By  on August 22, 2014

There’s an industry-wide problem and Kay Krill gets to the crux of it.

“We do not have a fashion must-have out there right now,” Krill, Ann Inc.’s president and chief executive officer, told WWD on Friday, just after Ann reported an 8.1 percent net income drop for the second quarter. “Since the colored-bottom trend, there has not been a got-to-have-it kind of item.”

Discussing the mind-set of the missy shopper, Krill observed, “She is definitely only buying something that excites her or is not in her closet, something that says ‘fashion.’ She is very price-conscious, and as far as something that’s more basic, it’s got to be at an excellent price.” Women, she added, are “value-oriented, fashion-oriented and not replenishing. This is truly [happening] across the entire industry.”

Krill said the industry has been in a steep promotional cycle for the past three quarters, underscoring what other retailers have already cited — this year’s unusually intense and sustained promotional environment, slowly recovering economy and slowing mall traffic.

“It’s always that way [promotional] in the fourth quarter,” Krill said. “But typically, it’s not so much in Q1 and Q3. It’s just continuing.”

The New York-based operator of Ann Taylor and Loft reported net income of $32.7 million in the second quarter, or 70 cents a diluted share, versus profits of $35.6 million, or 76 cents, in the year-ago period.

Sales rose 1.6 percent, to $648.7 million from $638.2 million, while comparable sales fell 2.3 percent. A comp decline of 4.1 percent at Loft was only partially offset by a 0.7 percent increase at Ann Taylor. Gross margin dropped to 52.4 percent of sales from 54.7 percent a year ago.

Krill said Ann has been adjusting to the soft business environment. “We bought our inventories more disciplined for the back half of the year. We’re hoping with less inventory, and more focus on fashion, we will have less of a need to be more promotional” in the third quarter, which most likely won’t be the case in the fourth quarter. “Internally, we refer to it as the Wild, Wild West,” Krill said.

Rather than making excuses, Ann’s ceo outlined shifts in the buying and merchandising to lift sales and resonate with consumers. More fashion will be on display during the second half, including novelty items such as leggings, leather and leather-trimmed styles, styles with moto influences, feminine sweatshirts that are more flattering or embellished, scuba fabrics in bottoms, pencil skirts and slim and shirt dresses.

“One thing people are talking about right now and that we have gotten on top of is denim ticking down. We have interesting leggings, faux leather, moto influences in skinny pants — lots of options to compensate. There is strength in relaxed skinny denim, but overall denim is soft,” she said.

Versatility in the offering at Ann Taylor, meaning refined separates, suits and dresses that can be worn from day into the evening, will be emphasized to a greater degree as well.

Knits, a sore point last quarter, are being de-emphasized in favor of more wovens and more Lou & Grey at Loft. According to Krill, all year she’s noticed the uptick in fashion and down-tick in basics, which she explained during a conference call. “We are not in a replenishment cycle. We are not replenishing basic knit tops or basic knit items. Novelty is a component that is really important. We have doubled our penetration in that,” she said.

Krill also said that this fall, the company commences a brick-and-mortar rollout of Lou & Grey, which was born out of the former Loft Lounge line and opened its first store in April in Westport, Conn. Lou & Grey is a fusion of streetwear and loungewear, emphasizing comfort, with a fashion component, not a performance component. Six Lou & Grey stores will open between the end of September and the middle of November, in Boston; Atlanta; Los Angeles; Chicago; Dallas, and Raleigh, N.C. “We are testing different geographies and different locations,” including upscale malls, street sites and lifestyle centers to see where it resonates, Krill said. “We hope it resonates everywhere, but we know she [the consumer] is responding to the product.” Krill added that a variety of store sizes, from 1,800 to 2,700 square feet, will be opened to determine an optimum size. At Loft stores, about 10 percent of the assortment is Lou & Grey, though 10 Lofts have expanded assortments. “It’s a category definitely in growth mode,” Krill said.

Meanwhile, Loft continues to expand, and sees the fleet reaching at least 600 units over time in the U.S., from the current count at just under 550. “We are going into small-to-mid markets. I think we are covered in larger markets,” Krill said.

In addition, Loft will enter Mexico with three franchise stores this year. “We are looking at other countries,” Krill said during the interview. Ann Inc. also operates 13 company-owned stores in Canada, both Loft and Ann Taylor.

While Loft “selectively” expands the footprint, at Ann Taylor the objective is to be “optimizing the productivity” of the fleet with the likelihood of some square-footage reduction at Ann Taylor.

Retailers have noticed a lift in business since late in the second quarter, but according to Krill, “Our time is really post-Labor Day,” when some momentum would be expected with new fall fashions, Krill said, noting that Ann Inc. doesn’t sell back-to-school.

Regarding inventories, Krill described them as “clean” entering the third quarter, with 90 percent of the inventory representing fresh fall product.

Ann Taylor’s performance was good in the second quarter, though Loft was softer than anticipated.

“Traffic was certainly an issue particularly in the later part of the quarter,” Krill said during the conference call. At Loft, “knit tops were very weak — excluding knits, comps would have been four points better. We have adjusted this category to be down substantially for third quarter and increased the investment in woven tops.” An exception was mixed-media fashion knit tops, which are knits mixed with woven material.

Still, there was gross margin pressure across the business broadly, with a greater degree felt at Loft due to the underperforming basic knit top category.

Summarizing the second quarter, Krill called it “challenging” but still a period where the company continued to make “significant strides in our overall objectives.”

For the third quarter, the company projects total sales to reach $670 million; comp sales flat to slightly negative, and the gross margin at 54 percent.

For the full year, Ann cut its guidance on revenues to $2.56 billion from a previous projection of $2.61 billion, reflecting flat total company sales compared with a low-single projection previously.

The gross margin rate is seen at 52 percent. The balance sheet remains healthy with no debt. Ann’s shares were down 3.32 percent, or $1.29, to $37.52 at the closing bell Friday.

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