Thursday, July 23, 1998
Ann Taylor Stores
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Phone: 212-541-3226
Price (7/22/98): $22 7/8
HOW DID IT DOUBLE?
Ann Taylor is fickle. So investors in this women's apparel retailer have learned to reserve the right to change their minds, too. And have they ever. After landing in the discount bin of our Daily Trouble just five months ago, this stock is now a tailor-made Double.
As my partner Rick Aristotle Munarriz so excellently put it back in February, "A Foolish investor... would probably want to keep an eye on the monthly comps that Ann Taylor reports -- since they seem to ultimately dictate the difference between Loft-life and Low-life."
Comparable store sales were up just 1.1% in January, dismal compared to rival Talbot's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLB)") else Response.Write("(NYSE: TLB)") end if %> 19.7% same-store sales gain. February results were even worse, down 15.9% due in part to the post-holiday clearance sale being pushed up to January this year versus February in 1997. Comp store sales were almost equally disappointing in March, down 7.5%.
But with investors already beginning to play Ann's change of mood, the stock got a giant push May 7 on the announcement that April same-store sales were up 4.7%. CFO Walter Parks said first quarter EPS would come in between $0.17 and $0.20 a share, beating expectations. Actual results were even better, matching the $0.25 a share reported last year.
While inventories appeared a bit high, especially after just a 2.8% same-store sales gain for May, June produced a blowout 9% jump in same-store sales. For the year so far, revenues are up 6.8% to $356.9 million. That's a modest gain, but enough to turn heads among folks that dismissed Ann as just a tease.
BUSINESS DESCRIPTION
Ann Taylor is a leading specialty retailer of apparel and accessories, primarily for working women. Its brand is associated with updated versions of classic styles for both office and casual wear.
The company had 339 stores at the end of May, including 291 mostly mall-based Ann Taylor stores, 14 Ann Taylor Factory discount stores, and 34 Ann Taylor Loft stores. It plans to open 26 new flagship stores this year plus 18 new Loft locations. The Loft stores feature more moderately priced merchandise and are located in outlet centers.
Executives and directors own just 1.4% of the stock. Merrill Lynch, which led a leveraged buyout of the company in 1989, is one of several large institutional holders, with 24% of the shares.
FINANCIAL FACTS
Income Statement*
12-month sales: $782.1 million
12-month income: $11.8 million
12-month EPS: $0.47
Profit Margin: 1.5%
Market Cap: $587.4 million
(*Excludes preferred stock, which would convert into 5.1 million shares and boost the market cap to $704.1 million.)
Balance Sheet
Cash: $36.7 million
Current Assets: $233.4 million
Current Liabilities: $102.1 million
Long-term Debt: $115.4 million
Ratios
Price-to-earnings: 46.8
Price-to-sales: 0.75
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Specialty retailers of women's apparel have had a tough time in recent years as proliferating store concepts began to blur along with fashion trends. But a strong economy tends to raise most boats, even those that have skirted a recovery in the past.
Moreover, Ann Taylor lost its controversial CEO Sally Frame Kasaks in August of 1996 and its CFO Paul Francis in early 1997. After such management turmoil, the new execs often need a few quarters to get the business hemming to their plans. While in this case you needed to be quick to act on the improving same-store sales figures, a little consideration of the brand and of the recent history might have suggested old Ann was a fair risk at $11 1/4 a share.
WHERE TO FROM HERE?
Although the consensus estimates call for $0.92 in EPS this year and $1.13 in FY99, the range is too wide to draw meaningful conclusions. Still, July quarter results seem likely to at least match the $0.15 a share estimate if the recent sales trend continues. So much depends, though, on whether women like what's on the racks.
That makes it difficult to really tell whether Chair/CEO J. Patrick Spainhour, formerly CFO of Donna Karan International, has succeeded in turning around the company or whether the recent rally is just another in a long line of trading range blips. Over the last three years, the stock hasn't made it above $25 1/4, and each trip into the $20s has been followed by an ugly plunge, as bad months followed good.
Inventory turns did pick up to 5.1 last year from 4.7 the previous year. The company is also in the middle of a two-year implementation of new information systems that should enhance support of merchandising functions. Thus, one can see some progress in moving from former CEO Kasaks's aggressive expansion strategy to a stance more focused on asset management and profitability.
But women's apparel retailers still live and die by whether they've got what's hot or not. The trend isn't encouraging. Ann Taylor's net sales per average square foot has dropped steadily over the last four years from $627 in FY94 to $445 last year. Longtime customers may be able to spot something that Wall Street has missed here. Yet the current price already appears to discount many more months of improving sales.
-- Louis Corrigan
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