What a difference a couple of weeks can make.
As October turned into November, women's clothier Ann Taylor (NYSE:ANN) had been treading water for nearly four months, with its shares trading at about the same $25 they fetched back in March.
Then a series of happy press releases from retailers such as American Eagle Outfitters (NASDAQ:AEOS), Abercrombie & Fitch (NYSE:ANF), Wal-Mart (NYSE:WMT), Buckle (NYSE:BKE), and Motley Fool Hidden Gems selection New York & Co. (NYSE:NWY) sparked a meteoric rise in Ann's stock.
Ann's own confirmation of its previous predicted earnings of $1.17 per share for fiscal 2005, combined with the glad tidings that its October comparable-store sales had risen slightly year over year (rather than declining, as analysts had predicted), added fuel to the stock's fire. A couple of weeks later, Ann's shares are trading 14% higher as we head into Friday's earnings news from the company.
With less than 24 hours remaining before the company posts its results, analysts are projecting that Q3 will see a near doubling of the company's year-ago profit numbers, resulting in earnings per share of $0.36 on a 14% rise in sales.
If that comes to pass Friday, it will be glad tidings indeed. But as fellow Fool Alyce Lomax pointed out earlier this month, the investors who bought Ann's shares in droves in the wake of the company's guidance update may have arrived early to Ann's party. This retailer still has some serious problems.
First and foremost: cash flow. Over the past 12 months, Ann has recorded $25.5 million in profits, calculated according to generally accepted accounting principles (GAAP). Actual cash profits, however, went missing entirely. On the contrary, in the the past 12 months, Ann experienced net free cash outflows of $58 million, a significant decline from the $113.6 million in free cash flow the company generated for the previous 12 months.
Inventories don't seem to be a problem anymore. Ann mentioned in its earnings guidance that by the end of October, inventory per square foot had dropped 17% year over year.
That monetization of stockpiled inventory could well boost free cash flow for the retailer.What could hurt, though, is the same thing that has hurt the company over each of the past four quarters: massive outlays of cash for capital expenditures.
Over the past 12 months, Ann has spent nearly $200 million on capex. What has it received? A 7.6% increase in sales (as of the most recent quarter) and an 8.7% decline in cash generated from operations. Call me a Fool, but I suspect the company had been anticipating more bang for its 200 million bucks.
Whatever tomorrow brings, here's hoping that by Christmastime, we see those capital improvements start paying off a bit more generously.
Fool contributor Rich Smith does not own shares of any company named above.
