Women’s specialty retailer Ann (NYSE:ANN) performed reasonably well in Q2 fiscal 2013 despite the overall industry weakness. The company reported comparable store sales growth of 2.8% driven by strong results from its mainline stores, partially offset by negative growth in the factory channel. In addition, online sales continued to grow in double digits during the quarter.  Encouraged by these results, Ann raised its sales growth outlook for the entire year.
The company’s Ann Taylor brand has been resilient so far, and we expect its growth to continue backed by its multi-part strategy which focuses on providing attractive products and enhancing the shopping experience. Ann saw improved results for its LOFT brand in this quarter due to an updated product mix. Going forward, we expect LOFT to benefit from the balance in its merchandise mix, growing customer base and timely launch of new products.
With the growth in the online apparel industry and Ann’ efforts to boost its online sales, we expect the retailer’s e-commerce channel to grow rapidly. The retailer is elevating its online shopping experience with exclusive products, digital marketing and the addition of new features.  Moreover, its multichannel initiative, which enables a single view of inventory across all the channels, has allowed Ann to offer more products online. The retailer launched international shipping to more than 100 countries earlier this year, which has provided good results.
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Ann Taylor Will Remain Strong With The Multi-Part Strategy
During Q2 fiscal 2013, Ann Taylor’s mainline stores’ comparable sales increased by almost 9% due to strong product performance.  The brand has done well in the past, and we expect it to carry this momentum in the second half of the year backed by its multi-part strategy. The key elements of this strategy are providing a wide range of appealing products at different prices and enhancing the customers’ shopping experience. These initiatives have helped the company in increasing its full-price sales. 
Most of the brand’s product offerings such as dresses, tops, skirts, jewelry, suits, accessories and shoes delivered robust growth during the quarter. Its white, navy and black color offerings were well received and Kate Hudson capsule collection was extremely successful.  In the upcoming quarter, neutral, black, navy and camel colors will the be salient features of Ann Taylor’s products. The brand launched a new footwear collection designed by Vince Camuto and the early signs suggest tremendous customer response.   Additionally, the brand will be relaunching its occasional dresses in the fall season, which have performed well in the past. 
Ann balances the brand’s product offerings across three different price points – good, better and best, and subsequently targets promotions to a fewer products. This allows the company to cater to a larger customer demographic and sustain its gross margins. Ann is providing its customers with an enhanced shopping experience through Ann Taylor’s concept and capital-right refreshed stores. The company stated that the new store format is designed to appear light and feminine while reflecting the brand’s modern aesthetics and aspirational position. These formats have garnered significant customer attention so far and Ann plans to remodel about 80% of its store fleet by the year end. 
LOFT’s Performance Gets Better
Following weak results in the prior two quarters, LOFT finally saw some rebound due to its updated product mix. The comparable sales of the brand’s mainline stores grew by 3.7% due to strong sales of navy, black and white, as well as prints and novelty offerings.  For the fall season, the retailer is focusing on maintaining a balance in LOFT’s color offerings, and leveraging the strength in LOFT lounge and denim to generate higher sales.  Additionally, it is updating and relaunching its pants with new fits, fabrics and silhouettes.
LOFT’s marketing campaigns have been focused on creating brand awareness and growing its customer base. During the quarter, the brand witnessed a significant rise in active clientele, which should help its growth in the future.  Moreover, LOFT will continue to expand in small and mid-markets, where it has identified substantial potential. 
However, Factory Channel Remains A Weak Link
During the past couple of quarters, LOFT Outlet and Ann Taylor Factory stores have registered negative comparable store sales growth suggesting that customers have been a little hesitant in spending on last season’s products. The weakness continued in the second quarter as well, with LOFT Outlet and Ann Taylor Factory registering a comparable store sales decline of 3.2% and 7.2% respectively. This decline can also be attributed to the rapid expansion of these stores, which is having a negative impact on the store traffic.  We believe that this trend will continue to be a drag on Ann’s overall comparable store sales growth in the near term.
Our price estimate for ANN stands at $35, which is just ahead of the market price.Notes: