UPDATE: AnnTaylor 3Q Net Soars, Sees Strong Holiday Season

AnnTaylor Stores Corp. (ANN) continued to deliver on turnaround promises by posting a strong third-quarter profit and said the momentum will continue through the holiday season.

The women's apparel retailer said it expects close to $500 million in sales during the current quarter, which assumes mid- to high-single digit same-store sales growth. Analysts were expecting $495 million and as a result of its projection, AnnTaylor raised its sales target for the year.

Investors cheered the results and outlook, lifting shares 9% to $25.89, a more than two-year high.

"I feel very positive about the holiday season, with our comparable-store sales positive so far in November and well positioned with our products and inventory levels," Chief Executive Kay Krill said in an interview with Dow Jones Newswires. "But at the same time we feel the season is going to be promotional and are prepared with strategies, both in-store and online, to make sure we get our share of our customers' spending this holiday season."

The positive outlook follows a rocky a path AnnTaylor began a couple of years ago. The recession left many of the retailer's core working women customers out of jobs, and the company was falling behind the times in terms of fashion and appeal.

AnnTaylor, along with other women's retailers like Talbots Inc. (TLB), underwent significant cost cutting and restructuring to become more appealing to its core customers by adding more compelling merchandise and remodeling stores.

The result, over recent quarters, has been better financial results as customers are returning to the stores and new ones are being won over. "We've been very aligned from the get-go of what we needed to accomplish," Krill said. "We had to stabilize the business, evolve it and grow it. We also had to differentiate AnnTaylor stores from Loft stores so they did not cannibalize each other."

Still, there are some jagged edges, with AnnTaylor's two units, its namesake and Loft stores, not performing consistently. The company's AnnTaylor stores offer merchandise for the higher-end consumer, a demographic that has been spending more freely. The Loft unit attracts more of a middle-income customer that still waits for offers and incentives to make purchases. AnnTaylor stores showed comparable-store sales growth of 23% in the third quarter. Loft stores showed a 0.6% drop in same-store sales.

While calling the third-quarter results "stellar," Randal Konik, retail analyst at Jefferies, said his only hesitation is the "zig-zagging performance of the two sister brands."

The AnnTaylor unit continues making big gains in recovering lost business, but the more casual Loft is trying to catch up. "The customer at (Loft) appears to be more price sensitive and cautious than at AnnTaylor," Konik said.

Part of AnnTaylor's restructuring has involved closing stores. But the retailer has not felt as much pressure to do so as its condition has improved. When reporting its latest results, AnnTaylor again lowered the number of store it plans to close this year, now putting the figure at 43 compared with the lowered figure of 56 given in August. Its three-year restructuring effort is now seen closing about 145 stores while opening others; there are 907 locations currently.

AnnTaylor in October also said it was taking over the leases of 40 outlets that Liz Claiborne Inc. (LIZ) was operating.

For the quarter ended Oct. 30, AnnTaylor reported a profit of $24.2 million, or 41 cents a share, up from $2.1 million, or 3 cents a share, a year earlier. Both periods included a penny in restructuring charges and the prior-year result also included 16 cents in write-downs. Analysts most recently predicted earnings of 34 cents for the latest quarter.

Revenue jumped 9.3% to $505.3 million. Same-store sales climbed 12%, jumping 22% at its namesake brand, following last year's 26% plunge, and up 5% at the Loft brand. In August, the company predicted revenue would "approach" $495 million, with overall same-store sales up by a mid- to high-single-digit percentage.

Gross margin dropped to 57.2% from 57.3%.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

--Matt Jarzemsky contributed to this article.

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