As Ann (NYSE:ANN) releases its Q4 fiscal 2012 earnings on March 8, we expect its strong performance to continue driven by good customer response to its fashion-based apparel, healthy direct-to-consumer growth and balanced pricing strategy. These factors had helped the retailer in registering an average revenue growth of about 7% for the first three quarters of fiscal 2012. With the ongoing boom in the online apparel industry, Ann Taylor’s fast growing e-commerce business and its multichannel approach, we expect a healthy quarter for online sales. However, the weaker than expected holiday season in the U.S. is likely to weigh on the results.
Expect Good Results From E-Commerce
Apparel retailers such as Urban Outfitters (NASDAQ:URBN), Gap (NYSE:GPS), American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF) have reported substantial growth via direct-to-consumer channel in their recent results. The on-going trend of growing online apparel sales has boosted Ann’s results as well. Ann reported significant e-commerce growth for its Ann Taylor (29%) and LOFT (15%) brands in Q2 fiscal 2012. This growth was on top of 32% and 34% growth observed in the same quarter a year before. We further note that Ann’s online sales have increased by an average of about 27% annually during 2009-2011.  Backed by its multichannel initiative, we expect strong results for fiscal 2012.
Last year, 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. This puts Ann in a good position to meet client demand in terms of variety and delivery, which will lead to better sales through the e-commerce channel. Ann changed its reporting structure in Q3 fiscal 2012, and will not provide separate figures for its e-commerce sales henceforth.
According to our estimates, the direct-to-consumer business contributes close to 20% to Ann’s value.
Good Response To Fashion Newness Is Likely To Continue
To improve variety in its product categories, Ann has modified its product assortments and launched new products successfully. For instance, in Q2 fiscal 2012, Ann Taylor increased vibrant colors in its apparel categories such as skirts, dresses and feminine tops. The customer response was good and inspired the retailer to add similar fashion to its fall collection.  Following the second quarter’s success, almost all of Ann’s product assortments such as tops, dresses, skirts, knit dresses, woven tops, skinny denim fits, colored tops etc. performed well in Q3 fiscal 2012.  It appears that Ann is not enjoying just a one-off success, but rather it is attending to customers’ wants. The response to fashion newness was good through the summer, spring and fall season, and we expect it to continue in the holiday season as well. Also, since Ann’s both brands (Ann Taylor and LOFT) have strong brand recognition in the U.S.
However, LOFT’s bright colored merchandise did not do well in the holiday season. As a result, the retailer had to clear its inventory by providing heavy discounts. This will have some offsetting impact on the retailer’s margins and comparable store sales growth.
Balanced Pricing Strategy Can Help
We believe that Ann’s pricing strategy, which aims at increasing the variety of product assortments at opening prices, will continue to drive store traffic. As Ann is a premium brand, its customers are more concerned about the fashion rather than the pricing. This enables Ann to reduce store-wide promotions and target them on specific products. This results in higher sales of full-priced merchandise, which in turn has a positive impact on the same-store sales and gross margins. We expect this to be reflected in the upcoming results.
Our price estimate for ANN stands at $36, implying a premium of about 30% to the market price.Notes: