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Ann Inc. Upbeat About Second Half

The retailer is painting a positive picture about the year ahead, after a challenging first quarter.

Ann Inc. is painting a positive picture about the year ahead, after a challenging first quarter in which the retailer managed to beat analysts’ earnings estimates.

Executives cite a pickup in traffic with the warmer weather, expect promotional activity to moderate and are sticking to forecasts for positive comparable sales.

“We’ve turned the corner. In April and May, we had positive comps,” Kay Krill, Ann’s president and chief executive officer, told WWD on Friday, just after the women’s specialty retailer reported first-quarter earnings of 33 cents a diluted share, excluding a restructuring charge, two cents ahead of the 31 cents that analysts expected. The stock rose $1.52, or 4.1 percent, to close at $38.87 on the New York Stock Exchange Friday.

For the second quarter and the year, the company is forecasting low, single-digit comparable sales gains. Net sales are seen at $670 million in the second quarter, and $2.61 billion for 2014. “We are planning for a stronger year-over-year performance in each quarter for the balance of the year,” Krill said.

Promotions should lighten up, as Michael Nicholson, chief operating officer and chief financial officer, explained to WWD. He said Ann Inc.’s factory outlets will continue to be promotional in the second quarter, but in the back half, with “very conservative inventory” seen, they won’t be as promotional. Loft, he said, will also need to be promotional in the second quarter, but subsequently “could step back,” while Ann Taylor will be less promotional in the second quarter and through the year.

In the first quarter, which ended May 3, the weak selling environment resulted in heavier-than-expected markdown activity and margin pressures, and pulled comparable sales down 1.8 percent. Total net sales were $590.6 million, compared with $574.5 million in the year-ago quarter. Traffic was negative in the stores and “tough” but still positive online.

Ann ended the first quarter with total inventory up 2.7 percent on a square-foot basis, though the company entered the second quarter with 90 percent of the inventory representing fresh product, Nicholson said. Still, the company did a good job managing expenses, helping the bottom line. Including a $10.2 million, or 22 cents a diluted share, after-tax restructuring charge, earnings came to 11 cents a share, or $5.2 million. In the year-ago quarter, when there was no restructuring charge, Ann’s net came to 44 cents a share, or $20.9 million.

The restructuring, revealed last March, involved cutting 100 positions at the corporate headquarters in Manhattan’s Times Square and moves to integrate stores and e-commerce. Gary Muto was promoted from president of Loft to president of Ann Inc. Brands, where he will be primarily focused on design, merchandising and marketing for all channels of the Ann Taylor and Loft brands, and also oversee the new format, Lou & Grey. Fran Horowitz was promoted to brand president of Loft, reporting to Muto.

Among the initiatives ahead, four Lou & Grey stores will open this fall, in Atlanta, Boston, Chicago and Raleigh, N.C. Another should open in Dallas in early 2015, and California is being scouted for a site.

In December, the Loft Lounge line was recast as Lou & Grey, and in January the label was introduced on Loft’s selling floors and on louandgrey.com with an elevated assortment extending beyond loungewear. Lou & Grey is considered a fusion of streetwear and loungewear.

Krill described the store opening strategy for Lou & Grey at the outset as “trying to get a good geographic spread” with malls, lifestyle centers and street locations in the mix. Earlier this spring, the first Lou & Grey shop-in-shop, carved out of an existing Loft store, opened in Westport, Conn. Krill said the company is pleased with the store’s performance so far.

Between Ann Taylor, Loft and Lou & Grey, the company addresses “the full spectrum of wardrobe needs affording Ann Inc. a strong and differentiated competitive position,” Krill said during a conference call.

Company-wide, “We are being very mindful of how we are growing our store fleet,” the ceo said. “We are primarily focused on Loft and outlets in small and midtier markets.” The top line may be less in those markets, but it’s where landlords and developers in terms of building costs contribute in a significant way. A 3 percent increase in square footage is seen this year.

Other initiatives this year include advancing the omnichannel program by adding technology to improve the mobile shopping experience so it’s easier and faster. “It hasn’t been so easy to convert. It’s been a little slow,” Krill acknowledged. Mobile accounts for about 40 percent of traffic on the site, and more than a quarter of the revenues. Next year, Ann will give shoppers in stores access to online inventories. It’s already enabled stores to fulfill orders generated online.

Also, Ann Taylor is continuing to pump up its assortment of novelty and fashion items, where it sees strong results. The company is also striving to do more sourcing closer to home, including Latin America and domestically, for faster speed to market. Some production is being consolidated as well.

“Even though Ann continues to experience margin pressure, the company continues to deliver on the bottom line with inventory control and cost savings initiatives,” said Adrienne Tennant, analyst at Janney Securities, in a research report. “Gross margin rate for 1Q14 came in below expectations at 53.4 percent, versus management guidance of 55 percent due to higher-than-anticipated promotional levels at Loft and factory outlet channels. However, the company was able to offset this by disciplined SG&A control. SG&A expenses for 1Q14 were $288.7 million, versus management’s initial expectations of $305 million.