Through its LOFT brand, Ann (NYSE:ANN) offers a wide range of women’s products such as casual separates, dresses, tops, weekend wear, shoes and accessories. The company operates more than 500 LOFT stores in the U.S. and an e-commerce channel for over 100 countries. As per our estimates, the brand’s mainline stores account for about 50% of the retailer’s value, which makes it the most important business segment for Ann.
The last one year has been very eventful for LOFT. Coming into last year, the brand started struggling due to an imbalance in its product mix that resulted in weak sales and high promotions. This continued in the first quarter of fiscal 2013 even though the company started working on its merchandise mix. However, its efforts paid off in the second quarter, which led to a strong rebound in its sales. LOFT was able to sustain this growth momentum in the third quarter as shoppers responded very well to its updated product mix. The brand’s last year performance is a good example of Ann’s efficient merchandise design and production system.
Our price estimate for ANN stands at $41, implying a premium of about 15% to the market price.
Product Imbalance Weighed On LOFT’s Q4 Fiscal 2012 and Q1 Fiscal 2013 results
In the latter half of 2012, Ann invested heavily in LOFT’s bright colors and kept the proportion of black and neutrals low, which led to product imbalance. As a result, the brand’s mainline stores comparable store sales declined by 1% in Q4 fiscal 2012 after increasing strongly for the first three quarters. The impact of product imbalance was so profound that LOFT was unable to benefit from its strength in denims, casual pants, shorts, tops and LOFT lounge. In the first quarter, the company invested heavily in LOFT’s warm weather products such as shorts, cropped pants, knit tops, etc. However, the unusually long winters that subdued the demand for such products undermined Ann’s efforts. This led to a 0.9% decline in LOFT’s comparable store sales in the first quarter of fiscal 2013.
Sales Rebounded In Q2 and Q3 With An Improved Merchandise Mix
After a couple of weak quarters, LOFT’s performance improved as Ann worked aggressively on its product mix. The company reduced its focus on bright colors and invested 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 these efforts, LOFT’s mainline stores’ comparable sales improved by 3.7% in Q2 fiscal 2013. Ann attributed this growth to strong sales of navy, black and white along with prints and novelty offerings.  In the third quarter, the brand’s growth momentum picked up as its comparable sales increased by 6% on top of a 14% rise in the same quarter last year. LOFT Outlet stores also came out of their slump and delivered a 2% rise in comparable store sales. A greater variety of fits and styles, along with balanced color offerings in several product categories, resonated well with customers.
We believe that the brand performed strongly in the recently concluded holiday season as well. In its third quarter earnings call, the company had said that it was well-positioned for the fourth quarter with balanced colors, prices, fashion and versatility. 
Strong Inventory Management Helped The Brand Revive Quickly
Proper inventory control is an important aspect of a retailer’s business as it enables it to launch new products in accordance to the prevailing trends and season, and operate with fewer discounts. 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 Ann’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 develop appealing products with relevant fashions. Since Ann was prompt in identifying and developing a balanced merchandise mix for LOFT, the brand was able to recover quickly despite the weakness in the U.S. apparel market.Notes: