What’s Driving Ann Taylor’s Stores & Internet Revenue Per Square Feet?

Ann (NYSE:ANN) is one of the largest specialty retailers for women’s merchandise in the U.S., which offers its products through two brands – Ann Taylor and LOFT. While Ann Taylor focuses on women’s professional attire, LOFT caters to its customers’ casual attire needs. Ann Taylor offers a full range of career and casual separates, dresses, tops, weekend wear, shoes and accessories. It mainly targets affluent buyers and its products are in the “better” price category. In this analysis we’ll take a look at what’s driving the brand’s “Stores & Internet revenue per square feet” (RPSF).

We calculate this metric by dividing Ann Taylor’s stores and e-commerce revenues by its total square footage. This serves as a measure for the brand’s comparable store sales growth. Over the past few years, Ann Taylor’s RPSF has been increasing steadily due to a good response to its product offerings, growth in e-commerce revenues and consolidation of under-performing stores. The figure increased from $317 in 2009 to $452 in 2012, and we expect it to continue to increase and cross $600 mark by the end of our Trefis forecast period. This growth will be fueled by the retailer’s disciplined inventory control, attractive marketing campaigns, growth in e-commerce revenues, and remodeled stores for better shopping experience.

Our price estimate for ANN stands at $39, implying a premium of about 10% to the market price.

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Disciplined Inventory Control Translates Into Better Products

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.

With attractive offerings in its arsenal, Ann Taylor is better positioned to operate more full priced sales, and drive store and web traffic. Moreover, its pricing strategy of balancing the products across three different price points – good, better and best, helps it target a wider demographic. As a result of these strategies, Ann Taylor has established a strong brand image for itself in the U.S. market. This is evident from the fact that the company has done well in the past several quarters, despite a lull in the overall apparel retail industry.

Attractive Marketing Campaigns Help In Attracting Customers

In addition to Ann Taylor’s strong product offerings, its celebrity endorsements have played a vital role in solidifying its brand image in the U.S. Popular Hollywood actress Kate Hudson has been associated with Ann Taylor for some time now and has featured in a number of its campaigns. Kate Hudson capsule collection launched earlier this year was extremely successful. The latest addition to the brand’s marketing is the recent “A Hollywood Holiday With Kate Hudson” campaign, which features the actress wearing her favorites from the holiday collection, playing with her son in Corinthia Hotel in London.

Ann is also focusing on devising a more relevant and personalized shopping experience for Ann Taylor. It is looking to build a solid base of brand loyal customers through targeted social media, e-mail, direct mail and other media channels.

Increase In E-Commerce Revenues Will Help RPSF Growth

Online apparel retail in the U.S. has grown at a robust pace due to increasing penetration of smartphones and tablets. This trend is likely to persist in the future as eMarketer forecasts U.S. online apparel sales to increase to $90 billion by 2016, up from $45 billion in 2012. Ann’s e-commerce revenues have also grown strongly in the past and we expect the trend to continue in the future, backed by its multichannel initiative and launch of global shipping.

Last fall, the company introduced its multichannel initiative, wherein it combined its online and store channel to integrate the inventory pool across its stores. The idea was to increase the product variety over the Internet and improve delivery responsiveness, and the results have been good. Ann even stated that the multichannel approach has enabled it to effectively clear excess inventory without unfavorable margin pressures. Earlier this year, Ann launched its global shipping for both its brands to over 100 countries. The initial response from a number of countries has been encouraging so far, and this provides tremendous growth opportunity for Ann Taylor’s e-commerce business.

Remodeled Stores Will Enhance Shopping Experience

By enhancing the in-store shopping experience, Ann Taylor positions itself better to drive greater store traffic. The brand 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. By the end of Q1 fiscal 2013, Ann Taylor had 80 concept and 100 capital-right refreshed stores operational. The company stated that about 80% of its Ann Taylor store fleet will be remodeled by the end of this year. We believe that this will have a positive impact on store traffic, which in turn will drive the brand’s RPSF.

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