Recently, investors gave Ann Taylor (NYSE:ANN) stock quite a discount after the company reported November same-store sales that were, in a word, frumpy. This was after a lackluster quarter that had already left a lot of investors wondering: What's gone wrong? Can it be righted?
I've often said that Ann Taylor Loft is one of my favorite retail stores, which helps compel me to write about this stock on a fairly frequent basis. Indeed, Loft has been boosting the whole company's fortunes for quite some time, since it has been a more popular stop for shoppers.
However, last month, even Loft suffered. Both the namesake Ann Taylor division and the higher-growth Loft concept suffered a 4% drop in customer traffic -- and that's 4% apiece.
One couldn't blame investors for questioning whether Ann Taylor can fix its wardrobe malfunction. (And in case you couldn't tell, I've been dying to use that phrase since it was first coined last February.) It's obvious that it can't hang on Loft's coattails forever.
From classic back to cool
It's arguable that whatever Ann Taylor's got going on is just not working, although, in its Form 10-K, the company mentioned "The Ann Taylor Look." Of course, the last year or so has revealed that the signature "look" has been in need of a facelift.
If you take a trip to Ann Taylor's website, you'll find a retailer that's definitely evolving. For a long while, I've been of the opinion that today's workplaces have made suits for women the exception and not the rule. This seems to be illustrated on Ann Taylor's Web site -- when I checked, many suits on the site were advertised at 60% off. Talk about a deep discount -- and related margin problems. Speaking of which, here's another possible misstep: Ann Taylor prices are notoriously pretty darn high to begin with, which probably alienates many of its target shoppers.
Having popped into my local Ann Taylor, there was hardly a suit jacket to be found, though there were still dress pants galore. While this may be a good sign that the concept is evolving, they still likely have a ways to go in terms of modernizing. I found the color scheme a bit outrageous, with hot, bright colors (pink, turquoise, green), many of which seemed a bit garish instead of cheerful. I can see how Ann Taylor continues to be a problem.
Back to those notoriously high prices, too. For example, a pair of slouchy pants that looked comfy -- but are perhaps best suited for yoga class or walking the dog -- were marked with a $129 tag, which seemed far pricier than the relaxed lines deserved.
Fashion sense
On the other hand, I think Ann Taylor Loft's magic has been all about its fashionable, trendy items, available at more moderate price points. Those lower prices mean that women of a variety of age groups consider them must-haves -- maybe the biggest reason is they're fun and they don't break the bank.
Loft's had some heady success, and indeed, it makes you wonder when the company's 10-K filing says that the Loft concept "appeals to women with a more relaxed lifestyle and work environment." Maybe that really does say that most women these days have a more relaxed lifestyle and work environment, and Loft's fun, fashionable clothes aren't about needing items but wanting them. These are two totally different shopping motivations, and want is definitely the stronger of the two.
A recent trip to Ann Taylor Loft suggested to me that nothing's intrinsically wrong there, in terms of clothing (which also makes me wonder whether perhaps the consumer has decided to cut holiday budgets, although some may rightly wonder whether that fear is overblown). There were cute, quality clothes at reasonable price points, and great customer service (one of Ann Taylor's claims to fame, an important step in creating customer loyalty).
What next?
Not long ago, Ann Taylor had a hopeful outlook (in this commentary from Seth Jayson back in the summertime, Ann Taylor was generating some admirable free cash flow). However, that outlook has since changed; in the recent quarter, free cash flow has ventured into the negative territory and gross margin has dropped from 57.7% to 51% because of the increased promotional activity to move its wares out the door.
At current levels, might Ann Taylor be a bargain? Maybe. Given signs of its own unresolved weaknesses and the negativity surrounding many retailers after the perception of a weak Thanksgiving weekend, the shares are currently trading at a forward P/E of 20. That might sound like a bargain compared with forward P/Es of 38 for Urban Outfitters (NASDAQ:URBN) (which runs Anthropologie) and 29 for Chico's (NYSE:CHS), for example. (On the other hand, Motley Fool Stock Advisor pick Gap (NYSE:GPS) has a forward P/E of 17, and it also shared rather lackluster November same-store sales.)
On the positive side, as I mentioned in a previous piece, Ann Taylor has put Kay Krill in a position in which she can (hopefully) translate some of the success she has had in the Loft concept to the namesake stores as well. It's obvious that the company is trying new things to update the "Ann Taylor Look," and given the past success of Loft, it's not too much of a stretch to imagine it can be done, especially given recipes for success management already has.
Some investors may want to take the chance that Ann Taylor can fix what ails its original retail concept, especially given a rather sour outlook focused on many retailers at the moment. However, it bodes well to bear in mind that at this point -- and until the Ann Taylor division rights itself, becoming more relevant to its customers' needs -- it's still very much a retail gamble.
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Alyce Lomax does not own shares of any of the companies mentioned.
