Ann’s Profits Fall Due To Revenue Decline And Weak Margins

Ann‘s (NYSE:ANN) Q3 fiscal 2014 profits fell by 28% to $29.86 million due to a decline in revenues, weak gross margins and increased expenses. The company reported its EPS at $0.65, while analysts polled by Thomson Reuters were expecting the figure to be around $0.68. However, excluding the negative impact of expenses related to the closure of Ann Taylor’s Madison Avenue store, earnings per share were a better-than-expected $0.72. During the quarter, Ann’s revenues fell to $646.81 million from $657.53 million from the same quarter last year, and missed the street estimates of $648.27 million. ^{[1] [2]}

Our price estimate for ANN stands at $38, which is roughly inline with the current market price. However, we are in the process of updating our model in light of the recent earnings release.

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Ann’s sales were impacted by weak mall traffic, sluggish consumer spending and a highly promotional environment. Despite the improvement in consumer confidence and the job situation, U.S. buyers have been somewhat reluctant in spending on premium discretionary products. Ann Taylor’s growth surprisingly faltered during the quarter, even though its loyal customer base had kept it afloat during the past several quarters amid an edgy retail environment. The retailer said during the earnings call that soft product performance in certain categories contributed to the brand’s comparable sales decline. In addition to continued softness in knit tops, products such as cropped sweaters, silhouettes sweaters and jackets, and short flair skirts underperformed during the quarter. ^[3] Apart from weak traffic and product issues, shipment delays due to labor uncertainties at West Coast ports also weighed on the retailer’s sales growth. For several months now, West Coast ports have been cramped with heavy traffic, which has resulted in delayed shipments. However, the Pacific Maritime Association claims that dock works are deliberately slowing down the work, since they have been working without a contract since July. ^[4] This disruption can continue for another couple of months, due to which apparel retailers such as Ann might have to rely on air freights.

Ann’s overall gross margins shrunk 310 basis points to 52.6%, as it ushered heavy markdowns to compensate for low store traffic. Apart from that, increased costs related to air freight had a negative impact of 80 basis points on the retailer’s margins. With labor uncertainties delaying Ann’s shipments during the initial half of the quarter, the company switched to air freight later in the quarter, that helped its sales recover but weighed on its profits.

The company’s margins will most likely remain under pressure in the holiday season as well, given that it may continue rely on air freight due to West Coast labor problems. The holiday season is the busiest time for retailers and Ann would not want any further delays in its shipments. The company has entered the holiday season with higher than anticipated inventory levels, which it will look to clear with heavy markdowns to make room for fresh inventory. The management said during the earnings call the fourth quarter will be highly promotional and competitive.

On the expense front, overall selling, general and administrative (SG&A) expenses fell 0.9%, but SG&A as percentage of revenues increased by 30 basis points. This can be attributed to $5 million in pre-tax charges related to the closure of Ann Taylor Madison Avenue store. Excluding the one time charge, SG&A rate declined by 40 basis points as compared to the year ago period. Lower investments in marketing and performance-based compensation, as well as ongoing efforts to enhance savings were responsible for this improvement. During its Q4 fiscal 2013 earnings call, Ann’s management had stated that it is looking to amplify its savings by more effecting planning of its expenses. It had plans to optimize its cost structure and reduce its work force. The slight improvement in SG&A rate in the recently concluded quarter is an indication that its efforts are yielding some results.

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1. Ann Inc. Reports Third Quarter 2014 Results, Ann Inc., Nov 21 2014 [↩]
2. Ann’s Inc. Q3 Profit Decline, Adl. Earnings Top Estimates; Backs Sales View, Nasdaq, Nov 21 2014 [↩]
3. Ann’s Q3 fiscal 2014 earnings transcript, Nov 21 2014 [↩]
4. West Coast port strife: The retail worry, CNBC, Nov 22 2014 [↩]