Ann Taylor's Stock Could Be Back in Fashion Soon

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Ann Taylor is a New York-based women's clothing chain with sales of $2.3 billion over the past year, making it about the same size as the Banana Republic division of Gap (GPS). It caters to "modern women's busy lifestyle" with a "polished approached to updated classic style." In other words, it sells mostly to women with jobs and spare cash, and specializes in suits and dresses appropriate for the office or for an after-work outing, so long as it's to a martinis-and-tapas bar and not a Pabst-and-peanuts one. Ann Taylor also operates a cheaper chain (a "value-conscious" one its marketers would have it) called Ann Taylor Loft and clearance outlets called Ann Taylor Factory.

We last looked at the company in a September 2003 search for promising midsize companies. Therein we concluded the stock, despite a near-doubling in price over the prior six months, still looked like a bargain. It's up 81% since then, nearly twice as much as the S&P 500 index and about 18 percentage points more than the S&P MidCap 400, which tracks shares of medium-sized companies.

A look at the stock's chart (below) shows that the company's recent setback started in early November, when it reported an October "same-store" sales decline of 0.5%. Same-store sales ignore sales from past-year acquisitions and new store openings to show whether seasoned stores are improving or worsening. Analysts had expected same-store sales to increase 2.8%. The company attributed the results to warm weather hurting sweater sales. Wall Street felt that drab colors at Loft were also to blame. Shares lost about $9 over November and December to close the year at just under $33.

Now they're $39. In January the president of the company's Loft division left and the chief executive assumed direct management of the chain. On March 16 the company reported a same-store sales decline of 6% in its fourth quarter vs. a year-earlier increase of 6.8%, along with a 29% decrease in operating earnings, but those results were better than expected. Management also noted that sales at Loft, where prices had been cut to clear out cold-weather merchandise, had shown improvements in March.

Some analysts say the worst is over and that the stock looks like a bargain. "We view Ann Taylor as a highly relevant brand with a loyal core following and continue to expect a turn at Loft come fall," wrote Roxanne Meyer of CIBC World Markets in a March 19 research note. "We see additional catalysts, such as strength of Factory/on-line, cost-control initiatives, share repurchase and launch of maternity and expansion of Celebrations to drive earnings per share growth." Celebrations is a collection of special-event items like wedding dresses that the company has tested in 40 stores and plans to expand to 100 stores this year.

Meyer notes that Ann Taylor should have further room to cut costs given that it will spend nearly 34% of its sales, or about three percentage points more than peers, on operating costs this year. As for share repurchases, Ann Taylor retired about five million of its shares last year at a cost of $180 million, and recently authorized $300 million more for repurchases. Stock repurchases tend to make remaining shares more valuable.

Shares of Ann Taylor can now be had for 17.8 times forecast 2007 earnings. Analysts expect the company to increase its earnings by 15% a year over the next five years, according to Reuters Research. Divide the first number by the second and you get a PEG ratio of 1.2. That suggests a discount of more than 20% to the broad stock market.