Slow consumer traffic, intense promotional headwinds and labor disruption at the West Coast ports hurt ANN INC.’s (ANN) third-quarter fiscal 2014 earnings which came in at 72 cents per share, witnessing a year-over-year decline of nearly 19%. Earnings, however, came ahead of the Zacks Consensus Estimate of 69 cents.
Sales
The company’s sales for the quarter declined 1.6% year over year to $646.8 million and fell short of the Zacks Consensus Estimate of $653 million as well as its own projection of $670 million. The company blamed the weaker-than-anticipated sales performance on soft sales at its Ann Taylor and LOFT brands owing to weak mall traffic and a highly promotional retail environment. Further, the company revealed that sales in the early half of the third quarter were impacted by product shipment delays due to labor disruption at the West Coast ports, which was later toned down by using air freight.
Going by brands, Ann Taylor sales came in at $233 million compared with $249.2 million in the prior-year quarter. LOFT sales, including Lou & Grey, moved up 1.3% to $413.8 million.
Further, the company’s Ann Taylor brand reported its first negative comparable-store sales (comps) performance in the last 10 years because of soft product performance in certain categories. This, combined with a comps decline at the LOFT stores resulted in total company comps falling 4.3%.
Comps for the Ann Taylor brand were down 6.6%, including a 4.8% fall at Ann Taylor stores and website and a 10.4% decline in the Ann Taylor Factory channel. At the LOFT brand, comps fell 2.9% characterized by a 3.3% fall at LOFT stores and website as well as a 1.0% decline in the LOFT Outlet Channel.
Margins and Costs
The company’s adjusted gross margin for the quarter contracted 390 basis points (bps) to 51.8%. Including an 80 basis points impact related to incremental air freight costs due to labor uncertainty at the West Coast ports, as well as ongoing weak traffic trends, a highly promotional environment and soft product performance in select categories at Ann Taylor, gross margin was 52.6%.
Adjusted selling, general and administrative (SG&A) expenses contracted 40 bps to 44.6% of net sales, on the back of a decline in marketing and performance-based compensation expenses as well as cost savings pertaining to the company’s first-quarter fiscal 2014 restructuring.
Adjusted operating income declined 26.6% to $51.7 million while operating margin fell 270 bps to 8.0%. The decline was primarily due to lower-than-expected sales coupled with gross margin contraction and increased expenses.
Stores Update
ANN operates a nationwide chain of fashionable clothing for women. During the quarter, the company introduced 14 new stores, including 2 Ann Taylor stores, 2 Ann Taylor Factory stores, 4 LOFT stores, 4 LOFT Outlet stores and 2 Lou & Grey stores. Also, during the same period, the company shut down 4 stores, including 2 Ann Taylor and 2 LOFT stores.
The total store count at the quarter end was 1,050. This includes 261 Ann Taylor stores, 546 LOFT stores, 115 Ann Taylor Factory stores, 126 LOFT outlets and 2 Lou & Grey stores.
The company aims at opening about 50 new stores in 2014, while shutting down nearly 45 stores. This is expected to result in a total of 1,030 stores at the end of fiscal 2014 and a 2% rise in the total weighted average square footage.
Balance Sheet
ANN ended the quarter with cash and cash equivalents of $109.8 million compared with $118.7 million last year. As of Nov 1, 2014, its total shareholders’ equity stood at $508.3 million compared with $449.3 million as of Nov 2, 2013.
The company reported an 8% increase in total inventory per square foot, at the end of the quarter. The year-over-year increase was primarily due to a rise of 22% in inventory levels at the Ann Taylor stores, 3% at LOFT and 8% in the factory/outlet channel. The improvement at Ann Taylor stores depicts favorable changes in merchandise mix as well as marginally higher unit inventory than the prior year, while the factory/outlet channel gained from a shift in the timing of receipt of products compared with last year.
Outlook and Conclusion
Following the conclusion of the third-quarter, ANN has reiterated its forecasts for the fourth quarter and updated its outlook for fiscal 2014.
For the fourth quarter, the company targets total sales of $630 million along with negative comps in the low-single digits. It projects gross margin of 46.5% and SG&A of roughly $295 million. Effective tax rate is expected to be 41% while share outstanding should total 46.2 million
The company now anticipates total sales for fiscal 2014 to come in at $2.516 billion, down from the earlier guidance of $2.560 billion. Comps for the fiscal are now anticipated to fall in the low-single digits range.
Further, it now expects gross margin to be around 51.2% compared with 52% predicted earlier. Gross margin includes a charge of $13 million related to incremental air freight costs. Adjusted SG&A expenses are projected at $1.161 billion for the fiscal compared with the earlier guidance of $1.175 billion. Effective tax rate is projected to be 39% while shares outstanding are anticipated to be 46.6 million.
The company also lowered its capital spending target to nearly $110 million compared with $120 million projected earlier.
Other Stocks to Consider
ANN currently holds a Zacks Rank #5 (Strong Sell). Better-ranked stocks in the same industry include bebe stores inc. (BEBE), Foot Locker Inc. (FL) and American Eagle Outfitters Inc. (AEO). Of these, bebe stores sports a Zacks Rank #1 (Strong Buy), while Foot Locker and American Eagle carry a Zacks Rank #2 (Buy).
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