with contributions from Kristin Larson
 on May 22, 2015

What’s the future for Ann Inc.?

With its merger into the Ascena Retail Group expected in the back half of the year, there’s intensifying interest in the corporation. Near term, the future entails low-single sales gains, sharper buying to better meet demand, and refining the Ann Taylor collection with outfits with enough versatility to be worn in different settings.

Ann Inc., officials acknowledged, is up against “choppy” traffic at the outlets and an industry-wide promotional environment that doesn’t let up.

On Friday, Ann projected net sales for 2015 to reach $2.56 billion, reflecting a low-single digit comparable sales increase, compared to last year’s $2.53 billion in revenues. The company also projected second quarter total sales of $660 million, reflecting “slightly positive” comparable sales, and a gross margin rate of 51.5 percent for both the quarter and the year.

The Ann Taylor, Loft and Loft outlet chains are all expected to deliver positive comps this quarter, while Ann Taylor outlets will remain negative, the retailer said.

Square footage for 2015 will remain practically flat, with 40 openings and about 35 closures, bringing the year-end store count to about 1,035.

For the holiday season, which is currently being bought, “We are holding more open to buy than we have ever, so we can chase into it based on trends,” said Kay Krill, president and chief executive officer, during a conference call after the company disclosed a 161 percent net income gain for the first quarter. The big net gain was largely based on reduced restructuring costs, expense controls, and some improved spring selling as temperatures climbed.

Krill said Ann is expanding its “test and chase” merchandise strategies involving testing products in certain markets and quickly seeking bigger orders of the items, if they sell. Krill and others on the team indicated that Ann is buying products closer to season, and that 90 percent of the merchandise in the stores currently is fresh for summer, reflecting good inventory management.

For the fourth quarter, “Inventory levels for sure are going to be better controlled than ever,” Krill said, noting that Q4 “is typically our lowest margin quarter.”

The ceo described the first quarter, which ended May 2, as Ann’s “most efficient first quarter in seven years,” with spring sales picking up in March and April as the weather warmed. Business was tough in February due to severe weather, primarily in the Northeast and mid-Atlantic regions, which is where Ann Inc. is most concentrated with stores. The Loft division was further impacted by late product deliveries stemming from the West Coast ports slowdown.

Both Loft outlets and Ann Taylor outlets have been navigating what Krill called “a choppy traffic” environment. “But Loft outlet has been able to mitigate this more through the strength of its entire product offering.”

The Ann Taylor outlets “had some product challenges, particularly in tops….Definitely we know there is work to do to reposition the offering,” at those stores, including “a better balance of classic styling and brand appropriate fashion.” On the bright side, Krill said business has improved at both outlet chains in May. Overall, bestsellers have included bold prints, geometric prints, florals, colors, cropped pants and knit dresses.

Looking ahead at Ann Taylor, Krill said, “We are continuing to evolve our product offering to provide more diversity and versatility in our style offering to meet multiple wear occasions, while also building on our strong legacy of modern separates, driving stronger performance in tops by offering a more balanced assortment across silhouette, color choices and end use.”
Krill also cited “utilizing multiple test and chase strategies and increasing the speed of our product pipeline in order to be more fashion right.”

“Overall, we feel that we are better positioned as we head into summer, and we look forward to building momentum at the Ann Taylor brand as we progress through the year.”

Ann Inc. will merge into Ascena through a $2.2 billion stock and cash deal revealed May 18. Both boards have approved the deal, which is still subject to approval by Ann stockholders. They will obtain a 16 percent stake in Ascena.

Regarding the merger, Ann Inc. officials are restricted from commenting at the current time, though Krill did say, “The board and I are very pleased with the outcome of our strategic review process and we are confident that the agreement with Ascena is in the best interests of Ann Inc.’s stockholders. The combination of cash and stock provides stockholders both immediate and certain value and the opportunity to participate in the upside of  the combined company.”

The Ascena-Ann combination creates a $7.3 billion, 4,900-unit specialty retail conglomerate, putting Ascena in a stronger competitive position and closer in size to the larger specialty retailers like L Brands and Gap Inc. Ann shareholders will hold a 16 percent stake in Ascena.

One potential growth area is with Ann Inc.’s Lou & Grey division launched last year. “We remain excited about its long-term potential,” Krill said.

Last April, Lou & Grey opened in Chicago, giving the fledgling chain a total of six locations. A “handful” of new locations are planned this year, including one slated to open in June at NorthPark Center, and another in El Segundo, Calif. A stand-alone e-commerce site will go up this summer or early this fall. Lou & Grey is a fusion of streetwear and loungewear, with a fashion component, emphasizing easy-to-wear casual looks, like tunics, cardigans, knits, lace dresses, unconstructed blazers and leggings.

Ann Inc.’s first-quarter net income rose to $13.6 million from $5.2 million in the year-ago period. Earnings per share almost tripled to 29 cents on a diluted basis from 11 cents.

The company had reduced restructuring charges of about $6.4 million, compared to more than $17 million in the year-ago period. Comparable sales in the quarter ended May 2 decreased 1.5 percent while total sales were nearly flat at $597.7 million, compared to $590.6 million in the first quarter of 2014.

At Ann Taylor, a 2.6 percent comp sales gain was offset by a 14.5 percent decline at Ann Taylor factory stores. Loft’s comparable sales were down 0.7 percent and down 0.2 percent at Loft outlets.

The retailer operates 242 Ann Taylor, 118 Ann Taylor factory, 540 Loft, 128 Loft outlets and six Lou & Grey stores. Store growth is primarily seen through Loft, where officials see expansion capping at around 600 units. Loft outlets could grow too.

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