Ann (NYSE:AEO) operates its LOFT brand stores in the U.S. and e-commerce channel globally. These two segments account for about 50% of the company’s value according to our estimates. In this analysis, we’ll discuss how the retailer makes money through these stores, how it’s expanding and what strategies it is employing to improve its comparable store sales.
Unlike Ann Taylor, which offers professional apparel, LOFT stores focus on women’s casual attire. LOFT’s store count has come down slightly in the last few years due to Ann’s consolidation strategy. However, with the retailer’s entry in Canada, the figure is likely to increase going forward. For the brand’s existing store network, Ann is looking to boost sales with a balanced pricing strategy, a better product mix and the launch of global shipping and multichannel initiative.
How Do LOFT Stores Make Money?
LOFT products include a wide range of casual separates, dresses, tops, weekend wear, shoes and accessories for women. The brand offers its products at lower prices than Ann Taylor while keeping designs and styles similar. As compared to Ann Taylor, LOFT offers more relaxed fashions for both work and home, making it an attractive buy for customers. Currently, the brand’s physical presence is limited to the U.S. As of 2012, the retailer operated around 506 LOFT stores in the country.  Apart from these stores, Ann also operates an e-commerce channel for LOFT, which directly complements its store sales. LOFT’s annual store revenues, including e-commerce sales, stand at around $1.2 billion. 
How Is The Brand Expanding?
Ann operated around 501 LOFT stores at the end of 2011, marginally down from 511 in 2008.  This was due to the retailer’s consolidation strategy aimed at improving store productivity. As a result, the revenue per square foot has increased at an average annual rate of 2% for the past few years.  Although Ann is still continuing this strategy in the U.S., it is also expanding in the region’s underpenetrated markets. The mixed impact was visible in 2012 as the store count increased slightly. Going forward, we expect the figure to rise with the retailer’s entry in Canada. 
Since Canadian buyers have been conscious about their spending, Ann is looking to target only the most lucrative markets in the region.   The retailer stated that its initial stores in Canada have performed exceedingly well. We believe that in addition to Canada, other markets such as Asia and the Middle East provide ample expansion opportunities for Ann. China should soon be on the list of the retailer’s international frontiers as the country’s apparel and luxury market is growing at a healthy pace.  
What’s Boosting Existing LOFT Stores’ Sales?
In order to attract different groups of customers, Ann employs a balanced pricing strategy and product specific promotions for its Ann Taylor and LOFT brands. This approach is aimed at improving product variety at the opening price tier and subsequently offering promotional discounts on specific products rather than store-wide promotions.  We believe this will help the retailer attract price-conscious customers who might otherwise not shop at Ann. This could result in an increase in the number of transactions and positively impact same store sales growth.
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.  This will provide additional revenues for LOFT with the existing store base, resulting in better revenue per square feet. Last year, the retailer launched a multichannel initiative to improve the delivery responsiveness of its online orders. It combined its online and store channels to integrate the inventory pool across its stores. This will not only help improve the delivery time but also provide a greater variety of products to choose from over the Internet. 
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, Ann will reduce its focus on bright colors and invest more in white, black and neutral as well as patterns and prints.  This will provide the brand with a more balanced product range that should allow it to operate with fewer markdowns. An imbalance in product mix has previously troubled other retailers as well including Urban Outfitters (NASDAQ:URBN), Aeropostale (NYSE:ARO) and Gap (NYSE:GPS) in the past. 
Our price estimate for Ann at $35, implying a premium of about 15% to the market price.Notes:
- Ann’s SEC filings [↩] [↩] [↩] [↩]
- Ann Taylor opens its first store in Toronto Eaton Centre, Canada Newswire, Sept 11 2012 [↩]
- Apparel In Canada, Euromonitor, May 2012 [↩]
- Ann’s Q4 fiscal 2012 earnings transcript, Mar 8 2013 [↩] [↩]
- From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]
- Chinese shoppers ‘biggest spenders on luxury goods’, South China Morning Post, December 13, 2012 [↩]
- Ann’s Q2 fiscal 2012 earnings transcript, Aug 17 2012 [↩]
- Ann Inc. launches international shipping for Ann Taylor and LOFT, Ann Inc., Mar 8 2013 [↩]
- Ann’s Q3 fiscal 2012 earnings transcript, Nov 28 1012 [↩]
- Companies’ SEC filings [↩]