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Shares of Ann (ANN), the specialty retailer of women's apparel, shoes and accessories, rose more than 20% in Friday's trading session. The company reported a strong set of second quarter results, prompting enthusiasm among investors.

Second Quarter Results

Ann reported second quarter revenues of $594.9 million, up 6.6% compared to last year. Comparable store sales growth of 4.7% drove the increase in revenues. The company reported a 34% increase in earnings per share to $0.63. The results comfortably beat analysts consensus, who were looking for earnings of $0.51 per share.

Gross margins expanded by 90 basis points to 55.9% as a result of lower promotional activities. Selling, general and administrative expenses fell 50 basis points to 47.0%, driven by positive operating leverage.

During the quarter, Ann repurchased approximately 1.6 million shares at a cost of $40 million. The company opened 17 new stores, predominantly LOFT stores. It closed 2 stores, bringing the total store count to 962.

CEO Kay Krill commented on the results, "We are extremely pleased with ANN's record earnings per share of $0.63. Our outstanding results were driven by a seven percent increase in sales, including a comparable sales increase of five percent, a gross margin rate of 56% and a 27% percent increase in operating income."

Segmental Information

Ann Taylor

The Ann Taylor brand generated net sales of $233.3 million, up 7.1% compared to last year. Comparable sales grew 3.2% at the stores to $122.6 million. Online sales rose 29.0% to $29.1 million, while Ann Taylor Factory reported a 2.1% growth to $81.6 million.

LOFT

Net sales of all brands within the channel came in at $361.6 million, up 6.2% compared to last year. LOFT store sales rose 4.1% to $273.0 million. LOFT e-commerce sales grew 14.6% to $27.5 million, while LOFT outlet sales increased by a mere 0.3% to $61.1 million.

Outlook

For the third quarter of 2012, Ann expects net sales to come in around $600 million. This implies a mid-single digit increase in comparable store sales. Gross margins are expected to come in at 58%.

For the full year of 2012, the company expects net sales of $2.385 billion. Comparable store sales growth will come in the mid-single digits. The full year revenue guidance is in line with analysts consensus. Gross margins will come in approximately around 55%, with selling, general and administrative expenses approaching $1.14 billion.

Valuation

Ann ended its second quarter with $133 million in cash and equivalents. It operates without the assumption of any meaningful debt for a strong net cash position. For the first six months of 2012, the company generated $1.16 billion in net sales. It net earned $59.5 million, or $1.21 per diluted share.

After Friday's 20% jump in the share price, the market values the firm at $1.65 billion. This values the operating assets of the firm at $1.52 billion. Based on the full year outlook, Ann is valued at 0.6 times annual revenues. If Ann were to generate annual profits of $100 million, the business is valued at 15 times annual earnings.

The jump in Ann's share price caused Francesca's (FRAN) to jump 10% as well. Shares of the chain of boutique stores have performed relatively well after last year's IPO.

Currently, Ann does not pay a dividend.

Investment Thesis

Year to date, shares of Ann have risen some 37% already. Shares traded within a $23-$29 trading range, before breaking out to $34 in Friday's session.

Over the longer term, investors have seen some mediocre performance. Shares returned 20% over the past five years, but investors saw their holdings fall to lows of $3.50 in the beginning of 2009.

In the meantime, the company has worked to improve its operational performance. Full year revenues of 2012, will surpass the levels of 2008 for the first time. The company has furthermore addressed its profitability issues, and has retired 10% of its shares outstanding over the past three years.

Despite the incremental improvements, I can hardly become very enthusiastic about the stock. Investors either love or hate the stock depending on the momentum, much as shoppers like or dislike the company's latest fashion offering.

While the stock clearly has a lot of momentum going this year, I am hesitant to jump on the bandwagon. The stock is trading near the high-end of its trading range, and trades around fair valuation metrics.

Source: Ann Taylor - Shares Are In Fashion After Latest Earnings Report