Quarterly earnings at specialty retailers Ann Taylor ( ANN) and Talbots ( TLB) have been at opposite ends of the spectrum for the past two years. The fourth quarter of 2003 is expected to have proven no different when the companies report earnings -- Ann Taylor after the close Tuesday, and Talbots on Wednesday.

While Ann Taylor is poised to nearly double its fourth-quarter profit, Talbots is expected to post another year-over-year quarterly decline, though both companies likely will report quarters in line with Wall Street's estimates.

In the past six quarters, the companies each have reported in line to above-consensus quarterly profit. But while Ann Taylor has improved its profit each quarter, Talbots' profit has been shrinking. Analysts expect Ann Taylor to earn 65 cents a share in the fourth quarter, which would be up from the year-earlier period's profit of 35 cents a share. Meanwhile, Talbots is expected to earn 40 cents a share in the quarter, which would be a decrease of 8 cents a share from the prior-year quarter.

In early February, Ann Taylor said it expected to earn 63 cents to 65 cents a share. Since the second quarter of 2002, both sales and earnings have increased on a quarter-over-quarter basis after the company hit a rough patch in 2000 and 2001 that was due to a series of merchandise miscues.

Lately, the company "has been in an improvement mode," said Harry Ikenson, a research analyst at First Albany. The company's Loft division has been driving results, he said, with 10 months of positive same-store sales growth through January. (Ikenson holds no shares of either Ann Taylor or Talbots, and his company does not do investment banking for them.)

In fact, the Loft division has lately had six consecutive months of double-digit same-store sales gains. "I see the Loft division as being the second-strongest adult apparel retailer out there, next to Chico's ( CHS)," said Ikenson, who expects Ann Taylor to report earnings of 65 cents a share on Tuesday.

The past two holiday seasons for Ann Taylor were plagued by a poor mix of "giftable merchandise," the analyst said, especially in 2002. But in 2003, he said, "They hit a home run. The merchandise was right at both divisions, and they had the right colors in sweaters."

The company's stock shows investors' faith that it will fully complete its turnaround, too. At around $45, the stock price is near its all-time high of $47.15 reached on March 1, and it is up 132% year over year.

Even with lower inventory levels in 2003 -- reflecting weak sales in the past two years -- the company had a low level of markdowns. As a result, same-store sales in the fourth quarter jumped 15.5%, compared with a 12.3% decrease in the same period of 2002. Loft same-store sales surged 20%, while the Ann Taylor division had a 14.4% rise. The company also said total sales increased 27.4% to $448.7 million in the quarter.

"The company was planning to manage their inventory effectively, then they had above-plan sales. That's a good problem to have," Ikenson said. "The worst problem would be to have too much inventory."

Ann Taylor said it entered February, the first month of the first quarter, "in a very clean inventory position," and that it expects first-quarter same-store sales in the midsingle-digit positive range. Last week, the company reported that February same-store sales increased 13.5%, compared with an 8.3% decrease a year earlier. The company cited a mix of style and color.

Ikenson believes the company's pickup in sales in January and February will continue for the rest of the year. Ann Taylor sees first-quarter earnings of 47 cents to 49 cents a share, compared with analysts' consensus for 49 cents.

Past results at Talbots, however, haven't been as robust. Earnings on a quarter-over-quarter basis have declined since the first quarter of 2002. "Talbots has missed on the fashions for a while," Ikenson said. "They need to get the merchandise right."

The company expects to earn 37 cents to 41 cents a share in the fourth quarter; analysts have forecast 40 cents a share. On Feb. 5, the company said total sales in the fourth quarter were $431.5 million, which is flat with the previous year's fourth quarter, while same-store sales fell 4.7%. Talbots will report earnings Wednesday before the bell.

Ikenson believes the missed fashion trends and the company's low inventory levels combined to make the quarter weak. In addition, the company had weak sell-through of marked-down merchandise. Like Ann Taylor, the company also suffered from a low inventory problem.

"Talbots initially made the decision to keep inventories lean for the fall/holiday, and by the time trends improved, management tried to and was unable to chase $10 million in reorders," said Prudential Equity Group analyst Stacey Pak. "Inventories were down 18% per foot at the end of December."

But while the company's fourth-quarter profit likely will be lower, Ikenson sees promise in Talbots' spring lineup, citing strengths in tank tops and pastel colors. Last week, the company reported that February same-store sales rose 5.8%, ahead of its own expectations, while total sales in February increased 10% to $84.3 million.

Last week's results led SG Cowen analyst Lauren Levitan to say the company will maintain positive same-store sales in 2004, after three years of declines. The sales will be driven by "more normalized spending by Talbots' traditionally conservative customer vs. curtailed levels during the war last year; Talbots' ability to participate in this season's feminine fashion styles; and strengthened inventory levels post-March," said Levitan in a Monday research note. (SG Cowen does investment banking for Talbots.)

Levitan sees the potential for a cent to 2 cents of upside to her fourth-quarter earnings estimate of 39 cents a share.

New fabrics and bright colors also will drive Talbots' spring sales, Ikenson thinks. "By April, they'll have enough inventory levels, and spring will be more important to the store. We will see more consistent results," he predicted. "If the merchandise is improved, they could generate some good momentum."

Analysts have forecast earnings of 55 cents a share for the first quarter, which would compare with 51 cents a share in the first quarter 2003. In the second quarter, the Wall Street expectation is for a profit of 36 cents a share, which also would be an increase over the profit of 32 cents a share in the second quarter of 2003.

Shares of Talbots are lagging those of Ann Taylor. At around $35.50, they are up 50% year over year and within range of their 52-week high of $38.65 reached on Sept. 3. They are well below their all-time high of $54.99 reached on Feb. 9, 2001.

Overall, said Ikenson, "There's a lot more femininity in apparel and more of a dress-up mode. The combination of those two will help companies like Ann Taylor and Talbots."

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