ANN Q1 Earnings Miss by a Penny, Slump Y/Y - Analyst Blog

Impacted by an extreme winter, slow consumer traffic and intense promotional headwinds, ANN INC.'s ANN first-quarter fiscal 2014 adjusted earnings of 33 cents per share plunged 25% year over year and missed the Zacks Consensus Estimate by a penny.

Including one-time items, the company's GAAP earnings came in at 11 cents a share, down 75% from the year-ago quarter.

Sales

Although weather remained adverse for most part of the quarter, favorable conditions in April provided some respite, and helped push net sales up 2.8% to $590.6 million. However, it came below the Zacks Consensus Estimate of $601.0 million.

Going by brands, the Ann Taylor brand sales came in at $219.9 million, compared with $219.3 million last year. The company's LOFT brand sales moved up 4.3% to $370.6 million.

Total comparable store sales (comps) dipped 1.8%, owing to a 2.3% fall in Ann Taylor brand comps coupled with a 1.6% slip in LOFT brand comps.

Margins and Costs

Gross margin contracted 240 basis points (bps) to 53.4% as a result of greater-than-expected promotional headwinds at the company's LOFT brand and factory outlet networks overshadowing robust merchandise margins at Ann Taylor.  

Selling, general and administrative (SG&A) expenses improved 100 bps to 48.9% of net sales, on the back of effective cost management and a decline in performance-based compensation. However, this was partly offset by a rise in occupancy, payroll and various other costs associated with new store openings. Further, adjusted operating income margin contracted 140 bps to 4.5% of net sales.

Stores Update

ANN operates a nationwide chain of fashionable clothing for women. During the quarter, the company introduced 13 new stores, including 3 Ann Taylor Factory stores, 7 LOFT stores and 3 LOFT Outlet stores. Also, during the same period, the company shut down 4 Ann Taylor and 2 LOFT stores.

The total store count at the quarter end was 1,032. This includes 264 Ann Taylor stores, 544 LOFT stores, 111 Ann Taylor Factory stores and 113 LOFT outlets.

Going forward, the company aims at opening 50 new stores in 2014, along with the closure of 30 stores and reducing the size of its Ann Taylor stores. ANN expects to close 2014 with 1,045 stores.

Balance Sheet

ANN ended the quarter with cash and cash equivalents of $127.7 million, compared with $80.5 million last year. As of May 3, 2014, its total shareholders' equity stood at $484.0 million, compared with $407.9 million as of May 4, 2013.

The company reported an increase of 3% in its total inventory per square foot, at the end of quarter. The year-over-year increase was primarily due to a rise of 15% and 8% in inventory levels at the company's Ann Taylor and factory outlets, respectively, partly offset by a 6% descent at LOFT store. The improvement depicts favorable changes in the merchandise mix at Ann Taylor and factory outlets, an overall decline in inventory per square foot and the favorable timing of Spring product clearance.
 
Outlook and Conclusion

For the second quarter of fiscal 2014, ANN targets total sales of $670.0 million, with a marginal improvement in comps. It envisions a gross margin of 53.5% and SG&A to be roughly $295.0 million in the second quarter.

For fiscal 2014, the company continues to anticipate net sales of $2.6 billion, with comps rising in the low single-digit range. However, it now expects gross margin to be around 53.2%, compared with 54% predicted earlier. SG&A is still expected at $1.2 billion. Further, the company maintains its capital spending target of nearly $120 million.

Management believes that the company is well placed for prolonged profitable growth in the future, given its sustained strategic initiatives. For the remaining quarters of the current fiscal, ANN expects to witness a robust year-over-year performance, and remains committed to showcase another year of record earnings.

Other Stocks to Consider

ANN currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Citi Trends, Inc. CTRN, American Apparel, Inc. APP and Foot Locker, Inc. FL. While Citi Trends carries a Zacks Rank #1 (Strong Buy), American Apparel and Foot Locker carry a Zacks Rank #2 (Buy) each.
 

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