Ann Rises On Better-Than-Expected Growth; Shows Merchandise And Cost Savings Improvement

Ann‘s (NYSE:ANN) shares increased by close to 10% after it posted an earnings surprise for its Q4 fiscal 2014.  Despite heavy discounting, sales were better-than-expected. The company’s net sales increased 3.9% to $647 million, better than the consensus estimate of $630 million. Net income totaled at $262,000 or $0.01 per share, while analysts expected a loss of $0.03 per share. Although the retailer’s profits were down close to 94% as compared to the year ago period, air freight cost was responsible for most of the decline. Due to West Coast traffic congestion, Ann imported a fair portion of its products through air freight, which resulted in an additional cost of $8.3 million. Excluding its impact, Ann’s earnings per share was at 12 cents, reflecting a year over year increase of 20%.

Ann’s gross profit margin  fell to 45.8% in Q4 fiscal 2014, down from 49.3% in the year ago period, and it was still able to increase its profits, thanks to better cost optimization. The retailer’s SG&A rate improved about 280 basis year over year to 45.6%, its lowest value in over seven years, due to strategic realignment and lower marketing. Ann’s aggressive approach for optimizing its cost structure helped it save $20 million in 2014, and it expects to save another $35 million by the end of 2016. Since the U.S. apparel industry will only get more competitive going forward, incremental savings on operating activities will do a world of good for the company’s bottom-line growth.

Our price estimate for ANN stands at $40, which is roughly inline with the current market price.

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Ann’s fourth quarter was marked with aggressive promotional activities as it had entered the holiday season with higher-than-anticipated inventory. It subsequently resorted to heavy discounting, which dragged its gross margins down and weighed on comparable sales growth. The retailer’s net comparable sales grew just 1%, driven by 1.9% growth at LOFT, partially offset by 0.4% decline at  Ann Taylor. Nevertheless, positive growth in Q4 despite the inventory problems reflects significant improvement over Q3 fiscal 2014 results, when company-wide comparable sales fell 4.3% due to merchandise issues. These results indicate that Ann was successful in improving customer response towards its merchandise during the holiday quarter, and had its inventory been on track, its growth would have been much better. The retailer stated that it delivered on its promise to clear excess inventory during the fourth quarter, and has entered 2015 with a conservative inventory plan.

For the first quarter of fiscal 2015, the company expects moderate comparable sales growth with gross margins at 53%, which shows its confidence in the Q1 merchandise inventory position. Ann added a greater depth in its color offerings in the fourth quarter that resonated well with buyers, and its fashion newness continued to help. The retailer is set to benefit from these aspects in Q1 as well and it stated that work is underway to develop better products and merchandise strategies for 2015. In fact, the color component in Ann Taylor’s portfolio is almost double for the spring season as compared to the holiday quarter. Diversity in prints and patterns is also significantly higher relative to last year. ^[1]

LOFT brand had troubled Ann through most of last year due to certain off-pitch fashion calls and inventory imbalance. However, the brand performed very well in Q4 and its factory channel was a stand out performer with 6.6% growth in comparable sales. Categories such as woven tops, shirts, pants and accessories generated positive comparable sales growth, and cotton shirts, feminine blouses, corduroy, ponte pants, sweater dresses and novelty skirts were particularly strong. The brand was able to find the right balance in colors, prints and patterns, lace, textured knits, jacquards and tweeds, which brought customers back. Provided that Ann can sustain its product strength by effectively leveraging its product development and design teams, it will continue to see this success.

A significant portion of Ann’s products is developed in-house exclusively by its product development and design teams. The merchandising group determines the inventory needs of the upcoming season, passes on the requirements to the design team, and plans a merchandise flow system for different manufacturers. This strategy allows the retailer to quickly adapt to changing consumer tastes, which subsequently enable it introduce trend and season relevant merchandise.

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1. Ann’s Q4 fiscal 2014 earnings transcript, Mar 13 2014 [↩]