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ANN INC. (ANN - Snapshot Report) posted strong financial results for the third quarter of fiscal 2013, primarily driven by robust top-line performance along with effective cost management and lower share counts. The upscale segment retailer’s earnings of 89 cents per share for the quarter surged 17.1% from the prior-year quarter’s adjusted earnings of 76 cents and beat the Zacks Consensus Estimate of 87 cents. The prior-year quarter does not include a benefit of 8 cents per share related to the recognition of gift card and merchandise credit breakage.

Quarterly Details

During the quarter, ANN’s net sales grew approximately 7.3% to $657.5 million from $612.5 million in the year-ago quarter. In terms of brands, the company’s ANN Taylor brand generated total sales of $249.2 million (37.9% of total sales), while its LOFT brand made a contribution of $408.4 million (62.1% of total sales). Moreover, quarterly revenue strides ahead of the Zacks Consensus Estimate of $654.0 million.

The year-over-year growth was primarily driven by a 3.7% rise in same-store sales. In terms of brands, same-store sales improved 0.6% at ANN Taylor and 5.6% at LOFT.

ANN’s gross profit recorded growth of 3.3% year over year to $366.2 million. However, gross margin contracted 220 basis points (bps) to 55.7%. The year-over-year decline in gross margin was primarily due to increased promotional expenses.

Selling, general and administrative (SG&A) expenses dipped 190 bps to 45.0% of net sales due to cost savings and increased net sales, partially offset by higher store expansion costs.

Accordingly, operating profit increased to $70.4 million from $66.9 million in the year-ago quarter. However, operating margin contracted 20 bps to 10.7% primarily due to lower gross margin partially offset by improved SG&A expenses as a percentage of sales.

Balance Sheet

ANN exited the quarter with cash of approximately $118.7 million compared with $166.5 million in the year-ago period. Total shareholders’ equity came in at $449.3 million compared with $448.4 million in the year-ago period.

The company reported an increase of 8% in its total inventory per square, at the end of quarter. The year-over-year increase was primarily due to rise in inventory levels at the company’s ANN Taylor, LOFT, and factory outlets of 1%, 14% and 10%, respectively.

Store Update

ANN operates a nationwide chain of fashionable clothing for women. During the quarter, the company opened 20 stores, consisting of 1 ANN Taylor store, 1 ANN Taylor Factory store, 12 LOFT stores and 6 LOFT Outlet stores. As of Nov 2, 2013, the company operated 276 ANN Taylor, 106 ANN Taylor Factory, 537 LOFT, and 108 LOFT Outlet stores across 47 states, the District of Columbia, Puerto Rico and Canada.

Guidance

Moving forward, ANN now targets total sales of $2,510 million for fiscal 2013, assuming low-to-mid-single digit growth in comparable store sales. At the end of second quarter, the company had estimated to generate $2,515 million of sales in fiscal 2013. Presently, the company expects to achieve a gross margin rate of 53.9% for fiscal 2013, compared with 54.3% projected earlier.

The company also stated that it now estimates capital expenditure of $155 million for fiscal 2013, down from the previous guidance of $160 million. Moreover, ANN intends to open nearly 66 new stores and shut down approximately 30 stores during the fiscal.

For the fourth quarter of fiscal 2013, the company expects sales of $640 million, assuming mid-single-digit growth in comparable store sales. Moreover, gross margin is expected to touch 49.5% while selling, general and administrative expenses are pegged at $305 million.

Other Stocks Worth Considering

ANN currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Fossil Group, Inc. (FOSL - Analyst Report), Finish Line Inc. (FINL - Snapshot Report) and DSW Inc. (DSW - Snapshot Report). All these stocks hold a Zacks Rank #2 (Buy).

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