Ann Taylor Sale Raises Concerns

The company had said it wouldn't need a November 'friends and family' promotion. It was wrong.
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It looks like November is shaping up as a tougher month for

Ann Taylor

(ANN)

than the women's clothing retailer had expected.

As recently as its third-quarter earnings conference call last week, company executives said that the retailer was not anticipating a "friends and family" promotion this November.

That expectation proved short-lived.

"We have noticed signs of stepped up promotional activity, including higher sale-rack counts and moving a friends & family promotion earlier into November," said John Morris, an analyst at Gerard Klauer Mattison. Morris downgraded the stock to outperform from buy on Friday.

"Management very recently made a strategic decision to move a Friends & Family promotional event ahead on its calendar by about 10 days from December into the last week of November for both the core Ann Taylor and loft divisions," Morris wrote. "This is likely a prudent response to the unpredictable trends in mall traffic, but could also be a competitive response to the challenging November environment."

A separate note from Bank of America Friday also discussed the schedule change. The company wouldn't comment on it, but did send out emails promoting the sale this week.

Morris cited a recent softening in women's apparel, which has resulted in a tougher competitive climate for Ann Taylor. This could force more promotions in coming weeks, he said.

According to the Gerard Klauer Mattison Sale-Rack Index, markdowns at core Ann Taylor stores have accelerated in November and are now running slightly ahead of last year. Meanwhile, mall traffic thus far in the holiday shopping season has been soft, according to various retail analysts.

The main issue for Ann Taylor is its margins, which are up compared to 2000 and 2001 holiday seasons. But the improvement could be thwarted by heightened promotional activity, Morris said.

Ann Taylor was lately off 4.42% at $24.23, while the S&P Retail Index was ahead 0.8%.