ANN (NYSE: ANN ) has been a 10-bagger since the market bottom in 2009, rising from $3.40 per share in March 2009 to around $36 per share at the time of writing. Also impressive is its consistent positive free cash flow over the past 10 years and its double-digit return on invested capital over the past three years. Moreover, the company just recently reported strong third-quarter results. So does all that make Ann a good stock for us to invest in? Let's dig deeper and find out.
An excellent third quarter and a commitment to grow operating performance
ANN is a national specialty retailer of women's apparel and other related accessories under two main brands, Ann Taylor and LOFT. In 2012, revenue of $1.2 billion, or 50.5% of its total revenue, was generated by the LOFT stores and LOFT.com. The Ann Taylor stores and Anntaylor.com ranked second with nearly $644.5 million in 2012 sales.
In the third quarter, ANN enjoyed excellent results with 7% sales growth and 4% comparable-store sales growth. Excluding the one-time benefit in the third quarter of 2012, its earnings per share rose by 17% from $0.76 per share last year to $0.89 this year. Both brands, Ann Taylor and LOFT, reported better results: Ann Taylor's comp sales rose 1%, while comp sales of the LOFT brand jumped 6%.
Looking forward, ANN will rely on five strategic initiatives to drive its operating performance. First is its multi-channel initiative to actively engage customers to shop multiple channels. In order to maximize its gross margin, the company will reposition its inventory to reflect real e-commerce demand. Second is ANN's growing e-commerce channel. The company has experienced double-digit sales growth here, led by higher traffic and conversions at its two brands.
ANN has improved its search engine optimization to improve customers' online experience. Third, its real estate strategy should be executed very well. ANN estimates that Ann Taylor could have 80% of its fleet updated by the end of this year while the LOFT brand expands into small and mid-markets. Fourth, to enhance shopper customization, the company has been trying to improve the efficiency of its marketing program and plans to provide more personalized choices for shoppers. Last but not least, ANN has broadened its business internationally which includes the recent expansion in Canada.
ANN is cheaply valued compared to Chico's FAS and Guess
Interestingly, ANN seems to be quite cheaply valued. At $36 per share, it is worth only 5.75 times its EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation, and amortization. Compared to peers Chico's FAS (NYSE: CHS ) and Guess? (NYSE: GES ) , ANN has the lowest valuation among the three. Chico's FAS trades at $18.70 per share with an EV/EBITDA of 6.5, while the EBITDA multiple of Guess? is the highest of the bunch at 7.12.
However, income investors might prefer both Chico's FAS and Guess? to ANN due to their dividends. Chico's FAS offers a 1.20% dividend yield with a conservative payout ratio at 21%, while Guess? pays the highest yield at 2.40%. With the annualized dividend payment of $0.80 per share, the payout ratio at Guess? is quite reasonable at 42.60%.
Interestingly, while ANN posted positive comp sales, both Chico's FAS and Guess?'s comp sales dropped. In the third quarter, comparable sales for Chico's FAS dropped by 1.4%, mainly due to a lower average dollar sale. In the second quarter of fiscal 2014, Guess? also reported that comp sales declined by 2%, which compares with a decline of 10% in the previous quarter. In the current challenging retail environment, Guess? has focused its efforts on expense control and inventory management to improve its overall operating margin by 150 basis points to 10.5%.
My Foolish take
ANN has managed to deliver comp sales growth in this challenging retail environment. Despite a promising performance, ANN has a lower valuation than its peers which experienced declining performance. With its five strategic initiatives, I expect that ANN can grow its business sustainably over the long run and continue to bring value to its shareholders.
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