Ann Taylor Stores (NYSE:ANN) has been on a tear since November -- the stock is up more than 50% -- thanks to revitalized performance at its stores. Recently released first-quarter results suggest that that trend is continuing.
Sales for the quarter increased 16.7% to $556.2 million. Ann Taylor Loft accounted for 49% of sales, while the eponymous stores accounted for 40% and Ann Taylor Factory, the outlet concept, brought in the remainder. Earnings came in at $0.53 per diluted share -- more than double the $0.24 reported for the same quarter last year. Total comparable sales, or sales comparisons at stores open more than one year, were up 5.6%. Comps were a strong 7.4% at Ann Taylor and 4.7% at Ann Taylor Loft; both chains experienced negative comps just a year ago.
Another positive was that inventory was down 19% versus last year's quarter. Cash on the balance sheet at the end of the quarter stood at slightly below $380 million, or about $5.00 per share.
All in all, it appears that Ann Taylor's fashion trends are right on the mark for its target customer base of 24- to 55-year-old affluent women.
Fashion forward
In terms of an outlook, management expects comparable sales in the "low-single-digit range" versus 2005. Earnings are expected to be $1.70 to $1.75 (which includes $0.06 for stock option expenses), or $0.10 higher than previous guidance. These figures represent a 40% to 44% increase over 2005 earnings.
Ann Taylor operated 824 stores as of the end of 2005, made up of 357 Ann Taylor, 416 Loft, and 51 Factory stores. Loft is the growing concept in the retail lineup; the company has plans to open about 60 Loft stores this year, compared with 10 namesake branches and five Factory stores. With new stores opening at a fast pace, I wonder how many stores can operate before saturation becomes a concern. (I couldn't find remarks from management or analysts on this question.) With Loft now outnumbering Ann Taylor in store count and revenue, it will also be interesting to see how much rapid growth the concept has left.
While this quarter was solid, sales over the past five years have been decent, averaging 11% annually. Earnings growth has been a bit tepid, averaging just 8% during that time frame. The company has been earnings-positive over the past five years, but earnings peaked back in 2003 at $1.42 and have yet to recover to that level. Cash flow from operations has been impressive, averaging two to three times net income over the past three years. That cash is mostly being spent on capital expenditures to open new stores, but with no long-term debt, all growth is funded with internally generated funds.
A crowded mall
It's clear that things are going well for Ann Taylor, and its stores have undoubtedly experienced a brand revitalization. However, as with any retailer, it's only a matter of time before sales fall off the fashion bandwagon and customers buy clothing at the competing retail concepts.
The trailing price-to-earnings ratio (P/E) of approximately 33 is lofty. The forward P/E is more reasonable at about 22, though it's still at the higher end of the women's retailing industry. Projections account for sustained rosy performance, so I'd recommend waiting until a fashion faux pas to snap up shares. And at a P/E above 20, I'd like a more consistent track record of earnings growth. Momentum investors may disagree, and things could certainly improve further, but as any Fool knows, retail investing will always be subject to the whims of a fickle customer base.
Fool contributor Ryan Fuhrmann does not have a financial interest in any company mentioned in this article.
