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Ann Inc Meets Q2 Earnings Estimates; Activist Investors Press Retailer for Sale

Women’s specialty retailer Ann Inc. released its second quarter 2014 earnings Friday, and although results were in line with Wall Street expectations, sales fell slightly short. The company tempered guidance for the remainder of the year, which sent its stock down more than 3 percent by the end of the day.

Then, on Monday morning, it was reported that the company board received a letter from two activist investor firms asserting that the company is dramatically undervalued and demanding that it put the company up for sale, sending the share price up as high as almost 7 percent to $40.13 in morning trading Monday. Though there is little indication that the retailer will heed the advice, it seems that the “undervalued” assessment has rekindled interest in the stock.

For the fiscal second quarter of 2014, the Company reported earnings per diluted share of $0.70, compared with earnings per diluted share of $0.76 in the second quarter of 2013.

Kay Krill, president and CEO, commented, “Our results for the quarter were slightly better than the outlook we provided earlier this month. As previously reported, while the quarter had started on a positive note with solid momentum through mid-June, the second half of the period proved challenging, as softer traffic levels and a highly promotional environment pressured sales and margin. In addition, LOFT experienced continued softness in basic knit tops, which represented a significant component of its summer assortment.

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We have entered the third quarter with fresh fall fashion and clean inventory levels at both brands.  While the environment has been choppy this year, both Ann Taylor and LOFT will be offering her great feminine fashion and outstanding value to meet all of her wardrobing needs for the Fall season.

In addition, we continue to make progress on our strategic growth initiatives, which offer significant potential to further expand our brands, broaden our client base and drive long-term growth and, as always, we are highly committed to further enhancing shareholder value,” Krill said.

Total net sales for the second quarter were $648.7 million, compared with net sales of $638.2 million in the second quarter of fiscal 2013 and consensus estimates of $650.2 million.

Net sales for the Ann Taylor brand were $250.0 million, up 1.9% from the prior year period. For the LOFT brand, net sales totaled $398.7 million, up 1.4% from the second quarter of 2013.

Total company comparable sales for the quarter decreased 2.3% versus the second quarter of 2013. At Ann Taylor, total brand comparable sales increased 0.7%, reflecting an increase of 2 percent at Ann Taylor, partially offset by a decline of 1.9% in the Ann Taylor Factory channel.

At LOFT, total brand comparable sales decreased 4.1%, reflecting a decrease of 5.2% at LOFT and an increase of 0.3% in the LOFT Outlet channel.

On the earnings conference call, management indicated that traffic was slower than expected and that sales deteriorated over the course of the quarter as sector-wide summer clearance sales exerted tremendous downward pressure on prices. Despite the challenges, Ann Taylor stores enjoyed higher dollars per transaction, higher full-priced sell-through, and higher average unit prices. The brand has benefitted greatly from an increase in offering of fashion merchandise, which now comprises 50 to 60 percent of the merchandise assortment, up from 40 to 50 percent at this time last year, with suits, jackets, skirts, pants, outerwear and sweaters all performing well.

Krill also mentioned on the call that the company is shifting some of its marketing away from traditional media to more digital outlets like social media, bloggers and influencers. Initial indications show that this effort has been successful and has enabled the brands to attract younger consumers.

The shift to omnichannel made progress in the quarter, according to CFO Mike Nicholson, and in the fall, the company will expand in-store online ordering capabilities.

Gross margin was 52.4%, down 230 basis points from the prior year’s second quarter, reflecting an overall decrease in merchandise margin due to higher-than-expected promotional activity.

Net income was $32.7 million versus $35.6 million reported in the prior year. Diluted earnings per share were $0.70, in line with guidance, though lower than the $0.76 per diluted share reported in the second quarter of 2013.

The company also said that it expects growth to be flat to slightly negative in the current quarter, and has tempered guidance for the remainder of the year.

Continuing a trend that is taking place at other specialty retailers, the company is opening more outlet than full-priced stores. During the second quarter of fiscal 2014, the Ann Inc. opened 17 stores, 11 of which were outlet stores, and closed nine regular priced stores. The total store count at the end of the fiscal second quarter was 1,040, including 261 Ann Taylor stores, 113 Ann Taylor Factory stores, 544 LOFT stores and 122 LOFT Outlet stores. The company now has 13 LOFT stores in Canada. Ann Inc. expects to close 25 underperforming Ann Taylor stores and 15 Loft stores at the end the fiscal year, and finish with a total of 1,035 stores.

Engine Capital LP, which along with Red Alder LLC controls “in excess of 1 percent” of Ann’s stock, said in a joint letter to the company’s board that the Ann Inc. Board should “retain immediately a nationally-recognized investment bank and establish a special committee of independent directors to explore strategic alternatives to maximize shareholder value, including a sale of the Company.”  The letter went on to explain that the company would be worth between $50 and $55 per share to a private equity firm or even more to a “strategic buyer.” The valuation represents a premium of as much as 47 percent to Ann’s Friday closing price of $37.52, and would put the value of the retailer at between $2.3 and $2.52 billion, according to calculations based on Ann’s shares outstanding as of Aug. 2.

“… We think the status quo is untenable,” said Engine Capital, which describes itself as a value-oriented special situations fund that invests both actively and passively in companies undergoing change.

In response to the letter Ann Inc. released the following statement: “ANN INC. welcomes open communications with its shareholders and values constructive input toward the goal of enhancing shareholder value. Our Board and management team are committed to creating value for all ANN INC. shareholders, and we will continue to take actions to accomplish this goal and position the Company for growth and success.”