Women’s specialty retailer Ann (NYSE:ANN) recorded 3% rise in its revenues and comparable sales during the fourth quarter of fiscal 2013 (ended January 31st). While the growth was positive, its magnitude was lower than what the company has seen in the previous few quarters. This is attributable to low store traffic, weak consumer confidence, fierce competition from fast fashion-brands and relentless cold, that has impacted several retailers in the U.S. Following these results, the company issued a lackluster guidance for the first quarter of fiscal 2014, stating that its sales are expected to remain flat. For the full year, Ann projected comparable sales growth in low single digits. 
Despite its slow growth and weak guidance, we remain optimistic on the company’s long term outlook on the back of its strong brand image. Even though Ann Taylor’s comparable sales increased by only 1% during Q4 due to soft traffic, its products resonated very well with customers. Interestingly, the brand saw pleasing response across its entire product portfolio, which indicates a strong company-customer connection. After fumbling for a couple of quarters, Ann’s LOFT brand has improved tremendously, driven by relevant fashion changes and better product mix. LOFT’s popularity is evident from the fact that buyers did not lose their interest in the brand, even after a couple of quarters of product imbalance. Therefore, we believe that LOFT has a bright future.
In addition to generating better comparable sales by keeping products inline with customer tastes, Ann is looking to improve its operating margins. If Ann’s efforts to reduce its SG&A expenses and cost of goods yield fruitful results, it can generate better cash flow in the future, which will have a positive impact on its stock price.
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Our price estimate for ANN stands at $41, implying a premium of about 10% to the market price. However, we are in the process of updating our model in light of the recent earnings.
Ann Taylor’s Connection With Its Customers Is Very Strong
While several U.S. retailers have lost their customers to fast-fashion brands such as Zara, Forever 21 and H&M lately, Ann has managed to hold onto its brand loyal customers by consistently delivering popular merchandise. The brand’s mainline stores comparable sales improved by 6.2%, 9% and 4% respectively in the first three quarters of fiscal 2013. Although this growth slowed down to just 1% in Q4, due to weak macroeconomic environment, underlying performance was good. Buyers responded very well to the brand’s entire product range of holiday fashion offerings, special collections, wedding collections, special occasion dresses, handbags, jewelry, shoes etc. The Vince Camuto footwear collection was a standout performer during the fourth quarter.  Such product performances suggest that Ann Taylor is well positioned in terms of product offerings to drive store and web traffic.
Additionally, the brand is aggressively updating and refreshing its store fleet to improve the in-store shopping experience. Ann Taylor launched its concept and capital-light refreshed stores in March last year, and they have garnered significant customer attention so far. The new store format was designed to appear light and feminine, while reflecting the brand’s modern aesthetics and aspirational position. Through these stores, the brand offers 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. At the end of fiscal 2013, about 80% of Ann Taylor stores had been included to the modern format, which were more productive and profitable than other stores. As the retailer adds the remaining 20% stores to this format in the near future, its revenue per square feet can improve.
Ann Taylor Stores contribute about 25% to the retailer’s value as per our estimates.
LOFT Is Drawing Significant Customer Attention
Since its product imbalance issues, LOFT’s performance has improved considerably as buyers have responded positively to its product mix and fashion changes. The brand’s mainline stores’ comparable sales increased by 3.7% and 6% respectively in Q2 and Q3 fiscal 2013. Interestingly, LOFT’s growth momentum picked up during the weak holiday season, as its comparable sales rose by 8%. The brand’s relaunch of LOFT lounge under Lou & Grey brand name was particularly strong and its pent, denim, skirts, dresses, accessories and jewelry also performed well. Going forward, Ann is planning to introduce Lou & Grey shop-in-shop locations in addition to offering this collection in 539 LOFT stores and online.
Overall, LOFT’s client base registered double digit growth (year-over-year) driven by its extensive marketing and appealing product range.  We believe that the brand’s customer base will continue to rise in the future backed by its updated website and continued expansion. During the fourth quarter, Ann tweaked its loft.com to better reflect the brand’s aesthetics, appeal and energy. The company opened 38 LOFT stores in fiscal 2013 and is planning to enhance the brand’s reach in small and middle markets in 2014. Additionally, Ann is scheduled to open its first LOFT store in Mexico later this year. 
LOFT stores contribute more than 50% to the retailer’s value as per our estimates.
Ann Is Trying To Improve Its Margins
During the earnings call, Ann stated that it is looking to amplify its savings by more effectively planning its expenses. The company is optimizing its cost structure, which is expected to result in $25 million in annualized savings. About two-third of the savings are likely to come from SG&A expenses and the remaining from gross profits. To lessen its SG&A expenses and as a part of its ongoing omni-channel realignment, Ann is planning to reduce its corporate workforce by 100. For generating better gross profits, the retailer is gradually shifting its sourcing from China to its low labor cost neighbors.Notes: