Fashion Smiles on AnnTaylor

Fickle fashion was moving the retail sector Thursday.

Only a few months ago

Talbots

(TLB)

was the rising star in the women's clothing sector, while rival

AnnTaylor

(ANN)

was stumbling. The difference: A string of strong seasonal offerings at Talbots and poor merchandising choices at AnnTaylor.

But Thursday, investors surveying monthly same-store sales data saw a surprising rebound at AnnTaylor and a steepening slide at markdown-ridden Talbots. Observers say the companies' fast-changing fortunes illustrate the pitfalls of investing in fashion-driven businesses, regardless of the state of the broader economy. Exhibit A is

Gap

(GPS) - Get Report

, the nation's largest apparel chain, which marked two straight years of declining same-store sales Thursday -- showing just how badly fashion missteps (along with a debt-fueled expansion, in Gap's case) can hamper a company.

Shares in Talbots sank $3.55, to $32.20, while AnnTaylor gained 65 cents, to $46.70. On the year, AnnTaylor shares are up over 30%, while Talbots has fallen about 12%.

Executing

On Thursday, New York-based AnnTaylor reported that March same-store sales, which measure activity in shops open at least a year, rose 3.5%, more than twice the 1.5% gain analysts expected. At the same time, AnnTaylor once again raised its earnings guidance for the first and second quarters. The company, which has a history of

constantly massaging its financial forecasts, now expects first-quarter earnings of 60 cents to 62 cents a share, compared with consensus expectations of 53 cents a share. In the second quarter, it expects earnings of 34 cents to 36 cents, compared with expectations of 32 cents a share.

Perhaps the best news for investors in AnnTaylor is that the company was able to keep markdowns to a minimum, a strong indication that it has overcome some of the fashion problems that have plagued the company recently. Last year AnnTaylor pushed more fashion-forward and tighter clothing, a move that alienated its clientele, which had come to rely on the company for traditional, career-oriented clothing.

"It has better merchandise and is doing a better job of executing, from a fashion perspective, this spring," says Jeff Stinson, who follows the company for Midwest Research. (He has a neutral rating on the stock, and his firm does not have an investment banking relationship.)

Markdowns

The story wasn't as pleasant at Talbots, once a darling of the apparel sector for its robust growth and

knack for reporting strong sales figures even when most of its competitors were faltering. The company, based in Hingham, Mass., said same-store sales increased 3.2%. But it achieved this growth through higher markdowns, suggesting shoppers haven't taken to the company's spring offerings. In late March the company "marked down additional new merchandise and took deeper markdowns on existing sale merchandise to increase customer traffic," according to the statement.

Talbots lowered its guidance for the first quarter to a range of 53 cents to 55 cents, compared with prior guidance of 63 cents to 65 cents a share. Last year Talbots earned 62 cents a share in the first quarter.

Most investors and analysts don't expect Talbots to go through a prolonged downturn like AnnTaylor slogged through last year. The company is expected to roll out a men's line later this year, and it will have easier sales comparisons in the second half of the year, analysts note.

But until the company proves it can overcome its recent troubles, many analysts say to hold off on the stock. "We continue to look for indications of improved near-term business trends before becoming more constructive on the shares," wrote Lauren Cooks Levitan, an analyst at Robertson Stephens, in a note Thursday. (She rates the stock a market perform, and her firm does not have a banking relationship with Talbots.)