10-K 1 ann_10kx2012.htm 10-K ANN_10K_2012
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 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 No. 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)
_________________________________________________
 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of each exchange on which registered
Common Stock, $.0068 Par Value
 
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
_________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No  ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨    No  ý.
Indicate by check mark whether 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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý.
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 the definitions 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 Act).    Yes  ¨    No  ý.
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant as of July 28, 2012 was $1,252,248,299.
The number of shares of the registrant’s common stock outstanding as of March 1, 2013 was 46,604,419.
Documents Incorporated by Reference:
Portions of the Registrant’s Proxy Statement for the Registrant’s 2013 Annual Meeting of Stockholders to be held on May 30, 2013 are incorporated by reference into Part III.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



ANN INC.
ANNUAL REPORT ON FORM 10-K INDEX
 
 
 
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1


Statement Regarding Forward-Looking Disclosures
This Annual Report on Form 10-K (this “Report”) includes, and incorporates by reference, certain 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. These forward-looking statements reflect the current expectations of ANN INC. concerning future events and actual results may differ materially from current expectations or historical results. Any such forward-looking statements are subject to various risks and uncertainties, including without limitation those discussed in the sections of this Report entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” ANN INC. does not assume any obligation to publicly update or revise any forward-looking statements at any time for any reason.


PART I

ITEM 1.
Business.

Overview
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 values are her values. We understand that a woman expresses herself through what she wears - at work, at home and at play. To meet her needs, we design pieces for her life and her changing roles to help her look and feel confident and beautiful. We create rich experiences that connect with her wherever she is, inspire her style and simplify her choices.
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.
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 984 retail stores in 47 states, the District of Columbia, Puerto Rico and Canada, comprised of 275 Ann Taylor stores, 512 LOFT stores, 101 Ann Taylor Factory stores and 96 LOFT Outlet stores. 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.
Unless the context indicates otherwise, all references to “we,” “our,” “us,” and “the Company” refer to ANN INC. and its wholly-owned subsidiaries.

Brands
Ann Taylor
At Ann Taylor, we champion the modern working woman and her love of fashion in everything we do. For generations, we have striven to be her go-to style destination for every aspect of her life. Ann Taylor competes in the affordable luxury price category, and offers clients a high-quality collection of beautiful, wear-now pieces and a unique combination of fashion, work and flattering fit. The goal at Ann Taylor is to help our clients feel confident, feminine and successful.
LOFT
At LOFT, we believe the best relationships are built on trust and an amazing wardrobe. Originally established in 1996 as an extension of the Ann Taylor brand, LOFT has evolved into a national brand that competes in the “upper-moderate” price category, and has become a trusted personal stylist to its clients by connecting with them on a genuine level - equal parts expert, confidante and friend who tells it like it is. We give our clients fashion advice, ideas and inspiration that make her style aspirations attainable. We believe in offering versatile, accessible and affordable fashion with undeniably feminine appeal, special and unexpected details and a flattering fit.


2


Business Strategy
We are committed to growing our business through a multi-channel retail strategy. Our goal is to assist our clients in accessing our brands whenever, wherever and however they choose to shop. In support of this, we successfully launched the first phase of our multi-channel initiative during the third quarter of Fiscal 2012, allowing store order fulfillment of internet sales. In Fall 2012, we also opened our first stores in Canada, building on strong brand awareness across the border and marking the first step in expanding our brands internationally. In the early part of Fiscal 2013, we plan to build on this momentum by continuing to open stores in Canada and by adding international shipping capabilities to our Online Stores, providing clients in certain countries outside the United States access to our brands and enabling us to assess further potential international expansion opportunities.
Our efforts thus far have been focused on increasing sales, gross margin rate performance and the overall profitability of our existing brands. In addition to the above actions, we have focused considerable attention on optimizing our store portfolio in order to improve 4-wall profitability and better serve our clients. This, combined with a focus on improving the brand aesthetic in our stores and building on our exceptional client service, will allow us to provide an optimal in-store shopping experience for our Ann Taylor and LOFT clients.
Over the longer term, we will continue to evaluate organic growth opportunities, including new merchandise offerings and brand extensions, as we successfully did with LOFT and our Ann Taylor wedding and LOFT maternity merchandise collections. In addition, we will continue to evaluate inorganic opportunities, such as acquisitions, when our research indicates that such an opportunity will complement our current brands and merchandise offerings and is in the best interest of our associates, clients and shareholders. Our primary focus, however, remains on our core Ann Taylor and LOFT brands.
Retail Stores
Our stores are located in malls, specialty or lifestyle centers, downtown or village locations and destination shopping centers. We open new stores in markets that we believe have a sufficient concentration of our target clients. We also optimize the size and/or location of existing stores as demographic conditions warrant and sites become available. In addition, we regularly evaluate and invest in our current store base and elevate and modernize the in-store experience we provide to our clients.
Store locations are determined on the basis of various factors, including geographic location, demographic studies, anchor tenants in a mall location, other specialty stores in a mall or specialty center location or in the vicinity of a village location and the proximity to professional offices in a downtown or village location. We open our Ann Taylor Factory and LOFT Outlet stores in outlet centers with co-tenants that generally include a significant number of outlet or discount stores operated under nationally recognized upscale brand names. Store size is determined on the basis of various factors, including merchandise needs, geographic location, demographic studies and space availability.
In Fiscal 2012, we continued to execute a more aggressive store growth program, opening 60 new stores in the United States and, for the first time, three new stores in Canada. We also continued to amend and renegotiate existing leases at more favorable occupancy rates and evaluate expiring leases for renewal based on strategic financial guidelines. In Fiscal 2013, we plan to open approximately 65 stores in the United States and Canada, and close approximately 30 U.S. stores, leading to net store growth of approximately 35 stores.
An average Ann Taylor store is approximately 5,100 square feet. During Fiscal 2012, we continued to roll out our new smaller format Ann Taylor stores, adding 11 new smaller-format stores, downsizing or remodeling another 21 stores, and updating an additional 100 stores. As a result of these capital investments, approximately two-thirds of our store fleet reflects our modern aspirational brand aesthetic. In Fiscal 2013, we plan to further this by opening approximately five new Ann Taylor stores and downsizing and/or remodeling approximately 20 existing stores.
Ann Taylor Factory stores average approximately 6,900 square feet. In Fiscal 2012, we opened three Ann Taylor Factory stores and downsized four existing stores. In Fiscal 2013, we plan to open approximately seven Ann Taylor Factory stores.
An average LOFT store is approximately 5,800 square feet. We also operate one LOFT flagship store on the ground floor of 7 Times Square, our corporate headquarters, in New York City. In Fiscal 2012, we opened 26 LOFT stores and we plan to open approximately 40 LOFT stores and downsize and/or remodel approximately 25 existing stores in Fiscal 2013.
LOFT Outlet stores average approximately 6,800 square feet. In Fiscal 2012, we continued to grow our fleet of LOFT Outlet stores by opening 23 new stores and we plan to open approximately 15 LOFT Outlet stores in Fiscal 2013.
Our stores typically have approximately 25% of their total square footage allocated to stockroom and other non-selling space.

3


We believe that our stores are located in some of the most productive retail centers in the United States and that our existing store base is a significant strategic asset of our business. During the past three years, we have invested approximately $258 million in our store base and approximately 51% of our stores are either new or have been expanded, downsized, remodeled or refurbished in the last three years.
The following table sets forth certain information regarding our Ann Taylor (“ATS”), LOFT (“LOFT”), Ann Taylor Factory (“ATF”) and LOFT Outlet (“LOS”) retail stores over the past three fiscal years:
 
Store Count
 
Ann Taylor Brand
 
LOFT Brand
 
 
ATS
 
ATF
 
Total

LOFT
 
LOS
 
Total
Total
January 30, 2010
 
291

 
92

 
383

 
506

 
18

 
524

 
907

New
 

 

 

 
10

 
14

 
24

 
24

Converted
 
(6
)
 

 
(6
)
 
2

 
4

 
6

 

Closed
 
(19
)
 

 
(19
)
 
(16
)
 

 
(16
)
 
(35
)
January 29, 2011
 
266

 
92

 
358

 
502

 
36

 
538

 
896

New
 
17

 
7

 
24

 
14

 
38

 
52

 
76

Closed
 
(3
)
 

 
(3
)
 
(16
)
 

 
(16
)
 
(19
)
January 28, 2012
 
280

 
99

 
379

 
500

 
74

 
574

 
953

New
 
11

 
3

 
14

 
26

 
23

 
49

 
63

Closed
 
(16
)
 
(1
)
 
(17
)
 
(14
)
 
(1
)
 
(15
)
 
(32
)
February 2, 2013
 
275

 
101

 
376

 
512

 
96

 
608


984


In Fiscal 2012, total square footage increased by approximately 101,000 square feet, or approximately 2%, from Fiscal 2011, to approximately 5.7 million square feet. During Fiscal 2013, we plan to open approximately 65 stores, close approximately 30 stores, and optimize the size of an existing 25 stores, resulting in a net increase in total square footage of approximately 135,000 square feet, or approximately 2% from Fiscal 2012.
In Fiscal 2012, capital expenditures related to new stores totaled approximately $76.6 million and expenditures for store remodeling and refurbishment totaled approximately $45.5 million. In Fiscal 2013, we expect that capital expenditures for new stores will be approximately $55 million, and expenditures for store remodeling and refurbishment will be approximately $85 million.
Our store expansion and refurbishment plans are dependent upon, among other things, general economic and business conditions affecting consumer confidence and spending, the availability of desirable locations and the negotiation of acceptable lease terms. See “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Online Stores
Growing our Online Stores remains one of our top strategic priorities. Our Online Stores reinforce the unique aesthetic of our Ann Taylor and LOFT brands and are designed to complement the in-store experience we deliver to our clients. We offer our clients a high-quality online shopping experience, from merchandise availability and website design to fulfillment and client service. We are committed to building a seamless, multi-channel experience for our clients and view our Online Stores as a key enabler of this strategy. As such, in Fiscal 2012, we implemented the first phase of our multi-channel initiative, enabling store order fulfillment of online sales. We plan to further evolve and integrate our Online Stores by making additional enhancements to website functionality and continued investments in infrastructure. To that end, in early Fiscal 2013, we plan to launch international shipping capabilities at our Online Stores, thereby providing clients in certain countries outside the United States access to our brands.


4


Merchandise Design and Production
Substantially all of our merchandise is developed by our in-house product design and development teams, who design merchandise exclusively for us. Our merchandising groups determine inventory needs for the upcoming season, edit the assortments developed by the design teams, plan merchandise flows and arrange for the production of merchandise by independent manufacturers, primarily through our in-house sourcing group. A small percentage of our merchandise is purchased through branded vendors and is selected to complement our in-house assortments.
Our production management and quality assurance departments establish the technical specifications for all merchandise and inspect our merchandise for quality, including periodic in-line inspections while goods are in production, to identify potential problems prior to shipment. Upon receipt, merchandise is inspected on a test basis for uniformity of size and color, as well as for conformity with specifications and overall quality of manufacturing.
In Fiscal 2012, we sourced merchandise from approximately 139 manufacturers and vendors in 16 countries, and no single supplier accounted for more than 10% of merchandise purchased on either a unit or cost basis. Approximately 39% of our merchandise unit purchases originated in China (representing approximately 43% of total merchandise cost), 16% in Vietnam (9% of total merchandise cost), 15% in India (14% of total merchandise cost), 15% in Indonesia (15% of total merchandise cost), and 10% in the Philippines (14% of total merchandise cost). Any event causing a sudden disruption of manufacturing or imports from any of these countries, including the imposition of additional import restrictions, could have a material adverse effect on our operations. We generally do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise with any single supplier. All of our foreign purchases are negotiated and paid for in U.S. dollars.
We have a supply chain compliance program that requires our suppliers, factories and authorized subcontractors to comply with our Global Supplier Principles and Guidelines, as well as the local laws and regulations in the country of manufacture. We conduct unannounced third-party audits to confirm manufacturer adherence to our compliance standards. We are also a certified and validated member of the United States Customs and Border Protection’s Customs-Trade Partnership Against Terrorism (“C-TPAT”) program and expect all of our suppliers shipping to the United States to adhere to our C-TPAT requirements. These include standards relating to facility security, procedural security, personnel security, cargo security and the overall protection of the supply chain. Third-party audits are conducted to confirm supplier compliance with our standards.
We believe we have solid relationships with our suppliers and that, subject to the discussion in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” we will continue to have adequate sources to produce a sufficient supply of quality merchandise in a timely manner and on satisfactory economic terms.
Inventory Control and Merchandise Allocation
Our planning departments analyze relevant historical product demand data (i.e., sales, margins, sales and inventory history of store clusters, etc.) by brand, size and store location, including our Online Stores, to assist in determining the quantity of merchandise to be purchased for, and the allocation of merchandise to, our channels. Merchandise is allocated to achieve an emphasis that is suited to each store’s client base, including our Online Stores. We also consider the effect our multi-channel initiative has had on in-store and online inventory levels in order to better inform our merchandise purchases and inventory allocation.
Merchandise is typically sold at its original marked price for several weeks, with the length of time varying by individual style or color choice and dependent on client acceptance. From time to time, we also run point-of-sale promotions which may apply to both full-price and markdown merchandise and temporarily reduce the merchandise selling price. We review inventory levels on an ongoing basis to identify slow-moving merchandise styles and broken assortments (items no longer in stock in a sufficient range of sizes) and use markdowns to clear this merchandise. Markdowns may also be used if inventory levels exceed client demand for reasons of design, seasonal adaptation or changes in client preference. Substantially all of our merchandise inventory is cleared in-store or through our Online Stores.
Our core merchandising system is the central repository for inventory data and related business activities that affect inventory levels, such as purchasing, receiving, allocation and distribution. Our primary distribution center is located in Louisville, Kentucky, as discussed further in "Properties." The majority of our merchandise is processed through our Louisville facility, which we own and operate. Additionally, we contract with third-party fulfillment vendors, utilizing a Bolingbrook, IL facility to fulfill online orders and a Toronto, Ontario facility for merchandise allocation to our Canadian stores. We also utilize a third-party distribution center bypass facility in Industry, CA. While a portion of our merchandise is processed through this bypass facility for direct distribution to our stores, it serves primarily as a trans-loading facility and a back-up distribution center in the event of a disaster.

5


Brand Building and Marketing
We believe that our Ann Taylor and LOFT brands are among our most important assets and that these brands and their relationship with our clients are key to our competitive advantage. We continually evolve these brands to appeal to the changing needs of our target clients and to stay competitive in the market.
We control all aspects of brand development for our retail concepts, including product design, store merchandising and design, channels of distribution and marketing and advertising. We continue to invest in the development of these brands through, among other things, client research, advertising, in-store and direct marketing and our online sites and online marketing initiatives. We also make investments to enhance the overall client experience through the opening of new stores, the expansion and remodeling of existing stores and a focus on client service. In addition, we are strategically focused on building a multi-channel brand strategy and continue to make investments to support this initiative.
We believe it is strategically important to communicate on a regular basis directly with our current client base and with potential clients, through national and regional advertising, as well as through direct mail marketing and in-store presentation. Marketing expenditures as a percentage of net sales were 4.1% in Fiscal 2012, and 4.0% in both Fiscal 2011 and Fiscal 2010.
Client Loyalty Programs
We have a credit card program that offers eligible clients in the United States the choice of a private label or co-branded credit card. All new cardmembers are automatically enrolled in our exclusive rewards program, which is designed to recognize and promote client loyalty. Both cards can be used at any Ann Taylor or LOFT location or channel of distribution, including Ann Taylor Factory, LOFT Outlet and our Online Stores. The co-branded credit card can also be used at any other business where the card is accepted. Both the private label and co-branded credit cards are offered in an Ann Taylor and LOFT version, depending upon where a client enrolls in the program; however, the core benefits offered to clients are the same.
To encourage clients to apply for a credit card, we provide a discount to approved cardmembers on all purchases made with a new card on the day of application acceptance. Rewards points are earned on purchases made with the credit card at any of our brands through any of our channels. Co-branded cardmembers also earn points on purchases made at other businesses where our card is accepted. Cardmembers who accumulate the requisite number of points are issued a Rewards Card redeemable toward a future purchase. In addition to earning points, all participants in the credit card program receive exclusive offers throughout the year. These offers include a Birthday Bonus and exclusive access to shopping events and periodic opportunities to earn bonus points.
Information Systems
During Fiscal 2012, we continued our investment in information services and technology, enhancing the systems we use to support our Online Stores and multi-channel capabilities, as well as our international expansion, merchandise procurement, inventory management and order fulfillment processes. These enhancements are generally aimed at driving sales, improving client access to merchandise assortments, and back office efficiencies.

Trademarks, Domain Names and Service Marks
The “AnnTaylor®,” “LOFT®,” “AnnTaylor Loft®” and other proprietary marks are registered with the United States Patent and Trademark Office and with the trademark registries of many foreign countries. Our rights in these marks are a significant part of our business, as we believe they are famous and well-known in the women’s apparel industry. Accordingly, we intend to maintain our trademarks and related registrations and vigorously protect them against infringement.
Competition
The women’s retail apparel industry is highly competitive. We compete with certain departments in international, national and local department stores and with other specialty stores, catalog and Internet businesses that offer similar categories of merchandise. We believe that our focused merchandise selection, versatile fashions and client service distinguish us from other apparel retailers. Our competitors range from smaller, growing companies to considerably larger players with substantially greater financial, marketing and other resources. While we are vigilant to maintain our competitiveness, there is, of course, no assurance that we will be able to compete successfully with them in the future. See “Risk Factors.”
Associate Relations
As of February 2, 2013, we had approximately 19,600 employees, of which approximately 2,050 were full-time salaried employees, 2,250 were full-time hourly employees and 15,300 were part-time hourly employees working less than 30 hours per week. None of our employees are represented by a labor union. We believe that our relationship with our employees is good.

6


Responsibly ANN
We are committed to operating our business responsibly and thoughtfully, and continue to set high standards and forge strong partnerships with our suppliers to ensure that our products are made in a socially and environmentally responsible manner. In addition, we try to make meaningful contributions to our communities and seek to minimize our impact on the environment by investing in new programs and innovations. Our brands reflect our passion for playing an active role in making the world a better place and we take pride in supporting causes that are important to our clients and our associates.
Available Information
We make available free of charge on our website, http://investor.anninc.com, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are filed electronically with, or otherwise furnished to, the United States Securities and Exchange Commission. Copies of the charters of each of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines and Business Conduct Guidelines, are also available on our website.

ITEM 1A.
Risk Factors.
Set forth below is a summary of the material risks to an investment in our securities, which should be considered carefully in evaluating such an investment. The risks described below are not the only risks our business faces. We may also be adversely affected by additional risks not presently known to us or that we currently deem immaterial. If any of the below risks actually occur, our business, results of operations, cash flows or financial condition could suffer, which might cause the value of our securities to decline. Please also see “Statement Regarding Forward-Looking Disclosures” in the section immediately preceding Item 1 of this Report.
Our ability to anticipate and respond to changing client preferences and fashion trends in a timely manner
Our success largely depends on our ability to consistently gauge fashion trends and provide a balanced assortment of merchandise that satisfies client demands for each of our brands in a timely manner. Any missteps may affect inventory levels, since we enter into agreements to manufacture and purchase our merchandise well in advance of the applicable selling season. Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends and economic conditions could lead to lower sales, missed opportunities, excess inventories and more frequent markdowns, which could have a material adverse impact on our business. Merchandise missteps could also negatively impact our image with our clients and result in diminished brand loyalty.
Our ability to maintain the value of our brands and engage new and existing clients
Our success depends on the value of our Ann Taylor and LOFT brands. The Ann Taylor and LOFT names are integral to our business, as well as to the implementation of strategies for expanding our business. Maintaining, promoting and growing our brands will depend largely on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high quality client experience. In addition, while our brands are mature and we have extensive client lists, our success depends, in part, on our ability to keep existing clients engaged and attract new clients to shop our brands. Our business could be adversely affected if we fail to achieve these objectives for one or both of our brands and our public image and reputation could be tarnished by negative publicity. Any of these events could negatively impact sales and profitability.
Our ability to manage inventory levels and changes in merchandise mix
The long lead times required for a substantial portion of our merchandise make client demand difficult to predict and responding quickly to changes challenging. Though we have the ability to source certain product categories with shorter lead times, we enter into contracts for a substantial portion of our merchandise well in advance of the applicable selling season. Our financial condition could be materially adversely affected if we are unable to manage inventory levels and respond to short-term shifts in client demand patterns. In addition, our multi-channel fulfillment strategy, which aims to help optimize merchandising decisions, improve client service and support our multi-channel operations, creates additional complexities in our ability to manage inventory levels. Inventory levels in excess of client demand may result in excessive markdowns and, therefore, lower than planned gross margin. On the other hand, if we underestimate demand for our merchandise, we may experience inventory shortages resulting in missed sales and lost revenues. Either of these events could significantly affect our operating results and brand image. In addition, our margins may be impacted by changes in our merchandise mix and a shift toward merchandise with lower selling prices. These changes could have a material adverse effect on our operating results.

7


Our reliance on key management and our ability to attract and retain qualified associates
Our success depends to a significant extent upon both the continued services of our current executive and senior management team, as well as our ability to attract, hire, motivate and retain qualified management talent in the future. Our senior executive officers have substantial experience and expertise in the retail business and have made significant contributions to the growth and success of our brands. Competition for key executives in the retail industry is intense, and our operations could be adversely affected if we cannot retain our key executives or if we fail to attract additional qualified individuals.
Our performance also depends in large part on the talents and contributions of engaged and skilled associates in all areas of our organization. If we are unable to identify, hire, develop, motivate and retain talented individuals, we may be unable to compete effectively and our business could be adversely impacted.
Our ability to execute brand extensions and other growth strategies, including international expansion
Part of our business strategy is to grow our existing brands and identify and develop new growth opportunities. The launch of new merchandise offerings or concepts may require significant capital expenditures and management oversight. Any such plan is subject to risks such as client acceptance, competition and product differentiation. There is no assurance that these merchandise offerings or concepts will be successful or that our overall profitability will increase as a result.
Our growth strategy may also include plans to expand our presence in both new and existing markets, as well as internationally, as we did in late 2012 with the opening of our first stores in Canada. We have no prior experience operating outside of the United States, including Canada, where we may face established competitors. International markets also present unique risks, including different operational characteristics in the areas of employment and labor, transportation, logistics, real estate, finance and law. Furthermore, consumer demand and behavior, as well as preferences and purchasing trends, may differ. Other challenges may include general economic conditions in specific countries or markets, disruptions or delays in shipments, changes in diplomatic and trade relationships, political instability and foreign governmental regulation. As a result of these and other factors, sales of our merchandise in other markets may not be successful, or the margins on those sales may not be in line with those we anticipate. In addition, any difficulties that we may encounter if we were to expand to other international markets may divert financial, operational and managerial resources from our existing operations, which could adversely impact our financial condition and results of operations.
Our ability to successfully upgrade and maintain our information systems in a timely and secure manner to support the needs of the organization
We rely heavily on information systems to manage our operations, including a full range of retail, financial, sourcing and merchandising systems, and regularly make investments to upgrade, enhance or replace these systems. The reliability and capacity of our information systems are critical. Despite our preventative efforts, our systems are vulnerable from time to time to damage or interruption from, among other things, natural disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses, and security breaches. Any disruptions affecting our information systems, or any delays or difficulties in transitioning to new systems or in integrating them with current systems, could have a material adverse impact on our business. Any failure to maintain adequate system security controls to protect our computer assets and sensitive data, including client data, from unauthorized access, disclosure or use could also damage our reputation with our clients. In addition, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption depends in part on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans.
As a component of our ongoing strategy to increase efficiencies, monitor costs and improve our information technology capabilities, we rely on third parties for the implementation and/or management of certain aspects of our information technology infrastructure. Many of the functions that are performed by third parties are performed in their offshore locations. Our agreements with those third parties require them to maintain certain levels of care and security with respect to our information systems and our data. However, failure by any of these third parties to implement and/or manage our information technology infrastructure effectively and securely could disrupt our operations, adversely affect our clients' shopping experience and negatively impact our profitability. Furthermore, the use of offshore service providers may expose us to risks related to local political, economic, social or environmental conditions (including acts of terrorism, the outbreak of war, or the occurrence of natural disaster), restrictive actions by foreign governments or changes in United States laws and regulations.

8


In addition, we are implementing enterprise-wide initiatives intended to standardize business processes across brands and functions and optimize performance. There can be no assurances that these initiatives will deliver the expected benefits or that there will not be delays in the expected timing of implementation. It is possible that the costs to complete any related system conversions may exceed current expectations, which could result in a significant additional investment of time and resources and add increased implementation risk. In addition, although we strive to ensure the orderly implementation of these initiatives, the risk of disruption to key operations is increased when complex system changes are undertaken. If our business transformation initiatives fail or are significantly delayed, our ability to improve existing operations and support future growth could be impaired or delayed, which could adversely impact our business and results of operations.
Our ability to secure and protect trademarks and other intellectual property rights
We believe that our “AnnTaylor,” “LOFT” and “AnnTaylor Loft” trademarks are critical to our success. Even though we register and defend our trademarks and other intellectual property rights, there is no assurance that our actions will protect us from the prior registration by others or prevent others from infringing our trademarks and intellectual property rights or seeking to block sales of our products as infringements of their trademarks and intellectual property rights. Further, the laws of foreign countries may not protect intellectual property rights to the same extent as do the laws of the United States. Because we have not registered without opposition all of our trademarks in all categories, or in all foreign countries in which we currently manufacture merchandise or may manufacture or sell merchandise in the future, our ability to source merchandise from international suppliers or pursue international expansion could be negatively impacted.
Effects of natural disasters, war, terrorism, public health concerns or other catastrophes
Natural disasters and public health concerns, including severe infectious diseases, could impact our ability to open and run our corporate offices and stores in affected areas and/or negatively impact our foreign sourcing offices and the manufacturing operations of our vendors. In addition, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption depends, in part, on the ability of our information systems to operate in accordance with our disaster recovery and business continuity plans. Lower client traffic due to the effect of natural disasters, security concerns, war or the threat of war and public health concerns could result in decreased sales that could have a material adverse impact on our business, financial condition and results of operations. In addition, threat of terrorist attacks or actual terrorist events in the United States and world-wide could cause damage or disruption to international commerce and the global economy, disrupt the production, shipment or receipt of our merchandise or lead to lower client traffic in regional shopping centers. Our ability to mitigate the adverse impact of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster or other catastrophic situation.
Risks associated with Internet sales
We sell merchandise over the Internet through our Online Stores, www.anntaylor.com and www.LOFT.com. Our Internet operations are subject to numerous risks, including:
the successful implementation of new systems, system enhancements and Internet platforms, including our multi-channel and online international order fulfillment and enhanced mobile capability;
the failure of the computer systems that operate our websites and their related support systems, causing, among other things, website downtimes and other technical failures;
reliance on third-party computer hardware/software;
reliance on third-party order fulfillment providers;
rapid technological change;
diversion of sales from our stores;
liability for online content;
violations of federal, state or other applicable laws, including those relating to online privacy;
credit card fraud; and
telecommunications failures and vulnerability to electronic break-ins and similar disruptions.

Our failure to successfully address and respond to these risks could reduce Internet sales, increase costs and damage the reputation of our brands.

9


Our reliance on third-party manufacturers and key vendors
We do not own or operate any manufacturing facilities and depend on independent third parties to manufacture our merchandise. We are at risk for increases in manufacturing costs and we cannot be certain that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control and failure to meet production deadlines. In addition, we source our merchandise from a select group of manufacturers and we continue to strengthen our relationships with these key vendors. While this strategy has benefits, it also has risks. If one or more of our key vendors were to cease working with us, the flow of merchandise to our stores could be impacted, which could have a material adverse effect on our sales and results of operations. In addition, world-wide economic conditions continue to negatively impact businesses around the world, and the impact of those conditions on our major suppliers cannot be predicted. Our suppliers may be unable to obtain adequate credit or access liquidity to finance their operations. While we have contingency plans for such potential interruptions, a manufacturer's failure to continue working with us, to ship merchandise to us on a timely basis or to meet the required product safety, quality and social compliance standards could cause supply shortages, failure to meet client expectations and damage to our brands.
The effect of fluctuations in sourcing costs
The raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high demand for fabrics, labor conditions, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, economic climate and other unpredictable factors. We take steps to mitigate sourcing pressures from fluctuating raw material costs by making advance commitments on key core fabrics when required, leveraging our strong vendor relationships and using country sourcing flexibility. Despite these measures, an increase in the demand for, the price of and/or a decrease in the availability of the raw materials used to manufacture our merchandise could have a material adverse effect on our cost of sales or our ability to meet our clients' needs. Additionally, increases in labor costs as well as a shortage of labor in certain areas of China, may also impact our sourcing costs. We may not be able to pass all or a portion of such higher sourcing costs onto our clients, which could negatively impact our profitability.
Our reliance on foreign sources of production
We purchase a significant portion of our merchandise from foreign suppliers. As a result, we are subject to various risks of doing business in foreign markets and importing merchandise from abroad, such as:
fluctuation in the value of the U.S. dollar against foreign currencies or restrictions on the transfer of funds;
imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our merchandise that may be imported into the United States or Canada from countries in regions where we do business;
significant delays in the delivery of cargo due to port security considerations;
imposition of duties, taxes, and other charges on imports;
imposition of anti-dumping or countervailing duties in response to an investigation as to whether a particular product being sold in the United States or Canada at less than fair value may cause (or threaten to cause) material injury to the relevant domestic industry;
financial or political instability in any of the countries in which our merchandise is manufactured or the transportation channels through which it passes;
impact of natural disasters and public health concerns on our foreign sourcing offices and vendor manufacturing operations;
potential cancellation of orders or recalls of any merchandise that does not meet our product safety and quality standards or is not manufactured in accordance with our social compliance requirements; and
disruption of imports by labor disputes and local business practices.
Any sudden disruptions in the manufacture or import of our merchandise caused by adverse changes in these or any other factors could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition, results of operations and liquidity.

10


Our ability to successfully manage store growth and optimize the productivity and profitability of our store portfolio
Our continued growth and success depend, in part, on our ability to successfully open and operate new stores, enhance and remodel existing stores on a timely and profitable basis, and optimize store performance by closing under-performing stores. Accomplishing our store expansion goals in the United States and planned expansion into other markets, such as Canada, depends upon a number of factors, including locating suitable sites and negotiating favorable lease terms. We must also be able to effectively renew and renegotiate lease terms for existing stores. Managing the profitability of our stores and optimizing store productivity also depends, in large part, on the continued success and client acceptance of our new Ann Taylor and LOFT store formats, as well as our ability to achieve planned store growth for our brands in Fiscal 2013 and beyond. Hiring and training qualified associates, particularly at the store management level, and maintaining overall good relations with our associates, is also important to our store operations. There is no assurance that we will achieve our store expansion goals, manage our growth effectively or operate our stores profitably.
The impact of a privacy breach and the resulting effect on our business and reputation
We rely heavily on digital technologies for the successful operation of our business, including electronic messaging, digital marketing efforts, collection and retention of client data and employee information, processing of credit card transactions, online e-commerce and social media activities and retention of data relating to the Company's financial position and strategic initiatives. Despite the robust security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to cyber-security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information, whether by us or by our third-party service providers, could adversely affect our business and operations, including severely damaging our reputation and our relationships with our clients, employees and investors and exposing us to risks of litigation and liability.
In addition, we may incur significant remediation costs in the event of a cyber-security breach or incident, including liability for stolen client or associate information, repairing system damage or providing credit monitoring or other benefits to affected clients. We may also incur increased costs to comply with various applicable laws regarding unauthorized disclosure of personal information. These and other cyber-security-related compliance, prevention and remediation costs, may adversely impact our financial condition and results of operations.
Manufacturer compliance with our social compliance program requirements
We require our independent manufacturers to comply with our Global Supplier Principles and Guidelines, which cover many areas including labor, health and safety and environmental standards. We monitor compliance with these Guidelines using third-party monitoring firms. Although we have an active program to provide training for our independent manufacturers and monitor their compliance with these standards, we do not control the manufacturers or their practices. Any failure of our independent manufacturers to comply with our Global Supplier Principles and Guidelines or local laws in the country of manufacture could disrupt the shipment of merchandise to our stores, force us to locate alternative manufacturing sources, reduce demand for our merchandise and/or damage our reputation.
Failure to comply with legal and regulatory requirements
Our business is subject to legal and regulatory requirements in the U.S. and abroad, including securities, employment and anti-bribery laws and regulations.  In addition, in the future there may be new legal or regulatory requirements or more stringent interpretations of applicable requirements, which could increase the complexity of the regulatory environment in which we operate and the related cost of compliance.
 While it is our policy and practice to comply with all legal and regulatory requirements and while our procedures and internal controls are designed to ensure such compliance, a finding that we are out of compliance with applicable laws and regulations could subject us to civil remedies or criminal sanctions, which could materially adversely impact our business.  In addition, even the claim of a violation of applicable laws or regulations could negatively affect our reputation.

11


The effect of general economic conditions
Our financial performance is subject to world-wide economic conditions and the resulting impact on consumer confidence and levels of consumer spending, which may remain volatile for the foreseeable future. Some of the factors impacting discretionary consumer spending include general economic conditions, wages and unemployment, consumer debt, reductions in net worth based on market declines, residential real estate and mortgage markets, tax policies, increases in fuel and energy prices, consumer confidence, failure to increase the debt ceiling in the U.S. and other macroeconomic factors. Consumer purchases of discretionary items, including our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected. A downturn in the economy could affect consumer purchases of our merchandise and adversely impact our results of operations and continued growth.
In addition, as a result of the instability in the global financial markets, there is continued diminished liquidity and credit availability and there can be no assurance that our liquidity will not be affected or that our capital resources will at all times be sufficient to satisfy our liquidity needs. Although we believe that our existing cash and cash equivalents, cash provided by operations and available borrowing capacity under our $250 million Fourth Amended and Restated Credit Agreement (the “Credit Facility”) will be adequate to satisfy our capital needs for the foreseeable future, any renewed tightening of the credit markets could make it more difficult for us to access funds, enter into agreements for new indebtedness or obtain funding through the issuance of our securities. Our Credit Facility also has financial covenants which, if not met, may further impede our ability to access funds under the Credit Facility.
We also have significant amounts of cash and cash equivalents on deposit at FDIC-insured financial institutions that are currently in excess of federally insured limits. Since the deposit insurance provisions of the Dodd-Frank Wall Street Reform Act expired on December 31, 2012, and because our Credit Facility contains certain restrictions on permitted investments, we cannot be assured that we will not experience losses with respect to cash on deposit in excess of federally insured limits.
The effect of competitive pressures from other retailers
The specialty retail industry is highly competitive. We compete with local, national and international department stores, specialty and discount stores, catalogs and internet businesses offering similar categories of merchandise. Many of our competitors are companies with substantially greater financial, marketing and other resources. Increased levels of promotional activity by our competitors, some of which may be able to adopt more aggressive pricing policies than we can, both online and in stores, may negatively impact our sales and profitability. There is no assurance that we can compete successfully with these companies in the future.
In addition to competing for sales, we compete for favorable store locations, lease terms and qualified associates. Increased competition in these areas may result in higher costs, which could reduce our sales and operating margins and adversely affect our results of operations.
Our dependence on our Louisville distribution center and other third-party distribution and transportation providers
Our wholly-owned and operated distribution center in Louisville, Kentucky, manages the receipt, storage, sorting, packing and distribution of the majority of merchandise to our stores. We also utilize third-party distribution facilities in Industry, California and Toronto, Canada for distribution support to our stores. In addition, sales at our Online Stores are primarily processed by a third-party fulfillment provider with facilities in Bolingbrook, Illinois. Independent third-party transportation companies then deliver merchandise from these facilities to our stores and/or our clients. Any significant interruption in the operation of our Louisville distribution center, the third-party distribution facilities that we utilize or the domestic transportation infrastructure due to natural disasters, accidents, inclement weather, system failures, work stoppages, slowdowns or strikes, or other unforeseen causes, could delay or impair our ability to distribute merchandise to our stores and/or our clients, which could result in lower sales, a loss of loyalty to our brands and excess inventory. Furthermore, we are susceptible to increases in fuel and other transportation costs that we may not be able to pass on to our clients, which could also adversely affect our results of operations.
Our dependence on shopping malls and other retail centers to attract clients to our stores
Many of our stores are located in shopping malls and other retail centers that benefit from the ability of “anchor” retail tenants, generally large department stores, and other attractions, to generate sufficient levels of consumer traffic in the vicinity of our stores. Any decline in the volume of consumer traffic at shopping centers, whether because of the economic slowdown, a decline in the popularity of shopping centers, the closing of anchor stores or otherwise, could result in reduced sales at our stores and excess inventory. We may have to respond by increasing markdowns or initiating marketing promotions to reduce excess inventory, which could have a material adverse effect on our margins and operating results.

12


In addition, continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation continue, a large proportion of our store base could be concentrated with one or a few entities that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable lease terms with these entities, this could affect our ability to profitably operate our stores, which could adversely impact our business, financial condition and results of operations.
The impact on our stock price relating to our level of sales and earnings growth
A variety of factors have historically affected, and will continue to affect, our comparable sales results and profit margins. These factors include fashion trends and client preferences, changes in our merchandise mix, competition, economic conditions, weather, effective inventory management and new store openings, among other things. There is no assurance that we will achieve positive levels of sales and earnings growth, and any decline in our future growth or performance could have a material adverse effect on the market price of our common stock.
Our stock price has experienced, and could continue to experience in the future, substantial volatility as a result of many factors, including global economic conditions, broad market fluctuations, our operating performance and public perception of the prospects for our brands or for the women's apparel industry in general. Failure to meet market expectations, particularly with respect to comparable sales, net revenue, operating margins and earnings per share, would likely result in a decline in the market value of our stock.
Our ability to realize deferred tax assets
Deferred tax assets represent the tax effect of the differences between the book and tax bases of assets and liabilities. Deferred tax assets are assessed periodically by management to determine whether they are realizable. Factors in management's determination consist of the performance of the business, including the ability to generate taxable income from operations, and tax-planning strategies. If, based on available information, it is more likely than not that a deferred tax asset will not be realized, we may be required to establish a valuation allowance against our deferred tax assets, which could have an adverse effect on our results of operations and financial condition.
The effect of external economic factors on our Pension Plan
Our future funding obligations with respect to our defined benefit Pension Plan, which was frozen in 2007, will depend upon the future performance of the Pension Plan assets, interest rates used to determine funding levels, actuarial data and experience and any changes in government laws and regulations. Our Pension Plan assets are held in common collective trusts and mutual funds that invest in equity and debt securities. Our ongoing pension expense and contribution obligations under our Pension Plan could be adversely impacted by changes in the net market value of our Pension Plan assets, fluctuating interest rates and/or declining asset returns, which could negatively affect our financial condition and results of operations.
The impact of climate change on our business    
There is growing concern that a gradual increase in global average temperatures due to an increased concentration of carbon dioxide and other greenhouse gases (GHG) in the atmosphere have caused and will continue to cause significant changes in weather patterns. Increased frequency or duration of extreme weather conditions could result in a shortage of raw materials used to produce our merchandise, disrupt our supply chain, deplete natural resources and/or impact demand for our merchandise. We do not have any operations that are currently subject to any government-enforced GHG emissions caps, trading programs or reporting requirements. In Fiscal 2011, we completed a carbon footprint estimation study to better understand the impact of our emissions sources from our U.S. corporate offices, distribution center and retail stores, and continue to take steps in our climate change mitigation efforts, such as implementing energy saving and carbon reduction technologies in our operations.
Although the effects, if any, of climate change on our business and results of operations are currently difficult to ascertain or quantify, public expectations for reductions in GHG emissions could result in increased energy, transportation and raw material costs and may require us and our third-party suppliers to make additional investments in facilities and equipment. In addition, our operations may be impacted by regulatory changes related to climate change and GHG emissions, which may increase our compliance costs and adversely impact our profitability.
ITEM 1B.
Unresolved Staff Comments.

None.


13


ITEM 2.
Properties.
As of February 2, 2013, we operated 984 retail stores in 47 states, the District of Columbia, Puerto Rico and Canada, all of which were leased. Store leases typically provide for initial terms of 10 years, although some leases have shorter or longer initial periods. A majority of our store leases grant us the right to extend the term for one or two additional five-year periods, and also contain early termination options, which can be exercised by us under specific conditions. Most of the store leases also require us to pay a specified minimum rent, plus a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold. In addition, most of the leases require us to pay real estate taxes, insurance and certain common area and maintenance costs. The current terms of our leases expire as follows:
Fiscal Years Lease
Terms Expire
 
Number of
Stores
2013 - 2015
 
435

2016 - 2018
 
315

2019 - 2021
 
148

2022 and later
 
86

We lease our corporate offices at 7 Times Square in New York City (approximately 308,000 square feet) under a lease expiring in 2020. In addition, in Milford, Connecticut, we maintain 42,000 square feet of office space under a lease that expires in 2019.
The Company’s wholly-owned subsidiary, AnnTaylor Distribution Services, Inc., owns our 256,000 square foot distribution center located in Louisville, Kentucky. The distribution center is located on approximately 27 acres, which could accommodate possible future expansion of the facility. The majority of our merchandise is distributed to stores through this facility.

ITEM 3.
Legal Proceedings.

We are subject to various legal proceedings and claims that arise in the ordinary course of our business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in our opinion, any such liability will not have a material adverse effect on our consolidated financial position, consolidated results of operations or liquidity.
 
ITEM 4.
Mine Safety Disclosures.

Not applicable.


14


PART II
 
ITEM 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed and traded on the New York Stock Exchange under the symbol “ANN.” The number of holders of record of common stock at March 1, 2013 was 1,912. The following table sets forth the high and low sale prices per share of our common stock on the New York Stock Exchange for the periods indicated:
 
Market Price
 
High
 
Low
Fiscal Year 2012
 
 
 
Fourth quarter
$
36.29

 
$
29.98

Third quarter
39.78

 
26.36

Second quarter
28.85

 
23.93

First quarter
29.81

 
22.14

Fiscal Year 2011
 
 
 
Fourth quarter
$
27.53

 
$
21.74

Third quarter
28.31

 
19.00

Second quarter
32.49

 
24.98

First quarter
32.11

 
21.43


STOCK PERFORMANCE GRAPH
The following graph compares the percentage changes in the cumulative total stockholder return on the Company’s Common Stock for the five-year period ended February 2, 2013, with the cumulative total return on the Standard & Poor’s 500 Stock Index (“S&P 500”) and the Dow Jones U.S. Retailers, Apparel Index for the same period. In accordance with the rules of the Securities and Exchange Commission, the returns are indexed to a value of $100 at February 2, 2008 and assume that all dividends, if any, were reinvested. This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act.

15


We have never paid cash dividends on our common stock. Any determination to pay cash dividends is at the discretion of our Board of Directors, which considers it on a periodic basis. In addition, as a holding company, our ability to pay dividends is dependent upon the receipt of dividends or other payments from our subsidiaries, including our wholly-owned subsidiary AnnTaylor, Inc. The payment of dividends by AnnTaylor, Inc. to us is subject to certain restrictions under our Credit Facility. We are also subject to certain restrictions contained in the Credit Facility on the payment of cash dividends on our common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

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)
October 28, 2012 to November 24, 2012
6,356

 
$
33.57

 

 
$
109,084

November 25, 2012 to December 29, 2012
638,106

 
33.00

 
637,000

 
88,063

December 30, 2012 to February 2, 2013
1,190,350

 
32.76

 
1,189,925

 
49,084

 
1,834,812

 
 
 
1,826,925

 
 
 
(1)
Includes a total of 7,887 shares of restricted stock purchased in connection with employee tax withholding obligations under employee equity compensation plans, which are not purchases under the Company’s publicly announced program.
(2)
On March 8, 2011, our Board of Directors approved a $200 million expansion of our existing securities repurchase program (the “Repurchase Program”) to a total of $600 million. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. We repurchased 1,826,925 shares under the Repurchase Program during the fourth quarter of Fiscal 2012. As of February 2, 2013, and as of March 8, 2013, the date of this Report, approximately $49.1 million remained available under the Repurchase Program.
The information called for by this item relating to “Securities Authorized for Issuance under Equity Compensation Plans” is provided in Item 12.


16



ITEM 6.
Selected Financial Data.
The following historical Consolidated Statements of Operations and Consolidated Balance Sheet information has been derived from our audited consolidated financial statements. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this document. All references to years are to our fiscal year, which ends on the Saturday nearest January 31 in the following calendar year. All fiscal years for which financial information is set forth below contain 52 weeks, except for the fiscal year ended February 2, 2013, which includes 53 weeks.
 
 
Fiscal Year Ended
 
 
 
February 2, 2013
 
January 28, 2012
 
 
January 29, 2011
 
 
January 30, 2010
 
 
January 31,
2009
 
 
 
(in thousands, except earnings per share and store count information)
 
Consolidated Statements of Operations:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,375,509

 
$
2,212,493

  
 
$
1,980,195

  
 
$
1,828,523

  
 
$
2,194,559

  
Cost of sales
 
1,073,167

 
1,004,350

 
 
876,201

  
 
834,188

  
 
1,139,753

  
Gross margin
 
1,302,342

 
1,208,143

 
 
1,103,994

  
 
994,335

  
 
1,054,806

  
Selling, general and administrative expenses
 
1,135,551

 
1,062,644

 
 
978,580

  
 
966,603

  
 
1,050,560

  
Restructuring charges
 

 

 
 
5,624

  
 
36,368

  
 
59,714

  
Asset impairment charges
 

 

 
 

  
 
15,318

  
 
29,590

  
Goodwill impairment charge
 

 

 
 

  
 

  
 
286,579

  
Operating income/(loss)
 
166,791

 
145,499

 
 
119,790

 
 
(23,954
)
  
 
(371,637
)
  
Interest and investment income/(expense), net
 
1,051

 
(1,052
)
 
 
(668
)
  
 
(2,156
)
  
 
215

  
Other non-operating income/(expense), net (1)
 
(189
)
 

 
 

 
 

 
 

 
Income/(loss) before income taxes
 
167,653

 
144,447

 
 
119,122

 
 
(26,110
)
  
 
(371,422
)
  
Income tax provision/(benefit)
 
65,068

 
57,881

 
 
45,725

 
 
(7,902
)
  
 
(37,516
)
  
Net income/(loss)
 
$
102,585

 
$
86,566

 
 
$
73,397

 
 
$
(18,208
)
  
 
$
(333,906
)
  
Basic earnings/(loss) per share
 
$
2.13

 
$
1.66

 
 
$
1.26

 
 
$
(0.32
)
  
 
$
(5.82
)
  
Diluted earnings/(loss) per share
 
$
2.10

 
$
1.64

 
 
$
1.24

 
 
$
(0.32
)
  
 
$
(5.82
)
  
Weighted average shares outstanding
 
47,494

 
51,200

 
 
57,203

  
 
56,782

  
 
57,366

  
Weighted average shares outstanding, assuming dilution
 
48,094

 
52,029

 
 
58,110

  
 
56,782

  
 
57,366

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Operating Information:
 
 
 
 
 
 
 
 
 
 
Percentage increase/(decrease) in comparable sales (2)
 
3.3
%
 
6.8
%
 
 
10.7
%
 
 
(17.4
)%
 
 
(13.4
)%
 
Number of stores:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Open at beginning of period
 
953

 
896

 
 
907

  
 
935

  
 
929

  
Opened during the period
 
63

 
76

 
 
24

  
 
14

  
 
66

  
Closed during the period
 
(32
)
 
(19
)
  
 
(35
)
  
 
(42
)
  
 
(60
)
  
Open at the end of the period
 
984

 
953

  
 
896

  
 
907

  
 
935

  
Total store square footage at end of period
 
5,685

 
5,584

  
 
5,284

  
 
5,348

  
 
5,492

  
Capital expenditures (3)
 
$
149,737

 
$
124,448

  
 
$
64,367

  
 
$
35,736

  
 
$
100,195

  
Depreciation and amortization
 
$
97,829

 
$
94,187

  
 
$
95,523

  
 
$
104,351

  
 
$
122,222

  
Working capital turnover (4)
 
13.2
x
 
9.7
x
 
 
8.0
x
 
 
10.5x

 
 
14.0x

 
Inventory turnover (5)
 
5.0
x
 
4.9
x
 
 
4.8
x
 
 
4.9
x
 
 
5.4
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Information:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
169,275

 
$
189,420

  
 
$
268,005

  
 
$
229,521

  
 
$
118,013

  
Total assets
 
942,205

 
887,681

  
 
926,820

  
 
902,141

  
 
960,439

  
Total stockholders’ equity
 
385,110

 
363,877

  
 
423,445

  
 
417,186

  
 
416,512

  
(Footnotes on following page)

17


(Footnotes for preceding page)

(1)
Other non-operating income/(expense), net consists of foreign currency transaction gains or losses.
(2)
Comparable sales provide a measure of existing store sales performance. A store is included in comparable sales in its thirteenth month of operation. A store with a square footage change of more than 15% is treated as a new store for the first year following its reopening. Sales from our Online Stores are also included in comparable sales. In a fiscal year with 53 weeks, such as in Fiscal 2012, sales in the last week of that fiscal year are excluded from comparable sales.
(3)
Capital expenditures are accounted for on the accrual basis and include net non-cash transactions totaling $2.5 million, $5.5 million, $3.2 million, $(2.8) million and $(10.1) million, in Fiscal 2012, 2011, 2010, 2009 and 2008, respectively. The non-cash transactions are primarily related to the purchase of property and equipment on account.
(4)
Working capital turnover is determined by dividing net sales by the average of the amount of working capital at the beginning and end of the period.
(5)
Inventory turnover is determined by dividing cost of sales by the average of the cost of inventory at the beginning and end of the period.


18


ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read together with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Management Overview
Fiscal 2012 was a very strong year for ANN INC., reflecting solid top-line growth, improved gross margin performance and double-digit percentage increases in operating income, net income and diluted earnings per share compared with Fiscal 2011. These results were driven by strong client response to our product offering throughout much of the year, as well as the positive effects of our strategic growth initiatives. We provided our clients with seamless access to our Ann Taylor and LOFT merchandise through the first-phase launch of our multi-channel initiative in Fall 2012. In addition, we successfully executed our real estate strategy, adding 63 new stores across the fleet, which included three new stores in Toronto, Canada, marking the first step in growing our brands internationally.
At the Ann Taylor brand, overall comparable sales increased 1.1%, on top of a 5.2% increase in Fiscal 2011. At our multi-channel Ann Taylor business, which includes Ann Taylor stores and anntaylor.com, comparable sales increased 1.8%, while at Ann Taylor Factory, comparable sales declined 0.5%. Results at Ann Taylor reflected the impact of our 2012 strategies for the brand, which included offering a better balance of fashion and basics within each merchandise category, more depth in key fashion items and a greater breadth of the assortment at opening price points. In addition, we continued efforts to create a more engaging and personalized in-store experience for our client and lowered our promotional stance, which resulted in higher gross margin rate performance as compared to Fiscal 2011.
The LOFT brand delivered a comparable sales increase of 4.8% in Fiscal 2012, on top of an 8.0% increase in Fiscal 2011. At our multi-channel LOFT business, which includes LOFT stores and LOFT.com, comparable sales increased 5.8%, which was partially offset by a decrease of 1.5% in the LOFT Outlet channel. Clients responded positively to LOFT's merchandise assortments, which contributed to an overall increase in full price sell-through as compared to Fiscal 2011, despite the effect of a fourth quarter merchandise offering that was overinvested in bright colors. Gross margin rate performance was slightly below Fiscal 2011 levels, due in part to a higher promotional stance during the fourth quarter of Fiscal 2012.
Our Fiscal 2012 real estate strategy was focused on expanding our store presence at both brands, enhancing store productivity across the entire fleet and opening our first international stores in Canada, as well as continued execution of selective store closures.  At the Ann Taylor brand, we opened 11 new Ann Taylor stores, including two stores in Canada, and updated or right-sized an additional 121 existing stores to reflect our new brand aesthetic. As a result of these capital investments, nearly two-thirds of the Ann Taylor store fleet now reflects our new brand aesthetic. At Ann Taylor Factory, we opened three new stores during Fiscal 2012. At LOFT, we continued to move forward with the expansion of our LOFT brand store fleet, opening 26 new LOFT stores, primarily in small- to mid-markets, including our first international LOFT store in Canada. We also opened 23 new LOFT Outlet stores in Fiscal 2012.
Throughout Fiscal 2012, we demonstrated our commitment to enhance shareholder value and maintain a healthy balance sheet and cash position. We repurchased 4.9 million shares of our common stock, representing nearly 10% of outstanding shares, at a cost of $135 million, closing the year with $167 million in cash and no bank debt. We also continued to closely manage inventory levels throughout the year, and ended the year with total inventory per square foot flat as compared to Fiscal 2011.
Looking ahead, our focus in Fiscal 2013 is to continue to move forward with our initiatives to strengthen our connection to our client, both by keeping existing loyal clients engaged and attracting new clients to shop our brands.  We plan to continue efforts to optimize our store portfolio and enhance our in-store shopping experience, as well as further our Canadian expansion.  We also expect to continue to grow our e-commerce business by further capitalizing on our recently launched multi-channel capabilities, offering our clients a more personalized online shopping experience and adding international shipping capabilities in certain countries outside the United States at both of our Online Stores.  Finally, we intend to use our strong free cash flow to invest in the profitable growth of ANN INC. as a means of delivering value to our shareholders.



19



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 more than 15% is treated as a new store for the first year following its reopening. Sales from our Online Stores are also included in comparable sales. In a fiscal year with 53 weeks, such as Fiscal 2012, sales in the last week of that fiscal year are excluded from comparable sales.
Gross margin – Gross margin measures our ability to control the direct costs of merchandise sold during the period. Gross margin is the difference between net sales and cost of sales, which includes the cost of merchandise sold; costs to transport merchandise from third-party suppliers to our distribution center, including customs costs; costs associated with our sourcing operations; costs associated with the fulfillment and shipment of online and multi-channel sales; depreciation related to merchandise management systems; sample development costs; and the direct costs of our credit card loyalty program. Buying and occupancy costs are excluded from cost of sales.
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 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.
Results of Operations
The following table sets forth data from our Consolidated Statements of Operations expressed as a percentage of net sales. All fiscal years presented contain 52 weeks, except for the fiscal year ended February 2, 2013, which includes 53 weeks:
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
Net sales
100.0
%
 
100.0
 %
 
100.0
 %
Cost of sales
45.2
%
 
45.4
 %
 
44.2
 %
Gross margin
54.8
%
 
54.6
 %
 
55.8
 %
Selling, general and administrative expenses
47.8
%
 
48.0
 %
 
49.4
 %
Restructuring
%
 
 %
 
0.3
 %
Operating income
7.0
%
 
6.6
 %
 
6.1
 %
Interest and investment income/(expense), net
%
 
(0.1
)%
 
(0.1
)%
Other non-operating expense, net
%
 
 %
 
 %
Income before income taxes
7.0
%
 
6.5
 %
 
6.0
 %
Income tax provision
2.7
%
 
2.6
 %
 
2.3
 %
Net income
4.3
%
 
3.9
 %
 
3.7
 %


20


The following table sets forth selected data from our Consolidated Statements of Operations expressed as a percentage change from the prior period. All fiscal years presented contain 52 weeks, except for the fiscal year ended February 2, 2013, which includes 53 weeks:
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
Net sales
7.4
%
 
11.7
%
 
8.3
%
Gross margin
7.8
%
 
9.4
%
 
11.0
%
Operating income
14.6
%
 
21.5
%
 
600.1
%
Net income
18.5
%
 
17.9
%
 
503.1
%
Sales and Sales Metrics
During Fiscal 2012, we revised the presentation of certain sales data from a channel-specific approach that segregated store sales from online sales at a brand level, to an approach that considers the impact of our multi-channel initiative on total brand sales. All prior year sales, comparable sales and sales-related metrics have been adjusted to conform to the current year presentation. In addition, all fiscal years presented contain 52 weeks, except for the fiscal year ended February 2, 2013, which includes 53 weeks.
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
Sales
 
Comp %
 
Sales
 
Comp %
 
Sales
 
Comp %
 
($ in thousands)
Sales and Comparable Sales
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor brand
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor (1)
$
644,486

 
1.8
 %
 
$
618,446

 
4.9
%
 
$
595,670

 
23.5
%
Ann Taylor Factory
300,738

 
(0.5
)%
 
289,406

 
5.7
%
 
268,016

 
9.3
%
Total Ann Taylor brand
945,224

 
1.1
 %
 
907,852

 
5.2
%
 
863,686

 
18.7
%
LOFT brand
 
 
 
 
 
 
 
 
 
 
 
LOFT (2)
1,202,244

 
5.8
 %
 
1,114,911

 
7.5
%
 
1,040,246

 
4.2
%
LOFT Outlet
228,041

 
(1.5
)%
 
189,730

 
14.2
%
 
76,263

 
21.2
%
Total LOFT brand
1,430,285

 
4.8
 %
 
1,304,641

 
8.0
%
 
1,116,509

 
5.0
%
Total Company
$
2,375,509

 
3.3
 %
 
$
2,212,493

 
6.8
%
 
$
1,980,195

 
10.7
%
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
Sales-Related Metrics
 
 
 
 
 
Average Dollars Per Transaction ("DPT")
 
 
 
 
 
Ann Taylor brand
$
77.67

 
$
78.90

 
$
80.22

LOFT brand
60.38

 
62.20

 
60.17

Average Units Per Transaction ("UPT")
 
 
 
 
 
Ann Taylor brand
2.36

 
2.34

 
2.29

LOFT brand
2.55

 
2.58

 
2.40

Average Unit Retail ("AUR")
 
 
 
 
 
Ann Taylor brand
$
32.91

 
$
33.72

 
$
35.03

LOFT brand
23.68

 
24.11

 
25.07

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

21


Store Data
The following table sets forth certain store data:
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
(square feet in thousands)
Stores and Square Footage
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor brand
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor
275

 
1,389

 
280

 
1,460

 
266

 
1,453

Ann Taylor Factory
101

 
696

 
99

 
700

 
92

 
668

Total Ann Taylor brand
376

 
2,085

 
379

 
2,160

 
358

 
2,121

LOFT brand
 
 
 
 
 
 
 
 
 
 
 
LOFT
512

 
2,950

 
500

 
2,904

 
502

 
2,930

LOFT Outlet
96

 
650

 
74

 
520

 
36

 
233

Total LOFT brand
608

 
3,600

 
574

 
3,424

 
538

 
3,163

Total Company
984

 
5,685

 
953

 
5,584

 
896

 
5,284

Number of:
 
 
 
 
 
 
 
 
 
 
 
Stores open at beginning of period
953

 
5,584

 
896

 
5,284

 
907

 
5,348

New stores
63

 
340

 
76

 
473

 
24

 
138

Downsized/expanded stores, net (1)

 
(69
)
 

 
(58
)
 

 
(14
)
Closed stores
(32
)
 
(170
)
 
(19
)
 
(115
)
 
(35
)
 
(188
)
Stores open at end of period
984

 
5,685

 
953

 
5,584

 
896

 
5,284

Converted stores (2)

 

 

 

 
10

 

 
(1)
During Fiscal 2012, we downsized 18 Ann Taylor stores, four Ann Taylor Factory stores, five LOFT stores and one LOFT Outlet store. During Fiscal 2011, we downsized 11 Ann Taylor stores and three Ann Taylor Factory stores. During Fiscal 2010, we downsized five Ann Taylor stores and two LOFT stores and expanded one Ann Taylor store.
(2)
During Fiscal 2010, we converted six Ann Taylor stores to LOFT stores and four LOFT stores to LOFT Outlet stores. There were no store conversions in Fiscal 2012 or Fiscal 2011.

Comparison of Fiscal Years 2012 and 2011

Total net sales increased approximately $163.0 million, or 7.4%, in Fiscal 2012 as compared with Fiscal 2011, with comparable sales increasing 3.3%. Approximately $25.4 million of the increase in total net sales was due to the effect of the 53rd week in Fiscal 2012. Despite challenges in the back half of the year, due, in part, to the lingering effects of Superstorm Sandy in the Northeast region, both brands experienced increases in total net sales and comparable sales in Fiscal 2012. Both brands also benefited from the third-quarter launch of the first phase of our multi-channel initiative, which enabled store order fulfillment of internet sales, and contributed to higher traffic and conversion. In addition, during Fiscal 2012, we recognized $6.6 million in revenue related to gift card and merchandise credit breakage, where we determined there was no legal obligation to escheat the value of the cards under unclaimed property laws and the likelihood of redemption was considered remote. Fiscal 2012 is the first period during which we recognized gift card and merchandise credit “breakage,” and therefore includes the breakage income related to gift cards sold and merchandise credits issued since inception of these programs.
At the Ann Taylor brand, total net sales increased approximately $37.4 million, or 4.1%, in Fiscal 2012 as compared with Fiscal 2011, with comparable sales increasing 1.1%. Sales at our multi-channel Ann Taylor business, which includes Ann Taylor stores and anntaylor.com, benefited from a merchandise mix that reflected the brand's updated assortment and pricing strategies. In addition, beginning in late Spring, our merchandise assortments offered a much higher penetration of color and a broader range of relevant fashion at opening price points, contributing to higher traffic, conversion and UPTs. At Ann Taylor Factory, we experienced a 3.9% increase in total net sales, due to higher UPTs, an increase in conversion and the addition of three new stores, partially offset by the effect of a decrease in traffic.

22


At the LOFT brand, total net sales increased $125.6 million, or 9.6%, in Fiscal 2012 as compared with Fiscal 2011, with comparable sales up 4.8%. At our multi-channel LOFT business, which includes LOFT stores and LOFT.com, clients responded positively to the brand's entire merchandise assortment, however, our full-year results were impacted by a fourth-quarter investment in bright colors that did not resonate with our clients during the holiday season. While this impacted our fourth quarter top-line results, for the full-year period, we experienced increases in both traffic and conversion, which contributed to higher full-price sell-through. At LOFT Outlet, we experienced higher conversion and an increase in UPTs, however, inventory levels were constrained in the back half of Fiscal 2012, which contributed to a comparable sales decrease of 1.5% for the full-year period.
Comparison of Fiscal Years 2011 and 2010
Total net sales increased approximately $232.3 million, or 11.7%, in Fiscal 2011 as compared with Fiscal 2010 with comparable sales increasing 6.8%. Full-price sell-through increased over last year at both brands, with significant increases in the LOFT Stores channel. Both brands experienced comparable sales gains for the year, with significant double-digit comparable sales percentage growth at our Online Stores and at LOFT Outlet. By brand, Ann Taylor’s net sales increased approximately $44.2 million, or 5.1% in Fiscal 2011 as compared with Fiscal 2010, as comparable sales increased 5.2%. At the LOFT brand, net sales increased $188.1 million, or 16.9%, in Fiscal 2011 as compared with Fiscal 2010, with comparable sales up 8.0%.
Ann Taylor’s Fiscal 2011 results were impacted by a miss in the print and novelty components of the Ann Taylor stores channel merchandise assortment in late Spring and a merchandise mix during the Fall season that lacked depth in fashion and did not offer enough choices at opening price points. Although traffic remained steady across all channels, we were more promotional than planned in the Ann Taylor stores channel, particularly during the back half of the year. This resulted in lower AURs and DPTs and contributed to a 1.2% decrease in comparable sales. At anntaylor.com, we experienced significant top-line growth over last year, with comparable sales increasing 36.8%, driven by increases in traffic, conversion and average order value. Sales at Ann Taylor Factory stores were also up, reflecting a 5.7% increase in comparable sales and the addition of seven new stores.
LOFT's Fiscal 2011 results reflected client acceptance of the brand's feminine, casual fashion and value proposition, particularly in the LOFT stores channel, where comparable sales increased 5.4%. The brand also experienced higher levels of full-price sell-through, as well as year-over-year increases in DPTs and UPTs. LOFT also experienced strong top-line growth at LOFT.com, reflecting increases in traffic, conversion, and average order value. In addition, sales at LOFT Outlet increased significantly as a result of a 14.2% increase in comparable sales and our accelerated Spring 2011 expansion in this channel.
Our net sales do not show significant seasonal variation. As a result, we have not had significant overhead and other costs generally associated with large seasonal variations.

Cost of Sales and Gross Margin
Because retailers do not uniformly record supply chain, buying and/or occupancy costs as cost of sales or selling, general and administrative expenses, our gross margin and selling, general and administrative expenses, both in dollars and as a percentage of net sales, may not be comparable to other retailers. For additional information regarding costs classified in “Cost of sales” and “Selling, general and administrative expenses,” on our Consolidated Statements of Operations, refer to Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements.
The following table presents cost of sales and gross margin in dollars and as a percentage of net sales:
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
(dollars in thousands)
Cost of sales
$
1,073,167

 
$
1,004,350

 
$
876,201

Gross margin
$
1,302,342

 
$
1,208,143

 
$
1,103,994

Percentage of net sales
54.8
%
 
54.6
%
 
55.8
%
Gross margin as a percentage of net sales was 54.8% in Fiscal 2012, an increase from 54.6% in Fiscal 2011. Our full-year gross margin results were positively impacted by favorable client response to our merchandise offerings, which enabled fewer store-wide promotions and more targeted promotional activity during most of the year.  This contributed to higher merchandise gross margin rate performance as compared to Fiscal 2011.  In addition, our full-year gross margin rate performance was positively impacted by the gross margin effect of gift card and merchandise credit breakage. These improvements were partially offset by a period-over-period increase in client shipping costs during the back half of Fiscal 2012, due, in part, to the effect of our multi-channel initiative.

23


Gross margin as a percentage of net sales was 54.6% in Fiscal 2011, down from 55.8% in Fiscal 2010. At Ann Taylor, full-price sell-through was negatively impacted by a miss in the print and novelty components in our Spring 2011 merchandise assortment at Ann Taylor stores, as well as a lack of depth in fashion and breadth at opening price points in the back half of the year. This, combined with the highly promotional retail environment we faced late in the year, also impacted the brand's overall gross margin rate performance. At LOFT, strong client acceptance of the brand's merchandise offering contributed to higher levels of full-price sell-through in the LOFT stores channel, which also drove higher gross margin rate performance. LOFT was also able to maintain its planned promotional strategy despite the highly competitive retail environment.
Selling, General and Administrative Expenses
The following table presents selling, general and administrative expenses in dollars and as a percentage of net sales:
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
(dollars in thousands)
Selling, general and administrative expenses
$
1,135,551

 
$
1,062,644

 
$
978,580

Percentage of net sales
47.8
%
 
48.0
%
 
49.4
%
Selling, general and administrative expenses in Fiscal 2012 increased approximately $72.9 million compared with Fiscal 2011. This increase was primarily due to higher payroll and occupancy costs associated with our store growth, an overall increase in variable costs related to higher net sales and other expenses to support the expansion of our business. These increases were partially offset by a decrease in certain performance-based compensation expense. As a percentage of net sales, selling, general and administrative expenses decreased 0.2% as compared to Fiscal 2011, primarily due to fixed cost leveraging as a result of higher net sales and a reduction in certain performance-based compensation expense, partially offset by an increase in expenses supporting the expansion of our business.
Selling, general and administrative expenses in Fiscal 2011 increased approximately $84.1 million compared with Fiscal 2010. This increase was primarily due to higher payroll and occupancy costs associated with our store growth, primarily in the factory outlet channel, an overall increase in variable costs related to higher net sales, an increase in marketing expenses and severance and related costs associated with the separation of the former Brand President, Ann Taylor division. These increases were partially offset by a decrease in performance-based compensation expense. The decrease in selling, general and administrative expenses as a percentage of net sales in Fiscal 2011 as compared to Fiscal 2010 was primarily due to fixed cost leveraging as a result of higher net sales, restructuring savings and our continued focus on expense management.
Income Taxes
The following table presents our income tax provision/(benefit) and effective income tax rate:
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
(dollars in thousands)
Income tax provision
$
65,068

 
$
57,881

 
$
45,725

Effective income tax rate
38.8
%
 
40.1
%
 
38.4
%
Our effective income tax rate decreased in Fiscal 2012 as compared with Fiscal 2011, primarily due to tax positions that were considered effectively settled during Fiscal 2012, partially offset by a change in the mix of earnings in various state taxing jurisdictions. Our effective income tax rate increased in Fiscal 2011 as compared with Fiscal 2010, primarily due to a change in the mix of earnings in various state taxing jurisdictions and certain other discrete items. See Note 8, “Income Taxes” in the Notes to the Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
Our primary source of working capital is cash flow from operations. Our primary ongoing cash requirements relate to the purchase of inventory and property and equipment.

24


The following table sets forth certain measures of our liquidity:
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
(dollars in thousands)
Cash provided by operating activities
$
258,909

 
$
207,828

 
$
164,311

Working capital
$
169,275

 
$
189,420

 
$
268,005

Current ratio
1.50:1

 
1.66:1

 
1.95:1

Operating Activities
Cash provided by operating activities increased $51.1 million, to $258.9 million, in Fiscal 2012 as compared to Fiscal 2011. This increase was primarily due to the result of higher net income adjusted for non-cash expenses and changes in merchandise inventories, accounts payable and accrued expenses, with the latter driven by changes in short-term compensation accruals.  These increases were partially offset by changes in prepaid expenses and other current assets, primarily related to the timing of February rent payments.
Cash provided by operating activities increased $43.5 million to $207.8 million in Fiscal 2011 as compared to Fiscal 2010 due to higher net income adjusted for non-cash expenses, changes in long-term compensation and prepaid expenses. These increases were partially offset by an increase in accounts receivable driven by higher sales and reductions in current compensation-related accruals.
Merchandise inventories increased approximately $3.4 million, or 1.6%, in Fiscal 2012 from Fiscal 2011, consistent with our comparable sales increase and our increase in the number of stores. On a per-square-foot basis, merchandise inventories remained flat at approximately $34 at the end of both periods. Inventory turned 5.0 times in Fiscal 2012 compared with 4.9 times in Fiscal 2011.
Investing Activities
Cash used for investing activities was $149.9 million in Fiscal 2012, compared with $120.5 million in Fiscal 2011. Cash used for investing activities in Fiscal 2012 was primarily related to capital expenditures associated with new store openings, store refurbishment projects and investments in technology.
Cash used for investing activities was $120.5 million in Fiscal 2011, compared with $57.2 million in Fiscal 2010. Cash used for investing activities in Fiscal 2011 was primarily related to capital expenditures associated with new store openings, store refurbishment projects and investments in technology. During Fiscal 2011, we opened 76 new stores, as compared with 24 new stores in Fiscal 2010.
The following table sets forth a breakdown of our accrual-basis capital expenditures:
 
 
Fiscal Year Ended
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
(in thousands)
New store construction
$
76,631

 
$
59,336

 
$
25,433

Store renovation/refurbishment
45,524

 
36,505

 
14,172

Information systems
23,298

 
26,747

 
22,953

Corporate offices/distribution center
3,792

 
1,380

 
779

Other
492

 
480

 
1,030

Total
$
149,737

 
$
124,448

 
$
64,367


We expect our total capital expenditure requirements in Fiscal 2013 will be approximately $165 million. Of this amount, approximately $55 million will be spent on new store construction, driven by the planned opening of approximately 65 stores. Approximately $85 million will be spent on 45 planned downsizes and remodels and other store renovation and refurbishment programs. This is expected to result in a net increase in total square footage of approximately 135,000 square feet, or approximately 2% from Fiscal 2012. In addition, approximately $25 million is planned for continued investments in information systems, technology and further integration of our Online Stores through additional enhancements to website functionality. The actual amount of our capital expenditures will depend in part on the number of stores opened, expanded and refurbished. To finance our capital requirements, we expect to use internally generated funds. See “Business - Retail Stores” for further discussion.

25


Financing Activities
Cash used for financing activities was $92.2 million in Fiscal 2012, compared with $163.8 million in Fiscal 2011. Cash used for financing activities in Fiscal 2012 was primarily due to the repurchase of $140.8 million of our common stock, partially offset by cash inflows related to an increase in stock option exercise activity.
Cash used for financing activities was $163.8 million in Fiscal 2011, compared with $84.9 million in Fiscal 2010. Cash used for financing activities in Fiscal 2011 was primarily due to the repurchase of $180.3 million of our common stock, partially offset by excess tax benefits related to stock-based compensation and cash inflows related to stock option exercises.

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, which amended the existing senior secured revolving credit facility due to expire in April 2013. The Credit Facility extended the maturity date to December 19, 2017, established a $75 million sub-facility solely for loans and letters of credit to be provided to ANN Canada Inc., and increased our option to expand 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. In addition, the margin added to the LIBOR rate for borrowing under the Credit Facility was reduced to between 1.25% - 1.50% from a previous range of 1.25% - 1.75%, depending upon the Average Daily Availability as defined in the Credit Facility and the monthly commitment fee on the unused revolving loan commitment was reduced to between 0.20% - 0.25% per annum, where it was previously 0.325% - 0.375% per annum. The Credit Facility 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, which includes, but is not limited to, a Material Adverse Effect, as defined in the Credit Facility, may cause any outstanding borrowings to become immediately due and payable.
The maximum availability for loans and letters of credit under the Credit Facility is governed by a quarterly borrowing base, determined by the application of specified percentages to certain eligible assets, primarily accounts receivable and inventory. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $14.1 million, $16.7 million and $17.6 million as of February 2, 2013, January 28, 2012 and January 29, 2011, respectively, leaving a remaining available balance for loans and letters of credit of $150.8 million, $146.4 million and $120.2 million as of February 2, 2013, January 28, 2012 and January 29, 2011, respectively. There were no borrowings outstanding under the Credit Facility at February 2, 2013January 28, 2012, or as of March 8, 2013, the date of this Report.
The Credit Facility permits us to pay cash dividends (and permits dividends by AnnTaylor, Inc. to fund such cash dividends) subject to certain Liquidity requirements (as defined in the Credit Facility) and other conditions as set forth in the Credit Facility. Subject, in some cases, to certain exceptions, certain of our subsidiaries are also permitted to pay dividends to us to fund certain taxes owed by us; fund ordinary operating expenses not in excess of $500,000 in any fiscal year; repurchase common stock held by employees not in excess of $100,000 in any fiscal year; and for certain other stated purposes. See Note 4, “Revolving Credit Facility,” in the Notes to the Consolidated Financial Statements for further discussion of the Credit Facility.

Repurchase Program
On March 8, 2011, our Board of Directors approved a $200 million expansion of our Repurchase Program, bringing the total authorized under the Repurchase Program to $600 million. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. Purchases of shares of common stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases or in privately negotiated transactions. Repurchased shares of common stock increase treasury shares available for general corporate purposes. During Fiscal 2012, Fiscal 2011 and Fiscal 2010, we repurchased 4.9 million, 7.3 million and 4.2 million shares of our common stock, respectively, through open market purchases under the Repurchase Program, at a cost of $135 million, $175 million, and $100 million, respectively. As of February 2, 2013 and March 8, 2013, the date of this Report, approximately $49.1 million remained available under the Repurchase Program.

Other
We have significant amounts of cash and cash equivalents on deposit at FDIC-insured financial institutions that are currently in excess of federally insured limits. Since the deposit insurance provisions of the Dodd-Frank Wall Street Reform Act expired on December 31, 2012, and because our Credit Facility contains certain restrictions on permitted investments, we cannot be assured that we will not experience losses with respect to cash on deposit. We continually evaluate our deposit investment options in accordance with our corporate investment policy.

26


As of February 2, 2013 , we had $3.0 million invested in foreign bank accounts, of which the majority was held in Canadian dollars. As of January 28, 2012, we had $0.5 million invested in foreign bank accounts. As we continue to expand outside of the United States, we expect to continue to generate cash from non-U.S. operations. We expect to manage our worldwide cash requirements considering available funds generated by the foreign subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and other international subsidiaries when it is cost effective to do so. Our intent is to indefinitely reinvest all of these funds outside of the United States, however, we will continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities and reassess whether there is a demonstrated need to repatriate funds held internationally to support our U.S. operations.
We have a credit card program that offers eligible clients in the United States the choice of a private label or co-branded credit card. All cardholders are automatically enrolled in our exclusive rewards program, which is designed to recognize and promote client loyalty. We provide the sponsoring bank with marketing support of the program, and use our sales force to process credit card applications for both the private label and co-branded credit cards. As part of the program, which began in October 2008 and has a 6.5 year term, we received an upfront signing bonus from the sponsoring bank. We also receive ongoing payments for new accounts activated, as well as a share of finance charges collected by the sponsoring bank. These revenue streams are accounted for as a single unit of accounting and accordingly, are recognized as revenue ratably based on the total projected revenues over the term of the agreement.
Certain judgments and estimates underlie our projected revenues and related expenses under the credit card program, including projected future store counts, the number of applications processed, our projected sales growth and points breakage, among other things. During Fiscal 2012, Fiscal 2011 and Fiscal 2010, we recognized approximately $17.8 million, $16.5 million and $14.8 million of revenue related to the credit card program, respectively. At February 2, 2013, January 28, 2012 and January 29, 2011, approximately $3.0 million, $4.4 million and $5.8 million, respectively, of deferred credit card income is included in “Accrued expenses and other current liabilities” on our Consolidated Balance Sheets. Partially offsetting the income from the credit card program are costs, net of points breakage, related to the client loyalty program. These costs are included in either “Cost of sales” or in “Net sales” as a sales discount, as appropriate. The cost of sales impact, net of points breakage, was approximately $5.7 million, $3.8 million and $0.3 million and the sales discount impact was approximately $6.8 million, $5.5 million and $3.0 million in Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively.
On October 1, 2007, we froze our non-contributory defined benefit pension plan (the “Pension Plan”). As a result of the freeze, only those associates who were eligible under the Pension Plan on or before September 30, 2007 (substantially all associates of the Company who completed 1,000 hours of service during a consecutive 12-month period prior to that date) are eligible to receive benefits from the Pension Plan once they have completed the five years of service required to become fully vested. No associate may become a participant in the Pension Plan on or after October 1, 2007 and no additional benefits have been earned under the Pension Plan since October 1, 2007.
Our funding obligations and liability under the terms of the Pension Plan are determined using certain actuarial assumptions, including a discount rate and an expected long-term rate of return on Pension Plan assets. The discount rate enables us to state expected future cash payments for pension benefits as a present value on the measurement date. A lower discount rate increases the present value of the benefit obligations and increases pension expense. The discount rate selected was based on a yield curve which uses expected cash flows from the Pension Plan and then discounts those cash flows with the bond rate for that period. This resulted in a discount rate of 4.35%. A one percent decrease in the assumed discount rate would increase total net periodic pension expense for Fiscal 2013 by $1.3 million and would increase the liability for pension benefits at February 2, 2013 by $8.9 million. A one percent increase in the assumed discount rate would decrease total net periodic pension expense for Fiscal 2013 by $0.7 million and would decrease the liability for pension benefits at February 2, 2013 by $6.6 million.
Pension Plan assets as of February 2, 2013 were allocated 36% in equities, and 64% in bond-related funds. For the purposes of developing long-term rates of return, it was assumed that the short-term investments were reallocated to equities and bond-related funds, yielding assumed long-term rates of return of 7.8% and 3.9%, respectively. To develop the expected long-term rate of return on Pension Plan assets, we considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. A lower expected rate of return on Pension Plan assets would increase pension expense. Our expected long-term rate of return on Pension Plan assets was 5.10% and 6.25% for Fiscal 2012 and Fiscal 2011. A one percent change in the long-term rate of return assumption would impact Fiscal 2013 pension expense by approximately $0.3 million.

27


Pension costs, excluding settlement charges, in Fiscal 2012 were $1 million higher than Fiscal 2011 due to a lower discount rate and a lower expected rate of return. Pension costs in Fiscal 2011 were $0.4 million lower than pension costs in Fiscal 2010 as a result of our Pension Plan assets experiencing gains in Fiscal 2010. Due to the large amount of lump sum distributions in 2012, pension expense for Fiscal 2013, excluding any potential settlement charges, is projected to be approximately $0.8 million, or $0.2 million lower than pension expense, excluding settlement charges, in Fiscal 2012. 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.
In Fiscal 2012, we initiated a communication to certain eligible Pension Plan participants with vested benefits to elect a lump-sum distribution. As a result of this effort, we made $8.7 million in lump-sum distribution payments, which resulted in a $1.5 million pension settlement charge in the fourth quarter of Fiscal 2012. In addition, since the total amount of lump sum pension distribution payments made to Pension Plan participants in the normal course of business exceeded the interest component of pension expense during Fiscal 2012 and Fiscal 2010, we recognized additional non-cash settlement charges of $0.3 million in both fiscal years. All such Pension Plan settlement charges were included in “Selling, general and administrative expenses” in our Consolidated Statements of Operations. There were no such settlement charges in Fiscal 2011.
We are self-insured for expenses related to our employee point of service medical plan, our workers’ compensation plan, general liability plan and for short-term and long-term disability, up to certain thresholds. Claims filed, as well as claims incurred but not reported, are accrued based on management’s estimates, using information received from plan administrators, third-party actuaries, historical analysis and other relevant data. We believe we have taken reasonable steps to ensure that we are adequately accrued for incurred costs related to these programs at February 2, 2013.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as defined by Item 303 (a) (4) of Regulation S-K.
Contractual Obligations
We have various contractual obligations, some of which are recorded as liabilities in our Consolidated Balance Sheets if the related goods or services were received prior to February 2, 2013. Other items, such as leases, purchase commitments and other contractual obligations represent future liabilities and may not be recognized as liabilities in our Consolidated Balance Sheets.
The following table sets forth our significant contractual obligations as of February 2, 2013:
 
Payments Due by Fiscal Year
 
Total
 
2013
 
2014-2015
 
2016-2017
 
2018
And After
 
(in thousands)
Long-term debt (1)
$
1,030

 
$
824

 
$
206

 
$

 
$

Capital leases (2)
560

 
448

 
112

 

 

Operating leases (3)
1,356,649

 
210,553

 
387,223

 
300,566

 
458,307

Purchase obligations:
 
 
 
 
 
 
 
 
 
New store construction (4)
2,795

 
2,795

 

 

 

Merchandise (5)
234,522

 
234,522

 

 

 

Information services (6)
51,707

 
20,412

 
31,295

 

 

Other (7)
30,760

 
28,195

 
2,559

 
6

 

Total
$
1,678,023

 
$
497,749

 
$
421,395

 
$
300,572

 
$
458,307

 
(Footnotes on following page)

28



(1)
Represents finance arrangements relating to support and maintenance associated with certain computer equipment on our Consolidated Balance Sheet.
(2)
Represents capital leases with four-year terms relating to certain computer equipment recorded on our Consolidated Balance Sheet as of February 2, 2013.
(3)
Represents future minimum lease payments under non-cancelable operating leases in effect as of February 2, 2013. The minimum lease payments above also do not include common area maintenance ("CAM") charges or real estate taxes, which are required contractual obligations under our store and office operating leases but are generally not fixed and can fluctuate from year to year. Total CAM charges and real estate taxes for Fiscal 2012, Fiscal 2011 and Fiscal 2010 were $78.8 million, $70.4 million and $68.6 million, respectively.
(4)
Represents purchase commitments for Fiscal 2013 store construction not recorded on our Consolidated Balance Sheet as of February 2, 2013.
(5)
Represents open purchase orders with vendors for merchandise not yet received or recorded on our Consolidated Balance Sheet as of February 2, 2013.
(6)
Represents outsourcing of certain back-office functions, consulting, maintenance and license agreements for services to be provided and/or software not yet received or recorded on our Consolidated Balance Sheet as of February 2, 2013.
(7)
Represents contractual commitments or open purchase orders for non-merchandise goods or services not received or recorded on our Consolidated Balance Sheet as of February 2, 2013.
There were no borrowings outstanding under the Credit Facility as of February 2, 2013. The Credit Facility contains a provision for commitment fees related to the unused revolving loan commitment and outstanding letters of credit, which are not included in the above table because these charges are not fixed and can fluctuate from year to year due to various circumstances. Total commitment fees were $0.9 million in each of Fiscal 2012, Fiscal 2011 and Fiscal 2010.
The table above also excludes approximately $3.9 million of tax reserves accounted for under ASC 740-10, Income Taxes, as we are unable to reasonably estimate the ultimate amount or timing of any settlement. See Note 8, “Income Taxes,” in the Notes to the Consolidated Financial Statements for further discussion. In addition, as discussed in Note 9, “Retirement Plans,” in the Notes to the Consolidated Financial Statements, we have a long-term liability for our Pension Plan. Minimum pension funding requirements are not included in the table above as such amounts are not readily determinable.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income. ASU 2011-05 amended ASC 220-10, Comprehensive Income, and requires that all changes in comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and also requires the presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. In December 2011, the FASB issued ASU 2011-12, Presentation of Comprehensive Income, which indefinitely deferred the requirement of ASU 2011-05 related to presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which sets forth additional disclosure requirements for items reclassified out of accumulated other comprehensive income and into net income that will be effective for annual reporting periods beginning after December 15, 2012. We adopted ASU 2011-05, as modified by ASU 2011-12, in the first quarter of Fiscal 2012, by presenting separate but consecutive statements. See the Consolidated Statements of Comprehensive Income. We will adopt the disclosures required by ASU 2013-02 in the first quarter of Fiscal 2013.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are more fully described in Note 1, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities. Actual results could differ from these estimates.
Based on the above, we have determined that our most critical accounting policies are those related to merchandise inventory valuation, asset impairment, income taxes and stock and incentive-based compensation. These policies are also discussed in the Notes to the Consolidated Financial Statements and in relevant sections of this discussion and analysis.

29


Merchandise Inventory Valuation
Merchandise inventories are valued at the lower of average cost or market, at the individual item level. Market is determined based on the estimated net realizable value, which is generally the merchandise selling price. Merchandise inventory levels are monitored to identify slow-moving items and broken assortments (items no longer in stock in a sufficient range of sizes) and markdowns are used to clear such merchandise. A reserve is established to account for situations where the current selling price or future estimated selling price is less than cost. Physical inventory counts are performed annually in January and estimates are made for any shortage between the date of the physical inventory count and the balance sheet date.
Asset Impairment
Long-lived tangible assets are accounted for under ASC 360-10, Property, Plant, and Equipment. Long-lived assets are reviewed periodically for impairment or when events or changes in circumstances indicate that full recoverability of net asset balances through future cash flows is in question. Management estimates future pre-tax cash flows at a store level (undiscounted and without interest charges) based on historical experience, knowledge and market data. Estimates of future cash flows require that we make assumptions and apply judgment, including forecasting future sales and expenses and estimating useful lives of the assets. These estimates can be affected by factors such as future store results, real estate demand, and economic conditions that can be difficult to predict, as well as other factors such as those outlined in “Risk Factors.” If the expected future cash flows related to the long-lived assets are less than the assets’ carrying value, an impairment loss would be recognized for the difference between estimated fair value and carrying value.
Income Taxes
We account for income taxes in accordance with ASC 740-10, Income Taxes, which requires the use of the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Inherent in the measurement of these deferred balances are certain judgments and interpretations of existing tax law and other published guidance as applied to our operations. A valuation allowance has been established for deferred tax assets relating to certain tax credits in non-U.S. jurisdictions, since we anticipate that it is not more likely than not that these assets will be realized. In determining the need for a valuation allowance, we are required to make assumptions and to apply judgment, including forecasting future earnings, taxable income, and the mix of earnings in the jurisdictions in which we operate. Our effective tax rate considers our judgment of expected tax liabilities in the various jurisdictions within which we are subject to tax.
The tax effects of uncertain tax positions taken or expected to be taken in income tax returns are recognized only if they are “more likely-than-not” to be sustained on examination by the taxing authorities, based on the technical merits as of the reporting date. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize estimated accrued interest and penalties related to uncertain tax positions in income tax expense.
We are currently under examination by certain state and local taxing jurisdictions. Further, at any given time, multiple tax years may be subject to examination by various taxing authorities. The recorded amounts of income tax are subject to adjustment upon examination, changes in interpretation and changes in judgment utilized in determining estimates. While no adjustments to recorded amounts are anticipated, a 1% variance in our effective tax rate would affect net income after taxes by approximately $1.7 million in Fiscal 2012.
Stock and Incentive-based Compensation
The calculation of stock-based compensation expense requires the input of subjective assumptions, including the expected term of the stock-based awards, stock price volatility and pre-vesting forfeitures. We estimate the expected life of shares granted in connection with stock-based awards using historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock at the date of grant based on an average of our historical volatility and the implied volatility of publicly traded options on our common stock, if the latter is available. We estimate forfeitures based on our historical experience of stock-based awards granted, exercised and cancelled, as well as future expected behavior.
Similarly, the calculation of long-term performance compensation expense related to our Restricted Cash Program (“RCP”) requires the input of subjective assumptions, including the expected forfeiture of earned and banked awards and forecasts of our future income growth. We estimate forfeitures based on historical RCP forfeiture patterns, as well as current and future trends of expected behavior. We estimate future income growth based on past performance, future business trends and new business initiatives.

30


The assumptions used to calculate the fair value of stock-based awards and long-term performance compensation expense represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we were to use different assumptions, the expense recorded could be materially different. For stock-based awards, if we were to adjust our forfeiture rate estimates by 5%, the impact to stock-based compensation cost would be approximately $0.5 million. Similarly, if we were to adjust RCP forfeiture rate estimates by 5%, the impact to long-term incentive compensation expense would be approximately $1.8 million. Finally, if we were to adjust the interest rate factors applied to amounts banked under the RCP by five percentage points, the impact to long-term incentive compensation expense would be approximately $1.1 million. See Note 7, “Equity and Incentive Compensation Plans,” in the Notes to the Consolidated Financial Statements for additional information.

ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.

We have significant amounts of cash and cash equivalents on deposit at FDIC-insured financial institutions that are currently in excess of federally insured limits. Since the deposit insurance provisions of the Dodd-Frank Wall Street Reform Act expired on December 31, 2012, and because our Credit Facility contains certain restrictions on permitted investments, we cannot be assured that we will not experience losses with respect to cash on deposit in excess of federally insured limits. We continually evaluate our deposit investment options in accordance with our corporate investment policy.
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 costs denominated in the Canadian dollar. As of February 2, 2013, our monetary assets and liabilities that are 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 be expected to have a material impact on our earnings or cash flows.
AnnTaylor Inc.’s Credit Facility allows for investments in financial instruments with original maturity dates of up to 360 days. As of February 2, 2013, we did not hold any investments that did not qualify as cash and cash equivalents.

ITEM 8.
Financial Statements and Supplementary Data.

The following Consolidated Financial Statements of the Company for the years ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks) are included as part of this Report (See Item 15):
Consolidated Statements of Operations for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks).
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks).
Consolidated Balance Sheets as of February 2, 2013 and January 28, 2012.
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks).
Consolidated Statements of Cash Flows for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks).
Notes to the Consolidated Financial Statements.

ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.
 

31


ITEM 9A.
Controls and Procedures.

Disclosure 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 Exchange Act) as of the end of the period covered by this Report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Report.
Management’s Report on Internal Control over Financial Reporting
The management of ANN INC. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 2, 2013 based on the framework and criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of February 2, 2013.
There were no changes in the Company's internal control over financial reporting during the Company's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company’s Independent Registered Public Accounting Firm, Deloitte & Touche LLP, issued a report on the Company’s internal control over financial reporting, which is included in the Report of Independent Registered Public Accounting Firm, on page 36.

ITEM 9B.
Other Information.

None.
PART III
 
ITEM 10.
Directors, Executive Officers and Corporate Governance.

The information required by this item is incorporated herein by reference to the Sections entitled “Election of Class I Directors,” “Executive Officers,” “Corporate Governance,” “Stockholder Proposals for the 2014 Annual Meeting” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2013 Annual Meeting of Stockholders.
The Company has Business Conduct Guidelines that apply to all its associates, including its chief executive officer, chief financial officer, principal accounting officer and controller, as well as members of the Company’s Board of Directors. The Business Conduct Guidelines are available on the Company’s website at http://investor.anninc.com. Any updates or amendments to the Business Conduct Guidelines, as well as any waiver from the Business Conduct Guidelines granted to an executive officer (including the Company’s chief executive officer, chief financial officer, principal accounting officer and controller), will also be posted on the website.
 
ITEM 11.
Executive Compensation.

The information required by this item is incorporated herein by reference to the Sections entitled “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Company’s Proxy Statement for its 2013 Annual Meeting of Stockholders.

ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated herein by reference to the Sections entitled “Beneficial Ownership of Common Stock” and “Equity Compensation Plans” in the Company’s Proxy Statement for its 2013 Annual Meeting of Stockholders.

32


ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is incorporated herein by reference to the Sections entitled “Related Person Transactions,” “Related Person Transactions Policy and Procedures” and “Corporate Governance” in the Company’s Proxy Statement for its 2013 Annual Meeting of Stockholders. 

ITEM 14.
Principal Accounting Fees and Services.

The information required by this item is incorporated herein by reference to the Section entitled “Ratification of the Appointment of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for its 2013 Annual Meeting of Stockholders.

PART IV
 
ITEM 15.
Exhibits and Financial Statement Schedules.

(a)
List of documents filed as part of this Annual Report:
1.The following Consolidated Financial Statements of the Company are filed as part of this Annual Report:
Report of Independent Registered Public Accounting Firm;
Consolidated Statements of Operations for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks);
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks);
Consolidated Balance Sheets as of February 2, 2013 and January 28, 2012;
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks);
Consolidated Statements of Cash Flows for the Fiscal Years Ended February 2, 2013 (53 weeks), January 28, 2012 (52 weeks) and January 29, 2011 (52 weeks); and
Notes to the Consolidated Financial Statements.
2.Schedules other than the above have been omitted because they are not applicable.
3.The exhibits filed as a part of this Annual Report are listed in the Exhibit Index.

(b)
The exhibits listed in the Exhibit Index attached hereto are filed as part of this Annual Report and incorporated herein by reference.
(c)
Not applicable.


33


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
By:
 
/s/     Kay Krill
 
 
Kay Krill
 
 
President and Chief Executive Officer
Date: March 8, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
/s/   Kay Krill
 
President, Chief Executive Officer and Director
(Principal Executive Officer)
March 8, 2013
Kay Krill
 
Date
/s/   Michael J Nicholson
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer, and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
March 8, 2013
Michael J. Nicholson
 
Date
/s/   Ronald W. Hovsepian
 
Non-Executive Chairman of the Board and Director
March 8, 2013
Ronald W. Hovsepian
 
Date
/s/   James J. Burke, Jr.
 
Director
March 8, 2013
James J. Burke, Jr.
 
Date
/s/    Michelle Gass
 
Director
March 8, 2013
        Michelle Gass
 
Date
/s/    Dale W. Hilpert
 
Director
March 8, 2013
        Dale W. Hilpert
 
Date
/s/    Linda A. Huett
 
Director
March 8, 2013
 Linda A. Huett
 
Date
/s/    Michael C. Plansky
 
Director
March 8, 2013
        Michael C. Plansky
 
Date
/s/    Stacey Rauch
 
Director
March 8, 2013
        Stacey Rauch
 
Date
/s/    Michael W. Trapp
 
Director
March 8, 2013
        Michael W. Trapp
 
Date
/s/    Daniel W. Yih
 
Director
March 8, 2013
        Daniel W. Yih
 
Date

34


ANN INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page No.
 
 
 
 
Consolidated Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to the Consolidated Financial Statements

35


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ANN INC.
New York, NY
We have audited the accompanying consolidated balance sheets of ANN INC. and its subsidiaries (the “Company”) as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three fiscal years in the period ended February 2, 2013. We also have audited the Company’s internal control over financial reporting as of February 2, 2013, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ANN INC. and its subsidiaries as of February 2, 2013 and January 28, 2012, and the results of its operations and its cash flows for each of the three years in the period ended February 2, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2013, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/    DELOITTE & TOUCHE LLP
New York, New York
March 8, 2013

36


ANN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Years Ended February 2, 2013January 28, 2012 and January 29, 2011
 
 
Fiscal Year Ended
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
(in thousands, except per share amounts)
Net sales
$
2,375,509

 
$
2,212,493

 
$
1,980,195

Cost of sales
1,073,167

 
1,004,350

 
876,201

 Gross margin
1,302,342

 
1,208,143

 
1,103,994

Selling, general and administrative expenses
1,135,551

 
1,062,644

 
978,580

Restructuring charges

 

 
5,624

 Operating income
166,791

 
145,499

 
119,790

Interest and investment income/(expense), net
1,051

 
(1,052
)
 
(668
)
Other non-operating income/(expense), net
(189
)
 

 

 Income before income taxes
167,653

 
144,447

 
119,122

Income tax provision
65,068

 
57,881

 
45,725

Net income
$
102,585

 
$
86,566

 
$
73,397

Earnings per share:
 
 
 
 
 
Basic earnings per share
$
2.13

 
$
1.66

 
$
1.26

 
 
 
 
 
 
Weighted average shares outstanding
47,494

 
51,200

 
57,203

 
 
 
 
 
 
Diluted earnings per share
$
2.10

 
$
1.64

 
$
1.24

 
 
 
 
 
 
Weighted average shares outstanding, assuming dilution
48,094

 
52,029

 
58,110

See accompanying Notes to Consolidated Financial Statements.


37


ANN INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Fiscal Years Ended February 2, 2013January 28, 2012 and January 29, 2011
 


 
 
Fiscal Year Ended
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
 
 
Net income
$
102,585

 
$
86,566

 
$
73,397

 
 
 
 
 
 
Other comprehensive income/(loss):
 
 
 
 
 
Foreign currency translation adjustment
19

 

 

Net change in employee benefit plans:
 
 
 
 
 
   Pension settlement charge
1,760

 

 
338

   Net actuarial (loss)/gain
(1,153
)
 
(4,932
)
 
2,317

   Amortization of net actuarial loss
726

 
62

 
300

Other comprehensive income/(loss), before tax
1,352

 
(4,870
)
 
2,955

Income tax expense/(benefit) on other comprehensive income items
531

 
(1,930
)
 
1,175

Other comprehensive income/(loss), net of tax
821

 
(2,940
)
 
1,780

Comprehensive income
$
103,406

 
$
83,626

 
$
75,177

See accompanying Notes to Consolidated Financial Statements.



38


ANN INC.
CONSOLIDATED BALANCE SHEETS
February 2, 2013 and January 28, 2012
 
 
February 2,
2013
 
January 28,
2012
 
(in thousands, except share amounts)
Assets
 
Current assets
 
 
 
Cash and cash equivalents
$
167,011

 
$
150,208

Accounts receivable
17,856

 
19,591

Merchandise inventories
216,848

 
213,447

Refundable income taxes
9,201

 
11,965

Deferred income taxes
30,397

 
30,999

Prepaid expenses and other current assets
64,716

 
49,107

Total current assets
506,029

 
475,317

Property and equipment, net
409,703

 
360,890

Deferred income taxes
7,841

 
39,134

Other assets
18,632

 
12,340

Total assets
$
942,205

 
$
887,681

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
105,691

 
$
94,157

Accrued salaries and bonus
23,969

 
16,122

Current portion of long-term performance compensation
34,233

 
19,373

Accrued tenancy
38,647

 
41,435

Gift certificates and merchandise credits redeemable
47,268

 
50,750

Accrued expenses and other current liabilities
86,946

 
64,060

Total current liabilities
336,754

 
285,897

Deferred lease costs
162,620

 
159,435

Deferred income taxes
228

 
1,320

Long-term performance compensation, less current portion
26,368

 
42,122

Other liabilities
31,125

 
35,030

 
 
 
 
Commitments and contingencies (see Note 5)

 

 
 
 
 
Stockholders’ equity
 
 
 
Common stock, $.0068 par value; 200,000,000 shares authorized; 82,563,516 shares issued
561

 
561

Additional paid-in capital
768,215

 
776,658

Retained earnings
676,842

 
574,257

Accumulated other comprehensive loss
(4,497
)
 
(5,318
)
               Treasury stock, 35,958,318 and 33,284,631 shares, respectively, at cost
(1,056,011
)
 
(982,281
)
Total stockholders’ equity
385,110

 
363,877

Total liabilities and stockholders’ equity
$
942,205

 
$
887,681

See accompanying Notes to Consolidated Financial Statements.


39


ANN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For Fiscal Years Ended February 2, 2013January 28, 2012 and January 29, 2011
 
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Total
 
(in thousands)
Balance at January 30, 2010
82,476

 
$
561

 
$
760,166

 
$
414,294

 
$
(4,158
)
 
23,702

 
$
(753,677
)
 
$
417,186

Net income

 

 

 
73,397