Specialty retailer Ann (NYSE:ANN) operates retail stores, e-commerce channels and a network of discount stores (LOFT Outlet and Ann Taylor Factory) for both of its brands Ann Taylor and LOFT in the U.S. The retailer’s LOFT Outlet and Ann Taylor Factory stores, collectively accounted for about 25% of Ann’s revenues in 2011.  This figure has consistently increased over the past four years, and we expect this trend to continue. Amid a highly promotional environment in the U.S. apparel industry and sluggish consumer spending growth, LOFT Outlet and Ann Taylor Factory provide Ann with a valuable business proposition for value conscious customers, who are offered popular merchandise at discounted prices.
How Do LOFT Outlet & Ann Taylor Factory Stores Function?
LOFT Outlet and Ann Taylor Factory stores offer the past season’s best sellers at discounted prices. Additionally, they offer products in the “affordable luxury” segment, designed specifically under the LOFT Outlet and Ann Taylor Factory labels. Ann operates around 110 LOFT Outlet stores and 105 Ann Taylor Factory stores. 
Unlike its competitors such as Jones Group (NYSE:JNY) and Talbots, Ann Taylor Factory focuses exclusively on professional attire for women, offering them wear-now and wear-to-work fashion at affordable prices. LOFT Outlet focuses on women’s casual attire including casual separates, dresses, tops, weekend wear, shoes and accessories. Together, they encompass the entire range of Ann’s product offerings.
Why Are These Stores Important For Ann?
Most of Ann’s merchandise fall under the “better” and “moderate” price category, implying that they are relatively expensive and cater to more affluent customers. However, LOFT Outlet and Ann Taylor Factory stores reach out to a larger customer base due to price discounts. Ann’s strong brand recognition and “affordable luxury” tag create a strong appeal. But with relatively fewer promotions in its full priced stores, Ann risks losing out to its competitors. However, LOFT Outlet and Ann Taylor Factory stores can help the retailer stay competitive.
On the flip side, customers have been a little hesitant in spending on last season products. In Q3 fiscal 2012, the comparable store sales for LOFT Outlet and Ann Taylor Factory increased by 1.5% and 3% respectively.  In comparison, the figures for LOFT and Ann Taylor stores stood at 5.6% and 8%. And while comparable store sales growth for the retailer’s LOFT Outlet and Ann Taylor 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.
History & Outlook
While the total number of Ann Taylor Factory and LOFT Outlet stores is limited to around 200, the retailer operates more than 750 Ann Taylor and LOFT stores in the U.S., and is planning to open new ones in Canada. Despite their smaller presence, Ann Taylor Factory and LOFT Outlet stores are important due to their healthy growth outlook.
While the number of Ann Taylor stores declined from 335 in 2008 to 273 in 2011, the number of Ann Taylor Factory stores increased from 80 to 95. A similar trend was witnessed for LOFT and LOFT Outlet stores.  The retailer cut the store count for Ann Taylor and LOFT stores as it underwent a significant restructuring to better manage in the challenging economic environment the last few years. As a premium brand, Ann struggled to sustain its growth during the recession of 2008-2009. At the same time, its Ann Taylor Factory and LOFT Outlet stores continued to expand due to their value for money appeal. For instance in 2009, when Ann’s overall revenues declined by more than 15%, the revenues from its Ann Taylor Factory and LOFT Outlet stores registered an increase of 10%.((Ann’s SEC filings))
Going forward, the number of LOFT stores are likely to decrease gradually due to the new restructuring, which includes shutting down the under-performing stores. On the other hand, the expansion of LOFT Outlet stores is one of the primary objectives of the retailer due to their growth potential and relatively low penetration in the U.S. apparel market. We expect similar trend for Ann Taylor Factory.
Our price estimate for ANN stands at $36, implying a premium of about 5% to the market price.Notes: