FOOL CONFERENCE CALL SYNOPSIS*

Transcript of November 19, 1996 Recorded Comments of J. Patrick Spainhour, Chairman and Chief Executive Officer, and Paul E. Francis, Chief Financial Officer, on Third Quarter 1996 Results.

COMMENTS OF J. PATRICK SPAINHOUR

Good morning. This is Pat Spainhour, and thank you for joining Paul Francis and me for our third quarter earnings conference call. I will be brief, as we covered many of the issues in our October sales conference call a week and a half ago.

This morning we announced that Ann Taylor earned net income of $3,262,000, or $0.13 per share, in the third quarter ended November 2, 1996. Our third quarter earnings are reduced by the previously announced one-time charge of $3.5 million (before taxes), or approximately $0.08 per share, on an after-tax basis, associated with Sally Frame Kasaks' employment contract. Excluding this one-time charge of $0.08 per share, our earnings in the third quarter would have been approximately $5.2 million or $0.21 per share, which is slightly above the most recent First Call estimates for Ann Taylor. This reflects a significant improvement over our net profit of $686,000, or $0.03 per share, in the third quarter of 1995.

1996 third quarter earnings reflect a gross margin rate of 45.7% of sales, and SG&A expense of $75.8 million, or 35.7% of sales. Paul will provide more detail regarding these operating results in just a moment.

Our operating results in the third quarter show that we are continuing to make progress in restoring Ann Taylor's financial performance. Comparable store sales in the quarter were up by 12.6% and total sales increased by 19.1% from the third quarter last year. These strong sales reflect good customer reaction to our Fall assortment and sufficient inventory levels to maintain the momentum in the business. Our third quarter merchandise assortments were especially on track in areas in which Ann Taylor traditionally has been strong, including our front of store separates business and key item tops such as fuji silk blouses and silk sweaters. Our business was also strong in more casual product categories such as denim and stretch bottoms. In addition, petites continues to grow as a percentage of our total business.

We are also pleased with our customers' initial response to our holiday collection and the early reads on our counterseasonal merchandise. We hope to have a good holiday season. We do not expect to continue to achieve double digit comparable store sales gains, but we think that mid-to-high single digit comparable store sales gains are achievable, which would enable us to continue to shor improvement in our financial results.

At this point I will turn the call over to Paul Francis.

COMMENTS OF PAUL E. FRANCIS

Thank you. I want to echo Pat's comments that we are pleased with the progress shown in our financial performance in the third quarter.

Our improved operating earnings in the third quarter were the result of good comparable store sales gains and improved gross margins and operating expense ratios. Our comparable store sales gain of 12.6% in the third quarter exceeded the comparable store sales decline of 11.3% in the third quarter last year, so we are getting back to 1994 levels of sales productivity in stores open during that period.

We said this Spring that we believed our sales were being negatively affected by relatively light inventory levels. We believe our relatively stronger inventory levels in the third quarter positively affected sales. We began the Fall season with inventories 14% below the prior year on a per square foot basis and ended the quarter 5% lower than at the end of the third quarter last year. These statistics exclude raw materials and work-in-progress inventory acquired in connection with our acquisition in September of CAT and the Woven Division of Cygne Designs. We previously indicated that we expected inventory levels on a per square foot basis to be within approximately 5% of last year's levels for the balance of the Fall season. However, principally because of our greater sell-throughs early in the season and the acceleration of some receipts in the third quarter in response to strong business, inventory levels in the fourth quarter may be 5-10% less than the prior year on a per square foot basis, depending on sales and other factors. We still believe that we can achieve mid-single-digit comparable store sales gains in the fourth quarter with these levels in inventory, subject of course to our customers' reaction to our merchandise content, the competitive environment, the level of promotional activity, and other factors.

Gross margin percentage in the third quarter was 45.7%, compared to 44.9% in the third quarter last year. Our gross margin benefited from increased full price selling and a lower markdown rate than a year ago. We expect that the acquisition of CAT and the Ann Taylor Woven Division of Cygne will result in an increase in gross margins over time. However, we saw relatively little gross margin benefit from the acquisition in the third quarter, because the closing occurred after the majority of third quarter shipments from these entities had been received.

Our ratio of operating expenses before goodwill to sales improved by 3% in the third quarter, from 38.7% last year to 35.7% this year. The improvement primarily reflected the increased leverage on fixed expenses resulting from our strong sales performance. SG&A expenses before goodwill totaled $75.8 million, an increase of 9.8% over the third quarter of last year. The increase in expense was primarily attributable to increased sales, as well as increased retail square footage, which at quarter end was 5.8% higher than last year. Interest expense in the third quarter was $6.3 million compared to $5.4 million a year ago. Interest expense includes interest on the convertible TOPrS that we issued in April, which have a somewhat higher cost of funds than the bank financing that it replaced.

Cash flow in the third quarter and our liquidity position continue to be strong. Total debt at the end of the third quarter was $164 million. At the end of the third quarter we had $102 million available under our $122 million revolving credit facility, $14 million available under our $40 million accounts receivable financing facility and $12 million available under Ann Taylor Global Sourcing's Credit Agreement, of which $8 million can be borrowed and the remainder used only for letters of credit.

We are still completing the purchase price accounting adjustments relating to the acquisition of CAT and the Woven Division of Cygne Designs, and will release our third quarter balance sheet reflecting these adjustments when we file our third quarter 10-Q.

In terms of real estate, we opened 4 new Ann Taylor stores and expanded 6 existing Ann Taylor stores during the third quarter. We also closed 1 underperforming Ann Taylor store, at the expiration of its lease term. In the fourth quarter we will open 1 new Ann Taylor store and 1 new Loft store. For the full year 1996, we will add about 80,000 square feet of retail space, which includes 9 new Ann Taylor stores, 7 expansions, one new Factory store, and one new Loft store. We have closed a total of 7 Ann Taylor stores this year, representing about 22,000 retail square feet in aggregate. These stores were underperforming and were closed at the end of their lease term.

Pat and I want to thank all of you for your support. Walter Parks and Jennifer Liu will be available to answer any questions you have concerning today's release.

[The company also sent a revision to the press release they issued this morning. In the first paragraph of the release, the charge to the Company's third quarter 1996 earnings relating to the estimated costs of the Company's obligations under the former chairperson's employment contract of approximately $2 million after tax resulted in a reduction of 1996 third quarter net income by $0.08 per share (not 1995 third quarter net income, as it reads now).]

*This written transcript of the conference call was supplied by Ann Taylor Inc. and is being republished by the Motley Fool.