May 24 (Bloomberg) -- AnnTaylor Stores Corp., a clothes retailer geared at women ages 25 to 55, said first-quarter profit declined 19 percent on markdowns to clear out merchandise at Loft, its biggest chain.

Net income fell to $31.5 million, or 46 cents a share, from $39 million, or 53 cents, a year earlier, AnnTaylor said today in a statement. Chief Executive Officer Kay Krill said she expects Loft sales to improve in the second half of the year, sending AnnTaylor shares up the most in two months.

Loft sales at stores open at least a year fell 9 percent, discounts lowered profit margins and the clothes didn't have enough ``updated classics,'' AnnTaylor said. Current Loft goods have more color and ``novelty'' such as madras, Krill said.

``Improving sales and merchandise at Loft is AnnTaylor's biggest challenge,'' said David Abella, an analyst at Rochdale Investment Management in New York. ``It seems like they have tried to identify some of the trends that will be more popular going forward and hopefully they will see an uptick.''

Analysts estimated net income of 45 cents a share, the average of 14 projections in a Bloomberg survey.

Shares of AnnTaylor, which operates 878 stores, rose $2.05, or 5.6 percent, to $38.70 as of 4:02 p.m. in New York, for the biggest increase since March 16. They have climbed 18 percent this year.

``Any signs of improvement in the Loft division was bound to be a positive for the stock,'' said Abella. Rochdale manages $2.4 billion, including 110,000 AnnTaylor shares.

Revenue Rises

Revenue for the three months ended May 5 climbed 4.3 percent to $580.3 million. Sales were helped by new locations and increases in sales from the Internet and Ann Taylor Factory stores. Overall comparable-store sales lost 3.3 percent.

AnnTaylor, based in New York, reaffirmed its full-year profit forecast of $2.15 to $2.25 a share. Same-store sales may increase in the ``low-single-digit range.''

Gross margin, or the percentage of sales left after subtracting the costs of goods sold, narrowed to 53.6 percent from 56.7 percent.

``We expect margins to continue to come under pressure'' in the second quarter, Ann Poole, an analyst at Nollenberger Capital Partners in New York, wrote today in a research note. ``We believe the product at Loft is far from being fixed, and that the stores remain very promotional.'' She rates AnnTaylor's shares ``neutral.''

Suits, Dresses

Same-store sales at the Ann Taylor chain increased 0.9 percent in the first quarter, led by suits, dresses, skirts and knit tops. The company sold more full-priced merchandise at Ann Taylor, whose collections tend to be dressier and more expensive than those at Loft.

The company plans this year to increase the number of Ann Taylor stores that carry the upscale Celebrations line that includes bridal gowns. The first beauty collection likely will hit store shelves in time for the holidays, Krill said today.

Krill, 52, took over Loft in January on a temporary basis after unit president Donna Noce left for personal reasons.

Loft's May merchandise has more color and novelty than April's line, Krill said today during a conference call with analysts and investors. Ann Taylor plans to start a maternity line at Loft in June and start a Loft Factory division in 2008.

Company History

AnnTaylor began in New Haven, Connecticut in 1954. It was named after a fictional woman created by founder Robert Liebskind to appeal to conservative shoppers. The company started the Loft chain in 1999 and its store growth has outpaced that at the flagship Ann Taylor locations.

The company operates 347 Ann Taylor stores, 474 Loft locations and 57 Ann Taylor Factory stores. The retailer plans to open as many as 85 stores in 2007, more than two-thirds of them Loft locations, close 10 and remodel 90 Ann Taylor stores. AnnTaylor plans to unveil a new shop concept in 2008.

To contact the reporter on this story: Heather Burke in New York at hburke2@bloomberg.net.

Last Updated: May 24, 2007 16:10 EDT