Ann (ANN) 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2005

Commission file number 1-10738

ANNTAYLOR STORES CORPORATION

(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 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  x    No  ¨.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

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 November 28, 2005
Common Stock, $.0068 par value	72,696,797

INDEX TO FORM 10-Q

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Statements of Income for the Quarters and Nine Months Ended October 29, 2005 and October 30, 2004 (unaudited)	3
	Condensed Consolidated Balance Sheets at October 29, 2005 and January 29, 2005 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 29, 2005 and October 30, 2004 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 6.	Exhibits	22
SIGNATURES		23
EXHIBIT INDEX		24

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Quarters and Nine Months Ended October 29, 2005 and October 30, 2004

(unaudited)

	Quarters Ended				Nine Months Ended
	Oct. 29, 2005		Oct. 30, 2004		Oct. 29, 2005		Oct. 30, 2004
	(in thousands, except per share amounts)
Net sales	$	513,976	$	460,365	$	1,499,106	$	1,366,245
Cost of sales		235,344		225,359		735,804		628,041
Gross margin		278,632		235,006		763,302		738,204
Selling, general and administrative expenses		228,653		212,034		675,450		611,723
Operating income		49,979		22,972		87,852		126,481
Interest income		2,150		1,290		6,092		3,586
Interest expense		560		464		1,428		3,213
Income before income taxes		51,569		23,798		92,516		126,854
Income tax provision		21,223		9,886		38,060		51,109
Net income	$	30,346	$	13,912	$	54,456	$	75,745
Basic earnings per share of common stock	$	0.42	$	0.20	$	0.76	$	1.09
Weighted average shares outstanding		71,674		70,354		71,527		69,564
Diluted earnings per share of common stock	$	0.42	$	0.19	$	0.76	$	1.04
Weighted average shares outstanding, assuming dilution		72,270		71,556		72,078		73,738

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

3

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

October 29, 2005 and January 29, 2005

(unaudited)

	October 29, 2005			January 29, 2005
	(in thousands, except per share data)
ASSETS
Current assets
Cash and cash equivalents	$	276,525		$	62,412
Short-term investments		—			192,400
Accounts receivable		22,071			12,573
Merchandise inventories		272,710			229,218
Prepaid expenses and other current assets		77,938			90,711
Total current assets		649,244			587,314
Property and equipment, net		518,318			434,328
Goodwill		286,579			286,579
Deferred financing costs, net		1,108			1,382
Other assets		20,558			17,735
Total assets	$	1,475,807		$	1,327,338
LIABILITIESAND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	97,415		$	88,340
Accrued salaries and bonus		9,664			21,617
Accrued tenancy		45,993			32,264
Gift certificates and merchandise credits redeemable		27,346			38,892
Accrued expenses		88,071			62,633
Total current liabilities		268,489			243,746
Deferred lease costs and other liabilities		202,760			156,848
Stockholders’ equity
Common stock, $.0068 par value; 120,000,000 shares authorized; 81,666,166 and 80,085,690 shares issued, respectively		555			545
Additional paid-in capital		714,267			669,128
Retained earnings		499,908			445,410
Deferred compensation on restricted stock		(15,312	)		(11,746	)
		1,199,418			1,103,337
Treasury stock, 9,363,207 and 9,453,242 shares respectively, at cost		(194,860	)		(176,593	)
Total stockholders’ equity		1,004,558			926,744
Total liabilities and stockholders’ equity	$	1,475,807		$	1,327,338

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

4

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended October 29, 2005 and October 30, 2004

(unaudited)

	Nine Months Ended
	October 29, 2005			October 30, 2004
	(in thousands)
Operating activities:
Net income	$	54,456		$	75,745
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred compensation		7,908			6,287
Deferred income taxes		(14,241	)		333
Depreciation and amortization		68,883			56,527
Loss on disposal and write-down of property and equipment		2,830			845
Non-cash interest		274			1,767
Tax benefit from exercise of stock options		9,134			6,330
Non-cash compensation expense		480			—
Changes in assets and liabilities:
Accounts receivable		(9,519	)		(7,731	)
Merchandise inventories		(43,493	)		(115,932	)
Prepaid expenses and other current assets		18,956			(18,489	)
Accounts payable and accrued expenses		24,013			17,160
Other non-current assets and liabilities, net		51,146			25,859
Net cash provided by operating activities		170,827			48,701
Investing activities:
Purchases of available-for-sale securities		(20,600	)		(278,800	)
Sales of available-for-sale securities		213,000			459,075
Purchases of property and equipment		(154,973	)		(98,754	)
Net cash provided by investing activities		37,427			81,521
Financing activities:
Issuance of common stock pursuant to associate discount stock purchase plan		2,332			2,239
Proceeds from exercise of stock options		40,043			20,365
Payment of financing costs		—			(22	)
Repurchases of common and restricted stock		(36,516	)		(120,833	)
Net cash provided (used) by financing activities		5,859			(98,251	)
Net increase in cash		214,113			31,971
Cash and cash equivalents, beginning of period		62,412			26,559
Cash and cash equivalents, end of period	$	276,525		$	58,530

5

ANNTAYLOR STORES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the Nine Months Ended October 29, 2005 and October 30, 2004

(unaudited)

	Nine Months Ended
	Oct. 29, 2005		Oct. 30, 2004
	(in thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	926	$	1,417
Income taxes	$	10,615	$	55,944
Conversion of long-term debt:
Conversion of Convertible Debentures into common stock, net of unamortized deferred financing costs	$	—	$	123,484
Change in accrual for purchases of property and equipment	$	729	$	3,612

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

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ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

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 significant intercompany accounts and transactions have been eliminated.

The results of operations for the 2005 interim periods shown in this Report are not necessarily indicative of results to be expected for the fiscal year.

The January 29, 2005 Condensed Consolidated Balance Sheet amounts have been derived from the audited Consolidated Balance Sheet of AnnTaylor Stores Corporation (the “Company”).

The Company has determined that acquisitions of property and equipment on account, which were previously reported as a component of changes in operating assets and liabilities and purchases of property and equipment, should not have been reported in the statements of cash flows. The Company’s financial statements for the nine months ended October 30, 2004 have been revised to reflect an increase in cash flows from operating activities with a corresponding decrease in cash flows from investing activities of $3.6 million. Purchases of property and equipment acquired on account have now been presented as supplemental disclosure of non-cash items. This revision has no effect on net income or the amount of cash and cash equivalents reported.

Detailed footnote information is not included in this Report. 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 January 29, 2005.

2. Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options, conversion of all outstanding convertible securities and vesting of unvested restricted stock, if the effect is dilutive.

	Quarters Ended
	October 29, 2005					October 30, 2004
	(in thousands, except per share amounts)
	Net Income		Shares	Per Share		Net Income		Shares	Per Share
Basic Earnings per Share
Income available to common stockholders	$	30,346	71,674	$	0.42	$	13,912	70,354	$	0.20
Effect of Dilutive Securities
Stock options and restricted stock		—	596				—	1,202
Diluted Earnings per Share
Income available to common stockholders	$	30,346	72,270	$	0.42	$	13,912	71,556	$	0.19

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ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

2. Earnings Per Share (continued)

	Nine Months Ended
	October 29, 2005					October 30, 2004
	(in thousands, except per share amounts)
	Net Income		Shares	Per Share		Net Income		Shares	Per Share
Basic Earnings per Share
Income available to common stockholders	$	54,456	71,527	$	0.76	$	75,745	69,564	$	1.09
Effect of Dilutive Securities
Stock options and restricted stock		—	551				—	1,440
Convertible Debentures		—	—				1,113	2,734
Diluted Earnings per Share
Income available to common stockholders	$	54,456	72,078	$	0.76	$	76,858	73,738	$	1.04

Options to purchase 1,622,862 and 2,801,762 shares of common stock during the quarter and nine months ended October 29, 2005, respectively, and 1,775,925 and 1,487,800 shares of common stock during the quarter and nine months ended October 30, 2004, respectively, were excluded from the above computations of weighted average shares for diluted earnings per share, due to the antidilutive effect of the options’ exercise prices as compared to the average market price of the common shares during those periods.

3. Share-based Payments

The Company accounts for stock-based awards and employees’ purchase rights under the Associate Discount Stock Purchase Plan using the intrinsic value-based method of accounting in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost is recognized for stock option awards granted at fair market value and employees’ purchase rights under the Associate Discount Stock Purchase Plan. Had compensation costs of option awards and employees’ purchase rights been determined under a fair value alternative method as stated in SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123”, the Company would have been required to prepare a fair value model for such options and employees’ purchase rights, and record such amount in the condensed consolidated financial statements as compensation expense. Pro forma stock-based employee compensation costs, net income and earnings per share, as they would have been recognized if the fair value method had been applied to all awards, are presented in the table below. The Company is currently evaluating the provisions of SFAS No. 123R, “Share-Based Payment”, and plans to adopt its provisions in Fiscal 2006.

8

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

3. Share-based Payments (continued)

	Quarters Ended						Nine months Ended
	Oct. 29, 2005			Oct. 30, 2004			Oct. 29, 2005			Oct. 30, 2004
	(dollars in thousands, except per share data)
Net income:
As reported	$	30,346		$	13,912		$	54,456		$	75,745
Add: Stock-based employee compensation expense included in net income, net of related tax effects		2,016			1,368			4,937			3,753
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(2,561	)		(2,111	)		(8,156	)		(6,680	)
Pro forma	$	29,801		$	13,169		$	51,237		$	72,818
Basic earnings per share:
As reported	$	0.42		$	0.20		$	0.76		$	1.09
Pro forma	$	0.42		$	0.19		$	0.72		$	1.05
Diluted earnings per share:
As reported	$	0.42		$	0.19		$	0.76		$	1.04
Pro forma	$	0.41		$	0.18		$	0.71		$	1.00

The estimated fair value of each option grant is calculated using the Black-Scholes option-pricing model, with the following weighted average assumptions:

	Quarters Ended				Nine Months Ended
	Oct. 29, 2005		Oct. 30, 2004		Oct. 29, 2005		Oct. 30, 2004
Expected volatility	32.1	%	30.7	%	38.5	%	34.1	%
Risk-free interest rate	3.8	%	1.6	%	2.8	%	1.0	%
Expected life (years)	4.0		4.0		4.0		4.0
Dividend yield	—		—		—		—

4. Long-Term Debt

During Fiscal 1999, the Company issued an aggregate of $199.1 million principal amount at maturity Convertible Subordinated Debentures due 2019 (the “Convertible Debentures”). In May 2004, the Company notified the holders that it would redeem these Convertible Debentures in June 2004. The holders had the option to convert their Convertible Debentures into common stock of the Company prior to redemption, and, on June 18, 2004, all the Convertible Debentures were converted for an aggregate total of 5.4 million shares of common stock. The conversion of Convertible Debentures had no effect on diluted earnings per share.

9

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

4. Long-Term Debt (continued)

In November 2003, Ann Taylor and certain of its subsidiaries entered into a Second Amended and Restated $175.0 million senior secured revolving credit facility (the “Credit Facility”) with Bank of America N.A. and a syndicate of lenders. The Credit Facility, which, at the Company’s option, provides for an increase in the total facility and the aggregate commitments thereunder up to $250.0 million, matures on November 14, 2008 and is used by Ann Taylor and certain of its subsidiaries for letters of credit and other general corporate purposes. There were no borrowings under the Credit Facility at any point during the first nine months of Fiscal 2005 or as of the date of this filing.

The Credit Facility permits the payment of cash dividends by the Company (and dividends by certain of its subsidiaries to fund such cash dividends) if, after the payment of such dividends, liquidity (as defined in the Credit Facility) is greater than $35.0 million. Certain subsidiaries of the Company are also permitted to: pay dividends to the Company to fund certain taxes owed by the Company; fund ordinary operating expenses of the Company 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 utilize the funds for certain other stated purposes.

5. Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs”. This Statement amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 151 and does not believe it will have any impact on the Company’s Consolidated Financial Statements.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) which revised SFAS No. 123, “Accounting for Stock-Based Compensation”. This statement supercedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS 123R also amends SFAS 95, “Statement of Cash Flows”, to require that excess tax benefits be reported as a financing cash inflow rather than as operating cash flows. Excess tax benefits, as defined by SFAS 123R, will be recognized as an addition to paid-in capital. SFAS No. 123R addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB No. 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. In April 2005, the SEC amended the compliance dates for SFAS No. 123R from fiscalperiodsbeginning after June 15, 2005 to fiscalyearsbeginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 123R and plans to adopt its provisions in Fiscal 2006. The Company will continue to account for share-based compensation using the intrinsic value method set forth in APB No. 25 until adoption of SFAS No. 123R.

10

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5. Recent Accounting Pronouncements (continued)

In December 2004, the FASB issued Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”). FSP No. 109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes”, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. Based upon the Company’s preliminary evaluation of the effects of the repatriation provision, management does not believe it will have any impact on the Company’s Consolidated Financial Statements.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143” (“FIN No. 47”). FIN No. 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN No. 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement are conditional upon a future event that may or may not be within control of the entity. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the provisions of Fin No. 47 and does not believe it will have a material effect on its financial position, results of operations or cash flows.

6. Employee Benefits

The following table summarizes the components of net periodic pension cost for the Company:

	Quarters Ended						Nine Months Ended
	Oct. 29, 2005			Oct. 30, 2004			Oct. 29, 2005			Oct. 30, 2004
	(in thousands)
Service cost	$	1,193		$	1,051		$	3,579		$	3,154
Interest cost		421			298			1,263			893
Prior service and interest cost		57			—			170			—
Expected return on plan assets		(478	)		(375	)		(1,434	)		(1,125	)
Amortization of prior service cost		19			2			57			6
Amortization of net loss		376			164			1,128			492
Net periodic pension cost	$	1,588		$	1,140		$	4,763		$	3,420

While no contributions to the Company’s pension plan are required in Fiscal 2005, as the fair value of plan assets has been greater than the funding obligation, the Company made a contribution of $5.0 million to the plan during the second quarter. The Company will consider future contributions to the plan during the remainder of Fiscal 2005.

11

ANNTAYLOR STORES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

7. Securities Repurchase Programs

On August 18, 2005, the Company’s Board of Directors approved a new $100 million securities repurchase program which replaced the $100.0 million securities repurchase program approved by the Company’s Board of Directors in August 2004. Under the new program, purchases of shares of the Company’s 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. During the first nine months of Fiscal 2005, the Company repurchased 1,375,000 shares of its common stock at a cost of approximately $34.4 million, of which 700,000 shares, or approximately $17.6 million, were repurchased under the August 2005 plan.

8. Income taxes

	Quarters Ended						Nine Months Ended
	Oct. 29, 2005			Oct. 30, 2004			Oct. 29, 2005			Oct. 30, 2004
	(in thousands)
Income Taxes	$	21,223		$	9,886		$	38,060		$	51,109
Effective tax rate		41.2	%		41.5	%		41.1	%		40.3	%

The increase in the effective tax rate during the first nine months of Fiscal 2005 compared to the first nine months of Fiscal 2004 was primarily due to higher state taxes and the non-deductibility of certain executive compensation.

9. Legal Proceedings

On February 15, 2005, two former managers of the Company’s California stores filed a purported class action against AnnTaylor Retail, Inc. in Los Angeles County Superior Court alleging that the Company misclassified its store managers and assistant store managers as exempt from California overtime wage and hour laws, thereby depriving them of overtime pay. On May 5, 2005, a second purported class action was filed against the Company in San Francisco County Superior Court by a former manager of one of the Company’s stores in California alleging violations of California labor laws with respect to overtime pay as well as adequate meal and rest periods. The action filed in San Francisco County Superior Court was transferred to Los Angeles Superior Court to be coordinated with the earlier action filed in that court.

The putative class members in the coordinated actions seek recovery in an unstated dollar amount of unpaid wages and other relief, including waiting time penalties. These actions are at a preliminary stage and, accordingly, it is too early to evaluate the outcome. The Company intends to vigorously defend these actions. A non-binding mediation is scheduled to take place in early December 2005.

On October 3, 2005, a former employee of one of the Company’s California stores brought a purported class action lawsuit against the Company and AnnTaylor Retail, Inc. in Santa Clara County Superior Court alleging that the Company denies its California employees earned vacation pay through its allegedly unlawful policies related to the accrual, use and forfeiture of vacation, personal days and holidays. The putative class members seek recovery in an unstated dollar amount of unpaid vacation wages and other relief, including waiting time penalties. This action is at a very preliminary stage and, accordingly, it is too early to evaluate the outcome. The Company intends to vigorously defend this action.

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10. Other

In June 2005, the Company relocated its corporate headquarters to 7 Times Square in New York City from its former 142 West 57^th Street location. As a result of the relocation, the Company recorded a one-time write-off of approximately $9.5 million for lease costs related to the former location. The lease for 142 West 57^th Street terminates in September 2006.

13

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

General

AnnTaylor Stores Corporation (the “Company”), through its wholly owned subsidiaries, is a leading national specialty retailer of women’s apparel, shoes and accessories sold primarily under the “Ann Taylor”, “Ann Taylor Loft” and “Ann Taylor Factory” brands. Ann Taylor Stores offer polished, sophisticated, updated classic styles while Ann Taylor Loft stores focus on relaxed, fashionable styles at a great value. Ann Taylor Factory stores are primarily found in outlet malls and offer a mix of factory-direct and clearance product. As of October 29, 2005, the Company operated 820 stores in 46 states, the District of Columbia and Puerto Rico, and also Online Stores atwww.anntaylor.com andwww.anntaylorLOFT.com. Unless the context indicates otherwise, all references herein to the Company include the Company and its wholly owned subsidiaries.

Management Overview

The Company achieved a significant improvement in both sales and earnings in the third quarter ended October 29, 2005. Both sales and gross margin improved as a result of improved merchandise, particularly at the Ann Taylor division, as well as better inventory management. The Ann Taylor client continued to respond positively to new product offerings, as well as the division’s renewed wardrobing focus. Ann Taylor Loft was negatively affected by sluggish sales of cold weather product during the quarter.

As a result of increased sales, improved gross margin and lower expenses as a percent of sales, operating profit increased to 9.7% of net sales in the third quarter of Fiscal 2005 compared to 4.9% of net sales in the third quarter of Fiscal 2004. Fiscal 2005 third quarter net income rose 118% to $30.3 million, or $0.42 per diluted share, from $13.9 million, or $0.19 per diluted share, for the third quarter of Fiscal 2004.

The Company remains clearly focused on restoring financial performance at Ann Taylor and restoring momentum at Ann Taylor Loft. As the Company moves forward, its emphasis on satisfying client fashion preferences, as well as continued focus on inventory management, ongoing efforts to leverage selling, general and administrative costs and measured store growth are each critical in enabling the Company to achieve its growth objectives.

Management has renewed its focus on the iconic client at each division to drive better product and marketing decisions, and plans to grow net sales by opening new stores as well as increasing comparable store sales through continued investments in the Ann Taylor and Ann Taylor Loft brands. The Company plans to continue its planned store openings using cash flow from operations. The Company’s ability to achieve its objectives will be dependent on factors such as those outlined in the “Statement Regarding Forward-Looking Disclosures”.

14

Results of Operations

The following table sets forth condensed consolidated income statement data expressed as a percentage of net sales:

		Quarters Ended				Nine Months Ended
		Oct. 29, 2005		Oct. 30, 2004		Oct. 29, 2005		Oct. 30, 2004
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales		45.8		49.0		49.1		46.0
Gross margin		54.2		51.0		50.9		54.0
Selling, general and administrative expenses		44.5		46.1		45.1		44.8
Operating income		9.7		4.9		5.8		9.2
Interest income		0.4		0.3		0.4		0.2
Interest expense	��	0.1		0.1		0.1		0.2
Income before income taxes		10.0		5.1		6.1		9.2
Income tax provision		4.1		2.1		2.5		3.7
Net income		5.9	%	3.0	%	3.6	%	5.5	%

The following table sets forth condensed consolidated income statement data expressed as a percentage increase (decrease) from the comparable prior year period:

	Quarters Ended				Nine Months Ended
	Oct. 29, 2005		Oct. 30, 2004		Oct. 29, 2005		Oct. 30, 2004
	Increase (decrease)
Net sales	11.6	%	16.0	%	9.7	%	19.9	%
Operating income	117.6	%	(54.9	)%	(30.5	)%	8.1	%
Net income	118.1	%	(53.7	)%	(28.1	)%	9.8	%

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Sales and Store Data

The following table sets forth certain sales and store data:

	Quarters Ended						Nine Months Ended
	Oct. 29, 2005			Oct. 30, 2004			Oct. 29, 2005			Oct. 30, 2004
Net sales (in thousands)
Total Company (a)	$	513,976		$	460,365		$	1,499,106		$	1,366,245
Ann Taylor		210,027			199,615			627,992			634,700
Ann Taylor Loft		251,867			215,447			720,660			609,375
Comparable stores sales percentage increase (decrease) (b)
Total Company		0.2	%		1.4	%		(2.3	)%		6.6	%
Ann Taylor		3.7	%		(4.2	)%		(2.6	)%		0.2	%
Ann Taylor Loft		(2.5	)%		9.2	%		(2.4	)%		16.7	%
Number of Stores
Open at beginning of period		782			687			738			648
New stores		40			41			86			81
Expanded stores		6			1			8			2
Closed stores		2			1			4			2
Open at end of period		820			727			820			727
Total square footage at end of period (in thousands) (c)		4,739			4,125

(a) Total Company sales includes sales at Ann Taylor, Ann Taylor Loft and Ann Taylor Factory stores, as well as internet sales.

(b) Comparable store sales are calculated by excluding the net sales of a store for any month of one period if the store was not also open during the same month of the prior period. A store that is expanded by more than 15% is treated as a new store for the first year following the opening of the expanded store.

(c) Unless otherwise indicated, references herein to square feet are to gross square feet, rather than net selling space.

Net sales increased $53.6 million or 11.6% in the third quarter of Fiscal 2005 over the comparable 2004 period due to the opening of 6 Ann Taylor stores, 74 Ann Taylor Loft stores and 13 Ann Taylor Factory stores since the third quarter of Fiscal 2004. By division, Ann Taylor’s net sales increased $10.4 million or 5.2%, while Ann Taylor Loft experienced an increase of $36.4 million or 16.9%. The increase in sales was primarily due to higher comparable store sales at Ann Taylor and the opening of new stores. The Company’s net sales increased $132.9 million or 9.7% in the first nine months of Fiscal 2005 over the comparable 2004 period.

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Cost of Sales

Cost of sales is comprised of direct inventory costs for merchandise sold, including all costs to transport merchandise from third party suppliers to the Company’s distribution center. Buying and occupancy costs are excluded from cost of sales. Cost of sales as a percentage of net sales decreased to 45.8% in the third quarter of Fiscal 2005 from 49.0% in the third quarter of Fiscal 2004. For the nine months ended October 29, 2005, cost of sales as a percentage of net sales increased to 49.1% compared to 46.0% for the same period last year.

Gross Margin

Gross margin as a percentage of net sales increased to 54.2% in the third quarter of Fiscal 2005 from 51.0% in the third quarter of Fiscal 2004. The increase in gross margin as a percentage of net sales was primarily due to higher full-price sales and less promotional sales activity at Ann Taylor, partially offset by lower full-price sales and lower margin rates achieved on non full-price sales at Ann Taylor Loft. For the nine months ended October 29, 2005, gross margin as a percentage of net sales decreased to 50.9% compared to 54.0% for the same period last year. The decrease in gross margin as a percentage of net sales was primarily due to lower full-price sales at Ann Taylor Loft in the third quarter and lower margins achieved on both full-price and non full-price sales at both divisions, primarily during the first six months of Fiscal 2005.

Selling, General and Administrative Expenses

Costs included in selling, general and administrative expenses include advertising, tenancy, payroll and benefits, certain product design costs and general and administrative expenses. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to lower marketing costs, which were higher last year due to the Company’s 50th anniversary advertising campaign. Selling, general and administrative expenses as a percentage of net sales increased to 45.1% for the first nine months of Fiscal 2005 compared to 44.8% for the same period last year.

Interest Income

Interest income as a percentage of net sales increased to 0.4% in the third quarter of Fiscal 2005 to $2.2 million from $1.3 million in the comparable 2004 period. The increase was primarily attributable to an approximate 200 basis point increase in interest rates as compared to the third quarter of Fiscal 2004. Interest income as a percentage of net sales increased to 0.4% for the first nine months of Fiscal 2005 compared to 0.2% for the same period last year.

Interest Expense

Interest expense increased $0.1 million in the third quarter of Fiscal 2005 to $0.6 million from $0.5 million in the comparable 2004 period. Interest expense as a percentage of net sales decreased to 0.1% for the first nine months of Fiscal 2005 compared to 0.2% for the same period last year. This decrease was primarily due to the conversion of the outstanding Convertible Debentures in the second quarter of Fiscal 2004, as discussed more fully below in “Liquidity and Capital Resources”.

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Liquidity and Capital Resources

The Company’s primary source of working capital is cash flow from operations. The following table sets forth material measures of the Company’s liquidity:

	October 29, 2005		January 29, 2005
	(dollars in thousands)
Working capital	$	380,755	$	343,568
Current ratio		2.42:1		2.41:1

For the first nine months of Fiscal 2005, net cash provided by operating activities totaled approximately $170.8 million, as compared to approximately $48.7 million for the first nine months of Fiscal 2004. Net cash provided by operating activities during the first nine months of Fiscal 2005 resulted from net earnings before non-cash expenses such as depreciation and amortization and increases in accounts payable and accrued expenses, and other non-current assets and liabilities partially offset by an increase in merchandise inventories. Cash provided by investing activities during the first nine months of Fiscal 2005 amounted to approximately $37.4 million due to the sale of available-for-sale securities, offset by capital expenditures for the opening of new stores and a new corporate office facility. Cash provided by financing activities amounted to approximately $5.9 million, and related primarily to the proceeds from the exercise of stock options, partially offset by the repurchase of shares of the Company’s common stock.

The Company’s investment policy permits investments in auction rate securities which have stated maturities beyond three months but are priced and traded as short-term instruments due to the liquidity provided through the interest rate reset mechanism of 28 or 35 days. Investments in auction rate securities are classified as short-term investments on the Company’s condensed consolidated balance sheets, as they are available to fund current operations.

On August 18, 2005, the Company’s Board of Directors approved a new $100 million securities repurchase program which replaced the $100.0 million securities repurchase program approved by the Company’s Board of Directors in August 2004. Under the new program, purchases of shares of the Company’s 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. During the first nine months of Fiscal 2005, the Company repurchased 1,375,000 shares of its common stock at a cost of approximately $34.4 million of which 700,000 shares, or approximately $17.6 million, were repurchased under the August 2005 plan.

The Company expects its total capital expenditure requirements in Fiscal 2005 will be approximately $185.0 million. The actual amount of the Company’s capital expenditures will depend in part on the number of stores opened, expanded and refurbished. The Company expects to use cash flow from operations to fund its capital expenditure requirements.

A portion of the Company’s Fiscal 2005 capital expenditures relates to costs associated with the June 2005 relocation of its corporate headquarters to 7 Times Square in New York City. As a result of this relocation, the Company adjusted the remaining lives of certain fixed assets to correlate to the expected move, the impact of which was not significant to the results of operations. In addition, the Company recorded a one-time write-off in June 2005 of approximately $9.5 million for lease costs related to the former offices at 142 West 57^th Street in New York City. The related lease is scheduled to expire in September 2006.

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During Fiscal 1999, the Company issued an aggregate of $199.1 million principal amount at maturity Convertible Subordinated Debentures due 2019 (the “Convertible Debentures”). In May 2004, the Company notified the holders that it would redeem these Convertible Debentures in June 2004. The holders had the option to convert their Convertible Debentures into common stock of the Company prior to redemption, and, on June 18, 2004, all the Convertible Debentures were converted for an aggregate total of 5.4 million shares of common stock. The conversion of Convertible Debentures had no effect on diluted earnings per share.

Critical Accounting Policies

Management has determined that the Company’s most critical accounting policies are those related to merchandise inventory valuation, asset impairment, and income taxes. The Company continues to monitor its accounting policies to ensure proper application. There have been no changes to these policies as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.

Statement Regarding Forward-Looking Disclosures

Sections of this quarterly report on Form 10-Q, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain various 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 Company’s current expectations 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 the failure by the Company to predict accurately client fashion preferences; decline in the demand for merchandise offered by the Company; competitive influences; changes in levels of store traffic or consumer spending habits; effectiveness of the Company’s brand awareness and marketing programs; the inability of the Company to secure and protect trademarks and other intellectual property rights in the United States and/or foreign countries; general economic conditions, including the impact of higher energy prices, or a downturn in the retail industry; the inability of the Company to locate new store sites or negotiate favorable lease terms for additional stores or for the expansion of existing stores; lack of sufficient consumer interest in the Company’s Online Stores; a significant change in the regulatory environment applicable to the Company’s business; risks associated with the possible inability of the Company, particularly through its sourcing and logistics functions, to operate within production and delivery constraints; the impact of quotas, and the elimination thereof; an increase in the rate of import duties or export quotas with respect to the Company’s merchandise; financial or political instability in any of the countries in which the Company’s goods are manufactured; the potential impact of natural disasters and health concerns relating to severe infectious diseases, particularly on manufacturing operations of the Company’s vendors; acts of war or terrorism in the United States or worldwide; work stoppages, slowdowns or strikes; the inability of the Company to hire, retain and train key personnel, and other factors set forth in the Company’s filings with the SEC. The Company does not assume any obligation to publicly update or revise any forward-looking statements at any time for any reason.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The market risk of the Company’s cash and cash equivalents as of October 29, 2005 has not significantly changed since January 29, 2005. Information regarding the Company’s financial instruments and market risk as of January 29, 2005 is disclosed in the Company’s 2004 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation 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 (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.

There was no change in the Company’s internal control over financial reporting during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On October 3, 2005, a former employee of one of the Company’s California stores brought a purported class action lawsuit against the Company and AnnTaylor Retail, Inc. in Santa Clara County Superior Court alleging that the Company denies its California employees earned vacation pay through its allegedly unlawful policies related to the accrual, use and forfeiture of vacation, personal days and holidays. The putative class members seek recovery in an unstated dollar amount of unpaid vacation wages and other relief, including waiting time penalties. This action is at a very preliminary stage and, accordingly, it is too early to evaluate the outcome. The Company intends to vigorously defend this action.

Earlier in Fiscal 2005, two other purported class action suits were brought against the Company in California. The plaintiffs in these actions allege, among other things, the Company violated California labor laws with respect to overtime pay. The following is an update relating to these two purported class action suits as previously disclosed under Item 1 of Part II of the Company’s Form 10-Q for the quarters ended April 30, 2005 and July 30, 2005.

The action filed in San Francisco County Superior Court was transferred to Los Angeles Superior Court to be coordinated with the earlier action filed in that court. A non-binding mediation with respect to these coordinated actions is scheduled to take place in early December 2005.

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

The following table sets forth information concerning purchases made by the Company of its common stock for the periods indicated:

	Total Number of Shares Purchased (a)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan (b)	Approximate Dollar Value of Shares that May Yet Be Purchased Under Publicly Announced Plan
					(in thousands)
July 31, 2005 to August 27, 2005	—	$	—	—	$	100,000
August 28, 2005 to October 1, 2005	302,591		26.37	300,000		92,091
October 2, 2005 to October 29, 2005	408,617		24.27	400,000		82,374
	711,208	$	25.16	700,000

(a) Includes11,208shares of restricted stock repurchased in connection with employee tax withholding obligations under employee compensation plans, which are not purchases under the Company’s publicly announced Plan.

(b) These shares were purchased under a $100.0 million securities repurchase plan, approved by the Company’s Board of Directors in August 2005. This plan replaced the August 2004 plan and will expire when the Company has repurchased all securities authorized for repurchase thereunder, unless terminated earlier by resolution of the Board of Directors.

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Item 6. Exhibits

Exhibit Number	Description
10.1	Employment Agreement with Katherine L. Krill, effective as of October 1, 2005. Incorporated by reference to Exhibit 10 of the Current Report on Form 8-K of the Company filed on November 23, 2005.
10.2	Agreement between AnnTaylor Stores Corporation and Laura Weil, dated as of August 29, 2005. Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of the Company filed on September 1, 2005.
*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.

* Filed 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.

	AnnTaylor Stores Corporation
Date: December 1, 2005	By:	/s/ Kay Krill
		Kay Krill
		President & Chief Executive Officer
		(Principal Executive Officer)
Date: December 1, 2005	By:	/s/ James M. Smith
		James M. Smith
		Executive Vice President,
		Chief Financial Officer and
		Treasurer
		(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit Number	Description
10.1	Employment Agreement with Katherine L. Krill, effective as of October 1, 2005. Incorporated by reference to Exhibit 10 of the Current Report on Form 8-K of the Company filed on November 23, 2005.
10.2	Agreement between AnnTaylor Stores Corporation and Laura Weil, dated as of August 29, 2005. Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K of the Company filed on September 1, 2005.
*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.

* Filed electronically herewith.

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