Ann (ANN) 10-Q 2014 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 2, 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 number 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)

Indicate by check mark whether the 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 Web site, 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 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 Exchange Act).    Yes  ¨    No  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of August 2, 2014
Common Stock, $.0068 par value	45,745,229

INDEX TO FORM 10-Q

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended August 2, 2014 and August 3, 2013	4
	Condensed Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended August 2, 2014 and August 3, 2013	5
	Condensed Consolidated Balance Sheets at August 2, 2014, February 1, 2014 and August 3, 2013	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 2, 2014 and August 3, 2013	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6.	Exhibits	25
SIGNATURES		26
EXHIBIT INDEX		27

2

Statement Regarding Forward-Looking Disclosures

Certain sections of this Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain 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. Forward-looking statements also include representations of the expectations or beliefs of ANN INC. (the “Company”) concerning future events that involve risks and uncertainties, including:

• the Company’s ability to anticipate and respond to changing client preferences and fashion trends and provide a balanced assortment of merchandise that satisfies client demands in a timely manner;

• the effectiveness of the Company’s brand awareness and marketing programs, its ability to maintain brand image, engage new and existing clients, drive traffic to its stores and websites and gain market share;

• the effect of competitive pressures from other retailers;

• the Company’s reliance on key management and its ability to hire, retain and develop qualified associates as well as ensure that the Company has the appropriate organizational structure and processes in place to achieve its strategic initiatives;

• the performance and operation of the Company’s websites and the risks associated with Internet sales;

• the impact of a privacy breach and the resulting effect on the Company’s business and reputation;

• the Company’s reliance on third-party manufacturers and key vendors, including operational risks such as reduced production capacity, errors in complying with merchandise specifications, insufficient quality control and failure to meet production deadlines;

• the impact of fluctuations in sourcing costs, in particular, increases in the costs of raw materials, labor and transportation;

• the Company’s reliance on foreign sources of production and the associated risks of doing business in foreign markets;

• the Company’s dependence on its Louisville distribution center and third-party distribution and transportation providers;

• the Company’s ability to successfully upgrade and maintain its information systems in a timely and secure manner to support the needs of the organization and to operate in accordance with its business continuity plan in the event of a disruption;

• the Company’s ability to successfully optimize implementation of its omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for its clients;

• the Company’s ability to manage inventory levels and changes in merchandise mix as well as optimize the operational aspects of its omni-channel fulfillment strategy;

• the Company’s ability to successfully execute brand goals, objectives and new concepts and strategies, including international expansion;

• the Company’s ability to secure and protect trademarks and other intellectual property rights;

• a significant change in the regulatory environment applicable to the Company’s business and the Company’s ability to comply with legal and regulatory requirements;

• the effect of general economic conditions on consumer spending and the Company’s liquidity and capital resources;

• the impact of fluctuations in sales and profitability on the Company’s stock price;

• the failure by independent manufacturers to comply with the Company’s social compliance program requirements or applicable laws and regulations;

• the potential impact of natural disasters, extreme weather, public health concerns, acts of war or terrorism in the United States or worldwide;

• the Company’s ability to successfully manage store growth and optimize the productivity and profitability of its store portfolio;

• the Company’s dependence on shopping malls and other retail centers to attract clients and the impact of potential consolidation of commercial and retail landlords on the Company’s ability to negotiate favorable rental terms; and

• the effect of tax matters on its business operations.

Further description of these risks and uncertainties and other important factors are set forth in the Company’s latest Annual Report on Form 10-K, including but not limited to Item 1A – Risk Factors and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations therein, and in the Company’s other filings with the SEC. Although these forward-looking statements reflect the Company’s current expectations concerning future events, actual results may differ materially from current expectations or historical results. The Company does not assume any obligation to publicly update or revise any forward-looking statements at any time for any reason.

3

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements.

ANN INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Quarters and Six Months Ended August 2, 2014 and August 3, 2013

(unaudited)

	Quarter Ended					Six Months Ended
	August 2, 2014			August 3, 2013		August 2, 2014			August 3, 2013
	(in thousands, except per share amounts)
Net sales	$	648,660		$	638,198	$	1,239,252		$	1,212,704
Cost of sales	309,055			288,921		584,455			542,862
Gross margin	339,605			349,277		654,797			669,842
Selling, general and administrative expenses	284,732			289,298		573,404			575,951
Restructuring charge	—			—		17,303			—
Operating income	54,873			59,979		64,090			93,891
Interest and investment income/(expense), net	(20		)	354		(517		)	441
Other non-operating income/(expense), net	(153		)	143		(128		)	197
Income before income taxes	54,700			60,476		63,445			94,529
Income tax provision	22,021			24,827		25,583			37,968
Net income	$	32,679		$	35,649	$	37,862		$	56,561
Earnings per share:
Basic earnings per share	$	0.70		$	0.76	$	0.81		$	1.21
Weighted average shares outstanding	45,480			45,695		45,529			45,887
Diluted earnings per share	$	0.70		$	0.76	$	0.81		$	1.20
Weighted average shares outstanding, assuming dilution	45,921			46,125		45,982			46,332

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

4

ANN INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Quarters and Six Months Ended August 2, 2014 and August 3, 2013

(unaudited)

	Quarter Ended					Six Months Ended
	August 2, 2014		August 3, 2013			August 2, 2014		August 3, 2013
	(in thousands)
Net income	$	32,679	$	35,649		$	37,862	$	56,561
Other comprehensive income/(loss):
Foreign currency translation adjustment	189		(167		)	375		(426		)
Amortization of net actuarial loss on pension plan	—		158			—		315
Other comprehensive income/(loss), before tax	189		(9		)	375		(111		)
Income tax expense on other comprehensive income	—		60			—		121
Other comprehensive income/(loss), net of tax	189		(69		)	375		(232		)
Comprehensive income	$	32,868	$	35,580		$	38,237	$	56,329

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

5

ANN INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

August 2, 2014, February 1, 2014 and August 3, 2013

(unaudited)

	August 2, 2014			February 1, 2014			August 3, 2013
	(in thousands, except share amounts)
Assets
Current assets
Cash and cash equivalents	$	150,325		$	201,707		$	107,021
Accounts receivable	25,347			22,448			24,438
Merchandise inventories	255,262			239,667			247,269
Refundable income taxes	6,658			7,252			8,271
Deferred income taxes	25,022			28,854			28,358
Prepaid expenses and other current assets	61,593			61,287			67,008
Total current assets	524,207			561,215			482,365
Property and equipment, net	437,927			443,086			423,850
Deferred income taxes	14,941			6,599			2,191
Other assets	21,767			22,060			21,457
Total assets	$	998,842		$	1,032,960		$	929,863
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	105,148		$	101,276		$	105,264
Accrued salaries and bonus	30,416			24,546			25,575
Current portion of long-term performance compensation	5,408			20,339			19,181
Accrued tenancy	37,074			38,331			38,312
Gift certificates and merchandise credits redeemable	38,454			48,150			37,873
Accrued expenses and other current liabilities	84,339			97,101			83,748
Total current liabilities	300,839			329,743			309,953
Deferred lease costs	160,356			164,703			165,027
Deferred income taxes	36			36			6,116
Long-term performance compensation, less current portion	8,049			15,456			12,452
Other liabilities	54,944			54,566			34,842
Commitments and contingencies
Stockholders’ equity
Common stock, $.0068 par value; 200,000,000 shares authorized;  82,563,516 shares issued	561			561			561
Additional paid-in capital	739,580			751,765			747,986
Retained earnings	817,134			779,272			733,403
Accumulated other comprehensive loss	(2,499		)	(2,874		)	(4,729		)
Treasury stock, 36,818,287; 36,344,643 and 36,730,220 shares, respectively, at cost	(1,080,158		)	(1,060,268		)	(1,075,748		)
Total stockholders’ equity	474,618			468,456			401,473
Total liabilities and stockholders’ equity	$	998,842		$	1,032,960		$	929,863

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

6

ANN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months EndedAugust 2, 2014 and August 3, 2013

(unaudited)

	Six Months Ended
	August 2, 2014			August 3, 2013
	(in thousands)
Operating activities:
Net income	$	37,862		$	56,561
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	(4,235		)	13,456
Depreciation and amortization	55,927			51,667
Loss on disposal and write-down of property and equipment	604			1,754
Stock-based compensation	6,804			7,616
Non-cash interest and other non-cash items	(786		)	(623		)
Tax benefit from exercise/vesting of stock awards	1,072			1,480
Changes in assets and liabilities:
Accounts receivable	(2,896		)	(6,625		)
Merchandise inventories	(15,536		)	(30,421		)
Prepaid expenses and other current assets	(356		)	(816		)
Refundable income taxes	594			930
Other non-current assets	623			(1,165		)
Other non-current liabilities	(3,543		)	7,819
Accounts payable, accrued expenses and other current liabilities	(27,432		)	(46,534		)
Net cash provided by operating activities	48,702			55,099
Investing activities:
Purchases of marketable securities	(1,808		)	(2,565		)
Sales of marketable securities	1,162			574
Purchases of property and equipment	(56,607		)	(60,679		)
Other, net	(250		)	813
Net cash used for investing activities	(57,503		)	(61,857		)
Financing activities:
Proceeds from the issuance of common stock pursuant to Associate Discount Stock Purchase Plan	1,158			1,169
Proceeds from exercise of stock options	13,217			3,603
Excess tax benefits from stock-based compensation	1,696			1,676
Repurchases of common and restricted stock	(54,556		)	(53,832		)
Repayments on fixed asset financing and capital lease obligations	(1,746		)	(751		)
Change in trade payable program obligation	(2,226		)	(4,988		)
Net cash used for financing activities	(42,457		)	(53,123		)
Effect of exchange rate changes on cash and cash equivalents	(124		)	(109		)
Net decrease in cash and cash equivalents	(51,382		)	(59,990		)
Cash and cash equivalents, beginning of period	201,707			167,011
Cash and cash equivalents, end of period	$	150,325		$	107,021

See accompanying Notes to Condensed Consolidated Financial Statements (unaudited).

7

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

Interim Financial Information

The Condensed Consolidated Financial Statements are unaudited but, in the opinion of management, contain all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. All intercompany accounts and transactions have been eliminated.

The results of operations for the 2014 interim periods presented in the Condensed Consolidated Financial Statements are not necessarily indicative of results to be expected for Fiscal 2014.

The February 1, 2014 Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheets of ANN INC. (the “Company”) included in its Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. As such, the financial information set forth herein should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2014. The Company believes that the disclosures made are adequate to prevent the interim financial statements from being misleading.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, “Revenue Recognition,” as well as various other sections of the ASC, such as, but not limited to, ASC 340-20, “Other Assets and Deferred Costs-Capitalized Advertising Costs.” The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is not permitted. The Company is in the process of evaluating the impact of ASU 2014-09, including the choice of retrospective application upon adoption, on its Consolidated Financial Statements.

2. Restructuring Charge

During the first quarter of Fiscal 2014, the Company executed an organizational restructuring in support of its omni-channel retail strategy and its strategic growth initiatives. As part of the restructuring, the Company realigned certain functions within its corporate workforce, including its marketing, merchandise planning, procurement and allocation functions, to eliminate redundancy and integrate processes to better support its brands and serve its clients. These actions resulted in the separation of approximately 100 full-time associates. In connection with this effort, the Company recorded a pre-tax restructuring charge of approximately $17.3 million for severance and other costs during the first quarter of Fiscal 2014. The Company does not expect to incur any further material costs related to the restructuring and expects to pay all amounts accrued in connection with the restructuring by 2017.

8

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

2. Restructuring Charge (Continued)

The following tables present a reconciliation of the restructuring reserve for the quarter and six months ended August 2, 2014:

	Quarter Ended
	Severance and Related Costs			Other Restructuring Costs		Total
	(in thousands)
Balance at May 4, 2014	$	17,358		$	—	$	17,358
Cash payments	(2,867		)	—		(2,867		)
Balance at August 2, 2014	$	14,491		$	—	$	14,491

	Six Months Ended
	Severance and Related Costs			Other Restructuring Costs			Total
	(in thousands)
Balance at February 1, 2014	$	—		$	—		$	—
Restructuring charge	16,742			561			17,303
Cash payments	(4,118		)	(561		)	(4,679		)
Reclassification to restructuring reserve (1)	1,867			—			1,867
Balance at August 2, 2014	$	14,491		$	—		$	14,491

(1) Prior compensation accruals related to associates separated in connection with the restructuring were reclassified to the restructuring reserve.

 Approximately $9.2 million and $5.3 million of the restructuring reserve is included in “Accrued salaries and bonus” and “Other liabilities,” respectively, on the Company’s Condensed Consolidated Balance Sheet at August 2, 2014, based upon the expected timing of the payments.

9

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

3. Fair Value Measurements

The Company follows a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

• Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company maintains a self-directed, non-qualified deferred compensation plan structured as a rabbi trust for certain executives at the vice-president level and above. Investment assets of the rabbi trust are valued based on quoted market prices or the net asset value at the closing price reported in certain major markets as of the measurement date, which are considered Level 1 inputs. The following tables segregate the rabbi trust assets that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine fair value at the measurement date:

	August 2, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Non-qualified deferred compensation plan assets:
Equity securities	$	3,743	$	3,743	$	—	$	—
Fixed income funds	862		862		—		—
Equity funds	7,294		7,294		—		—
Total assets	$	11,899	$	11,899	$	—	$	—
	February 1, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Non-qualified deferred compensation plan assets:
Equity securities	$	3,698	$	3,698	$	—	$	—
Fixed income funds	782		782		—		—
Equity funds	6,944		6,944		—		—
Total assets	$	11,424	$	11,424	$	—	$	—

	August 3, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Non-qualified deferred compensation plan assets:
Equity securities	$	4,110	$	4,110	$	—	$	—
Fixed income funds	694		—		694		—
Equity funds	6,166		—		6,166		—
Total assets	$	10,970	$	4,110	$	6,860	$	—

As of the dates presented, the Company believes that the carrying value of cash and cash equivalents, receivables and payables approximates fair value, due to the short maturity of these financial instruments.

10

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

4. Earnings Per Share

The following tables present a reconciliation of basic and diluted earnings per share for the quarters and six months ended August 2, 2014 and August 3, 2013:

	Quarter Ended
	August 2, 2014					August 3, 2013
	(in thousands, except per share amounts)
Basic Earnings per Share:	Net Income		Shares	Per Share Amount		Net Income		Shares	Per Share Amount
Net income	$	32,679				$	35,649
Less net income associated with participating securities	685					709
Basic earnings per share	$	31,994	45,480	$	0.70	$	34,940	45,695	$	0.76
Diluted Earnings per Share:
Net income	$	32,679				$	35,649
Less net income associated with participating securities	678					702
Effect of dilutive securities			441					430
Diluted earnings per share	$	32,001	45,921	$	0.70	$	34,947	46,125	$	0.76

	Six Months Ended
	August 2, 2014					August 3, 2013
	(in thousands, except per share amounts)
Basic Earnings per Share:	Net Income		Shares	Per Share Amount		Net Income		Shares	Per Share Amount
Net income	$	37,862				$	56,561
Less net income associated with participating securities	770					1,077
Basic earnings per share	$	37,092	45,529	$	0.81	$	55,484	45,887	$	1.21
Diluted Earnings per Share:
Net income	$	37,862				$	56,561
Less net income associated with participating securities	762					1,066
Effect of dilutive securities			453					445
Diluted earnings per share	$	37,100	45,982	$	0.81	$	55,495	46,332	$	1.20

For the six months ended August 2, 2014, non-participating securities (stock options) representing 12,000 shares of common stock were excluded from the computation of weighted average shares for diluted earnings per share due to their antidilutive effect, since their exercise prices exceeded the average market price of the common shares during that period. There were no such shares excluded from the computation of weighted average shares for diluted earnings per share for the quarter ended August 2, 2014.

For the quarter and six months ended August 3, 2013, non-participating securities (stock options) representing 710,200 and 754,435 shares of common stock, respectively, were excluded from the computation of weighted average shares for diluted earnings per share due to their antidilutive effect, since their exercise prices exceeded the average market price of the common shares during those periods.

11

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5. Equity and Incentive Compensation Plans

Repurchase Program

On August 21, 2013, the Company’s Board of Directors approved a new $250 million securities repurchase program (the “Repurchase Program”). 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. The Repurchase Program will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by the Company’s Board of Directors.

During the quarter and six months ended August 2, 2014, the Company repurchased 1.3 million shares of its common stock through open market purchases under its Repurchase Program at a cost of $50 million. As of August 2, 2014, there was $200 million available for additional share repurchases under the Repurchase Program.

During the quarter and six months ended August 3, 2013, the Company repurchased 1.5 million shares of its common stock through open market purchases under its then existing $600 million securities repurchase program at a cost of $49.1 million, fully exhausting that securities repurchase program.

Stock Incentive Plans

During the quarter and six months ended August 2, 2014, the Company recognized approximately $2.9 million and $6.8 million, respectively, in stock-based compensation expense. During the quarter and six months ended August 3, 2013, the Company recognized approximately $3.6 million and $7.6 million, respectively, in stock-based compensation expense. As of August 2, 2014, there was $2.7 million and $19.3 million of unrecognized compensation cost related to unvested stock options and unvested restricted stock awards, respectively, which is expected to be recognized over a remaining weighted average vesting period of 1.8 years and 3.0 years, respectively. Restricted stock award grants and shares underlying the exercise of stock options during the six months endedAugust 2, 2014 were issued out of treasury stock. In addition, restricted stock awards forfeited, as well as shares returned to cover employee tax withholding obligations related to the exercise of stock options and the vesting of restricted stock, were returned to treasury stock.

Stock Options

The following table summarizes stock option activity for the six months ended August 2, 2014:

	Shares		Weighted  Average Exercise Price
Options outstanding at beginning of period	2,199,719		$	26.60
Granted (1)	63,700		37.52
Exercised	(455,463	)	29.02
Forfeited or expired	(41,073	)	27.55
Options outstanding at end of period	1,766,883		$	26.35
Vested and exercisable at August 2, 2014	1,515,368		$	25.41
Options expected to vest in the future as of August 2, 2014	227,072		$	32.25

(1) Awards vest annually over a three-year period and expire ten years after the grant date.

12

ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5. Equity and Incentive Compensation Plans (Continued)

Stock Options (continued)

The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted as of the grant date. For the six months ended August 2, 2014 and August 3, 2013, the fair value of options granted was estimated using the following weighted average assumptions:

	Six Months Ended
	August 2, 2014	August 3, 2013
Expected volatility	47.5%	52.9%
Risk-free interest rate	1.7%	0.9%
Expected life (years)	5.4	5.0
Dividend yield	—	—

The weighted average fair value of options granted during the six months ended August 2, 2014 and August 3, 2013 was $16.79 and $14.09 per share, respectively. The Company estimates the volatility of its common stock on the date of grant based on an average of its historical common stock volatility and the implied volatility of publicly traded options on its common stock.

Restricted Stock

The following table summarizes restricted stock activity for the six months ended August 2, 2014:

	Time - Based					Performance - Based
	Number of Shares			Weighted  Average Grant Date Fair Value		Number of Shares			Weighted  Average Grant Date Fair Value
Restricted stock awards at February 1, 2014	602,205			$	29.95	289,935			$	29.56
Granted	408,393		(1)	37.55		141,617		(2)	37.53
Vested	(208,210	)		29.06		(124,139	)		29.24
Forfeited	(84,461	)		30.08		(51,028	)		29.45
Restricted stock awards at August 2, 2014	717,927			$	34.52	256,385			$	34.14

(1) Of this amount, 22,893 shares vest in June 2015; 127,700 shares vest in equal installments in each of March 2015, 2016 and 2017; 255,900 shares vest in equal installments in each of March 2017, 2018 and 2019; and 1,900 shares vest in equal installments in each of June 2015, 2016 and 2017.

(2) These shares vest over a three-year period based on achievement of performance targets set bi-annually for each tranche of the grant. Based on Company performance, grantees may earn 50% to 200% of the shares granted with respect to each tranche. If the Company does not achieve the minimum threshold goal associated with such shares, grantees will not earn any shares with respect to that tranche.

Long-Term Performance Compensation

The Company maintains a long-term cash incentive program, the Restricted Cash Program (“RCP”), for vice-presidents and above. Compensation expense under the RCP is charged to the same income statement line item as the base salary earned by participating associates. During the quarters ended August 2, 2014 and August 3, 2013, the Company recognized $1.2 million and $2.1 million, respectively, in compensation expense under the RCP, inclusive of the effect of changes in estimates. During the six months ended August 2, 2014 and August 3, 2013, the Company recognized $1.2 million and $6.8 million, respectively, in compensation expense under the RCP, inclusive of the effect of changes in estimates. RCP compensation expense for the six months ended August 2, 2014 also reflects the impact of changes in forfeiture rate estimates recorded during the first quarter of Fiscal 2014 in connection with the Company’s restructuring. As of August 2, 2014, there was $14.7 million of unrecognized compensation cost under the RCP, which is expected to be recognized over a remaining weighted average deferral period of 2.6 years.

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ANN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

6. Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss for the six months ended August 2, 2014:

	Foreign Currency Translation			Unrecognized Pension Benefit Costs			Total
	(in thousands)
Balance at February 1, 2014	$	(1,290	)	$	(1,584	)	$	(2,874	)
Other comprehensive income/(loss) before reclassifications:
Foreign currency translation adjustment	375			—			375
Balance at August 2, 2014	$	(915	)	$	(1,584	)	$	(2,499	)

7. Legal Proceedings

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the amount of any liability that could arise with respect to these actions cannot be determined with certainty, in the Company’s opinion, any such liability will not have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

ANN INC., through its wholly-owned subsidiaries, is a leading national specialty retailer of women’s apparel, shoes and accessories, sold primarily under the “Ann Taylor” and “LOFT” brands. We were incorporated in the State of Delaware in 1988 and changed our name to ANN INC. in March 2011. For more than half a century, we have evolved with the needs of real women who live full, active lives.

Our 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 1,040 retail stores in 47 states, the District of Columbia, Puerto Rico and Canada. 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.

We are committed to and driven by a simple but important mission - “to inspire and connect with our clients to put their best selves forward every day.” This is evident in our strong brands as well as in our commitment to operate our business responsibly and thoughtfully. This commitment means that our clients can look and feel great about the clothes that they wear, and that as a business, we are holding ourselves to high standards. It means forging strong partnerships with our suppliers so that our products are made ethically. It means investing in new programs and innovation to minimize our impact on the environment. And it means making meaningful contributions to our communities.

Unless the context indicates otherwise, all references to “we,” “our,” “us” and “the Company” refer to ANN INC. and its wholly-owned subsidiaries.

Management Overview

Despite positive performance through mid-June, the balance of the second quarter of Fiscal 2014 proved to be challenging. Soft traffic and a highly promotional environment across the industry affected our top-line performance, resulting in a comparable sales decline of 2.3%, and also negatively impacted our gross margin rate performance. In addition, LOFT experienced continued softness in basic knit tops, a meaningful component of the summer assortment, which further impacted our sales and gross margin results. However, through continued disciplined expense management, including the impact of savings associated with our first quarter restructuring, we realized a 140 basis point improvement in selling, general and administrative expenses as a percentage of net sales compared with the second quarter of Fiscal 2013. These factors contributed to net income of $32.7 million and diluted earnings per share of $0.70 for the second quarter.

At the Ann Taylor brand, total net sales in the second quarter of Fiscal 2014 increased 2.0% compared to last year, with overall comparable sales up 0.7%. At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, comparable sales increased 2.0% compared with the second quarter of Fiscal 2013, despite the impact of soft traffic and a highly promotional environment throughout much of the quarter. This performance reflected the strength of our merchandise assortment and a shift in our merchandise mix, as we increased our offering of refined separates, which carry higher initial retail prices. At Ann Taylor Factory, comparable sales declined 1.9%, reflecting the impact of continued traffic challenges and high levels of promotional activity in factory outlet centers.

At the LOFT brand, total net sales in the second quarter of Fiscal 2014 increased 1.4% compared to last year, while overall comparable sales declined 4.1%. At LOFT, which includes LOFT stores and LOFT.com, comparable sales decreased 5.2%, reflecting the impact of lower mall traffic and continued softness in the knit tops category, which represented 20% of the merchandise assortment during the quarter. LOFT was able to successfully clear through its summer inventory and while this impacted second quarter gross margin performance, it allowed us to enter the third quarter in a clean inventory position. At LOFT Outlet, total net sales increased 15.8% over the second quarter of Fiscal 2013 and comparable sales increased 0.3%. This performance was primarily driven by store growth and a strong merchandise assortment, which helped to offset the impact of continued traffic challenges and high levels of promotional activity in factory outlet centers.

During the second quarter of Fiscal 2014, we continued to move forward on our real estate strategy, adding six new LOFT stores, including three in Canada, two Ann Taylor Factory Stores and nine LOFT Outlet stores. We also closed nine underperforming stores across the fleet, leading to a total store count at the end of the second quarter of 1,040 stores. Regarding our new concept, Lou & Grey, we have been encouraged by the initial results of our first shop-in-shop, and plan to open several stand-alone Lou & Grey locations this year to test the concept in diverse regions. In addition, we plan to further expand our international presence later this year via entry into Mexico.

Our omni-channel offering was further enhanced during the quarter through improvements to our web platform,

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including a series of upgrades to the client-facing portions of our Websites, as well as improvements to enhance client information capture. These improvements to site functionality come ahead of enhancements to our mobile experience across both brands, which we plan to launch during the third quarter. These efforts are designed to improve the overall client experience, allowing her to shop wherever and whenever she chooses in order to drive higher conversion. Looking ahead, we will begin to lay the groundwork for the second phase of our omni-channel initiative, designed to further enhance the seamless client shopping experience by enabling fulfillment of in-store client orders online. Finally, we expect to further develop our client relationship management tool for more effective marketing and client outreach.

During the second quarter of Fiscal 2014, we repurchased 1.3 million shares of our common stock at a cost of $50 million, and will continue to evaluate share repurchase activity using the $200 million of remaining availability under our share repurchase authorization as a means of further enhancing shareholder value.

Overall, we are moving forward on our commitment to strengthen our position as the go-to wardrobing destination for women of style. Together, Ann Taylor, LOFT and Lou & Grey represent a full-spectrum offering that puts ANN INC. in a unique position to meet the needs of women at every important phase of their lives. We continue to make progress on our strategic initiatives, which we believe present significant opportunities to build on the strength of our brands in order to deliver long-term, profitable growth.

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, 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.

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Results of Operations

The following table sets forth data from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales:

	Quarter Ended				Six Months Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	47.6	%	45.3	%	47.2	%	44.8	%
Gross margin	52.4	%	54.7	%	52.8	%	55.2	%
Selling, general and administrative expenses	43.9	%	45.3	%	46.3	%	47.5	%
Restructuring charge	—	%	—	%	1.4	%	—	%
Operating income	8.5	%	9.4	%	5.1	%	7.7	%
Interest and investment income/(expense), net	—	%	0.1	%	—	%	0.1	%
Other non-operating income/(expense), net	—	%	—	%	—	%	—	%
Income before income taxes	8.5	%	9.5	%	5.1	%	7.8	%
Income tax provision	3.4	%	3.9	%	2.1	%	3.1	%
Net income	5.1	%	5.6	%	3.0	%	4.7	%

The following table sets forth selected data from our Condensed Consolidated Statements of Operations expressed as a percentage change from the comparable prior period:

	Quarter Ended				Six Months Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
	increase/(decrease)
Net sales	1.6	%	7.3	%	2.2	%	5.0	%
Gross margin	(2.8	)%	5.1	%	(2.2	)%	3.1	%
Operating income	(8.5	)%	13.3	%	(31.7	)%	(4.5	)%
Net income	(8.3	)%	16.0	%	(33.1	)%	(4.9	)%

Sales and Sales-Related Metrics

The following tables set forth certain sales and sales-related metrics:

	Quarter Ended
	August 2, 2014				August 3, 2013
	Sales		Comp %		Sales		Comp %
Sales and Comparable Sales	($ in thousands)
Ann Taylor brand
Ann Taylor (1)	$	168,004	2.0	%	$	165,807	9.3	%
Ann Taylor Factory	81,944		(1.9	)%	79,356		(7.2	)%
Total Ann Taylor brand	$	249,948	0.7	%	$	245,163	3.1	%
LOFT brand
LOFT (2)	$	314,538	(5.2	)%	$	320,373	3.7	%
LOFT Outlet	84,174		0.3	%	72,662		(3.2	)%
Total LOFT brand	$	398,712	(4.1	)%	$	393,035	2.5	%
Total Company	$	648,660	(2.3	)%	$	638,198	2.8	%

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Sales and Sales-Related Metrics (Continued)

	Six Months Ended
	August 2, 2014				August 3, 2013
	Sales		Comp %		Sales		Comp %
Sales and Comparable Sales	($ in thousands)
Ann Taylor brand
Ann Taylor (1)	$	318,660	1.1	%	$	316,590	7.8	%
Ann Taylor Factory	151,237		(4.3	)%	147,840		(6.6	)%
Total Ann Taylor brand	$	469,897	(0.7	)%	$	464,430	2.6	%
LOFT brand
LOFT (2)	$	620,827	(3.6	)%	$	618,870	1.5	%
LOFT Outlet	148,528		0.1	%	129,404		(5.3	)%
Total LOFT brand	$	769,355	(2.9	)%	$	748,274	0.4	%
Total Company	$	1,239,252	(2.1	)%	$	1,212,704	1.2	%

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

(2) Includes sales at LOFT stores and LOFT.com.

	Quarter Ended				Six Months Ended
	August 2, 2014		August 3, 2013		August 2, 2014		August 3, 2013
Sales-Related Metrics
Average Dollars Per Transaction (“DPT”)
Ann Taylor brand	$	71.68	$	71.61	$	76.52	$	75.38
LOFT brand	58.18		56.95		60.91		60.41
Average Units Per Transaction (“UPT”)
Ann Taylor brand	2.50		2.45		2.49		2.47
LOFT brand	2.67		2.65		2.70		2.66
Average Unit Retail (“AUR”)
Ann Taylor brand	$	28.67	$	29.23	$	30.73	$	30.52
LOFT brand	21.79		21.49		22.56		22.71

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Store Data

The following tables set forth certain store data:

	Quarter Ended
	August 2, 2014				August 3, 2013
	Stores		Square Feet		Stores		Square Feet
	(square feet in thousands)
Stores and Square Footage
Ann Taylor brand
Ann Taylor	261		1,283		275		1,373
Ann Taylor Factory	113		760		105		715
Total Ann Taylor brand	374		2,043		380		2,088
LOFT brand
LOFT	544		3,095		525		3,015
LOFT Outlet	122		801		102		685
Total LOFT brand	666		3,896		627		3,700
Total Company	1,040		5,939		1,007		5,788
Number of:
Stores open at beginning of period	1,032		5,904		989		5,699
New stores (1)	17		99		21		111
Downsized/expanded stores, net (2)	—		(16	)	—		(8	)
Closed stores	(9	)	(48	)	(3	)	(14	)
Stores open at end of period	1,040		5,939		1,007		5,788

	Six Months Ended
	August 2, 2014				August 3, 2013
	Stores		Square Feet		Stores		Square Feet
	(square feet in thousands)
Number of:
Stores open at beginning of period	1,025		5,873		984		5,685
New stores (3)	30		170		34		177
Downsized/expanded stores, net (4)	—		(25	)	—		(14	)
Closed stores	(15	)	(79	)	(11	)	(60	)
Stores open at end of period	1,040		5,939		1,007		5,788

(1) During the quarter ended August 2, 2014, we opened two new Ann Taylor Factory stores, six new LOFT stores and nine new LOFT Outlet stores. During the quarter ended August 3, 2013, we opened three new Ann Taylor stores, three new Ann Taylor Factory stores, 11 new LOFT stores and four new LOFT Outlet stores.

(2) During the quarter ended August 2, 2014, we downsized one Ann Taylor store and four LOFT stores. During the quarter ended August 3, 2013, we downsized one Ann Taylor store and expanded one LOFT store.

(3) During the six months ended August 2, 2014, we opened five new Ann Taylor Factory stores, 13 new LOFT stores and 12 new LOFT Outlet stores. In addition, we opened our first Lou & Grey shop-in-shop within an existing LOFT store. During the six months ended August 3, 2013, we opened four new Ann Taylor stores, four new Ann Taylor Factory stores, 20 new LOFT stores and six new LOFT Outlet stores.

(4) During the six months ended August 2, 2014, we downsized two Ann Taylor stores and four LOFT stores. During the six months ended August 3, 2013, we downsized six Ann Taylor stores, one Ann Taylor Factory store and two LOFT stores and expanded one LOFT store.

Net sales for the quarter and six months ended August 2, 2014 increased 1.6% and 2.2%, respectively, over the comparable 2013 periods, with comparable sales down 2.3% and 2.1%, respectively. For both periods, the increase in net sales was primarily due to the impact of net store growth and higher revenue related to our private label and co-branded credit card program, partially offset by a decline in total comparable sales. Approximately one-half and two-thirds of the decline in comparable sales for the quarter and six months ended August 2, 2014, respectively, was offset by higher sales at

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our Websites. Overall, our sales results continued to be impacted by softer traffic trends and a highly promotional retail environment.

At the Ann Taylor brand, total net sales for the quarter and six months ended August 2, 2014 increased $4.8 million, or 2.0%, and $5.5 million, or 1.2%, respectively, over the comparable prior-year periods, with comparable sales increasing 0.7% and decreasing 0.7%, respectively. At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, net sales for the second quarter and six months ended August 2, 2014 increased $2.2 million, or 1.3%, and $2.1 million, or 0.7%, respectively, over the comparable period-year periods. Despite a year-over-year net decrease in stores and softer traffic, clients responded favorably to our product offering and merchandising strategy, which helped drive full-price sell-through as well as improvements in conversion, AUR and DPT, and contributed to comparable sales increases of 2.0% and 1.1% for the quarter and six-month periods, respectively. At Ann Taylor Factory, net sales for the second quarter and six-month periods increased $2.6 million , or 3.3%, and $3.4 million, or 2.3%, respectively, over the comparable period-year periods, primarily due to net store growth, partially offset by decreases in comparable sales of 1.9% and 4.3% for the second quarter and six-month periods, respectively. Although traffic slightly improved in the second quarter, it remained down compared to last year, which when combined with the highly promotional environment in factory outlet centers, contributed to decreases in AUR and DPT.

At the LOFT brand, total net sales for the quarter and six months ended August 2, 2014 increased $5.7 million, or 1.4%, and $21.1 million, or 2.8%, respectively, over the comparable prior-year periods, with comparable sales decreasing 4.1% and 2.9%, respectively. At LOFT, which includes LOFT stores and LOFT.com, net sales for the second quarter and six months ended August 2, 2014 decreased $5.8 million, or 1.8%, and increased $2.0 million, or 0.3%, respectively, over the comparable prior-year periods. LOFT experienced some product challenges during Spring 2014, primarily in basic knit tops, which represented a meaningful component of the spring and summer assortments. This had a negative impact on conversion which, combined with softer traffic and the highly promotional retail environment, resulted in comparable sales declines of 5.2% and 3.6% for the second quarter and six-month periods, respectively. At LOFT Outlet, net sales for the second quarter and six-month periods increased $11.5 million, or 15.8%, and $19.1 million, or 14.8%, respectively, over the comparable prior-year periods, primarily due to net store growth and comparable sales increases of 0.3% and 0.1% for the second quarter and six-month periods, respectively. Although traffic continued to be challenging in factory outlet centers, strong product and effective promotions helped drive increases in conversion, UPT and DPT.

Cost of Sales and Gross Margin

The following table presents cost of sales and gross margin in dollars and gross margin as a percentage of net sales:

	Quarter Ended						Six Months Ended
	August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
	(dollars in thousands)
Cost of sales	$	309,055		$	288,921		$	584,455		$	542,862
Gross margin	$	339,605		$	349,277		$	654,797		$	669,842
Percentage of net sales	52.4		%	54.7		%	52.8		%	55.2		%

Gross margin as a percentage of net sales for the quarter ended August 2, 2014 decreased 230 basis points to 52.4%, down from 54.7% in the comparable 2013 period. For the six months ended August 2, 2014, gross margin as a percentage of net sales decreased 240 basis points to 52.8%, down from 55.2% in the comparable 2013 period. The overall decrease in gross margin rate performance for both the second quarter and six-month periods was primarily due to lower merchandise gross margin rate, which was negatively impacted by continued traffic challenges and the highly competitive retail environment, both of which caused us to be more promotional than planned at both brands in order to clear through inventory. In addition, product challenges at LOFT further weighed on merchandise gross margin rate performance for both the quarter and six-month periods.

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Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses in dollars and as a percentage of net sales:

	Quarter Ended						Six Months Ended
	August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
	(dollars in thousands)
Selling, general and administrative expenses	$	284,732		$	289,298		$	573,404		$	575,951
Percentage of net sales	43.9		%	45.3		%	46.3		%	47.5		%

For the quarter and six months ended August 2, 2014, selling, general and administrative expenses decreased approximately $4.6 million and $2.5 million, respectively, versus the comparable prior-year periods. The decrease in selling, general and administrative expenses for both the quarter and six-month periods was primarily due to a reduction in marketing expenses, lower performance-based compensation expense and savings realized as a result of our first quarter 2014 restructuring. These decreases were partially offset by increases in occupancy and other variable expenses related to store growth as well as other expenses to support the expansion of our business. As a percentage of net sales, selling, general and administrative expenses for the quarter and six months ended August 2, 2014 decreased 140 basis points and 120 basis points, respectively, versus the comparable prior-year periods, reflecting lower marketing and performance-based compensation expense, as well as savings associated with our first quarter 2014 restructuring. These decreases were partially offset by increases in occupancy and other variable expenses related to store growth and other expenses to support the expansion of our business.

Restructuring Charge

During the first quarter of Fiscal 2014, we executed an organizational restructuring in support of our omni-channel retail strategy and our strategic growth initiatives. As part of the restructuring, we realigned certain functions within our corporate workforce, including our marketing, merchandise planning, procurement and allocation functions, to eliminate redundancy and integrate processes to better support our brands and serve our clients. These actions resulted in the separation of approximately 100 full-time associates. In connection with this effort, we recorded a pre-tax restructuring charge of approximately $17.3 million for severance and other costs in the first quarter of Fiscal 2014. We do not expect to incur any further material costs related to the restructuring. The restructuring is expected to result in pre-tax operating savings of approximately $20 million in Fiscal 2014, of which approximately $5 million was realized during the six months ended August 2, 2014, and ongoing annual savings of approximately $25 million in Fiscal 2015 and thereafter. For additional information, see Note 2, “Restructuring Charge,” in the Notes to Condensed Consolidated Financial Statements.

Income Taxes

The following table presents our income tax provision and effective income tax rate:

	Quarter Ended						Six Months Ended
	August 2, 2014			August 3, 2013			August 2, 2014			August 3, 2013
	(dollars in thousands)
Income tax provision	$	22,021		$	24,827		$	25,583		$	37,968
Effective income tax rate	40.3		%	41.1		%	40.3		%	40.2		%

Our effective income tax rate was 40.3% for the quarter ended August 2, 2014 as compared to 41.1% for the comparable 2013 period, primarily due to the effect of certain discrete items recorded during the prior-year period. We expect our full year effective income tax rate to be approximately 40%.

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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:

	August 2, 2014		February 1, 2014		August 3, 2013
	(dollars in thousands)
Working capital	$	223,368	$	231,472	$	172,412
Current ratio	1.70:1		1.70:1		1.60:1

Operating Activities

Cash provided by operating activities was $48.7 million for the six months ended August 2, 2014, compared with $55.1 million for the six months ended August 3, 2013. The year-over-year decrease in cash provided by operating activities is primarily the result of lower net income adjusted for non-cash expenses, partially offset by changes in merchandise inventories and lower payments under our incentive compensation plans.

Merchandise inventories increased approximately $8.0 million, or 3.2%, at August 2, 2014 compared to August 3, 2013. On a per-square-foot basis, merchandise inventories at August 2, 2014 increased 1% as compared to August 3, 2013, reflecting an increase of 10% at Ann Taylor, partially offset by a 2% decrease at LOFT and a 2% decrease in our factory outlet channels. The increase in inventory per square foot at Ann Taylor was primarily due to higher in-transit inventory resulting from a shift in the timing of Fall merchandise receipts as well as a change in merchandise mix. At LOFT, the decrease in inventory per square foot was primarily due to the successful clearance of summer product, as well as an overall decrease in unit inventory per square foot.

Investing Activities

Cash used for investing activities was $57.5 million for the six months ended August 2, 2014, compared with $61.9 million for the six months ended August 3, 2013. Cash used for investing activities was primarily driven by capital expenditures related to our store expansion and refurbishment projects during both periods.

Financing Activities

Cash used for financing activities was $42.5 million for the six months ended August 2, 2014, compared with $53.1 million for the six months ended August 3, 2013. The year-over-year change was primarily due to an increase in proceeds received from the higher level of stock option exercise activity during the current-year period.

Share Repurchase Program

During the quarter ended August 2, 2014, we repurchased 1.3 million shares of our common stock through open market purchases under our $250 million securities repurchase program at a cost of $50 million.  See Note 5, “Equity and Incentive Compensation Plans,” in the Notes to Condensed Consolidated Financial Statements for further discussion.

Revolving Credit Facility

On December 19, 2012, our 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 “Credit Facility”), which amended the then existing senior secured revolving credit facility due to expire in April 2013.

The 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., a wholly-owned subsidiary of AnnTaylor, 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, including but

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not limited to, a Material Adverse Effect, as defined in the Credit Facility, may cause any outstanding borrowings to become immediately due and payable.

The maximum availability for loans and letters of credit under the Credit Facility is governed by a quarterly borrowing base, determined by the application of specified percentages to certain eligible assets, primarily accounts receivable and inventory. Commercial and standby letters of credit outstanding under the Credit Facility totaled approximately $10.3 million, $11.0 million and $13.5 million as of August 2, 2014, February 1, 2014 and August 3, 2013, respectively, leaving a remaining available balance for loans and letters of credit of $206.6 million, $171.4 million and $199.1 million, respectively. There were no borrowings outstanding under the Credit Facility at August 2, 2014, February 1, 2014, August 3, 2013 or as of August 22, 2014, the date of this filing.

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 program, including projected future store counts, the number of applications processed, our projected sales growth and points breakage, among other things. During the quarters ended August 2, 2014 and August 3, 2013, we recognized approximately $10.0 million and $2.4 million of revenue related to the credit card program, respectively. During the six months ended August 2, 2014 and August 3, 2013, we recognized approximately $20.3 million and $4.7 million of revenue related to the credit card program, respectively. At August 2, 2014, February 1, 2014 and August 3, 2013, approximately $5.0 million, $3.0 million and $2.3 million, respectively, of deferred credit card income is included in “Accrued expenses and other current liabilities” on our Condensed Consolidated Balance Sheets. Additionally, in connection with the December 2013 agreement, $18.8 million and $20.7 million of long-term deferred credit card income is included in “Other liabilities” on our Consolidated Balance Sheets at August 2, 2014 and February 1, 2014, respectively. Partially offsetting the income from the credit card program are costs, net of points breakage, related to our 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 $3.0 million and $1.3 million for the quarters ended August 2, 2014 and August 3, 2013, respectively, and approximately $6.0 million and $2.3 million for the six months ended August 2, 2014 and August 3, 2013, respectively. The Sales discount impact was approximately $5.2 million and $1.5 million for the quarters ended August 2, 2014 and August 3, 2013, respectively, and approximately $8.5 million and $2.9 million for the six months ended August 2, 2014 and August 3, 2013, respectively.

Other

Foreign cash balances at August 2, 2014 were $4.4 million, the majority of which was held in Canadian dollars. As of February 1, 2014 and August 3, 2013, we had foreign cash balances of $2.1 million and $3.9 million, respectively.

On October 1, 2007, we froze our noncontributory defined benefit pension plan (the “Pension Plan”). 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.

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.

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Critical Accounting Policies and Estimates

Our discussion and analysis of our results of operations and capital resources are based on the Condensed Consolidated Financial Statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and use assumptions that affect the reported amounts in the financial statements and accompanying notes, including revenue, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities. Management has determined that our most critical accounting estimates are those related to revenue recognition, merchandise inventory valuation, asset impairment, income taxes and stock and other incentive-based compensation. Actual results in these areas could differ from management’s estimates. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes in the information concerning our Critical Accounting Policies and Estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

Item 3.    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 contained 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 August 2, 2014, our monetary assets and liabilities 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.

Our Credit Facility allows for investments in financial instruments with original maturity dates of up to 360 days. As of August 2, 2014, we did not hold any investments that did not qualify as cash and cash equivalents.

Item 4.    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 Securities Exchange Act of 1934, as amended), as of the end of the period covered by this filing. 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 filing.

During the second quarter of Fiscal 2014, there were no changes in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As of August 2, 2014, the Company continued to utilize the Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and plans to transition to the Internal Control – Integrated Framework (2013) by the end of Fiscal 2014.

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PART II. OTHER INFORMATION

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

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)
May 4, 2014 to May 31, 2014	—	$	—	—	$	250,000
June 1, 2014 to July 5, 2014	798,027	40.03		797,545	218,077
July 6, 2014 to August 2, 2014	455,496	39.69		455,496	200,000
	1,253,523			1,253,041

(1) Includes 482 shares of restricted stock purchased in connection with employee tax withholding obligations under our equity compensation plans, which are not purchases under our publicly announced program.

(2) On August 21, 2013, our Board of Directors approved a new $250 million securities repurchase program (the “Repurchase Program”). During the second quarter of Fiscal 2014, we repurchased 1,253,041 shares under the Repurchase Program at a cost of $50 million. The Repurchase Program will expire when we have repurchased all securities authorized for repurchase thereunder, unless terminated earlier by our Board of Directors.

Item 6.    Exhibits

Exhibit Number	Description
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1°	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

* Filed electronically herewith.

° Furnished electronically herewith.

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SIGNATURES

Pursuant to the requirements 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.
Date:	August 22, 2014	By:	/s/    Kay Krill
			Kay Krill
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	August 22, 2014	By:	/s/    Michael J. Nicholson
			Michael J. Nicholson
			Executive Vice President, Chief Operating Officer,
			Chief Financial Officer and Treasurer
			(Principal Financial Officer)

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Exhibit Index

Exhibit Number	Description
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1°	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

* Filed electronically herewith.

° Furnished electronically herewith.

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