How Can Ann Inc. Reach $35?

by Trefis Team
-1.19%
Downside
38.51
Market
38.05
Trefis
ANN
ANN
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Quick Take

  • We remain optimistic on Ann’s strong product performance, international expansion, strategies to attract store traffic and all these support our $35 price estimate for the stock
  • Ann’s strong brand recognition and fashion responsiveness allows it to successfully launch seasonal collections
  • The retailer launched global e-commerce shipping and started expanding in Canada, which will open new revenue opportunities
  • Its balanced pricing strategy and product mix as well as the new store format will help drive store traffic

Ann (NYSE:ANN) is a leading specialty retailer of women’s apparel, shoes and accessories. It sells its products primarily under the highly recognized national brands “Ann Taylor” and “LOFT”. Ann’s stock price has almost doubled since mid 2010 due to its strong financial performance.

Our price estimate for Ann Inc. stands at $35, implying a premium of about 20% to the market price. We believe that this premium is justified by the retailer’s continued strong product performance, focus on balancing the product mix and international expansion. Additionally, Ann’s balanced pricing strategy and store remodeling to improve shopping experience will have a positive impact on its store traffic.

See our complete analysis for ANN

Strong Product Performance – The Primary Growth Factor

Ann Taylor and LOFT brands offer a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories, with distinct fashion addressing all aspects of a customer’s lifestyle. Along with the strong brand recognition, a quick response to changing fashion has helped the retailer in successfully launching its seasonal collection. Last year, refreshing changes such as vibrant colors in tops, dresses, skirts, woven tops and knit dresses boosted Ann’s product performance. [1] As a result, the retailer did well through the spring, summer and fall seasons.

Even during the weak holiday season, Ann’s core products such as knit tops, wovens, sweaters, denim, cords and LOFT lounge remained strong. [2] At Ann Taylor, dresses, skirts, wovens, knit tops, casual bottoms and jewelry delivered good results as customers responded well to the product offerings. Additionally, the retailer reduced the inventory of suits and shoes in the third quarter, which resulted in fewer promotional discounts for Ann Taylor. ((Ann’s Q4 fiscal 2012 earnings transcript, Mar 8 2013)) This led to an increase of 1.1% in the brand’s comparable store sales and an improvement of 20 basis points in the retailer’s overall gross margins for fiscal 2012. We expect this strong product performance to drive Ann’s future growth.

International Expansion – In Search Of Untapped Revenues

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. [3] 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 (NYSE:LTD) have been successful in Canada, registering more than 30% revenue growth last year. [4]

Ann recently launched international shipping for its Ann Taylor and LOFT products to more than 100 countries. The retailer is now in a better position to cater to the needs of international customers, who were previously underserved. As an added advantage, Ann will provide free shipping for orders above $100 for a limited period. [5] International markets, with better macro-economic conditions and lower competition than the U.S., provide tremendous potential for apparel retailers. We believe that this is a big step for the retailer’s e-commerce business as well as international expansion.

Store Remodeling And Balanced Pricing Strategy – Better Store Traffic

Ann is remodeling its Ann Taylor stores to improve the shopping experience of customers. The company stated that the new store format will better reflect the brand’s modern aesthetics and aspirational position. [2] This format features a large variety of merchandise in a smaller space along with touch screen TVs for easy access to the company’s website. [6] The store is designed in a way that makes customers feel at home. [7] Ann launched this format in March 2012 and by the end of fiscal 2012, it had remodeled more than 65% of its stores. The customer feedback has been encouraging so far and we expect it to have a positive impact on store traffic going forward.

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 for specific products rather than store-wide promotions. We believe this will help the retailer attract price-conscious customers who otherwise might not shop at Ann.

Balanced Product Mix – Keeping The Customers Interested

Ann’s Q4 results remained weak due to an imbalance in LOFT’s product mix arising from excessive bright colors and limited black and neutrals. During the next two quarters, the retailer will reduce its focus on bright colors and invest more in white, black and neutral, as well as patterns and prints, providing a balanced product range. [2] This is vital for any retailer. An imbalance in the product mix has severely impacted Aeropostale (NYSE:ARO) who has been unable to sustain its store traffic. [8]

Our price estimate for ANN stands at $36, implying a premium of about 20% to the market price.

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Notes:
  1. Ann’s Q3 fiscal 2012 earnings transcript, Nov 28 1012 []
  2. Ann’s Q4 fiscal 2012 earnings transcript, Mar 8 2013 [] [] []
  3. Ann Taylor opens its first store in Toronto Eaton Centre, Canada Newswire, Sept 11 2012 []
  4. Limited Brands’ SEC filings []
  5. Ann Inc. launches international shipping for Ann Taylor and LOFT, Ann Inc., Mar 8 2013 []
  6. Ann Taylor unveils new store design at new Michigan Avenue location, Chicago Business, March 1 2012 []
  7. Ann Taylor tailors new Mag Mile store to fit modern shoppers, improve sales, Chicago Tribune, March 1 2012 []
  8. Aeropostale’s SEC filings []
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