Women’s specialty retailer Ann (NYSE:ANN) is scheduled to release its Q1 fiscal 2013 earnings on June 6th. According to a recent press release, the company will report a comparable store sales (CSS) decline of 0.5% due to weak results from LOFT brand and factory stores channel.  This can be attributed to lower demand for spring clothing due to prolonged cold and a strong comparable period of Q1 fiscal 2012.
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LOFT struggled during the fourth quarter of fiscal 2012 due to an imbalance in its product mix. A decrease of 1.9% in the brand’s comparable store sales suggests that the issue might have persisted in this quarter as well. On the positive side, Ann Taylor stores registered 6.2% increase in CSS backed by remolded stores, balanced pricing strategy and launch of international shipping.
Strong Results From Ann Taylor Stores
Strong Products: Despite all of the troubles, Ann Taylor stores have performed well due to their strong product offerings. Even during the weak holiday season, the brand’s products such as dresses, skirts, wovens, knit tops, casual bottoms and jewelry garnered good customer response. Additionally, Ann reduced the inventory of suits and shoes in Q3 fiscal 2012, which resulted in fewer promotional discounts at the stores in the fourth quarter. ((Ann’s Q4 fiscal 2012 earnings transcript, Mar 8 2013)) The retailer maintained its brand strength in Q1 fiscal 2013 with its traditional wear-now assortments posting robust growth. 
Store Remodel: Ann is remodeling its Ann Taylor stores to improve the shopping experience. The company stated that the new store format will better reflect the brand’s modern aesthetics and aspirational position.  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.  The store is designed in a way that makes customers feel at home.  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 the store traffic.
Balance Pricing Strategy & International Shipping: 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. The retailer recently launched international shipping for its Ann Taylor and LOFT products to more than 100 countries.  It is now in a better position to cater to the needs of international customers, who were previously underserved. This step opens up new revenue channels for Ann, which will complement its comparable store sales growth.
On The Flip Side, Product Imbalance & Prolonged Cold Weighed on LOFT’s Results
Ann’s Q4 fiscal 2012 results remained weak due to an imbalance in LOFT’s product mix arising from excessive bright colors and limited black and neutrals. For the first two quarters of fiscal 2013, the retailer planned to reduce its focus on bright colors and invest more in white, black and neutral, as well as patterns and prints, to provide a balanced product range.  However, LOFT’s comparable store sales declined by 0.9% in this quarter suggesting that the brand still lacked the desired merchandise mix. This was worsened by the lower demand of spring clothing as the winter season this year was unusually cold. Demand for shorts during the fourth weak of March fell by 12% as compared to the previous quarter. 
Factory & Outlet Stores Will Be The Weakest
Through Ann Taylor factory and LOFT Outlet stores, the retailer offers past season’s best sellers at discounted prices along with some exclusive products. During the past few quarters, comparable store sales growth for LOFT Outlet and Ann Taylor Factory stores has been lower than that of full priced stores as customers have been a little hesitant in spending on last season’s products. For instance in Q3 fiscal 2013, the CSS 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%. 
Interestingly, this channel has faced the brunt of the weakness in the apparel industry. During the last holiday season, CSS for Ann Taylor Factory and LOFT Outlet fell by 6.8% and 7.1%, whereas the full priced stores performed better.  Similarly, as the apparel industry’s growth remained weak in the first quarter of 2013 due to delayed spring and payroll tax increase, these stores saw a sharp decline in their comparable store sales. 
Together, Ann Taylor Factory and LOFT Outlet contribute about 20% to the company’s value according to our estimates.
Our price estimate for ANN stands at $36, implying a premium of about 15% to the market price.Notes:
- ANN INC. Updates Outlook for First Quarter 2013, Ann Inc., May 9 2013 [↩] [↩] [↩]
- Ann’s Q4 fiscal 2012 earnings transcript, Mar 8 2013 [↩] [↩] [↩]
- Ann Taylor unveils new store design at new Michigan Avenue location, Chicago Business, March 1 2012 [↩]
- Ann Taylor tailors new Mag Mile store to fit modern shoppers, improve sales, Chicago Tribune, March 1 2012 [↩]
- Ann Inc. launches international shipping for Ann Taylor and LOFT, Ann Inc., Mar 8 2013 [↩]
- Prolonged Cold Puts Retail Sales in Deep Freeze, CNBC, Mar 31 2013 [↩]
- Ann’s SEC filings [↩]