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Mark Vickery

Ann Reports Solid 3Q, Ups Guidance

CHS ANN

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Driven by strong top-line performance along effective cost management, the upscale segment retailer, Ann Inc.’s (ANN - Snapshot Report) adjusted earnings of 76 cents per share for the third quarter of fiscal 2012 surged approximately 25% from the year-ago comparable quarter’s earnings of 61 cents. Moreover, quarterly earnings beat the Zacks Consensus Estimate of 74 cents per share. The results exceeded the Zacks Consensus Estimates for the fourth straight quarter.

Ann’s strong quarterly performance boosted investor’s sentiments, which reflected on its share price. The company’s share price closed 8.23% higher at $35.10 on November 28, 2012, from the previous day’s closing price of $32.43.

Quarterly Details

During the quarter, Ann’s total revenue grew approximately 8.6% to $612.5 million from $564.0 million in the year-ago quarter. In terms of brands, the company’s Ann Taylor brand generated total sales of $244.6 million, while its LOFT brand made a contribution of $368.0 million. Moreover, quarterly revenue exceeded the Zacks Consensus Estimate of $606.0 million.

The year-over-year growth was primarily driven by a 5.5% rise in same-store sales. In terms of brands, same-store sales improved 4.3% at Ann Taylor and 6.2% at LOFT. We believe that the company’s newly launched concept stores along with better mix of products have helped it attract more customers to its stores.

Ann’s gross profit recorded a growth of 9.3% year over year to $354.4 million, while gross margin expanded 37 basis points (bps) to 57.86%. The growth was mainly attributable to quality fashionable product offerings along with lower promotional expenses.

Selling, general and administrative expenses dipped 85 bps to 46.93% of net sales due to cost savings and increased net sales, partially offset by higher expenses related to new store openings. Accordingly, Ann’s operating profit climbed to $66.9 million from $54.7 million in the year-ago quarter. Consequently, the operating margin expanded 210 basis points to 10.92% compared with 9.71% in the third quarter of 2011.

Balance Sheet

Ann exited the quarter with cash and cash equivalents of approximately $166.5 million compared with $139.6 million in the comparable period last year. The company’s balance sheet is free from any long-term debt. Total shareholders’ equity came in at $448.4 million compared with $436.1 million in 2011.

The company reported a year-over-year decline of 5% in its total inventory per square foot including e-commerce, during the quarter. The decrease was primarily due to 1% and 18% falls in inventory level at the company’s LOFT Brand and factory outlets, respectively, partially offset by 1% increase at the company’s Ann Taylor stores.

Store Update

Ann operates a nationwide chain of fashionable clothing for women. During the quarter, the company opened 25 stores, consisting 4 Ann Taylor stores, 1 Ann Taylor Factory store, 8 LOFT stores, 12 LOFT Outlet stores while closed 3 LOFT and 3 Ann Taylor stores. As of October 27, 2012, the company operated 981 Ann Taylor, LOFT, Ann Taylor Factory, and LOFT Outlet stores across 46 states, the District of Columbia, Puerto Rico and Canada.

Guidance

Moving forward, Ann now targets total sales of $2.395 billion for fiscal 2012, assuming a mid-single digit hike in comparable store sales. At the end of the second quarter, the company had expected to generate $2.385 billion of sales in fiscal 2012. The company now expects to achieve a gross margin of 55% for fiscal 2012.

The company also stated that it still estimates capital expenditure of $160 million for the rest of fiscal 2012. Moreover, Ann intends to open nearly 65 new stores and shut down approximately 30 stores during the fiscal year, keeping the total store counts at approximately 985 stores.

For the fourth quarter of fiscal 2012, the company expects sales of $625 million, assuming mid-single-digit growth in comparable store sales. Moreover, gross margin is expected to touch 51% while selling, general and administrative expenses are pegged at $300.0 million.

Highlights of the Quarter

During the quarter, the company opened its first international store in Toronto Canada. Ann also intends to open a second store in the country by the end of this month, at Yorkdale Shopping Centre, Toronto.

Apart from this, Ann is in the first phase of building a multi-channel retail format, under which its stores will have sufficient inventory to fulfill the requirements of online orders. We believe that the strategy will boost the company’s top line while minimizing costs.

Our Recommendation

We believe that the company’s strategy of expanding its store network in domestic as well as international markets, along with enhancing e-commerce capabilities will certainly boost its top and bottom lines.

However, we remain slightly cautious on the stock’s future performance due to prevailing sluggish economic growth in the U.S. Moreover, intense competition and rising material costs may negatively impact the company’s profitability.

Therefore, we are maintaining a long-term ‘Neutral’ recommendation on the stock. Moreover, Ann has a Zacks #3 Rank, which implies a short-term Hold rating.

Last week, one of the company’s main peers, Chico's FAS Inc. (CHS - Snapshot Report) also reported robust third-quarter 2012 financial results. Chico’s earnings of 25 cents per share for the quarter surged approximately 39% from the year-ago quarter's adjusted earnings of 18 cents and also surpassed the Zacks Consensus Estimate of 22 cents. Currently, it holds a Zacks #2 Rank, implying a short-term Buy rating.

Headquartered in New York, New York, Ann operates as a national retailer of upscale women's clothing. The company’s stores offer a full range of apparel and accessories under the names Ann Taylor, Ann Taylor Studio, ATdenim, Ann Taylor Petites and LOFT. It serves the customers through its traditional retail stores, online stores – anntaylor.com and LOFTonline.com – as well as via phone. The company targets college-educated women between the ages of 25 and 55, who are employed in professional and managerial positions.

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