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Investment Overview for ANN (NYSE:ANN)
- LOFT Stores Revenue per Square Foot:LOFT stores revenue per square foot (including e-commerce sales) increased from $352 in 2010 to $422 in 2013. The increase was primarily driven by compelling fashion and balanced merchandise assortments at LOFT stores, which resonated well with the customers. Growth in online sales was also responsible for this increase. However, LOFT lost its growth momentum in 2014 due to weak demand on account of sluggish consumer spending and product imbalance. As a result, its revenue per square feet fell to $416 in 2014. We predict the figure to increase steadily going forward and reach $491 by the end of our forecast period. Improvement in merchandise design, better planning, growth in online sales and omni-channel initiatives will drive this growth. However, given the highly competitive environment in the U.S. apparel market, a single merchandise goof up can lead to a slump in sales. If the revenue per square foot increases only to $450 by the end of Trefis forecast period, there can be 5% downside to our price estimate. On the other hand, if LOFT stores channel's revenue per square foot increases to $540 by the end of Trefis forecast period, driven by online growth and omni-channel initiatives, there can be 5% upside to our price estimate.
- LOFT Stores EBITDA Margin: LOFT Stores EBITDA Margin declined in 2011 due to a sudden increase in cotton costs. In 2012, despite the lower cotton prices, margins remained stable at 20.9% due higher expenses related to expansion. Due to the highly promotional in the U.S. over the last couple of years, margins had declined to 20.6% in 2013, and they shrunk further to 18.4% in 2014 due to heavy discounting. Going forward, we expect painful recovery in margins as the the company tries to operate with fewer markdowns and continues to shift its sourcing from China to other low cost destinations. This recovery will be offset by growth in web business, which is a low margin channel.
However, if the apparel market continues to be exceptionally promotional and production costs in China rise dramatically dragging the margins down to 17% by the end of the forecast period, there can be about 5% downside to our price estimate. Conversely, if the macro-economic conditions improve, Ann controls its expenses and is able to operate with fewer markdowns, its margins can improve. If the figure improves to 20.5% by the end of our forecast period, there can be about 5% upside to our price estimate for Ann.
Ann Inc. is a leading specialty retailer of women’s apparel, shoes and accessories, sold primarily under the highly recognized national brands “Ann Taylor” and “LOFT”, in the US.
Ann Taylor and LOFT brands offer a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories, with distinct fashion points of view, though both are equally committed to providing clients with feminine, fashionable, high quality merchandise that is highly relevant to all aspects of a persons lifestyle.
Ann's factory and outlet stores are mainly present in the suburban areas and are larger in size than the full-priced Ann Taylor and LOFT stores. As compared to Ann Taylor stores, LOFT stores offer more relaxed fashions, for both work and home and are more affordable as they are priced in the "upper moderate" segment, offering style and value to customers.
The selection at LOFT stores differs from Ann Taylor stores, while the design and styles of clothes are similar, and the prices lower.
We believe that LOFT stores are almost twice as valuable as the Ann Taylor stores. Also, the segment's value is more than twice as that of Ann Taylor factory and LOFT outlet combined. Here are the reasons why:
More LOFT stores than Ann Taylor stores
The number of LOFT stores operated by Ann is about 1.8 times the number of Ann Taylor stores and almost 3 times the number of Ann Taylor factory stores and LOFT outlet stores combined.
Higher revenue per square foot for factory / outlet stores
The revenue per square foot for factory stores (including both Ann Taylor factory stores and LOFT outlet stores) are much higher than the company's full-priced stores (including both LOFT stores and Ann Taylor stores). This indicates the increasing popularity of factory stores format in the U.S. However lately, their comparable store sales growth has lagged far behind Ann's full price stores, which can pull the figure down in the future.
Initiatives for online growth
During the 2010-2012 period, Ann Taylor and LOFT e-commerce business had grown by a staggering 35% and 33%, respectively. Subsequently, the company had identified the increasing significance of its online channel and the tremendous growth potential it offers. In 2012, Ann launched its multichannel initiative to leverage its strong online presence to enhance store and web sales. The retailer combined its online and store channels to integrate the inventory pool across its stores. This not only helped in improving the delivery time, but it also provided a greater variety of products to choose from over the internet. Alongside, the retailer launched global shipping for both its brands to over 100 countries. These factors are expected to keep the company's online growth afloat and subsequently, help its revenue per square feet.
Growth in online industry
With increasing Internet penetration and proliferation of smartphones and tablets, the U.S. online apparel industry has grown at a robust pace over the past few years. Ann has been at the forefront of this growth with its strong online channel and enticing merchandise range. We believe that this trend will continue in the future as the forecast for online apparel industry is very optimistic. According to eMarketer, online apparel sales in the U.S. are expected to increase to $86 billion by 2018, up from $48 billion in 2013.
Disciplined inventory control
Inventory hangover during the latter half of 2011 forced Ann to increase promotional levels on its merchandise, which took a toll on its margins. This was primarily due to an imbalance in the company’s holiday merchandise that resulted in inventory pile-up. However, with its merchandise design and production strategy, Ann was able to quickly respond to this issue. Its impact was clearly visible in Q4 fiscal 2012 when the retailer reduced the inventory of suits and shoes in the prior quarter, which resulted in fewer markdowns for Ann Taylor. It again faced a similar problem, when demand forecast for Ann's LOFT brand went haywire in early 2014. However, the company has effectively addressed this issues, which will get the brand's growth back on track in 2015.
A significant portion of Ann’s products is developed in-house exclusively by its product development and design teams. The merchandising group determines the inventory needs of the upcoming season, passes on the requirements to the design team, and plans a merchandise flow system for different manufacturers. This strategy enabled the retailer to quickly adapt to changing consumer tastes, which subsequently enable it introduce trend and season relevant merchandise.
Balanced pricing strategy and product specific promotion
In order to attract different customer demographics, Ann employs a balanced pricing strategy and product specific promotions. This approach is aimed at increasing the product variety at the opening price tier and subsequently focusing on promotional discounts on specific products rather than store-wide promotions. It enables Ann to attract customers from different demographics, who otherwise might not shop at Ann.
Apart from strengthening its omni-channel platform in the U.S., Ann is looking to expand its international footprint. The company entered Canada and introduced global shipping a few years back. In 2014, Ann unveiled plans to enter Mexico. The retailer appears to be following an orthodox expansion strategy, where a company begins its international expansion in Canada, moves on to Mexico and Brazil, and subsequently targets China and Japan. We may as well see Ann exploring opportunities in China in the future, given the region's lucrative luxury market.
Gradually moving production away from China
Back in 2009, Ann sourced about 50% of its merchandise units from China, which accounted for more than half of its overall merchandise cost. However, with rising labor costs, the retailer gradually lowered its dependence on the region. At the end of fiscal 2014, about 35% of Ann’s merchandise units came from China, which made up about 38% of its merchandise cost. On the other hand, merchandise sourced from Vietnam accounted for just 10% of the cost but 16% of the total units. This clearly indicates that per unit cost of production for Ann in China is much higher than its other sourcing locations such as Vietnam, Indonesia, Cambodia, etc.
Labor wages in China are three times that of Indonesia, four times that of Vietnam, five times that of Cambodia and ten times that of Bangladesh. Monthly minimum wages in India range from half to one-fourth of China’s minimum wages. In 2009, Ann only sourced 6%, 12% and 10% of its merchandise units from Vietnam, Indonesia and India, respectively. These figures increased to 16%, 19% and 13% in 2014. As rising labor costs in China continue to trouble Ann, we expect these figures to go up in the future, which will have a positive impact on the retailer’s gross margins.
Speculations of a probable buyout
After Ann reported disappointing Q2 fiscal 2014 results and slashed its revenue guidance for the full year, activist investor Engine Capital recommended that Ann’s management consider a sale of the company. This came as a surprise considering that Ann has been among the better performers in the U.S. even as buyers are looking for ways to save money. However, Engine Capital’s prime concern wasn’t the company’s performance. It believed that the market wasn’t valuing the women’s specialty retailer fairly and Ann could easily fetch around $2.5 billion, while its market cap stands at $1.8 billion.
Soon after, the company signed a confidentiality agreement with its biggest shareholder, Golden Gate Capital, that includes discussions on several points regarding Ann’s probable future options, that can generate the best returns for shareholders. While Engine Capital was fixated on convincing Ann’s management to put the company up for sale, Golden Gate Capital had not shown any such interest. In response to the consistent pressure from the activist investor and its affiliates, Ann hired JPMorgan (NYSE:JPM) in late 2014 to look for possible sale options. With the agreement, Golden Gate Capital was included in the options review process, and Ann believed that the private equity firm’s expertise in retail would prove helpful.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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