Financial Targets Keep Moving at Ann Taylor

One thing's for sure: You can't fault Ann Taylor (ANN Quote) for keeping investors in the dark.

The women's apparel chain boosted its financial guidance after the close of trading Wednesday, triggering a rally Thursday that sent shares to a 52-week high. The rise in first-quarter earnings targets marked the seventh time in just over a year that New York-based Ann Taylor has changed its financial guidance.

Of course, following the collapse of Enron, investors have made it clear they prefer more information to less. But Ann Taylor's record of frequently revising its targets, along with chatter about the quality of its earnings, suggests investors might do well to hold off rushing into the stock right now.

The stock rose $2.05, or 5%, to $43.05 Thursday, doubling its 52-week low reached in October.

First Things First

Wednesday evening, the company raised its first-quarter guidance to 52 cents to 54 cents a share, from its prior guidance of 48 cents to 52 cents, citing better margins from lower-than-expected markdowns in February.

But a look at the company's continually changing guidance over the past year has some observers asking how much stock to put into Ann Taylor's forecasts. Since January 2001, Ann Taylor has warned on earnings five times and raised guidance twice.

Staying in Fashion Changes in guidance at Ann Taylor over a year or so
Date: 2001	Guidance
Jan. 4	Fourth quarter will be in low range of 38 cents to 42 cents a share
Feb. 8	Warns on fourth quarter -- predicts 18 cents a share
March 8	Expects 33 cents to 37 cents in first quarter; 28 cents to 32 cents in second quarter
May 16	Hits first-quarter number
June 7	Reaffirms second quarter
July 12	Warns on second quarter; expects 20 cents to 24 cents
Aug. 15	Reports 22 cents for second quarter, notes in release it is penny above First Call consensus; predicts 79 cents to 83 cents in third quarter
Oct. 10	Warns on third quarter, says expects 42 cents to 46 cents
Nov. 8	Warns on third quarter, says expects 40 cents a share; later in month hits that number, guides to 25 cents to 30 cents in fourth quarter
Dec. 6	Reaffirms fourth quarter
Date: 2002	Guidance
Jan. 10	Reaffirms fourth quarter, but only before $17 million charge that includes costs from canceling merchandise orders
Feb. 7	Raises fourth quarter, expects 33 cents to 34 cents a share before charges; gives guidance for first quarter
March 6	Reports 34 cents a share in fourth quarter, before charges; raises first quarter
Source: Company Press Releases

In one head-spinning, three-month span in late 2000 and early 2001, Ann Taylor lowered its fourth-quarter earnings guidance four times, by an aggregate 77%. Patricia DeRossa, then president and chief operating officer, resigned after the dismal holiday showing; the company's fortunes have turned up somewhat since then, but the record (see table above) shows Ann Taylor continues to tinker with forecasts frequently.

Notably, as recently as last August, Ann Taylor was still predicting full-year earnings of more than $2 a share. Yet the company ended up reporting full-year net of $1.34 before charges; after write-offs, its loss was a penny a share.

"One would think that a company that as late as August 15th of last year was still guiding analyst earnings estimates above $2.10 ... would be a little more circumspect in its earnings guidance," Jefferies analyst Eliot Laurence wrote in a note. (He rates Ann Taylor hold, and his firm doesn't have a banking relationship with the retailer.)

Charge Accounts

Of course, there's nothing improper about changing guidance; a company could change its numbers every day if it chose, depending on the information it was gathering about its business. But Ann Taylor's guidance isn't the only financial information generating a certain amount of skepticism on Wall Street. Notably, Ann Taylor also said Wednesday that its fourth-quarter earnings were 34 cents a share, a penny above the Wall Street consensus, according to Thomson Financial/First Call.

The earnings release once again highlighted a previously announced $17 million charge that includes costs from canceling merchandise orders; if the company had not taken the charge it would have come nowhere near Wall Street's expectations. Some investors say the charge draws additional attention to Ann Taylor's forecasting follies.

One short-seller points out that the company would have fallen short of the consensus analyst estimates in the fourth quarter had it not taken a $2 million-plus writedown of certain costs associated with ordering fall and spring merchandise. While most observers on Wall Street are willing to give Ann Taylor the benefit of the doubt for the rest of the $17 million charge -- which includes costs associated with settling a class-action lawsuit, discontinuing a cosmetics line and paying severance to former workers -- the portion dealing with order cancellations has raised eyebrows.

"Most of the other charges are probably legitimate," says the short-seller. "But this one is questionable."

Many analysts, even those who are otherwise bullish on the company, say such costs are simply part of doing business and point out that few if any other retailers have taken similar charges.

Stacy Pak, who covers Ann Taylor for Prudential Securities, says the order cancellation is an operating cost, and that earnings would have been 30 cents a share, well below estimates, had those costs been included. (She rates Ann Taylor market perform; her firm doesn't do underwriting.) Jefferies' Laurence wrote that he was "appalled" by that portion of the write-off.

An Ann Taylor representative didn't immediately return a call seeking comment.

Bulls on Board

Even so, despite questions about its numbers and its premium price-to-earnings ratio, several analysts published bullish reports on Ann Taylor on Thursday. Merrill Lynch and Robertson Stephens, which have had underwriting relationships with the company, raised estimates and reiterated buy ratings. But perhaps Jennifer Black of Wells Fargo Securities, whose firm doesn't have a banking relationship with Ann Taylor, said it best.

"We believe that Ann Taylor is back on track and that it can once again become a darling of Wall Street," wrote the analyst, who reiterated her strong buy rating.

Judging by the Street's take on the company's numbers, perhaps it already is.