At AnnTaylor, Time to Show the Goods

Publish date:

Here we go again.



shares have jumped 121% this year, much of it in the past two weeks on strong sales data, as the chain continues its two-year-old turnaround. The stock's rise easily outpaces the 35% year-to-date gain for the

S&P Retail Index

, and there are signs the business has been shored up from top to bottom.

But old hands say this wouldn't be the first time investors have bid up the women's specialty store retailer, only to be disappointed a few months later.

"It always looks like they have it fixed at this point," says a money manager who has owned the stock since it traded at 14 a year ago and began scaling back his position when shares hit 29 5/16, where they closed Friday. "AnnTaylor has snatched defeat from the jaws of victory a number of times in the past. When a retailer finds its stride, it should last longer than a quarter or two."

When New York-based AnnTaylor, with 342 stores, tomorrow reports earnings for its second quarter ended Aug. 1, investors will be treated to one of its few solid quarters since 1995, when the company lost focus and alienated those career women in their 20s and 30s on whose business it so desperately depends.

When the company reported last week that same-store sales for July rose a stellar 23.2%, it also projected that earnings for the period would come in between 24 and 27 cents a share. That's higher than the 17 cents a share analysts polled by

First Call

had been expecting.

Sensing good news, Kindra Hix, an analyst with

NationsBanc Montgomery Securities

in San Francisco, raised her rating on the company to a buy from a hold on July 30. (Her firm hasn't performed any underwriting services for the company.) She expects improving sales trends, expanding operating margins, accelerating square footage growth and an improving balance sheet to support the stock going forward.

Without a doubt, AnnTaylor has made important strides in shoring up its business, including managing its inventory more efficiently and refocusing its merchandise to appeal to its core consumer -- the young career woman.

But after drastically reducing inventory in 1997 to curtail costs, the company found itself short of merchandise, which hurt sales. "We narrowed our assortment too far and we had too few styles for our customer to choose from," says a company spokeswoman. For instance, AnnTaylor didn't have enough basic tops that women could buy to match with suits. Analyst Hix expects the company to increase inventory levels by 10% to 20% over the next three quarters.

The key to increasing inventory, however, is buying the right merchandise. Part of the problem last fall, the first time that President Patti DeRosa influenced the styles, was merchandise that was too fashion-forward for AnnTaylor's traditional customers. There weren't enough blacks and browns.

"Merchandising is a subjective part of the business," Hix admits. It's as easy to have the wrong colors and styles as it is to have the right ones. Hix is betting that a new divisional merchandise manager, Diane Holmes, will lend strength to the buying bench. "Patti was supposed to make everything go great at the end of 1997, but she stumbled a bit," Hix says. But now, "The team has had time to jell."

Maybe so, but AnnTaylor executives are keeping their heads down.

After canceling an analyst meeting that was slated for last September -- just before the company hit more snags -- management has no plans for an investor conference at this point, says a spokeswoman. Furthermore, the spokeswoman adds, neither Chief Executive Patrick Spainhour nor DeRosa is giving interviews at this time. And the company has no comment about its ability to meet analysts' earnings expectations, even as those forecasts increase. Hix, for instance, raised her estimate for 1998 to $1.10 a share from 87 cents a share.

That reticence has kept some investors away from the stock, despite its resounding gains of late. "The visibility was extremely low," says one New York money manager. "After being frustrated with management about trying to get some information, we took it off our radar screen. You had to have a lot of faith in a management team that didn't give you much reason to have faith. With a few positive quarters, I figured they'd be out there telling people about it. Maybe they feel they're not totally out of the woods yet."

A spate of insider selling hasn't helped the company put its best foot forward. Two directors, Gerald Armstrong and James Burke, sold 774,480 shares between June 5 and June 9, when the stock traded between 20 and 20 7/32. Those sales were made in conjunction with sales by

Merrill Lynch Capital

, which became AnnTaylor's largest institutional investor after a 1980s leveraged buyout. Both Armstrong and Burke had prior affiliations with Merrill Lynch.

"We add more significance to the Merrill sales, because of the directors," says Stacey Griffin of

CDA Investnet

, a Rockville, Md.-based firm that tracks insider trading. "If Merrill was solely an outside investor, then they wouldn't know the kind of information about a company that makes insider trades valuable."

The AnnTaylor spokeswoman says she's unable to comment on the stock sales at this time.

"In a stock that's been such a dog for so long, there's a certain element of 'Gee, I could use some money,'" says the New York money manager, who has been scaling back his position. "But selling is what it is. If you think you'll make more money soon, you wouldn't be selling."

Trading at 27 times First Call earnings estimates for the year ending January 1999, AnnTaylor has ricocheted from a bargain to a full-priced stock in a blink. "It's a great stock at 23," says another New York money manager, who's been eyeing the stock. "Not at 30. You have to let the business catch up with itself."

And so it's prove-it time for Ann.

With just one quarter of solid sales and earnings under its belt, Ann's still in show-me mode. For instance, in the first quarter of this year, ended May 19, earnings exceeded analysts' estimates -- with the help of 7 cents per share in nonoperating gains thanks to a new tax rate and a change in inventory accounting.

Another risk is the company's expansion of its


concept. Slated for lower-income malls, AnnTaylor Lofts carry more casual and lower-priced items. Eight Lofts have been opened this year, and Hix, the analyst, expects the company to open eight more by year end. While this growth vehicle may fuel sales, name-brand companies run a risk when they penetrate a lower-tier market. Case in point:



fumble at its

Off 5th Outlet


Despite these challenges, most analysts and investors who follow the company say AnnTaylor is a much stronger company than it was three years ago, when then CEO Sally Frame Kasaks tried to grow sales in a less controlled manner. Also lending to Ann's credibility is its increasing cash flow -- Hix expects it to reach $70 million this year, up from $52 million last year -- and shrinking debt.

For more info on institutional holders of this stock, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.