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Investment Overview for ANN (NYSE:ANN)
- LOFT Stores Revenue per Square Foot:LOFT stores revenue per square foot increased from $319 in 2010 to $361 in 2012. The increase was primarily driven by compelling fashion and balanced merchandise assortments at LOFT stores which resonated well with the customers. Owing to LOFT's strong brand positioning in the U.S. women's apparel market and disciplined product balance, we expect the figure to reach $436 by the end of the Trefis forecast period.
However, in the current weak macro-economic conditions the competition among women apparel retailers is exceedingly fierce, and a single merchandise goof-up (such as the one during Q4 fiscal 2012) can cost the company its market share. If the revenue per square foot increases only to $400 by the end of Trefis forecast period, there could be 5% downside to our price estimate. On the other hand if LOFT stores channel maintains its strong run and the revenue per square foot increases to $485 by the end of Trefis forecast period, there could 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 at 21.6% due higher expenses related to expansion. We expect the figure to slowly improve in the future and reach 22.3% by the end of Trefis forecast period driven by lower cotton prices, disciplined inventory control, balanced pricing strategy and product specific promotion.
However, if the apparel market continues to be exceptionally promotional and production costs in China rise dramatically dragging the margins down to 18.5% by the end of Trefis forecast period, there could be 10% downside to our price estimate. Conversely, if the macro-economic conditions improve, Ann maintains a balanced product mix and the promotional environment ceases to continue pushing the margins to 26%, there could be 10% upside to our price estimate.
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 Factory stores as well as LOFT outlet stores. This compares to Ann Taylor Factory stores and LOFT outlet stores which are of comparable value, due to the following reasons:
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 more than 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 US and their growth potential in the future. However lately, their comparable store sales growth has lagged far behind Ann's full price stores.
Growth in e-commerce business backed by several initiatives
During the last three years, Ann Taylor e-commerce channel and LOFT e-commerce business has grown by a staggering 35% and 33% respectively.The company has identified the increasing significance of the online channel and the tremendous growth potential it offers. In 2012, Ann launched a multichannel initiative in order to improve the delivery responsiveness of its online orders. The retailer combined its online and store channels to integrate the inventory pool across its stores. This will not only help in improving the delivery time, but it will also provide a greater variety of products to choose from over the internet. Along with this, the retailer also launched global shipping for its for both its brands to over 100 countries. The response has been pleasing from a number of countries, which bodes well well Ann's long term growth outlook.
Disciplined inventory control
The 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.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 add a greater depth in color choices, versatility and key fashion trends, which was reflected in its strong performance through the most of last year.
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.
Ann is looking to expand its international footprint by entering Canada and initiating worldwide shipping for online orders. Last year, the retailer opened its first three stores in Canada, which have performed exceedingly well. Over the next few years, Ann will continue to add more stores in a way that it taps the most lucrative markets in the region. Given the similarity between the U.S. and Canadian consumers, expanding in the region will be relatively easy for Ann. This will not only allow the company to grow its revenues, but also help it reduce its dependence on the sluggish U.S. economy. Other U.S. retailers such as Limited Brands have been successful in Canada, registering more than 30% revenue growth last year.
Over-reliance on china for merchandise sourcing
Due to a shortage of labor, an aging Chinese population and government regulations, there has been a substantial rise in China’s labor costs.The rise in labor costs has translated into an increase in production costs, which has hurt a number of retailers. By 2015, the minimum wage is expected to reach $6 per hour and it might become cheaper to manufacture goods for the U.S. market in America itself. This is a big threat for Ann as it sources almost 40% of its merchandise from China, which accounts for around 43% of its total merchandise costs. For safeguarding its margins, the retailer will have to reduce its dependence on China and look for other low cost destinations. The most viable option appears to be Vietnam as currently its labor costs are about half of China’s. Ann also sources a limited portion of its merchandise (16%) from Vietnam, but it only accounts for 9% of its merchandise costs.
Saturation of women's apparel market in the US
The women's apparel market in the U.S. is a mature market and has historically witnessed a low but stable growth rate annually. After a decline of 5% in 2009, women led the way in the fashion apparel market in 2010 with women's apparel sales increasing by 2.9%. The figure remained comparable in 2011.
However, both of Ann Taylor's primary brands are approaching market saturation. In order to keep growth from stalling, the company has been working on new outlets (like factory stores and online stores) and other fashion styles.
Increasing competition from department stores & specialty retailers
The women’s apparel retail industry is highly competitive, with the number of players increasing year after year. While Ann has made progress by upgrading its namesake store and fine-tuning its Loft brand, expanding market share may prove to be difficult as the company faces increasing competition from department stores (Nordstrom, Macy's) and specialty retailers (Chico's FAS, Talbots, Abercrombie & Fitch, Limited Brands, GAP). In addition, pricing will become increasingly competitive and increasing revenue per square foot will be difficult.
How Does Trefis Modelling Work?
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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