Extreme Weather Takes A Toll On Ann, But Its Future Still Looks Good

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ANN: ANN logo
ANN
ANN

While women’s specialty retailer Ann (NYSE:ANN) performed very well throughout last year amid an uncertain retail environment, the start of fiscal 2014 turned out to be disappointing for the company. Following several quarters of meaningful comparable sales growth, the retailer reported a 1.8% decline in comparable sales in Q1 fiscal 2014. Same-store sales fell 2.3% at Ann Taylor with flat sales in mainline stores and a staggering 7.1% decline in factory channel. Although LOFT mainline stores’ comparable sales stumbled by 1.8%, Outlet stores registered only a marginal decline of 0.2%. Overall, the brand’s comparable sales fell by 1.6%. Also, Ann’s gross margins shrunk to 53.4% from 55.8% in the same quarter last year and its net income, excluding restructuring charges, decreased by 25%. [1]

Ann cited unfavorable weather conditions and higher-than-anticipated promotional activities as the primary reason for its dismal performance in the first quarter. However, it also said that traffic and sales improved towards the latter half of the quarter and the retailer was on course to deliver third consecutive year of record EPS. Over the years, the company has built a strong image for itself in the U.S. apparel industry with its expansive product variety, enticing marketing campaigns and compelling shopping experience. Despite the recent fumble, Ann Taylor and LOFT still remain in the league of strong brands in their respective market segments, delivering products that resonate well with customers. Considering that these brands performed very well even when the U.S. consumer confidence was down, they should be back on track in the foreseeable future.

Our price estimate for ANN stands at $41.31, which is less than 5% premium to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

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See our complete analysis for ANN

Unwavering Customer Response Will Drive Ann’s Sales

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 a 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. Even though the brand witnessed a slump in the recently concluded quarter on account of relentless winters, its history with strong product performances positions it very well for the future.

Popular Hollywood actress Kate Hudson, who has been Ann Taylor‘s brand ambassador for a long time, has designed a capsule collection of five different Little Black Dresses (LBD) for the brand featuring a floor length gown with asymmetric cut, an open back dress, a short frock with faux leather details, and a sheer dress with revealing insets. [2] A black dress is considered to be the most iconic and essential item of a women’s wardrobe and thus, Ann Taylor‘s new LBD collection is likely to become an integral part of its portfolio. The actress has been at the core of Ann Taylor‘s marketing strategy, and her involvement in designing appears to be a valid move considering that she is known for her impeccable fashion taste.

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. While Q1 fiscal 2014 may not have been the best quarter for the brand, its performance is likely to improve as Ann introduces Lou & Grey shop-in-shop locations in addition to offering this collection in 544 LOFT stores and online.

Strong Inventory Management Will Ensure Trend Relevant Merchandise

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 weakness in the U.S. apparel market.

By leveraging its sturdy supply chain, Ann should be able to maintain its fashion responsiveness, which will ultimately propel its store and web traffic. During the first quarter, total inventory per square foot increased by just 3% as Ann was able to successfully clear LOFT‘s early spring merchandise and stock Ann Taylor with season relevant inventory.

Growing Online Business And Multichannel Retailing Will Help

With rising popularity of online shopping, increasing Internet penetration and proliferation of smartphones and tablets, the U.S. online apparel industry has grown at a robust pace over the past few years. Ann has been at the forefront of this growth with its strong online channel and enticing merchandise range. We believe that this trend will continue in the future as the forecast for online apparel industry is very optimistic. According to eMarketer, online apparel sales in the U.S. are expected to increase to $90 billion by 2016, up from $45 billion in 2012. [3] Apart from the industry growth in the U.S., the launch of global shipping will also help Ann’s online revenue growth. Last year, Ann started shipping its products to over 100 countries, where it received a pleasing customer response. This provides a tremendous growth opportunity for the retailer’s e-commerce business and, subsequently, its store sales.

Additionally, Ann is leveraging its strong online channel to drive greater store traffic with its multichannel retailing. In 2012, the retailer introduced its multichannel initiative, wherein it combined its inventory pool across stores and digital channel to have a single view of inventory. The idea was to increase its product variety over the Internet and improve delivery responsiveness. The results have been very good so far and the multichannel approach has enabled the company to effectively clear surplus inventory without much pressure on comparable sales or margins.

Better Expense Management Will Lower SG&A Expenses and Boost EBITDA Margins

During its last quarterly 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 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. In the first quarter of fiscal 2014, SG&A (as a percentage of revenues) improved by 100 basis points driven by a decrease in performance-based compensation as well as disciplined expense management. We expect Ann to sustain a firm control over its expenses in the future, which can have some positive impact on its EBITDA (earnings before interest tax depreciation and amortization) margins. [1]

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Notes:
  1. Ann Inc. Reports First Quarter 2014 Results, Ann Inc., May 30 2014 [] []
  2. Ann Taylor Taps Kate Hudson for Exclusive LBD Collection, Ann Inc., Mar 19 2014 []
  3. Retail Ecommerce Set To Keep A Strong Pace Through 2017, eMarketer, Apr 24 2013 []