ANN Earnings Preview: On Its Way To Solid Q3 Results

As the specialty retailer Ann (NYSE:ANN) releases its Q3 fiscal 2012 earnings on November 28, we expect good results driven by strong brand performance in the U.S. ^[1] The good response to the fashion newness in the previous quarter inspired the retailer to add the same to its fall collection. Ann signed the actress Kate Hudson as the face of the fall collection. ^[2] We believe that this will have a positive impact on its revenue growth. Other initiatives such as an increase in the product categories at opening prices, and lower promotional activities will help Ann Taylor in posting good results. ^[3]

Moreover, updates regarding Ann’s Canadian expansion plans will also be closely monitored by investors and analysts. As Ann Taylor enjoys strong brand recognition in the U.S., it is well poised to enter the Canadian market. Lastly, with the ongoing boom in the online apparel industry and Ann Taylor’s fast growing e-commerce business, we expect a healthy quarter of online sales.

See our complete analysis for ANN

Strong Performance Driven By Fashion Newness & Pricing Strategy

Ann’s both brands, i.e. Ann Taylor and LOFT have strong brand recognition in the U.S. This enables the retailer to modify its product assortments and launch new products successfully. For instance, in the last quarter, Ann Taylor increased the penetration of vibrant colors in its apparel categories such as skirts, dresses and feminine tops. ^[3] It also improved the variety in its product categories. This witnessed good customer response and inspired the retailer to add similar fashion trends to its fall collection. It was designed by designer Lisa Axelson and promoted by actress Kate Hudson. Following the success of spring and the summer collection, we expect a healthy customer response to the fall collection as well.

We believe that Ann’s pricing strategy, which aims at increasing the variety of product assortments at opening prices, will continue to drive the store traffic. ^[3] As Ann is a premium priced brand, its customers are more concerned about the fashion trends rather than the pricing. This enabled Ann to reduce the store-wide promotions and target them on specific products. ^[3] This further led to an increase in the full price sales. We expect that this will boost Ann’s gross margins and comparable store sales in the upcoming results.

Booming Online Apparel Industry Will Drive Ann’s E-Commerce

In the current scenario of increasing popularity of online shopping, apparel retailers such as Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS) and Urban Outfitters (NASDAQ:URBN) are enjoying substantial growth in their direct-to-consumer business. ^[4] This segment has also been lucrative for Ann, which has registered significant e-commerce growth in Ann Taylor (29%) and LOFT (15%) brands in Q2 fiscal 2012. ^[5] This growth was on top of the 32% and 34% increase in the same quarter last year. ^[5] We believe that the online trends in the apparel industry will drive Ann’s e-commerce business in this quarter as well.

The online business constitutes about 20% to the company’s value according to our estimates.

Updates On Expansion Plans

In the last quarter, Ann’s management stated that it will be entering Canadian market in the latter part of 2012. ^[3] The first store was opened last month in Toronto. ^[6] As Canada is the initial frontier for the U.S. retailers’ foreign expansion, this marks the beginning Ann’s international footprint. Although it’s too early to speculate on the performance, it will be interesting to see how the Canadian consumers have responded. Moreover, we will also be watching updates on the expansion plans.

Our price estimate for ANN stands at $38, implying a premium of about 10% to the market price.
Understand How a Company’s Products Impact its Stock Price at Trefis

1. ANN Inc. Investor Relations [↩]
2. Ann Taylor Announces World-Renowned Actress Kate Hudson To Return As Face For Fall 2012, ANN Inc., July 25 2012 [↩]
3. Ann’s Q2 fiscal 2012 earnings transcript, Aug 17 2012 [↩] [↩] [↩] [↩] [↩]
4. Companies’ SEC filings [↩]
5. Ann’s SEC filings [↩] [↩]
6. Ann Loves Toronto, News wire, Oct 5 2012 [↩]