Ann Inc. fought off margin erosion from steep markdowns to post a 20.8 percent jump in first-quarter net income and expects strict cost controls and good e-commerce sales to deliver a strong second quarter.

This story first appeared in the May 23, 2011 issue of WWD. Subscribe Today.

The New York-based operator of Ann Taylor and Loft said Friday that it registered net income of $27.3 million, or 51 cents a diluted share, for the period ended April 30, compared with year-ago income of $22.6 million, or 38 cents a share. Net sales rose 10 percent to $523.6 million, from $476.2 million in 2010.

Analysts expected EPS of 48 cents on sales of $512.1 million, according to Yahoo Finance.

Comparable-store sales increased 8 percent for the quarter, anchored by a 15.3 percent jump at Ann Taylor that was propped up by a 43.1 percent increase in e-commerce. Comps at Loft edged up 2.4 percent, helped by a 32.8 percent rise in e-commerce.

Heavy markdowns to captivate consumer dollars caused gross margin to shrink to 57.3 percent of sales, versus year-ago margin of 59.4 percent.

“Easter is our Christmas,” president and chief executive officer Kay Krill told WWD. “It was critical that we got our share.”

According to the ceo, for the retailer, Easter has a larger volume in a 10-day period and the company took markdowns rather than sit with inventory.

Gross margin is expected to rise moving ahead, led by an increase in second-quarter margin to 55.5 percent of sales versus 2010’s margin of 55 percent.

“The economic environment has stayed kind of static,” said Krill, adding that the retailer is prepared for rising commodity costs and will only raise apparel prices “very selectively” and only at its Ann Taylor division. “We have mitigated cost increases for the entire 2011, which is huge.…Our goal is to get greater market share.”

“Ann has been one of, if not the best at managing and preparing for these cost increases,” said Janney Capital Markets analyst Adrienne Tennant, who rates the company stock “buy.” “As competitors are forced to attempt to pass on costs to customers in the form of price hikes, we believe Ann may benefit from an offering that comes free of uptick.”

Stable pricing, along with the accelerated expansion of its Loft concept and its e-commerce channel, will help drive profitability, the company said, adding that it anticipates second-quarter sales to be $550 million, and EPS to be “slightly higher” than analysts’ current estimates of 45 cents.

Full-year sales are projected to be $2.2 billion, above analysts’ $2.18 billion estimates.

The retailer’s shares fell $1.11, or 3.7 percent, Friday to $29.09 as the S&P Retail Index was off 1.4 percent to 531.23, leaving it down 2.9 percent for the week.

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