Ann Earnings Preview: Weakness In LOFT And Ann Taylor Factory To Weigh On Results

Women’s specialty retailer Ann (NYSE:ANN) is scheduled to release its Q2 fiscal 2014 results on August 22. In a recent press release, the company stated that its comparable sales decreased by 2.3% during the quarter. While comparable sales at Ann Taylor’s mainline stores increased by 2%, they declined by 5.2% at LOFT. ^[1] Although Ann Taylor continues to grow at a steady pace, it appears that LOFT has lost its last year’s growth momentum. The brand had performed very well in 2013 amid an unconducive retail environment, but it hasn’t been able to repeat that stellar performance this year.

Moreover, Ann Taylor’s factory channel (which offers past season’s best sellers) still remains a concern for the company, as it recorded 1.9% decline in comparable sales in Q2. Since U.S. buyers have become extremely fashion conscious, they are not spending too much on last season’s products in spite of their attractive prices. Most of Ann Taylor’s customers are affluent buyers who are more concerned about merchandise design than its prices. Hence, they prefer to shop at the brand’s mainline stores, that offer trend and season relevant inventory.

However, LOFT offers more relaxed fashion as compared to Ann Taylor at relatively lower prices, which attracts value conscious buyers as well. During the quarter, LOFT Outlet stores (which offer past season’s best sellers) registered a marginal increase of 0.3% in comparable sales, while the brand’s mainline store growth stumbled. This can be attributed to the fact that LOFT’s last year’s merchandise resonated very well with customers, but its fresh inventory did not have the same impact.

Our price estimate for ANN stands at $38.88, implying a premium of about 5% to the market price.

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Ann Taylor’s Growth Remains Steady

With its strong market position and a loyal customer base, Ann Taylor’s mainline stores have sustained a steady growth momentum. 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 extreme temperatures, 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. Even though the brand’s comparable sales growth was flat in the first quarter of 2014, on account of relentless winters, it recorded 2% growth in Q2 as buyers returned to stores.

The brand has a history of delivering on its customers expectations. Every season, it introduces trend relevant merchandise, that resonate very well with customers. Ann Taylor has been able to do so with its firm inventory control. 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.

Ann Taylor Stores contribute about 25% to the retailer’s value as per our estimates.

LOFT Stumbles After a Strong 2013

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.

However, LOFT’s mainline comparable sales in Q1 declined by 1.8% as it was unable to drive sufficient store traffic on account of extreme temperatures. While it was expected that the brand’s sales will rebound in Q2, its comparable sales declined at an alarming rate of 5.2%. Customer response to LOFT’s basic knit top remained soft, which forms a big part of its summer inventory. In response, the brand ushered heavy markdowns in this category, which helped it attain a clean inventory position, but dragged its comparable sales down.

LOFT stores contribute more than 50% to the retailer’s value as per our estimates.

Ann Taylor Factory Continues To Be A Drag

During the past four-five quarters, Ann Taylor Factory stores have struggled to register positive comparable sales growth, suggesting that customers have been a little hesitant in spending on last season’s products. Ann Taylor Factory recorded a comparable store sales decline of 7.2% in Q2 fiscal 2013 and 7% in the Q3. Performance of the factory channel worsened in Q4 fiscal 2013 as comparable sales at Ann Taylor and LOFT stumbled by 6% and 4% respectively. During the first quarter of fiscal 2014, Ann Taylor Factory’s comparable sales declined by a staggering 7.1%. Although the intensity of comparable sales decline came down to 1.9% in Q2, it still remains a big concern for the company.

As per our estimates, Ann Taylor Factory accounts for close to 12% of the company’s value.

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1. ANN INC. Updates Outlook For Second Quarter 2014, Ann, Aug 7 2014 [↩]