10-Q 1 ann_10qxq22013.htm 10-Q ann_10Q_Q2 2013

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 August 3, 2013
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 August 3, 2013
Common Stock, $.0068 par value
 
45,833,296



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 the value of its brands and engage new and existing clients;
•
the Company's ability to manage inventory levels and changes in merchandise mix;
•
the Company's reliance on key management and its ability to hire, retain and train qualified associates;
•
the Company's ability to successfully execute brand goals, objectives and new concepts and strategies, including international expansion;
•
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 potential impact of natural disasters and public health concerns, including severe infectious diseases, acts of war or terrorism in the United States or worldwide, particularly on the Company's foreign sourcing offices and the manufacturing operations of the Company's vendors;
•
the performance and operation of the Company's websites and the risks associated with Internet sales;
•
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;
•
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 Company's ability to secure and protect trademarks and other intellectual property rights;
•
the impact of fluctuations in sourcing costs, in particular, increases in the costs of raw materials, labor, fuel and transportation;
•
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 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;
•
the failure by independent manufacturers to comply with the Company's social compliance program requirements;
•
the effect of general economic conditions on consumer spending and the Company's liquidity and capital resources;
•
the effect of competitive pressures from other retailers;
•
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;
•
the Company's dependence on shopping malls and other retail centers to attract customers and the impact of potential consolidation of commercial and retail landlords on the Company's ability to negotiate favorable rental terms;
•
the impact on the Company's stock price relating to the Company's level of sales and earnings growth;
•
the Company's ability to realize its deferred tax assets;
•
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 and extreme or unseasonable weather conditions 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 August 3, 2013 and July 28, 2012
(unaudited)
 
 
Quarter Ended
 
Six Months Ended
 
August 3,
2013
 
July 28,
2012
 
August 3,
2013
 
July 28,
2012
 
(in thousands, except per share amounts)
Net sales
$
638,198

 
$
594,872

 
$
1,212,704

 
$
1,155,283

Cost of sales
288,921

 
262,471

 
542,862

 
505,511

  Gross margin
349,277

 
332,401

 
669,842

 
649,772

Selling, general and administrative expenses
289,298

 
279,456

 
575,951

 
551,474

  Operating income
59,979

 
52,945

 
93,891

 
98,298

Interest and investment income/(expense), net
354

 
(384
)
 
441

 
(164
)
Other non-operating income, net
143

 
—

 
197

 
—

  Income before income taxes
60,476

 
52,561

 
94,529

 
98,134

Income tax provision
24,827

 
21,826

 
37,968

 
38,667

  Net income
$
35,649

 
$
30,735

 
$
56,561

 
$
59,467

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.76

 
$
0.64

 
$
1.21

 
$
1.23

 
 
 
 
 
 
 
 
Weighted average shares outstanding
45,695

 
47,571

 
45,887

 
47,747

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.76

 
$
0.63

 
$
1.20

 
$
1.21

 
 
 
 
 
 
 
 
Weighted average shares outstanding, assuming dilution
46,125

 
48,118

 
46,332

 
48,398













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

4

ANN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Quarters and Six Months Ended August 3, 2013 and July 28, 2012
(unaudited)
 
 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28,
2012
 
August 3,
2013
 
July 28,
2012
 
(in thousands)
Net income
$
35,649

 
$
30,735

 
$
56,561

 
$
59,467

 
 
 
 
 
 
 
 
Other comprehensive (loss)/income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(167
)
 
—

 
(426
)
 
—

Net change in employee benefit plans:
 
 
 
 
 
 
 
Amortization of net actuarial loss
158

 
175

 
315

 
350

Other comprehensive (loss)/income, before tax
(9
)
 
175

 
(111
)
 
350

Income tax expense on other comprehensive (loss)/income
60

 
75

 
121

 
155

Other comprehensive (loss)/income, net of tax
(69
)
 
100

 
(232
)
 
195

Comprehensive income
$
35,580

 
$
30,835

 
$
56,329

 
$
59,662






















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

5

ANN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
August 3, 2013, February 2, 2013 and July 28, 2012
(unaudited)
 
 
August 3,
2013
 
February 2,
2013
 
July 28,
2012
 
(in thousands, except share amounts)
Assets
 
Current assets
 
 
 
 
 
Cash
$
107,021

 
$
167,011

 
$
132,663

Accounts receivable
24,438

 
17,856

 
28,074

Merchandise inventories
247,269

 
216,848

 
221,634

Refundable income taxes
8,271

 
9,201

 
7,765

Deferred income taxes
28,358

 
30,397

 
32,122

Prepaid expenses and other current assets
67,008

 
64,716

 
65,816

Total current assets
482,365

 
506,029

 
488,074

Property and equipment, net
423,850

 
409,703

 
374,803

Deferred income taxes
2,191

 
7,841

 
29,361

Other assets
21,457

 
18,632

 
13,350

Total assets
$
929,863

 
$
942,205

 
$
905,588

Liabilities and Stockholders’ Equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
105,264

 
$
105,691

 
$
97,725

Accrued salaries and bonus
25,575

 
23,969

 
31,080

Current portion of long-term performance compensation
19,181

 
34,233

 
29,750

Accrued tenancy
38,312

 
38,647

 
45,258

Gift certificates and merchandise credits redeemable
37,873

 
47,268

 
41,518

Accrued expenses and other current liabilities
83,748

 
86,946

 
81,293

Total current liabilities
309,953

 
336,754

 
326,624

Deferred lease costs
165,027

 
162,620

 
158,450

Deferred income taxes
6,116

 
228

 
1,250

Long-term performance compensation, less current portion
12,452

 
26,368

 
20,634

Other liabilities
34,842

 
31,125

 
30,455

 
 
 
 
 
 
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
747,986

 
768,215

 
769,516

Retained earnings
733,403

 
676,842

 
633,724

Accumulated other comprehensive loss
(4,729
)
 
(4,497
)
 
(5,123
)
Treasury stock, 36,730,220; 35,958,318 and 35,239,186 shares, respectively, at cost
(1,075,748
)
 
(1,056,011
)
 
(1,030,503
)
Total stockholders’ equity
401,473

 
385,110

 
368,175

Total liabilities and stockholders’ equity
$
929,863

 
$
942,205

 
$
905,588



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

6

ANN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended August 3, 2013 and July 28, 2012
(unaudited)
 
 
Six Months Ended
 
August 3,
2013
 
July 28,
2012
 
(in thousands)
Operating activities:
 
 
 
Net income
$
56,561

 
$
59,467

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
13,456

 
8,425

Depreciation and amortization
51,667

 
46,365

Loss on disposal and write-down of property and equipment
1,754

 
1,354

Stock-based compensation
7,616

 
7,463

Non-cash interest and other non-cash items
(623
)
 
307

Tax benefit from exercise/vesting of stock awards
1,480

 
5,390

Changes in assets and liabilities:
 
 
 
Accounts receivable
(6,625
)
 
(8,483
)
Merchandise inventories
(30,421
)
 
(8,187
)
Prepaid expenses and other current assets
(816
)
 
(12,113
)
Refundable income taxes
930

 
4,200

Other non-current assets and liabilities, net
6,654

 
1,309

Accounts payable, accrued expenses and other current liabilities
(46,534
)
 
(300
)
Net cash provided by operating activities
55,099

 
105,197

Investing activities:
 
 
 
Purchases of marketable securities
(2,565
)
 
(1,445
)
Sales of marketable securities and short-term investments
574

 
17

Purchases of property and equipment
(60,679
)
 
(59,642
)
Other, net
813

 
(250
)
Net cash used for investing activities
(61,857
)
 
(61,320
)
Financing activities:
 
 
 
Proceeds from the issuance of common stock pursuant to Associate Discount Stock Purchase Plan
1,169

 
1,154

Proceeds from exercise of stock options
3,603

 
11,080

Excess tax benefits from stock-based compensation
1,676

 
5,828

Repurchases of common and restricted stock
(53,832
)
 
(79,086
)
Repayments on fixed asset financing and capital lease obligations
(751
)
 
(722
)
Change in trade payable program obligation, net
(4,988
)
 
324

Net cash used for financing activities
(53,123
)
 
(61,422
)
Effect of exchange rate changes on cash
(109
)
 
—

Net decrease in cash
(59,990
)
 
(17,545
)
Cash, beginning of period
167,011

 
150,208

Cash, end of period
$
107,021

 
$
132,663

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
478

 
$
668

Cash paid during the period for income taxes
$
26,307

 
$
28,311

Accrual for purchases of property and equipment
$
24,839

 
$
19,988

 Property and equipment acquired through capital lease
$
2,444

 
$
—


See accompanying Notes to the 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 2013 interim periods presented in the Condensed Consolidated Financial Statements are not necessarily indicative of results to be expected for Fiscal 2013.

The February 2, 2013 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 2, 2013.

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 2, 2013. The Company believes that the disclosures made are adequate to prevent the interim financial statements from being misleading.
Immaterial Correction of Balance Sheet Equity Accounts

Subsequent to the issuance of its second quarter Fiscal 2012 interim financial statements, the Company determined that, beginning in Fiscal 2009, it had been incorrectly recording the dollar impact of shares issued out of Treasury Stock in connection with the exercise of stock options, the issuance of restricted stock grants and the vesting, in shares, of restricted unit grants. In connection with these share issuances, the Company inappropriately reduced its Treasury Stock balance in an amount equal to the exercise price of shares issued in connection with stock options exercised or the incorrect cost basis of shares issued in connection with restricted stock grants and the vesting, in shares, of restricted unit grants. The Company should have reduced Treasury Stock by the cost basis of the shares issued, with any difference being charged or credited to Additional Paid-in Capital. As a result, the Company has restated previously presented balances to appropriately reflect the impact of these transactions in its Condensed Consolidated Balance Sheet as of July 28, 2012. The cumulative impact of these corrections has the effect of reducing both Treasury Stock and Additional Paid-in Capital by $41.9 million as of July 28, 2012.

2.
Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”), which sets forth additional disclosure requirements for items reclassified out of AOCI and into net income, and is effective for annual and interim reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 in the first quarter of Fiscal 2013 by presenting amounts reclassified out of AOCI as a separate disclosure in the Notes to the Condensed Consolidated Financial Statements. Amounts reclassified out of AOCI were related to the amortization of net actuarial loss associated with our pension plan.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however retrospective application is permitted. The Company is in the process of evaluating ASU 2013-11 and does not expect that it will have a significant impact on its consolidated financial statements.

 

8
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. 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 based on the net asset value determined by the value of the underlying assets, which are considered Level 2 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 each of the stated measurement dates:
 
 
August 3,
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

 
$
4,110

 
$
4,110

 
$
—

 
$
—

Fixed income funds
 
694

 
—

 
694

 
—

Equity funds

 
6,166

 
—

 
6,166

 
—

Total assets
 
$
10,970

 
$
4,110

 
$
6,860

 
$
—

 
 
 
 
 
 
 
 
 
 
 
February 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

 
$
3,868

 
$
3,868

 
$
—

 
$
—

Fixed income funds
 
572

 
—

 
572

 
—

Equity funds

 
3,683

 
—

 
3,683

 
—

Total assets
 
$
8,123

 
$
3,868

 
$
4,255

 
$
—

 
 
 
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:
 
 
 
 
 
 
 
 
Equity securities

 
$
2,037

 
$
2,037

 
$
—

 
$
—

Fixed income funds
 
517

 
—

 
517

 
—

Equity funds

 
3,335

 
—

 
3,335

 
—

Total assets
 
$
5,889

 
$
2,037

 
$
3,852

 
$
—



9
ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

3.
Fair Value Measurements (Continued)
As of the dates presented, the Company believes that the carrying value of cash, receivables and payables approximates fair value, due to the short maturity of these financial instruments. As of the dates presented, the Company had no cash equivalents.

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.

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.
The following table presents a reconciliation of basic and diluted earnings per share for the quarters and six months ended August 3, 2013 and July 28, 2012:
 
Quarter Ended
 
August 3, 2013
 
July 28, 2012
 
(in thousands, except per share amounts)
Basic Earnings per Share:
Net
Income
 
Shares
 
Per
Share
Amount
 
Net
Income
 
Shares
 
Per
Share
Amount
Net income
$
35,649

 
 
 
 
 
$
30,735

 
 
 
 
Less net income associated with participating securities
709

 
 
 
 
 
446

 
 
 
 
Basic earnings per share
$
34,940

 
45,695

 
$
0.76

 
$
30,289

 
47,571

 
$
0.64

Diluted Earnings per Share:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
35,649

 
 
 
 
 
$
30,735

 
 
 
 
Less net income associated with participating securities
702

 
 
 
 
 
441

 
 
 
 
Effect of dilutive securities
 
 
430

 
 
 
 
 
547

 
 
Diluted earnings per share
$
34,947

 
46,125

 
$
0.76

 
$
30,294

 
48,118

 
$
0.63

 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
(in thousands, except per share amounts)
Basic Earnings per Share:
Net
Income
 
Shares
 
Per
Share
Amount
 
Net
Income
 
Shares
 
Per
Share
Amount
Net income
$
56,561

 
 
 
 
 
$
59,467

 
 
 
 
Less net income associated with participating securities
1,077

 
 
 
 
 
884

 
 
 
 
Basic earnings per share
$
55,484

 
45,887

 
$
1.21

 
$
58,583

 
47,747

 
$
1.23

Diluted Earnings per Share:
 
 
 
 
 
 
 
 
 
 
 
Net income
$
56,561

 
 
 
 
 
$
59,467

 
 
 
 
Less net income associated with participating securities
1,066

 
 
 
 
 
872

 
 
 
 
Effect of dilutive securities
 
 
445

 
 
 
 
 
651

 
 
Diluted earnings per share
$
55,495

 
46,332

 
$
1.20

 
$
58,595

 
48,398

 
$
1.21


10
ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

4.
Earnings Per Share (Continued)
For the quarter and six months ended August 3, 2013, non-participating securities (stock options) representing 710,200 and 754,435 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.
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 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. In addition, for the six months ended July 28, 2012, non-participating securities (performance-based restricted units) representing 12,334 shares of common stock were excluded from the computation of weighted average shares for diluted earnings per share due to the fact that they are contingently issuable securities whose contingency was not met at certain dates during the six-month period. No such shares were excluded from the computation of weighted average shares for diluted earnings per share for the six months ended August 3, 2013, or the quarter ended July 28, 2012. In addition, no such shares were outstanding during the quarter ended August 3, 2013, as all outstanding performance-based restricted units vested in shares during the first quarter of Fiscal 2013.

5.
Equity and Incentive Compensation Plans
Repurchase Program
During the quarter and six months ended August 3, 2013, the Company repurchased 1.5 million shares of its common stock through open market purchases under its existing $600 million securities repurchase program at a cost of $49.1 million. During the quarter and six months ended July 28, 2012, the Company repurchased 1.6 million shares and 3.1 million shares, respectively, of its common stock through open market purchases at a cost of $40.0 million and $75.0 million, respectively. As of August 3, 2013, there were no amounts remaining for additional share repurchases under the Company's $600 million securities repurchase program.
On August 21, 2013, the Company’s Board of Directors approved a new $250 million securities repurchase program. The program will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by the Company’s Board of Directors.
Stock Incentive Plans
During the quarter and six months ended August 3, 2013, the Company recognized approximately $3.6 million and $7.6 million, respectively, in stock-based compensation expense. During the quarter and six months ended July 28, 2012, the Company recognized approximately $4.1 million and $7.5 million, respectively, in stock-based compensation expense. As of August 3, 2013, there was $5.4 million and $16.3 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 1.8 years and 2.1 years, respectively. Restricted stock award grants, restricted unit award vestings and shares underlying stock option exercises during the six months ended August 3, 2013 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 vestings, were returned to treasury stock.
On May 30, 2013, the Company’s shareholders approved certain amendments to the Company's 2003 Equity Incentive Plan, including increasing the total authorized shares reserved for issuance from 11.75 million to 13.4 million common shares.

11
ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

5.
Equity and Incentive Compensation Plans (Continued)
Stock Options
The following table summarizes stock option activity for the six months ended August 3, 2013:
 
Shares
 
Weighted  Average
Exercise Price
Options outstanding at beginning of period
2,785,102

 
$
25.61

Granted (1)
101,400

 
30.73

Exercised
(183,098
)
 
19.68

Forfeited or expired
(53,294
)
 
30.40

Options outstanding at end of period
2,650,110

 
$
26.12

 
 
 
 
Vested and exercisable at August 3, 2013
2,112,422

 
$
25.50

 
 
 
 
Options expected to vest in the future as of August 3, 2013
460,762

 
$
28.62


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

The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted as of the grant date. For the six months ended August 3, 2013 and July 28, 2012, the fair value of options granted was estimated using the following weighted average assumptions:
 
Six Months Ended
 
August 3,
2013
 
July 28,
2012
Expected volatility
52.9
%
 
54.6
%
Risk-free interest rate
0.9
%
 
0.9
%
Expected life (years)
5.0

 
4.4

Dividend yield
—

 
—


The weighted average fair value of options granted during the six months ended August 3, 2013 and July 28, 2012 was $14.09 and $12.36 per share, respectively. There were no options granted during the quarters ended August 3, 2013 and July 28, 2012. 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 August 3, 2013:
 
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 2, 2013
461,396

  
$
27.96

 
203,671

  
$
27.81

Granted
401,228

(1) 
30.82

 
178,638

(2) 
30.74

Vested
(186,276
)
 
27.41

 
(82,633
)
 
27.92

Forfeited
(41,910
)
 
29.36

 
(7,800
)
 
30.73

Restricted stock awards at August 3, 2013
634,438

  
$
29.84

 
291,876

  
$
29.49


(1)
Of this amount, 181,500 shares vest in equal installments in each of March 2014, 2015 and 2016, 179,100 shares vest in March 2016, 27,628 shares vest in May 2014 and 13,000 shares vest in equal installments in each of June 2014, 2015 and 2016.
(footnotes continued on following page)

12
ANN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)

5.
Equity and Incentive Compensation Plans (Continued)

(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 August 3, 2013:

 
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 February 2, 2013
75,016

  
$
19.58

 
46,003

  
$
19.58

Vested (1)
(75,016
)
 
19.58

 
(46,003
)
 
19.58

Restricted unit awards at August 3, 2013
—

 
$
—

 
—

  
$
—


(1)
All restricted unit awards vested in shares during the first quarter of Fiscal 2013.
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 August 3, 2013 and July 28, 2012, the Company recognized $2.1 million and $3.3 million, respectively, in compensation expense under the RCP, a portion of which was the result of changes in estimates. During the six months ended August 3, 2013 and July 28, 2012, the Company recognized $6.8 million and $8.2 million, respectively, in compensation expense under the RCP, a portion of which was the result of changes in estimates. As of August 3, 2013, there was $26.9 million of unrecognized compensation cost under the RCP, which is expected to be recognized over a remaining weighted average deferral period of 2.6 years.

6.
Revolving Credit Facility
On December 19, 2012, the Company’s 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 existing senior secured revolving credit facility due to expire in April 2013. The Credit Facility provides the Company with 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 increase 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 expires on December 19, 2017 and 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, each 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 of certain eligible assets, primarily accounts receivable and inventory. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $13.5 million, $14.1 million and $14.1 million as of August 3, 2013, February 2, 2013 and July 28, 2012, respectively, leaving a remaining available balance for loans and letters of credit of $199.1 million, $150.8 million and $172.6 million, respectively. There were no borrowings outstanding under the Credit Facility at August 3, 2013, February 2, 2013, July 28, 2012 or as of August 23, 2013, the date of this filing.
The lenders have been granted a security interest in the inventory and accounts receivable of AnnTaylor, Inc. and certain of its subsidiaries, as collateral for the obligations under the Credit Facility. 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.


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
 
August 3,
2013

July 28,
2012
 
August 3,
2013
 
July 28,
2012
 
(in thousands)
Net periodic pension cost:

 

 
 
 
 
Interest cost
$
360

 
$
438

 
$
720

 
$
875

Expected return on plan assets
(323
)
 
(378
)
 
(645
)
 
(755
)
Amortization of actuarial loss
158

 
175

 
315

 
350

Net periodic pension cost
$
195

 
$
235

 
$
390

 
$
470

The Company froze its noncontributory defined benefit pension plan (the "Pension Plan") in October 2007. The Company was neither required to, nor did it make, any contributions to its Pension Plan during the quarters or six months ended August 3, 2013 and July 28, 2012.

8.
Accumulated Other Comprehensive Income
 
The following table summarizes the components of AOCI for the six months ended August 3, 2013:

 
Foreign Currency Translation
 
Unrecognized Pension Benefit Costs
 
Total
 
(in thousands)
Balance at February 2, 2013
$
19

 
$
(4,516
)
 
$
(4,497
)
Other comprehensive income/(loss) before reclassifications:
 
 
 
 
 
Foreign currency translation adjustment
(426
)
 
—

 
(426
)
Amounts reclassified from AOCI:
 
 
 
 
 
Amortization of net actuarial loss (1)
—

 
315

 
315

Amounts reclassified from AOCI, before tax (2)
—

 
315

 
315

Income tax expense (3)
—

 
121

 
121

Net current period other comprehensive (loss)/income, net of tax
(426
)
 
194

 
(232
)
Balance at August 3, 2013
$
(407
)
 
$
(4,322
)
 
$
(4,729
)

(1)
Amount is included in net periodic pension cost, which is presented in “Selling, general and administrative expenses” on the Company's Condensed Consolidated Statements of Operations. See Note 7, “Employee Benefits,” for further details.
(2)
During the quarter and six months ended August 3, 2013, the Company reclassified income of $0.2 million ($0.1 million net of tax) and $0.3 million ($0.2 million net of tax), respectively, from AOCI related to our employee benefit plan.
(3)
Relates to amounts reclassified from AOCI.

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. 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. Today, we operate 1,007 retail stores in 47 states, the District of Columbia, Puerto Rico and Canada. 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.
We are committed to and driven by a simple but important mission - “to inspire and connect with our clients 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
During the second quarter of Fiscal 2013, we achieved record diluted earnings per share results of $0.76, which reflects solid growth in net sales, positive comparable sales at both brands and double-digit growth in net income as compared to the same period last year.  Despite the highly promotional and competitive retail environment, we experienced higher merchandise gross margin rate performance, due to higher full price selling and more effective targeted promotions. However, increased client shipping costs related to our multi-channel initiative more than offset these gains and resulted in lower overall gross margin rate performance as compared to last year.  In the factory/outlet channel at both brands, we focused on maximizing profitability, as factory/outlet centers continued to experience softer traffic trends during the second quarter.
 At the Ann Taylor brand, overall comparable sales increased 3.1% during the second quarter of Fiscal 2013. At our multi-channel Ann Taylor business, which includes Ann Taylor stores and anntaylor.com, comparable sales increased 9.3%, while at Ann Taylor Factory, comparable sales declined 7.2%. Results at Ann Taylor continued to benefit from our strategies to offer clients a broader assortment of fashion in all stores and online; maintain a more category-specific promotional stance; ensure the right balance of the merchandise offering across good, better and best price points; and further enhance the shopping experience, both in-store and online. Together, these strategies resulted in higher full-price sell-through, as well as an increase in merchandise gross margin rate performance as compared to the second quarter of Fiscal 2012.  At Ann Taylor Factory, softer traffic patterns in factory/outlet centers continued to impact top-line performance during the second quarter.  Despite this, the Ann Taylor brand achieved its fifth consecutive quarter of positive comparable sales performance and we believe the brand is well-positioned to continue this momentum through the Fall season.
At the LOFT brand, overall comparable sales increased 2.5% during the second quarter of Fiscal 2013, reflecting an increase of 3.7% at our multi-channel LOFT business, which includes LOFT stores and LOFT.com, and a decline of 3.2% at LOFT Outlet.  Overall, LOFT's second quarter merchandise offerings were received positively by clients, and our expanded offerings in denim and LOFT Lounge, in particular, resonated very well.  At LOFT Outlet, the comparable sales decline largely reflected reduced traffic at factory/outlet centers during the quarter; however, we continued to focus on maximizing profitability in this channel, supported by conservative inventory positioning. Looking ahead, we see the opportunity to deliver positive comparable sales in the LOFT Outlet channel and we believe that, overall, the LOFT brand is well-positioned to deliver profitable growth over the remainder of Fiscal 2013.

15

We continue to make progress on our real estate strategy, which is focused on supporting our brands' objectives to enhance the overall productivity and profitability of our store fleet in the United States and Canada. Overall, we opened 21 new stores and closed three underperforming stores during the second quarter of Fiscal 2013. Ann Taylor continued to roll-out its new format stores, opening three new stores and right-sizing and remodeling five existing stores during the quarter. At LOFT, we continued to expand the fleet, primarily in small- and mid-markets, with the addition of 11 new stores during the quarter. We also continued expansion in the factory/outlet channel, adding three new Ann Taylor Factory stores and four new LOFT Outlet stores. At the end of the second quarter, our 1,007 store fleet was comprised of 275 Ann Taylor stores, 525 LOFT stores, 105 Ann Taylor Factory stores and 102 LOFT Outlet stores.
 In summary, our record second quarter diluted earnings per share results reflect that our product was well received and our strategic initiatives continue to gain traction, and we expect they will create further opportunities for ANN INC. over the long-term.  Both Ann Taylor and LOFT are strong brands that offer great fashion, service, quality, value and personalization, along with an engaging client experience across all channels.  We believe in our brands and are focused on strategically growing our business.  In support of this commitment, our Board of Directors recently approved a new $250 million share repurchase program, reflecting both the confidence in our business strategy and our efforts to further enhance shareholder value.
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 Online Stores are also included in 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 revenue and/or expenses related to:  our sourcing operations; fulfillment and shipment of online and multi-channel sales; depreciation related to merchandise management systems; sample product development; 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.
•
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
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Net sales
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Cost of sales
45.3
%
 
44.1
 %
 
44.8
%
 
43.8
 %
Gross margin
54.7
%
 
55.9
 %
 
55.2
%
 
56.2
 %
Selling, general and administrative expenses
45.3
%
 
47.0
 %
 
47.5
%
 
47.7
 %
Operating income
9.4
%
 
8.9
 %
 
7.7
%
 
8.5
 %
Interest and investment income/(expense), net
0.1
%
 
(0.1
)%
 
0.1
%
 
—
 %
Other non-operating income, net
—
%
 
—
 %
 
—
%
 
—
 %
Income before income taxes
9.5
%
 
8.8
 %
 
7.8
%
 
8.5
 %
Income tax provision
3.9
%
 
3.7
 %
 
3.1
%
 
3.3
 %
Net income
5.6
%
 
5.1
 %
 
4.7
%
 
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
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
 
increase/(decrease)
Net sales
7.3
%
 
6.6
%
 
5.0
 %
 
6.8
%
Gross margin
5.1
%
 
8.3
%
 
3.1
 %
 
7.1
%
Operating income
13.3
%
 
27.0
%
 
(4.5
)%
 
12.2
%
Net income
16.0
%
 
24.0
%
 
(4.9
)%
 
14.1
%

Sales and Sales-Related Metrics
The following tables set forth certain sales and sales-related metrics:
 
 
Quarter Ended
 
August 3, 2013

July 28, 2012

Sales

Comp %

Sales

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







Ann Taylor (1)
$
165,807


9.3
 %

$
151,689


7.8
%
Ann Taylor Factory
79,356


(7.2
)%

81,586


2.1
%
Total Ann Taylor brand
$
245,163


3.1
 %

$
233,275


5.6
%
LOFT brand







LOFT (2)
$
320,373


3.7
 %

$
300,489


5.0
%
LOFT Outlet
72,662


(3.2
)%

61,108


0.3
%
Total LOFT brand
$
393,035


2.5
 %

$
361,597


4.2
%
Total Company
$
638,198


2.8
 %

$
594,872


4.7
%










17

Sales and Sales-Related Metrics (continued)

 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
Sales
 
Comp %
 
Sales
 
Comp %
Sales and Comparable Sales
($ in thousands)
Ann Taylor brand
 
 
 
 
 
 
 
Ann Taylor (1)
$
316,590

 
7.8
 %
 
$
293,900

 
(1.9
)%
Ann Taylor Factory
147,840

 
(6.6
)%
 
151,751

 
1.5
 %
Total Ann Taylor brand
$
464,430

 
2.6
 %
 
$
445,651

 
(0.8
)%
LOFT brand
 
 
 
 
 
 
 
LOFT (2)
$
618,870

 
1.5
 %
 
$
599,363

 
8.4
 %
LOFT Outlet
129,404

 
(5.3
)%
 
110,269

 
2.5
 %
Total LOFT brand
$
748,274

 
0.4
 %
 
$
709,632

 
7.5
 %
Total Company
$
1,212,704

 
1.2
 %
 
$
1,155,283

 
4.3
 %


 
Quarter Ended
 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
August 3, 2013
 
July 28, 2012
Sales-Related Metrics
 
 
 
 
 
 
 
Average Dollars Per Transaction ("DPT")
 
 
 
 
 
 
 
Ann Taylor brand
$
71.61

 
$
76.50

 
$
75.38

 
$
79.44

LOFT brand
56.95

 
58.16

 
60.41
 
62.59

Average Units Per Transaction ("UPT")
 
 
 
 
 
 
 
Ann Taylor brand
2.45

 
2.37

 
2.47
 
2.36

LOFT brand
2.65

 
2.64

 
2.66
 
2.66

Average Unit Retail ("AUR")
 
 
 
 
 
 
 
Ann Taylor brand
$
29.23

 
$
32.28

 
$
30.52

 
$
33.66

LOFT brand
21.49

 
22.03

 
22.71
 
23.53


(1)
Includes sales at Ann Taylor stores and anntaylor.com.
(2)
Includes sales at LOFT stores and LOFT.com.



18



Store Data
    
The following tables set forth certain store data:
 
Quarter Ended
 
August 3, 2013
 
July 28, 2012
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
(square feet in thousands)
Stores and Square Footage
 
 
 
 
 
 
 
Ann Taylor brand
 
 
 
 
 
 
 
Ann Taylor
275

 
1,373

 
277

 
1,419

Ann Taylor Factory
105

 
715

 
100

 
691

Total Ann Taylor brand
380

 
2,088

 
377

 
2,110

LOFT brand
 
 
 
 
 
 
 
LOFT
525

 
3,015

 
505

 
2,929

LOFT Outlet
102

 
685

 
80

 
555

Total LOFT brand
627

 
3,700

 
585

 
3,484

Total Company
1,007

 
5,788

 
962

 
5,594

Number of:
 
 
 
 
 
 
 
Stores open at beginning of period
989

 
5,699

 
947

 
5,524

New stores (1)
21

 
111

 
17

 
97

Downsized/expanded stores, net (2)
—

 
(8
)
 
—

 
(16
)
Closed stores
(3
)
 
(14
)
 
(2
)
 
(11
)
Stores open at end of period
1,007

 
5,788

 
962

 
5,594


 
Six Months Ended
 
August 3, 2013
 
July 28, 2012
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
(square feet in thousands)
 
 
 
 
 
 
 
 
Number of:
 
 
 
 
 
 
 
Stores open at beginning of period
984

 
5,685

 
953

 
5,584

New stores (3)
34

 
177

 
24

 
133

Downsized/expanded stores, net (4)
—

 
(14
)
 
—

 
(41
)
Closed stores
(11
)
 
(60
)
 
(15
)
 
(82
)
Stores open at end of period
1,007

 
5,788

 
962

 
5,594


(1)
During the quarter ended August 3, 2013, we opened three new Ann Taylor stores, three new Ann Taylor Factory stores, 11 new LOFT stores and four new LOFT Outlet stores. 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.
(2)
During the quarter ended August 3, 2013, we downsized four Ann Taylor stores and expanded one LOFT store. During the quarter ended July 28, 2012, we downsized six Ann Taylor stores, one Ann Taylor Factory store and expanded one Ann Taylor store.
(3)
During the six months ended August 3, 2013, we opened four new Ann Taylor stores, four new Ann Taylor Factory stores, 20 new LOFT stores and six new LOFT Outlet stores. 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.
(4)
During the six months ended August 3, 2013, we downsized six Ann Taylor stores, one Ann Taylor Factory store and two LOFT stores and expanded one LOFT store. 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.


19

Net sales for the quarter and six months ended August 3, 2013 increased 7.3% and 5.0%, respectively, over the comparable 2012 periods, with comparable sales up 2.8% and 1.2%, respectively. These results were on top of the 4.7% and 4.3% comparable sales increases achieved during the quarter and six months ended July 28, 2012. The overall sales increase for both the quarter and six-month periods was driven by increases in traffic and transactions at our multi-channel Ann Taylor and LOFT businesses, reflecting the combined benefits of fresh new fashion and multi-channel sales growth as well as the impact of net store growth over the comparable prior year periods.

By brand, Ann Taylor's net sales for the quarter and six months ended August 3, 2013 increased $11.9 million, or 5.1%, and $18.8 million, or 4.2%, respectively, over the comparable prior-year periods, with comparable sales increasing 3.1% and 2.6%, respectively. Sales at our multi-channel Ann Taylor business, which includes Ann Taylor stores and anntaylor.com, benefited from increases in traffic and transactions, which reflected the success of our strategy to provide an expanded assortment of relevant fashion with better offerings across all price points both in-store and online, and contributed to comparable sales increases of 9.3% and 7.8% for the quarter and six-month periods, respectively. At Ann Taylor Factory, sales were impacted by a continued decrease in traffic at factory/outlet centers across much of the United States, which contributed to comparable sales decreases of 7.2% and 6.6% for the quarter and six-month periods, respectively.

At LOFT, net sales increased $31.4 million, or 8.7%, and $38.6 million, or 5.4%, during the quarter and six months ended August 3, 2013, respectively, with comparable sales up 2.5% and 0.4% for the quarter and six-month period, respectively. At our multi-channel LOFT business, which includes LOFT stores and LOFT.com, we benefited from incremental store growth and robust traffic and transactions, partially offset by decreases in AUR and DPT due to an increased level of promotional activity early in the Spring season to effectively clear through inventory. Our second quarter merchandise assortment was well received, particularly our expanded offerings in denim and Loft Lounge. These factors contributed to comparable sales increases of 3.7% and 1.5% for the second quarter and six-month periods, respectively. At LOFT Outlet, net sales increased 18.9% and 17.4% for the quarter and six months ended August 3, 2013, respectively, primarily as a result of continued store growth, while comparable sales decreased 3.2% and 5.3%, respectively, due to a continued decline in traffic at factory/outlet centers across much of the United States.

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
 
Six Months Ended
 
August 3,
2013
 
July 28,
2012
 
August 3,
2013
 
July 28,
2012
 
(dollars in thousands)
Cost of sales
$288,921
 
$262,471
 
$542,862
 
$505,511
Gross margin
$349,277
 
$332,401
 
$669,842
 
$649,772
Percentage of net sales
54.7
%
 
55.9
%
 
55.2
%
 
56.2
%

Gross margin as a percentage of net sales for the quarter ended August 3, 2013 was 54.7% versus 55.9% in the comparable 2012 period. We experienced a year-over-year increase in merchandise gross margin rate performance, primarily due to the impact of multi-channel sales, an expanded assortment of relevant fashion with better offerings across all price points at Ann Taylor and our strategy to conservatively manage inventory levels to drive profitability in our factory/outlet channel at both brands. The improvement in merchandise gross margin rate performance was more than offset by the impact of higher levels of client shipping associated with multi-channel sales on our overall gross margin rate.

For the six months ended August 3, 2013, gross margin as a percentage of net sales decreased to 55.2% from 56.2% in the comparable 2012 period. We experienced merchandise gross margin rate improvement compared to the prior-year period primarily due to the impact of multi-channel sales, favorable client response to our merchandise assortment and pricing strategies at Ann Taylor and our strategy to conservatively manage inventory levels to drive profitability in our factory/outlet channel at both brands. However, the improvement in merchandise gross margin rate performance during the six-month period was more than offset by the effect of higher levels of client shipping associated with multi-channel sales and an increased level of promotional activity at LOFT early in the Spring season.


20

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
 
August 3,
2013
 
July 28,
2012
 
August 3,
2013
 
July 28,
2012
 
(dollars in thousands)
Selling, general and administrative expenses
$
289,298

 
$
279,456

 
$
575,951

 
$
551,474

Percentage of net sales
45.3
%
 
47.0
%
 
47.5
%
 
47.7
%
 
The increase in selling, general and administrative expenses for the second quarter and six months ended August 3, 2013 versus the comparable prior-year periods was primarily due to higher payroll and occupancy costs related to store growth and other expenses associated with the expansion of our business. As a percentage of net sales, the decrease in selling, general and administrative expenses for the quarter and six months ended August 3, 2013 versus the comparable prior-year periods was primarily due to fixed cost leveraging as a result of higher net sales partially offset by higher payroll and occupancy costs related to store growth and other expenses supporting the expansion of our business.

Income Taxes
The following table presents our income tax provision and effective income tax rate: 
 
Quarter Ended
 
Six Months Ended
 
August 3,
2013
 
July 28,
2012
 
August 3,
2013
 
July 28,
2012
 
(dollars in thousands)
Income tax provision
$
24,827

 
$
21,826

 
$
37,968

 
$
38,667

Effective income tax rate
41.1
%
 
41.5
%
 
40.2
%
 
39.4
%

The effective income tax rate of 41.1% for the quarter ended August 3, 2013 was consistent with the comparable 2012 period. The increase in our effective income tax rate for the six months ended August 3, 2013 over the comparable 2012 period is primarily due to the benefit in the prior-year period of tax positions that were considered effectively settled, as well as changes in the mix of earnings in various state taxing jurisdictions. We expect our full year effective income tax rate to be approximately 41%.

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:
 
 
August 3, 2013
 
February 2, 2013
 
July 28, 2012
 
(dollars in thousands)
Working capital
$
172,412

 
$
169,275

 
$
161,450

Current ratio
1.56:1

 
1.50:1

 
1.49:1


Operating Activities
Cash provided by operating activities was $55.1 million for the six months ended August 3, 2013, compared with $105.2 million for the six months ended July 28, 2012. The year-over-year decrease is primarily the result of year-over-year increases in cash used for the purchase of merchandise inventories, payments related to our incentive compensation plans, and the timing of payment of accounts payable and other accrued expenses.

Merchandise inventories increased approximately $25.6 million, or 11.6%, at August 3, 2013 compared to July 28, 2012. On a per-square-foot basis, merchandise inventories at August 3, 2013 increased 8% as compared to July 28, 2012, reflecting a 5% decrease at Ann Taylor, and increases of 18% at LOFT and 11% in the factory/outlet channel. The increases at LOFT and the factory/outlet channel reflect the impact of timing shifts in the receipt of merchandise as compared to last year.


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Investing Activities
Cash used for investing activities was $61.9 million for the six months ended August 3, 2013, compared with $61.3 million for the six months ended July 28, 2012. Cash used for investing activities was primarily driven by capital expenditures related to our store expansion and refurbishment projects during both periods.

Financing Activities
Cash used for financing activities was $53.1 million for the six months ended August 3, 2013, compared with $61.4 million for the six months ended July 28, 2012. Cash used for financing activities was primarily for the repurchase of common stock under our share repurchase program during both periods. During the prior-year period, this was partially offset by cash inflows related to the exercise of stock options.

Repurchase Program
During the quarter and six months ended August 3, 2013, we repurchased 1.5 million shares of our common stock through open market purchases under our existing $600 million securities repurchase program at a cost of $49.1 million. During the quarter and six months ended July 28, 2012, we repurchased 1.6 million shares and 3.1 million shares, respectively, of our common stock through open market purchases at a cost of $40.0 million and $75.0 million, respectively. As of August 3, 2013, there were no amounts remaining for additional share repurchases under our $600 million securities repurchase program.

On August 21, 2013, the Company’s Board of Directors approved a new $250 million securities repurchase program. The program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors.

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 existing senior secured revolving credit facility due to expire in April 2013. 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 of certain eligible assets, primarily accounts receivable and inventory. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $13.5 million, $14.1 million and $14.1 million as of August 3, 2013, February 2, 2013 and July 28, 2012, respectively, leaving a remaining available balance for loans and letters of credit of $199.1 million, $150.8 million and $172.6 million as of August 3, 2013, February 2, 2013 and July 28, 2012, respectively. There were no borrowings outstanding under the Credit Facility at August 3, 2013, February 2, 2013, July 28, 2012 or as of August 23, 2013, the date of this filing.
The Credit Facility contains financial and other covenants, including limitations on indebtedness and liens, and a fixed charge coverage ratio covenant that is triggered if certain liquidity thresholds are not met.  As of August 3, 2013 and August 23, 2013, the date of this filing, the Company was in compliance with all such covenants. For additional information, see Note 6, “Revolving Credit Facility,” in the Notes to the Condensed Consolidated Financial Statements.

Other
We have significant amounts of cash 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 in our Credit Facility.
Foreign cash balances at August 3, 2013 were $3.9 million, the majority of which was held in Canadian dollars. As of February 2, 2013 and July 28, 2012, we had foreign cash balances of $3.0 million and $0.5 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 were not required to make a contribution to the Pension Plan in Fiscal 2012 or Fiscal 2011, any deterioration in the financial markets or changes in discount rates may require us to make a contribution to our Pension Plan in Fiscal 2013.
We are self-insured for expenses related to our employee medical plan, our workers' compensation plan, general liability plan and for short-term and long-term disability, up to certain thresholds.

22

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 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 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 policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”), which sets forth additional disclosure requirements for items reclassified out of AOCI and into net income, and is effective for annual and interim reporting periods beginning after December 15, 2012. We adopted ASU 2013-02 in the first quarter of Fiscal 2013, by presenting amounts reclassified out of AOCI as a separate disclosure in the Notes to the Condensed Consolidated Financial Statements. Amounts reclassified out of AOCI were related to the amortization of net actuarial loss associated with our pension plan.
In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, however retrospective application is permitted. We are currently in the process of evaluating ASU 2013-11 and do not expect that it will have a significant impact on our financial statements.

Item 3.        Quantitative and Qualitative Disclosures About Market Risk.
We have significant amounts of cash 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 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 expenses denominated in the Canadian dollar. As of August 3, 2013, 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 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 August 3, 2013, we did not hold any investments that did not qualify as cash.

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.

23

During the second quarter of Fiscal 2013, 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.

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)
May 5, 2013 to June 1, 2013
962

 
$
31.10

 
—

 
$
49,084

June 2, 2013 to July 6, 2013
1,044,082

 
32.35

 
1,043,600

 
15,322

July 7, 2013 to August 3, 2013
457,365

 
33.55

 
456,746

 
—

 
1,502,409

 
 
 
1,500,346

 
 
 
(1)
Includes 2,063 shares of restricted stock purchases 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)
We repurchased 1,500,346 shares under our existing $600 million share repurchase program during the second quarter of Fiscal 2013 at a cost of $49.1 million, exhausting that repurchase authorization. On August 21, 2013, our Board of Directors approved a new $250 million securities repurchase program. The program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors.




24

Item 6. Exhibits
Exhibit
Number
Description
 
 
10.1*†
The ANN INC. 2003 Equity Incentive Plan, as amended through March 6, 2013, and the Amendment to The ANN INC. 2003 Equity Incentive Plan, dated August 22, 2013.

 
 
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.


25

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 23, 2013
By:
/s/    Kay Krill
 
 
 
Kay Krill
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
Date:
August 23, 2013
By:
/s/    Michael J. Nicholson
 
 
 
Michael J. Nicholson
 
 
 
Executive Vice President, Chief Operating Officer,
 
 
 
Chief Financial Officer, and Treasurer
 
 
 
(Principal Financial Officer)


26

Exhibit Index
 
Exhibit
Number
  
Description
 
 
 
10.1*†
 
The ANN INC. 2003 Equity Incentive Plan, as amended through March 6, 2013, and the Amendment to The ANN INC. 2003 Equity Incentive Plan, dated August 22, 2013.
 
 
 
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.


27