Should You Buy This Outperforming Fashion Company?

Ann is reporting exceptionally strong performance in a challenging environment for the industry, and this says a lot about the company's brand power and management team quality.

Mar 14, 2014 at 6:58PM

Image Loft

Source: Ann.

Ann (NYSE:ANN) was rising by more than 7.6% on Friday after the company reported better than expected results for the fourth quarter of 2013. This performance is particularly encouraging when compared against industry peers such as Gap (NYSE:GPS) and Abercrombie & Fitch (NYSE:ANF), which are being materially affected by industry headwinds. Should you go shopping for shares of this trendy fashion company?

On the right side of the trend
Total sales during the fourth quarter of 2013 came in at $623 million, versus $608 million in the same quarter of the prior year, thanks to a strong increase of 2.9% in comparable store sales.

While many competitors have experienced margin pressure due to intense promotions lately, Ann reported an increase of 20 basis points in gross margin to 49.3% during the quarter.

The Ann Taylor brand suffered a 1.1% decline in comparable sales, while store and online sales rose by 0.9%, the factory channel showed a big decline of 6.1%, which management attributed to weak traffic in regions that were particularly affected by the weather. 

The LOFT brand, on the other hand, continues firing on all cylinders with an increase of 5.7% in total brand comparable sales during the quarter. While comparable sales in the LOFT outlet channel decreased by 3.5%, store and online sales showed a remarkable growth rate of 7.6% in comparable revenues during the quarter.

Net income during the period came in at $4.7 million versus $2.4 million in the fourth quarter of 2012. Earnings per share were $0.10, double the $0.05 per share the company generated in the same quarter of the prior year, and materially better than the $0.07 per share forecasted on average by Wall Street analysts.

The company has a pristine balance sheet with more than $200 million in cash and equivalents and no financial debt, and management is planning to use its financial flexibility to reward shareholders with stock buybacks. During fiscal 2013, Ann repurchased approximately 1.5 million of its outstanding shares at a total cost of $49.1 million, decreasing shares outstanding by 4% during the year.

Industry headwinds
Retailers in different sectors are facing heavy headwinds due to weak consumer spending and tough weather conditions over the last months, and fashion apparel companies are no exception by any means.

Gap is typically considered a steady performer in comparison to peers because of its wide global reach and diverse customer base, which provide stability for the company´s sales. However, Gap is clearly not immune to weather conditions; the company reported big same-store sales declines across its different brands during February, as more than 450 of its stores had to close during the unusually cold winter.

Comparable-store sales at Gap Global fell by 10% in February versus the same month in the prior year, while revenues from Banana Republic declined by 7%, and Old Navy delivered a decrease of 6% in comparable-store sales.

Abercrombie & Fitch is trying to implement a turnaround by reinvigorating its brands and streamlining operations. Even if the company is making some improvements in areas like cost cuttings and closing unprofitable stores, sales continue to decline at a considerable speed, so there is little or no sign of a sustainable turnaround for Abercrombie & Fitch at this point.

Net sales during the 14 weeks ended on Feb.1 declined by 11.5% versus the same period in the prior year, and performance remains week across the board. Comparable sales decreased 6% for Abercrombie & Fitch, while Abercrombie Kids delivered a decline of 8%, and comparable sales at Hollister fell by 10% during the period.

Moving forward
The company ended the year with a total of 1,025 stores, comprised of 268 Ann Taylor stores, 108 Ann Taylor Factory stores, 539 LOFT stores, and 110 LOFT Outlet stores. Management is planning to open approximately 50 stores in the coming year, with a special focus on its particularly successful LOFT brand.

In addition, the company has announced it will be cutting approximately 100 jobs as it streamlines its operations to adapt to an onmi-channel world. Management expects costs savings in the area of $25 million per year from this restructuring.

These kinds of decisions are always hard to make, especially when a company is reporting better-than-expected performance. However, Ann seems to be trying to stay ahead of the curve and adapting to changing industry conditions as quickly as possible while keeping costs at bay, and this is the right approach to a dynamic and competitive business like fashion retail.

Bottom line
Ann is doing materially better than its competitors in spite of a challenging environment for the industry, as its LOFT brand is performing specially well. Management remains focused on keeping costs under control and adapting to changing industry dynamics, so the company looks well positioned to continue rewarding shareholders with superior performance in the middle term.

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Andres Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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