Ann Inc., the $2 billion U.S. women’s specialty retail powerhouse with 950 stores and 5.6 million square feet of selling space, got its start in 1954 as a dress shop in New Haven, Connecticut. The company went public in the late Eighties, when baby boomer women were joining the workforce in droves and couldn’t get enough of the brand’s updated corporate style. The growth continued for the next decade and a half, then slowed as the corporate casual dressing trend took hold. Sales peaked at almost $2.4 billion in 2007, then declined for the next two years when the recession took its toll on discretionary spending and the job market and the competition in the women’s specialty sector intensified. Sales have rebounded from their 2009 dip, however, and are expected to finish this year at $2.2 billion, up 12% on top of an 8% increase in 2010. Overall same-store sales improved almost 11% in 2010, after two years of double digit declines.
With its celebrity spokesmodels (such as Demi Moore, Naomi Watts and Heidi Klum) and beautifully appointed stores, it is the Ann Taylor brand that tends to dominate the company’s positioning and image. The better women’s tailored clothing and sportswear brand offers coordinated pants, skirts, dresses, jackets, tops, sweaters, denim, outerwear, shoes, accessories, fragrance, and other key women’s categories at prices ranging from $30 for a cotton tee to $400 for a wool coat. However, the flagship stores now represent less than a quarter of company sales, down from almost 40% in 2006. In 2010, the 266-door Ann Taylor division had volume of just $500 million in 2010, up 9% from the year before, but well below its peak of over $900 million, reached in 2004. The company has closed 88 Ann Taylor retail stores in the past 6 years, and plans to renovate some of the remaining ones, which average 5,000 sq. ft., into smaller 4,000 sq. ft. units.
The Loft retail division, launched in 1994 as an “Ann Taylor Light” concept featuring casual and cheaper sportswear and accessories for younger, more value-conscious women, has been so successful that it is now the retailer’s biggest division, with over 500 doors (down from 510 in 2007) and 2010 sales of $940 million. However, topline growth at Loft remains elusive as well: sales have drifted down from a peak of almost $1.2 billion in 2007, when they made up almost half of total sales, to just over 45% of the total for the first nine months of 2011. Many of the Loft stores, which average 6,000 sq. ft., are being downsized by up to 30%.
Big gains have been made by the 170 Ann Taylor factory and Loft outlet stores, where store count has almost tripled in the past four years. Factory and outlet sales have been growing by double digits in each of the past two years and now comprise a collective 22% of sales year-to-date (up from 12% five years ago). E-commerce sales, which jumped an impressive 55% in 2010, now total 10% of the business.
Comparable store sales, which so far this year are up by 5.5%, less than half of last year’s rate for the first nine months, are expected to be sluggish for Ann Taylor stores in 2011, though should improve next year when the impact of the renovated stores is reflected.
Financial Performance Gross margin has drifted in a generally upward direction from 51% of sales in 2005 to almost 56% last year, except for a severe dip during the recession. SG&A hovered between 44 and 45% of sales for most of the period between 2001 and 2007, increased to 52% in 2009, then dropped to under 50% of sales in 2010, and is expected to decline again next year. The company sustained a steep net loss in 2008, exacerbated by a goodwill impairment charge of $286 million, but turned in net income of $74 million, or $1.26 per share, last year, and is on track to exceed last year’s earnings per share in the current fiscal year. Through the third quarter of this year, sales are up 12% and net income has increased 29%, to $84.4 million. Operating margins are expected to increase to 7.3% of sales this year. A stock buyback program helped the stock price to almost double in 2010, but so far this year, shares have decreased 9%. Some analysts feel the stock is undervalued and have recently upgraded ratings.
The Continuous Makeover Kay Krill, CEO since 2005, joined the company in 1994 to launch the wildly successful Loft division, then moved up the ranks to work her magic in the rest of the business. A veteran merchant whose resume includes tours at Macy’s, Talbots and Hartmarx, Krill has also been lauded for many of the human resource initiatives she’s introduced at the company – 90% of whose employees are women – including free mammograms, backup day care, and improved benefits for spouses and domestic partners.
Krill was charged with reviving both the Ann Taylor and Loft brands when she took the top job. The company had lost touch with its customers, and after conducting a comprehensive marketing research study, found out it needed to evolve the product and marketing to stay at least a step ahead of competitors such as Talbots, Chicos, Banana Republic and Coldwater Creek. The repositioning worked, and both brands began to grow nicely, but then the recession hit, and although Loft seems to have fared pretty well, the Ann Taylor division has yet to fully recover from the economic downturn, it seems.
The latest effort to reinvent the flagship brand has met with mixed success so far. In 2010, both average unit price and transaction size for the brand increased, but these figures have both declined for the first three quarters compared to the same period last year, a trend that is not expected to reverse itself in the fourth quarter, given the highly promotional holiday retail environment. One positive sign is that dollars per square foot have increased so far this year.
The Loft division has also been evolving and gaining increasing customer acceptance as its value-oriented product resonates with working women looking for some feminine fashion in their wardrobes at tremendous values. The company confirms that 70% of the items in the Loft stores are priced at $50 or less, before discounts. The average unit retail selling price at Ann Taylor is almost 40% higher than Loft, but that differential has gradually shrunk over the past several years. It was 50% in 2006.
Growth Initiatives The company introduced a beauty line, maternity collection and bridal business several years ago. A higher-priced Ann Taylor Collection did not gain traction, however, and the only loyalty program is a co-branded credit card. No new product categories seem to be on the horizon. In the company’s third quarter earnings conference call, management admitted it is considering expansion internationally, beginning with international shipping (to see where its potential customers are) and some possible store openings in Canada. New technology initiatives to coordinate marketing and inventory between bricks-and-mortar and e-commerce, will be fully functional sometime next year. The company is also making increased use of social networking to connect with customers. Corporate capital expenditures for 2011 are planned at $125 million, more than double that of 2010, which and will cover 75 new stores, the conversion or renovation of some existing stores, and investment in new technology systems. The company plans to expand square footage by 5% per year.
Challenges Management has expressed disappointment at the lack of topline sales growth at the Ann Taylor division, but is optimistic about product design initiatives – like updated silhouettes and edgier styling– that have energized sales in the past two seasons. Although Krill and her team have tried to take the high road, and sell as much as possible at full price, it has been virtually impossible to avoid the discounting that has plagued the industry of late. Plus, there continue to be occasional merchandising missteps. Sales of tops were slower than expected in the Fall, and the company underestimated the demand for color. Staying on top of product trends and customer needs – critical for achieving sales and margin growth – will require constant monitoring and attention. Despite improvements in inventory management and sourcing technology, the merchandising team spends a tremendous amount of time and effort making sure the right product in the right quantities is in stock at the right time. Another challenge the retailer faces is ensuring brand positioning, particularly of the Ann Taylor brand, which acts as a sort of umbrella over both retail entities. So far the marketing campaigns have been successful, but using high-profile celebrities, many of whom appear frequently in the tabloids, is expensive, and not without its risks.
Big Questions What will it take to grow this company significantly beyond $2 billion? With 950 stores, and two fairly mature brands, it might prove difficult, unless the retailer starts thinking seriously about new product categories with significant topline growth potential, like home furnishings, activewear or intimate apparel, to snag increased business from existing customers. It might also consider aggressively expanding existing categories, like accessories and shoes, which could help drive more frequent traffic to stores and sites. The opening of some larger-than-average full-price “brand showcase” stores in major markets would create an exciting selling environment and a compelling customer experience. The issue still remains, however, as to whether the brands will remain strong given all the discounting. The disproportionate share of outlet growth and the heavy promoting in full-price stores to drive traffic and sales could cause problems down the road. Consumers will be trained to wait until product goes on sale, which erodes earnings potential and tarnishes the brands. Some industry watchers even feel that the quality of some of the Ann Taylor merchandise has been diluted to achieve gross margin targets, bringing it closer to Loft’s level. Now that cotton and other raw materials costs have declined, it might be an excellent time to renew focus on product quality, or growth of the flagship brand may be limited. Foreign expansion, new product introductions and improved marketing will only be profitable if the brands retain their integrity.
|($MM, exc EPS and ratios)||2010||2009||2010||2009|
|Cost of sales||876||834||44.2||45.6|
|Intrest exp., net||1||2||0.0||0.1|
|EPS – basic||1.26||-0.32||NA||NA|
|Same Store Sales||10.7||-17.4||NA||NA|
|Number of stores:|
|Start of Year||907||935||NA||NA|
|End of Year||896||907||NA||NA|
|Qtr Ended 10/31||2011||2010||2011||2010|
|Cost of sales||240||217||42.5||42.8|
|Interest exp., net||-0.4||0.1||0.0||0.0|
|EPS – basic||0.62||0.41||NA||NA|
|Same Store Sales||5.5||11.7||NA||NA|
|Number of stores:|
|End of Period||950||907||NA||NA|