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EXCEL - IDEA: XBRL DOCUMENT - ANN INC.Financial_Report.xls
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ANN INC.exhibit312-q32014.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ANN INC.exhibit311-q32014.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ANN INC.exhibit321-q32014.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 2014
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
 
ANN INC.
(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  ý    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  ý    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
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  ý
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 1, 2014
Common Stock, $.0068 par value
 
45,715,507




INDEX TO FORM 10-Q
 
 
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






2


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 ANN INC. (the “Company”) concerning future events that involve risks and uncertainties, including:
the Company’s ability to anticipate and respond to changing client preferences and fashion trends and provide a balanced assortment of merchandise that satisfies client demands in a timely manner;
the effectiveness of the Company’s brand awareness and marketing programs, its ability to maintain brand image, engage new and existing clients, drive traffic to its stores and websites and gain market share;
the effect of competitive pressures from other retailers as well as general macroeconomic pressures in the specialty retail sector;
the Company’s reliance on key management and its ability to hire, retain and develop qualified associates as well as ensure that the Company has the appropriate organizational structure and processes in place to achieve its strategic initiatives;
the Company’s reliance on third-party manufacturers and key vendors, including operational risks such as reduced production capacity, errors in complying with merchandise specifications, insufficient quality control and failure to meet production deadlines;
the impact of fluctuations in sourcing costs, in particular, increases in the costs of raw materials, labor and transportation;
the Company’s reliance on foreign sources of production and the associated risks of doing business in foreign markets;
the Company’s dependence on its Louisville distribution center and third-party distribution and transportation providers;
the impact of a privacy breach and the resulting effect on the Company’s business and reputation;
the Company’s ability to successfully execute brand goals, objectives and new concepts and strategies, including international expansion;
the Company’s ability to secure and protect trademarks and other intellectual property rights;
the performance and operation of the Company’s websites and the risks associated with Internet sales;
the Company’s ability to successfully optimize implementation of its omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for its clients;
the Company’s ability to manage inventory levels and changes in merchandise mix as well as optimize the operational aspects of its omni-channel fulfillment strategy;
the Company’s ability to successfully upgrade and maintain its information systems in a timely and secure manner to support the needs of the organization and to operate in accordance with its business continuity plan in the event of a disruption;
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;
the effect of general economic conditions on consumer spending and the Company’s liquidity and capital resources;
the impact of fluctuations in sales and profitability on the Company’s stock price;
the failure by independent manufacturers to comply with the Company’s social compliance program requirements or applicable laws and regulations;
the potential impact of natural disasters, extreme weather, public health concerns, acts of war or terrorism in the United States or worldwide;
the Company’s ability to successfully manage store growth and optimize the productivity and profitability of its store portfolio;
the Company’s dependence on shopping malls and other retail centers to attract clients and the impact of potential consolidation of commercial and retail landlords on the Company’s ability to negotiate favorable rental terms; and
the effect of tax matters on the Company’s business operations.
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.

3


PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements.
ANN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters and Nine Months Ended November 1, 2014 and November 2, 2013
(unaudited)
 
 
Quarter Ended
 
Nine Months Ended
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
 
(in thousands, except per share amounts)
Net sales
$
646,805

 
$
657,532

 
$
1,886,057

 
$
1,870,236

Cost of sales
306,863

 
291,312

 
891,318

 
834,174

Gross margin
339,942

 
366,220

 
994,739

 
1,036,062

Selling, general and administrative expenses
293,215

 
295,813

 
866,619

 
871,764

Restructuring charge

 

 
17,303

 

Operating income
46,727

 
70,407

 
110,817

 
164,298

Interest and investment income/(expense), net
468

 
(224
)
 
(49
)
 
217

Other non-operating income/(expense), net
(133
)
 
(140
)
 
(261
)
 
57

Income before income taxes
47,062

 
70,043

 
110,507

 
164,572

Income tax provision
17,206

 
28,854

 
42,789

 
66,822

Net income
$
29,856

 
$
41,189

 
$
67,718

 
$
97,750

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.65

 
$
0.90

 
$
1.46

 
$
2.10

 
 
 
 
 
 
 
 
Weighted average shares outstanding
44,799

 
44,967

 
45,285

 
45,581

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.65

 
$
0.89

 
$
1.45

 
$
2.08

 
 
 
 
 
 
 
 
Weighted average shares outstanding, assuming dilution
45,242

 
45,443

 
45,735

 
46,036













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

4


ANN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Quarters and Nine Months Ended November 1, 2014 and November 2, 2013
(unaudited)
 
 
Quarter Ended
 
Nine Months Ended
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
 
(in thousands)
Net income
$
29,856

 
$
41,189

 
$
67,718

 
$
97,750

 
 
 
 
 
 
 
 
Other comprehensive income/(loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(327
)
 
31

 
48

 
(395
)
Pension settlement charge
125

 

 
125

 

Amortization of net actuarial loss on pension plan

 
158

 

 
473

Other comprehensive income/(loss), before tax
(202
)
 
189

 
173

 
78

Income tax expense on other comprehensive income
51

 
60

 
51

 
181

Other comprehensive income/(loss), net of tax
(253
)
 
129

 
122

 
(103
)
Comprehensive income
$
29,603

 
$
41,318

 
$
67,840

 
$
97,647






















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

5


ANN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
November 1, 2014, February 1, 2014 and November 2, 2013
(unaudited)
 
 
November 1,
2014
 
February 1,
2014
 
November 2,
2013
 
(in thousands, except share amounts)
Assets
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
109,761

 
$
201,707

 
$
118,692

Accounts receivable
32,357

 
22,448

 
36,612

Merchandise inventories
331,360

 
239,667

 
302,395

Refundable income taxes
8,635

 
7,252

 
7,365

Deferred income taxes
23,199

 
28,854

 
30,638

Prepaid expenses and other current assets
63,918

 
61,287

 
67,752

Total current assets
569,230

 
561,215

 
563,454

Property and equipment, net
440,524

 
443,086

 
445,541

Deferred income taxes
18,082

 
6,599

 
2,335

Other assets
21,462

 
22,060

 
22,308

Total assets
$
1,049,298

 
$
1,032,960

 
$
1,033,638

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
126,027

 
$
101,276

 
$
123,257

Accrued salaries and bonus
17,914

 
24,546

 
20,837

Current portion of long-term performance compensation
5,725

 
20,339

 
19,945

Accrued tenancy
37,350

 
38,331

 
40,529

Gift certificates and merchandise credits redeemable
36,702

 
48,150

 
35,890

Accrued expenses and other current liabilities
98,717

 
97,101

 
117,334

Total current liabilities
322,435

 
329,743

 
357,792

Deferred lease costs
154,110

 
164,703

 
170,221

Deferred income taxes
58

 
36

 
3,361

Long-term performance compensation, less current portion
9,910

 
15,456

 
14,295

Other liabilities
54,488

 
54,566

 
38,648

 
 
 
 
 
 
Commitments and contingencies


 


 


 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
 
Common stock, $.0068 par value; 200,000,000 shares authorized;  82,563,516 shares issued
561

 
561

 
561

Additional paid-in capital
744,787

 
751,765

 
750,934

Retained earnings
846,990

 
779,272

 
774,592

Accumulated other comprehensive loss
(2,752
)
 
(2,874
)
 
(4,600
)
Treasury stock, 36,848,009; 36,344,643 and 36,642,644 shares, respectively, at cost
(1,081,289
)
 
(1,060,268
)
 
(1,072,166
)
Total stockholders’ equity
508,297

 
468,456

 
449,321

Total liabilities and stockholders’ equity
$
1,049,298

 
$
1,032,960

 
$
1,033,638



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

6


ANN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended November 1, 2014 and November 2, 2013
(unaudited)
 
 
Nine Months Ended
 
November 1,
2014
 
November 2,
2013
 
(in thousands)
Operating activities:
 
 
 
Net income
$
67,718

 
$
97,750

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
(5,547
)
 
8,217

Depreciation and amortization
83,097

 
78,690

Loss on disposal and write-down of property and equipment
2,302

 
3,584

Stock-based compensation
9,621

 
11,621

Non-cash interest and other non-cash items
(1,468
)
 
(470
)
Tax benefit from exercise/vesting of stock awards
1,131

 
1,601

Changes in assets and liabilities:
 
 
 
Accounts receivable
(9,915
)
 
(18,799
)
Merchandise inventories
(91,770
)
 
(85,547
)
Prepaid expenses and other current assets
(2,670
)
 
(1,352
)
Refundable income taxes
(1,383
)
 
1,836

Other non-current assets
1,384

 
401

Other non-current liabilities
(7,499
)
 
13,468

Accounts payable, accrued expenses and other current liabilities
(10,020
)
 
(6,210
)
Net cash provided by operating activities
34,981

 
104,790

Investing activities:
 
 
 
Purchases of marketable securities
(2,362
)
 
(3,215
)
Sales of marketable securities
1,734

 
574

Purchases of property and equipment
(84,902
)
 
(103,607
)
Other, net
(147
)
 
813

Net cash used for investing activities
(85,677
)
 
(105,435
)
Financing activities:
 
 
 
Proceeds from the issuance of common stock pursuant to Associate Discount Stock Purchase Plan
1,666

 
1,660

Proceeds from exercise of stock options
13,935

 
5,536

Excess tax benefits from stock-based compensation
1,802

 
1,860

Repurchases of common and restricted stock
(54,582
)
 
(53,854
)
Repayments on fixed asset financing and capital lease obligations
(2,562
)
 
(1,565
)
Proceeds from fixed asset financing

 
4,317

Change in trade payable program obligation
(1,502
)
 
(5,296
)
Net cash used for financing activities
(41,243
)
 
(47,342
)
Effect of exchange rate changes on cash and cash equivalents
(7
)
 
(332
)
Net decrease in cash and cash equivalents
(91,946
)
 
(48,319
)
Cash and cash equivalents, beginning of period
201,707

 
167,011

Cash and cash equivalents, end of period
$
109,761

 
$
118,692







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

7


ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1.
Basis of Presentation
Interim Financial Information

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 intercompany accounts and transactions have been eliminated.

The results of operations for the 2014 interim periods presented in the Condensed Consolidated Financial Statements are not necessarily indicative of results to be expected for Fiscal 2014.

The February 1, 2014 Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheets of ANN INC. (the “Company”) included in its Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

The “Recognition of gift card and merchandise credit breakage” line item within the Condensed Consolidated Statement of Cash Flows was reclassified to the line item “Non-cash interest and other non-cash items” for the nine months ended November 2, 2013 to conform to the current period presentation. The impact of this reclassification is not material to the Condensed Consolidated Statement of Cash Flows.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. As such, 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 February 1, 2014. The Company believes that the disclosures made are adequate to prevent the interim financial statements from being misleading.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, “Revenue Recognition,” as well as various other sections of the ASC, such as, but not limited to, ASC 340-20, “Other Assets and Deferred Costs-Capitalized Advertising Costs.” The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is not permitted. The Company is in the process of evaluating ASU 2014-09, including the choice of retrospective application upon adoption, and does not currently anticipate it will have a material impact on the Company’s Consolidated Financial Statements.

2.
Restructuring Charge
During the first quarter of Fiscal 2014, the Company executed an organizational restructuring in support of its omni-channel retail strategy and its strategic growth initiatives. As part of the restructuring, the Company realigned certain functions within its corporate workforce, including its marketing, merchandise planning, procurement and allocation functions, to eliminate redundancy and integrate processes to better support its brands and serve its clients. These actions resulted in the separation of approximately 100 full-time associates. In connection with this effort, the Company recorded a pre-tax restructuring charge of approximately $17.3 million for severance and other costs during the first quarter of Fiscal 2014. The Company expects to pay all amounts accrued in connection with the restructuring by 2017.

8

ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

2.
Restructuring Charge (Continued)
The following tables present a reconciliation of the restructuring reserve for the quarter and nine months ended November 1, 2014:
 
Quarter Ended
 
Severance
and Related
Costs
 
Other
Restructuring
Costs
 
Total
 
(in thousands)
Balance at August 2, 2014
$
14,491

 
$

 
$
14,491

Cash payments
(3,765
)
 

 
(3,765
)
Balance at November 1, 2014
$
10,726

 
$

 
$
10,726

 
Nine Months Ended
 
Severance
and Related
Costs
 
Other
Restructuring
Costs
 
Total
 
(in thousands)
Balance at February 1, 2014
$

 
$

 
$

Restructuring charge
16,742

 
561

 
17,303

Cash payments
(7,883
)
 
(561
)
 
(8,444
)
Reclassification to restructuring reserve (1)
1,867

 

 
1,867

Balance at November 1, 2014
$
10,726

 
$

 
$
10,726



(1)
Prior compensation accruals related to associates separated in connection with the restructuring were reclassified to the restructuring reserve.
 Approximately $4.8 million and $5.9 million of the restructuring reserve is included in “Accrued salaries and bonus” and “Other liabilities,” respectively, on the Company’s Condensed Consolidated Balance Sheet at November 1, 2014, based upon the expected timing of the payments.
 

9

ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

3.
Fair Value Measurements
The Company follows 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 Company maintains a self-directed, non-qualified deferred compensation plan structured as a rabbi trust for certain executives at the vice-president level and above. Investment assets of the rabbi trust are valued based on quoted market prices or the net asset value at the closing price reported in certain major markets as of the measurement date, which are considered Level 1 inputs. The following tables segregate the rabbi trust assets that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine fair value at the measurement date:
 
 
November 1,
2014
 
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:
 
 
 
 
 
 
 
 
Equity securities
 
$
3,941

 
$
3,941

 
$

 
$

Fixed income funds
 
909

 
909

 

 

Equity funds
 
7,580

 
7,580

 

 

Total assets
 
$
12,430

 
$
12,430

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
February 1, 2014
 
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:
 
 
 
 
 
 
 
 
Equity securities
 
$
3,698

 
$
3,698

 
$

 
$

Fixed income funds
 
782

 
782

 

 

Equity funds
 
6,944

 
6,944

 

 

Total assets
 
$
11,424

 
$
11,424

 
$

 
$

 
 
 
November 2,
2013
 
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:
 
 
 
 
 
 
 
 
Equity securities
 
$
4,091

 
$
4,091

 
$

 
$

Fixed income funds
 
777

 

 
777

 

Equity funds
 
6,648

 

 
6,648

 

Total assets
 
$
11,516

 
$
4,091

 
$
7,425

 
$


As of the dates presented, the Company believes that the carrying value of cash and cash equivalents, receivables and payables approximates fair value, due to the short maturity of these financial instruments.

10

ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

4.
Earnings Per Share
The following tables present a reconciliation of basic and diluted earnings per share for the quarters and nine months ended November 1, 2014 and November 2, 2013:
 
Quarter Ended
 
November 1, 2014
 
November 2, 2013
 
(in thousands, except per share amounts)
Basic Earnings per Share:
Net
Income
 
Shares
 
Per
Share
Amount
 
Net
Income
 
Shares
 
Per
Share
Amount
Net income
$
29,856

 
 
 
 
 
$
41,189

 
 
 
 
Less net income associated with participating securities
616

 
 
 
 
 
824

 
 
 
 
Basic earnings per share
$
29,240

 
44,799

 
$
0.65

 
$
40,365

 
44,967

 
$
0.90

Diluted Earnings per Share:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
29,856

 
 
 
 
 
$
41,189

 
 
 
 
Less net income associated with participating securities
610

 
 
 
 
 
816

 
 
 
 
Effect of dilutive securities
 
 
443

 
 
 
 
 
476

 
 
Diluted earnings per share
$
29,246

 
45,242

 
$
0.65

 
$
40,373

 
45,443

 
$
0.89

 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
(in thousands, except per share amounts)
Basic Earnings per Share:
Net
Income
 
Shares
 
Per
Share
Amount
 
Net
Income
 
Shares
 
Per
Share
Amount
Net income
$
67,718

 
 
 
 
 
$
97,750

 
 
 
 
Less net income associated with participating securities
1,383

 
 
 
 
 
1,892

 
 
 
 
Basic earnings per share
$
66,335

 
45,285

 
$
1.46

 
$
95,858

 
45,581

 
$
2.10

Diluted Earnings per Share:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
67,718

 
 
 
 
 
$
97,750

 
 
 
 
Less net income associated with participating securities
1,370

 
 
 
 
 
1,874

 
 
 
 
Effect of dilutive securities
 
 
450

 
 
 
 
 
455

 
 
Diluted earnings per share
$
66,348

 
45,735

 
$
1.45

 
$
95,876

 
46,036

 
$
2.08

For the nine months ended November 1, 2014, non-participating securities (stock options) representing 8,000 shares of common stock were excluded from the computation of weighted average shares for diluted earnings per share due to their antidilutive effect, since their exercise prices exceeded the average market price of the common shares during that period. There were no such shares excluded from the computation of weighted average shares for diluted earnings per share for the quarter ended November 1, 2014.
For the quarter and nine months ended November 2, 2013, non-participating securities (stock options) representing 585,250 and 698,040 shares of common stock, respectively, were excluded from the computation of weighted average shares for diluted earnings per share due to their antidilutive effect, since their exercise prices exceeded the average market price of the common shares during those periods.


11

ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

5.
Equity and Incentive Compensation Plans

Repurchase Program
On August 21, 2013, the Company’s Board of Directors approved a new $250 million securities repurchase program (the “Repurchase Program”). Purchases of shares of 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 purposes. The Repurchase Program will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by the Company’s Board of Directors.

During the nine months ended November 1, 2014, the Company repurchased 1.3 million shares of its common stock through open market purchases under its Repurchase Program at a cost of $50 million. There were no shares repurchased under the Repurchase Program during the quarter ended November 1, 2014. As of November 1, 2014, there was $200 million available for additional share repurchases under the Repurchase Program.

The Company repurchased 1.5 million shares of its common stock through open market purchases during the second quarter of Fiscal 2013 under its then existing $600 million securities repurchase program at a cost of $49.1 million, fully exhausting that securities repurchase program.
Stock Incentive Plans
During the quarter and nine months ended November 1, 2014, the Company recognized approximately $2.8 million and $9.6 million, respectively, in stock-based compensation expense. During the quarter and nine months ended November 2, 2013, the Company recognized approximately $4.0 million and $11.6 million, respectively, in stock-based compensation expense. As of November 1, 2014, there was $2.0 million and $15.8 million of unrecognized compensation cost related to unvested stock options and unvested restricted stock awards, respectively, which is expected to be recognized over a remaining weighted average vesting period of 1.7 years and 2.9 years, respectively. Restricted stock award grants and shares underlying the exercise of stock options during the nine months ended November 1, 2014 were issued out of treasury stock. In addition, restricted stock awards forfeited, as well as shares returned to cover employee tax withholding obligations related to the exercise of stock options and the vesting of restricted stock, were returned to treasury stock.
Stock Options
The following table summarizes stock option activity for the nine months ended November 1, 2014:
 
Shares
 
Weighted  Average
Exercise Price
Options outstanding at February 1, 2014
2,199,719

 
$
26.60

Granted (1)
63,700

 
37.52

Exercised
(478,713
)
 
29.11

Forfeited or expired
(62,274
)
 
30.18

Options outstanding at November 1, 2014
1,722,432

 
26.18

Vested and exercisable at November 1, 2014
1,495,451

 
$
25.35

Options expected to vest in the future as of November 1, 2014
206,451

 
$
31.88


(1)
Awards vest annually over a three-year period and expire ten years after the grant date.

12

ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

5.
Equity and Incentive Compensation Plans (Continued)
Stock Options (continued)
The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted as of the grant date. For the nine months ended November 1, 2014 and November 2, 2013, the fair value of options granted was estimated using the following weighted average assumptions:
 
 
Nine Months Ended
 
 
November 1,
2014
 
November 2,
2013
Expected volatility
 
47.5
%
 
52.9
%
Risk-free interest rate
 
1.7
%
 
0.9
%
Expected life (years)
 
5.4

 
5.0

Dividend yield
 
%
 
%

The weighted average fair value of options granted during the nine months ended November 1, 2014 and November 2, 2013 was $16.79 and $14.09 per share, respectively. There were no options granted during the quarter ended November 1, 2014. The Company estimates the volatility of its common stock on the date of grant based on an average of its historical common stock volatility and the implied volatility of publicly traded options on its common stock.

Restricted Stock
The following table summarizes restricted stock activity for the nine months ended November 1, 2014:
 
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 February 1, 2014
602,205

  
$
29.95

 
289,935

  
$
29.56

Granted
408,393

(1) 
37.55

 
141,617

(2) 
37.53

Vested
(216,616
)
 
28.92

 
(124,139
)
 
29.24

Forfeited
(127,263
)
 
32.36

 
(75,294
)
 
31.07

Restricted stock awards at November 1, 2014
666,719

  
34.48

 
232,119

  
34.10


(1)
Of this amount, 22,893 shares vest in June 2015; 127,700 shares vest in equal installments in each of March 2015, 2016 and 2017; 255,900 shares vest in equal installments in each of March 2017, 2018 and 2019; and 1,900 shares vest in equal installments in each of June 2015, 2016 and 2017.

(2)
These shares 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 50% to 200% 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.
Long-Term Performance Compensation
The Company maintains a long-term cash incentive program, the Restricted Cash Program (“RCP”), for vice-presidents and above. Compensation expense under the RCP is charged to the same income statement line item as the base salary earned by participating associates. During the quarters ended November 1, 2014 and November 2, 2013, the Company recognized $2.1 million and $2.6 million, respectively, in compensation expense under the RCP, inclusive of the effect of changes in estimates. During the nine months ended November 1, 2014 and November 2, 2013, the Company recognized $3.3 million and $9.4 million, respectively, in compensation expense under the RCP, inclusive of the effect of changes in estimates. RCP compensation expense for the nine months ended November 1, 2014 also reflects the impact of changes in forfeiture rate estimates recorded during the first quarter of Fiscal 2014 in connection with the Company’s restructuring. As of November 1, 2014, there was $14.3 million of unrecognized compensation cost under the RCP, which is expected to be recognized over a remaining weighted average deferral period of 2.5 years.

13

ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

6.
Accumulated Other Comprehensive Loss 
The following table summarizes the components of accumulated other comprehensive loss (“AOCL”) for the nine months ended November 1, 2014:

 
Foreign Currency Translation
 
Unrecognized Pension Benefit Costs
 
Total
 
(in thousands)
Balance at February 1, 2014
$
(1,290
)
 
$
(1,584
)
 
$
(2,874
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
Foreign currency translation adjustment
48

 

 
48

Amounts reclassified from AOCL:
 
 
 
 
 
Pension settlement charge (1)

 
125

 
125

Amounts reclassified from AOCL, before tax (2)

 
125

 
125

Income tax expense (3)

 
51

 
51

Net current period other comprehensive income/(loss), net of tax
48

 
74

 
122

Balance at November 1, 2014
$
(1,242
)
 
$
(1,510
)
 
$
(2,752
)

(1)
Amount is included in net periodic pension cost, which is presented in “Selling, general and administrative expenses” on the Companys Condensed Consolidated Statement of Operations.
(2)
During the quarter and nine months ended November 1, 2014, the Company reclassified $0.1 million, both gross and net of tax, from AOCL related to the Companys employee benefit plan.
(3)
Relates to amounts reclassified from AOCL to income tax expense.

7.
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 determined with certainty, 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.

14


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
ANN INC., through its wholly-owned subsidiaries, is a leading national specialty retailer of women’s apparel, shoes and accessories, sold primarily under the “Ann Taylor” and “LOFT” brands. We were incorporated in the State of Delaware in 1988 and changed our name to ANN INC. in March 2011. For more than half a century, we have evolved with the needs of real women who live full, active lives.
Our rich heritage dates back to 1954, when we opened our first Ann Taylor store in New Haven, Connecticut. Back then, “Ann Taylor” represented a best-selling dress style that embodied the well-dressed woman. As of November 1, 2014, we operated 1,050 retail stores in 47 states, the District of Columbia, Puerto Rico and Canada. In addition to our stores, our clients can shop online in more than 100 countries worldwide at www.anntaylor.com and www.LOFT.com (together, our “Websites”), by phone at 1-800-DIAL-ANN and 1-888-LOFT-444 or at our LOFT franchise stores in Mexico.
We are committed to and driven by a simple but important mission - “to inspire and connect with women to put their best selves forward every day.” This is evident in our strong brands as well as in our commitment to operate our business responsibly and thoughtfully. This commitment means that our clients can look and feel great about the clothes that they wear, and that as a business, we are holding ourselves to high standards. It means forging strong partnerships with our suppliers so that our products are made ethically. It means investing in new programs and innovation to minimize our impact on the environment. And it means making meaningful contributions to our communities.
Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to ANN INC. and its wholly-owned subsidiaries.
Management Overview
Our third quarter performance reflected the external challenges of weak industry traffic, a highly promotional retail environment and product delays stemming from congestion at the West Coast ports, the latter of which impacted the timeliness of inventory receipts and pressured sales performance, particularly in the early part of the third quarter. We sought to mitigate this situation by shifting to air freight, resulting in approximately $5 million in incremental transportation costs during the quarter, which negatively impacted our gross margin performance. However, this also had the desired effect of driving sales improvement through the latter part of the quarter, as product arrived at our stores and online distribution center on time. In addition to these external challenges, Ann Taylor experienced soft product performance in select categories during the quarter. These factors contributed to a comparable sales decrease of 4.3% and a 310 basis point decline in gross margin rate performance. However, through continued disciplined expense management, including the ongoing impact of savings associated with our first quarter restructuring, selling, general and administrative expenses for the third quarter decreased slightly as compared to last year, despite the impact of a $5 million pre-tax charge associated with the closure of Ann Taylor’s Madison Avenue store. As a result, we realized net income of $29.9 million and diluted earnings per share of $0.65 during the third quarter of Fiscal 2014, which includes the $3.2 million, or $0.07 per diluted share, after-tax impact of the aforementioned charge.
At the Ann Taylor brand, total net sales in the third quarter of Fiscal 2014 decreased 6.5% compared to last year, with overall comparable sales down 6.6%. At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, comparable sales decreased 4.8% compared with the third quarter of Fiscal 2013, which marked the first time Ann Taylor experienced negative comparable sales in the last ten quarters. This reflected the impact of soft traffic and the highly promotional retail environment, as well as soft product performance in select merchandise categories. In hindsight, we would have benefitted from having more color and print choices in our assortment, particularly in tops. Looking ahead, while Ann Taylor is entering the fourth quarter with higher than anticipated inventory levels, we are committed to clearing excess inventory by year-end to enter fiscal 2015 in a clean inventory position. At Ann Taylor Factory, comparable sales declined 10.4%, reflecting continued traffic challenges and high levels of promotional activity in factory outlet centers, as well as soft product performance, particularly in the tops category. Going forward, we will continue to carefully manage our inventory position, with a focus on maximizing the channel’s bottom-line performance.
At the LOFT brand, total net sales across all channels, including Lou & Grey, increased 1.3% in the third quarter of Fiscal 2014 compared to last year, while overall comparable sales declined 2.9%. At LOFT, which includes LOFT stores and LOFT.com, comparable sales decreased 3.3%, reflecting the impact of soft traffic, the highly promotional retail environment and product delays related to the West Coast port situation. Importantly, we saw performance improve as we took action to address the inventory delays by moving to air delivery of select merchandise categories, including pants and sweaters. At LOFT Outlet, despite a strong merchandise assortment that was well-received by clients, comparable sales decreased 1.0%, reflecting the impact of continued traffic challenges and high levels of promotional activity in factory outlet centers. Looking

15


ahead, we believe that the LOFT brand is well-positioned for a competitive holiday season, with a merchandise offering that provides a compelling selection of fashion coupled with seasonal favorites and gift items.
During the third quarter, we continued to move forward on our real estate strategy, adding a total of 14 new stores, including two Ann Taylor stores, two Ann Taylor Factory stores, four LOFT stores, four LOFT Outlet stores and our first two stand-alone Lou & Grey stores. We also closed four underperforming stores during the quarter, including the largest Ann Taylor store in our fleet at Madison Avenue in New York City, leading to a total store count of 1,050 stores at the end of the third quarter. Regarding our new concept, Lou & Grey, we have been encouraged by the initial results of our first stand-alone stores, and plan to open three additional stand-alone Lou & Grey locations this year to further test the concept in diverse regions. In addition, we continued to further expand our international presence, with the opening of two franchised LOFT stores in Mexico during the quarter.
During the third quarter, we also enhanced our omni-channel offering through the launch of a new mobile experience, the pilot launch of our “endless aisle” capabilities in select Ann Taylor and LOFT stores as well as other ongoing improvements to our web platform and capabilities. Our new mobile experience is resonating well with our clients and, with smartphones now accounting for almost half of our website visits, we have begun to see a lift in sales from these devices. In addition, early results from our “endless aisle” pilot have been promising. This pilot represents the first steps toward the launch of the second phase of our omni-channel initiative in 2015, which is designed to further enhance the seamless client shopping experience by enabling fulfillment of in-store client orders online.
Finally, during the quarter, we also launched a new corporate initiative focused on enhancing the effectiveness and efficiency of our sourcing capabilities, including a comprehensive, end-to-end assessment of our supply chain, designed to identify opportunities to enhance our profitability with a focus on speed, flexibility, improved product sell-through and reduced cost of goods sold.
Overall, even as we navigate ongoing external challenges, we are moving forward on our commitment to strengthen our position as the go-to wardrobing destination for women of style. Together, Ann Taylor, LOFT and Lou & Grey represent a full-spectrum offering that puts ANN INC. in a unique position to meet the needs of women at every important phase of their lives. We continue to make progress on our strategic initiatives, which we believe present significant opportunities to build on the strength of our brands in order to deliver long-term, profitable growth.
Key Performance Indicators
In evaluating our performance, senior management reviews certain key performance indicators, including:
Comparable sales – Comparable sales (“comps”) provide a measure of existing store sales performance. A store is included in comparable sales in its thirteenth month of operation. A store with a square footage change of greater than 15% is treated as a new store for the first year following its reopening. Sales from our Websites are also included in comparable sales. In a fiscal year with 53 weeks, sales in the last week of that fiscal year are excluded from comparable sales. International franchise stores are not considered in the determination of comparable sales.
Gross margin and merchandise gross margin – Gross margin measures our ability to control the direct costs of merchandise sold during the period. Merchandise gross margin represents the difference between net merchandise sales and merchandise cost. Merchandise cost includes the cost paid to our third-party suppliers for merchandise sold during the period and the cost to transport that merchandise from our suppliers to our distribution center, including customs costs. Gross margin includes merchandise gross margin, as well as the effect of revenue and/or expenses related to:  our sourcing operations; fulfillment and shipment of online and omni-channel sales; depreciation related to merchandise management systems; sample development costs; and direct costs of our credit card loyalty program. Buying and occupancy costs are excluded from cost of sales and gross margin.
Operating income – Because retailers do not uniformly record supply chain, buying and/or occupancy costs as components 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, other income/expense 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.

16


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.

Results of Operations
The following table sets forth data from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales:
 
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
%
Cost of sales
47.4
 %
 
44.3
 %
 
47.3
 %
 
44.6
%
Gross margin
52.6
 %
 
55.7
 %
 
52.7
 %
 
55.4
%
Selling, general and administrative expenses
45.3
 %
 
45.0
 %
 
45.9
 %
 
46.6
%
Restructuring charge
 %
 
 %
 
0.9
 %
 
%
Operating income
7.3
 %
 
10.7
 %
 
5.9
 %
 
8.8
%
Interest and investment income/(expense), net
0.1
 %
 
 %
 
 %
 
%
Other non-operating income/(expense), net
 %
 
 %
 
 %
 
%
Income before income taxes
7.4
 %
 
10.7
 %
 
5.9
 %
 
8.8
%
Income tax provision
2.7
 %
 
4.4
 %
 
2.3
 %
 
3.6
%
Net income
4.7
 %
 
6.3
 %
 
3.6
 %
 
5.2
%
The following table sets forth selected data from our Condensed Consolidated Statements of Operations expressed as a percentage change from the comparable prior period:
 
 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014

November 2, 2013
 
November 1, 2014

November 2, 2013
 
increase/(decrease)
Net sales
(1.6
)%
 
7.3
%
 
0.8
 %
 
5.8
 %
Gross margin
(7.2
)%
 
3.3
%
 
(4.0
)%
 
3.2
 %
Operating income
(33.6
)%
 
5.2
%
 
(32.6
)%
 
(0.6
)%
Net income
(27.5
)%
 
1.1
%
 
(30.7
)%
 
(2.5
)%

Sales and Sales-Related Metrics
The following tables set forth certain sales and sales-related metrics:
 
 
Quarter Ended
 
November 1, 2014

November 2, 2013

Sales

Comp %

Sales

Comp %
Sales and Comparable Sales
($ in thousands)
Ann Taylor brand







Ann Taylor (1)
$
159,759


(4.8
)%

$
172,172


4.4
 %
Ann Taylor Factory
73,235


(10.4
)%

77,003


(6.9
)%
Total Ann Taylor brand
$
232,994


(6.6
)%

$
249,175


0.6
 %
LOFT brand







LOFT (2)
$
331,711


(3.3
)%

$
336,874


6.3
 %
LOFT Outlet
82,100


(1.0
)%

71,483


1.8
 %
Total LOFT brand
$
413,811


(2.9
)%

$
408,357


5.6
 %
Total Company
$
646,805


(4.3
)%

$
657,532


3.7
 %




17


Sales and Sales-Related Metrics (Continued)

 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
Sales
 
Comp %
 
Sales
 
Comp %
Sales and Comparable Sales
($ in thousands)
Ann Taylor brand
 
 
 
 
 
 
 
Ann Taylor (1)
$
478,419

 
(1.0
)%
 
$
488,762

 
6.6
 %
Ann Taylor Factory
224,472

 
(6.3
)%
 
224,843

 
(6.7
)%
Total Ann Taylor brand
$
702,891

 
(2.7
)%
 
$
713,605

 
1.9
 %
LOFT brand
 
 
 
 
 
 
 
LOFT (2)
$
952,539

 
(3.5
)%
 
$
955,744

 
3.1
 %
LOFT Outlet
230,627

 
(0.3
)%
 
200,887

 
(2.8
)%
Total LOFT brand
$
1,183,166

 
(2.9
)%
 
$
1,156,631

 
2.1
 %
Total Company
$
1,886,057

 
(2.8
)%
 
$
1,870,236

 
2.0
 %

(1)
Includes sales at Ann Taylor stores and anntaylor.com.
(2)
Includes sales at LOFT stores, LOFT.com and Lou & Grey stores.


 
Quarter Ended
 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
November 1, 2014
 
November 2, 2013
Sales-Related Metrics
 
 
 
 
 
 
 
Average Dollars Per Transaction (“DPT”)
 
 
 
 
 
 
 
Ann Taylor brand
$
78.82

 
$
78.86

 
$
77.46

 
$
76.46

LOFT brand
66.70

 
65.98

 
62.74

 
62.18

Average Units Per Transaction (“UPT”)
 
 
 
 
 
 
 
Ann Taylor brand
2.47

 
2.51

 
2.49

 
2.48

LOFT brand
2.65

 
2.73

 
2.68

 
2.68

Average Unit Retail (“AUR”)
 
 
 
 
 
 
 
Ann Taylor brand
$
31.91

 
$
31.42

 
$
31.11

 
$
30.83

LOFT brand
25.17

 
24.17

 
23.41

 
23.20























18


Store Data
    
The following tables set forth certain store data:
 
Quarter Ended
 
November 1, 2014
 
November 2, 2013
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
(square feet in thousands)
Stores and Square Footage
 
 
 
 
 
 
 
Ann Taylor brand
 
 
 
 
 
 
 
Ann Taylor
261

 
1,246

 
276

 
1,371

Ann Taylor Factory
115

 
772

 
106

 
721

Total Ann Taylor brand
376

 
2,018

 
382

 
2,092

LOFT brand
 
 
 
 
 
 
 
LOFT (1)
548

 
3,106

 
537

 
3,073

LOFT Outlet
126

 
824

 
108

 
719

Total LOFT brand
674

 
3,930

 
645

 
3,792

Total Company
1,050

 
5,948

 
1,027

 
5,884

Number of Company operated:
 
 
 
 
 
 
 
Stores open at beginning of period
1,040

 
5,939

 
1,007

 
5,788

New stores (2)
14

 
67

 
20

 
104

Downsized/expanded stores, net (3)

 
(5
)
 

 
(8
)
Closed stores
(4
)
 
(53
)
 

 


Stores open at end of period
1,050

 
5,948

 
1,027

 
5,884

 
Nine Months Ended
 
November 1, 2014
 
November 2, 2013
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
(square feet in thousands)
Number of Company operated:
 
 
 
 
 
 
 
Stores open at beginning of period
1,025

 
5,873

 
984

 
5,685

New stores (4)
44

 
237

 
54

 
281

Downsized/expanded stores, net (5)

 
(31
)
 

 
(22
)
Closed stores
(19
)
 
(131
)
 
(11
)
 
(60
)
Stores open at end of period
1,050

 
5,948

 
1,027

 
5,884

International franchise stores open at end of period (6)
2

 
 
 

 
 

(1)
Includes Lou & Grey stores.
(2)
During the quarter ended November 1, 2014, we opened two new Ann Taylor stores, two new Ann Taylor Factory stores, four new LOFT stores, four new LOFT Outlet stores and two new Lou & Grey stores. During the quarter ended November 2, 2013, we opened one new Ann Taylor store, one new Ann Taylor Factory store, 12 new LOFT stores and six new LOFT Outlet stores.
(3)
During the quarter ended November 1, 2014, we downsized two Ann Taylor stores. During the quarter ended November 2, 2013, we downsized three Ann Taylor stores, three LOFT stores and expanded one LOFT store.
(4)
During the nine months ended November 1, 2014, we opened two new Ann Taylor stores, seven new Ann Taylor Factory stores, 17 new LOFT stores, 16 new LOFT Outlet stores, two new Lou & Grey stores and one Lou & Grey shop-in-shop within an existing LOFT store. During the nine months ended November 2, 2013, we opened five new Ann Taylor stores, five new Ann Taylor Factory stores, 32 new LOFT stores and 12 new LOFT Outlet stores.
(5)
During the nine months ended November 1, 2014, we downsized four Ann Taylor stores, four LOFT stores and one LOFT Outlet store. During the nine months ended November 2, 2013, we downsized nine Ann Taylor stores, one Ann Taylor Factory store and five LOFT stores and expanded two LOFT stores.
(6)
International franchise stores are not considered in brand-level or Company operated stores and square footage data.


19


Total net sales for the quarter ended November 1, 2014 decreased 1.6% over the comparable 2013 period, with comparable sales down 4.3%. The decrease in net sales was primarily due to the net impact of weak traffic across the industry and a highly promotional retail environment, which contributed to the decline in total comparable sales, partially offset by increased sales at our Websites and net store growth over the comparable 2013 period. In addition, sales during the first half of the quarter were negatively impacted by product shipment delays related to labor uncertainty at the West Coast ports, which were mitigated by the use of air freight later in the quarter. Approximately one-third of the decline in comparable sales for the quarter ended November 1, 2014 was offset by higher sales at our Websites.
During the nine months ended November 1, 2014, total net sales increased 0.8% over the comparable 2013 period, with comparable sales down 2.8%. The increase in net sales was primarily due to the impact of net store growth and higher revenue related to our private label and co-branded credit card program, partially offset by the decline in total comparable sales. Approximately one-half of the decline in comparable sales for the nine months ended November 1, 2014 was offset by higher sales at our Websites. Overall, our sales results were impacted by softer traffic trends and a highly promotional retail environment throughout much of the period.
At the Ann Taylor brand, total net sales for the quarter and nine months ended November 1, 2014 decreased $16.2 million, or 6.5%, and $10.7 million, or 1.5%, respectively, over the comparable prior-year periods, with comparable sales down 6.6% and 2.7%, respectively. At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, net sales for the third quarter and nine months ended November 1, 2014 decreased $12.4 million, or 7.2%, and $10.3 million, or 2.1%, respectively, over the comparable period-year periods. These decreases were driven by a year-over-year net decrease in stores, soft traffic and the highly promotional retail environment, as well as soft product performance in select categories during the third quarter of Fiscal 2014, which contributed to comparable sales declines of 4.8% and 1.0% for the quarter and nine-month periods, respectively. At Ann Taylor Factory, net sales for the third quarter and nine months ended November 1, 2014 decreased $3.8 million, or 4.9%, and $0.4 million, or 0.2%, respectively, over the comparable prior-year periods, primarily due to comparable sales declines of 10.4% and 6.3% for the third quarter and nine-month periods, respectively, partially offset by the impact of net store growth. Continuing traffic challenges and the highly promotional environment in factory outlet centers, as well as soft product performance in certain categories, contributed to decreases in AUR and DPT during both the quarter and nine-month periods.
At the LOFT brand, total net sales for the quarter and nine months ended November 1, 2014 increased $5.5 million, or 1.3%, and $26.5 million, or 2.3%, respectively, over the comparable prior-year periods, with comparable sales decreasing 2.9% in both periods. At LOFT, which includes LOFT stores, LOFT.com and Lou & Grey stores, net sales for the third quarter and nine months ended November 1, 2014 decreased $5.2 million, or 1.5%, and $3.2 million, or 0.3%, respectively, over the comparable prior-year periods. LOFT experienced soft product performance in certain categories during the first half of the year, primarily in basic knit tops, and was also affected by product shipment delays during the first half of the third quarter, which impacted our inventory position in key categories including pants and sweaters. Sales improved significantly as product arrived by late September, which contributed to increased full price sell-through and higher AUR during the third quarter of Fiscal 2014. Despite this, the continued impact of soft traffic and a highly promotional retail environment contributed to comparable sales declines of 3.3% and 3.5% for the third quarter and nine-month periods, respectively. At LOFT Outlet, net sales for the third quarter and nine months ended November 1, 2014 increased $10.6 million, or 14.9%, and $29.7 million, or 14.8%, respectively, over the comparable prior-year periods, primarily due to net store growth. Although strong product and effective promotions helped drive increases in conversion, UPT and DPT, traffic challenges in factory outlet centers resulted in comparable sales decreases of 1.0% and 0.3% for the third quarter and nine-month periods, respectively.










20


Cost of Sales and Gross Margin
The following table presents cost of sales and gross margin in dollars and gross margin as a percentage of net sales:
 
Quarter Ended
 
Nine Months Ended
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
 
(dollars in thousands)
Cost of sales
$
306,863

 
$
291,312

 
$
891,318

 
$
834,174

Gross margin
$
339,942

 
$
366,220

 
$
994,739

 
$
1,036,062

Percentage of net sales
52.6
%
 
55.7
%
 
52.7
%
 
55.4
%

Gross margin as a percentage of net sales for the quarter ended November 1, 2014 decreased 310 basis points to 52.6%, down from 55.7% in the comparable 2013 period. For the nine months ended November 1, 2014, gross margin as a percentage of net sales decreased 270 basis points to 52.7%, down from 55.4% in the comparable 2013 period. The overall decrease in gross margin rate performance for both the third quarter and nine-month periods was primarily due to lower merchandise gross margin rate, which was negatively impacted by continued traffic challenges and the highly competitive retail environment, both of which caused us to be more promotional than planned at both brands in order to clear through inventory. Further, during the quarter ended November 1, 2014, labor uncertainty at the West Coast ports resulted in higher levels of air transportation to ensure on-time delivery of key merchandise, which resulted in approximately $5 million in incremental shipping costs. We expect this issue to continue into the fourth quarter and currently anticipate our fourth quarter gross margin results will be impacted by approximately $8 million in incremental shipping costs. Finally, full-price sell-through at Ann Taylor was down in certain categories during the third quarter, further pressuring gross margin rate during the period, while soft product performance in certain categories at LOFT during the first half of the fiscal year impacted merchandise gross margin rate performance during the nine-month period.
Selling, General and Administrative Expenses
The following table presents selling, general and administrative expenses in dollars and as a percentage of net sales:
 
 
Quarter Ended
 
Nine Months Ended
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 1,
2014
 
(dollars in thousands)
Selling, general and administrative expenses
$
293,215

 
$
295,813

 
$
866,619

 
$
871,764

Percentage of net sales
45.3
%
 
45.0
%
 
45.9
%
 
46.6
%

Selling, general and administrative expenses for the quarter and nine months ended November 1, 2014 decreased approximately $2.6 million and $5.1 million, respectively, versus the comparable prior-year periods, despite the impact of a $5.0 million charge recorded during the third quarter of Fiscal 2014 related to the early lease termination and related closure of our Ann Taylor store on Madison Avenue in New York City. The decrease in selling, general and administrative expenses for both the quarter and nine month periods was primarily due to lower performance-based compensation expense, a reduction in marketing expenses and savings realized as a result of our first quarter 2014 restructuring. These decreases were partially offset by higher occupancy costs and other variable expenses related to store growth, the impact of the above-mentioned charge, as well as other expenses to support the expansion of our business.
As a percentage of net sales, selling, general and administrative expenses for the quarter ended November 1, 2014 increased 30 basis points versus the comparable prior-year period, reflecting the impact of lower net sales, the charge associated with our Ann Taylor Madison Avenue lease termination and related store closure and an increase in other expenses to support the expansion of our business. This was partially offset by a decrease in marketing and performance-based compensation expenses and savings associated with our first quarter 2014 restructuring. 
As a percentage of net sales, selling, general and administrative expenses for the nine months ended November 1, 2014 decreased 70 basis points versus the comparable prior-year period, reflecting the impact of lower marketing and performance-based compensation expenses, as well as savings associated with our first quarter 2014 restructuring. These decreases were partially offset by an increase in occupancy costs, including the impact of the charge associated with our Ann Taylor Madison Avenue lease termination and related store closure, as well as other expenses to support the expansion of our business.



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Restructuring Charge
In connection with our first quarter 2014 organizational realignment, we recorded a pre-tax restructuring charge of approximately $17.3 million for severance and other costs in the first quarter of Fiscal 2014. The restructuring is expected to result in pre-tax operating savings of approximately $20 million in Fiscal 2014, of which approximately $12 million was realized during the nine months ended November 1, 2014, and ongoing annual savings of approximately $25 million in Fiscal 2015 and thereafter. For additional information, see Note 2, “Restructuring Charge,” in the Notes to Condensed Consolidated Financial Statements.

Income Taxes
The following table presents our income tax provision and effective income tax rate: 
 
Quarter Ended
 
Nine Months Ended
 
November 1,
2014
 
November 2,
2013
 
November 1,
2014
 
November 2,
2013
 
(dollars in thousands)
Income tax provision
$
17,206

 
$
28,854

 
$
42,789

 
$
66,822

Effective income tax rate
36.6
%
 
41.2
%
 
38.7
%
 
40.6
%

Our effective income tax rate was 36.6% for the quarter ended November 1, 2014 as compared to 41.2% for the comparable 2013 period, primarily due to tax credits taken related to prior open periods as well as certain other discrete items. We expect our full year effective income tax rate to be approximately 39%.

Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operations, available cash and cash equivalents and availability under our revolving credit facility. Our primary ongoing cash requirements relate to working capital needs, retail store expansion, store renovation and refurbishment, investments in technology and additional share repurchases.
The following table sets forth certain measures of our liquidity:
 
 
November 1,
2014
 
February 1,
2014
 
November 2,
2013
 
(dollars in thousands)
Working capital
$
246,795

 
$
231,472

 
$
205,662

Current ratio
1.77:1

 
1.70:1

 
1.57:1


Operating Activities
Cash provided by operating activities was $35.0 million for the nine months ended November 1, 2014, compared with $104.8 million for the nine months ended November 2, 2013. The year-over-year decrease in cash provided by operating activities is primarily the result of lower net income, adjusted for non-cash expenses, higher year-over-year income tax payments, the lease termination payment associated with our Madison Avenue store closing and changes in merchandise inventories, partially offset by lower payments under our incentive compensation plans.
Merchandise inventories increased approximately $29.0 million, or 9.6%, at November 1, 2014 compared to November 2, 2013. On a per-square foot basis, merchandise inventories at November 1, 2014 increased approximately 8% as compared to November 2, 2013, reflecting increases of 22% at Ann Taylor, 3% at LOFT and 8% in the factory/outlet channel. The increase in inventory per square foot at Ann Taylor primarily reflects a change in merchandise mix and, to a lesser extent, slightly higher unit inventory compared to the the prior year. The increase in inventory per square foot at LOFT primarily reflects a change in merchandise mix compared to the prior year. In our factory/outlet channel, the increase in inventory per square foot primarily reflects a shift in the timing of merchandise receipts versus last year.

Investing Activities
Cash used for investing activities was $85.7 million for the nine months ended November 1, 2014, compared with $105.4 million for the nine months ended November 2, 2013. Cash used for investing activities was primarily driven by capital expenditures related to our store expansion and refurbishment projects during both periods.



22


Financing Activities
Cash used for financing activities was $41.2 million for the nine months ended November 1, 2014, compared with $47.3 million for the nine months ended November 2, 2013. Cash used for financing activities was primarily for the repurchase of common stock under our securities repurchase programs during both periods. During the current-year period, this was more significantly offset by cash inflows related to a higher level of stock option exercise activity.

Repurchase Program
During the nine months ended November 1, 2014, we repurchased 1.3 million shares of our common stock through open market purchases under our $250 million securities repurchase program at a cost of $50 million.  See Note 5, “Equity and Incentive Compensation Plans,” in the Notes to Condensed Consolidated Financial Statements for further discussion.

Revolving Credit Facility
On December 19, 2012, our wholly-owned subsidiary, AnnTaylor, Inc., and certain of its subsidiaries, entered into a Fourth 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 the then existing senior secured revolving credit facility due to expire in April 2013.
The Credit Facility, which expires on December 19, 2017, includes a $75 million sub-facility solely for loans and letters of credit to be provided to ANN Canada Inc., a wholly-owned subsidiary of AnnTaylor, Inc., and an option to expand the total facility and the aggregate commitments thereunder up to $400 million, subject to the lenders’ agreement to increase their commitment for the requested amount. The Credit Facility may be used for working capital, letters of credit and other corporate purposes, and contains an acceleration clause which, upon the occurrence of an Event of Default, including but not limited to, a Material Adverse Effect, as defined in the Credit Facility, may cause any outstanding borrowings to become immediately due and payable.
The maximum availability for loans and letters of credit under the Credit Facility is governed by a quarterly borrowing base, determined by the application of specified percentages to certain eligible assets, primarily accounts receivable and inventory. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $9.9 million, $11.0 million and $11.6 million as of November 1, 2014, February 1, 2014 and November 2, 2013, respectively, leaving a remaining available balance for loans and letters of credit of $240.1 million, $171.4 million and $238.4 million, respectively. There were no borrowings outstanding under the Credit Facility at November 1, 2014, February 1, 2014November 2, 2013 or as of November 21, 2014, the date of this filing.

Credit Card Program
We have a credit card program that offers eligible clients in the United States the choice of a private label or co-branded credit card. All cardholders are automatically enrolled in our exclusive rewards program, which is designed to recognize and promote client loyalty. We provide the sponsoring bank with marketing support of the program, and use our sales force to process credit card applications for both the private label and co-branded credit cards. On December 2, 2013, we entered into an eight-year agreement with the sponsoring bank, which amended and restated the original agreement that began in October 2008. As with the original agreement, we received an upfront signing bonus from the sponsoring bank and also receive ongoing payments 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 and accordingly, are recognized as revenue ratably based on the total projected revenues over the term of the agreement.
Certain judgments and estimates underlie our projected revenues and related expenses under the program, including projected future store counts, the number of applications processed, our projected sales growth and points breakage, among other things. During the quarters ended November 1, 2014 and November 2, 2013, we recognized approximately $16.3 million and $11.4 million of revenue related to the credit card program, respectively. During the nine months ended November 1, 2014 and November 2, 2013, we recognized approximately $36.6 million and $16.2 million of revenue related to the credit card program, respectively. At November 1, 2014, February 1, 2014 and November 2, 2013, approximately $4.0 million, $3.0 million and $2.0 million, respectively, of deferred credit card income is included in “Accrued expenses and other current liabilities” on our Condensed Consolidated Balance Sheets. Additionally, in connection with the December 2013 agreement, $18.1 million and $20.7 million of long-term deferred credit card income is included in “Other liabilities” on our Consolidated Balance Sheets at November 1, 2014 and February 1, 2014, respectively. Partially offsetting the income from the credit card program are costs, net of points breakage, related to our client loyalty program. These costs are included in either Cost of sales or in Net sales as a Sales discount, as appropriate. The Cost of sales impact, net of points breakage, was approximately $3.2 million and $1.7 million for the quarters ended November 1, 2014 and November 2, 2013,

23


respectively, and approximately $9.2 million and $4.0 million for the nine months ended November 1, 2014 and November 2, 2013, respectively. The Sales discount impact was approximately $5.8 million and $1.7 million for the quarters ended November 1, 2014 and November 2, 2013, respectively, and approximately $14.3 million and $4.6 million for the nine months ended November 1, 2014 and November 2, 2013, respectively.

Other
Foreign cash balances at November 1, 2014 were $3.7 million, the majority of which was held in Canadian dollars. As of February 1, 2014 and November 2, 2013, we had foreign cash balances of $2.1 million and $2.9 million, respectively.
On October 1, 2007, we froze our noncontributory defined benefit pension plan (the “Pension Plan”). Our Pension Plan is invested in readily liquid investments, primarily equity and debt securities. Although we are not required to make a contribution to the Pension Plan in Fiscal 2014, any deterioration in the financial markets or changes in discount rates may require us to make a contribution to our Pension Plan in the future.
We are self-insured for expenses related to our employee point of service medical plan, our workers’ compensation plan, general liability plan and for short-term and long-term disability, up to certain thresholds.

24



Critical Accounting Policies and Estimates
Our discussion and analysis of our results of operations and capital resources are based on the Condensed Consolidated Financial Statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and use assumptions that affect the reported amounts in the financial statements and accompanying notes, including revenue, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities. Management has determined that our most critical accounting estimates are those related to revenue recognition, merchandise inventory valuation, asset impairment, income taxes and stock and other incentive-based compensation. Actual results in these areas could differ from management’s estimates. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes in the information concerning our Critical Accounting Policies and Estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
We have significant amounts of cash and cash equivalents on deposit at FDIC-insured financial institutions that are currently in excess of federally insured limits, therefore, we cannot be assured that we will not experience losses with respect to those deposits. We continually evaluate our deposit investment options in accordance with our corporate investment policy and certain restrictions on permitted investments contained in our Credit Facility.
We are exposed to limited market risk, primarily related to foreign currency exchange. We have exchange rate exposure primarily with respect to certain revenues and costs denominated in the Canadian dollar. As of November 1, 2014, our monetary assets and liabilities subject to this exposure are immaterial, therefore, the potential immediate loss to us that would result from a hypothetical 10% change in foreign currency exchange rates would not be expected to have a material impact on our earnings or cash flows.
Our Credit Facility allows for investments in financial instruments with original maturity dates of up to 360 days. As of November 1, 2014, we did not hold any investments that did not qualify as cash and cash equivalents.

Item 4.    Controls and Procedures.
The Company conducted an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, 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), as of the end of the period covered by this filing. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this filing.
During the third quarter of Fiscal 2014, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As of November 1, the Company continued to utilize the Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and plans to transition to the Internal Control – Integrated Framework (2013) by the end of Fiscal 2014.



25




PART II. OTHER INFORMATION

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

The following table sets forth information concerning purchases of our common stock for the periods indicated, which, upon repurchase, are classified as treasury shares available for general corporate purposes:
 
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
Per Share
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Program (2)
 
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under Publicly
Announced
Program
 
 
 
 
 
 
 
(in thousands)
August 3, 2014 to August 30, 2014

 
$

 

 
200,000

August 31, 2014 to October 4, 2014
617

 
41.72

 

 
200,000

October 5, 2014 to November 1, 2014

 

 

 
200,000

 
617

 
 
 

 
 
 
(1)
Represents 617 shares of restricted stock purchased in connection with employee tax withholding obligations under our equity compensation plans, which are not purchases under our publicly announced program.
(2)
On August 21, 2013, our Board of Directors approved a new $250 million securities repurchase program (the “Repurchase Program”). There were no repurchases made under the Repurchase Program during the quarter ended November 1, 2014. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors.

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.
 
 
101.INS
XBRL Instance
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation
 
 
101.DEF
XBRL Taxonomy Extension Definition
 
 
101.LAB
XBRL Taxonomy Extension Labels
 
 
101.PRE
XBRL Taxonomy Extension Presentation
 
*
Filed electronically herewith.
°
Furnished electronically herewith.


26


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.
 
 
 
ANN INC.
 
 
 
 
Date:
November 21, 2014
By:
/s/    Kay Krill
 
 
 
Kay Krill
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
Date:
November 21, 2014
By:
/s/    Michael J. Nicholson
 
 
 
Michael J. Nicholson
 
 
 
Executive Vice President, Chief Operating Officer,
 
 
 
Chief Financial Officer and Treasurer
 
 
 
(Principal Financial Officer)


27


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.
 
 
101.INS
  
XBRL Instance
 
 
101.SCH
  
XBRL Taxonomy Extension Schema
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation
 
 
101.DEF
  
XBRL Taxonomy Extension Definition
 
 
101.LAB
  
XBRL Taxonomy Extension Labels
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation
 
*
Filed electronically herewith.
°
Furnished electronically herewith.


28