While most U.S. apparel retailers have struggled with their growth this year, women’s specialty retailer Ann (NYSE:ANN) has performed well. After a disappointing first quarter which was weighed down by prolonged cold and an imbalance in LOFT product mix, the retailer registered sturdy growth in Q2 and Q3 backed by its strong brand image. Although the U.S. retail market has been sluggish in the ongoing holiday season, Ann appears to be well positioned to fend off the industry weakness.
Over the last one year or so, the company has taken some valuable steps to propel its growth. It has worked aggressively on its LOFT product mix and has seen success almost immediately. Ann launched global shipping for both its brands to over 100 countries earlier this year, which added a new revenue stream to its e-commerce business. Additionally, the retailer has continued its expansion in Canada after entering the market late in 2012. The results have been good so far, which will only encourage it to continue expanding in the region.
Our price estimate for ANN stands at $41, implying a premium of about 10% to the market price.
LOFT’s Revival After A Slump In The First Quarter
Towards the end of last year, Ann had invested heavily in LOFT’s bright colors while keeping the proportion of black and neutrals low, which led to product imbalance. Also, the company’s heavy investments in LOFT’s warm weather products was undermined by the unusually long winters that subdued their demand. As a result, the brand’s comparable store sales fell by 0.9% in the first quarter of fiscal 2013.  However, LOFT’s performance improved as Ann worked aggressively on its product mix by reducing its focus on bright colors and investing more in white, black and neutral, as well as prints and patterns. This provided the brand with a much better product mix that complemented its strong offerings in denims, casual pants, shorts, tops etc. Alongside, the company also expanded LOFT’s performing product categories such as LOFT lounge, and updated its pants with new fits, fabrics and silhouettes.
With a better focus on the brand’s product mix, the company was able to win back its customers. During Q2 fiscal 2013, LOFT’s mainline stores’ comparable sales improved by 3.7% driven by strong sales of navy, black and white along with prints and novelty offerings.  In the third quarter, comparable sales increased by 6% on top of 14% growth witnessed in the same quarter last year. LOFT Outlet stores also 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 color offerings. We believe that the brand can sustain this growth momentum in the future as it continues to introduce a balanced and on-trend product mix. It’s already well positioned for the fourth quarter with balanced colors, prices, fashion and versatility. 
Launch Of Global Shipping
In March this year, Ann launched international shipping for its Ann Taylor and LOFT products to more than 100 countries. This move positioned the retailer better to cater to the needs of international customers, who were previously under-served. As a strategy to attract customers from the outset, Ann provided free shipping for orders above $100 for a limited period.  International markets provide tremendous potential for apparel retailers seeking to broaden their e-commerce channel. Often they offer better macroeconomic conditions, lower competition than the U.S., and an affinity to online retailing. This was a big step for Ann’s e-commerce business, which should drive its “stores and Internet revenue per square feet” in the future. Moreover, as the retailer enhances its brand awareness in these markets, it will become easier for its retail store expansion.
Continuation Of Canadian Expansion
Towards the latter part of last year, Ann initiated its international expansion by opening its first store in Toronto Canada.  At the end of the first quarter of fiscal 2013, the retailer had three stores operational in the region, with all of them generating robust sales. In its second quarter earnings call, Ann stated that its Canadian stores were performing significantly better than its expectations. The company is on track to increase its store count to 10 by the end of the year. It also said that it currently wants to open 15 Ann Taylor stores and 35 LOFT stores in the region, and is looking for franchising as well. Though Canada might be insignificant for Ann’s results at present, it marks the start of the company’s international expansion.
Although highly saturated, the Canadian market provides some room for growth for Ann. The apparel industry growth has seen modest growth over the past few years, which is likely to continue in the future. Also, the share of e-commerce business in the overall apparel sales in the region has been increasing, which can work in Ann’s favor. However, Ann’s growth in the region might not be swift as it will face stiff competition from other established brands such as J. Crew, Coach (NYSE:COH), Forever 21, Zara, H&M etc. Notes:
- Ann’s Q1 fiscal 2013 earnings transcript, Jun 6 2013 [↩]
- Ann’s Q2 fiscal 2013 earnings transcript, Aug 23 2013 [↩]
- Ann’s Q3 fiscal 2013 earnings transcript, Nov 22 2013 [↩]
- Ann Inc. launches international shipping for Ann Taylor and LOFT, Ann Inc., Mar 8 2013 [↩]
- Ann Taylor opens its first store in Toronto Eaton Centre, Canada Newswire, Sept 11 2012 [↩]
- Apparel in Canada, Euromonitor, Jun 2013 [↩]