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 July 28, 2012

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 definition 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 July 27, 2012
Common Stock, $.0068 par value	47,324,330

INDEX TO FORM 10-Q

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended July 28, 2012 and July 30, 2011	4
	Condensed Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended July 28, 2012 and July 30, 2011	5
	Condensed Consolidated Balance Sheets at July 28, 2012, January 28, 2012 and July 30, 2011	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 28, 2012 and July 30, 2011	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 6.	Exhibits	25
SIGNATURES		26
EXHIBIT INDEX		27

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, and its ability to maintain the value of its brands;

• the Company's ability to manage inventory levels and changes in merchandise mix;

• the Company's ability to successfully implement its business transformation initiatives and upgrade and maintain its information systems, including adequate system security controls, successful transitioning of certain information technology functions to third parties and the ability to operate in accordance with its business continuity plan in the event of a disruption;

• the Company's reliance on key management and its ability to hire, retain and train qualified associates;

• the performance and operation of the Company's websites and the risks associated with Internet sales;

• the Company's ability to successfully execute brand goals, objectives and new concepts;

• the impact of fluctuations in sourcing costs, in particular increases in the costs of raw materials, labor, fuel and transportation;

• the depressed levels of consumer spending and consumer confidence resulting from the worldwide economic downturn and financial crisis;

• the Company's ability to secure and protect trademarks and other intellectual property rights;

• the Company's reliance on foreign sources of production and the associated risks of doing business in foreign markets, including fluctuations in the value of the U.S. dollar against foreign currencies, the imposition of duties or other possible trade law or import restrictions, including legislation relating to import quotas, and financial or political instability in any of the countries in which the Company's merchandise is manufactured;

• 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 Company's ability to successfully manage store growth and optimize the productivity and profitability of its store portfolio;

• the impact of a privacy breach and the resulting effect on the Company's business and reputation;

• 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 failure by independent manufacturers to comply with the Company's social compliance program requirements;

• the effect of competitive pressures from other retailers;

• the effect of continued uncertainty in the global economy on the Company's liquidity and capital resources;

• the Company's dependence on its Louisville distribution center and third-party distribution facilities and transportation companies, including any significant interruptions due to work stoppages, slowdowns or strikes by employees of the third-party vendors that it utilizes;

• the impact on the Company's stock price relating to the Company's level of sales and earnings growth;

• acts of war or terrorism in the United States or worldwide, and the potential impact of natural disasters and public health concerns, including severe infectious diseases, particularly on the Company's foreign sourcing offices and the manufacturing operations of the Company's vendors;

• the Company's dependence on shopping malls and other retail centers to attract customers;

• the impact of potential consolidation of commercial and retail landlords on the Company's ability to negotiate favorable rental terms;

• the effect of external economic factors on the Company's future funding obligations for its defined benefit pension plan; and

• the impact of climate change on the Company's business.

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 Six Months Ended July 28, 2012 and July 30, 2011

(unaudited)

	Quarter Ended				Six Months Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
	(in thousands, except per share amounts)
Net sales	$	594,872	$	558,201	$	1,155,283	$	1,081,829
Cost of sales	262,471		251,400		505,511		475,076
Gross margin	332,401		306,801		649,772		606,753
Selling, general and administrative expenses	279,456		265,125		551,474		519,158
Operating income	52,945		41,676		98,298		87,595
Interest income	101		98		656		333
Interest expense	485		531		820		811
Income before income taxes	52,561		41,243		98,134		87,117
Income tax provision	21,826		16,451		38,667		35,011
Net income	$	30,735	$	24,792	$	59,467	$	52,106
Earnings per share:
Basic earnings per share	$	0.64	$	0.48	$	1.23	$	0.99
Weighted average shares outstanding	47,571		51,277		47,747		51,679
Diluted earnings per share	$	0.63	$	0.47	$	1.21	$	0.97
Weighted average shares outstanding, assuming dilution	48,118		52,161		48,398		52,625

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

4

ANN INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Quarters and Six Months Ended July 28, 2012 and July 30, 2011

(unaudited)

	Quarter Ended				Six Months Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
	(in thousands)				(in thousands)
Net income	$	30,735	$	24,792	$	59,467	$	52,106
Other comprehensive income:
Amortization of net loss included in net periodic pension benefit cost	175		24		350		47
Other comprehensive income, before tax	175		24		350		47
Income tax expense/(benefit) on other comprehensive income items	75		9		155		(30		)
Other comprehensive income, net of tax	100		15		195		77
Comprehensive income	$	30,835	$	24,807	$	59,662	$	52,183

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

5

ANN INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

July 28, 2012, January 28, 2012 and July 30, 2011

(unaudited)

	July 28, 2012			January 28, 2012			July 30, 2011
	(in thousands, except share amounts)
Assets
Current assets
Cash and cash equivalents	$	132,663		$	150,208		$	145,178
Accounts receivable	28,074			19,591			29,468
Merchandise inventories	221,634			213,447			213,686
Refundable income taxes	7,765			11,965			26,457
Deferred income taxes	32,122			30,999			25,845
Prepaid expenses and other current assets	65,816			49,107			64,513
Total current assets	488,074			475,317			505,147
Property and equipment, net	374,803			360,890			359,355
Deferred income taxes	29,361			39,134			27,514
Other assets	13,350			12,340			12,348
Total assets	$	905,588		$	887,681		$	904,364
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	97,725		$	94,157		$	97,501
Accrued salaries and bonus	31,080			16,122			22,094
Current portion of long-term performance compensation	29,750			19,373			17,835
Accrued tenancy	45,258			41,435			43,055
Gift certificates and merchandise credits redeemable	41,518			50,750			38,043
Accrued expenses and other current liabilities	81,293			64,060			70,458
Total current liabilities	326,624			285,897			288,986
Deferred lease costs	158,450			159,435			166,300
Deferred income taxes	1,250			1,320			1,040
Long-term performance compensation, less current portion	20,634			42,122			31,222
Other liabilities	30,455			35,030			22,893
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	811,382			811,707			798,992
Retained earnings	633,724			574,257			539,797
Accumulated other comprehensive loss	(5,123		)	(5,318		)	(2,301		)
Treasury stock, 35,239,186, 33,284,631 and 30,324,921 shares, respectively, at cost	(1,072,369		)	(1,017,330		)	(943,126		)
Total stockholders’ equity	368,175			363,877			393,923
Total liabilities and stockholders’ equity	$	905,588		$	887,681		$	904,364

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

6

ANN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended July 28, 2012 and July 30, 2011

(unaudited)

	Six Months Ended
	July 28, 2012			July 30, 2011
	(in thousands)
Operating activities:
Net income	$	59,467		$	52,106
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	8,425			6,230
Depreciation and amortization	46,365			47,992
Loss on disposal and write-down of property and equipment	1,354			533
Stock-based compensation	7,463			10,702
Non-cash interest and other non-cash items	307			228
Tax benefit from exercise/vesting of stock awards	5,390			6,483
Changes in assets and liabilities:
Accounts receivable	(8,483		)	(11,937		)
Merchandise inventories	(8,187		)	(20,061		)
Prepaid expenses and other current assets	(12,113		)	(7,146		)
Refundable income taxes	4,200			174
Other non-current assets and liabilities, net	1,309			15,227
Accounts payable and accrued expenses	(300		)	(30,533		)
Net cash provided by operating activities	105,197			69,998
Investing activities:
Purchases of marketable securities	(1,445		)	(550		)
Sales of marketable securities	17			84
Purchase of intangible asset	(250		)	—
Purchases of property and equipment	(59,642		)	(61,542		)
Net cash used for investing activities	(61,320		)	(62,008		)
Financing activities:
Proceeds from the issuance of common stock pursuant to the Associate Discount Stock Purchase Plan	1,154			1,189
Proceeds from exercise of stock options	11,080			6,532
Excess tax benefits from stock-based compensation	5,828			7,691
Repurchases of common and restricted stock	(79,086		)	(104,921		)
Repayments of fixed asset financing and capital lease obligations	(722		)	(810		)
Change in trade payable program obligation, net	324			863
Net cash used for financing activities	(61,422		)	(89,456		)
Net decrease in cash	(17,545		)	(81,466		)
Cash and cash equivalents, beginning of period	150,208			226,644
Cash and cash equivalents, end of period	$	132,663		$	145,178
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	668		$	640
Cash paid during the period for income taxes	$	28,311		$	22,463
Accrual for purchases of property and equipment	$	19,988		$	25,890

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

7

ANN INC.

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 intercompany accounts and transactions have been eliminated.

The results of operations for the 2012 interim periods presented in the Condensed Consolidated Financial Statements are not necessarily indicative of results to be expected for Fiscal 2012.

The January 28, 2012 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 January 28, 2012.

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 January 28, 2012. The Company believes that the disclosures made are adequate to prevent the financial statements from being misleading.

2. Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 amended ASC 220-10, Comprehensive Income, and requires that all changes in comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and also requires the presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. In December 2011, the FASB issued ASU 2011-12, Presentation of Comprehensive Income, which indefinitely deferred the requirement of ASU 2011-05 related to presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  No other requirements of ASU 2011-05 were impacted by ASU 2011-12.  ASU 2011-05, as modified by ASU 2011-12, became effective and was adopted by the Company in the first quarter of Fiscal 2012 by presenting separate but consecutive statements. See the Condensed Consolidated Statements of Comprehensive Income for more information.

3. 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.

8

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

3. Fair Value Measurements (Continued)

The following tables segregate all financial assets and liabilities of the Company 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:

	July 28, 2012		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 (1)	$	5,889	$	2,037	$	3,852	$	—
Total assets	$	5,889	$	2,037	$	3,852	$	—
	January 28, 2012		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 (1)	$	4,149	$	1,309	$	2,840	$	—
Total assets	$	4,149	$	1,309	$	2,840	$	—

	July 30, 2011		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 (1)	$	3,240	$	1,073	$	2,167	$	—
Total assets	$	3,240	$	1,073	$	2,167	$	—

(1) 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. Certain of the investment assets of the rabbi trust are valued based on quoted market prices, which are considered Level 1 inputs, with the remainder valued based on quoted prices for identical securities in markets that are not active, which are considered Level 2 inputs.

At July 28, 2012, 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.

4. Earnings Per Share

Basic earnings per share is calculated by dividing net 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 discussed in ASC 260-10, Earnings Per Share.

The determination and reporting of earnings per share requires the inclusion of time and performance-based 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 income, participating securities have the effect of diluting both basic and diluted earnings per share. During periods of net loss, no effect is given to participating securities, since they do not share in the losses of the Company.

9

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

4.Earnings Per Share (Continued)

The following table presents a reconciliation of basic and diluted earnings per share for the quarters and six months ended July 28, 2012 and July 30, 2011:

	Quarter Ended
	July 28, 2012					July 30, 2011
	(in thousands, except per share amounts)
Basic Earnings per Share:	Net Income		Shares	Per Share Amount		Net Income		Shares	Per Share Amount
Net income	$	30,735				$	24,792
Less net income associated with participating securities	446					421
Basic earnings per share	$	30,289	47,571	$	0.64	$	24,371	51,277	$	0.48
Diluted Earnings per Share:
Net income	$	30,735				$	24,792
Less net income associated with participating securities	441					414
Effect of dilutive securities			547					884
Diluted earnings per share	$	30,294	48,118	$	0.63	$	24,378	52,161	$	0.47
	Six Months Ended
	July 28, 2012					July 30, 2011
	(in thousands, except per share amounts)
Basic Earnings per Share:	Net Income		Shares	Per Share Amount		Net Income		Shares	Per Share Amount
Net income	$	59,467				$	52,106
Less net income associated with participating securities	884					881
Basic earnings per share	$	58,583	47,747	$	1.23	51,225		51,679	$	0.99
Diluted Earnings per Share:
Net income	$	59,467				$	52,106
Less net income associated with participating securities	872					865
Effect of dilutive securities			651					946
Diluted earnings per share	$	58,595	48,398	$	1.21	$	51,241	52,625	$	0.97

For the quarter and six months ended July 28, 2012, non-participating securities (stock options) representing 2,220,200 and 2,147,825 shares of common stock, respectively, were excluded from the above computations 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. In addition, non-participating securities (performance-based restricted units) representing 12,334 shares of common stock were excluded from the above computation of weighted average shares for diluted earnings per share for the six months ended July 28, 2012, due to the fact that they are contingently issuable securities whose contingency was not met at certain dates during the six months then ended. No such contingently issuable securities were excluded from the computation of weighted average shares for diluted earnings per share for the quarter ended July 28, 2012.

10

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

4.Earnings Per Share (Continued)

For the quarter and six months ended July 30, 2011, non-participating securities (stock options) representing 1,667,283 and 1,691,658 shares of common stock, respectively, were excluded from the above computations 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. In addition, non-participating securities (performance-based restricted units) representing 14,125 shares of common stock were excluded from the above computation of weighted average shares for diluted earnings per share for the six months ended July 30, 2011, due to the fact that they are contingently issuable securities whose contingency was not met at certain dates during the six months then ended. No such contingently issuable securities were excluded from the computation of weighted average shares for diluted earnings per share for the quarter ended July 30, 2011.

5. Equity and Incentive Compensation Plans

Stock Incentive Plans

During the quarter and six months ended July 28, 2012, the Company recognized approximately $4.1 million and $7.5 million, respectively, in total stock-based compensation expense. During the quarter and six months ended July 30, 2011, the Company recognized approximately $4.7 million and $10.7 million, respectively, in total stock-based compensation expense. As of July 28, 2012, there was $9.5 million, $11.1 million, and $1.6 million of unrecognized compensation cost related to unvested stock options, unvested restricted stock awards and unvested restricted unit awards, respectively, which is expected to be recognized over a remaining weighted average vesting period of 2.1 years, 2.1 years and 0.7 years, respectively. Restricted stock award grants, restricted unit award vestings and shares underlying stock option exercises during the six months ended July 28, 2012 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 stock option exercises and restricted stock award vestings, were returned to treasury stock.

Stock Options

The following table summarizes stock option activity for the six months ended July 28, 2012:

	Six Months Ended
	July 28, 2012
	Shares		Weighted  Average Exercise Price
Options outstanding at beginning of period	4,498,817		$	22.18
Granted (1)	514,750		27.85
Exercised	(827,049	)	13.40
Forfeited or expired	(194,885	)	27.46
Options outstanding at end of period	3,991,633		$	24.47
Vested and exercisable at July 28, 2012	2,822,658		$	24.57
Options expected to vest in the future as of July 28, 2012	1,022,530		$	24.32

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

11

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5.     Equity and Incentive Compensation Plans (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 quarters and six months ended July 28, 2012 and July 30, 2011, the fair value of options granted was estimated using the following assumptions:

	Quarter Ended				Six Months Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
Expected volatility	—	%	56.3	%	54.6	%	57.1	%
Risk-free interest rate	—	%	1.6	%	0.9	%	1.8	%
Expected life (years)	—		4.54		4.40		4.54
Dividend yield	—		—		—		—

There were no options granted during the quarter ended July 28, 2012. The weighted average fair value of options granted during the quarter ended July 30, 2011 was $13.08 per share. The weighted average fair value of options granted during the six months ended July 28, 2012 and July 30, 2011 was $12.36 and $13.21 per share, respectively. 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 six months ended July 28, 2012:

	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 28, 2012	523,096			$	18.40	247,003			$	17.13
Granted	302,562		(1)	27.69		146,500		(2)	27.85
Vested	(316,089	)		13.98		(81,364	)		10.44
Forfeited	(27,087	)		25.12		(94,467	)		14.90
Restricted stock awards at July 28, 2012	482,482			$	26.74	217,672			$	27.81

(1) Of this amount, 257,375 shares vest in equal installments in each of March 2013, 2014 and 2015, 4,000 shares vest in equal installments in each of March 2013 and 2014 and 41,187 shares vest in May 2013.

(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 150% 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.

Restricted Units

The following table summarizes restricted unit activity for the six months ended July 28, 2012:

	Time - Based				Performance - Based
	Number of Shares		Weighted  Average Grant Date Fair Value		Number of Shares		Weighted  Average Grant Date Fair Value
Restricted unit awards at January 28, 2012	175,353		$	19.58	98,670		$	19.58
Vested	(86,165	)	19.58		(27,871	)	19.58
Forfeited	(7,836	)	19.58		(21,462	)	19.58
Restricted unit awards at July 28, 2012	81,352		$	19.58	49,337		$	19.58

12

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5.     Equity and Incentive Compensation Plans (Continued)

Long-Term Performance Compensation

The Company maintains a long-term cash incentive program, the Restricted Cash Program (“RCP”) for vice-presidents and above. During the quarters ended July 28, 2012 and July 30, 2011, the Company recognized $3.3 million and $11.2 million in compensation expense under the RCP, a portion of which results from changes in estimates. During the six months ended July 28, 2012 and July 30, 2011, the Company recognized $8.2 million and $16.8 million in compensation expense under the RCP, a portion of which results from changes in estimates. As of July 28, 2012, there was $35.6 million of unrecognized compensation cost under the RCP, which is expected to be recognized over a remaining weighted average deferral period of 2.3 years.

6. Debt and Other Financing Arrangements

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. On February 28, 2012, the Company amended the Credit Facility to make certain technical, non-substantive modifications. The Credit Facility provides the Company with an option to increase 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 an Event of Default, which includes, but is 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 monthly borrowing base, determined by the application of specified percentages of certain eligible assets. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $14.1 million, $16.7 million and $15.6 million as of July 28, 2012, January 28, 2012 and July 30, 2011, respectively, leaving a remaining available balance for loans and letters of credit of $172.6 million, $146.4 million and $167.1 million, respectively. There were no borrowings outstanding under the Credit Facility at July 28, 2012, January 28, 2012, July 30, 2011 or August 17, 2012, the date of this filing.

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 (i) the federal funds rate plus a margin of 0.5% and (ii) the Bank of America prime rate, or 2) the LIBOR Rate (as defined in the Credit Facility), plus a margin of 1.25% to 1.75%, depending on the Average Daily Availability as defined in the Credit Facility. In addition, AnnTaylor, Inc. is required to pay the lenders a monthly commitment fee on the unused revolving loan commitment at a rate ranging from 0.325% to 0.375% per annum also depending on the Average Daily Availability. 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. Subject, in some cases, to specific exceptions, 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 and for certain other stated purposes.

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 other assets of AnnTaylor, Inc. and certain of its subsidiaries, as collateral for its obligations under the Credit Facility.

13

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

7. Employee Benefits

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

	Quarter Ended						Six Months Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
	(in thousands)						(in thousands)
Net periodic pension cost:
Interest cost	$	438		$	416		$	875		$	832
Expected return on plan assets	(378		)	(428		)	(755		)	(856		)
Amortization of actuarial loss	175			24			350			48
Net periodic pension cost	$	235		$	12		$	470		$	24

The Company froze its noncontributory defined benefit pension plan in October 2007. The Company was not required to make and did not make any contributions to its pension plan during the quarters or six months ended July 28, 2012 and July 30, 2011.

8. Securities Repurchase Program

On March 8, 2011, the Company’s Board of Directors approved a $200 million expansion of the Company’s existing securities repurchase program (the “Repurchase Program”), bringing the total authorized under the Repurchase Program to $600 million. 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. 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. Pursuant to the Repurchase Program, the Company repurchased 1.6 million shares and 3.1 million shares of its common stock through open market purchases during the quarter and six months ended July 28, 2012, respectively, at a cost of $40.0 million and $75.0 million, respectively. During the six months ended July 30, 2011, the Company repurchased 4.2 million shares of its common stock through open market purchases at a cost of $100.0 million. There were no repurchases made under the Repurchase Program during the quarter ended July 30, 2011. As of July 28, 2012 and August 17, 2012, the date of this filing, approximately $109.1 million remained available for share repurchases under the Repurchase Program.

9. 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. Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to ANN INC. and its wholly-owned subsidiaries.

Ann Taylor is an aspirational luxury brand that offers modern style while remaining true to its legacy as a destination for every generation of working women, with timeless wear-now and wear-to-work fashion of impeccable quality at compelling prices. LOFT provides versatile, accessible and affordable fashion that delivers feminine appeal, special and unexpected details, and a flattering fit, making our clients' style aspirations attainable.

Our Ann Taylor and LOFT brands offer a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories, coordinated as part of a strategy to provide modern styles that are versatile across all occasions and needs. We also offer updated past season best sellers from the Ann Taylor and LOFT merchandise collections at our Ann Taylor Factory and LOFT Outlet stores, respectively. In addition to our stores, our clients can shop online at www.anntaylor.com and www.LOFT.com (together, our “Online Stores”) or by phone at 1-800-DIAL-ANN and 1-888-LOFT-444. As of July 28, 2012, we operated 962 stores in 46 states, the District of Columbia and Puerto Rico.

Management Overview

Our Fiscal 2012 second quarter results reflect the benefit of strong top-line acceleration at our Ann Taylor brand, continued momentum at LOFT, strong gross margin rate performance at both brands and increased fixed cost leverage. Total net sales were up 6.6%, to $594.9 million, reflecting the impact of positive comparable sales results across all channels, compelling product and a value proposition that resonated with our clients at both our Ann Taylor and LOFT brands. As a result, we were able to take a more disciplined approach to promotional activity, running fewer full-store promotions and more category-specific and targeted promotions as compared to the second quarter of Fiscal 2011. These factors contributed to our strong gross margin rate performance of 55.9%, a record for a second quarter period. In addition, our continued efforts to aggressively manage costs, combined with the impact of higher net sales, resulted in a 50 basis-point decrease in selling, general and administrative costs as a percent of net sales. This contributed to net income of $30.7 million and diluted earnings per share of $0.63, a record for a second quarter period.

At the Ann Taylor brand, total comparable sales were up 5.6%, reflecting increases of 3.2% in the Ann Taylor stores channel, 29.0% in the Ann Taylor e-commerce channel and 2.1% at Ann Taylor Factory. At the Ann Taylor stores channel, we experienced a return to positive comparable sales results, with positive comparable sales every month of the quarter, driven by the successful execution of our product, pricing and promotional strategies. At anntaylor.com, our top-line results benefited from increased traffic, higher average order values and strong client response to our online exclusives. Ann Taylor Factory marked its eleventh consecutive quarter of positive comparable sales, driven by higher conversion. Looking ahead to the back half of Fiscal 2012, we plan to further evolve our merchandise offering to include a greater breadth of the assortment at opening price points. In addition, at Ann Taylor stores, we are expanding availability of the full breadth of our assortment to every store in the chain.

The LOFT brand achieved strong results during the second quarter of Fiscal 2012, building on its strong momentum by continuing to deliver feminine, casual, high-quality fashion at great value. LOFT's merchandise assortments were well-received across all categories and all channels of the brand, resulting in an overall comparable sales increase of 4.2%. By channel, LOFT stores delivered a 4.1% comparable sales increase, driven by compelling fashion and balanced merchandise assortments. Strong merchandise offerings also drove comparable sales performance at LOFT.com and LOFT Outlet, which saw comparable sales increases of 14.6% and 0.3%, respectively. At LOFT.com, traffic was up significantly throughout the quarter, however, our top-line results were impacted by constrained inventory levels during July. At LOFT Outlet, inventory levels were also constrained, which impacted the channel's top-line results, but contributed to higher levels of full-price sell-through and strong gross margin rate performance. We believe the LOFT brand is positioned to build on its momentum and expand its appeal to an even broader base of women to continue to drive profitable growth.

Throughout the second quarter, we continued to further our real estate strategy at both brands to optimize store productivity and enhance the presence of our brands. To this end, we opened three Ann Taylor stores in our new store format and one Ann Taylor Factory store. We also opened seven LOFT stores, continuing to execute on that brand's small- and mid-market growth strategy, and opened six new LOFT Outlet stores. We also closed two LOFT stores, and ended the quarter with 962 stores.

15

For the full year of fiscal 2012, we expect to open or downsize a total of 40 Ann Taylor stores in our highly productive and profitable new concept format. Together with the existing new concept stores, these stores will represent nearly one-third of the Ann Taylor store fleet by the end of the fiscal year. In addition, we plan to enhance an additional 100 Ann Taylor stores with a “capital light” refresh during the third quarter, capturing the look and feel of our new format stores in order to expand the brand's aspirational aesthetic across the fleet. In addition, we expect to open three Ann Taylor Factory stores. At LOFT, we plan to open approximately 25 LOFT stores and 20 LOFT Outlet stores during Fiscal 2012.

The Company remained committed to enhancing shareholder value and maintaining a healthy balance sheet and cash position. During the second quarter of Fiscal 2012, we repurchased approximately 1.6 million shares of our common stock at a cost of $40 million, and closed the quarter with $133 million in cash and no bank debt. We also continued to closely manage our inventory levels and ended the quarter with total inventory per square foot, excluding e-commerce, up 2% from the comparable period last year.

Overall, our businesses experienced significant growth in net sales, comparable sales, net income and diluted earnings per share during the second quarter of Fiscal 2012 as compared to the prior year.  Ann Taylor and LOFT both demonstrated strong product acceptance in the second quarter, driven by the successful delivery of compelling fashion, excellent quality, outstanding value and an engaging shopping experience, both in store and online. Looking ahead to the back half of Fiscal 2012, we expect to continue to build our momentum at both brands, while also launching our multi-channel initiative and entering the Canadian market with our first Ann Taylor and LOFT store openings in Toronto.

Key Performance Indicators

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

• Comparable sales – Comparable sales 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 Online Stores are also included in comparable sales. In a fiscal year with 53 weeks, sales in the last week of that year are excluded from comparable sales.

• 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.

16

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				Six Months Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	44.1	%	45.0	%	43.8	%	43.9	%
Gross margin	55.9	%	55.0	%	56.2	%	56.1	%
Selling, general and administrative expenses	47.0	%	47.5	%	47.7	%	48.0	%
Operating income	8.9	%	7.5	%	8.5	%	8.1	%
Interest income	—	%	—	%	0.1	%	—	%
Interest expense	0.1	%	0.1	%	0.1	%	0.1	%
Income before income taxes	8.8	%	7.4	%	8.5	%	8.0	%
Income tax provision	3.7	%	2.9	%	3.3	%	3.2	%
Net income	5.1	%	4.5	%	5.2	%	4.8	%

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				Six Months Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
Net sales	6.6	%	15.5	%	6.8	%	12.7	%
Operating income	27.0	%	39.4	%	12.2	%	27.7	%
Net income	24.0	%	33.2	%	14.1	%	26.4	%

Sales and Store Data

The following table sets forth certain brand sales and store data:

	Quarter Ended
	July 28, 2012				July 30, 2011
	Sales		Comp %		Sales		Comp %
Sales and Comps	($ in thousands)
Ann Taylor brand
Ann Taylor Stores	$	122,593	3.2	%	$	117,297	0.6	%
Ann Taylor e-commerce	29,096		29.0	%	22,597		32.0	%
Subtotal	151,689		7.8	%	139,894		4.7	%
Ann Taylor Factory	81,586		2.1	%	78,003		6.5	%
Total Ann Taylor brand	$	233,275	5.6	%	$	217,897	5.3	%
LOFT brand
LOFT Stores	$	272,989	4.1	%	$	260,475	8.6	%
LOFT e-commerce	27,500		14.6	%	23,867		33.5	%
Subtotal	300,489		5.0	%	284,342		10.3	%
LOFT Outlet	61,108		0.3	%	55,962		23.7	%
Total LOFT brand	$	361,597	4.2	%	$	340,304	11.0	%
Total Company	$	594,872	4.7	%	$	558,201	8.6	%

17

Sales and Store Data (Continued)

	Six Months Ended
	July 28, 2012				July 30, 2011
	Sales		Comp %		Sales		Comp %
Sales and Comps	($ in thousands)
Ann Taylor brand
Ann Taylor Stores	$	232,190	(6.6	)%	$	242,676	7.0	%
Ann Taylor e-commerce	61,710		18.0	%	52,058		38.1	%
Subtotal	293,900		(1.9	)%	294,734		11.5	%
Ann Taylor Factory	151,751		1.5	%	146,038		7.8	%
Total Ann Taylor brand	$	445,651	(0.8	)%	$	440,772	10.2	%
LOFT brand
LOFT Stores	$	535,377	6.9	%	$	499,574	3.8	%
LOFT e-commerce	63,986		22.4	%	52,160		33.1	%
Subtotal	599,363		8.4	%	551,734		6.0	%
LOFT Outlet	110,269		2.5	%	89,323		20.0	%
Total LOFT brand	$	709,632	7.5	%	$	641,057	6.7	%
Total Company	$	1,155,283	4.3	%	$	1,081,829	8.2	%

	Quarter Ended				Six Months Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
Sales Related Metrics
Average Dollars Per Transaction ("DPT")
Ann Taylor brand	$	76.50	$	73.34	$	79.44	$	80.59
LOFT brand	58.16		59.09		62.59		62.62
Average Units Per Transaction ("UPT")
Ann Taylor brand	2.37		2.40		2.36		2.42
LOFT brand	2.64		2.68		2.66		2.64
Average Unit Retail ("AUR")
Ann Taylor brand	$	32.28	$	30.56	$	33.66	$	33.30
LOFT brand	22.03		22.05		23.53		23.72
Net Sales Per Average Gross Square Foot (1)
Ann Taylor Stores	$	86	$	81	$	162	$	167
Ann Taylor Factory	118		114		220		215
LOFT Stores	94		89		185		171
LOFT Outlet	113		116		208		221

(1) Net sales per average gross square foot is determined by dividing net sales for the period by the average monthly gross square footage for the period. Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space. Sales from our Online Stores are excluded from the net sales per average gross square foot calculations.

18

Sales and Store Data (Continued)

	Quarter Ended
	July 28, 2012				July 30, 2011
	Stores		Square Feet		Stores		Square Feet
	(square feet in thousands)
Stores and Square Footage
Ann Taylor brand
Ann Taylor Stores	277		1,419		272		1,446
Ann Taylor Factory	100		691		97		691
Total Ann Taylor brand	377		2,110		369		2,137
LOFT brand
LOFT Stores	505		2,929		501		2,920
LOFT Outlet	80		555		72		506
Total LOFT brand	585		3,484		573		3,426
Total Company	962		5,594		942		5,563
Number Of:
Stores open at beginning of period	947		5,524		923		5,494
New stores (1)	17		97		24		132
Downsized/expanded stores (2)	—		(16	)	—		(36	)
Closed stores	(2	)	(11	)	(5	)	(27	)
Stores open at end of period	962		5,594		942		5,563

	Six Months Ended
	July 28, 2012				July 30, 2011
	Stores		Square Feet		Stores		Square Feet
	(square feet in thousands)
Stores and Square Footage
Number Of:
Stores open at beginning of period	953		5,584		896		5,284
New stores (3)	24		133		56		376
Downsized/expanded stores (4)	—		(41	)	—		(40	)
Closed stores	(15	)	(82	)	(10	)	(57	)
Stores open at end of period	962		5,594		942		5,563

(1) During the quarter ended July 28, 2012, we opened three new Ann Taylor stores, one new Ann Taylor Factory store, seven new LOFT stores, and six new LOFT Outlet stores. During the quarter ended July 30, 2011, we opened seven new Ann Taylor stores, one new Ann Taylor Factory store, five new LOFT stores and 11 new LOFT Outlet stores.

(2) During the quarter ended July 28, 2012, we downsized six Ann Taylor stores and one Ann Taylor Factory store and expanded one Ann Taylor store. During the quarter ended July 30, 2011, we downsized six Ann Taylor stores and two Ann Taylor Factory stores.

(3) During the six months ended July 28, 2012, we opened five new Ann Taylor stores, one new Ann Taylor Factory store, 11 new LOFT stores, and seven new LOFT Outlet stores. During the six months ended July 30, 2011, we opened seven new Ann Taylor stores, five new Ann Taylor Factory stores, eight new LOFT stores and 36 new LOFT Outlet stores.

(4) During the six months ended July 28, 2012, we downsized nine Ann Taylor stores, four Ann Taylor Factory stores, one LOFT store and one LOFT Outlet store and expanded one Ann Taylor store. During the six months ended July 30, 2011, we downsized seven Ann Taylor stores and two Ann Taylor Factory stores.

19

Net sales during the quarter and six months ended July 28, 2012 increased 6.6% and 6.8%, respectively, over the comparable 2011 periods, with comparable sales up 4.7% and 4.3%, respectively. These results built on our first quarter momentum, and were on top of the 8.6% and 8.2% comparable sales gains achieved during the quarter and six months ended July 30, 2011. Overall, full-price sell-through at the Ann Taylor stores channel increased significantly during the second quarter of Fiscal 2012, and both brands experienced positive comparable sales results in all channels during the quarter.

By brand, Ann Taylor's net sales increased $15.4 million, or 7.1%, and $4.9 million or 1.1%, during the quarter and six months ended July 28, 2012, respectively. Comparable sales were up 5.6% for the quarter and down 0.8% for the six-month period. At Ann Taylor stores, our second quarter results benefited from merchandise assortments that offered a much higher penetration of color and a greater investment in key categories, such as dresses, skirts and tops. In addition, we were very encouraged by client response to the brand's new pricing strategy, which offered an expanded selection of merchandise at opening price points. These factors, combined with our more targeted promotional strategy, drove higher AURs and a much healthier full-price business at Ann Taylor stores, which contributed to a 3.2% increase in comparable sales. Ann Taylor's e-commerce business achieved another quarter of significant top-line growth, with comparable sales up 29.0%, driven by a double-digit increase in traffic and higher conversion. Ann Taylor Factory also delivered a 2.1% increase in comparable sales, primarily driven by higher conversion.

At the LOFT brand, net sales increased $21.3 million, or 6.3%, and $68.6 million or 10.7%, for the quarter and six months ended July 28, 2012, respectively, with comparable sales increasing 4.2% and 7.5%, respectively. LOFT's overall top-line performance was driven by increases in traffic and conversion. At LOFT stores, clients responded positively to the brand's entire merchandise assortment, with all regions delivering strong top-line results, contributing to a 4.1% increase in comparable sales for the quarter. The brand's e-commerce channel also experienced a 14.6% increase in comparable sales during the second quarter, driven by higher traffic and conversion. LOFT Outlet also experienced growth this quarter, with comparable sales up 0.3%, the twelfth consecutive quarter of comparable sales growth in this channel, driven by increased conversion.

Cost of Sales and Gross Margin

The following table presents cost of sales and gross margin in dollars and as a percentage of net sales:

	Quarter Ended						Six Months Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
	(dollars in thousands)
Cost of sales	$	262,471		$	251,400		$	505,511		$	475,076
Gross margin	$	332,401		$	306,801		$	649,772		$	606,753
Percentage of net sales	55.9		%	55.0		%	56.2		%	56.1		%

Gross margin, as a percentage of net sales, increased to 55.9% and 56.2% for the quarter and six months ended July 28, 2012, respectively, as compared to 55.0% and 56.1%, respectively, in the comparable 2011 periods. The year-over-year increase in gross margin rate performance for both periods was primarily due to increased full-price sell-through in the Ann Taylor stores channel resulting from strong client response to the brand's merchandise offerings and a more targeted approach to promotional activity.

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						Six Months Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
	(dollars in thousands)
Selling, general and administrative expenses	$	279,456		$	265,125		$	551,474		$	519,158
Percentage of net sales	47.0		%	47.5		%	47.7		%	48.0		%

The increase in selling, general and administrative expenses for the quarter and six months ended July 28, 2012 as compared to the comparable 2011 periods was primarily due to higher payroll and occupancy costs related to our year-over-year store growth, an increase in variable costs related to higher net sales and other expenses supporting the expansion of our business. As a percentage of net sales, selling, general and administrative expenses decreased for both the quarter and six-month period ended July 28, 2012 as compared to the comparable 2011 periods, primarily due to fixed cost leveraging resulting from higher net sales, partially offset by increases in expenses associated with our year-over-year store growth and other expenses supporting the expansion of our business.

20

Income Taxes

The following table presents our income tax provision and effective income tax rate:

	Quarter Ended						Six Months Ended
	July 28, 2012			July 30, 2011			July 28, 2012		July 30, 2011
	(dollars in thousands)
Income tax provision	$	21,826		$	16,451		38,667		35,011
Effective income tax rate	41.5		%	39.9		%	39.4	%	40.2	%

The increase in our effective income tax rate for the quarter ended July 28, 2012 over the comparable 2011 period was primarily due to changes in the mix of earnings in various state taxing jurisdictions and certain other discrete items.

The decrease in our effective income tax rate for the six months ended July 28, 2012 over the comparable 2011 period was primarily due to tax positions that were considered effectively settled during the first quarter of Fiscal 2012 and certain other discrete items. We expect our full year tax rate to be approximately 40%.

Liquidity and Capital Resources

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

	July 28, 2012		January 28, 2012		July 30, 2011
	(dollars in thousands)
Working capital	$	161,450	$	189,420	$	216,161
Current ratio	1.49:1		1.66:1		1.75:1

Operating Activities

Cash provided by operating activities was $105.2 million for the six months ended July 28, 2012, compared with $70.0 million for the six months ended July 30, 2011. The year-over-year increase is primarily the result of higher net income adjusted for non-cash expenses, a year-over-year reduction in short-term incentive payments and net working capital items, primarily accounts payable, accounts receivable and inventory.

Merchandise inventories increased approximately $7.9 million, or 3.7%, at July 28, 2012 compared to July 30, 2011. On a per-square-foot basis, excluding e-commerce, merchandise inventories increased approximately 2% over the prior year period.

Investing Activities

Cash used for investing activities was $61.3 million for the six months ended July 28, 2012, compared with $62.0 million for the six months ended July 30, 2011. Cash used for investing activities was primarily driven by capital expenditures related to our store expansion and refurbishment projects during the periods.

Financing Activities

Cash used for financing activities was $61.4 million for the six months ended July 28, 2012, compared with $89.5 million for the six months ended July 30, 2011. Cash used for financing activities was primarily for the repurchase of $75.0 million of our common stock during the six months ended July 28, 2012 and $100.0 million during the six months ended July 30, 2011 under our share repurchase program, partially offset by the impact of excess tax benefits related to stock-based compensation and cash inflows related to exercise of options during each of the periods.

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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. On February 28, 2012, we amended the Credit Facility to make certain technical, non-substantive modifications. 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 percentages of certain eligible assets. The remaining available balance for loans and letters of credit was $172.6 million, $146.4 million and $167.1 million as of July 28, 2012, January 28, 2012 and July 30, 2011, respectively.

On March 8, 2011, our Board of Directors approved a $200 million expansion of our existing securities repurchase program (the “Repurchase Program”), bringing the total authorized under the Repurchase Program to $600 million. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. 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. Pursuant to the Repurchase Program, we repurchased 1.6 million shares and 3.1 million shares of our common stock through open market purchases during the quarter and six months ended July 28, 2012, respectively, at a cost of $40.0 million and $75.0 million, respectively. During the six months ended July 30, 2011, we repurchased 4.2 million shares of our common stock through open market purchases at a cost of $100.0 million. There were no repurchases made under the Repurchase Program during the quarter ended July 30, 2011. As of July 28, 2012 and August 17, 2012, the date of this filing, approximately $109.1 million remained available for share repurchases under the Repurchase Program.

Other

At July 28, 2012, substantially all of our cash and cash equivalents were invested in deposit accounts at FDIC-insured banks. All of our deposit account balances are currently FDIC insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

On October 1, 2007, we froze our noncontributory defined benefit pension plan (the “Pension Plan”). As a result of a lower discount rate and a lower expected rate of return, which is consistent with changes in the underlying asset allocation of the Pension Plan made in Fiscal 2011, pension expense for Fiscal 2012, excluding any potential settlement charges, is projected to be higher than pension expense in Fiscal 2011, excluding settlement charges. Our Pension Plan is invested in readily liquid investments, primarily debt and equity securities. Any deterioration in the financial markets or changes in discount rates may require us to make a contribution to our Pension Plan in Fiscal 2012.

Critical Accounting 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 assumptions that affect the reported amounts in the financial statements and accompanying notes, including assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Management has determined that our most critical accounting estimates are those related to merchandise inventory valuation, asset impairment, income taxes and stock and 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 estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 amended ASC 220-10, Comprehensive Income, and requires that all changes in comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and also requires the presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. In December 2011, the FASB issued ASU 2011-12, Presentation of Comprehensive Income, which indefinitely deferred the requirement of ASU 2011-05 related to presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  No other requirements of ASU 2011-05 were impacted by ASU 2011-12.  ASU 2011-05, as modified by ASU 2011-12, became effective and was adopted in the first quarter of Fiscal 2012 by presenting separate but consecutive statements. See the Condensed Consolidated Statements of Comprehensive Income for more information.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We have significant amounts of cash and cash equivalents invested in deposit accounts at FDIC-insured banks. All of our deposit account balances are currently FDIC insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

AnnTaylor Inc.’s Credit Facility allows for investments in financial instruments with original maturity dates of up to 360 days. As of July 28, 2012, 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 report. 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 report.

During the second quarter of Fiscal 2012, 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.

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PART II. OTHER INFORMATION

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 during the periods indicated:

	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)
April 29, 2012 to May 26, 2012	1,047	$	27.97	—	$	149,084
May 27, 2012 to June 30, 2012	1,556,072	24.69		1,555,600	110,674
July 1, 2012 to July 28, 2012	65,726	24.44		65,118	109,084
	1,622,845			1,620,718

(1) Includes 2,127 shares of restricted stock purchased in connection with employee tax withholding obligations under the employee equity compensation plans, which are not purchases under the Company’s publicly announced program.

(2) On March 8, 2011, our Board of Directors approved a $200 million expansion of our existing securities repurchase program (the “Repurchase Program”) to a total of $600 million. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. We purchased 1,620,718 shares under the Repurchase Program during the second quarter of Fiscal 2012 and 3,081,430 shares during the first six months of Fiscal 2012. As of July 28, 2012 and August 17, 2012, the date of this filing, approximately $109.1 million remained available for future repurchases under the Repurchase Program.

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Item 6. Exhibits

Exhibit Number	Description
10.1*†	Amended and Restated ANN INC. Management Performance Compensation Plan.
10.2*†	Summary of Compensation Arrangements for Non-Employee Directors
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.

† Management contract or compensatory plan or arrangement.

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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:	August 17, 2012	By:	/s/    Kay Krill
			Kay Krill
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	August 17, 2012	By:	/s/    Michael J. Nicholson
			Michael J. Nicholson
			Executive Vice President,
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)

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Exhibit Index

Exhibit Number	Description
10.1*†	Amended and Restated ANN INC. Management Performance Compensation Plan.
10.2*†	Summary of Compensation Arrangements for Non-Employee Directors
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.

† Management contract or compensatory plan or arrangement.

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