ANN Earnings Preview: LOFT Weakness, Traffic Decline And Port Delays Will Hurt Results

The parent company of Ann Taylor and LOFT, Ann (NYSE:ANN), is scheduled to release its Q4 fiscal 2014 earnings on March 13th, and we expect its results to be bogged down by continued weakness in core brands, a fall in foot traffic, heavy markdowns and inventory delays due to West Coast port issues. Although Ann Taylor registered steady growth for several quarters backed by its strong product portfolio, its mainline stores’ comparable sales declined 4.8% in Q3 fiscal 2014 due to soft customer response to several product categories such as knit tops, cropped sweaters, silhouettes sweaters and jackets, and short flair skirts. We believe that the brand might not have recovered completely from its third quarter fumble and, hence, its results are expected to remain weak.

While Ann Taylor’s weak performance is relatively new, LOFT has been a drag on the company’s results throughout the year. After growing strongly in fiscal 2013, LOFT’s mainline comparable sales declined by 1.8% in Q1 fiscal 2014, as it was unable to drive sufficient store traffic on account of extreme weather. While it was expected that the brand’s sales would rebound in Q2, its comparable sales decline 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 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% d iecreasen its comparable sales. We believe that LOFT’s dismal performance likely  continued in the fourth quarter as well.

Our price estimate for ANN stands at $38, which is roughly inline with the current market price.

See our complete analysis for ANN

Throughout the year, Ann’s sales were impacted by weak mall traffic, sluggish consumer spending and a highly promotional environment. With growing Internet penetration and emergence of several affordable e-commerce apparel retailers, U.S. buyers in numbers have moved to online shopping, which has led to a lull in store traffic. During the holiday season, industry-wide foot traffic declined 8.3% and it fell 7.7% in January as well. ^[1] We believe that similar to casual apparel retailers, Ann likely felt the impact of falling store traffic as well, made worse by customers’ reluctance to spend on premium discretionary products.

Apart from product issues and weak traffic, shipment delays due to labor strife at West Coast ports might have also weighed on the retailer’s sales growth. Before the agreement between the Pacific Maritime Association and International Warehouse and Longshore Union, West Coast ports were cramped with heavy traffic due to a deliberate slowdown in work and complete port shutdowns. This resulted in delayed shipments for a number of retailers including Ann. In fact, this issue troubled the women’s specialty retailer in Q3 as well and as management resorted to air freight, which negatively impacted its Q3 margins by 80 basis points. We expect Ann to have faced a similar problem in Q4 as well, given that it may have continued to rely on air freight, as holiday season is the busiest time of the year.

Another issue that would have troubled the retailer in Q4 was its inventory position. Ann had entered the holiday season with higher than anticipated inventory levels, which it may have had to clear with heavy markdowns to make room for fresh inventory. The management had said during Q3 earnings call the fourth quarter was going to be highly promotional and competitive.

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1. Holiday season U.S. store sales down 8 percent in 2014: RetailNext, Reuters, Jan 7 2015 [↩]