Ann‘s (NYSE:ANN) stock has increased significantly since August 2012 following the company’s announcement of its improved outlook for fiscal 2012. The retailer’s brands such as Ann Taylor and LOFT enjoy strong brand recognition in the U.S. It operates over 700 stores in the U.S. and a healthy e-commerce channel. Moreover, its factory stores provide a viable alternative for budget conscious customers. Apart from strong brand recognition, Ann also focuses on being responsive to frequently changing fashion trends. Our price estimate of $36 for the company stands at a premium of about 10% to the market price.
But while Ann seems to be doing well in most areas of its business, there are some risks that can potentially weigh on its growth. These include relatively higher pricing and fewer promotional activities compared to its rivals such as Abercrombie & Fitch (NYSE:ANF) and Gap (NYSE:GPS).
Responsive To Changing Fashion Trends
It is important for an apparel retailer to stay attuned to the changing fashion trends and maintain adequate inventory of fashion apparel. For example, Aeropostale (NYSE:ARO) has been struggling with declining comparable store sales as a result of poor fashion appeal. Its women’s segment has been the weakest performer despite higher fashion apparel demand among women.
On the other hand, Ann is entirely a women’s apparel focused brand where fashion changes frequently. So far, Ann’s “fashion newness” has received good customer response. Over the past three quarters, the retailer introduced vibrant colors in their skirts, knit dresses, woven tops, skinny denim fits and colored tops.  This was welcomed by its customers, resulting in good product performance for summer, spring and fall season. Ann’s choice of actress Kate Hudson as the face for their latest ad campaign must have added to their brand image too. These strategies together helped the retailer in registering a 5.5% comparable store sales growth in Q3 fiscal 2012.  We think Ann’s timely fashion responsiveness will be one of the key drivers for its future growth.
Factory Stores For Value Conscious Customers
Most of Ann’s merchandise falls under “better” and “moderate” price category, implying that it is relatively expensive. However, the retailer also operates a network of factory stores which offers previous season’s bestsellers at discounted prices, thus reaching out to a larger customer base.
Ann operates around 200 factory stores which contribute a little over 20% to its overall revenues.  Although these stores provide popular merchandise at low prices, customers have been relatively hesitant in spending on outdated products. In Q3 fiscal 2012, the comparable store sales for Ann Taylor & LOFT factory stores increased by 1.5% and 3% respectively.  In comparison, the figures for full priced stores were 5.6% and 8%.
While comparable store sales growth for the retailer’s factory stores is lower than that for its full priced stores, it still has a positive outlook. These stores are making more money every year and will continue to be an important part of Ann’s business.
Rapidly Growing E-Commerce Business
Currently, the apparel industry in the U.S. is being driven by direct-to-consumer business with retailers such as Urban Outfitters (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO) and Gap registering substantial growth through this channel. Their direct-to-consumer revenues increased by 36%, 28% and 23% respectively in their latest quarterly results.  This trend has also lifted Ann’s business. Ann Taylor and LOFT’s e-commerce revenues increased by 29% and 15% respectively in Q2 fiscal 2012.  Its increase is on top of last year’s 30%+ growth. With the increasing popularity of online shopping, Ann’s e-commerce channel is likely to complement its growth in the future.
Need To Step Up Promotions
Ann offers its merchandise at relatively higher prices compared to its rivals such as Abercrombie & Fitch and Gap. As apparel industry in the U.S. is highly promotional, most retailers offer discounts in order to attain a competitive advantage. On this front, Ann risks losing out to its competitors due to lower promotional activities. The U.S. consumer spending outlook doesn’t look too good, and real consumer spending is expected to decline next year.  Ann may have to take this into account to stay competitive. The retailer has improved the variety of products that it offers at opening prices in order to attract more customers, which seems the right solution to the problem.
Our price estimate for ANN stands at $36, implying a premium of about 5% to the market price.