Why Ann, Inc. Isn't Listening to Activist Investors

Yesterday, Ann  (NYSE: ANN  ) , owners of Ann Taylor and Loft, issued a statement that, without context, seems obvious. The company said, "Our Board and management team are committed to creating value for all ANN INC. shareholders, and we will continue to take actions to accomplish this goal and position the Company for growth and success." That seems like a pretty good, if basic, business plan, but it's actually a reaction to a call for privatization.

Earlier, activist funds Engine Capital and Red Alder issued a joint letter saying that Ann could unlock additional value through a sale. The two funds, which control just over 1% of Ann's outstanding stock, believe the retailer could go for $50-$55 per share -- at least a 25% premium on the current $40 share price.

What are they looking for?
In many ways, it's an odd call. Normally, activists are pushing for failing businesses to sell out, but Ann has been on a relative tear. The company's stock has grown steadily over the last five years, outpacing the S&P 500. Over the last year, the retailer has fallen slightly behind the index's growth, but it's still up 17% over the last 12 months.

In the joint letter, Engine and Red Alder said they believed an international buyer could help the brand expand overseas at a faster pace. The funds also believed that there was untapped potential in Ann's margins and free cash flow. 

Ann announced its second-quarter results at the end of last week, and that was likely the catalyst for the funds' claim that the "status quo is untenable." In its quarter, gross margins took a hit because of promotional activity and comparable sales fell. Even with the setbacks, it seems unlikely Ann would make any sort of move at this point.

Why it's not going to happen
Analysts have said Ann isn't going to pursue a sale unless it's forced to, and the 1% backing of Engine and Red Alder aren't going to be enough to twist Ann's arm. Golden Gate Capital, which has a 9.5% stake in the business, has said that it has no plans to push for a sale or change of board members. 

Instead, what Ann needs is simply to push through its small setback. The retail market has been unkind to almost everyone over the last six months, with a combination of early-year weather and mid-year consumer disinterest adding up to excessive promotions.

Ann is rolling its first-half shortfalls into the second half, but it isn't forecasting any serious hurdles beyond those already faced. Management has said that inventory has been slimmed through the second-quarter promotions, giving the second half of the year stronger positioning for a less promotional environment. The company is also hoping to see some upside on costs with a potential fall in cotton prices. 

The bottom line
All of this points to a business that isn't going to just fold its hand in order to get some short-term gain. The bump in Ann's shares from the announcement is likely to be a shortly held gain. Ann is still running a relatively strong business, albeit one that has had a weak second quarter. If that was the metric for selling a business to private enterprise, half of the retail business in the market would be on the auction block.

Look for a stronger second half from Ann and for the privatization talk to die down quickly. Of course, there's always the small chance that Golden Gate will be swayed by Engine and Red Alder's argument, but it would be very surprising.

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