AnnTaylor: Dressing Up Again

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Ann is back.

Same-store-sales increases have averaged 10.9% for the past five months at

AnnTaylor

(ANN:NYSE), the retailer known for conservative career clothes for women. (Think pearls and navy blazers.) That's no small change considering many women's apparel retailers have barely eked out single-digit gains. By comparison, in the same period last year, Ann's average same-store sales were down 12.8%.

Those watching the company say the numbers prove Ann is winning back consumers who were alienated in 1995, when the retailer expanded product line and lost focus.

Despite the fundamental rebound, the company's share price has failed to come within sight of its previous record of 44, reached in 1994. Today Ann traded at 17 1/4, at the midpoint of its 11-to-24 range during the past 52 weeks.

And Ann continues to push ahead, trying to refine its image and win back customers -- and investors. As part of that effort, Ann will trim product offerings from 12 to four collections annually. That move not only will help the retailer focus on core fashion developments, but it will also save the company money, says Terrence Foran, chairman of

Lake West Group

, a consulting firm in Cleveland that specializes in retailing.

"The same-store sales are encouraging," he adds. "It shows they're moving in the right direction."

Jennifer Black Groves, executive vice president of

Black & Co.

, a brokerage firm in Portland, Ore., expects that improving sales trend to continue. She predicts the retailer will report a January same-store-sales increase of 7% during a conference call on Thursday, Feb. 6.

Looking further ahead to next season, Groves says she's "hearing positive reads on the spring merchandise from store managers." AnnTaylor is stocking low-heeled suede loafers (in Easter-egg colors for the new season), which proved big sellers for other retailers this winter.

Yet on an anecdotal basis, there is still negative sentiment swirling around Ann, proving that once disappointed, consumers are tough to win back.

"I haven't bought anything there in over a year," says Wendy Kligman, a one-time Ann fan who a is conference planner in New York. "The clothes have gone downhill."

This isn't the first time Ann has fallen from grace. Back in the early '90s, struggling under heavy debt from a 1989 leveraged buyout, the retailer tried to expand margins by buying cheaper merchandise and raising prices -- moves that turned off consumers.

Sally Frame Kasaks, Ann's former chief executive who resigned in August, was able to save the retailer that time by upgrading quality and apologizing to consumers. But why couldn't Kasaks, who served as AnnTaylor's president in the 1980s before becoming CEO in 1992, resurrect the brand this time?

Actually, Kasaks is credited with engineering the early stages of a turnaround by refocusing product back to Ann's classic, career-oriented roots. Certain people familiar with the situation say Kasaks was pressured to leave, because sales didn't improve fast enough.

In a cruel twist of fate, Kasaks resigned the same month Ann reported positive same-store sales, after 14 consecutive months of negative comps. Adding to the irony, the merchandise selling so well in stores today is product Kasaks purchased before she left, since retail works on a 12-month lead time.

But those familiar with the situation also accuse the longtime executive of running the company aground. Several industry professionals interviewed for this article say Kasaks rolled out a massive store expansion that diluted AnnTaylor's customer base to please majority investor

Merrill Lynch

. The investment banking firm acquired a stake in Ann through the LBO and helped take the retailer public in 1991. Today Merrill Lynch Capital Partners and affiliates own a 26.6% stake in the 309-store company, according to

Securities and Exchange Commission

documents.

"Merrill is not involved in the day-to-day management of companies in which its investment funds have an interest," says Merrill Lynch spokesman Dan Alfaro.

Still, Alan Millstein, president of

Fashion Network Report

in New York, echoes the sentiments of several company watchers when he says: "Sally had an impossible job. She was working for a brokerage house. Her board was filled with people who knew nothing about operating retail stores, meaning Merrill Lynch."

Adding to the controversy is a lawsuit, filed in April 1996 in U.S. District Court, that claims AnnTaylor and Merrill Lynch & Co. inflated profits by hiding millions of dollars of unsold inventory in warehouses.

Alfaro declined to comment on the suit, which is still pending. Gina Iaderosa, a spokeswoman for AnnTaylor, says the company "doesn't talk to the press."

If those concerns aren't enough to scare investors, management shuffles have added to the unease. Following Kasaks' departure, Ann's president, Patrick Spainhour, stepped into the CEO spot. In November Patricia DeRosa was hired as president and chief operating officer. All was in place until this week, when Ann's chief financial officer, Paul Francis, resigned. Walter Parks, the company's vice president of finance, will assume CFO duties.

Although she's been on the job for more than two months, DeRosa's influence won't be felt until summer, when her first product lines hit the stores.

"Patty can't even find her way to the computer room yet," Millstein says. "Her impact won't be felt for nine months."

Analyst Stacy Pak, with

CS First Boston's

branch in San Francisco, downgraded the company to hold from buy in November on that issue. "(DeRosa) does not have a magic wand," Pak wrote in her report, which questioned whether the executive "has the right eye for the AnnTaylor look."

Still, DeRosa is a retail veteran. She spent 18 years at the

Gap

(GPS:NYSE), where she worked for a time with Spainhour. While her merchandising performance is unmeasured as yet, DeRosa has an interest in raising Ann's stock price. As part of her signing contract, she received 100,000 stock options exercisable at 19 3/4.

Meanwhile, Francis' departure is a sign that the company is back on track, Groves of Black & Co. says. In fact, she upgraded her rating to a strong buy from a buy on the news Tuesday evening.

She says Spainhour, who did a stint as CFO at

Donna Karan

(DK:NYSE), is financially adept. "There was overkill of that skill set," she says. "Paul's departure sends a strong message about the growing health of AnnTaylor's business," she wrote in her report. "His talents were becoming somewhat underutilized." Black & Co. hasn't done any underwriting for AnnTaylor.

Another positive sign for Ann: Institutional investors are clamoring to buy shares, says one source who spoke on the condition of anonymity. "There's an increased level of institutional interest," she says.

By Suzanne Kapner

skapner@thestreet.com