Ann’s (NYSE:ANN) recently reported Q4 fiscal 2012 earnings reflected weak results from its LOFT brand due to hurricane Sandy and an imbalance in its product mix. The retailer’s overall comparable store sales decreased by 0.7%. However, there was strong growth in e-commerce business that gained from Ann’s multichannel initiative.  Also, core product categories of LOFT and Ann Taylor continued to perform well.
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Going forward, we expect Ann’s product specific promotions and balanced pricing strategy to help drive its business. Ann Taylor’s store remodeling, recent global shipping launch and Canadian expansion will further aid its growth. Ann is also looking to improve LOFT’s product mix and is bringing back actress Kate Hudson as brand ambassador for Ann’s spring and summer campaign. 
Why Was The Fourth Quarter Weak?
The slow growth in the fourth quarter can be mainly attributed to the weakness in the LOFT brand, which constitutes about 65% of the company’s value, according to our estimates.  The brand’s growth was impacted by hurricane Sandy as most of its operations are concentrated in the Northeast region.  An imbalance in the product mix also contributed to the weakness as the retailer hoarded apparel in bright colors and had limited of the black and neutrals.  This did not resonate well with the customers, resulting in 2.1% decline in the comparable store sales along with negative impact on Ann’s gross margins.
The Offsetting Factors
Although LOFT’s results were under pressure, its core products such as knit tops, wovens, sweaters, denim, cords and LOFT lounge performed well.  At Ann Taylor, dresses, skirts, wovens, knit tops, casual bottoms and jewelry delivered good results as customers responded well to the product offerings. Additionally, the retailer reduced the inventory of suits and shoes in the third quarter, which resulted in fewer promotional discounts for Ann Taylor. ((Ann’s Q4 fiscal 2012 earnings transcript, Mar 8 2013)) This led to an increase of 1.4% in the brand’s comparable store sales and an improvement of 20 basis points in the retailer’s gross margins for Q4 fiscal 2012.
What Is Likely To Drive Ann In The Future?
Ann’s e-commerce channel continued its rapid growth with favorable results from its multichannel initiative. Through this initiative, the retailer integrated the inventory pool across its channels, to fulfill online order with retail store inventory. Moreover, Ann’s balanced pricing strategy and product specific promotions helped its annual and quarterly results. This strategy aims at increasing the product variety at the opening price tier and subsequently focusing promotional discounts on specific products rather than store-wide promotion. Apart from these, there are other factors at play.
Launch Of Global Shipping: Ann recently launched international shipping for its Ann Taylor and LOFT products to more than 100 countries. Ann is now in a better position to cater to the needs of its international customers, who were previously underserved. As an added advantage, Ann will be providing free shipping for orders above $100 for a limited period.  This is a key step for the retailer’s e-commerce growth, as well as international expansion.
Store Remodeling: Ann is remodeling its Ann Taylor stores to improve customers’ shopping experience. The company stated that new store format will better reflect the brand’s modern aesthetics and aspirational position.  By the end of fiscal 2012, Ann had remodeled more than 65% of its stores and received encouraging customer feedback. We believe that this will have a positive impact on the store traffic.
Balancing LOFT’s Product Mix: Ann’s Q4 results remained weak due to an imbalance in LOFT’s product mix arising from excessive bright colors and limited black and neutrals. During the next two quarters, the retailer will reduce its focus on bright colors and invest more in white, black and neutral, as well as patterns and prints.  This will provide the brand with a more balanced product range that will complement its strong offerings in denims, casual pants, shorts, tops and LOFT lounge. We believe that this will revive LOFT from its temporary weakness.
Canadian Expansion: Last year, Ann opened its first three stores in Canada, and these have performed exceedingly well, according to the retailer.  Over the course of next few years, Ann will continue to add more stores in a such a way that it taps the most lucrative markets in the region. In the long run, this should help Ann generate higher sales.
Our price estimate for ANN stands at $36, implying a premium of about 30% to the market price.Notes:
- Ann’s Q4 fiscal 2012 earnings transcript, Mar 8 2013 [↩] [↩] [↩] [↩] [↩] [↩]
- Ann Taylor and Kate Hudson to debut capsule collection, Ann Inc., Jan 24 2013 [↩]
- Ann’s SEC filings [↩]
- 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 [↩]