Ann Concludes Another Strong Quarter Amid The Retail Market Woes

by Trefis Team
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Trefis
ANN
ANN
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Quick Take

  • Ann’s Q3 revenues and comparable store sales increased by 7% and 4% respectively; reflecting its resilience to the edgy retail environment
  • Ann Taylor product offerings continued to resonate well with customers backed by its balanced pricing strategy, enhanced shopping experience and online exclusive products
  • LOFT carried on its improvement during the quarter driven by its balanced product mix, which is likely to help it in the future as well
  • Inventory management was a little offtrack, but should get better in the future
  • Factory channel continues to be weak and Ann needs to come up with some strategy to revive this business

Women’s specialty retailer Ann (NYSE:ANN) recently reported strong growth in Q3 fiscal 2013 revenues, indicating its resilience to the apparel industry weakness. The company’s net sales increased by 7%, which was better than its own expectations. Its comparable store sales rose by 4% on top of 6% growth in the same quarter last year. Ann has seen similar growth in preceding quarters as well, and thus, we expect its strong performance to continue in the future. However, the company lowered its outlook for the fourth quarter as it is expecting weak sales during the holiday season.

The retailer’s third quarter performance can be mainly attributed to Ann Taylor’s strong product offerings and LOFT’s improving results. Going forward, we do not see any reason why these brands should lose their growth impetus. Although this quarter was not the best in terms of inventory management, Ann’s strong supply chain should help it address this issue. The company’s factory channel continues to be a concern with its persistent weak performance and Ann needs to formulate a viable strategy to revive this business.

Our price estimate for ANN stands at $39, implying a premium of about 10% to the market price. However, we’re in the process of updating our model in light of the recent earnings release.

See our complete analysis for ANN

Ann Taylor Products Continued To Resonate Well

During the third quarter, Ann Taylor’s tops, skirts, pants, jackets, jewelry, accessories and shoes performed very well. The brand’s sweaters, blouses, shirts, pencil skirts as well as versatile jackets were well received by its customers. They also responded positively to accessories such as shoes, handbags and jewelry. Ann had recently added a new line of shoes in partnership with Vince Camuto, that yielded strong results during the quarter. In terms of fashion trends and colors, cobalt blue, wine, animal prints and leather trims were among the hot selling categories. Over the Internet, Ann Taylor witnessed strong sales of its wedding collection driven by its expanded events line of special occasion dresses. [1]

The brand has been able to maintain steady store sales growth backed by its balanced pricing strategy and enhanced shopping experience. It offers its products under three distinct price categories thus targeting a wider customer demographic. Also, it has been remodeling its stores to appear more feminine. In its online channel, Ann Taylor regularly adds exclusive products to drive its growth and prevent self-cannibalization. At the end of the third quarter, exclusive offerings accounted for about 30% of the products available online. [1]

In the third quarter, Ann Taylor‘s mainline stores comparable sales increased by almost 4% and its online revenues rose in double digits. Moreover, the brand has been performing well for some time now and we expect it to carry this momentum in the future. For the fourth quarter, Ann Taylor plans to launch a line of versatile separates, dresses, special event products and an assortment of great tops suited for gifting needs. It is also expanding its jewelry offerings such as necklaces and bracelets. [1] We believe that with strong products in its arsenal, that brand should survive the weak holiday season.

LOFT Keeps Getting Better

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. [2]

The brand continued to improve in the third quarter with a 6% increase in comparable store sales on top of 14% growth witnessed in the same quarter last year. Even LOFT Outlet stores came out of their slump and delivered a 2% rise in comparable store sales. This performance can be attributed to strong sales of knits, jackets, wovens and pants featuring a greater variety of fits and styles, along with balanced and on-trend color offerings. We believe that LOFT can sustain its growth as it continues to offer a balanced product mix. Ann itself stated that the brand is well positioned for the fourth quarter with balanced colors, prices, fashion and versatility. [1]

Slight Mismanagement In Inventory Should Not Be A Worry

During the quarter, Ann’s gross margins declined from 57.9% to 55.7% due to a highly promotional environment and rising inventory levels. The retailer’s inventory per square foot increased by 8%, which was higher than its sales growth rate. The company stated that the increase in inventory was mainly due to timing shifts of merchandise receipts. [1] This indicates that there might be a slight mismanagement in Ann’s inventory control. However, we believe that the company is capable of addressing this problem quickly and effectively.

Ever since Ann faced inventory hangover issues in the latter part of 2011, it has been on top of its inventory management with its merchandise design and production strategy. A significant portion of the retailer’s products are developed in-house exclusively by its product development and design teams. The merchandising group determines the inventory needs for the upcoming season, passes on the requirements to the design team, and plans a merchandise flow system for different manufacturers. This strategy has enabled the retailer to remain responsive to its inventory needs and should allow it to address any issue that surfaces.

Factory Channel Still Remains A Concern

Prior to Q3 fiscal 2013, LOFT Outlet and Ann Taylor Factory stores reported negative comparable store sales growth for three consecutive quarters. This has been due to low store traffic suggesting that customers have been a little hesitant in spending on last season’s products. In the third quarter, while LOFT Outlet manged to post positive growth, Ann Taylor Factory comparable sales declined by 7%. This kept Ann Taylor’s overall comparable store sales growth at +1% even when its mainline stores and online channel performed reasonably well. [1] If Ann does not come up with a strategy to boost its factory channel, it will continue to be a drag on the retailer’s growth.

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Notes:
  1. Ann’s Q3 fiscal 2013 earnings transcript, Nov 22 2013 [] [] [] [] [] []
  2. Ann’s Q2 fiscal 2013 earnings transcript, Aug 23 2013 []
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