Is Ann Taylor an Outperform?

With shares of Ann Taylor (NYSE:ANN) trading at around $28.00, is ANN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Ann Taylor hasn’t had a memorable 2013 thus far. It began when the company announced that it expected overall sales for Q4 to come in at $608 million versus an earlier prediction of $625 million. This news wasn’t received well by investors. Ann Taylor also expects a 1 percent comparable sales decline. The good news is that gross margins are expected to improve to 49 percent, but this is still below the original expectation of 51 percent. As far as 2013 goes, the consensus is for 5 percent sales growth and 16 percent EPS growth.

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Ann Taylor was also recently downgraded to Market Perform from Outperform by Avondale. This didn’t help matters. In addition to that, Ann Taylor has reported that its brightly-colored clothes have failed to catch on with shoppers. Brightly-colored clothes tend to sell better during more optimistic times and during warmer months. It seems as though the timing might have been a little off.

It might appear to be all bad news so far, but there is a lot more to this story. And a good deal of the story pertains to industry trends. Therefore, the most important information can be found in the Trends section. For now, let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Strong           

The debt-to-equity ratio for Ann Taylor is strong. The balance sheet is excellent. Cash flow is also superb. There might be several negatives to point to with this story, but as long as Ann Taylor remains strong in a fiscal sense, there will always be good long-term potential.  

Debt-To-Equity

Cash

Long-Term Debt

ANN

0.00

$166.53 Million

$0

URBN

0.00

$362.71 Million

$0

 

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T = Technicals on the Stock Chart Are Weakening    

Ann Taylor has performed well over the past three years. Over that time frame, it has outperformed the S&P 500 and Urban Outfitters (NASDAQ:URBN). However, year-to-date has been poor.

1 Month

Year-To-Date

1 Year

3 Year

ANN

-12.52%

-17.23%

16.51%

78.86%

URBN

-3.83%

6.02%

46.52%

30.57%

S&P 500

2.48%

6.86%

14.19%

46.34%

 

At $28.00, Ann Taylor is currently trading below all its averages.     

50-Day SMA

31.96

100-Day SMA

33.61

200-Day SMA

31.27

 

E = Earnings Have Been Improving                 

Ann Taylor has shown steady earnings improvement on an annual basis. Revenue has also been impressive over the past few years.

2008

2009

2010

2011

2012

Revenue ($)in billions

2.40

2.20

1.83

1.98

2.21

Diluted EPS ($)

1.51

-5.82

-0.32

1.24

1.64

 

When we look at the last quarter on a year-over-year basis, we see an improvement in revenue and earnings.  

10/2011

1/2012

4/2012

7/2012

10/2012

Revenue ($)in millions

564.00

566.66

560.41

594.87

612.55

Diluted EPS ($)

0.61

0.05

0.58

0.63

0.84

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

There is only one real positive here, which is that Ann Taylor caters to high-end consumers. With the stock market on a tear, high-end consumers have more money to spend, which is good news for a company like Ann Taylor. On the other hand, there are several negatives that also come into play, which include higher payroll taxes, increased gas prices, and increased food prices. Not all Ann Taylor shoppers are high-income, and those that aren’t may begin to be more cautious with their spending.

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Conclusion

Ann Taylor has a strong balance sheet, great cash flow, and decent margins. The forward P/E is also just 12.07. However, the shorts are lurking as there is an 11.20 percent short position on the stock. A large short position like this is rarely a good sign. The only benefit is a potential short squeeze.

The most important factors here are industry trends. That being the case, the risks outweigh the rewards. Ann Taylor is a well-run company with a good long-term future, but the near future doesn’t look as bright.

Ann Taylor is a WAIT AND SEE.

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