Ann Earnings Preview: Strong Ann Taylor And Improved LOFT To Offset Industry Weakness

| About: Ann, Inc. (ANN)

The past two quarters have been lackluster for women’s merchandise retailer Ann (NYSE:ANN). While an imbalance in LOFT’s product mix weighed heavily on its growth during the holiday season, weak demand during the first quarter resulting from prolonged cold weather overshadowed its product improvement. However, Ann Taylor brand maintained its strength during both the quarters due to quick response to changing trends, wide product range, appealing shopping experience and balanced pricing strategy.

As the company releases its Q2 fiscal 2013 earnings on Aug. 23, we expect Ann Taylor to continue performing well backed by the launch of new Kate Hudson for Ann Taylor collection. Moreover, the improvement in LOFT’s product mix will help drive the retailer’s store traffic. Ann recently launched its global shipping to more than 100 countries, and the quarterly results will reflect additional revenues from this channel. We expect these factors to offset the prevailing weakness in the apparel industry to some extent and drive Ann’s results. LOFT and Ann Taylor contribute about 60% and 40% to the company’s value, respectively, according to our estimates.

We Expect Strong Performance From Ann Taylor Brand

Backed by its diverse product range and appealing marketing, Ann Taylor has established a strong brand identity in the U.S. During Q1 fiscal 2013 when the industry wide demand for spring clothing was weak, the brand’s mainline stores’ comparable sales jumped 6.2% driven by robust sales of its dresses, skirts, woven tops, shoes and jewelry. It registered similar results even in the preceding weak holiday quarter.

We expect Ann Taylor to carry this momentum in Q2 fiscal 2013 with firm inventory control and new product launches. The brand launched an exclusive Kate Hudson for Ann Taylor collection in May. The collection featured the actress’ red-carpet glamor in products and accessories such as premiere dress, entrance skirt, elegant tank, whisper top, shimmer platform heels and moonlight necklace. Ann’s strategy of showcasing Kate Hudson as the brand’s face has yielded good results so far and customers have shown strong affinity towards its products.

Additionally, Ann is focused on providing Ann Taylor’s customers with a fun shopping experience. Its concept and capital-right refreshed stores have seen a positive customer response. The company stated that the new store format is designed to appear light and feminine, while reflecting the brand’s modern aesthetics and aspirational position. Through these stores, Ann Taylor offers a large variety of merchandise in a smaller space along with style assistance from store staff.

LOFT Can Perform Better

Toward the end of last year, Ann invested heavily in LOFT’s bright colors, and kept the proportion of black and neutrals low. This led to product imbalance and resulted in weak performance from the brand. The first quarter results weren’t good either as the company increased its investments in LOFT‘s warm weather products, and unusually long winters subdued their demand.

However, Ann stated that LOFT started well in the second quarter with greater product balance and good customer response to latest prints and patterns. Since some of the brand’s product categories such as denim, LOFT lounge, dresses and jackets delivered robust growth in Q1 despite weak demand, they are likely to do well in the second quarter as well. Additionally, the company’s campaigns to increase LOFT’s brand awareness has drawn good attention so far, and this is likely to have a positive impact on the store traffic.

Weakness in the U.S. Apparel Market Will Have an Offsetting Impact

The spring season in the U.S. this year was coldest since 1996 and also turned out very wet. Subsequently, the demand for apparel and accessories suited for warmer and drier conditions declined, which weighed on the industry-wide apparel sales during the period of March-May. Moreover, consumer spending remained weak due to payroll tax increases and higher unemployment rate. As U.S. employers slowed their hiring pace outside the farming sector, unemployment rate rose in about 28 states in July and remained at the same level in 14.

As a result, the start to back-to-school (July-September) season was quite weak as most retailers tried to attract customers with heavy discounts. According to the National Retail Federation, average spending per family on apparel, shoes, supplies and electronics will decline by almost 8% during this season compared to 2012. The overall industry weakness severely impacted the results of retailers including American Eagle Outfitters (NYSE:AEO) and Aeropostale (NYSE:ARO), and will weigh on Ann as well.

Our price estimate for ANN stands at $35, implying a premium of about 5% to the market price.

Disclosure: No positions.

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Tagged: , Apparel Stores, Earnings
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