Ann's Thrifty Strategy Tailored for Tough Times

The struggling purveyor of office wear for upper-middle managers did better with casual threads at its Loft chain. Better expense and inventory controls are also boosting the bottom line, the New York company said.

Sales for the three months ended May 3 rose just 2% to $592 million, but that too was better than what the Street expected. Analysts' view was for sales of $588 million. Same-store sales, or sales in stores open at least a year, fell 4.3%. The flagship Ann Taylor chain posted an 11.5% decline in same-store sales, which are a key measure of a retailer's health. The good news: Comparable sales at Loft stores rose 0.7%.

Ann Taylor, which operates 929 stores in 46 states, the District of Columbia and Puerto Rico, tried hard to keep its recent thrift from lofting long-range expectations. "Despite the fact that our first-quarter results are tracking ahead of our plan, and we are confident in our business strategy, we remain cautious about our outlook for the balance of the year, given the highly volatile and uncertain nature of the current economic environment," said Chief Executive Kay Krill in a statement. And with that, management stuck to its prior outlook for full-year earnings of $1.80 to $1.90 a share.

That's almost certainly wise. This is a tough time for retailers, especially specialty shops like Ann Taylor that are seeing strapped customers pull back on purchases or trade down to discounters like Wal-Mart Stores (WMT). It's telling that Loft stores carry more casual, lower-priced items than the company's namesake chain. But better to have the Loft borrow shoppers from Ann than to lose them to the discounters, presumably.

The company also said Monday that it's postponing the launch of a new store concept that was to have targeted baby boomers. At the same time, Ann is charging ahead with a plan to open Loft factory outlet stores this summer. Those are understandable moves given the current economic climate, but what they tell us about the state of the consumer is not very reassuring. Eschewing higher-priced (and higher-margin) merchandise to go after bargain shoppers at outlet stores is not exactly a harbinger of strong growth.

The company is playing defense, and doing it well. "Low inventory levels and the turnaround at Loft are driving gross margins higher and the cost cutting program is beginning to have a positive effect," wrote Merrill Lynch analyst Lorraine Maikis, who rates shares at Buy. "It is becoming more evident that management's focus on aggressive cost cutting and lean inventory is the right one in this environment."

Also, the bean counters will need help if Ann is to keep up with the tastes and fashions of its increasingly segmented clientele. "Ann Taylor's primary challenge remains getting both Ann Taylor Stores and Loft moving forward at the same time," wrote Buckingham Research analyst Barbara Wyckoff, who rates shares at Neutral. "We believe that it needs to improve product offerings in Ann Taylor and offer more irresistible items."

The risk of missteps by the company and further cutbacks by consumers make Ann Taylor shares too iffy to slip into at the moment. There are likely better ways to dress a portfolio for success.

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