Ann Taylor has a Promising Outlook

By Shas Dey - February 14, 2013 | Tickers: ARO, ANN, JNY | 0 Comments

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Key revenue drivers

Ann Inc (NYSE: ANN) owns a chain of retail stores, eCommerce platform and discount or economy stores in the U.S. (Ann Taylor factory outlets and LOFT stores.) Revenue generated through LOFT stores have been a major contributor to the total revenue of Ann Taylor over the past few years, and going forward we expect the upward trend to continue.  In the current state of the US economy and declining consumer spending, Ann Taylor’s factory outlets and LOFT stores together propose an economic range of apparel for a highly price sensitive US apparel market. LOFT stores and factory outlets currently contribute 54% to the overall revenue, while Ann stores contributes approximately 20% to the total revenue.

Unique business model

Ann Taylor’s factory outlets and LOFT outlets (discount stores) together offer the best selling apparel range from the previous season at discounted prices. Furthermore, the company has an “Affordable Luxury” segment that designs luxury apparel specifically for the  outlet stores. This is a unique approach, as there are not many apparel retailers that design clothing specifically for their discount outlets. This business model strategically allows them to reach out to larger base of customers, whilst maintaining its core value of a being premium brand. LOFT and Ann Taylor’s factory outlets allow a large volume of consumers that generally prefer economy stores, but desire premium brands, to own Ann Taylor’s clothing. This is a massive contributor to overall revenue, as the main Ann Taylor brand only constitutes 20% of the overall earnings. However, the main Ann Taylor stores allow the brand to maintain a certain image and a high-end perception in the eyes of potential customers. Hence, we also expect the sales of the full price stores to increase gradually and contribute more.

Key competitors

Jones Group (NYSE: JNY) is a front line competitor of Ann Taylor. The group has a market cap of approximately $1 billion. It currently generates higher revenues from international retail sales, relative to its domestic sales. The group owns a stream of brands that are targeted at different segments of the market. The brands under the group offer footwear, clothing and various kinds of accessories. Another top line competitor of Ann Taylor is Aeropostale (NYSE: ARO). It is one of the biggest apparel retail chains that operates primarily in the US and offers apparel and accessories to the younger segment. Similar to Jones Group, Aeropostale also has a market cap of $1 billion. The retail stores contribute more than 85% to the overall revenue, with internet and catalogue sales only contributing 14%.

Growing online retailing

The Ann Taylor and LOFT eCommerce platform grew by 35% and 28%, respectively in 2011. Going forward, Ann Taylor realized the potential from the online channel and increased the CAPEX to boost its online sales in 2012. The online retailing channel as a whole for the retail apparel industry has grown exponentially over the past five years. Many retailing giants rely on sales through eCommerce platforms to drive their overall revenues. Currently, Ann Taylor and LOFT’s online sales have a very small contribution towards the overall earnings, thus this presents a huge opportunity to increase sales volume. As the industry evolves, sales through the online platform will be a key driver for Ann Taylor.

Growing LFL sales and international expansion

During the crises of 2008/09, the sales per square foot at Ann Taylor declined significantly. However, there has been a major turnaround, and in the last two years it has managed to grow the sales per square foot (like for like sales) considerably. The rationale behind the expected continued growth is the strengthening brand image and increasing brand equity. Ann Taylor’s average price per unit has also increased gradually, and we expect the trend to continue, as well as seeing growth in unit sales.

Going forward, Ann Taylor’s entry into the Canadian market will be a huge leap forward. The Canadian market promises a robust response.  In addition the strengthening Canadian dollar will be an added bonus to the overall business performance.

My take

The current stock price is trading around $27-$28, which is 69% of its 52 week high. I certainly expect a huge upside for the stock, as the company fundamentals are robust and the industry outlook is gradually improving.  I expect the US economy to recover and consumer spending to slowly increase.

However, it is imperative to point out that the stock performance depends on company earnings.  Material cost in apparels accounts for roughly 60% of the overall manufacturing cost. Thus, profit margin heavily depends on how fabric cost moves in the future. Nonetheless, fabric cost on average has declined in the last two years and the large retail selling margins should keep the P&L in good shape. If the company is able to sustain its cost structure, and continue the gradual increase in its market share, which seems extremely likely, then Ann Taylor is certain to exceed all expectations.

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