Ann Taylor’s LOFT and E-Commerce Business Carrying Growth
Source : Google Finance
Ann Taylor’s (NYSE:ANN) most recent results showed solid performance of its LOFT brand and a significant double digit increase in its e-commerce channels. The company also managed to post a gross margin comparable to that of last year, signifying the ability of luxury brands to counter the margin headwinds more effectively as compared to value based brands. The “affordable luxury” retailer for women competes with other brands like Aeropostale (NYSE:ARO), Jones Apparel Group (NYSE:JNY) and Limited Brands (NYSE:LTD).
We have revised our $28 price estimate of Ann Taylor’s stock, which is roughly 20% above current market price. The adjustments in our price estimate primarily reflects adjustments made to the company’s current net cash/debt position and the capital expenditures. Ann Taylor announced an increase in its capital expenditures primarily for opening new stores, which has caused a decline in our price estimate.
LOFT and online business drive the sales
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Solid growth in LOFT brand was the primary reason behind the improved performance of Ann Taylor this quarter. On a divisional basis, LOFT Outlet stores displayed a comp growth in excess of 20% along with a record growth in overall outlet sales primarily due to the opening of 11 new stores. The full value stores also reported a moderate growth based on the balanced mix of fashion and print.
A significant growth in Ann Taylor’s e-commerce channels was also one of the major highlights of earning results. Both Ann Taylor e-commerce as well as LOFT e-commerce recorded a growth in net sales in excess of 30%. We expect the momentum to continue during the latter half of the year, primarily due to the announcement of $15 million investment to enhance the e-commerce business.
Ability to counter shrinking margins
One of the most important points from the Q2 earnings was the gross margin comparable to last year at 55%. The slide in Ann Taylor’s stock by 20% after Q1 result was primarily associated with the fall in gross margins by 2%. We believe the improved performance in margins were due to following three factors:
1. Improvement in macro-economic conditions: Easing cotton prices have helped Ann Taylor to improve its gross margins over the last quarter. With the regular supply of cotton resuming from cotton producing areas we expect the margins to improve even further in the next quarter.
2. Ability of Ann Taylor to pass the cost pressures to customers: This is one of the significant reason behind the good performance of luxury brands this quarter. Luxury brands can pass the cost pressure more easily to customers as compared to value based brands, which hesitate in doing so in fear of loosing their business.
3. Growth in e-commerce channels: Ann Taylor’s margins in e-commerce are 1.5x of that in retail stores. The high double digit growth in online business has helped the company to improve the gross margins despite of tough macro-economic conditions.
We expect the growth in online business to continue at the same pace going forward with Ann Taylor investing significantly to enhance e-commerce channels. This would also mean an improvement in margins over the latter half of the year.