Ann
's (
ANN
) stock has increased significantly since August 2012 following the
company's announcement of its improved outlook for fiscal 2012. The
retailer's brands such as
Ann Taylor
and
LOFT
enjoy strong brand recognition in the U.S. It operates over 700
stores in the U.S. and a healthy e-commerce channel. Moreover, its
factory stores provide a viable alternative for budget conscious
customers. Apart from strong brand recognition, Ann also focuses on
being responsive to frequently changing fashion trends.
Our price estimate of $36
for the company stands at a premium of about 10% to the market
price.
But while Ann seems to be doing well in most areas of its
business, there are some risks that can potentially weigh on its
growth. These include relatively higher pricing and fewer
promotional activities compared to its rivals such as
Abercrombie & Fitch
(
ANF
) and Gap (
GPS
).
See our complete analysis for ANN
Responsive To Changing Fashion Trends
It is important for an apparel retailer to stay attuned to the
changing fashion trends and maintain adequate inventory of fashion
apparel. For example, Aeropostale (
ARO
) has been struggling with declining comparable store sales as a
result of poor fashion appeal. Its women's segment has been the
weakest performer despite higher fashion apparel demand among
women.
On the other hand, Ann is entirely a women's apparel focused
brand where fashion changes frequently. So far, Ann's "fashion
newness" has received good customer response. Over the past three
quarters, the retailer introduced vibrant colors in their skirts,
knit dresses, woven tops, skinny denim fits and colored tops. This
was welcomed by its customers, resulting in good product
performance for summer, spring and fall season. Ann's choice of
actress Kate Hudson as the face for their latest ad campaign must
have added to their brand image too. These strategies together
helped the retailer in registering a 5.5% comparable store sales
growth in Q3 fiscal 2012. We think Ann's timely fashion
responsiveness will be one of the key drivers for its future
growth.
Factory Stores For Value Conscious Customers
Most of Ann's merchandise falls under "better" and "moderate"
price category, implying that it is relatively expensive. However,
the retailer also operates a network of factory stores which offers
previous season's bestsellers at discounted prices, thus reaching
out to a larger customer base.
Ann operates around 200 factory stores which contribute a little
over 20% to its overall revenues. Although these stores provide
popular merchandise at low prices, customers have been relatively
hesitant in spending on outdated products. In Q3 fiscal 2012, the
comparable store sales for
Ann Taylor
&
LOFT
factory stores increased by 1.5% and 3% respectively. In
comparison, the figures for full priced stores were 5.6% and
8%.
While comparable store sales growth for the retailer's factory
stores is lower than that for its full priced stores, it still has
a positive outlook. These stores are making more money every year
and will continue to be an important part of Ann's business.
Rapidly Growing E-Commerce Business
Currently, the apparel industry in the U.S. is being driven by
direct-to-consumer business with retailers such as Urban Outfitters
(
URBN
), American Eagle Outfitters (AEO) and Gap registering substantial
growth through this channel. Their direct-to-consumer revenues
increased by 36%, 28% and 23% respectively in their latest
quarterly results. This trend has also lifted Ann's business.
Ann Taylor
and
LOFT's
e-commerce revenues increased by 29% and 15% respectively in Q2
fiscal 2012. Its increase is on top of last year's 30%+ growth.
With the increasing popularity of online shopping, Ann's
e-commerce channel is likely to complement its growth in the
future.
Need To Step Up Promotions
Ann offers its merchandise at relatively higher prices compared
to its rivals such as Abercrombie & Fitch and Gap. As apparel
industry in the U.S. is highly promotional, most retailers offer
discounts in order to attain a competitive advantage. On this
front, Ann risks losing out to its competitors due to lower
promotional activities. The U.S. consumer spending
outlook doesn't look too good, and real consumer spending
is expected to decline next year. Ann may have to take this into
account to stay competitive. The retailer has improved the variety
of products that it offers at opening prices in order to attract
more customers, which seems the right solution to the problem.
Our price estimate for ANN stands at $36, implying a premium of
about 5% to the market price.
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