RUMORS OF SUITORS PERSIST AS ANN TAYLOR POSTS LOSS

Byline: Jennifer Brady

NEW YORK — Is Ann Taylor in play?
Amid speculation that the specialty retailer is a potential takeover target, Ann Taylor Stores Corp. posted a fourth-quarter loss of $1.2 million, against a profit of $8.4 million, or 35 cents a share a year ago.
Ann Taylor’s stock has bounced back in recent weeks, closing at 18 7/8, down 1/8, on the New York Stock Exchange Tuesday after hitting a 52-week low of 9 1/4 in January. The action has fueled the takeover talk, though the stock is still well off its all-time high of 44 7/8 reached in 1994.
Rumors that The Gap is a possible suitor — strongly denied by a Gap official — have been heating up Wall Street, but there is also speculation that an unidentified manufacturer might be eyeing the retail chain.
“They could be a takeover candidate,” said Jennifer Black Groves, analyst at Black & Co. in Portland, Ore. “I wouldn’t be surprised…They have a quality brand name, and they didn’t lose their customer in a couple of bad seasons.”
Groves added that the stock is trading near book value at $14 a share.
Regarding a possible takeover, Jeffrey Edelman, analyst at Deutsche Morgan Grenfell, said, “Never say never.”
Stock activity might have been spurred because two investment firms recently upgraded Ann Taylor, citing improved merchandise, easier same-store sales and margin comparisons beginning this month. Monday, Alex Brown & Sons Inc. upgraded the company to “buy” from “neutral.” Last week, J.P. Morgan Securities upgraded Ann Taylor to “buy” from “market performer.”
On Tuesday, Warren Hashagen, Gap’s senior vice president of finance, said of the latest Gap/Ann Taylor gossip: “It’s a rumor that surfaces from time to time, and it’s absolutely untrue.”
Ann Taylor officials were not available for comment.
Edelman noted that The Gap is going after the same market as Ann Taylor with its Banana Republic division, and that The Gap has “a lot of cash.” However, one source noted that The Gap’s sourcing structure would not blend well into Ann Taylor’s to maximize cost-saving synergies.
Ann Taylor’s loss in the latest quarter, about 5 cents a share, was a bit higher than average Wall Street estimates of a 3 cent loss. In the quarter, sales were up 6.2 percent to $200.6 million from $189 million.
According to Edelman, Ann Taylor’s expense growth slowed last year, inventories came down and the company ended the year financially liquid.
Walter Loeb, of Loeb Associates, said he believes Ann Taylor “wants to be independent, will remain independent and will reestablish itself as an investment vehicle.”
Maura Hunter Byrne, analyst at J.P. Morgan, noted that while the fourth-quarter loss was as expected, gross margins were about 100 basis points lower than she anticipated. Gross margins dropped to 39.9 percent of sales from 44 percent.
Byrne attributed the decline in margins to heavy markdowns during a very promotional holiday period, adding that “initial merchandise margins were comparable to last year.”
The company’s fiscal year ending Feb. 3, 1996 had 53 weeks compared to the fiscal year ended Jan. 28, 1995, which had 52 weeks. Excluding the extra week, sales inched ahead 1.1 percent to $191.1 million. Same-store sales, excluding the last week of the quarter, sank 15.2 percent, compared with a same-store sales jump of 19.9 percent in the fourth quarter last year.
Selling general and administrative expenses as a percentage of sales increased to 36 percent compared with 32.6 percent in the year-ago quarter.
Black & Co.’s Groves noted that one particular bright spot in the latest report was the “significant drop” in inventories. On a per-square-foot basis, fiscal 1995 yearend merchandise inventories were 22 percent lower than at the end of fiscal 1994. She added that the reduced inventory level “gives us confidence that they can control inventories well.”
J.P. Morgan’s Byrne expects Ann Taylor to earn 11 cents in the first quarter against 15 cents a year ago. She noted that the spring merchandise offerings should appeal to Ann Taylor’s core customer base. Groves said the company is becoming focused again on offering “better quality fashion classics” that have an improved fit. She highlighted strength in pastel suits, chinos and blouses.
Going forward, she noted, “Patrick Spainhour will add to the company’s sourcing and manufacturing capabilities.” He joined as president and chief operating officer last month.
“I think they are through the worst of it,” Groves added.
In a conference call, Sally Frame Kasaks, chairman and chief executive officer, told analysts that the company continues to be in compliance with all of its covenants and financing with its bank agreements. At yearend, total long-term debt was $272.5 million, including $101 million outstanding under the company’s revolving credit facility.
Ann Taylor’s total store square footage was up 40.8 percent to 1,651,000 square feet from 1,173,000 square feet. During the latest quarter, the 306-unit company opened three Ann Taylor Stores, including a flagship in San Francisco and two Ann Taylor Loft Stores. Two Ann Taylor stores were closed. In the year ended Feb. 3, the specialty retailer lost $876,000, or 4 cents a share, against a profit of $32.6 million, or $1.40 a share. Per-share figures are after the deduction of goodwill amortization of 41 cents a share in both periods.
Sales rose 11 percent to $731.1 million from $658.8 million. Gross margins eased to 41.8 percent of sales from 45.7 percent, while SG&A expenses were up to 37.1 percent of sales from 32.5 percent. — Fairchild News Service

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