Ann Earnings Preview: Ann Taylor Stumbles As LOFT Remains A Drag

Women’s specialty retailer Ann (NYSE:ANN) is scheduled to release its Q3 fiscal 2014 results on November 21st. In a recent press release, the company stated that its comparable sales decreased by 4.3% during the quarter. While comparable sales at Ann Taylor’s mainline stores declined by 4.8%, they  were down 3.3% at LOFT. ^[1] Although Ann Taylor had maintained a steady growth momentum over the past few quarters, its growth faltered in Q3 due to weak mall traffic, a highly promotional environment and delayed shipments. On the other hand, the retailer’s relatively affordable brand, LOFT, continues to lose its growth momentum following its merchandise goof up. 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 big concern for the company, as it recorded a sharp 10% decline in comparable sales in Q3. 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 trendy and seasonal merchandise.

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 last season’s best sellers) registered a marginal decline of 1% in comparable sales, which isn’t too bad compared to Ann’s overall performance. This can be attributed to the fact that LOFT’s last year’s merchandise, that resonated very well with customers, may still be stocked in the brand’s outlet stores.

Our price estimate for ANN stands at $38, which is just ahead of the current market price.

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Ann Taylor Falters Following Several Steady Quarters

With its strong market position and a loyal customer base, Ann Taylor’s mainline stores have registered steady growth in comparable sales for the past several quarters. The brand’s mainline stores’ comparable sales had improved by 6.2%, 9% and 4% respectively in the first three quarters of fiscal 2013. Although this growth had slowed down to just 1% in Q4, due to extreme temperatures, underlying performance was good. Buyers had 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 had grown 2% in Q2 as buyers returned to stores.

However, the brand witnessed a negative turn in Q3, as its comparable sales declined for the first time in the last 10 quarters. Its mainline comparable sales fell by 4.8%, driven by a decline in mall traffic and heavy promotional activity. Moreover, Ann Taylor‘s sales were negatively impacted by shipment delays on account of labor uncertainties at the West Coast ports. In addition, the weaker-than-expected performance of certain product categories also contributed to the brand’s comparable sales decline.

LOFT’s Fall Continues

After its product imbalance issues in Q1 fiscal 2013, LOFT’s performance had improved substantially in the remaining three quarters of the year. The brand’s mainline stores’ comparable sales had increased by 4% and 6% respectively in Q2 and Q3 fiscal 2013, and its growth momentum had picked up during the weak holiday season, with 8% rise in comparable sales. LOFT’s relaunch of LOFT lounge under Lou & Grey brand name was particularly strong and its pent, denim, skirts, dresses, accessories and jewelry had also performed well.

However, after growing strongly in fiscal 2013, LOFT’s mainline comparable sales had declined by 1.8% in Q1, 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 decline had reached 5.2%. Customer response to LOFT’s basic knit top was soft, which forms a big part of its summer inventory. In response, the brand had ushered heavy markdowns in this category, which helped it attain a clean inventory position, but dragged its comparable sales down. LOFT’s weakness continued in Q3 fiscal 2014, as it recorded 3.3% fall in its comparable sales.

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 had recorded a comparable store sales decline of 7.2% in Q2 fiscal 2013 and 7% in the Q3. Performance of the factory channel had worsened in Q4 fiscal 2013 as comparable sales at Ann Taylor and LOFT had stumbled by 6% and 4% respectively. During the first quarter of fiscal 2014, Ann Taylor Factory’s comparable sales had fallen by a staggering 7.1%. Although the intensity of comparable sales decline had came down to 1.9% in Q2, it took a giant leap in the third quarter. During its recent release, Ann stated that comparable sales at Ann Taylor factory declined by 10% in Q3 fiscal 2014.

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1. Ann Updates Outlook for Third Quarter and Full Year 2014, Ann Inc, Nov 6 2014 [↩]