Slow consumer traffic and intense promotional headwinds hurt ANN INC.’s (ANN) second-quarter fiscal 2014 earnings of 70 cents per share, which witnessed a year over year decline of nearly 8.6%. Earnings, however, came in line with the Zacks Consensus Estimate.
Sales
The company’s sales for the quarter improved 1.6% year over year to $648.7 million but fell short of both the Zacks Consensus Estimate of $650 million and its own projection of $670 million. The company blamed the weaker-than-anticipated comparable store sales (comps) on soft traffic trends and a highly promotional environment across the industry in the latter half of the quarter. However, the company noted that sales trends remained positive through mid June.
Going by brands, Ann Taylor sales came in at $250 million compared with $245.2 million in the prior-year quarter. LOFT sales moved up 1.5% to $398.7 million.
Total comps dropped 2.3% owing to a 4.1% fall in LOFT brand comps partially offset by a 0.7% improvement in Ann Taylor brand comps. The company remains encouraged by the positive comps delivered at Ann Taylor, which was mainly driven by a 2% rise at Ann Taylor stores, partially offset by a 1.9% decline in the Ann Taylor Factory channel.
For LOFT, dismal comps can be traced back to soft demand for basic knit tops which form a key component of the brand’s summer collection. Comps decline at LOFT brand was characterized by a 5.2% fall at LOFT stores marginally offset by a 0.3% gain in the LOFT Outlet Channel.
Margins and Costs
The company’s gross margin for the quarter contracted 230 basis points (bps) to 52.4%. The built-up pressure on gross margin was due to the measures taken by the company to clear summer inventory which resulted in clean inventories at both brands although it weighed upon margins.
Selling, general and administrative (SG&A) expenses increased 140 bps to 43.9% of net sales, on the back of effective cost management and a decline in marketing expenses as well as performance-based compensation.
Stores Update
ANN operates a nationwide chain of fashionable clothing for women. During the quarter, the company introduced 17 new stores, including 2 Ann Taylor Factory stores, 6 LOFT stores and 9 LOFT Outlet stores. Also, during the same period, the company shut down 3 Ann Taylor and 6 LOFT stores.
The total store count at the quarter end was 1,040. This includes 261 Ann Taylor stores, 544 LOFT stores, 113 Ann Taylor Factory stores and 122 LOFT outlets.
Going forward, the company aims at 50 new store openings in 2014, along with the closure of 40 stores and reduction of its Ann Taylor store size. ANN expects to close 2014 with 1,035 stores.
Balance Sheet
ANN ended the quarter with cash and cash equivalents of $150.3 million compared with $107 million last year. As of Aug 2, 2014, its total shareholders’ equity stood at $474.6 million compared with $401.5 million as of Aug 3, 2013.
The company reported an increase of 1% in its total inventory per square foot, at the end of the quarter. The year-over-year increase was primarily due to a rise of 10% in inventory levels at the Ann Taylor stores, partly offset by a 2% decline at LOFT store as well as across all factory/outlet channels. The improvement depicts favorable changes in the merchandise mix at Ann Taylor stores as well as the timing of receiving fall products.
Outlook and Conclusion
Looking at the second-quarter financial performance, ANN has lowered its outlook for fiscal 2014. The company now anticipates total sales to come in at $2.560 billion, down from the earlier guidance of $2.6 billion. Comps for the full fiscal is now anticipated to remain flat year over year versus a low single-digit rise expected earlier.
Further, it now expects gross margin to be around 52% compared with 53.2% predicted earlier. SG&A expenses are projected at $1.175 billion for the full fiscal compared with the earlier guidance of $1.2 billion. However, the company maintains its capital spending target at nearly $120 million.
Furthermore, the company initiated guidance for the third quarter of fiscal 2014. ANN targets total sales of $670 million, with flat-to-marginal negative comps. It projects gross margin of 54% and SG&A of roughly $300 million.
Other Stocks to Consider
ANN currently holds a Zacks Rank #5 (Strong Sell). However, some better-ranked stocks in the same industry include Citi Trends, Inc. (CTRN), The Men’s Wearhouse, Inc. (MW) and Foot Locker, Inc. (FL). Of these, Citi Trends and Men’s Wearhouse sport a Zacks Rank #1 (Strong Buy), while Foot Locker carries a Zacks Rank #2 (Buy).
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