What Should You Do With Shares of Ann Inc.?

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Ann Inc. (NYSE:ANN) engages in the retailing of women’s apparel, shoes, and accessories under the Ann Taylor and LOFT brands. It operates over 1,000 Ann Taylor, Ann Taylor Factory, Loft, and Loft Outlet stores in forty-seven states, the District of Columbia, Puerto Rico, and Canada. The company also sells its products through operating anntaylor.com and LOFT.com, as well as by telephone. You may recall that the company was formerly known as AnnTaylor Stores Corporation, bur changed its name to Ann Inc. in March 2011. The stock has been strong for shareholders in the last two years, rising 35 percent during this time. The question is: Can this momentum continue? An examination of the company’s recent performance suggests that the stock may begin to stall.

The company’s recent quarter was rather lukewarm. For the fiscal first quarter of 2014, the company reported earnings per diluted share of $0.11 on a GAAP basis, or $0.33 per diluted share excluding the after-tax impact of a restructuring charge of approximately $0.22 per diluted share. This compares with earnings per diluted share of $0.44 in the first quarter of 2013. There was no restructuring charge recorded in the first quarter of 2013. Total net sales were $590.6 million, compared with net sales of $574.5 million in the first quarter of fiscal 2013. By brand, net sales across all channels of the Ann Taylor brand totaled $219.9 million, compared with net sales of $219.3 million in the first quarter of 2013. At the LOFT brand, net sales across all channels were $370.6 million, compared with net sales of $355.2 million in the first quarter of 2013. Total company comparable sales for the quarter decreased 1.8 percent versus a decrease of 0.5 percent in the first quarter of 2013.

At Ann Taylor, total brand comparable sales declined 2.3 percent, reflecting flat comparable sales at Ann Taylor, which includes Ann Taylor stores and anntaylor.com, and a decline of 7.1 percent in the Ann Taylor Factory channel. At LOFT, total brand comparable sales declined 1.6 percent, reflecting decreases of 1.8 percent at LOFT, which includes LOFT stores and LOFT.com, and a decline of 0.2 percent in the LOFT Outlet channel. The company reported operating income of $9.2 million on a GAAP basis. Excluding the aforementioned restructuring charge, operating income was $26.5 million, compared with operating income of $33.9 million in the first quarter of 2013.

Gross margin, as a percentage of net sales was 53.4 percent, versus the 55.8 percent gross margin rate achieved in the first quarter of 2013. This performance primarily reflected stronger merchandise margin at Ann Taylor that was more than offset by higher-than-anticipated promotional levels at LOFT and in its factory outlet channels as compared with the first quarter of 2013. Selling, general and administrative expenses for the first quarter of 2014 were $288.7 million, versus $286.7 million reported in the first quarter of 2013. As a percentage of net sales, selling, general and administrative expenses were 48.9 percent, a 100 basis point improvement compared to the first quarter of 2013, reflecting a decrease in performance-based compensation expense as well as the benefit of ongoing disciplined expense management. These decreases were partially offset by an increase in payroll, occupancy and other variable expenses related to store growth.

Kay Krill, President and Chief Executive Officer, stated, “Despite the headwinds of severe winter weather, soft traffic across the industry and the resulting higher than anticipated promotional environment, we delivered first quarter results that met our bottom-line expectations. Importantly, traffic and sales accelerated with the return of more seasonable weather, driving positive comparable sales for April and into May.Looking ahead, we continue to make meaningful progress on our strategic initiatives, and we are planning for a stronger year-over-year performance in each quarter for the balance of the year. We remain highly focused on our objective to deliver our third consecutive year of record earnings per share in 2014.”

The quarter was so-so, however looking ahead, things appear to be improving. For the fiscal second quarter of 2014, the company expects total net sales to be $670 million, reflecting a total company comparable sales increase in the low-single digits. Gross margin rate performance is expected to be 53.5 percent. Selling, general and administrative expenses are expected to be $295 million. For the year, total net sales are expected to be $2.610 billion, reflecting a total company comparable sales increase in the low-single digits. Gross margin rate performance is expected to be 53.2 percent while total expenses are expected to be $1.200 billion, which excludes the impact of the first quarter pre-tax restructuring charge of approximately $17 million. The effective tax rate is quite high as it is expected to be 40 percent.

Given the so-so quarter with some strong news from sales but weakness in earnings, the updated guidance, growing same store sales and but increasing expenses and a high tax rate, the company is in a decent position moving forward, but there is some fundamental weakness. Given the strengths and weaknesses of the company, I expect the stock to trade range bound for the next quarter or two.As such I rate the stock as a hold with a $40 price target.

Disclosure: Christopher F. Davis hold no position in Ann Inc. and has no plans to initiate a position in the next 72 hours.

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