10-K 1 ann_10kx2013.htm ANN_10K_2013

                                                                                                                                                                                                                                                                                                                                                      
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 1, 2014
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 August 3, 2013 was $1,523,192,303.
The number of shares of the registrant’s common stock outstanding as of February 28, 2014 was 46,218,873.
Documents Incorporated by Reference:
Portions of the Registrant’s Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders to be held on May 22, 2014 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 company name to ANN INC. in 2011. For more than half a century, we have evolved with the needs of real women who live full, multi-faceted lives. Our values are her values. Our focus remains on providing her with fashionable, versatile product, excellent value and an engaging shopping experience. We understand that a woman expresses herself through what she wears - at work, at home and at play. And we’re there for her every step of the way, with stylish clothing and accessories that transform her, allowing her to move from one instance to the next in her full and busy day.
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 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 1,025 retail stores in 47 states, the District of Columbia, Puerto Rico and Canada, comprised of 268 Ann Taylor stores, 539 LOFT stores, 108 Ann Taylor Factory stores and 110 LOFT Outlet stores. In addition to our stores, our clients can shop online in more than 100 countries worldwide at www.anntaylor.com and www.LOFT.com (together, our “Websites”) 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. LOFT 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 brands through our omni-channel retail strategy. Our goal is to enable clients to seamlessly shop our brands across both store and online channels whenever and wherever they choose to shop. In support of this, during Fiscal 2012, we successfully launched the first phase of our omni-channel initiative, which enabled store fulfillment of online sales. During Fiscal 2013, we built on this momentum by implementing e-receipt technology, making significant enhancements to our online search engine optimization program and launching our client relationship management platform. We have additional plans to optimize our omni-channel capabilities in Fiscal 2014 and beyond to further enhance this seamless client experience and drive incremental sales and profitability.
Our omni-channel retail strategy, which is focused on integrating the in-store and online operations at Ann Taylor and LOFT, further enables us to manage our full-price stores and Websites as a combined single channel at the brand level. This omni-channel focus guides most aspects of our plans for growth at our Ann Taylor and LOFT brands, including:

Most merchandise styles are available both in-store and online, excluding wedding at Ann Taylor and maternity at LOFT, which are available online only and represent a small percentage of each brand’s combined in-store and online merchandise assortment;
Technology that enables store fulfillment of online sales by allowing our Websites access to inventory maintained at full-price brick-and-mortar brand locations;
Continued investments in technology to enable clients of our Ann Taylor and LOFT brands to seamlessly shop across store and online channels whenever and wherever they choose to shop;
Coordinated online events designed to effectively and profitably clear through markdown inventory at Ann Taylor and LOFT stores;
Further integration of our merchandise planning, procurement and allocation functions to serve each brand’s full-price store and online channels;
Continued refinement of a cross-channel client relationship management tool focused on client behaviors across each brand’s full-price store and online channels;
Integrated marketing and client outreach efforts aimed at increasing traffic and conversion, both in-store and online;
Weekly Ann Taylor and LOFT business review meetings focused on the combined productivity of each brand’s in-store and online channels;
Field training and monetary incentives aimed at educating and encouraging store associates to effectively meet the needs of our clients across channels; and
Management incentive compensation programs at Ann Taylor and LOFT that reward associates based on the combined performance of each brand’s full-price store and online channels.

We view the store and online operations of our full-price Ann Taylor and LOFT businesses as one single channel that allows clients to fully experience those brands, not just a channel within those brands. Further, we manage our full-price in-store and online operations as a single, integrated channel rather than as separate sales channels operating independently, with our Websites viewed as the largest store within each brand. In support of this, clients can return merchandise purchased at our Websites at any of their respective full-price brick-and-mortar brand locations. The technology and reports utilized to manage the business support this omni-channel approach, in that total sales and comparable sales are tracked on a combined basis. We believe this omni-channel approach to managing our full-price Ann Taylor and LOFT businesses is critical to meeting the ever-increasing expectations of our clients, and therefore critical to the ongoing success of our brands.
During Fiscal 2012, we opened our first stores in Canada, marking the first step in expanding our brands internationally. Building on this momentum, during Fiscal 2013, we continued to expand our retail presence in Canada and launched international shipping capabilities to more than 100 countries worldwide via our Websites. These efforts not only extend the reach of our brands to clients outside the United States, but also help us assess further potential international expansion opportunities. Over the longer term, we will continue to evaluate these and other organic growth opportunities, including new merchandise offerings and brand extensions, which may involve forging additional strategic partnerships, as we did in Fiscal 2013 with our shoe and eyewear collections, or further evolving a brand or product category through our own internal efforts. In addition, we will continue to evaluate inorganic growth opportunities, such as an acquisition, when our research indicates that such an opportunity will complement our existing 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.

3


Stores
We continue to focus considerable attention on optimizing our store portfolio, including our Websites, in order to improve profitability and better serve our clients. As a result of our capital investments, approximately 80% of our Ann Taylor store fleet now reflects our modern aspirational brand aesthetic. At LOFT, we have continued our strategy of expanding into small- and mid-markets, where we have identified potential for meaningful growth. We also believe continued investments in our Websites and further integration of our store and online channels will be a major contributor to our future growth.
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 2013, we continued our store growth program, opening 66 new stores, including seven new stores in Canada, bringing our total store base in Canada to 10 stores at the end of Fiscal 2013. Capital expenditures related to our new stores totaled approximately $70.8 million and expenditures for store remodeling and refurbishment projects totaled approximately $42.6 million. In Fiscal 2013, total net square footage increased by approximately 188,000 square feet, or approximately 3%, to approximately 5.9 million square feet, as compared to 5.7 million square feet at the end of Fiscal 2012.
In Fiscal 2014, we plan to open approximately 50 new stores in the United States and Canada and close approximately 30 U.S. stores, leading to net store growth of approximately 20 stores. In addition, we plan to optimize the size of an additional 11 stores. Total net square footage is expected to increase approximately 65,000 square feet, or approximately 1.0%, as compared to Fiscal 2013. Fiscal 2014 capital expenditures are expected to be approximately $40 million for new stores and approximately $50 million for store remodeling and refurbishment projects. 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.”
The following table sets forth certain information regarding our Ann Taylor (“AT”), LOFT, Ann Taylor Factory (“ATF”) and LOFT Outlet (“LOS”) retail stores over the past three fiscal years:

Store Count
 
Ann Taylor Brand
 
LOFT Brand
 
 
AT
 
ATF
 
Total

LOFT
 
LOS
 
Total
Total
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 (1)
 
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

New (1)
 
7

 
7

 
14

 
38

 
14

 
52

 
66

Closed
 
(14
)
 

 
(14
)
 
(11
)
 

 
(11
)
 
(25
)
February 1, 2014
 
268

 
108

 
376

 
539

 
110

 
649

 
1,025


(1)
During Fiscal 2013, we opened two Ann Taylor stores and five LOFT stores in Canada. During Fiscal 2012, we opened two Ann Taylor stores and one LOFT store in Canada.


4


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 $331.4 million in our store base and approximately 70% of our stores are either new or have been expanded, downsized, remodeled or refurbished.
Store design and environment
Our Ann Taylor stores average approximately 5,000 square feet. During Fiscal 2013, we continued to roll out our new smaller format Ann Taylor stores, adding seven new smaller format stores, downsizing or remodeling another 13 stores, and updating an additional 18 stores. As a result of these capital investments, approximately 80% of our store fleet reflects our modern aspirational brand aesthetic. In Fiscal 2014, we plan to build on this by opening approximately five new Ann Taylor stores and downsizing and/or remodeling approximately 10 additional stores.
Our LOFT stores average approximately 5,700 square feet. We operate one LOFT flagship store on the ground floor of 7 Times Square, our corporate headquarters, in New York City. At LOFT, we continued to execute our store growth program, which included a strategy of expanding into small- and mid-markets, opening 38 new LOFT stores and rightsizing and/or remodeling 35 additional stores in Fiscal 2013. In Fiscal 2014, we plan to open approximately 20 LOFT stores and downsize and/or remodel approximately 30 additional stores.
Our Ann Taylor Factory stores average approximately 6,800 square feet and our LOFT Outlet stores average approximately 6,600 square feet. In Fiscal 2013, we continued to grow our outlet fleet, opening seven new Ann Taylor Factory stores and 14 new LOFT Outlet stores. In Fiscal 2014, we plan to further grow our factory outlet presence, and open approximately five new Ann Taylor Factory stores and 20 new LOFT Outlet stores.
Our stores typically have approximately 25% of their total square footage allocated to stockroom and other non-selling space.
Websites
Our Websites 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 order fulfillment and client service. We are committed to building a seamless, omni-channel experience for our clients and view our Websites as a key enabler of this strategy. As such, in Fiscal 2012, we implemented the first phase of our omni-channel initiative, which enabled store fulfillment of online sales. In Fiscal 2013, we launched international shipping capabilities to more than 100 countries worldwide, providing clients outside the United States access to our brands. We also implemented e-receipt technology and made significant enhancements to our search engine optimization program to further enhance the online shopping experience. We continue to explore opportunities to further improve speed, navigation and our overall online shopping experience and expect further integration of our Websites to be a major contributor to the future growth of our Ann Taylor and LOFT brands.
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. We also complement our in-house assortments by purchasing a small percentage of merchandise from branded vendors.
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.


5


In Fiscal 2013, we sourced merchandise for our Ann Taylor and LOFT brands from approximately 133 manufacturers and vendors in 17 countries, and no single supplier accounted for more than 10% of merchandise purchased on either a unit or cost basis. Approximately 37% of our merchandise unit purchases originated in China (representing approximately 40% of total merchandise cost), 17% in Indonesia (17% of total merchandise cost), 15% in India (14% of total merchandise cost), 13% in Vietnam (7% of total merchandise cost) and 11% in the Philippines (15% 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. However, we generally do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise with any single supplier. In addition, 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 Websites, 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 Websites. We also consider the effect our omni-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 Websites.
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.
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. Our focus on continually evolving our brands to appeal to the changing needs of our clients helps us stay relevant and competitive in the women’s retail apparel industry.
We manage all aspects of brand development for our retail concepts, including product design, store design and merchandising and brand marketing and advertising. We continue to invest in the development of our brands through client research and outreach, as well as in-store and direct marketing campaigns. We make strategic investments to optimize the overall client experience by focusing on client service, as well as opening new stores, reinvesting in existing stores and enhancing the online shopping experience at our Websites. In addition, we continue to build on our omni-channel retail strategy by making focused investments to support this initiative.

6


We believe it is essential to communicate on a regular basis with our current client base and potential clients by telling each brand’s story through aspirational national and regional advertising, as well as through compelling direct mail marketing and in-store presentation. Marketing expenditures as a percentage of net sales were 4.4% in Fiscal 2013, 4.1% in Fiscal 2012 and 4.0% in Fiscal 2011.
Client Relationship Management
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 Websites. 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 either 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.
We are focused on building on our client service through a client relationship management initiative designed to deliver a more personalized and relevant shopping experience for our Ann Taylor and LOFT clients. We are increasingly engaging clients through more targeted and personalized outreach, both at our full-price and outlet channels, to provide an optimal omni-channel shopping experience, establish stronger relationships and further enhance the efficiency of our marketing programs.
Information Systems
During Fiscal 2013, we continued our investment in information services and technology, enhancing the systems we use to support our Websites and omni-channel capabilities, as well as our international expansion, merchandise procurement, inventory management and order fulfillment processes. These enhancements are generally aimed at optimizing the client experience, driving sales, improving client access to merchandise assortments and back-office efficiencies.

Trademarks, Domain Names and Service Marks
The “Ann Taylor®,” “LOFT®,” “Ann Taylor 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 strategy, 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 retail stores, catalog and Internet businesses that offer similar categories of merchandise. We believe that our focused fashion point of view, product versatility and strong client service distinguish us from other women’s 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 1, 2014, we had approximately 19,800 employees, of which approximately 2,150 were full-time salaried employees, 2,400 were full-time hourly employees and 15,250 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.
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.

7


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. These are not the only risks our Company 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 risks were to materialize, our business, results of operations, cash flows or financial condition may be materially adversely impacted , 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 missed opportunities, excess inventory and more frequent markdowns or inventory shortages, all of which could negatively impact sales and gross margin performance and have a material adverse effect on our business. Merchandise missteps could also negatively impact our image with our clients and result in diminished brand loyalty.
Our ability to maintain our brand image, engage new and existing clients and gain market share
Our ability to maintain our brand image and reputation is integral to our business as well as the implementation of strategies to expand it. 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 either or both of our brands and failure to achieve consistent, positive performance at both of our brands simultaneously could have an adverse effect on our sales and profitability. In addition, our ability to address the challenges of declining store traffic, including at factory outlet centers, in a highly promotional, low growth environment may impact our ability to maintain and gain market share and also impact our sales and profitability.
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. We face a variety of competitive challenges, including anticipating and quickly responding to changing client demands or preferences; maintaining favorable brand recognition and effectively marketing our products to our clients in several diverse demographic markets; sourcing merchandise efficiently; and developing innovative, high-quality merchandise in styles that appeal to our clients in ways that favorably distinguish us from our competitors. In addition, 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 operating margins and adversely affect our results of operations.


8


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 successfully optimize implementation of our omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for our clients
We are committed to growing our business through a omni-channel retail strategy. Our goal is to assist our clients in accessing our brands whenever and wherever they choose to shop. In support of this goal, we successfully launched the first phase of our omni-channel initiative during the third quarter of Fiscal 2012, allowing store order fulfillment of internet sales. Our success depends to a large degree on our ability to plan and manage inventory levels and the fulfillment of orders, address operational issues in stores and online and further align both channels to optimize our omni-channel retail strategy.
In addition, our success also depends on our ability to anticipate and implement innovations in sales and marketing technology to appeal to existing and potential clients who increasingly rely on multiple portals, including mobile technologies, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our clients’ shopping preferences could significantly impair our ability to meet our strategic business and financial goals. If we do not successfully optimize the implementation of our omni-channel retail strategy or if it does not achieve its intended results, we may experience an adverse impact on our business.
Our ability to manage inventory levels and changes in merchandise mix as well as optimize the operational aspects of our omni-channel fulfillment strategy
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. Inventory levels in excess of client demand may result in excessive markdowns and, therefore, lower than planned sales and 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. Our margins may also 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.
In addition, our omni-channel fulfillment strategy, which aims to help optimize the client experience, improve merchandising decisions and support our omni-channel operations, creates additional complexities in our ability to manage inventory levels, as well as certain operational issues in stores and online, including packaging, shipping, timeliness and returns. If we are unable to successfully manage the inventory complexities and operational issues associated with our omni-channel fulfillment strategy, we may experience an adverse impact on our business.
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. We regularly make investments to upgrade, enhance or replace these systems, as well as leverage new technologies to support our growth strategies. In addition, we have implemented enterprise-wide initiatives that are intended to standardize business processes and optimize performance. Any delays or difficulties in transitioning to new systems or integrating them with current systems or the failure to implement our initiatives in an orderly and timely fashion could result in additional investment of time and resources, which could impair our ability to improve existing operations and support future growth, and ultimately have a material adverse effect on our business.

9


The reliability and capacity of our information systems are critical. Despite 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, human error, power outages, computer viruses and security breaches. Any disruptions affecting our information systems could have a material adverse impact on our business. In addition, any failure to maintain adequate system security controls to protect our computer assets and sensitive data, including associate and client data, from unauthorized access, disclosure or use could damage our reputation with our associates and our clients. Finally, 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 products and implementation and/or management of certain aspects of our information systems and infrastructure. Many of the functions that are performed by third parties are performed in 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. Failure by any of these third parties to implement and/or manage our information systems and 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 disasters), restrictive actions by foreign governments or changes in United States laws and regulations.
Risks associated with Internet sales
We sell merchandise over the Internet through our Websites. Our Internet operations are subject to numerous risks, including:
the failure to successfully implement new systems, system enhancements and Internet platforms, including our omni-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;
the reliance on third-party computer hardware/software providers;
the reliance on third-party order fulfillment providers;
rapid technological change;
the diversion of sales from our stores;
liability for online content;
violations of federal, state, foreign or other applicable laws, including those relating to online privacy;
credit card fraud; and
telecommunications failures and vulnerability to electronic break-ins and other similar disruptions.

Our failure to successfully address and respond to these risks could negatively impact sales, increase costs and damage the reputation of our brands.
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 and the collection and retention of client data and associate information. We also rely on other third parties to process credit card transactions, perform online e-commerce and social media activities and retain data relating to the Company’s financial position and results of operations, strategic initiatives and other important information. 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, associates and investors and expose 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 or associates. We may also incur increased costs to comply with various applicable laws or industry standards regarding use and/or 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.



10


Our reliance on third-party manufacturers and key vendors
We do not own or operate any manufacturing facilities, and therefore, depend on independent third parties to manufacture our merchandise. As such, we face the risk of increased manufacturing costs and 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 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 and clients could be impacted, which could have a material adverse effect on our sales and results of operations. In addition, we cannot predict the impact of world-wide political or economic conditions on our major suppliers. Our suppliers may be unable to obtain adequate credit or access to liquidity to finance their operations. Our suppliers also continue to face economic pressure as a result of rising wages and inflation, which could lead to vendor consolidation. While we have contingency plans for such potential risks, 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 or low demand for fabrics, labor conditions, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, inflation and 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’ expectations. Additionally, increases in labor costs, as well as a shortage of skilled labor in certain areas of China, may also impact our sourcing costs. The cost of transportation has also been increasing, and these cost pressures are likely to persist. 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 to and from foreign countries;
foreign laws and regulations;
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 our merchandise is manufactured;
significant delays or disruptions in the delivery of cargo due to port security issues, labor disputes or shortages, local business practices or weather conditions;
imposition of duties, taxes and other charges on imports or exports;
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 or terrorist acts in any of the countries in which our merchandise is manufactured or the transportation channels through which it passes;
the impact of natural disasters, extreme weather, public health concerns or other catastrophes 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
increased security requirements applicable to imported goods and increased inspections of import shipments by domestic authorities.

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 reputation, business, financial condition, results of operations and liquidity.



11


Our dependence on our Louisville distribution center and other third-party distribution and transportation providers
Our wholly-owned and operated primary 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 City of Industry, California and Toronto, Canada for distribution support to our stores. In addition, sales at our Websites 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 or our third-party distribution, fulfillment or transportation providers for any reason, including as a result of natural disasters, accidents, inclement weather, system failures, work stoppages, slowdowns or strikes or other unforeseen causes, could adversely impact our business by delaying or impairing our ability to distribute merchandise to our stores and/or our clients. These interruptions could result in, among other things, inventory issues, increased costs, lower sales and a loss of loyalty to our brands.
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. In addition, if we fail to properly execute our plans, or fail to identify alternative strategies, it could have a material adverse effect on our financial position and results of operations.
Our growth strategy may also include plans to develop new strategic partnerships as well as expand our presence in both new and existing markets, including international markets, as we did in late 2012 with the opening of our first stores in Canada and the introduction of international shipping capabilities at our Websites in the first quarter of 2013. We have very limited experience operating outside of the United States, 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, our efforts to enter foreign markets may not be successful, or the sales and gross margin generated by our foreign operations may not be in line with our expectations. In addition, international expansion, including 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 and/or require us to increase our costs to manage such expansion, which could adversely impact our financial condition and results of operations.
In addition, as we continue to implement our plans for international expansion, we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as to the laws of the foreign countries in which we operate. We must use all commercially reasonable efforts to ensure compliance with these laws. Any violations of such laws could subject us to sanctions or other penalties, which could negatively affect our reputation, business and operating results.
Our ability to secure and protect trademarks and other intellectual property rights
We believe that our trademarks and other intellectual property rights 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. Any litigation regarding our trademarks could be time-consuming and costly. Moreover, the loss of exclusive use of our trademarks and other proprietary rights could have a material adverse effect on our business.
Failure to comply with legal and regulatory requirements
Our business is subject to legal and regulatory requirements in the United States and abroad, including, without limitation, those required by the SEC, the New York Stock Exchange, the Sarbanes-Oxley Act of 2002 and securities, tax, 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.

12


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 or our vendors or agents are out of compliance with applicable laws and regulations could subject us to civil remedies or criminal sanctions, which could have a material adverse effect on our business, reputation and stock price. In addition, even the claim of a violation of applicable laws or regulations could negatively affect our reputation.
The effect of general economic conditions
Our financial performance is dependent on consumer confidence and levels of consumer spending, which may remain volatile for the foreseeable future. Some of the factors impacting consumer confidence and discretionary consumer spending include, but are not limited to: general economic conditions; fiscal and monetary policies of governments; wages and unemployment; consumer debt; reductions in net worth based on market declines or declines in the residential real estate and mortgage markets; tax policies; increases in fuel and energy prices; changes in interest rates and the domestic and international political environment. 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 lead to excess inventory levels, which could adversely impact our liquidity, capital resources, 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 revolving 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 revolving credit facility also has financial covenants and certain restrictions which, if not met, may further impede our ability to access funds.
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 and therefore, we cannot be assured that we will not experience losses with respect to cash on deposit in excess of such limits.
The impact of fluctuations in sales and profitability on our stock price
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, extreme or unseasonable 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, could result in a decline in the market value of our stock.
Effects of natural disasters, war, terrorism, public health concerns or other catastrophes
Natural disasters, extreme weather and public health concerns, including severe infectious diseases, could impact our ability to open and run our corporate offices, distribution center, stores and other operations in affected areas and/or negatively impact our foreign sourcing offices and the 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 or extreme weather, 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. 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. In addition, although we maintain business interruption and property insurance, there can be no assurance that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us.

13


Manufacturer compliance with our social compliance program requirements
We require our independent manufacturers to comply with all applicable laws and regulations, as well as our Global Supplier Principles and Guidelines, which cover many areas, including labor, health, safety, environmental and other legal 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 labor or other local laws in the country of manufacture, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical in the United States, 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. Any of these events could have a material adverse effect on our business.
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 Canada, and planned expansion into other markets, 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 Ann Taylor and LOFT store formats, as well as our ability to achieve planned store growth for our brands in Fiscal 2014 and beyond. Hiring and training qualified associates, particularly at the store management level, maintaining overall good relations with our associates and vendors and managing inventory and distribution effectively to meet the needs of new and existing clients on a timely basis are 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. In addition, the inability to achieve acceptable results in new and existing stores could lead to store closures and/or asset impairment charges, which could adversely affect our results of operations and our ability to grow.
Our dependence on shopping malls and other retail centers to attract clients to our stores and ability to negotiate acceptable lease terms
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 operating results.
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 effect of tax matters on our business operations.
We are subject to income taxes in the United States and foreign jurisdictions. Our provision for income taxes and cash tax liability in the future could be adversely affected by numerous factors including, but not limited to, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations and accounting rules and regulations or interpretations thereof, which could adversely impact our results of operations, financial condition and cash flow in future periods. In addition, we are subject to the examination of our income tax returns by various tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcome of these examinations will not have an adverse effect on our provision for income taxes and cash tax liability.

ITEM 1B.
Unresolved Staff Comments.

None.


14


ITEM 2.
Properties.
As of February 1, 2014, we operated 1,025 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
2014 - 2016
 
462

2017 - 2019
 
250

2020 - 2022
 
229

2023 and later
 
84

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, we maintain 42,000 square feet of office space in Milford, Connecticut, under a lease that expires in 2019. Both of these leases grant us the right to extend the term for two additional five-year periods.
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.


15


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 February 28, 2014 was 1,899. 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 2013
 
 
 
Fourth quarter
$
39.13

 
$
31.63

Third quarter
37.03

 
31.40

Second quarter
35.00

 
28.66

First quarter
32.80

 
26.95

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


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 1, 2014, with the cumulative total return on the Standard & Poor’s 500 Stock Index (“S&P 500”) and the Dow Jones U.S. Apparel Retailers 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 January 31, 2009 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.

16



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)
November 3, 2013 to November 30, 2013
482

 
$
35.97

 

 
$
250,000

December 1, 2013 to January 4, 2014
370

 
35.66

 

 
250,000

January 5, 2014 to February 1, 2014

 

 

 
250,000

 
852

 
 
 

 
 
 
(1)
Represents 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 August 21, 2013, our Board of Directors approved a new $250 million securities repurchase program (the “Repurchase Program”). The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors. There were no repurchases made under the Repurchase Program during the fourth quarter of Fiscal 2013. As of February 1, 2014 and March 14, 2014, the date of this Report, $250 million remained available for share repurchases 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.

17



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 1, 2014
 
February 2, 2013
 
January 28, 2012
 
January 29, 2011
 
January 30, 2010
 
 
(in thousands, except earnings per share and store count information)
Consolidated Statements of Operations:
 
 
 
 
 
 
Net sales
 
$
2,493,491

 
$
2,375,509

 
$
2,212,493

 
$
1,980,195

 
$
1,828,523

Cost of sales
 
1,150,183

 
1,073,167

 
1,004,350

 
876,201

 
834,188

Gross margin
 
1,343,308

 
1,302,342

 
1,208,143

 
1,103,994

 
994,335

Selling, general and administrative expenses
 
1,173,234

 
1,135,551

 
1,062,644

 
978,580

 
966,603

Restructuring charges
 

 

 

 
5,624

 
36,368

Asset impairment charges
 

 

 

 

 
15,318

Operating income/(loss)
 
170,074

 
166,791

 
145,499

 
119,790

 
(23,954
)
Interest and investment income/(expense), net
 
(94
)
 
1,051

 
(1,052
)
 
(668
)
 
(2,156
)
Other non-operating expense, net (1)
 
(17
)
 
(189
)
 

 

 

Income/(loss) before income taxes
 
169,963

 
167,653

 
144,447

 
119,122

 
(26,110
)
Income tax provision/(benefit)
 
67,533

 
65,068

 
57,881

 
45,725

 
(7,902
)
Net income/(loss)
 
$
102,430

 
$
102,585

 
$
86,566

 
$
73,397

 
$
(18,208
)
Basic earnings/(loss) per share
 
$
2.21

 
$
2.13

 
$
1.66

 
$
1.26

 
$
(0.32
)
Diluted earnings/(loss) per share
 
$
2.19

 
$
2.10

 
$
1.64

 
$
1.24

 
$
(0.32
)
Weighted average shares outstanding
 
45,490

 
47,494

 
51,200

 
57,203

 
56,782

Weighted average shares outstanding, assuming dilution
 
45,955

 
48,094

 
52,029

 
58,110

 
56,782

 
 
 
 
 
 
 
 
 
 
 
Consolidated Operating Information:
 
 
 
 
 
 
Percentage increase/(decrease) in comparable sales (2)
 
2.3
%
 
3.3
%
 
6.8
%
 
10.7
%
 
(17.4
)%
Number of stores:
 
 
 
 
 
 
 
 
 
 
Open at beginning of period
 
984

 
953

 
896

 
907

 
935

Opened during the period
 
66

 
63

 
76

 
24

 
14

Closed during the period
 
(25
)
 
(32
)
 
(19
)
 
(35
)
 
(42
)
Open at the end of the period
 
1,025

 
984

 
953

 
896

 
907

Total store square footage at end of period
 
5,873

 
5,685

 
5,584

 
5,284

 
5,348

Capital expenditures (3)
 
$
145,065

 
$
149,737

 
$
124,448

 
$
64,367

 
$
35,736

Depreciation and amortization
 
$
106,588

 
$
97,829

 
$
94,187

 
$
95,523

 
$
104,351

Working capital turnover (4)
 
12.4
x
 
13.2
x
 
9.7
x
 
8.0
x
 
10.5
x
Inventory turnover (5)
 
5.0
x
 
5.0
x
 
4.9
x
 
4.8
x
 
4.9
x
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Information:
 
 
 
 
 
 
Working capital
 
$
231,472

 
$
169,275

 
$
189,420

 
$
268,005

 
$
229,521

Total assets
 
1,032,960

 
942,205

 
887,681

 
926,820

 
902,141

Total stockholders’ equity
 
468,456

 
385,110

 
363,877

 
423,445

 
417,186

(Footnotes on following page)

18


(Footnotes for preceding page)

(1)
Other non-operating 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 greater than 15% is treated as a new store for the first year following its reopening. Sales from our Websites 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.
(3)
Capital expenditures are accounted for on the accrual basis and include net non-cash transactions totaling $2.0 million, $2.5 million, $5.5 million, $3.2 million and $(2.8) million, in Fiscal 2013, 2012, 2011, 2010 and 2009, 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.


19


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 2013 was another strong year for ANN INC. Despite soft traffic and tepid consumer spending across much of the retail industry, particularly during the back half of the year, we achieved record diluted earnings per share of $2.19 for the year. This performance reflected higher net sales, including our fourth consecutive year of positive comparable sales performance at both brands, solid gross margin rate performance, continued disciplined management of expenses and the benefit of additional share repurchase activity. Our focus on our client helped drive this performance, with strong product offerings at both Ann Taylor and LOFT throughout much of the year and continued investments in stores and technology aimed at providing clients a more engaging and seamless shopping experience.
At the Ann Taylor brand, total net sales in Fiscal 2013 increased 1.5% compared to last year, with overall comparable sales increasing 1.1%. At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, comparable sales increased 4.9%, reflecting the strength of our merchandise offerings throughout much of the year, despite the impact of the challenging macroeconomic environment, which forced us to be more promotional across all channels of the business. This was especially true at Ann Taylor Factory, where we also experienced softer traffic throughout the year and a 6.6% decrease in comparable sales.
At the LOFT brand, total net sales in Fiscal 2013 increased 7.2% compared to last year, with overall comparable sales up 3.0% on top of the 4.8% increase achieved in Fiscal 2012. At LOFT, which includes LOFT stores and LOFT.com, comparable sales increased 4.2% primarily due to favorable response to LOFT’s merchandise assortments, particularly in the back half of the year. LOFT’s comparable sales momentum improved throughout the year, despite the consumer challenges and increasingly promotional retail environment in the back half. Performance at LOFT Outlet, however, was negatively impacted by softer traffic trends at factory outlet centers throughout much of the year, which caused a 3.0% decrease in comparable sales.
Our Fiscal 2013 real estate strategy was primarily focused on expanding our domestic store presence at the LOFT brand, continuing to increase our international presence in Canada at both Ann Taylor and LOFT and the execution of selective store closures across the fleet.  Toward that end, we opened a total of 66 new stores during Fiscal 2013. At the Ann Taylor brand, we opened seven new Ann Taylor stores, including two stores in Canada, and updated or right-sized an additional 31 existing stores. As a result of these capital investments, approximately 80 percent of the Ann Taylor store fleet now reflects our updated modern brand aesthetic. At Ann Taylor Factory, we opened seven new stores during Fiscal 2013. At LOFT, we continued to move forward with the expansion of our LOFT fleet, opening 38 new LOFT stores, primarily in small- to mid-markets, including five LOFT stores in Canada. In addition, we opened 14 new LOFT Outlet stores during Fiscal 2013. We also closed a total of 25 underperforming stores during Fiscal 2013, bringing our total store count at the end of the year to 1,025 stores.
Our strategic priorities for Fiscal 2014 include further evolving our business for continued growth in an increasingly omni-channel retail environment.  Retailing has undergone significant changes over the past few years, driven primarily by the shift in consumer shopping behavior and the rise of omni-channel offerings that span both store and online channels.  The Fall 2012 launch of the first phase of our omni-channel initiative marked the first step in our omni-channel journey.  We built on this momentum in Fiscal 2013 with enhancements to our online search engine optimization program and the launch of our client relationship management platform.  In 2014, we plan to begin laying the groundwork for the second phase of our omni-channel initiative, which will further enhance the seamless client shopping experience by enabling fulfillment of in-store client orders online. We are also realigning our organization to better support our integrated stores/e-commerce structure and further accelerate our strategic growth agenda and overall financial performance.
We also have plans to further expand our international business in Fiscal 2014, with additional store openings in Canada and the anticipated opening of the first LOFT store in Mexico later in the year. We view this as another opportunity to continue to grow our client base and the geographic reach of our strong brands. In addition, building on the success of LOFT Lounge, a product category at LOFT that combines style and comfort and is very much in sync with how women are dressing today, we are developing a new brand concept under the Lou & Grey name. We believe Lou & Grey is uniquely positioned in an attractive segment in the women’s retail market and are assessing a range of opportunities to grow this brand, including a shop-in-shop concept and the testing of free-standing stores.

20


Overall, we are committed to expanding the scope of our entire product offering at ANN INC., making us the clear wardrobing destination for women with style. Ann Taylor is focused on wear-to-work and special occasion, LOFT on relaxed wear-to-work and casual separates, and Lou & Grey on effortless, casual, comfortable style. Our brands offer great fashion, service, quality and value, along with an engaging client experience across all channels.  We believe our strategic initiatives present significant opportunities to build on the strength of our brands in order to deliver long-term, profitable growth in 2014 and beyond. In addition, with $202 million in cash and cash equivalents, strong free cash flow and availability under our $250 million share repurchase program, we will continue to evaluate share repurchase activity as another means of further enhancing shareholder value.

Key Performance Indicators
In evaluating our performance, senior management reviews certain key performance indicators, including:
Comparable sales – Comparable sales (“comps”) provide a measure of existing store sales performance. A store is included in comparable sales in its thirteenth month of operation. A store with a square footage change of greater than 15% is treated as a new store for the first year following its reopening. Sales from our Websites 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 and merchandise gross margin – Gross margin measures our ability to control the direct costs of merchandise sold during the period.  Merchandise gross margin represents the difference between net merchandise sales and merchandise cost.   Merchandise cost includes the cost paid to our third-party suppliers for merchandise sold during the period and the cost to transport that merchandise from our suppliers to our distribution center, including customs costs.  Gross margin includes merchandise gross margin, as well as the effect of revenue and/or expenses related to:  our sourcing operations; fulfillment and shipment of online and omni-channel sales; depreciation related to merchandise management systems; sample development costs; and direct costs of our credit card loyalty program. Buying and occupancy costs are excluded from cost of sales and gross margin.
Operating income – Because retailers do not uniformly record supply chain, buying and/or occupancy costs as components of cost of sales or selling, general and administrative expenses, operating income allows us to benchmark our performance relative to other retailers. Operating income represents earnings before interest, other income/expense and income taxes and measures our earnings power from ongoing operations.
Store productivity – Store productivity, including sales per square foot, average unit retail price (“AUR”), units per transaction (“UPT”), dollars per transaction (“DPT”), traffic and conversion, is evaluated by management in assessing our operating performance.
Inventory turnover – Inventory turnover measures our ability to sell our merchandise and how many times it is replaced over time. This ratio is important in determining the need for markdowns, planning future inventory levels and assessing client response to our merchandise.
Quality of merchandise offerings – To monitor and maintain client acceptance of our merchandise offerings, we monitor sell-through levels, inventory turnover, gross margin, returns and markdown rates at a class and style level. This analysis helps identify merchandise issues at an early date and helps us plan future product development and buying.


21


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 1, 2014

February 2, 2013

January 28, 2012
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
46.1
 %
 
45.2
 %
 
45.4
 %
Gross margin
53.9
 %
 
54.8
 %
 
54.6
 %
Selling, general and administrative expenses
47.1
 %
 
47.8
 %
 
48.0
 %
Operating income
6.8
 %
 
7.0
 %
 
6.6
 %
Interest and investment income/(expense), net
 %
 
 %
 
(0.1
)%
Other non-operating expense, net
 %
 
 %
 
 %
Income before income taxes
6.8
 %
 
7.0
 %
 
6.5
 %
Income tax provision
2.7
 %
 
2.7
 %
 
2.6
 %
Net income
4.1
 %
 
4.3
 %
 
3.9
 %

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 1, 2014
 
February 2, 2013
 
January 28, 2012
Net sales
5.0
 %
 
7.4
%
 
11.7
%
Gross margin
3.1
 %
 
7.8
%
 
9.4
%
Operating income
2.0
 %
 
14.6
%
 
21.5
%
Net income
(0.2
)%
 
18.5
%
 
17.9
%
Sales and Sales Metrics
The following tables present information on sales and certain sales-related metrics. All fiscal years presented contain 52 weeks, except for the fiscal year ended February 2, 2013, which includes 53 weeks.
 
 
Fiscal Year Ended
 
February 1, 2014

February 2, 2013

January 28, 2012
 
Sales
 
Comp %
 
Sales
 
Comp %
 
Sales
 
Comp %
 
($ in thousands)
Sales and Comparable Sales
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor brand
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor (1)
$
667,995

 
4.9
 %
 
$
644,486

 
1.8
 %
 
$
618,446

 
4.9
%
Ann Taylor Factory
291,797

 
(6.6
)%
 
300,738

 
(0.5
)%
 
289,406

 
5.7
%
Total Ann Taylor brand
959,792

 
1.1
 %
 
945,224

 
1.1
 %
 
907,852

 
5.2
%
LOFT brand
 
 
 
 
 
 
 
 
 
 
 
LOFT (2)
1,272,854

 
4.2
 %
 
1,202,244

 
5.8
 %
 
1,114,911

 
7.5
%
LOFT Outlet
260,845

 
(3.0
)%
 
228,041

 
(1.5
)%
 
189,730

 
14.2
%
Total LOFT brand
1,533,699

 
3.0
 %
 
1,430,285

 
4.8
 %
 
1,304,641

 
8.0
%
Total Company
$
2,493,491

 
2.3
 %
 
$
2,375,509

 
3.3
 %
 
$
2,212,493

 
6.8
%
(1)
Includes sales at Ann Taylor stores and anntaylor.com.
(2)
Includes sales at LOFT stores and LOFT.com.


22



 
Fiscal Year Ended
 
February 1, 2014

February 2, 2013

January 28, 2012
Sales-Related Metrics
 
 
 
 
 
Average Dollars Per Transaction (“DPT”)
 
 
 
 
 
Ann Taylor brand
$
74.67

 
$
77.67

 
$
78.90

LOFT brand
60.54

 
60.38

 
62.20

Average Units Per Transaction (“UPT”)
 
 
 
 
 
Ann Taylor brand
2.43

 
2.36

 
2.34

LOFT brand
2.63

 
2.55

 
2.58

Average Unit Retail (“AUR”)
 
 
 
 
 
Ann Taylor brand
$
30.73

 
$
32.91

 
$
33.72

LOFT brand
23.02

 
23.68

 
24.11

Store Data
The following table sets forth certain store data:
 
Fiscal Year Ended
 
February 1, 2014
 
February 2, 2013
 
January 28, 2012
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
Stores
 
Square Feet
 
(square feet in thousands)
Stores and Square Footage
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor brand
 
 
 
 
 
 
 
 
 
 
 
Ann Taylor
268

 
1,329

 
275

 
1,389

 
280

 
1,460

Ann Taylor Factory
108

 
732

 
101

 
696

 
99

 
700

Total Ann Taylor brand
376

 
2,061

 
376

 
2,085

 
379

 
2,160

LOFT brand
 
 
 
 
 
 
 
 
 
 
 
LOFT
539

 
3,081

 
512

 
2,950

 
500

 
2,904

LOFT Outlet
110

 
731

 
96

 
650

 
74

 
520

Total LOFT brand
649

 
3,812

 
608

 
3,600

 
574

 
3,424

Total Company
1,025

 
5,873

 
984

 
5,685

 
953

 
5,584

Number of:
 
 
 
 
 
 
 
 
 
 
 
Stores open at beginning of period
984

 
5,685

 
953

 
5,584

 
896

 
5,284

New stores
66

 
344

 
63

 
340

 
76

 
473

Downsized/expanded stores, net (1)

 
(24
)
 

 
(69
)
 

 
(58
)
Closed stores
(25
)
 
(132
)
 
(32
)
 
(170
)
 
(19
)
 
(115
)
Stores open at end of period
1,025

 
5,873

 
984

 
5,685

 
953

 
5,584

 
(1)
During Fiscal 2013, we downsized 10 Ann Taylor stores, two Ann Taylor Factory stores and five LOFT stores and expanded two LOFT stores. 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.


23


Comparison of Fiscal Years 2013 and 2012

Total net sales for Fiscal 2013 increased approximately $118.0 million, or 5.0%, as compared with Fiscal 2012. This was driven, in part, by a 2.3% increase in total comparable sales, with approximately two-thirds of the increase in total comparable sales attributable to higher sales at our Websites. The remainder of the increase in total net sales was primarily due to net store growth; increases in traffic and transactions at Ann Taylor and LOFT, reflecting the continued benefit of our omni-channel initiative; and the benefit of our strategy to offer clients a broader assortment of relevant fashion in-store and online. Despite continued soft traffic trends, particularly in factory outlet centers throughout the year, and tepid consumer spending during the holiday selling season, both brands experienced increases in total net sales and comparable sales over the prior-year period, which benefited from approximately $25.4 million in total net sales due to the effect of the 53rd week.

At the Ann Taylor brand, total net sales increased approximately $14.6 million, or 1.5%, in Fiscal 2013 as compared with Fiscal 2012, with comparable sales increasing 1.1%. At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, net sales increased 3.6% to $668.0 million, driven by a 4.9% increase in comparable sales partially offset by the impact of a net reduction in stores. Our strategy to provide an expanded assortment of relevant fashion across all price points, both in-store and online, as well as the success of our wear-to-work offerings, drove increases in traffic, transactions and UPT, all of which contributed to this performance. At Ann Taylor Factory, net sales decreased 3.0% to $291.8 million, due to the net effect of a 6.6% decrease in comparable sales, partially offset by the impact of net store growth during the period. This performance reflected the impact of softer traffic and a highly promotional environment in factory outlet centers, which caused a decrease in transactions and lower AUR and DPT as compared to Fiscal 2012.

At the LOFT brand, total net sales increased approximately $103.4 million, or 7.2%, in Fiscal 2013 as compared with Fiscal 2012, with comparable sales increasing 3.0%. At LOFT, which includes LOFT stores and LOFT.com, net sales increased 5.9% to $1,272.9 million, driven by a 4.2% increase in comparable sales and the impact of a net increase in stores over the prior year. LOFT experienced increases in traffic, UPT and DPT and also benefited from our strategy to expand the brand into small and mid-sized markets. At LOFT Outlet, net sales increased 14.4% to $260.8 million, which was primarily due to net store growth, partially offset by a 3.0% decrease in comparable sales. LOFT Outlet was similarly impacted by softer traffic at factory outlet centers, which caused decreases in AUR and DPT as compared to Fiscal 2012.
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 total comparable sales increasing 3.3%. Approximately one-quarter of the increase in total comparable sales was attributable to higher net sales at our Websites. 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.
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.

24


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 gross margin as a percentage of net sales:
 
 
Fiscal Year Ended
 
February 1, 2014

February 2, 2013

January 28, 2012
 
(dollars in thousands)
Cost of sales
$
1,150,183

 
$
1,073,167

 
$
1,004,350

Gross margin
$
1,343,308

 
$
1,302,342

 
$
1,208,143

Percentage of net sales
53.9
%
 
54.8
%
 
54.6
%
Gross margin as a percentage of net sales was 53.9% in Fiscal 2013, a decrease from 54.8% in Fiscal 2012. Our full-year gross margin results were negatively impacted by a highly competitive retail environment, which caused us to be more promotional than planned at both brands in order to clear through inventory. As a result, we experienced an overall decrease in merchandise gross margin rate, despite higher merchandise gross-margin rate performance at Ann Taylor, which was primarily due to higher full-price sell-through. Our year-over-year gross margin rate performance was also negatively impacted by higher levels of client shipping associated with a full-year of omni-channel sales in Fiscal 2013 as compared to Fiscal 2012, as well as the benefit in the prior-year period associated with initial recognition of gift card and merchandise credit breakage.
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.
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 1, 2014

February 2, 2013

January 28, 2012
 
(dollars in thousands)
Selling, general and administrative expenses
$
1,173,234

 
$
1,135,551

 
$
1,062,644

Percentage of net sales
47.1
%
 
47.8
%
 
48.0
%
Selling, general and administrative expenses in Fiscal 2013 increased approximately $37.7 million compared with Fiscal 2012. This increase was primarily due to increases in payroll, occupancy and other variable expenses related to store growth and higher net sales, as well as other expenses to support the expansion of our business. These increases were partially offset by an overall decrease in performance-based compensation expense. As a percentage of net sales, selling, general and administrative expenses decreased 0.7% as compared to Fiscal 2012, reflecting the benefit of increased fixed cost leverage as a result of higher net sales and lower performance-based compensation expense.

25


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.
Income Taxes
The following table presents our income tax provision and effective income tax rate:
 
 
Fiscal Year Ended
 
February 1, 2014

February 2, 2013

January 28, 2012
 
(dollars in thousands)
Income tax provision
$
67,533

 
$
65,068

 
$
57,881

Effective income tax rate
39.7
%
 
38.8
%
 
40.1
%
Our effective income tax rate increased to 39.7% in Fiscal 2013 as compared to 38.8% in Fiscal 2012, primarily due to the benefit in the prior-year period of tax positions that were considered effectively settled. 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. See Note 8, “Income Taxes” in the Notes to the Consolidated Financial Statements for further discussion.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operations, available cash and cash equivalents and availability under our revolving credit facility.  Our primary cash requirements relate to working capital needs, retail store expansion, store renovation and refurbishment, investments in technology and additional share repurchases.
The following table sets forth certain measures of our liquidity:
 
 
Fiscal Year Ended
 
February 1, 2014
 
February 2, 2013
 
January 28, 2012
 
(dollars in thousands)
Cash provided by operating activities
$
215,747

 
$
258,909

 
$
207,828

Working capital
$
231,472

 
$
169,275

 
$
189,420

Current ratio
1.70:1

 
1.50:1

 
1.66:1

Operating Activities
Cash provided by operating activities decreased $43.2 million, to $215.7 million, in Fiscal 2013 as compared to $258.9 million in Fiscal 2012. The year-over-year decrease is primarily the result of increases in cash used for the purchase of merchandise inventories, payments related to our incentive compensation plans and the timing of payment of income taxes, accounts payable and other accrued expenses, partially offset by the receipt of an upfront bonus associated with our credit card program.
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.
Merchandise inventories increased approximately $22.8 million, or 10.5%, in Fiscal 2013 from Fiscal 2012.  This increase reflects inventory to support our comparable sales and store growth, a change in the merchandise mix at Ann Taylor and the timing of receipts for Spring product in our factory outlet channel.  On a per-square-foot basis, merchandise inventories increased 7% as compared to last year, reflecting increases of 10% at Ann Taylor, 7% at LOFT and 6% in the factory outlet channel. Inventory turned 5.0 times in both Fiscal 2013 and Fiscal 2012.

26


Investing Activities
Cash used for investing activities was $142.6 million in Fiscal 2013, compared with $149.9 million in Fiscal 2012. Cash used for investing activities in Fiscal 2013 was primarily related to capital expenditures associated with our store expansion and refurbishment projects, continued enhancements to our online capabilities and other investments in technology.
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.
The following table sets forth a breakdown of our accrual-basis capital expenditures:
 
 
Fiscal Year Ended
 
February 1, 2014
 
February 2, 2013
 
January 28, 2012
 
(in thousands)
New store construction
$
70,840

 
$
76,631

 
$
59,336

Store renovation/refurbishment
42,590

 
45,524

 
36,505

Information systems
26,739

 
23,298

 
26,747

Corporate offices/distribution center
3,974

 
3,792

 
1,380

Other
922

 
492

 
480

Total
$
145,065

 
$
149,737

 
$
124,448


We expect our total capital expenditure requirements in Fiscal 2014 will be approximately $120 million. Of this amount, approximately $40 million will be spent on new store construction, driven by the planned opening of approximately 50 stores. Approximately $50 million will be spent on 40 planned downsizes and remodels and other store renovation and refurbishment projects. The new stores, store closures and downsizes are expected to result in a net increase in total square footage of approximately 65,000 square feet, or approximately 1% as compared to Fiscal 2013. In addition, approximately $30 million is planned for continued investments in information systems, technology and further integration of our Websites 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 - Stores” for further discussion.

Financing Activities
Cash used for financing activities was $38.0 million in Fiscal 2013, compared with $92.2 million in Fiscal 2012. Cash used for financing activities in Fiscal 2013 was primarily related to the repurchase of our common stock, partially offset by cash inflows related to stock option exercise activity and the related tax benefits.
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.

Revolving Credit Facility
On December 19, 2012, the Company’s wholly-owned subsidiary, AnnTaylor, Inc., and certain of its subsidiaries, entered into a Fourth Amended and Restated $250 million senior secured revolving credit facility with Bank of America, N.A. and a syndicate of lenders (the “New Credit Facility”), which amended the then existing senior secured revolving credit facility due to expire in April 2013 (collectively, the “Credit Facility”). The New Credit Facility, which expires on December 19, 2017, includes a $75 million sub-facility solely for loans and letters of credit to be provided to ANN Canada Inc. and an 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. 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.

27


The maximum availability for loans and letters of credit under the New 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 $11.0 million, $14.1 million and $16.7 million as of February 1, 2014, February 2, 2013 and January 28, 2012, respectively, leaving a remaining available balance for loans and letters of credit of $171.4 million, $150.8 million and $146.4 million as of February 1, 2014, February 2, 2013 and January 28, 2012, respectively. There were no borrowings outstanding under the Credit Facility at February 1, 2014, February 2, 2013, or as of March 14, 2014, 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 August 21, 2013, our Board of Directors approved a new $250 million securities repurchase program (the “Repurchase Program”). 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. There were no share repurchases made under the Repurchase Program during Fiscal 2013. As of February 1, 2014 and March 14, 2014, the date of this Report, $250 million remained available for share repurchases under the Repurchase Program.
During Fiscal 2013, Fiscal 2012 and Fiscal 2011, under our then existing $600 million securities repurchase program, we repurchased 1.5 million, 4.9 million and 7.3 million shares of our common stock, respectively, through open market purchases at a cost of $49 million, $135 million, and $175 million, respectively. There are no amounts remaining for additional share repurchases under our former securities repurchase program, as we exhausted that share repurchase authorization during the second quarter of Fiscal 2013.

Credit Card Program
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. On December 2, 2013, we entered into an eight-year agreement with the sponsoring bank, which amended and restated the original agreement that began in October 2008. As with the original agreement, we received an upfront signing bonus from the sponsoring bank and 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 2013, Fiscal 2012 and Fiscal 2011, we recognized approximately $18.8 million, $17.8 million and $16.5 million of revenue related to the credit card program, respectively. At February 1, 2014, February 2, 2013 and January 28, 2012, approximately $3.0 million, $3.0 million and $4.4 million, respectively, of deferred credit card income is included in “Accrued expenses and other current liabilities” on our Consolidated Balance Sheets. Additionally, at February 1, 2014, in connection with the new agreement, $20.7 million of long-term deferred credit card income is included in “Other 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 $5.2 million, $5.7 million and $3.8 million and the sales discount impact was approximately $6.8 million, $6.8 million and $5.5 million in Fiscal 2013, Fiscal 2012 and Fiscal 2011, respectively.


28


Pension Obligations
Our funding obligations and liability under the terms of our non-contributory defined benefit pension plan (the “Pension Plan”), which was frozen in Fiscal 2007, 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 4.65%. A one percent decrease in the assumed discount rate would increase total net periodic pension expense for Fiscal 2014 by $0.8 million and would increase the liability for pension benefits at February 1, 2014 by $7.2 million. A one percent increase in the assumed discount rate would decrease total net periodic pension expense for Fiscal 2014 by $0.1 million and would decrease the liability for pension benefits at February 1, 2014 by $5.4 million.
Pension Plan assets as of February 1, 2014 were allocated 35% in equities, and 65% 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 7.0% and 5.0%, 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% for each of Fiscal 2013 and Fiscal 2012. A one percent change in the long-term rate of return assumption would impact Fiscal 2014 pension expense by approximately $0.3 million.
Pension expense in Fiscal 2013 was $0.2 million lower than Fiscal 2012, excluding settlement charges, due to the large amount of lump sum distributions made in Fiscal 2012. Pension costs, excluding settlement charges, in Fiscal 2012 were $1.0 million higher than Fiscal 2011 due to a lower discount rate and a lower expected rate of return. Pension expense for Fiscal 2014, excluding any potential settlement charges, is projected to be approximately $0.1 million, or $0.7 million lower than pension expense in Fiscal 2013, as unrecognized net loss is not expected to exceed 10% of the projected benefit obligation or assets. 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 2013 or Fiscal 2012, any deterioration in the financial markets or changes in discount rates may require us to make a contribution to our Pension Plan in Fiscal 2014.
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, we recognized additional non-cash settlement charges of $0.3 million during that period. 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 2013 or Fiscal 2011.

Other
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 1, 2014.
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, therefore, we cannot be assured that we will not experience losses with respect to those deposits. We continually evaluate our deposit investment options in accordance with our corporate investment policy and certain restrictions on permitted investments in our Credit Facility.
As of February 1, 2014 , we had $2.1 million invested in foreign bank accounts, of which the majority was held in Canadian dollars. As of February 2, 2013 and January 28, 2012, we had $3.0 million and $0.5 million, respectively, 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 global cash requirements, considering available funds generated by our foreign subsidiaries and the cost effectiveness with which those funds can be accessed. 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.

29


On March 14, 2014, we announced an organizational restructuring to support the further integration of our brick-and-mortar and online channels, accelerate our strategic growth agenda and enhance our ongoing financial performance. As a result of the restructuring, we have downsized our corporate workforce, eliminating approximately 100 positions, including one of our named executive officers. The total pre-tax cash charge associated with this reduction in force is expected to be approximately $15 million, substantially all of which is expected to be incurred during the first quarter of Fiscal 2014. The restructuring is expected to result in pre-tax operating savings of approximately $15 million in Fiscal 2014 and approximately $25 million annually thereafter.
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 1, 2014. 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 1, 2014:
 
Payments Due by Fiscal Year
 
Total
 
2014
 
2015-2016
 
2017-2018
 
2019
And After
 
(in thousands)
Long-term debt (1)
$
5,208

 
$
1,825

 
$
3,035

 
$
348

 
$

Capital leases (2)
4,538

 
1,536

 
2,626

 
376

 

Operating leases (3)
1,318,305

 
215,702

 
377,810

 
296,481

 
428,312

Purchase obligations:
 
 
 
 
 
 
 
 
 
Store construction (4)
4,678

 
4,678

 

 

 

Merchandise (5)
281,609

 
281,609

 

 

 

Information services (6)
35,879

 
19,057

 
16,822

 

 

Other (7)
33,885

 
32,225

 
1,484

 
176

 

Total
$
1,684,102

 
$
556,632

 
$
401,777

 
$
297,381

 
$
428,312


(1)
Represents finance arrangements relating to support and maintenance associated with certain computer equipment on our Consolidated Balance Sheet as of February 1, 2014.
(2)
Represents capital leases with four-year terms relating to certain computer equipment and licenses recorded on our Consolidated Balance Sheet as of February 1, 2014.
(3)
Represents future minimum lease payments under non-cancelable operating leases in effect as of February 1, 2014. 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 2013, Fiscal 2012 and Fiscal 2011 were $84.4 million, $78.8 million and $70.4 million, respectively.
(4)
Represents purchase commitments for Fiscal 2014 store construction not recorded on our Consolidated Balance Sheet as of February 1, 2014.
(5)
Represents open purchase orders with vendors for merchandise not yet received or recorded on our Consolidated Balance Sheet as of February 1, 2014.
(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 1, 2014.
(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 1, 2014.
There were no borrowings outstanding under the Credit Facility as of February 1, 2014. 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 $0.7 million in Fiscal 2013, and $0.9 million in each of Fiscal 2012 and Fiscal 2011.

30


The preceding table also excludes approximately $5.4 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
There were no new accounting pronouncements that we expect to have a material impact on our financial condition or results of operations in future periods.
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 revenue recognition, 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.
Revenue Recognition
We record revenue as merchandise is sold to clients. Sales from our Websites are recorded as merchandise is shipped to clients based on the date clients are expected to receive the merchandise. A reserve for estimated returns is established when sales are recorded to account for the financial impact of potential client merchandise returns. We estimate future client merchandise returns based upon an analysis of actual historical return patterns and current sales and gross margin rate performance. Based on this analysis, reductions in sales and gross margin are recorded for the estimated value of future client merchandise returns of previously sold merchandise.
Our gift cards and merchandise credits do not have expiration dates and we honor all gift cards and merchandise credits presented by clients, regardless of the length of time that passes from issuance to redemption. We record a liability for unredeemed gift cards and merchandise credits at the time gift cards are sold or merchandise credits are issued. We recognize revenue and relieve the corresponding gift card and/or merchandise credit liability when the cards are redeemed by clients.
In cases where we have determined that there is a legal obligation to remit the value of unredeemed gift cards and merchandise credits to any state, the value of these cards is escheated to the appropriate state in accordance with unclaimed property laws. In cases where we have determined that, under applicable state unclaimed property laws, there is no legal obligation to escheat these amounts to such states and the likelihood of redemption is considered remote, we recognize a portion of the unredeemed value of gift cards and merchandise credits. Such gift card and merchandise credit “breakage” is estimated based upon an analysis of actual historical redemption patterns.
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 and provides cardholders membership in an exclusive client loyalty rewards program. 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. In connection with this arrangement, we received an upfront signing bonus from the sponsoring bank and 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 the projected revenues and related expenses under the credit card program, including projected future store counts, the number of applications processed, projected sales growth and points breakage, among other things.

31


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 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 using 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. In determining the need for a valuation allowance on deferred tax assets, 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 2013.
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.

32


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 15%, the impact to long-term incentive compensation expense would be approximately $3.7 million. Finally, if we were to adjust the interest rate factors applied to amounts banked under the RCP by 15%, the impact to long-term incentive compensation expense would be approximately $2.1 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, therefore, we cannot be assured that we will not experience losses with respect to those deposits. We continually evaluate our deposit investment options in accordance with our corporate investment policy and certain restrictions on permitted investments in our Credit Facility.
We are exposed to limited market risk, primarily related to foreign currency exchange. We have exchange rate exposure primarily with respect to certain revenues and costs denominated in the Canadian dollar. As of February 1, 2014, 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 1, 2014, 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 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks) are included as part of this Report (See Item 15):
Consolidated Statements of Operations for the Fiscal Years Ended February 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks).
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended February 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks).
Consolidated Balance Sheets as of February 1, 2014 and February 2, 2013.
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended February 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks).
Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks).
Notes to the Consolidated Financial Statements.

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

None.
 

33


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 1, 2014 based on the framework and criteria established in Internal Control – Integrated Framework (1992) 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 1, 2014.
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 40.

ITEM 9B.
Other Information.

None.

34


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 2015 Annual Meeting” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2014 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 2014 Annual Meeting of Stockholders.


35


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

The information required by this item is presented below and incorporated herein by reference to the Section entitled “Beneficial Ownership of Common Stock” in the Company’s Proxy Statement for its 2014 Annual Meeting of Stockholders.
The following table sets forth information with respect to shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans, as of February 1, 2014:
  
(a)
 
(b)
 
(c)
 
Plan Category
Number of Securities
to be Issued Upon
Exercise of  Outstanding
Options, Warrants and Rights
 
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available
for Future Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in  Column (a))
 
Equity compensation plans approved by security holders (1)
1,971,617

 
$
27.27

 
4,425,029

(2
)
Equity compensation plans not approved by security holders (3)
228,102

 
20.82

 

  
Total
2,199,719

 
$
26.60

 
4,425,029

  
 
(1)
Consists of the 2003 Equity Incentive Plan and the Associate Discount Stock Purchase Plan (“ADSPP”).
(2)
Includes 1,352,527 shares of Common Stock available for issuance under the ADSPP.
(3)
Relates to the 2002 Stock Option and Restricted Stock and Unit Award Plan.
See Note 7, “Equity and Incentive Compensation Plans” in the Notes to Consolidated Financial Statements for a description of the material features of these plans.

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 2014 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 2014 Annual Meeting of Stockholders.


36


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 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks);
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended February 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks);
Consolidated Balance Sheets as of February 1, 2014 and February 2, 2013;
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended February 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (52 weeks);
Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1, 2014 (52 weeks), February 2, 2013 (53 weeks) and January 28, 2012 (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.


37


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 14, 2014
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 14, 2014
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 14, 2014
Michael J. Nicholson
 
Date
/s/   Ronald W. Hovsepian
 
Non-Executive Chairman of the Board and Director
March 14, 2014
Ronald W. Hovsepian
 
Date
/s/   James J. Burke, Jr.
 
Director
March 14, 2014
James J. Burke, Jr.
 
Date
/s/    Dale W. Hilpert
 
Director
March 14, 2014
        Dale W. Hilpert
 
Date
/s/    Linda A. Huett
 
Director
March 14, 2014
 Linda A. Huett
 
Date
/s/    Michael C. Plansky
 
Director
March 14, 2014
        Michael C. Plansky
 
Date
/s/    Stacey Rauch
 
Director
March 14, 2014
        Stacey Rauch
 
Date
/s/    Daniel W. Yih
 
Director
March 14, 2014
        Daniel W. Yih
 
Date

38

ANN INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 
Page No.
 
 
 
 
Consolidated Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 

39


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 1, 2014 and February 2, 2013, 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 1, 2014. We also have audited the Company’s internal control over financial reporting as of February 1, 2014, based on criteria established in Internal ControlIntegrated Framework (1992) 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 1, 2014 and February 2, 2013, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2014, 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 1, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/    DELOITTE & TOUCHE LLP
New York, New York
March 14, 2014

40

ANN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

For Fiscal Years Ended February 1, 2014February 2, 2013 and January 28, 2012
 
 
Fiscal Year Ended
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
(in thousands, except per share amounts)
Net sales
$
2,493,491

 
$
2,375,509

 
$
2,212,493

Cost of sales
1,150,183

 
1,073,167

 
1,004,350

Gross margin
1,343,308

 
1,302,342

 
1,208,143

Selling, general and administrative expenses
1,173,234

 
1,135,551

 
1,062,644

Operating income
170,074

 
166,791

 
145,499

Interest and investment income/(expense), net
(94
)
 
1,051

 
(1,052
)
Other non-operating expense, net
(17
)
 
(189
)
 

Income before income taxes
169,963

 
167,653

 
144,447

Income tax provision
67,533

 
65,068

 
57,881

Net income
$
102,430

 
$
102,585

 
$
86,566

Earnings per share:
 
 
 
 
 
Basic earnings per share
$
2.21

 
$
2.13

 
$
1.66

 


 


 
 
Weighted average shares outstanding
45,490

 
47,494

 
51,200

 


 


 
 
Diluted earnings per share
$
2.19

 
$
2.10

 
$
1.64

 


 


 
 
Weighted average shares outstanding, assuming dilution
45,955

 
48,094

 
52,029


















See accompanying Notes to Consolidated Financial Statements.

41

ANN INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For Fiscal Years Ended February 1, 2014February 2, 2013 and January 28, 2012
 
 
Fiscal Year Ended
 
February 1,
2014
 
February 2,
2013
 
January 28,
2012
 
(in thousands)
Net income
$
102,430

 
$
102,585

 
$
86,566

 
 
 
 
 
 
Other comprehensive income/(loss):
 
 
 
 
 
Foreign currency translation adjustment
(1,309
)
 
19

 

Net change in employee benefit plans:
 
 
 
 
 
   Pension settlement charge

 
1,760

 

   Net actuarial gain/(loss)
4,156

 
(1,153
)
 
(4,932
)
   Amortization of net actuarial loss
600

 
726

 
62

Other comprehensive income/(loss), before tax
3,447

 
1,352

 
(4,870
)
Income tax expense/(benefit) on other comprehensive income items
1,824

 
531

 
(1,930
)
Other comprehensive income/(loss), net of tax
1,623

 
821

 
(2,940
)
Comprehensive income
$
104,053

 
$
103,406

 
$
83,626






















See accompanying Notes to Consolidated Financial Statements.

42

ANN INC.
CONSOLIDATED BALANCE SHEETS

February 1, 2014 and February 2, 2013
 
 
February 1,
2014
 
February 2,
2013
 
(in thousands, except share amounts)
Assets
 
Current assets
 
 
 
Cash and cash equivalents
$
201,707

 
$
167,011

Accounts receivable
22,448

 
17,856

Merchandise inventories
239,667

 
216,848

Refundable income taxes
7,252

 
9,201

Deferred income taxes
28,854

 
30,397

Prepaid expenses and other current assets
61,287

 
64,716

Total current assets
561,215

 
506,029

Property and equipment, net
443,086

 
409,703

Deferred income taxes
6,599

 
7,841

Other assets
22,060

 
18,632

Total assets
$
1,032,960

 
$
942,205

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
101,276

 
$
105,691

Accrued salaries and bonus
24,546

 
23,969

Current portion of long-term performance compensation
20,339

 
34,233

Accrued tenancy
38,331

 
38,647

Gift certificates and merchandise credits redeemable
48,150

 
47,268

Accrued expenses and other current liabilities
97,101

 
86,946

Total current liabilities
329,743

 
336,754

Deferred lease costs
164,703

 
162,620

Deferred income taxes
36

 
228

Long-term performance compensation, less current portion
15,456

 
26,368

Other liabilities
54,566

 
31,125

 
 
 
 
Commitments and contingencies

 

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

 
561

Additional paid-in capital
751,765

 
768,215

Retained earnings
779,272

 
676,842

Accumulated other comprehensive loss
(2,874
)
 
(4,497
)
Treasury stock, 36,344,643 and 35,958,318 shares, respectively, at cost
(1,060,268
)
 
(1,056,011
)
Total stockholders’ equity
468,456

 
385,110

Total liabilities and stockholders’ equity
$
1,032,960

 
$
942,205





See accompanying Notes to Consolidated Financial Statements.

43

ANN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For Fiscal Years Ended February 1, 2014February 2, 2013 and January 28, 2012
 
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Total
 
(in thousands)
Balance at January 29, 2011
82,555

 
$
561

 
$
772,574

 
$
487,691

 
$
(2,378
)
 
27,206

 
$
(835,003
)
 
$
423,445

Net income

 

 

 
86,566

 

 

 

 
86,566

Other comprehensive loss, net of tax







 
(2,940
)
 

 

 
(2,940
)
Exercise of stock options, related tax benefit and tax effect of expirations of $4,454
9

 

 
(10,675
)
 

 

 
(804
)
 
18,850

 
8,175

Stock-based compensation

 

 
20,710

 

 

 

 

 
20,710

Issuance of restricted stock and vesting of restricted units, net of forfeitures and related tax benefits of $3,001

 

 
(5,896
)
 

 

 
(511
)
 
11,986