FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Ann Taylor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %>
142 West 57th Street
New York, NY 10019
(212) 541-3226

Transcript of February 6, 1997 Recorded Comments of Pat Spainhour, Chairman and Chief Executive Officer, on January 1997 Sales

Good morning. This is Pat Spainhour. Thank you for joining me for the January sales report.

This morning we announced that total net sales for the four weeks ended February 1, 1997 were up 5.9% to $43.5 million, and comparable store sales for the month were up 2.6%, compared to the four week period ending January 27, 1996. Because 1995 was a 53 week year, when compared to the full 5 week fiscal month last year, net sales for the four week period ended February 1, 1997 were down 14.2% compared to total net sales of $50.6 million for the five week period ended February 3, 1996. Excluding the extra week in the fourth quarter of fiscal 1995 for comparison purposes, net sales were up 11.5% to $213.1 million, and comparable store sales were up 7.9% compared to the thirteen week period ended January 27, 1996.

We also announced this morning that we will take a one-time charge of approximately $0.08 per share in the fourth quarter as a result of our decision to close our nine Ann Taylor Studio shoe stores, which have been unprofitable since their opening. I will address the Studio store closings after discussing our January sales and our outlook for the Spring season.

We were pleased with our performance in January. The rate of our comparable store sales increase in January was below the level we have been achieving throughout the Fall season, but full price selling was up significantly from a year ago. We believe that the lower rate of comparable store sales increase in January was attributable to the fact that we converted to Spring merchandise more effectively this year and simply had much less clearance merchandise to sell during what is primarily a promotional period. We began the month with inventories down from the prior year by approximately 30% on a per square foot basis and we ended the month with inventories down by approximately 17% on a per square foot basis. Please note that these inventory 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.

Our performance in January culminates what we believe was a successful fourth quarter. When we announce earnings on March 11, we expect to meet the current First Call consensus earnings estimate for the fourth quarter, before the reduction of $0.08 per share for the charge related to the closing of our studio stores.

We are also very pleased with the strength of our balance sheet. We finished the year with no borrowings outstanding under either our $122 million revolving credit agreement or our $40 million accounts receivable financing facility and with $10 million in cash reserves on hand. Year-end debt net of cash reserves stands at $121 million, compared to $272 million at the beginning of the fiscal year.

Our business was strong throughout the Fall season. Total sales in the Fall season increased by 15.2% to $425.8 million compared to the 26 week period ending January 27, 1996 and comparable store sales increased by 10.1%. From a merchandise perspective, we found good success in areas where Ann Taylor traditionally has been strongest, such as updated classics in separates and silk tops, including sweaters and fuji shirts. Our business also improved strongly in more casual goods, including our weekend business and the "middle of the store" assortment that is both suitable for dressy casual and more casual work environments. Our petites business continues to grow as a percentage of our overall business.

Equally important to our successful Fall season was our commitment to tighter inventory management. Our strategy of accelerating promotional activity to ensure a clean conversion to Spring may have cost us some sales in January, but should result in fewer markdowns in the first quarter from end of season carryover. We believe that we can continue to improve our inventory turns and gross margins in 1997.

We have been generally pleased with the early reads on Spring merchandise, although we are always cautious about drawing any conclusions this early in the season. Nevertheless, we believe that we can achieve mid-to-high single digit comparable store sales increases in the first quarter and for the full Spring season. We expect that gross margins will be higher than Ann Taylor has achieved in recent history, both as a result of the favorable effects of the acquisition earlier this year of CAT and the Woven Division of Cygne Designs and as a result of our cleaner conversion into Spring and tighter management of inventory levels. We expect to be able to hold operating expenses as a percentage of sales at Spring 1996 levels despite a planned increase in spending in some areas, such as marketing, which we believe will benefit the business going forward. Based on these assumptions, we are comfortable with the First Call consensus estimates for the first quarter and the 1997 fiscal year.

Of course, actual sales and earnings will depend on our customers' response to our merchandise offerings this Spring, as well as trends in spending for women's apparel generally, the nature of the competitive environment, the degree of promotional activity we engage in, our operating expenses and other factors.

We have reached the decision that the Ann Taylor Studio stand alone shoe stores which were opened in 1994 and 1995 cannot reach our profit objectives and are incompatible with our basic strategy of encouraging head to toe wardrobing within the Ann Taylor Store. As a result, we expect to close our nine Ann Taylor Studio stand alone shoe stores during the first half of 1997 and will reintroduce shoes into the sister Ann Taylor stores in each of these locations. As a result of this decision, we expect to record in the fourth quarter of 1996 a one-time charge of $3.6 million before tax, which comprises a non-cash charge of approximately $2.5 million to cover the write-off of the remaining net book value of these stores, approximately $350,000 to cover projected losses from these stores prior to their closing and approximately $750,000 to cover our estimated lease liabilities and related costs. This charge, which we will take in 1996, will reduce earnings by $0.08 per share. The nine Studio stores that we expect to close had aggregate sales of approximately $4.6 million and lost a total of approximately $1.1 million on a four-wall basis in 1996.

We believe that closing the Studio stores will increase our merchandising focus and improve operating profitability on an ongoing basis.

This has been a year of significant accomplishment for Ann Taylor. We clearly regained our merchandising focus after the problems of 1995. We made substantial progress in developing a first class infrastructure, including the acquisition of our principal sourcing partners. And we greatly improved our financial position by raising $100 million of convertible preferred securities in April and generating approximately $50 million in free cash flow over the course of the year to further reduce debt.

As we mentioned last week, Paul Francis has resigned from Ann Taylor and we want to take this opportunity to thank him for his many contributions to our company over the past four years and wish him success in his new endeavors.

As usual, Walter Parks and Jennifer Liu will be available to answer any questions you have concerning today's announcement.

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