Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: Flash Update: Ann Taylor to Accelerate Factory Outlet Expansion in 2011
Previous Edition: September 10, 2010; 2Q10 Earnings Update
Flash News Update
On October 28, 2010, AnnTaylor Stores Corporation announced that it expects to significantly expand its factory outlet footprint in 2011 through the opening of approximately 35 LOFT Outlet Stores and 5 Ann Taylor Factory Stores. To accelerate its expansion in this channel, the Company is leasing premium store locations at leading factory outlet centers across the United States formerly occupied by Liz Claiborne Inc.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON ANN.
Portfolio Manager Executive Summary[Note: only highlighted material has been changed]
Ann Taylor Stores Corp. (ANN or the Company) is a national specialty retailer of women’s apparel, shoes, and accessories operating under three concepts: Ann Taylor Stores (ATS), Ann Taylor Loft (LOFT), and Ann Taylor Factory (an outlet division), Ann Taylor being the core brand.
Of the twelvefirms covering ANN, fiveprovided positive ratings, sixfirms assigned neutral ratings, and onefirmrendered a negative rating on the stock. Of the firms, ten provided target prices while six firms came up with valuation metrics. Target prices range from $17.00 to $28.00 with an average of $21.30. Two firms with the highest target price have a positive view on the stockwhile three firms with the lowest target price are Neutral on the stock.
The following is a summarized opinion of the diverse brokerage firms’viewpoints:
Neutral or equivalent outlook (50.0%; 6/12firms): The target prices range from $17.00 to $23.00. Thesefirmsprefer to remainon the sidelines regarding the shares of ANNdue to the current macroenvironment. The firmsmaintain a neutral stance based on the limited visibility on near-term earnings profitability, the ongoing merchandising changes that are underway, and exposure to higher-end professional shoppers atATS. They believe the Company has positioned itself for a prolonged consumer downturn better than its peers, and cuttingcosts, closing stores, pulling back on new initiatives,and maintaining lean inventory levels will likely allowANN to withstand the downturn.
The firms remain encouraged that management has undergone a strategic evaluation of its pricing structure by category across the full assortment at the Ann Taylor division. According to the firms, Ann Taylor has an improved offering of innovative, exciting and sophisticated merchandise including contemporary silhouettes and better fabrics and a new sensibility.Moreover, management is heading in the right direction with plans to add more color and better versatility.
Positive or equivalent outlook (41.7%; 5/12 firms): The target prices range from $19.00 to $28.00. These firms maintained their positive outlook based on the belief that the Company will continue with its solid merchandising execution in order to meet consumer demand. The firms believe a key to ANN's recovery is to make the customer to pay full price again, and the more compelling product and lean inventories are helping to recondition the customer to do this. According to the firms, the Company is one of the best positioned in the current environment and think the business is in full recovery mode with the sales trend and margins improving in both brands.
Negative or equivalent outlook (8.3%; 1/12firms): The firm did not provide any target price.
Additional factors to be taken into consideration before investing in the stock:
Although there is scopefor improvement on both operating margins and sales productivity, the Company may not be able to continue to improve its current business. If the Companyis unable to improve its current business model, it could miss consensus earnings estimates.
Fashion is sensitive to timing and to the ability to receive the latest styles on a timely basis. If vendors import or port issues or transportation strikes delay product arrival in the stores, the Company's business may be negatively affected. Moreover, its sales are likely to be affected if the Company misses key fashion trends or display trends that were not appealing to its core customer.
Competition is difficult in the Company's core target market. There can be no assurance that the Company can compete effectively for market share.
Consumer spending habits, including spending on fashionable apparel and related accessories, remainaffected by economic conditions, levels of employment, salary and wage rates, consumer confidence, and consumer perception of economic conditions. A general slowdown in the U.S. economy could result in lower spending, and negatively affect the Company's business.
September 10, 2010
Recent Events[Note: only highlighted material has been changed]
On August 20, 2010, ANN reported its 2Q10 financial results. Highlights are as folows:
Ann Taylor Stores reported 2Q10 total sales of $483.5 million, up from $470.2 million in 2Q09. The reported net sales were lower than the Zacks Digest average estimate. The Zacks Digest average estimate for 2Q10 net sales was $503.8 million.
The Company reported 2Q10 net income of $18.6 million versus a net loss of $18.0 million in 2Q09. The reported net income was above the Zacks Digest average estimate. The Zacks Digest average estimate for 2Q10 net income was $18.5 million.
Ann Taylor Stores reported pro-forma EPS of $0.31 in 2Q10 versus a loss per share of $0.32 in 2Q09. The reported EPS was slightly below the Zacks Digest average estimate. The Zacks Digest average estimates for 2Q10 EPS was $0.32.
Overview[Note: only highlighted material has been changed]
The firms identified the following factors for evaluating the investment merits of ANN:
Key Positive Arguments / Key Negative Arguments- Ann Taylor Stores’s long-term initiatives arefocused on improving the topline, gross margin, and reducing costs.
- Solid inventory management, continued full price selling, and a new approach to product promotions areexpected to boost margins, going forward.
- Specific initiativeshave been undertaken to improve merchandising and profitability.
- Its strong balance sheet and cash flow gave ANN the flexibility to repurchase shares.
- A product turnaround at Loft and Ann should eventually lead to growth in a better environment.
- Merchandising at the Loft division lacks newness.
- Inability to capitalize on new fashion trends or forecast future trends will negatively affect the Company's sales.
- Competition is increasing from retailers in different forms (e.g., new companies from abroad are entering the U.S. market, and existing retailers are launching new concepts, etc.).
- A general slowdown in the U.S. economy could result in lower spending, and negatively affect the Company's business.
- Deterioration in mall traffic from a prolonged recession could make more promotions necessary, hurting earnings.
Based in New York City, Ann Taylor Stores Corp. (ANN or the Company) is a national specialty retailer of women’s apparel, shoes, and accessories targeted the 25 to 55 year old age group. The Company operates under three concepts: Ann Taylor Stores (ATS), Ann Taylor Loft (Loft), and Ann Taylor Factory (an outlet division). Ann Taylor, the core brand, primarily targets fashion-conscious, professional women aged 25-55, while Loft appeals to the price-sensitive, slightly younger customer with a more relaxed lifestyle and/or work environment. At the end of 2Q10, ANN operated 894 Ann Taylor, LOFT, Ann Taylor Factory, and LOFT Outlet stores in 46 states, the District of Columbia and Puerto Rico. The Company also sells AT and Loft merchandise at its websites and respectively. Ann Taylor Stores’ fiscal year ends on January 31.
September 10, 2010
Revenue[Note: only highlighted material has been changed]
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue ($ M) / 2Q09A / 1Q10A / 2Q10A / 3Q10E / 2009A / 2010E / 2011E / 2012EAnn Taylor Sales / $108.9 / $167.7 / $177.5 / $114.8 / $456.5 / $573.2 / $575.1
Loft Sales / $250.6 / $271.3 / $265.1 / $240.3 / $940.2 / $1,009.4 / $1,042.9
Other Revenue / $110.9 / $74.6 / $122.3 / $138.1 / $432.0 / $475.2 / $567.4
Total Revenue / $470.2 / $476.2 / $483.4 / $493.4 / $1,828.6 / $1,950.5 / $2,047.2 / $2,019.0
Digest High / $470.2 / $476.3 / $483.5 / $495.3 / $1,829.2 / $1,969.7 / $2,107.7 / $2,019.0
Digest Low / $470.0 / $476.0 / $483.0 / $487.6 / $1,828.4 / $1,944.2 / $1,972.7 / $2,019.0
Y/Y Growth / -20.6% / 11.6% / 2.8% / 6.7% / -16.7% / 6.7% / 5.0% / -1.4%
Q/Q Growth / 10.2% / 1.5% / 1.5% / 2.1%
*Note: Only one broker provided the estimate for 2012.
Total revenue was $483.5 millionversus$270.2 million in 2Q09. By brand, net sales across all channels of the Ann Taylor brand totaled $207.2 million in 2Q10, compared with net sales of $191.8 million in 2Q09. At the LOFT brand, net sales across all channels were $276.2 million in 2Q10, compared with net sales of $278.4 million in 2Q09.
Total Company comparable sales for the quarter increased 6.1%, versus a decline of 22.4% in the prior year. At Ann Taylor, total brand comparable sales increased 15.2%, reflecting increases of 19.6% at Ann Taylor stores, 28.5% in the Ann Taylor e-commerce channel and 6.3% in the Ann Taylor Factory channel. At LOFT, total brand comparable sales were flat, reflecting a decrease of 3.1% at LOFT stores that was offset by an increase of 54.6% in the LOFT e-commerce channel and a 13.2% increase in the LOFT Outlet channel.
Segment Results
Ann Taylor Stores (ATS): As per the Zacks Digest model, revenue at the ATS division increased 63.0% y-o-y and 5.9% sequentially to $177.5 million in2Q10.
Ann Taylor Loft (ATL): As per the Zacks Digest model, Loft revenue increased 5.8%y-o-y,but declined2.3% q-o-q to $265.1 million in 2Q10.
Ann Taylor Factory/Others: The Zacks Digest averagerevenue at the division increased 10.3%y-o-y,but 64.0% q-o-q to $122.3 million in 2Q10.
A graphical representation of the revenue segments is provided below:
Guidance
For the third quarter of 2010, the Company expects total net sales to approach $495 million, reflecting mid- to high-single digit comparable sales performance at the Company, including a strong double-digit comparable sales increase at the Ann Taylor brand and a low single-digit comparable sales increase at the LOFT brand. For fiscal 2010, the Company expects total net sales to approach $1.95 billion. In addition, the Company anticipates positive comparable sales at both brands.
Outlook
The Digest model forecasts total revenue of $1,950.5 million forFY10, $2,047.2million for FY11, and $2,019.0 million in FY12, reflectinga y-o-yincrease of 6.7% in FY10 and 5.0% in FY11, and a y/y decline of1.4% in FY12. The three-year Compound Annual Growth Rate (CAGR) realized on FY10 revenue is projected to be2.8%.
Please refer to the separately published spreadsheet of ANN for additional details and updated forecasts.
Margins[Note: only highlighted material has been changed]
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 2Q09A / 1Q10A / 2Q10A / 3Q10E / 2009A / 2010E / 2011E / 2012EGross Margin / 52.4% / 59.4% / 55.0% / 56.1% / 54.4% / 55.6% / 55.5% / 55.6%
Operating Margin / 1.3% / 8.2% / 6.4% / 6.6% / 1.5% / 5.9% / 6.4% / 5.9%
Pre-tax Margin / 1.1% / 8.2% / 6.2% / 6.6% / 1.4% / 5.9% / 6.4% / 6.1%
Net Margin / 0.8% / 4.8% / 4.0% / 3.9% / 0.9% / 3.5% / 3.8% / 3.7%
2Q10 Summary
Cost of goods sold was $217.3 million, down 3.0% y/y and up 12.4% q/q. Gross margin was55.0% in the quarter, a 260 basis pointsy/y increase driven by improved product offerings and higher full-price selling at the Ann Taylor brand, effective marketing initiatives and the success of the Company's strategy to appropriately position the inventory levels.
Selling, general and administrative expensescame in at $235.4 million versus $240.2 million in the year-ago quarter. This decline in expenses reflected restructuring program savings, as well as continued aggressive management of expenses, partially offset by incremental marketing investment versus 2Q09.
The Company recorded pre-tax restructuring charges of $0.8 million in 2Q10associated with its previously announced strategic restructuring program, compared with $31.1 million in 2Q09. On an after-tax basis, 2Q10 restructuring charges totaled $0.5 million, or $0.01 per diluted share, compared with $21.6 million, or $0.38 per diluted share in 2Q09.
Excluding the aforementioned charges, operating income was $30.7 million in 2Q10 versus an operating income of $6.0 million in 2Q09. Including the above-mentioned charges, reported operating income was $29.9 million in 2Q10 versus an operating loss of $25.2 million in 2Q09.
Excluding the aforementioned charges, net income in the quarter was $19.1 millionversus a net income of $3.6 million in 2Q09. Including the above-mentioned charges, reported net income was $18.6 million in 2Q10 versus a net loss of $18.0 million in 2Q09.
Guidance
Management expects 3Q10 gross margin rate performance to be slightly better than 56%. Selling, general and administrative expenses are estimated to be $245 million, including approximately $5 million in incremental marketing investment versus last year.
Management expects 2010 gross margin rate performance to be approximately 100 basis points better than the 54.4% rate achieved in fiscal 2009. Selling, general and administrative expenses are expected to be essentially flat with the $967 million reported in fiscal 2009, despite an anticipated increase of approximately $120 million in net sales and incremental marketing spend of $15-$20 million for fiscal 2010. It reflects the benefits of the Company's strategic restructuring program and the ongoing efforts to reduce expenses.
Outlook
The Company is expecting some pressures relating to costs in 2H10. One firm (BofA Merrill Lynch) expects these pressures to be offset by moving production to lower-cost countries and by correcting other sourcing inefficiencies.
As per the Zacks Digest model, the firms expect cost of goods sold (COGS) to increase at a slower rate than revenue in FY10 (4.0% versus 6.7%) and in FY11 (4.2% versus 5.0%), driving gross margin expansion. However, COGS is projected to decline at a slower rate than a revenue decline in FY12 (-0.8% versus -1.4%), inducing gross margin contraction.
The firms expect the SG&A expense to increase 0.1% in FY10, 3.8% in FY11 and decrease0.1% in FY12 versus a revenue growth of 6.7% and 5.0%, and a decline of 1.4%, respectively. Operating margin is thus expected to be 5.9% in FY10, 6.4% in FY11 and 5.9% in FY12.
The Digest model forecasts operating income of $114.7 million for FY10, $130.2 million for FY11, and $119.0 million for FY12, reflecting a y-o-y growth of 324.0% in FY10 and 13.5% in FY11, while a y-o-y decline of 8.6% in FY12. The three-year Compound Annual Growth Rate (CAGR) realized on FY10operating income is projected to be3.4%.
Please refer to the separately published spreadsheet of ANN for additional details and updated forecasts.
Earnings per Share[Note: only highlighted material has been changed]
The Company reported EPS of $0.32, excluding after-tax restructuring charges of $0.01 per diluted share versusearnings per diluted share of $0.06 in 1Q09, excluding after-tax restructuring charges totaling $0.38 per share. On a GAAP basis, including the aforementioned restructuring charges, earnings per diluted share were $0.31 in 2Q10, compared with a loss per diluted share of ($0.32) in 2Q09.
Provided below is a summary of earnings per share as compiled by Zacks Research Digest
EPS / 2Q09A / 1Q10A / 2Q10A / 3Q10E / 2009A / 2010E / 2011E / 2012EZacks Consensus / $0.31 / $1.12 / $1.34
Digest High / $0.06 / $0.39 / $0.32 / $0.34 / $0.32 / $1.27 / $1.58 / $1.59
Digest Low / $0.06 / $0.38 / $0.32 / $0.31 / $0.27 / $1.12 / $1.25 / $1.59
Digest Average / $0.06 / $0.38 / $0.32 / $0.33 / $0.29 / $1.18 / $1.37 / $1.59
Y-o-Y Growth / -88.7% / 1095.7% / 429.4% / 66.7% / 1039.8% / 308.7% / 16.7% / 15.7%
Q-o-Q Growth / 257.1% / 670.2% / -16.4% / 4.5%
*Note: Only one broker provided the estimate for 2012.
Shares outstanding totaled 58.8 million in 2Q10, a y/y increase of 3.6% and a q/q increase of 0.6%.
Outlook
One firm (Raymond James) increased FY10 EPS estimate attributable to higher 2Q10 results, and is based on a same-store sales expectation of an increase of 6.6% and an operating margin of 5.7%.
One firm (Jefferies) expects substantial earnings momentum to remain for another quarter or two, but may slow in 2H10 against tougher comparisons and rising Street expectations.
The Zacks Digest model projects an average EPS of $1.18 for FY10, $1.37 for FY11, and $1.59 for FY12 with a y-o-y growth of 308.7% in FY10,16.7% in FY11, and 15.7% in FY12. The three-year Compound Annual Growth Rate (CAGR) realized on FY10 EPS is projected at 13.5%.
Highlights from the EPS chart are as follows:
- FY10 forecasts (total 7) range from $1.12 to $1.27; the average is $1.18.
- FY11 forecasts (total 7) range from $1.25 to $1.58; the average is $1.37.
- Only one firm (Cowen) provided an FY12 EPS estimate of $1.59.
The Digest model forecasts net income of $68.6 million for FY10, $78.4 million for FY11, and $75.0 million for FY12 reflecting a y-o-y growth of 316.1% in FY10 and 14.2% in FY11 and a y-o-y decline of 4.3% in FY12. The three-year Compound Annual Growth Rate (CAGR) realized on FY10 net income is projected at 5.2%.
As per the Zacks Digest model, the firms expect the share count to increase by 1.9% y-o-y to 58.2 million at the end of FY10and decrease by 2.1% y-o-y to 57.0 million at the end of FY11 and by 17.5% at the end of FY12. The three-year Compound Annual Growth Rate (CAGR) realized on FY10 shares outstanding is projected at 6.9%.
Please refer to the separately published spreadsheet of ANN for additional details and updated forecasts.
Target Price/Valuation[Note: only highlighted material has been changed]
Of the twelvefirms covering ANN, fiveprovided positive ratings, sixfirms assigned neutral ratings, and onefirm rendered anegativerating on the stock. The Zacks Digest average target priceprovided by the firm is $21.30 ($0.61from the previous report; 37.4%upside from the current price). The lowest target price is $17.00 (9.7% upside from the current price) (Goldman, J.P. Morgan, Jefferies),while the highest target price is $28.00 (80.6% upside from the current price) (Piper Jaffray, UnionBankSwitz.). Most of the firms used P/E multiples, EV/sales multiples, EV/EBITDA multiples to compute their target prices.
Twofirms with the highest target price are positive on the stock, while three firms with the lowest target price areNeutral on the stock.
Since the last update, fourfirms reduced their target prices on the stock.
Rating DistributionPositive / 41.7%
Neutral / 50.0%
Negative / 8.3%
Avg. Target Price / $21.30
Digest High / $28.00
Digest Low / $17.00
Analysts with Target Price/Total / 10/12
Risks to the target price include the changing winds of fashion, risk tied to a situation in which all of ANN's product is private-label and bears the sole burden of potential markdowns, geopolitical uncertainty, heightened competitive environment, consumer receptivity to merchandising changes, return to aggressive promotional pace, deterioration in macroeconomic conditions, volatility of energy costs, and changes to import tariffs/quotas.
Metrics detailing current management effectiveness are as follows:
Metric (TTM) / Company / Industry / S&P 500Return on Assets (ROA) / 4.50% / 1.79% / 5.68%
Return on Investments (ROI) / 6.62% / 2.61% / 7.22%
Return on Equity (ROE) / 9.72% / 4.15% / 15.67%
The Compnay’s ROA, ROI and ROE are lower than the industry and overall market averages (as measured by S&P 500).
Capital Structure/Solvency/Cash Flow/Governance/Other[Note: only highlighted material has been changed]
Balance Sheet
The Company ended the quarter with $262.6 million in cash and cash equivalentsversus $203.9 million at the end of 2Q09. Accounts receivable totaled $26.4 million versus $21.8 million at the end of 2Q09.
Merchandise inventories were $181.1 million at 2Q10 end versus $169.9 million at the end of 2Q09. Total inventory per square foot at the end the quarterincreased 8.3%, reflecting 25.2% increase at Ann Taylor stores and a 1.9% increase at LOFT stores, while factory/outlet channel was essentially flat. The increase at Ann Taylor stores reflects earlier receipt of the full complement of the brand seasonal core wardrobe essentials versus last year, without which, inventory per square foot at Ann Taylor stores would have increased approximately 10%.