Tough Year Ahead for Ann Taylor, Coldwater Creek and Talbots

In the first quarter of this year, I was quite bullish about the U.S. economy for the second half of this year. Most of that was on the premise of low unemployment, lower interest rates (this helps those with fixed rate mortgages as they can refinance), and continued help with inflation as many more companies are moving their manufacturing to China and other Asian areas.

I also believed that oil would come down to $80 a barrel. I think this was the biggest mistake I had as it now looks like we will not see anywhere near below triple digits anytime soon. Even if oil comes back, gas prices are going to be set as they continue to try and catch up, and find a crack spread where they can actually make money. Overall, I still believe that the economy is in good shape, as many were trying to compare it to the start of a new "Depression," however, retail should continue to suffer.

In March, ANN raised guidance for 2008. I think that this could prove to be a mistake. I do think that ANN's management is good, but they may have predicted a bottom a little too soon as far as women's apparel is concerned. As it has done a nice job with inventories, I believe that traffic will continue to lighten over the next six months.

I think that many people believe that ANN will benefit from the tax rebate checks, but unfortunately, most of this will go into the 35 and over's SUVs. This is because this subsection of vehicle's market value has decreased and now they cannot get enough out of them to trade in on a four or six cylinder, which is why Ford (F) had such an abysmal quarter. SUVs are experiencing the same pricing problems as homes are in this country. I do believe that if there is any retailer who is positioned to receive part of those checks, it is Wal-Mart (WMT), and it will be the one to see most of that money.

If we look at the charts, ANN, Coldwater Creek (CWTR), and Talbots (TLB) have had a bearish trend over the past year. In additions, if you look at their short-term numbers, all of their sales have been going into their earnings.

ANN has seen its price drop dramatically over the past five days. As of last Monday, this stock was worth over $28 a share and now sets at $25.87. Even with this move, the stock still has a P/E of 16.89. In my mind, very pricey in a section that is seeing reduced growth and continued slowing in retail. I believe that numbers will not only continue to be bad, but they are going to get even worse.

Earnings estimates are quite telling as this quarter has seen an 8% retraction in year over year earnings, and estimated growth for next quarter is only 4.5%. Despite this, full year estimates are still up 1.6% year over year. It is my contention that there will not be growth in this sector of retail for 2008.

I believe these estimates are quite high and that ANN could see a loss for the year. Current revenue for the quarter is estimated to grow 2.8% and 2.5% for the year. I also believe that revenue could be down considerably as it continues to mark down prices.

The reason I believe that markdowns will increase is because of current trends in the stores in my area. Much of the winter clothing did well and there was only a moderate number of clearance items going into the seasonal change. However, summer clothes are quite different. Much of the summer items are already marked down considerably and traffic in stores have slowed to a halt.

Keep an eye on numbers of CWTR after earnings, as it will provide some transparency with respect to this group for what is to come the rest of this year.

Comments

[icenine:]

My wife works at Ann Taylor Outlet and you can hardly get in the door. This is where the majority of sales will come from. See if you can find one in your area. Go inside and watch. Everyone buys something, most several. I think the avg ticket is $75-110. Forget Ann Tayler Loft, its the outlets. Ice

2008 May 27 04:25 PM

[noni1:]

Dude, wipe the sweat off your face and cover your short! CWTR to 7.50 by JUNE 20!

2008 May 28 04:30 PM

[legmaker:]

I didnt short this one, just wait the call is for the full year. These stocks only got a breather, they will continue to go down.

2008 May 30 01:02 AM