NEW YORK (TheStreet) - Shares of Ann Inc. (ANN - Get Report), the parent company to Ann Taylor and LOFT brands, are rising after the women's specialty retailer beat earnings estimates by 3 cents a share and posted better-than-expected sales.
The stock was up 1% to $36.61 in morning trading.
Ann Inc. and other retailers continue to operate in a highly promotional retail environment. Wall Street is watching closely the extent of margin erosion at many retailers, especially in the all-important holiday season, as consumers continue to remain cautious about where they spend their money.
Another specialty retailer, Gap (GPS), reported better-than-expected earnings late Thursday, but reaffirmed - as opposed to raising -- previous guidance for the year, suggesting that with massive competition and strong promotions, this year's holiday selling season could prove challenging.
Must Read: Gap's 3Q Beats But Holidays Could Be Tough
Ann Inc. posted third-quarter earnings of $41.2 million, or 89 cents a share, compared to $407 million, or 84 cents a share, in the year-earlier quarter. The year-earlier quarter included an 8-cent gain related to gift card and merchandise credit breakage.
Quarterly net sales for the Nov. 2-ending quarter rose 7% to $657.5 million over last year fueled by strong sales at LOFT. Sales were above analysts' expectations of $654.2 million, according to Yahoo! Finance.
Sales at all Ann Taylor channels, which includes factory and online sales, rose by 1.8% to $249.2 million. The LOFT brand brought in total sales of $408.4 million, up 11% compared to the year-earlier period.
Total comparable sales for the company increased 3.7%, below last year's gain of 5.5% but above the 2.8% gain the second quarter. Comparable sales at Ann Taylor rose just 0.6%, which was hurt by a 6.9% decline in the Ann Taylor Factory channel. That said, comp growth at LOFT jumped 5.6% in the quarter.
Gross margin slipped in the quarter to 55.7% as a percentage of net sales, compared to 57.9% in the year-earlier quarter.
Ann Taylor acknowledged that the gross margin performance reflected "a highly competitive promotional environment."
Selling, general and administrative expenses totaled $295.8 million in the quarter. As a percentage of net sales, the company said SG&A expenses improved 190 basis points to 45% compared to the third quarter 2012 rate of 46.9%.
"Our bottom-line growth reflected higher sales, including mid-single digit comparable sales growth, a solid gross margin rate, continued disciplined management of expenses, as well as the benefit of share repurchase activity," said Kay Krill, president and CEO of Ann Inc. in the earnings statement.
"Among the highlights for the quarter, LOFT generated positive momentum on top of its strong performance last year. Our clients responded very well to the brand's fashionable assortment and exceptional value. At Ann Taylor, we achieved continued success with our versatile wear-to-work offering, as well as our new shoe and jewelry collections. This strong performance at Ann Taylor was partially offset by softness at Ann Taylor Factory," Krill added.
The company said it expects fourth-quarter sales to be $640 million, lower than analysts' expectations of $646 million. Gross margin rate performance is expected to be 49.5%, while SG&A expenses are estimated to be $305 million.
Ann's earnings beat "was driven by SG&A savings as promotions pushed gross margin below plan," Stifel analyst Richard Jaffe writes in a note on Friday. Jaffe has a buy rating on the stock.
"Looking ahead, it appears management is cautiously optimistic for [fourth quarter] and has issued guidance that implies an EPS estimate of approximately $0.17, which is $0.02 above the street," the note says. "However, similar to 3Q, a highly promotional retail environment is expected to hold back gross margin in the 4Q and prudent cost control will likely drive EPS. We would be buyers of the stock in any weakness as we believe the power of the ANN model is its significant leverage opportunity. This was supported by today's beat and management's 4Q guidance. Trend right product and targeted promotions drive top line gains, which allow the company to significantly leverage their expense base and realize substantial profit flow through to the bottom line."
Written by Laurie Kulikowski in New York.