Women’s specialty retailer Ann (NYSE:ANN) is scheduled to release its Q3 fiscal 2013 earnings results on November 22. We expect the company to post good results, based on its published sales data. The company performed well during the last quarter backed by its strong brands Ann Taylor and LOFT. Ann’s comparable store sales increased by 2.8% driven by a compelling customer response and double digit growth in online sales.  Though the first quarter was weak, the rest of the fiscal year (ends with January) has been better. Ann still raised its sales growth outlook for the entire year encouraged by second quarter results. Therefore, we believe that the company is well-positioned for growth in the third quarter despite the challenging retail environment.
The company’s Ann Taylor brand has been resilient so far with its attractive products, a balanced pricing strategy and an enhanced shopping experience. In the second quarter, Ann saw significant improvement in LOFT’s results driven by its updated and balanced product mix. Since the retailer supported this product strength during the third quarter with new product launches, we expect the brands to continue performing well. However, we do not expect Ann’s factory channel to generate positive results as they have been struggling for the past several quarters. Also, weakness in the U.S. apparel industry will have an offsetting impact on Ann’s results.
Our price estimate for ANN stands at $39, implying a premium of about 10% to the market price.
Ann Taylor Likely To Perform Well
Ann Taylor has been performing well for some time now, driven by its multi-part strategy which focuses on providing a wide range of appealing products at different prices and enhancing customer shopping experience. The brand’s mainline store comparable sales increased by almost 9% during the second quarter, and we expect it to carry this momentum in the third quarter as well.
Last quarter, most of Ann Taylor’s product offerings (dresses, tops, skirts, jewelry, suits, accessories and shoes) delivered robust growth. Its white, navy and black color offerings were well-received and the Kate Hudson Capsule Collection was extremely successful.  Following this success, Kate Hudson once again was featured in the brand’s marketing with “A Hollywood Holiday With Kate Hudson” campaign. For the third quarter, the brand focused on neutral, black, navy and camel colors, and launched a new footwear collection designed by Vince Camuto. The company stated that early signs suggested a tremendous customer response to this collection.   Additionally, Ann Taylor planned to relaunch its occasional dresses in the fall season, which have performed well in the past. 
Ann balances the brand’s product offerings across three different price points – good, better and best – and subsequently targets promotions to a fewer products. This allows the company to cater to a larger customer demographic and sustain its gross margins. In addition, Ann is providing its customers with an enhanced shopping experience through Ann Taylor’s concept and capital-right refreshed stores, which have garnered significant customer attention so far.  Due to these aforementioned factors, we believe that Ann Taylor’s products continued to resonate well with customers during the third quarter.
LOFT Should Sustain The Improvement
Towards the end of last year, 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. The first quarter results were not good either as the company increased its investments in LOFT‘s warm weather products, and unusually long winters subdued their demand. However, LOFT’s sales rebounded in the second quarter with a strong customer response to its navy, black and white, as well as prints and novelty offerings.  For the fall season, Ann focused on maintaining a balance in the brand’s color offerings, and leveraged the strength in LOFT lounge and denim to generate higher sales.  Additionally, it is updating and relaunching its pants with new fits, fabrics and silhouettes. In light of these initiatives, we expect LOFT’s growth momentum to carry on in the third quarter.
However, Industry Weakness Will Have An Offsetting Impact
The U.S. apparel retail market has been particularly weak this year due to cautious consumer spending and a change in spending patterns. Hit by the impact of payroll tax increase, slow job growth, gasoline price increases and higher healthcare costs, U.S. buyers have been extremely watchful of their spending on discretionary products. Moreover, some buyers have started diverting their spending to cars and houses to take advantage of low interest rates. As a result, they are holding back on other products such as apparel and accessories. This resulted in a weak back-to-school season for apparel retailers.
I response, U.S. retailers relied on deep discounts to win back customers, which weighed heavily on their growth. According to the Commerce Department, retail sales in August (excluding the automotive sector) increased by just 0.1%. In September, several apparel retailers such as Gap Inc (NYSE:GPS), Zumiez Inc, The Buckle Inc and American Apparel Inc posted comparable store sales declines. The government shutdown in October slowed job growth and weighed on consumer confidence. Due to this, U.S. retailers reported only modest growth during the month.  Moreover, warmer than usual temperatures during October might have a mitigating impact on the sales of fall products.
Factory Channel Will Be A Concern
During the past three quarters, LOFT Outlet and Ann Taylor Factory stores have registered negative comparable store sales growth, suggesting that customers have been a little hesitant in spending on last season’s products. The weakness continued in the second quarter as well, with LOFT Outlet and Ann Taylor Factory registering a comparable store sales decline of 3.2% and 7.2%, respectively. This decline can also be attributed to the rapid expansion of these stores, which is having a negative impact on the store traffic.  We believe that this trend will continue to be a drag on Ann’s overall comparable store sales growth Q3.Notes: