Ann (NYSE:ANN) reported weak results for its Q1 fiscal 2013 due to the impact of prolonged cold and poor performance from LOFT brand. This was partially offset by strong growth in Ann Taylor brand and online business. Overall, the quarter was a disappointment as the company’s comparable store sales declined by 0.5%.  However, Ann’s performance in the initial part of the second quarter has improved and we remain optimistic about its long-term growth. Strength in Ann Taylor, improved performance from LOFT, growth in e-commerce business and brand specific marketing strategies support our outlook.
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Strength In Ann Taylor Brand Will Drive The Company’s Growth
With a quick response to changing fashion and appealing product offerings, Ann Taylor has established a strong brand identity in the U.S. Despite the impact of prolonged cold which subdued the demand for spring clothing, the brand posted good results driven by robust sales of its dresses, skirts, woven tops, shoes and jewelry.  Ann Taylor stores’ comparable sales jumped 6.2% driven by its multi-part strategies. The brand is focused on providing its customers with a wide variety of assortments reflecting relevant fashion across all its stores. It is maintaining a firm control over its balanced pricing strategy that aims at attracting customers from different demographics. Ann Taylor offers an extended variety of products at good, better and best price points and subsequently, targets promotions on fewer products. 
Enhancing the shopping experience remains one of the top priorities of Ann Taylor and its concept and capital-right refreshed stores have garnered significant customer attention.  The company stated that the new store format is designed to appear light and feminine, while reflecting the brand’s modern aesthetics and aspirational position.   Through these stores, the brand will offer a large variety of merchandise in a smaller space along with style assistance where the staff helps customers in choosing an appealing combination of clothes. Ann launched this format in March 2012 and by the end of Q1 fiscal 2013, it had 80 concept and 100 capital-right refreshed stores operational. Currently, these stores account for 66% of the brand’s store fleet and the company plans to increase this figure to 80% by the year end. 
Ann Taylor brand contributes about 30% to the company’s value according to our estimates.
Better Performance Expected From LOFT
During the holiday season, Ann invested heavily in LOFT’s bright colors and kept the proportion of black and neutrals low. This led to product imbalance and resulted in weak performance from the brand. For the first quarter, the company increased its investments in LOFT‘s warm weather products, and the results didn’t turn out as planned due to unusually long winters.  As a result, LOFT stores’ comparable store sales fell by 0.9%.
We expect the brand’s performance to improve in the future as it works on its product mix and the impact of cold weather fades away. In fact, the company stated that LOFT has started well in the second quarter with latest prints and patterns leading the way. Some of the brand’s product categories such as denim, LOFT lounge, dresses and jackets delivered positive comparable store sales growth in Q1.  Interestingly, denim registered record sales in the quarter driven by appealing silhouettes and color offerings. 
Going forward, Ann plans to significantly expand its LOFT lounge category, which has been among the strongest performers over the past three quarters.  In terms of geographical reach, the company will expand the brand’s footprint in small and medium markets. At the same time, it will update and revamp LOFT’s presence in high-profile locations. 
LOFT Brand contributes about 70% to the company’s value according to our estimates.
Growth In Online Business Backed By Multichannel Approach
Online apparel retail market in the U.S. is growing at a robust pace due to growing Internet usage and proliferation of smartphones and tablets. A number of retailers have thrived on this trend and Ann is no exception. The outlook for the industry is encouraging as eMarketer forecasts the online apparel sales to increase from about $45 billion in 2012 to $90 billion in 2016. 
During Q1 fiscal 2013, both Ann Taylor and LOFT showed strong momentum in their online sales growth. Even though LOFT’s business mostly remained weak, online exclusive products garnered strong customer response.  Last fall, the company introduced its multichannel initiative, wherein it combined its online and store channel to integrate the inventory pool across its stores.  The idea was to increase the product variety over the Internet and improve delivery responsiveness. The results have been good so far.  The company stated that the multichannel approach has enabled it to effectively clear superfluous inventory without unfavorable margin pressures. Ann plans to continue investing in marketing, site enhancement, inventory and new functionality to bolster the channel.  Additionally, the recent launch of international shipping to more than 100 countries positions it well on a global scale. Initial response has been positive from a number of countries, which will inspire Ann to expand its presence in those regions.
Brand Specific Marketing
For Ann Taylor, the company is focused on devising a more personalized and relevant shopping experience. It is looking to build a solid base of brand loyal customers and attract new clients. The retailer is targeting social media, e-mail, direct mail and media to reach its customers. Additionally, Ann Taylor’s celebrity endorsements featuring Kate Hudson, will remain the core of the brand’s marketing strategy.  For LOFT, the focus is more towards increasing the brand awareness and strengthening the connection with existing customers. Ann stated that the brand’s marketing campaigns have drawn significant customer attention and it will leverage this to build a vast customer base.
Our price estimate for ANN stands at $36, implying a premium of about 10% to the market price.Notes:
- Ann’s SEC filings [↩]
- Ann’s Q1 fiscal 2013 earnings transcript, June 6 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- Ann Taylor Bringing Redesigned Stores Concept To Scottsdale Fashion Square, Business Journal, April 3 2013 [↩]
- Ann’s Q4 fiscal 2012 earnings transcript, March 8 2013 [↩]
- Retail Ecommerce Set to Keep a Strong Pace Through 2017, eMarketer, Apr 24 2013 [↩]
- Ann’s Q3 fiscal 2012 earnings transcript, Nov 28 1012 [↩]