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Tuesday, February
17, 1998
Ann Taylor
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %>
Phone: 212-541-3226
Price (2/13/98): $12 7/16
HOW DID IT FIND TROUBLE?
Sometimes you can be too good. The 1996 holiday season was a smashing success
for mall re-taylor Ann Taylor. Patrons picked the racks bare. The
January quarter was strong, topping analyst estimates.
At first it was a welcome sign for investors. The 1995 shopping season had
been cruel, and by the time February 1996 rolled around the company had to
devote 40% of its inventory to clear out the lingering merchandise. But early
1997 was different. As the new spring lines came in they were snapped up
and there were few leftovers. Only 5% of Ann Taylor's racks were devoted
to the clearance-priced apparel.
But shoppers who opened wide for the clothing smorgasbord in 1996 were not
so anxious to ring up purchases when the clearance sales were scarce. While
same-store sales rebounded later in the spring, and the sale of full-price
items naturally had better profit margins, the tone was set for a company
that would fail to keep up the sales pace throughout the latter part of the
year.
After peaking at $25 in May, the shares went into a slow and deliberate strip
tease. With Ann fans fading as competing chains like Talbots <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLB)") else Response.Write("(NYSE: TLB)") end if %> were performing relatively better, the chain whose discount stores were
named Ann Taylor Loft soon found its share price living in the basement.
BUSINESS DESCRIPTION
New York-based Ann Taylor operates 324 retail stores specializing in women's
apparel. The casual yet upscale retailer is located mostly in enclosed shopping
malls. The company sells its outlet merchandise through Ann Taylor Loft and
Ann Taylor Factory Stores.
A year ago the company left the retail shoe industry by closing down its
nine Ann Taylor Studio stores.
FINANCIAL FACTS
Income Statement
12-month sales: $782.4 million
12-month income: $12.6 million
12-month EPS: $0.50
Profit Margin: 1.6%
Market Cap: $319.6 million
Balance Sheet
Cash: $7.1 million
Current Assets: $211.5 million
Current Liabilities: $95.2 million
Long-term Debt: $105.5 million
Ratios
Price-to-earnings: 24.9
Price-to-sales: 0.41
HOW COULD YOU HAVE SEEN IT COMING?
As retail stocks do, Ann Taylor's stock was susceptible to small yet definite
price swings with every month's same-store sales report. Last year began
with a 2.5% same-store sales rise in January and the stock fell on the report
since the majority of mall-based retailers turned in stronger performances.
That set the scene for a 1.2% decline the following month. This was related
to the lack of promotional items -- again, a blessing over the holidays but
a problem when shoppers accustomed to late winter deals walked out of the
stores empty-handed.
The comps improved over the spring -- and on higher margin full-price merchandise
-- but the only thing more fickle than fashion is a fashion shopper. Try
as Ann Taylor would, the merchandise mix was not working for the customers.
Same-store sales turned negative for the second half of the year and so did
investor sentiment.
There was a springtime blip in the store's popularity. But once the conflicting
signals turned bearish with a summer slowdown, investors headed for the exit
again.
WHERE TO FROM HERE?
In the October quarter, same-store sales fell a staggering 15.6%. The lower
customer acceptance is a delicate issue in retail but not one that is
permanent.
However, the 1997 holiday buying season did not live up to expectations and
retailers were again turning to deep discounts to clear out the winter garb.
While the 10.1% sales decline in December was dreadful, it opened up the
clearance racks and the comps turned positive last month.
However, Ann Taylor is a relative weakling yet again. While January's same-store
sales rise of 1.1% was positive, over at Talbots the same-store sales shot
up 19.7%. They were both coming off poor Decembers and some would think winning
the clearance rack war is a bit of a Pyrrhic victory. Of the two chains,
Ann Taylor is the only one expecting to turn a profit for the January quarter.
In the meantime, analysts have been trimming away at their earning earnings
projections for Ann Taylor. They now expect the company to produce net income
of $0.85 a share in this new year. With the volatile nature of the industry,
it is best not to take that target literally. Any shift, up or down, in comps
can very well dictate revisions. A Foolish investor, while looking at the
long-term potential of any holding, 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.
-Rick Aristotle Munarriz
([email protected])
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