuring Charges (continued)

 

The following tables detail information related to restructuring charges recorded during the nine months ended October 31, 2009 and November 1, 2008:

 

     Nine months ended October 31, 2009  
   Asset
Impairment (1)
    Severance
and Related
Costs
    Other
Restructuring
Costs (2)
    Total  
   (in thousands)  

Balance at January 31, 2009

   $ —        $ (9,743   $ (1,562   $ (11,305

Restructuring provision

     (9,446     (8,049     (15,227     (32,722
                                

Subtotal

     (9,446     (17,792     (16,789     (44,027
                                

Cash payments

     —          13,290        5,819        19,109   

Non-cash adjustments

     9,446        —          5,631        15,077   
                                

Balance at October 31, 2009

   $ —        $ (4,502   $ (5,339   $ (9,841
                                
     Nine months ended November 1, 2008  
   Asset
Impairment (1)
    Severance
and Related
Costs
    Other
Restructuring
Costs (2)
    Total  
   (in thousands)  

Balance at February 2, 2008

   $ —        $ (4,227   $ (500   $ (4,727

Restructuring provision

     (10,480     (11,525     (4,756 (3)      (26,761
                                

Subtotal

     (10,480     (15,752     (5,256     (31,488
                                

Cash payments

     —          3,891        1,932        5,823   

Non-cash adjustments

     10,480        —          544        11,024   
                                

Balance at November 1, 2008

   $ —        $ (11,861   $ (2,780   $ (14,641
                                

 

(1) Includes asset impairment charges related to the write-down of store assets to their estimated fair value for store locations identified for closure under the Company’s restructuring program.
(2) Other restructuring charges include the write-down of corporate assets disposed of in connection with the sublet of the Company’s excess corporate office space in New York City, as well as the estimated loss, net of sublet income, associated with that same sublet of excess office space in New York City.
(3) Included in this amount is $2.0 million of costs related to consulting services. The consulting services are a direct result of executing the Company’s strategic plan to streamline operations and rationalize its cost structure.

Restructuring expenses of approximately $0.8 million previously included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations for the quarter ended May 2, 2009 were reclassified to restructuring charges for the nine months ended October 31, 2009 to conform to the presentation for the quarter ended October 31, 2009.

 

17


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

6. Net (Loss)/Income Per Share

Basic (loss)/earnings per share is calculated by dividing net (loss)/income associated with common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method as discussed in ASC 260-10, Earnings Per Share.

The Company adopted certain amendments to ASC 260-10 on February 1, 2009, which impacted the determination and reporting of earnings per share by requiring the inclusion of restricted stock and performance restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. Including these shares in the Company’s earnings per share calculation during periods of net income has the effect of diluting both basic and diluted earnings per share. As a result of adopting the amendments to ASC 260-10, prior period basic and diluted shares outstanding, as well as the related per share amounts presented below, have been adjusted retroactively. The retroactive application of the two-class method did not result in a change to previously reported basic and diluted earnings per share for the quarter ended November 1, 2008, but did result in a change to previously reported basic and diluted earnings per share for the nine months ended November 1, 2008 from $0.72 to $0.71.

 

Basic Earnings per Share

   Quarters Ended  
   October 31, 2009    November 1, 2008  
   (in thousands, except per share amounts)  
   Net
Income
   Shares    Per
Share
Amount
   Net
Loss
    Shares    Per
Share
Amount
 

Net (loss)/income

   $ 2,069          $ (13,447     

Less net income associated with participating securities

     66            —          
                          

Basic (loss)/earnings per share

   $ 2,003    56,855    $ 0.04    $ (13,447   56,252    $ (0.24
                                    

Diluted Earnings per Share

                                

Net (loss)/income

   $ 2,069          $ (13,447     

Less net income associated with participating securities

     65            —          
                          

Effect of dilutive securities

      1,182         —     
                    

Diluted (loss)/earnings per share

   $ 2,004    58,037    $ 0.03    $ (13,447   56,252    $ (0.24
                                        

 

18


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

6. Net (Loss)/Income Per Share (continued)

 

     Nine Months Ended
     October 31, 2009     November 1, 2008
     (in thousands, except per share amounts)

Basic Earnings per Share

   Net
Loss
    Shares    Per
Share
Amount
    Net
Income
   Shares    Per
Share
Amount

Net (loss)/income

   $ (18,249        $ 41,700      

Less net income associated with participating securities

     —               653      
                         

Basic (loss)/earnings per share

   $ (18,249   56,727    $ (0.32   $ 41,047    57,697    $ 0.71
                                   

Diluted Earnings per Share

                               

Net (loss)/income

   $ (18,249        $ 41,700      

Less net income associated with participating securities

     —               651      
                         

Effect of dilutive securities

     —           164   
                   

Diluted (loss)/earnings per share

   $ (18,249   56,727    $ (0.32   $ 41,049    57,861    $ 0.71
                                       

For the quarter ended October 31, 2009, non-participating securities (options) representing 3,827,371 shares of common stock were excluded from the above computations of weighted-average shares for diluted earnings per share due to the antidilutive effect of the securities’ exercise prices as compared to the average market price of the common shares during that period. For the nine months ended October 31, 2009, non-participating securities (options and contingently issuable securities) in the amount of 5,123,404 and participating securities representing 1,746,657 shares were excluded from the above computations of weighted-average shares for basic and diluted earnings per share because the effect would be antidilutive due to the net loss for the period.

For the quarter ended November 1, 2008, non-participating securities (options) in the amount of 3,586,260 and participating securities representing 841,602 shares of common stock were excluded from the above computations of weighted-average shares for basic and diluted earnings per share because the effect would be antidilutive due to the net loss for the period. For the nine months ended November 1, 2008, non-participating securities (options) representing 3,110,516 shares of common stock were excluded from the above computations of weighted-average shares for diluted earnings per share due to the antidilutive effect of the securities’ exercise prices as compared to the average market price of the common shares during that period.

 

19


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

7. Share-based Payments

Stock Incentive Plans

During the quarter and nine months ended October 31, 2009, the Company recognized approximately $4.1 million and $11.5 million, respectively, in total share-based compensation expense. During the quarter and nine months ended November 1, 2008, the Company recognized approximately $0.4 million and $8.9 million, respectively, in total share-based compensation expense. As of October 31, 2009, there was $12.8 million of unrecognized compensation cost related to unvested options, which is expected to be recognized over a remaining weighted-average vesting period of 2.4 years. As of October 31, 2009, there was $8.4 million of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.3 years.

Stock Options

The following table summarizes stock option activity for the quarter and nine months ended October 31, 2009:

 

     Quarter Ended
October 31, 2009
   Nine Months Ended
October 31, 2009
     Shares     Weighted -
Average
Exercise
Price
   Shares     Weighted -
Average
Exercise
Price

Options outstanding at beginning of period

   4,871,277      $ 18.58    3,475,926      $ 26.90

Granted (1)

   578,750        14.08    2,372,500        6.73

Exercised

   (7,547     12.39    (7,547     12.39

Forfeited or expired

   (168,077     26.58    (566,476     26.97
                         

Options outstanding at October 31, 2009

   5,274,403      $ 17.84    5,274,403      $ 17.84
                         

Vested and exercisable at October 31, 2009

   2,028,124      $ 26.75    2,028,124      $ 26.75
                         

Options expected to vest at October 31, 2009

   2,367,412      $ 11.23    2,367,412      $ 11.23
                         

 

(1) Options granted during the quarter and nine months ended October 31, 2009 vest annually over a three year period, and expire ten years after the grant date, except for one option grant of 20,000 shares granted during the second quarter of Fiscal 2009, which vests annually over a four year period.

The weighted-average fair value of options granted during the quarters ended October 31, 2009 and November 1, 2008, estimated as of the grant date using the Black-Scholes option pricing model, was $7.33 and $9.71 per share, respectively. The weighted-average fair value of options granted during the nine months ended October 31, 2009 and November 1, 2008, estimated as of the grant date using the Black-Scholes option pricing model, was $3.49 and $8.90 per share, respectively.

 

20


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

7. Share-based Payments (continued)

 

Stock Options (continued)

 

The fair value of options granted under the Company’s stock option plans was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

     Quarters Ended     Nine Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Expected volatility

   65.9   47.0   63.1   42.6

Risk-free interest rate

   2.1   2.9   2.2   2.5

Expected life (years)

   4.2      4.2      4.2      4.2   

Dividend yield

   —        —        —        —     

The Company estimates the volatility of its common stock at the date of grant based on an average of its historical volatility and the implied volatility of publicly traded options on its common stock.

Restricted Stock

The following table summarizes restricted stock activity for the quarter ended October 31, 2009:

 

     Time - Based    Performance - Based
     Number of
Shares
    Weighted -
Average
Grant Date
Fair Value
   Number of
Shares
    Weighted -
Average
Grant Date
Fair Value

Restricted stock awards at August 1, 2009

   1,474,992      $ 8.86    441,502      $ 8.00

Granted

   —          —      —          —  

Vested

   (30,583     25.52    (5,000     23.22

Forfeited

   (27,744     21.80    —          —  
                         

Restricted stock awards at October 31, 2009

   1,416,665      $ 8.24    436,502      $ 7.83
                         

 

21


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

7. Share-based Payments (continued)

 

Restricted Stock (continued)

 

The following table summarizes restricted stock activity for the nine months ended October 31, 2009:

 

     Time - Based    Performance - Based
     Number of
Shares
    Weighted -
Average
Grant Date
Fair Value
   Number of
Shares
    Weighted -
Average
Grant Date
Fair Value

Restricted stock awards at January 31, 2009

   609,323      $ 25.72    193,334      $ 27.39

Granted

   1,078,500  (1)      3.25    352,500  (2)      3.43

Vested

   (194,241     29.78    (5,000     23.22

Forfeited

   (76,917     22.32    (104,332     28.48
                         

Restricted stock awards at October 31, 2009

   1,416,665      $ 8.24    436,502      $ 7.83
                         

 

(1) Of this amount, 610,500 shares vest annually over a three year period, 15,000 shares vest annually over a four year period, and the remaining 453,000 shares vest over a one year period.
(2) These awards vest over a three year period based on achievement of performance targets set bi-annually for each tranche of the grant. Based on Company performance, grantees may earn 75% to 125% of the shares granted with respect to each tranche. If the Company does not achieve the minimum threshold goal associated with such shares, grantees will not earn any shares with respect to that tranche.

8. Debt, Capital Leases and Operating Leases

Credit Facility

On April 23, 2008, the Company’s wholly owned subsidiary AnnTaylor, Inc. and certain of its subsidiaries entered into a Third Amended and Restated $250 million senior secured revolving credit facility with Bank of America N.A. and a syndicate of lenders (“the Credit Facility”), which amended its then existing $175 million senior secured revolving credit facility which was due to expire in November 2008. The Credit Facility provides for a potential increase in the total facility and the aggregate commitments thereunder up to $350 million, subject to the lenders’ agreement to increase their commitment for the requested amount. The Credit Facility expires on April 23, 2013 and may be used for working capital, letters of credit and other general corporate purposes. The Credit Facility contains an acceleration clause which, upon the occurrence of a Material Adverse Effect, as defined in the Credit Facility, may cause any borrowings outstanding to become immediately due and payable.

The maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified advance rates against certain eligible assets. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $13.6 million, $33.8 million and $36.6 million as of October 31, 2009, January 31, 2009 and November 1, 2008, respectively, leaving a remaining available balance for loans and letters of credit of $177.4 million, $115.0 million and $207.8 million, respectively. There were no borrowings outstanding under the Credit Facility at January 31, 2009. On March 5, 2009, the Company borrowed $125 million from its Credit Facility. The Company repaid $50 million of these revolver borrowings in July 2009 and the remaining $75 million in October 2009. There were no borrowings outstanding under the Credit Facility at October 31, 2009 or as of the date of this filing.

 

22


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

8. Debt, Capital Leases and Operating Leases (continued)

 

Credit Facility (continued)

 

Amounts outstanding under the Credit Facility bear interest at a rate equal to, at the option of AnnTaylor, Inc., 1) the Base Rate, defined as the higher of the federal funds rate plus a margin of 0.25% or the Bank of America Prime Rate, or 2) LIBOR Rate, plus a margin of 1.25% to 1.75%, depending on the average daily availability. In addition, AnnTaylor, Inc. is required to pay the lenders a monthly commitment fee on the unused revolving loan commitment amount at a rate ranging from 0.325% to 0.375% per annum. Fees for outstanding commercial and standby letters of credit range from 0.50% to 0.75% and from 1.25% to 1.75%, respectively. The Credit Facility contains financial and other covenants, including limitations on indebtedness and liens, and a fixed charge coverage ratio covenant that is triggered if certain liquidity thresholds are not met.

The Credit Facility permits the Company to pay cash dividends (and permits dividends by AnnTaylor, Inc. to fund such cash dividends) subject to certain Liquidity requirements (as defined in the Credit Facility) and other conditions as set forth in the Credit Facility. Certain subsidiaries of the Company are also permitted to: pay dividends to the Company to fund certain taxes owed by the Company; fund ordinary operating expenses of the Company not in excess of $500,000 in any fiscal year; repurchase common stock held by employees not in excess of $100,000 in any fiscal year (with certain stated exceptions); and for certain other stated purposes (subject to certain exceptions).

The lenders have been granted a pledge of the common stock of AnnTaylor, Inc. and certain of its subsidiaries, and a security interest in substantially all real and personal property (other than leasehold interests) and the other assets of AnnTaylor, Inc. and certain of its subsidiaries, as collateral for AnnTaylor, Inc.’s obligations under the Credit Facility.

Capital Lease

On August 25, 2008, the Company entered into a capital lease relating to certain computer equipment with a four year term. The computer equipment was placed in service on February 1, 2009. The following table presents leased assets by major class:

 

     As of
     October 31,
2009
    January 31,
2009
   November 1,
2008
     (in thousands)

Computer Equipment

   $ 1,638      $ 1,638    $ 1,638
                     
     1,638        1,638      1,638

Less accumulated depreciation and amortization

     (246     —        —  
                     

Net property and equipment

   $ 1,392      $ 1,638    $ 1,638
                     

 

23


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

8. Debt, Capital Leases and Operating Leases (continued)

 

Capital Lease (continued)

 

Future minimum lease payments under the capital lease as of October 31, 2009 are as follows:

 

Fiscal Year

   (in thousands)

2009

   $ 106

2010

     424

2011

     424

2012

     248

2013

     —  

Thereafter

     —  
      

Total

     1,202
      

Less weighted average interest rate of 1.8% on capital lease

     31
      

Total principal, excluding interest

   $ 1,171
      

Operating Leases

Future minimum lease payments under non-cancelable operating leases, as well as offsetting sublease rental income, as of October 31, 2009 are as follows:

 

Fiscal Year

   (in thousands)

2009

   $ 48,286

2010

     182,233

2011

     165,930

2012

     148,488

2013

     137,752

Thereafter

     487,547
      

Total

     1,170,236
      

Sublease rentals

     28,065
      

Net rentals

   $ 1,142,171
      

Other

There was $2.6 million, $2.2 million and $4.2 million included in accrued expenses and other current liabilities and $1.1 million, $3.4 million and $3.7 million included in other liabilities on the Condensed Consolidated Balance Sheets at October 31, 2009, January 31, 2009 and November 1, 2008, respectively, related to borrowings for the purchase of fixed assets. In addition, in connection with the sublease of excess corporate office space, the Company received a $0.6 million deposit, held as restricted cash, which is included in other assets with an offsetting long-term liability included in other liabilities on the Company’s Condensed Consolidated Balance Sheet at October 31, 2009.

 

24


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

9. Employee Benefits

The following table summarizes the components of net periodic pension cost for the Company:

 

     Quarters Ended     Nine Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
     (in thousands)     (in thousands)  

Net periodic pension cost:

        

Interest cost

     527        483        1,580        1,483   

Expected return on plan assets

     (400     (536     (1,201     (1,736

Amortization of actuarial loss

     257        (33     772        37   

Settlement loss

     330        —          890        —     
                                

Net periodic pension cost

   $ 714      $ (86   $ 2,041      $ (216
                                

For the quarter and nine months ended October 31, 2009, the total amount of lump sum payments made to plan participants exceeded the anticipated interest cost for Fiscal 2009. As a result, non-cash settlement charges of $0.3 and $0.9 million, respectively, were recorded.

The Company was not required to make and did not make any contributions to its pension plan during the quarters and nine months ended October 31, 2009 and November 1, 2008.

10. Securities Repurchase Program

In August 2007, the Company’s Board of Directors approved a $300 million securities repurchase program (the “August 2007 Program”). Under the August 2007 Program, purchases of shares of the Company’s common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock increase treasury shares available for general corporate and other purposes. There were no repurchases made under the August 2007 program during the quarter and nine months ended October 31, 2009. During the nine months ended November 1, 2008, the Company repurchased 4,108,183 shares of its common stock under the August 2007 Program at a cost of approximately $100.8 million. There were no repurchases made under the August 2007 program during the quarter ended November 1, 2008.

 

25


Table of Contents

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

11. Income Taxes

The following table shows the Company’s effective income tax rate for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     Quarters Ended     Six Months Ended  
     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Effective income tax rate

   1.7   33.6   32.5   38.7

The effective tax rate for the quarter ended October 31, 2009 differs from the effective tax rate for the quarter ended November 1, 2008 primarily due to an increase in the Company’s estimated annual effective tax rate and the resultant quarterly adjustment necessary to adjust the current year-to-date expense to the revised estimate of the Company’s annual effective rate. The change in estimate resulted in a tax benefit due to the pre-tax loss the Company experienced during the first half of Fiscal 2009, which partially offset the tax expense associated with the net income earned during the quarter ended October 31, 2009.

The Company’s effective income tax rate decreased for the nine months ended October 31, 2009 due to the impact of permanent items in a period of net loss versus a period of net income and a change in the mix of earnings in various state taxing jurisdictions, as well as certain discrete items.

12. Comprehensive Income/(Loss)

The components of comprehensive income/(loss) are shown below (in thousands):

 

     Quarters Ended     Nine Months Ended  
     October 31,
2009
   November 1,
2008
    October 31,
2009
    November 1,
2008
 

Net income/(loss)

   $ 2,069    $ (13,447   $ (18,249   $ 41,700   

Amortization of actuarial loss, net of taxes of approximately $30 and ($12), respectively, and approximately $269 and $10, respectively

     113      (21     504        27   

Pension settlement charge, net of taxes of approximately $127 and $0, respectively, and approximately $340 and $0, respectively

     203      —          550        —     

Temporary impairment of available-for-sale securities (See Note 3)

     —        (386     —          (798
                               

Comprehensive income/(loss)

   $ 2,385    $ (13,854   $ (17,195   $ 40,929   
                               

13. Legal Proceedings

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.

 

26


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

AnnTaylor Stores Corporation (the “Company”, “we”, “us” and “our”), through its wholly owned subsidiaries, is a leading national specialty retailer of women’s apparel, shoes and accessories sold primarily under the “Ann Taylor”, “LOFT,” “Ann Taylor Factory” and “LOFT Outlet” brands. The Ann Taylor brand is focused on offering chic, sophisticated and feminine clothing across her lifestyle needs, from modern wearable separates for every day, to powerful pieces for big days, to the perfect item to wear for special events and a casual chic for relaxing with friends and family. LOFT is the ultimate casual, fashionable and fun retail destination for women. LOFT offers women’s clothing that is feminine and on-trend as well as versatile clothing staples in the latest colors and styles, all at unexpected prices. Our Ann Taylor Factory and LOFT Outlet businesses offer past season best sellers from the Ann Taylor and LOFT merchandise collections and are natural extensions of those brands in the outlet environment. As of October 31, 2009, we operated 932 stores in 46 states, the District of Columbia and Puerto Rico, and also Online stores at www.anntaylor.com and www.LOFTonline.com. Unless the context indicates otherwise, all references herein to the Company, we, us and our include the Company and its wholly owned subsidiaries.

Management Overview

Although the overall macroeconomic environment showed some signs of improvement in the third quarter of Fiscal 2009, consumer sentiment remained at very low levels and consumer spending continued to be uncertain. This impacted our overall sales performance during the quarter, however we had anticipated much of this and positioned our inventory levels accordingly. This lean inventory position allowed us to take a more strategic promotional stance and supported our efforts to maximize gross margin performance during the quarter. As a result, we achieved a 57.3% gross margin rate in the third quarter, as compared to 48.8% in the third quarter of Fiscal 2008.

Net sales for the third quarter of Fiscal 2009 decreased 12.3% to $462.4 million, with comparable store sales decreasing 13.7%, compared to the third quarter of Fiscal 2008. Despite the weakness in comparable store sales, the combination of better product at both divisions, solid gross margin performance across all channels, savings generated under our multi-year strategic restructuring program and other expense reductions, helped mitigate the top-line softness we experienced.

At Ann Taylor, net sales decreased 29.6%, driven by a 25.8% decline in comparable store sales. This performance reflected the continued impact of macroeconomic pressures, including a very high unemployment rate, and the impact these factors had on apparel sales, particularly for professional working women. While comparable store sales performance improved over the second quarter, that progress was more significant as we moved through the third quarter, driving a 25 point improvement in comparable store sales from August to October. Sales results were somewhat constrained during the quarter by lower levels of inventory, particularly of markdown product, and fewer promotions, particularly at the beginning of the quarter, which also contributed to a higher gross margin rate than in the third quarter of Fiscal 2008. Inventory levels at the end of the quarter were down 17% on a per square foot basis compared to the comparable period last year. From a product perspective, Ann Taylor’s Fall merchandise assortment represented a first step in what we anticipate will be a multi-season repositioning of the brand to become more modern, chic and sophisticated.

At LOFT, net sales declined 11.1% and comparable store sales declined 9.7%, reflecting the continued impact of weak consumer spending on women’s apparel, significantly lower inventory levels, particularly of markdown product, and a limited promotional stance. While this strategy negatively impacted comparable store sales results, it enabled LOFT to achieve a strong gross margin rate, which approached near-record levels during the third quarter. In addition, LOFT entered the fourth quarter with total inventory per square foot down 19% versus last year.

 

27


Table of Contents

Our Factory and Internet channels experienced improved sales and margin trends during the third quarter as compared to last year.

During the quarter, we opened one new LOFT store and closed one Ann Taylor store and one LOFT store. In addition, we converted one Ann Taylor store into a LOFT store. In connection with the real estate component of our restructuring program, we plan to close an additional 28 stores in late January 2010. At the end of the third quarter, our total store count was 932, comprised of 313 Ann Taylor stores, 509 LOFT stores, 92 Ann Taylor Factory stores and 18 LOFT Outlet stores.

We continue to be highly focused on maintaining a healthy balance sheet. During the third quarter, we paid down all remaining revolver borrowings, which totaled $75 million, and ended the quarter with $134 million in cash and cash equivalents.

Key Performance Indicators

In evaluating our performance, senior management reviews certain key performance indicators, including:

Comparable store sales – Comparable store sales provide a measure of existing store sales performance. A store is included in comparable store sales in its thirteenth month of operation. A store with a square footage change of more than 15% is treated as a new store for the first year following its reopening.

Gross margin – Gross margin measures our ability to control the direct costs of merchandise sold during the period. Gross margin is the difference between net sales and cost of sales, which is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third-party suppliers to our distribution center. Buying and occupancy costs are excluded from cost of sales.

Operating income – Because retailers do not uniformly record supply chain costs as a component of cost of sales or selling, general and administrative expenses, operating income allows us to benchmark our performance relative to other retailers. Operating income represents earnings before interest and income taxes and measures our earnings power from ongoing operations.

Store productivity – Store productivity, including sales per square foot, average unit retail price (AUR), units per transaction (UPT), dollars per transaction (DPT), traffic and conversion, is evaluated by management in assessing our operating performance.

Inventory turnover – Inventory turnover measures our ability to sell our merchandise and how many times it is replaced over time. This ratio is important in determining the need for markdowns, planning future inventory levels and assessing client response to our merchandise.

Quality of merchandise offerings – To monitor and maintain client acceptance of our merchandise offerings, we monitor sell-through levels, inventory turnover, gross margin, returns and markdown rates at a class and style level. This analysis helps identify merchandise issues at an early date and helps us plan future product development and buying.

 

28


Table of Contents

Results of Operations

The following table sets forth data from our consolidated statement of operations expressed as a percentage of net sales:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Net sales

   100.0   100.0   100.0   100.0

Cost of sales

   42.7      51.2      45.0      48.4   
                        

Gross margin

   57.3      48.8      55.0      51.6   

Selling, general and administrative expenses

   53.2      48.3      53.3      45.9   

Restructuring charges

   0.1      3.8      2.4      1.6   

Asset impairment charges

   3.3      0.5      1.1      0.2   
                        

Operating (loss)/income

   0.7      (3.8   (1.8   3.9   

Interest income

   —        0.1      0.1      0.1   

Interest expense

   0.2      0.1      0.2      0.1   
                        

(Loss)/income from before income taxes

   0.5      (3.8   (1.9   3.9   

Income tax (benefit)/provision

   —        (1.3   (0.6   1.5   
                        

Net (loss)/income

   0.5   (2.5 )%    (1.3 )%    2.4
                        

The following table sets forth selected data from our consolidated statements of operations expressed as a percentage change from the comparable prior period.

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
   increase (decrease)     increase (decrease)  

Net sales

   (12.3 )%    (12.3 )%    (20.6 )%    (4.7 )% 

Operating (loss)/income

   (113.4 )%    (130.4 )%    (137.3 )%    (59.6 )% 

Net (loss)/income

   (115.4 )%    (133.0 )%    (143.8 )%    (59.9 )% 

Sales and Store Data

The following table sets forth certain sales and store data:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Net sales (in thousands)

        

Total Company

   $ 462,410      $ 527,216      $ 1,359,386      $ 1,711,194   

Ann Taylor

     112,313        159,549        328,611        542,885   

LOFT

     233,950        263,047        707,712        857,147   

Other

     116,147        104,620        323,063        311,162   

Comparable store sales percentage increase/(decrease) (a)

        

Total Company

     (13.7 )%      (19.4 )%      (22.6 )%      (11.6 )% 

Ann Taylor

     (25.8 )%      (24.8 )%      (36.1 )%      (16.7 )% 

LOFT

     (9.7 )%      (15.4 )%      (16.7 )%      (8.0 )% 

 

29


Table of Contents

Sales and Store Data (Continued)

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Average dollars per transaction

        

Total Company

   $ 69.37      $ 70.73      $ 66.43      $ 74.50   

Ann Taylor

     76.26        80.50        72.87        86.40   

LOFT

     62.90        64.44        61.24        68.43   

Average units per transaction

        

Total Company

     2.46        2.41        2.42        2.39   

Ann Taylor

     1.94        2.16        1.97        2.11   

LOFT

     2.51        2.40        2.44        2.43   

Average unit retail sold

        

Total Company

   $ 28.20      $ 29.35      $ 27.45      $ 31.17   

Ann Taylor

     39.31        37.27        36.99        40.95   

LOFT

     25.06        26.85        25.10        28.16   

Net sales per average gross square foot (b)

        

Total Company

   $ 84      $ 94      $ 248      $ 309   

Ann Taylor

     66        87        192        293   

LOFT

     78        86        236        281   

Total store square footage at end of period (in thousands) (b)

        

Total Company

     5,481        5,651       

Ann Taylor

     1,692        1,841       

LOFT

     2,998        3,071       

Number of:

        

Stores open at beginning of period

     933        959        935        929   

New stores

     1        15        14        63   

Closed stores

     (2     (8     (17     (26
                                

Stores open at end of period

     932        966        932        966   
                                

Expanded stores

     —          —          1        8   

Converted stores (c)

     1        —          1        —     

 

(a) A store is included in comparable store sales in its thirteenth month of operation. A store with a square footage change of more than 15% is treated as a new store for the first year following its reopening.
(b) Net sales per average gross square foot is determined by dividing net sales for the period by the average of the gross square feet at the beginning and end of each period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space.
(c) During the quarter ended October 31, 2009, we converted one Ann Taylor store to a LOFT store.

Net sales decreased 12.3% and 20.6% during the quarter and nine months ended October 31, 2009, respectively, over the comparable 2008 periods. The decrease in net sales for both periods was primarily due to lower traffic and the resulting impact on transactions combined with lower AURs and DPTs. These results reflect the current recessionary environment and its impact on discretionary retail spending, particularly for women’s specialty retailers. The decrease in net sales was also consistent with the decrease in comparable store sales for the quarter and nine months ended October 31, 2009. By division, Ann Taylor’s net sales decreased $47.2 million, or 29.6%, and $214.3 million or 39.5% for the quarter and nine months ended October 31, 2009, respectively. At LOFT, net sales decreased $29.0 million, or 11.1%, and $149.4 million or 17.4% for the quarter and nine months ended October 31, 2009, respectively.

 

30


Table of Contents

Cost of Sales and Gross Margin

The following table shows cost of sales and gross margin in dollars and the related gross margin percentages for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
   (dollars in thousands)     (dollars in thousands)  

Cost of sales

   $ 197,555      $ 270,060      $ 611,500      $ 828,911   

Gross margin

   $ 264,855      $ 257,156      $ 747,886      $ 882,283   

Gross margin as a percentage of net sales

     57.3     48.8     55.0     51.6

The increase in gross margin as a percentage of net sales for the quarter ended October 31, 2009 as compared to the comparable 2008 period was due primarily to higher full price sales as a percentage of total sales coupled with higher margin rates achieved on both full price and non-full price sales. This solid gross margin performance was also due to improved inventory management across all divisions.

The increase in gross margin as a percentage of net sales for the nine months ended October 31, 2009 as compared to the comparable 2008 period primarily reflected higher full price sales as a percentage of total sales across all divisions and lower inventory levels throughout the period, which led to lower markdown goods for sale.

Selling, General and Administrative Expenses

The following table shows selling, general and administrative expenses in dollars and as a percentage of net sales for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
   (dollars in thousands)     (dollars in thousands)  

Selling, general and administrative expenses

   $ 246,200      $ 254,770      $ 725,019      $ 785,268   

Percentage of net sales

     53.2     48.3     53.3     45.9

The decrease in selling, general and administrative expenses for the quarter and nine months ended October 31, 2009 as compared to the comparable 2008 periods primarily reflects the benefit of our restructuring program and cost savings initiatives, with the majority of the savings being payroll and tenancy related, partially offset by an increase in performance-based compensation versus the 2008 periods. The increase in selling, general and administrative expenses as a percentage of net sales for the quarter and nine months ended October 31, 2009 as compared to the comparable 2008 period was primarily due to the impact of fixed cost deleveraging resulting from lower net sales.

 

31


Table of Contents

Restructuring Charges

The following table presents restructuring charges in dollars and as a percentage of net sales for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
   (dollars in thousands)     (dollars in thousands)  

Restructuring charges

   $ 630      $ 19,893      $ 32,722      $ 26,761   

Percentage of net sales

     0.1     3.8     2.4     1.6

During the quarters and nine months ended October 31, 2009 and November 1, 2008, we recorded restructuring charges related to the non-cash write-down of store assets, severance and other costs incurred during the periods. See “Liquidity and Capital Resources” and Note 5, Restructuring Charges, in the Notes to Condensed Consolidated Financial Statements for further discussion.

Asset Impairment Charges

The following table presents asset impairment charges in dollars and as a percentage of net sales for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
   (dollars in thousands)     (dollars in thousands)  

Asset impairment charges

   $ 15,318      $ 2,741      $ 15,318      $ 2,764   

Percentage of net sales

     3.3     0.5     1.1     0.2

During the quarters and nine months ended October 31, 2009 and November 1, 2008, we recorded non-cash store asset impairment charges as shown in the table above based on our projected undiscounted future cash flows related to stores that we expect to continue operating. For both the quarter and nine months ended October 31, 2009, these non-cash store asset impairment charges related to 87 stores, while, for the quarter and nine months ended November 1, 2008, these non-cash store asset impairment charges related to 4 and 5 stores, respectively. The non-cash store asset impairment charges shown above are calculated using certain assumptions, including estimates related to comparable store sales and gross margin rates. A 5% increase or decrease in projected comparable store sales combined with a respective 2% increase or decrease in the projected gross margin rate, and the resulting impact to future period projected profitability, would result in an increase or decrease in the third quarter 2009 asset impairment charge of approximately $4.0 million.

Interest Income

The following table shows interest income in dollars and as a percentage of net sales for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
   (dollars in thousands)     (dollars in thousands)  

Interest income

   $ 186      $ 311      $ 750      $ 1,571   

Percentage of net sales

     —       0.1     0.1     0.1

Interest income decreased for both the quarter and nine months ended October 31, 2009 due to lower interest rates over the past year, partially offset by higher average cash balances due to our borrowings under our Credit Facility during the nine months ended October 31, 2009.

 

32


Table of Contents

Interest Expense

The following table shows interest expense in dollars and as a percentage of net sales for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 
   (dollars in thousands)     (dollars in thousands)  

Interest expense

   $ 788      $ 325      $ 2,598      $ 1,025   

Percentage of net sales

     0.2     0.1     0.2     0.1

Interest expense includes various charges, the largest of which are interest and fees related to our Credit Facility. The increase in interest expense for the quarter and nine months ended October 31, 2009 compared to the prior year periods is due primarily to interest on borrowings under our Credit Facility. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $13.6 million, $33.8 million and $36.6 million as of October 31, 2009, January 31, 2009 and November 1, 2008, respectively. There were no borrowings outstanding under the Credit Facility at January 31, 2009. On March 5, 2009, we borrowed $125 million from our Credit Facility. We repaid $50 million of these revolver borrowings in July 2009 and the remaining $75 million in October 2009. There were no borrowings outstanding under the Credit Facility at October 31, 2009 or as of the date of this filing. See “Liquidity and Capital Resources” and Note 8, Debt, Capital Leases and Operating Leases in the Notes to Condensed Consolidated Financial Statements for further discussion of our Credit Facility.

Income Taxes

The following table shows our effective income tax rate for the quarters and nine months ended October 31, 2009 and November 1, 2008:

 

     Quarters Ended     Nine Months Ended  
   October 31,
2009
    November 1,
2008
    October 31,
2009
    November 1,
2008
 

Effective income tax rate

   1.7   33.6   32.5   38.7

The effective tax rate for the quarter ended October 31, 2009 differs from the effective tax rate for the quarter ended November 1, 2008 primarily due to an increase in our estimated annual effective tax rate and the resultant quarterly adjustment necessary to adjust the current year-to-date expense to the revised estimate of our annual effective rate. The change in estimate resulted in a tax benefit due to the pre-tax loss we experienced during the first half of Fiscal 2009, which partially offset the tax expense associated with the net income earned during the quarter ended October 31, 2009.

Our effective income tax rate decreased for the nine months ended October 31, 2009 due to the impact of permanent items in a period of net loss versus a period of net income and a change in the mix of earnings in various state taxing jurisdictions, as well as certain discrete items.

 

33


Table of Contents

Liquidity and Capital Resources

Our primary source of working capital is cash flow from operations. The following table sets forth material measures of our liquidity:

 

     October 31,
2009
   January 31,
2009
   November 1,
2008
   (dollars in thousands)

Working capital

   $ 193,978    $ 118,013    $ 156,517

Current ratio

     1.69:1      1.39:1      1.49:1

Operating Activities

Cash provided by operating activities was $52.4 million for the nine months ended October 31, 2009, compared with $114.2 million for the nine months ended November 1, 2008. The decrease in cash provided by operating activities for the nine months ended October 31, 2009 compared with the nine months ended November 1, 2008 was primarily due to a net loss in the current period compared to net income in the comparable prior year period, a decrease in cash received for accounts receivable, and increases in cash used for inventory and accounts payable. These changes were offset by cash received in the current year period for income tax refunds. While total inventory at October 31, 2009 decreased $63.3 million, or 23%, compared to November 1, 2008, the increase in cash used for the purchase of inventory for the nine months ended October 31, 2009 as compared to the comparable prior year period was a result of the Company’s tight inventory position at January 31, 2009, which was down $77.3 million, or 31% compared to February 2, 2008.

Investing Activities

Cash used for investing activities was $29.7 million for the nine months ended October 31, 2009, compared with $74.8 million for the nine months ended November 1, 2008. The decrease in cash used for investing activities was primarily due to a decrease in capital expenditures resulting from of our scaled-back store opening plans combined with the impact during the prior year period of liquidating $9 million in auction rate securities. During the nine months ended October 31, 2009, we opened 14 new stores, as compared to 63 new stores in the comparable prior year period. We are not planning any new store openings in the fourth quarter of Fiscal 2009, and expect total square footage to decrease approximately 2.6% by the end of the year. This reflects the impact of approximately 45 planned store closings under our restructuring program, with approximately 28 of these stores expected to close during the fourth quarter. In addition, we plan to convert approximately 10 Ann Taylor stores to LOFT stores during the fourth quarter.

Financing Activities

Cash used for financing activities was $0.9 million for the nine months ended October 31, 2009, compared with cash used of $92.7 million for the nine months ended November 1, 2008. The change in cash used for financing activities was primarily due to the decrease in stock repurchase activity for the nine months ended October 31, 2009.

On April 23, 2008, our wholly owned subsidiary AnnTaylor, Inc. and certain of its subsidiaries entered into a Third Amended and Restated $250 million senior secured revolving credit facility with Bank of America N.A. and a syndicate of lenders (the “Credit Facility”), which amended its then existing $175 million senior secured revolving credit facility which was due to expire in November 2008. At AnnTaylor, Inc.’s option, the Credit Facility provides for an increase in the total facility and the aggregate commitments thereunder up to $350 million, subject to the lenders’ agreement to increase their commitment for the requested amount. The Credit Facility expires on April 23, 2013 and may be used for working capital, letters of credit and other general corporate purposes. The Credit Facility contains an acceleration clause which, upon the occurrence of a Material Adverse Effect, as defined in the Credit Facility, may cause any borrowings outstanding to become immediately due and payable.

 

34


Table of Contents

The maximum availability for loans and letters of credit under the Credit Facility is governed by a monthly borrowing base, determined by the application of specified advance rates against certain eligible assets. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $13.6 million, $33.8 million and $36.6 million as of October 31, 2009, January 31, 2009 and November 1, 2008, respectively, leaving a remaining available balance for loans and letters of credit of $177.4 million, $115.0 million and $207.8 million, respectively. There were no borrowings outstanding under the Credit Facility at January 31, 2009 or at any point during Fiscal 2008. On March 5, 2009, we borrowed $125 million from our Credit Facility. We repaid $50 million of these revolver borrowings in July 2009 and the remaining $75 million in October 2009. There were no borrowings outstanding under the Credit Facility at October 31, 2009 or as of the date of this filing.

The Credit Facility contains financial and other covenants, including limitations on indebtedness and liens, and a fixed charge coverage ratio covenant that is triggered if certain liquidity thresholds are not met. In addition, the Credit Facility permits us to pay cash dividends (and permits dividends by AnnTaylor, Inc. to fund such cash dividends) subject to certain Liquidity requirements (as defined in the Credit Facility) and other conditions as set forth in the Credit Facility. Certain of our subsidiaries are also permitted to: pay dividends to us to fund certain taxes owed us; fund ordinary operating expenses not in excess of $500,000 in any fiscal year; repurchase common stock held by employees not in excess of $100,000 in any fiscal year (with certain stated exceptions); and for certain other stated purposes (subject to certain exceptions).

Other

The recent distress in the financial markets has caused declines in consumer confidence and spending, extreme volatility in securities prices, diminished liquidity and credit availability and declining valuations of certain investments. We have assessed the implications of these factors on our current business and have responded with expansion of our strategic restructuring program, scaled back planned capital expenditures and are maintaining a conservative approach to discretionary spending, including our stock repurchase program. If the national, or global, economies or credit market conditions in general were to deteriorate further in the future, it is possible that such deterioration could put additional pressure on consumer spending and negatively affect our cash flows. Although we have available borrowing capacity under our Credit Facility, tightening of the credit markets could also make it more difficult for us to access these funds, enter into agreements for new indebtedness or obtain funding through the issuance of our securities. The effects of these changes could also require us to make additional changes to our current plans and strategy. Additionally, although our levels of net cash provided by operating activities may be negatively affected by general economic conditions, we believe that we will continue to generate positive cash flow from operations, which, along with our available cash and borrowing capacity under our Credit Facility, will provide the means needed to fund our operations for the foreseeable future. At October 31, 2009, substantially all of our cash was invested in money market funds or in FDIC insured banks. The money market funds invest substantially all of their assets in U.S. Treasury Securities.

On January 30, 2008, we initiated a multi-year, strategic restructuring program designed to enhance profitability and improve overall operating effectiveness. This program, the result of a comprehensive review of our cost structure, included closing 117 underperforming stores over the Fiscal 2008 to Fiscal 2010 period, eliminating 180 corporate positions and initiating a broad-based productivity initiative that included, among other things, centralized procurement of non-merchandise goods and services, outsourcing certain activities and optimizing store productivity and effectiveness.

During Fiscal 2008, we implemented additional actions that built upon this multi-year, strategic restructuring program. These actions included a further organizational streamlining, which resulted in the elimination of 260 additional corporate and divisional positions, and expansion of our store closing plans, including identification of 46 additional underperforming stores.

 

35


Table of Contents

On July 30, 2009, we expanded our multi-year strategic restructuring program to further reduce our cost structure and improve overall efficiency and effectiveness. This included further organizational streamlining, changes to our field staffing model and further optimization of our real estate portfolio. As a result of these changes, we expect total ongoing annualized savings of approximately $125 million by Fiscal 2010. Based on a comprehensive review of our corporate and divisional organizations, we eliminated an additional 160 positions in an effort designed to further increase span of control, eliminate redundancy and improve operating efficiency and effectiveness. As a result of these and earlier restructuring-related organizational streamlining efforts, we consolidated our New York-based corporate and divisional associates at our 7 Times Square corporate headquarters and vacated approximately 71,916 square feet of leased office space in New York City.

In addition to these actions, we also performed a comprehensive review of our remaining store portfolio in July 2009 and identified an additional 66 stores that failed to deliver an acceptable long-term return on investment. During the third quarter of Fiscal 2009, we further evaluated our store portfolio, and now expect to close approximately 180 stores in connection with our restructuring initiatives during the Fiscal 2008 to Fiscal 2010 program period and an additional 44 stores in Fiscal 2011 and beyond. The majority of these stores will be closed in accordance with termination rights in our existing leases. We closed 60 stores in during Fiscal 2008 and an additional 17 stores during the first nine months of Fiscal 2009. We expect to close approximately 28 stores during the remainder of Fiscal 2009 and 75 stores in Fiscal 2010. Of the 17 stores that were closed during the nine months ended October 31, 2009, 6 were Ann Taylor stores and 11 were LOFT stores.

We expect total pre-tax expenses associated with our restructuring initiatives in the range of $130 to $140 million. These costs and charges are estimates and may vary materially based on various factors, including, among other things, timing in execution of the restructuring program, outcome of negotiations with landlords and other third parties and changes in our assumptions and projections. An aggregate of approximately $92 million in restructuring costs were recognized during Fiscal 2007 and Fiscal 2008.

During the third quarter of Fiscal 2009, we recognized pre-tax charges of approximately $0.6 million in connection with our restructuring initiatives. Of this amount, approximately $0.7 million were cash charges primarily related to the sublease of excess office space in New York City and store closing liabilities and approximately ($0.1) million were net adjustments to the restructuring accrual related to changes in estimates.

In October 2008, we launched an enhanced credit card program, which offers eligible clients the choice of a private label or a co-branded credit card. All new cardholders are automatically enrolled in our exclusive rewards program, which is designed to recognize and promote client loyalty. As part of the program, we received an upfront signing bonus from the sponsoring bank. We also receive ongoing bounties for new accounts activated, as well as a share of finance charges collected by the sponsoring bank. These revenue streams are accounted for as a single unit of accounting under Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition, and accordingly will be recognized into revenue ratably based on the total projected revenues over the term of the agreement. During the quarter and nine months ended October 31, 2009, we recognized approximately $8.0 million and $12.0 million of revenue related to the credit card program, respectively. No material revenue was recognized under this program during the quarter or nine months ended November 1, 2008. At October 31, 2009, January 31, 2009 and November 1, 2008, approximately $7.5 million, $8.5 million and $1.4 million, respectively, of deferred credit card income is included in accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheets. Partially offsetting the income from the credit card program are costs related to the customer loyalty program, which are included in cost of sales.

On April 16, 2009, General Growth Properties, Inc. (“GGP”) and many of its affiliates (collectively “GGP Debtors”) filed for protection under Chapter 11 of the United States Bankruptcy Code. We currently operate 107 stores that the GGP Debtors and certain of their non-debtor affiliates own, manage, or control. Based on the information currently available, we do not anticipate that the GGP Debtor’s bankruptcy will have a material adverse effect on our operations or financial results.

 

36


Table of Contents

As a result of losses experienced in global equity markets, our pension funds experienced negative returns in Fiscal 2008 which, in turn, increased pension costs in 2009. Our pension plan is invested in readily-liquid investments, primarily equity and debt securities. Continued deterioration in the financial markets may require us to make a contribution to our pension plan in Fiscal 2009. For the quarter and nine months ended October 31, 2009, the total amount of lump sum payments made to plan participants exceeded the anticipated interest cost for Fiscal 2009. As a result, non-cash settlement charges of $0.3 and $0.9 million, respectively, were recorded.

Critical Accounting Policies

Management has determined that our most critical accounting policies are those related to merchandise inventory valuation, asset impairment, income taxes and stock-based compensation. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to these policies as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Recent Accounting Pronouncements

Recently Issued Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (“SFAS No. 166”). SFAS No. 166 seeks to improve financial reporting by providing a short-term solution to address inconsistencies in practice relating to the existing concepts in SFAS No. 140, such as eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance. SFAS No. 166 is effective for annual financial periods beginning after November 15, 2009, and interim periods within that annual period, and thereafter, and shall be applied prospectively. Early adoption is prohibited. We are in the process of evaluating SFAS No. 166 and do not expect it will have a significant impact on our Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 seeks to improve financial reporting by requiring that entities perform an analysis to determine whether any variable interest or interests that they have give them a controlling financial interest in a variable interest entity. SFAS No. 167 is effective for annual financial periods beginning after November 15, 2009, and interim periods within that annual period, and thereafter, and shall be applied prospectively. Early adoption is prohibited. We are in the process of evaluating SFAS No. 167 and do not expect it will have a significant impact on our Consolidated Financial Statements.

In December 2008, the FASB issued amendments to ASC 715-20, Compensation – Retirement Benefits, which require additional detailed disclosures about the assets of a defined benefit pension or other postretirement plan and are effective for fiscal years ending after December 15, 2009. We are in the process of evaluating the amendments to ASC 715-20, and do not expect they will have a significant impact on our Consolidated Financial Statements.

Recently Adopted Standards

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value. ASU 2009-05 amends ASC 820-10, Fair Value Measurements and Disclosures, for the fair value measurement of liabilities, and provides clarification of the accounting for circumstances in which a quoted price in an active market for an identical liability is not available. ASU 2009-05 is effective for the first reporting period (including interim periods) after its issuance. We adopted ASU 2009-05 during the third quarter of Fiscal 2009. The adoption of ASU 2009-05 did not have a material impact on our Consolidated Financial Statements.

 

37


Table of Contents

In June 2009, the FASB issued ASC 105-10, Generally Accepted Accounting Principles. Upon adoption, the FASB ASC established by ASC 105-10 becomes the source of authoritative generally accepted accounting principles in the United States, and supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC will become non-authoritative. We adopted ASC 105-10 during the third quarter of Fiscal 2009. The adoption of ASC 105-10 impacted our disclosures by eliminating all references to pre-Codification standards, excepting only pre-Codification standards that have not yet been codified.

In June 2009, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities. SAB No. 111 clarifies the SEC’s position related to other-than-temporary impairments of debt and equity securities and was issued in order to make the relevant interpretive SEC guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. We adopted SAB No. 111 on June 4, 2009, the date of its issuance. The adoption of SAB No. 111 did not have any impact on our Consolidated Financial Statements.

In May 2009, the FASB issued amendments to ASC 855-10, Subsequent Events, which establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The amendments to ASC 855-10 introduce the concept of financial statements being available to be issued, and require the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. We adopted the amendments to ASC 855-10 during the second quarter of Fiscal 2009. See Note 1, Basis of Presentation, for the disclosure required under these amendments to ASC 855-10.

In April 2009, the FASB issued amendments to ASC 825-10, Financial Instruments, which require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The amendments to ASC 825-10 also require those disclosures in summarized financial information at interim reporting periods. The amendments to ASC 825-10 are effective for interim reporting periods ending after June 15, 2009. The amendments to ASC 825-10 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. We adopted the amendments to ASC 825-10 during the second quarter of Fiscal 2009. See Note 3, Investments, and Note 4, Fair Value Measurements, for further disclosures required under these amendments to ASC 825-10.

In April 2009, the FASB issued amendments to ASC 320-10, Investments – Debt and Equity Securities, which impact the other-than-temporary impairment guidance in U.S. generally accepted accounting principles (“GAAP”) for debt securities to make the guidance more operational and improve the presentation and disclosure of other-than-temporary impairment on debt and equity securities in the financial statements. The amendments to ASC 320-10 do not amend existing recognition and measurement guidance related to other-than-temporary impairment of equity securities. The amendments to ASC 320-10 are effective for interim reporting periods ending after June 15, 2009. The amendments to ASC 320-10 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. We adopted the amendments to ASC 320-10 during the second quarter of Fiscal 2009. The adoption of the amendments to ASC 320-10 did not have any impact on our Consolidated Financial Statements.

In April 2009, the FASB issued amendments to ASC 820-10, Fair Value Measurements and Disclosures, which provide guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. These amendments to ASC 820-10 include guidance on identifying circumstances that indicate when a transaction is not orderly, and are effective for interim reporting periods ending after June 15, 2009. These amendments to ASC 820-10 do not require disclosures for earlier periods presented for comparative purposes at initial adoption, and, in periods after initial adoption, comparative disclosures are only required for periods ending after initial adoption. We adopted these amendments to ASC 820-10 during the second quarter of Fiscal 2009. See Note 3, Investments, for disclosure required under these amendments to ASC 820-10.

 

38


Table of Contents

In June 2008, the FASB issued amendments to ASC 260-10, Earnings Per Share, which require that unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) be considered participating securities and be included in the two-class method of computing earnings per share. These amendments to ASC 260-10 are effective for fiscal years beginning after December 15, 2008, and interim periods within those years. We adopted these amendments to ASC 260-10 on February 1, 2009. The adoption of these amendments to ASC 260-10 impacted the determination and reporting of earnings per share by requiring the inclusion of unvested restricted stock and performance restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. The amendments to ASC 260-10 also required retroactive application to previously reported earnings per share amounts. Including these shares in our earnings per share calculation during periods of net income has the effect of diluting both its basic and diluted earnings per share. However, in periods of net loss, no effect is given to the participating securities since they do not have an obligation to share in the losses of the Company. See Note 6, Net (Loss)/Income Per Share for further discussion.

In September 2006, the FASB issued amendments to ASC 820-10, Fair Value Measurements and Disclosures. Subsequently, on February 12, 2008, the portion of these amendments related to non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis was deferred by the FASB for one year. We adopted the partially deferred portion of the amendments to ASC 820-10 on February 1, 2009. See Note 4, Fair Value Measurements, for additional disclosures required under these amendments to ASC 820-10 for non-financial assets and liabilities recognized or disclosed at fair value in the financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We have significant amounts of cash and cash equivalents (money market funds) at financial institutions that are in excess of federally insured limits. With the current financial environment and the instability of financial institutions, we cannot be assured that we will not experience losses on our deposits. At October 31, 2009 substantially all of our cash was invested in money market funds or FDIC insured banks. The money market funds invest substantially in US Treasury Securities.

At each of the periods ended October 31, 2009, January 31, 2009, and November 1, 2008 we had $6.0 million invested in auction rate securities with a fair market value of $5.7 million, $5.8 million, and $5.6 million, respectively. The approximate net carrying value of these investments represents our best estimate of the fair value of these investments based on available information on those dates.

On November 14, 2008, we entered into a settlement agreement with UBS AG (“UBS”). As a result of the settlement agreement with UBS, we reclassified these auction rate securities from available-for-sale securities to trading securities, and all previously recorded temporary impairment charges were charged to earnings in accordance with ASC 320-10, Investments – Debt and Equity Securities. During the quarter and nine months ended October 31, 2009, unrealized losses related to these securities recognized in earnings and included in interest income on our Condensed Consolidated Statements of Operations were immaterial.

We classified the net carrying value of our remaining investment in auction rate securities as long-term, included in other assets, on our Condensed Consolidated Balance Sheets as of January 31, 2009 and November 1, 2008. However, since we have auction rate security rights that enable us to sell our auction rate securities back to UBS at par value anytime during the two year period beginning June 30, 2010, and because we intend to exercise this right as soon as practicably possible, as of August 1, 2009, we reclassified the net carrying value of our remaining investment in auction rate securities as short-term, included in short-term investments on its Condensed Consolidated Balance Sheets at October 31, 2009.

In accordance with ASC 320-10, these auction rate securities were classified as available-for-sale and were carried at fair market value as of November 1, 2008. During the quarter and nine months ended November 1, 2008 we recorded a temporary impairment charge of approximately $0.4 and $0.8 million, respectively, to accumulated other comprehensive loss related to our investment in auction rate securities.

 

39


Table of Contents

As a result of losses experienced in global equity markets, our pension funds experienced negative returns in Fiscal 2008 which, in turn, increased pension costs in 2009. Our pension plan is invested in readily-liquid investments, primarily equity and debt securities. Continued deterioration in the financial markets may require us to make a contribution to our pension plan in Fiscal 2009.

 

Item 4. Controls and Procedures.

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.

During the second quarter of Fiscal 2009, the Company implemented new computer hardware and software that support its human resources, finance, and reporting functions, which the Company expects will further enhance its control environment by automating certain manual processes and standardizing various processes. There was no change in the Company’s internal control over financial reporting during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

40


Table of Contents

PART II. OTHER INFORMATION

 

Item 1A. Risk Factors.

Except as set forth below, there have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

The bankruptcy or significant deterioration of any of our major national retail landlords could have a material adverse affect on our sales and overall retail strategy.

The current economic downturn has had a significant negative impact on the commercial real estate sector, including large commercial and retail landlords. On April 16, 2009 one of our major national landlords, General Growth Properties, Inc. (“GGP”) and many of its affiliates (collectively “GGP Debtors”) filed petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code (11 U.S.C. § 101 et seq.). We are currently tenants at 107 stores that the GGP Debtors and certain of their non-debtor affiliates own, manage, or control. Approximately 62 of the 107 stores are subject to leases on which a GGP Debtor is a landlord, and the balance of the stores are with affiliates of GGP that did not file for bankruptcy relief on April 16, 2009. As a result of the bankruptcy filing, the GGP Debtors may have or seek to exercise certain rights that could potentially negatively impact us, including without limitation the right to assume or reject all or any of the store leases to which a GGP Debtor is a party. The GGP Debtors may also pursue the sale or other disposition of the mall properties in which our stores are located, which could adversely affect our leases. Moreover, if a GGP Debtor or any buyer of a GGP Debtor’s property is unable to continue to operate its malls in a first class condition and otherwise perform its obligations as landlord, including without limitation its repair and maintenance obligations, then our sales and operating results in those malls could be adversely affected. While we are taking steps to control and mitigate any adverse effects of the GGP Debtor’s bankruptcy, there can be no assurance that all significant impacts can be avoided. Nor can there be any assurance that other affiliates of GGP do not file for bankruptcy and adversely affect additional leases.

If the current macro-economic conditions continue or deteriorate further, additional commercial landlords may be similarly impacted which in turn could materially adversely impact our sales and operating results.

Effects of war, terrorism or other catastrophes

Threat of terrorist attacks or actual terrorist events in the United States and worldwide could cause damage or disruption to international commerce and the global economy, disrupt the production, shipment or receipt of our merchandise or lead to lower client traffic in regional shopping centers. Natural disasters and public health concerns, including severe infectious diseases, could also impact our ability to open and run our stores in affected areas and negatively impact our foreign sourcing offices and the manufacturing operations of our vendors. Lower client traffic due to security concerns, war or the threat of war, natural disasters and public health concerns could result in decreased sales that would have a material adverse impact on our business, financial condition and results of operations.

 

41


Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information concerning purchases made by the Company of its common stock for the periods indicated:

 

     Total Number
of Shares
Purchased (a)
   Average
Price Paid
Per Share
   Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Program (b)
   Approximate
Dollar Value of
Shares that May
Yet Be
Purchased
Under Publicly
Announced
Program
                    (in thousands)

August 2, 2009 to August 29, 2009

   4,676    $ 11.89    —      $ 159,083

August 30, 2009 to October 3, 2009

   8,528      14.45    —        159,083

October 4, 2009 to October 31, 2009

   479      15.54    —        159,083
               
   13,683       —     
               

 

(a) Represents shares of restricted stock purchased in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under the Company’s publicly announced program.
(b) The $300 million securities repurchase program approved by our Board of Directors on August 23, 2007 will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by resolution of the Board of Directors. There were no shares purchased under this program during the nine months ended October 31, 2009.

 

42


Table of Contents
Item 6. Exhibits

 

Exhibit
Number

 

Description

*31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed electronically herewith.

 

43


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  AnnTaylor Stores Corporation
Date: November 20, 2009   By:   /S/    KAY KRILL        
    Kay Krill
   

President & Chief Executive Officer

(Principal Executive Officer)

Date: November 20, 2009   By:  

/S/    MICHAEL J NICHOLSON        

    Michael J. Nicholson
   

Executive Vice President, Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

44


Table of Contents

Exhibit Index

 

Exhibit
Number

  

Description

*31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed electronically herewith.

 

45