Ann Taylor (NYSE:ANN) recently reported strong Q3 fiscal 2012 earnings and improved the outlook for fiscal 2012. Both of its brands, Ann Taylor and LOFT performed well due to strong brand recognition and direct-to-consumer business. Ann’s customers responded well to the fashion trends across all its product offerings. Driven by the fashion newness, the brand has now performed well through the summer, spring and the fall seasons. We see no reason why that will not continue in the future. Ann also launched a multichannel approach which will complement its online business. Moreover, its strategy to increase the variety of product assortments at opening prices is being welcomed by value conscious customers, and this is likely to continue. Looking at the overall picture, we anticipate a good future for the retailer.
Direct-To-Consumer Business Significant For Ann In The Future
Apparel retailers such as Urban Outfitters (NASDAQ:URBN), GAP (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF) have reported substantial growth via the direct-to-consumer channel in their recent results. American Eagle Outfitters (NYSE:AEO), which released its earnings along with Ann also reported considerable growth in its direct-to-consumer revenues.  The on-going online trend in the apparel industry has boosted Ann’s results as well.
Furthermore, Ann has witnessed significant e-commerce revenue growth in the previous quarter as well.  However, due to the launch of the multichannel initiative, the retailer has changed its reporting structure. Hence, it did not report the figure for increase in the e-commerce revenues in this quarter.
According to our estimates, direct-to-consumer business contributes close to 20% to the company’s value.
Fashion Newness Remains A Valuable Factor
Almost all of Ann’s product assortments such as tops, dresses, skirts, knit dresses, woven tops, skinny denim fits, colored tops etc. have performed well driven by fashion newness.  The refreshing changes in the product assortments mainly included the addition of vibrant colors, which were quite appealing to the customers. The performance has been good through the summer, spring and fall season, and we expect it to continue in the holiday season as well. Fashion responsiveness and innovation will be a key driver for Ann’s long-term growth.
Pricing Strategy Driving Store Traffic
Ann is a near luxury brand with most of its products in the premium price range. However, the strategy to increase the variety of product assortments at opening prices is being welcomed by the customers.  We believe that this will help in increasing Ann’s customer base by attracting price conscious customers, who otherwise might not shop at Ann.
Furthermore, due to Ann’s strong brand recognition in the U.S. and its luxury tag, it is able to operate more full-priced sales.  People shopping at Ann stores are more concerned about the design, fashion and trendiness of the products than the prices. This results in the increase of full-priced sales, which in turn has a positive impact on the same-store sales and gross margins. Looking at the above mentioned factors, we can say that Ann is in a good position to not only attract brand conscious customers, but the value conscious customers to a certain extent as well.
Ann recently launched a multichannel initiative which will help in improving the delivery responsiveness of the online orders. The retailer has combined its online and store channel in order to integrate the inventory pool across its stores.  This will not only help in improving the delivery time, but will also provide a greater variety of products to choose from over the internet. This puts Ann in a good position to meet client demand in terms of variety and delivery. This will help the retailer in generating better sales through the e-commerce channel, which currently seems to be the apparel industry driver.
Our price estimate for ANN stands at $36, implying a premium of about 5% to the market price.Notes: