With headlines this morning for Ann Taylor (NYSE:ANN) saying things such as plummet, falls, and plunges, you would think the company's stock is tanking, but it's not. It's certainly true that second-quarter earnings did fall, but the company's struggles of late are well-documented, and a poor performance was expected and communicated by management well in advance.
Despite the fact that the stock is up sharply today, some of the numbers are a bit ugly. Sales were up what appears to be a solid 7.6% versus last year, but that's before factoring in that there are 13.8% more stores now than there were at this point last year. The overall decline in sales is also reflected in the same-store sales numbers, which were down at both the Ann Taylor and the Ann Taylor Loft stores, and gross margins were down 5.5% versus last year as well.
There are reasons to think that the future will not be so bleak. The company is getting a better handle on what its core customers desire at both stores. It's also beginning to buy its inventory closer to need, which should make for lower overall inventory levels and even better cash management. The inventory levels for the second quarter partially bear this out. With this piece in place, Ann Taylor expects that its gross margins will recover and return to normal.
In the last couple of years, Ann Taylor has invested heavily in new store openings, meaning lower free cash flow than in previous years. Judging by management's comments on its conference call, it looks like there will be additional expansion and a large number of stores will be remodeled next year. While this investment is necessary to stay competitive with Talbots (NYSE:TLB), Limited (NYSE:LTD), and Chico's FAS (NYSE:CHS), it means investors have to trust that there will be larger amounts of free cash flow available in the future than there were in the past.
For its part, the company seems to realize this and continues to repurchase large amounts of its shares in the open market with the free cash flow it's generating. Ann Taylor also still has a very solid balance sheet. So, while things are tough now, there are more than a couple of reasons to believe that it can regain its form.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
