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Today, corporate dress codes are not what they once were. That being said, there is still a sense of what constitutes appropriate dress in the corporate world. Ann, Inc. (ANN) is a specialty retailer serving the needs of women for more than fifty years. The company meets the needs of women by providing quality suits, separates, dresses, shoes and accessories. The company operates the Ann Taylor and Loft brands through 947 stores in 46 states, the District of Columbia and Puerto Rico. Products are also available online.

The Ann Taylor brand operates online and at 272 stores. Its target category is called the "better" priced category. The Loft brand has 501 store locations and competes in the "upper moderate" priced category. There are also 169 Ann Taylor Factory and Loft Outlet stores.

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Revenues

The second quarter of fiscal 2013 ended July 28, 2012. Sales in this quarter were up 6.6% to $594.9 million. The Ann Taylor brand was up a total of 5.6% across sales channels. Ann Taylor stores were up 3.2; Ann Taylor online sales increased 29.0% and the Ann Taylor Factory outlet group was up 2.1%. The overall increase for the Loft brand was 4.2%. The stores grew by 4.1%; the online store saw an increase of 14.6% and the Outlet was up 0.3%. For the twelve month period ending with 2Q13, sales grew about 8.7% to $2,286.0 million as compared to the year earlier period.

Full year F2013 revenue estimates are from $2,211.41 million to $2,224.00 million with an average estimate of $2,213.24 million. Looking out to F2014, analysts see revenue growing. The estimates range from $2,381.18 million to $2,403.85 million and average $2,388.56 million.

Earnings

Diluted earnings per share for 2Q12 were $0.63 as compared to $0.47 a year earlier. For the twelve month period, diluted EPS was $1.86 compared to $1.53 or 22.4% higher year-over-year. The company attributes the higher EPS to several factors including fewer full-store promotions and more category-specific and targeted promotions, an aggressive approach to managing costs, higher net sales and a decrease in sales, general and administrative costs as a percent of sales. Analysts had been forecasting second quarter earnings of about $0.51 so the actual EPS came as a 24% surprise.

Going forward, analysts estimate that full year F2013 EPS will be in the $2.10 to $2.30 range and the consensus estimate is $2.20. Analysts see growth continuing into F2014 with EPS ranging from $2.37 to $2.70 and averaging $2.53 per share.

Margins

Operating margins in 2Q13 were 6.9% as compared to 6.8% for the trailing twelve months and 6.6% for F2012. The company reported net margins of 5.1% for 2Q13, an improvement over the 4.1% for the trailing twelve months and the 3.8% reported for F2012. For the quarter, inventory grew only 3.7% whereas sales grew by 6.6%. This is an indication that the company managed its inventory well. Another metric to consider is inventory to sales. At the end of 2Q13, the inventory to sales ratio was 9.7%, virtually unchanged for year-ending 2012 at 9.6%.

Balance Sheet

The company has a very strong balance sheet with no long term debt and cash and short term investments of $132.7 million. Ann carries no goodwill or intangibles on its balance sheet. On an historical basis, the balance sheet shows no use of "non-recurring" items and few adjustments. The company does not pay a dividend.

Profitability

The company is solidly profitable with return on equity of 24.1% compared to the industry median of 15.4%. The five year average ROE is 1.7% due to a big loss in 2009. We confirm the quality of earnings by looking at free cash flow and related metrics. On a TTM basis, free cash flow totals $2.64 per share compared to diluted EPS of $1.86. We also see that free cash has been growing for each of the past three years. We find that ANN has a cash flow to invested capital ratio of 34.06% which is an indication of the company's strength and profitability on a cash basis.

Capital Allocation

If ANN has a strike against it, it is because the company does not pay a dividend. However, the company does have a share buyback program. In 2011, the Board of Directors approved a $200 million expansion of the then existing share repurchase program bringing the total authorized repurchase program to $600 million. During the quarter, the company repurchased 1.6 million shares on the open market and during the six months ended July 30, 2012, the company repurchased 3.1 million shares on the open market. For the quarter, this share buyback provided the shareholder a yield of 7.2%.

Valuation

We present here several popular valuation metrics. On a PE basis, ANN is currently trading at a premium to the market. Looking at the company's forward PE of 16.2X and the estimated long term growth rate, we get a PEG ratio of 1.27X; not exactly a bargain but not screamingly over-priced either. The price/sales ratio is a reliable metric. With a PSR of 0.74X and the industry median of 0.70X, the company looks fairly priced. On a price-to-book basis, at 4.60X, the company looks overpriced.

We favor looking at enterprise value based metrics as they take into consideration the company's capital structure. ANN has an EV/free cash ratio of 9.21X, which is well below the industry median of 12.39X. The EV/sales ratio for ANN is 0.51X compared to the industry median of 0.65X. EBITDA is a commonly used surrogate for cash flow. ANN is trading at an EV/EBITDA multiple of 7.43X, whereas the industry median is 9.9X.

Conclusion

Ann Taylor is a profitable, well-managed company. The pros include that it has no long term debt, is solidly profitable and has a strong cash flow stream. Another big plus is that it has a share buyback program in place and has actively repurchased shares on the open market. This is a shareholder friendly action for a company with adequate cash flow to support the program. If growth materializes as the analysts forecast, we think ANN can support an EV/EBITDA multiple of 9.12X.

The share price of ANN has been trending higher all year and the price has been hitting new highs. The shares made a big jump when the quarterly earnings report was released. If we are right, the share price of ANN has about 22%-23% upside before becoming fairly valued.

Disclosure: I have a LONG position in ANN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: AnnTaylor Stores: Dressed For Success