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

Ann Taylor Stores Corp. <% 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 March 6, 1997 Recorded Comments of J. Patrick Spainhour, Chairman and Chief Executive Officer, and Walter J. Parks, Chief Financial Officer, on Fiscal 1996 Fourth Quarter Earnings and February 1997 Sales

Introduction by Walter J. Parks

Good morning. This is Walter Parks. Welcome to our fiscal 1996 year end earnings conference call. Pat Spainhour, Chairman and Chief Executive Officer, will cover these results and comment on our February sales, which we also released this morning.

Please remember than any forward-looking information discussed on today's call is subject to certain risks and uncertainties. Although we are trying to provide you with our current best thinking, actual sales and earnings will depend on our customers' continued favorable response to our merchandise offerings, 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. Now I'd like to turn the call over to Pat.

Comments by J. Patrick Spainhour

Good morning and thank you for joining us for today's call.

This morning we announced that Ann Taylor earned net operating income of $5.0 million or $0.20 per share in the fourth quarter ended February 1, 1997, before the deduction of $0.08 per share (after taxes) for the previously announced one-time pre-tax charge of $3.6 million associated with the planned closing of our 9 Ann Taylor Studio shoe stores. Reported net income for the fourth quarter, after taking this charge into account was $3.0 million or $0.12 per share. Fourth quarter earnings reflect a significant improvement over our net loss of $1.2 million, or $0.05 per share, in the fourth quarter of 1995.

1996 fourth quarter earnings reflect a gross margin rate of 44.0% of sales and SG&A expense of $74.9 million, excluding the one-time charge, or 35.1% of sales.

For the 1996 fiscal year, Ann Taylor's net operating earnings were $12.7 million, or $0.53 per share, before the one-time $3.6 million charge I just described, and before the previously announced one-time pre-tax charge of $3.5 million, or $0.08 per share after taxes, relating to the former Chairperson's employment contract. Reported net income for the fiscal year, after taking these charges into account was $8.7 million, or $0.36 per share, compared to a loss of $876,000, or $0.04 per share, for fiscal 1995. I will speak more about 1996 earnings results in just a moment.

This morning we also announced that net sales for the four weeks ended March 1, 1997 increased 1.3% to $51.2 million, and comparable store sales for the month declined 1.2%, compared to the same four week period last year.

February comparable store sales reflect the general absence of a promotional presence during what historically has been for Ann Taylor, as a result of carryover inventory, a promotional period. As a result of improved inventory management and more aggressive promotional activity in the fourth quarter, we simply had much less clearance merchandise available to offer in February. By way of comparison, in the beginning of February 1997, markdown units represented approximately 5% of our inventory, which is significantly less than last February, when markdown units were in excess of 40% of inventory.

The decline in promotion-driven traffic cost us more in sales than we had originally anticipated and as a result, February comparable store sales were slightly below our original expectations. However, we were very pleased with the quality of February sales and were especially encouraged by full price selling of early Spring season receipts. Full price selling was up significantly in February compared to the same period a year ago. This also has favorable implications for first quarter gross margin.

With respect to total inventories on a per square foot basis, we began the month with inventories down from the prior year approximately 19% and we ended the month with inventories down approximately 14% compared to the prior year, principally reflecting the reduction in markdown units. These inventory statistics exclude inventory associated with Ann Taylor Global Sourcing. These levels reflect our commitment to tighter inventory management and a cleaner conversion to Spring merchandise than the Company has seen in its recent past, which should also result in higher gross margins in the first quarter and improved inventory turns.

Assuming our customers continue to react favorably to our Spring merchandise collection, we expect to achieve mid-single digit comparable store sales increases in the first quarter and for the full Spring season and we remain comfortable with the current First Call consensus earnings estimate for the first quarter.

Turning back to our 1996 earnings results, as we announced last month, total sales for fiscal year 1996 were $798.1 million, an increase of 10.6% over the comparable fifty-two week period ended January 27, 1996. Comparable sales for the same period rose 1.8%, compared to a comparable store sales decline of 8.9% in 1995.

Fourth quarter gross margin as a percentage of sales improved 4% to 44.0% in 1996, from 39.9% in 1995. For the full year, gross margin as a percentage of sales was up almost 3% to 44.4%, from 41.8% in 1995. Gross margin benefited from increased full-price selling and a lower markdown rate than a year ago.

Operating expenses excluding goodwill and the non-recurring charge in the fourth quarter totaled $74.9 million, an increase of 3.5% over the fourth quarter of last year. As a percentage of sales, this represented an improvement to 35.1% for the fourth quarter of 1996, compared to 36.1% in the fourth quarter of 1995. For the full year, SG&A expenses before goodwill and non-recurring charges totaled $291.0 million, an increase of 7.3% over last year. The SG&A rate for the year improved to 36.5% of sales in 1996, from 37.1% of sales in 1995. The increases in SG&A dollars were primarily attributable to increased sales, as well as increased retail square footage, which at quarter and year end was 3.3% higher than last year. The improvement in the SG&A rate as a percentage of sales primarily reflects the increased leverage on fixed expenses resulting from our improved sales performance in 1996.

Interest expense in the fourth quarter was $5.7 million, compared to $6.6 million a year ago, and for the full year was $24.4 million, compared to $21 million a year ago. Interest expense includes interest on the convertible TOPrS issued by our finance trust last Spring.

The SG&A expense figures include $7 million of depreciation expense in the fourth quarter of 1996 versus $5 million in the fourth quarter a year ago, and $26 million of depreciation expense for all of 1996 versus $19 million in 1995. We expect to have approximately $29 million in depreciation expense in 1997.

These expense figures do not include goodwill amortization expense, which amounted to $10.1 million and $9.5 million in 1996 and 1995 respectively. The increase in goodwill amortization is a result of the September 1996 acquisition of our sourcing division. Going forward, goodwill amortization will be approximately $11.0 million annually, reducing annual net income by approximately $0.42 per share.

Capital expenditures in the fourth quarter were $6.3 million, and for the full year totaled $16.1 million. Capital expenditures were principally attributable to our 1996 real estate expansion program and, to a lesser extent, investments in information systems.

In terms of real estate, we added approximately 80,000 gross square feet of space in fiscal 1996, which includes 9 new Ann Taylor stores, 1 new Loft store, 1 new Factory store, and 7 expansions. We also closed 8 Ann Taylor stores in fiscal 1996, representing in aggregate, about 26,000 square feet. These stores were under-performing and were closed at the end of their lease terms.

We are currently estimating that capital expenditures in 1997 will be approximately $25 million, reflecting a slightly more aggressive real estate expansion program of approximately 125,000 gross square feet for 1997. We expect this program will be focused on our core Ann Taylor Stores division and represents approximately 26 new stores and 11 expansions.

We are also very pleased with the strength of our balance sheet. As we announced last month, we finished fiscal 1996 with no borrowings outstanding under either our $122 million revolving credit facility or our $40 million accounts receivable financing facility. Year-end debt, excluding the TOPrS and net of cash reserves, stood at $121 million, compared to $272 million at the beginning of the fiscal year.

1996 was a year of significant accomplishment for Ann Taylor. We clearly regained our merchandising focus after a very disappointing 1995. We also 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 the Spring and generating approximately $50 million in free cash flow over the course of the year to further reduce debt. Most importantly, we restored profitability for our stockholders. We look forward to building upon these efforts in 1997.

As usual, Walter Parks and Jennifer Liu will be available today to answer your questions concerning this morning's announcements.

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

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