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UPDATE 3-AnnTaylor profit beats; cautious on holiday

2009-11-20 16:07:30 GMT (Reuters)
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* Q3 adj EPS 20 cts tops Street view of 7 cts

* Net sales down 12 pct, miss Street view

* Sees Q4 sales down from pvs qtr, drop in gross margin

* Shares down 2.8 percent (Recasts; Adds comments from company, analyst; updates shares)

By Martinne Geller

NEW YORK, Nov 20 (Reuters) - Clothing retailer AnnTaylor Stores Corp posted a better-than-expected quarterly profit on Friday, but shares fell as the company forecast soft sales for the holiday shopping season.

Third-quarter sales missed expectations and were softer than the company expected, with both the Ann Taylor and Ann Taylor LOFT chains reporting declines as its mature women customers continue to spend cautiously. Shares fell 2.8 percent.

The company said fourth-quarter sales and margins would be slightly below those of the third quarter, due to heightened promotions it expects to use to drive sales throughout the holiday shopping period.

Still margins will be higher than a year ago, when the financial crisis led to steep profit-sapping markdowns for the whole industry.

Jefferies analyst Randal Konik praised the company's improved gross margin, but said sales need to improve "materially" for shares to move much higher.

"Until we see meaningful signs of sales improvement at both divisions, we believe shares should stay range-bound," Konik said, reiterating his "Hold" rating on the company.

UBS analyst Roxanne Meyer said the margin improvement will likely not be enough to please investors.

"While gross margin is expected up significantly, the bar on the Street is already high," Meyer said in a research note.

AnnTaylor said net profit was $2.1 million, or 3 cents per share, in the quarter ended on Oct 31, versus a net loss of $13.4 million, or 24 cents per share, a year earlier.

Excluding restructuring and asset impairment charges, profit was 20 cents per share. On that basis analysts on average were expecting 7 cents per share, according to Thomson Reuters I/B/E/S.

Net sales fell 12 percent to $462.4 million, missing analysts' estimate of $473.9 million.

The company's gross margin was 57.3 percent, 8.5 percentage points higher than in the year-ago period.

"Our third-quarter strategy was focused on maximizing gross margin dollars, not comp performance, while mitigating inventory risk," said Chief Financial Officer Michael Nicholson on a conference call.

SALES STILL KEY

CEO Kay Krill said third-quarter sales were softer than expected, and weakest in August, when inventories were lightest before new fall merchandise entered stores.

AnnTaylor has tried to reposition its flagship brand as more fashionable and modern, with new styles and splashy advertisements. Over the summer, it also began selling evergreen wardrobe items like "the perfect pencil skirt and perfect pants" throughout a whole season, and bringing in fashionable pieces monthly to complement them.

Krill said consumers responded positively to Ann Taylor's new suits, dresses, pencil skirts and jackets, while sales of jewelry, shoes and belts exceeded the company's expectations.

AnnTaylor said same-store sales, or sales at stores open at least a year, fell 13.7 percent in the third quarter -- an improvement from declines of 22.5 percent in the second quarter and 30.7 percent in the first.

By brand, same-store sales fell 25.8 percent at Ann Taylor and 9.7 percent at LOFT. For the fourth quarter, the company said it expects same-store sales to fall at a low- to mid-teen percentage rate at Ann Taylor and to range from flat to up slightly at LOFT.

Like Chico's FAS Inc, Talbots Inc and other chains that target mature women, AnnTaylor has suffered in the recession as some customers reduced spending on themselves before cutting back on purchases for their families.

Yet earlier this week, Chico's posted better-than-expected results, saying a revamping of its merchandise helped it snag market share from rivals. ID:nN11368546.

AnnTaylor recently repaid $75 million outstanding on its revolving credit facility and currently has no outstanding debt. (Reporting by Martinne Geller, editing by Gerald E. McCormick, Dave Zimmerman)

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