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ANN Inc. Down to Strong Sell on Dismal Q2 Preliminary Sales

Zacks Equity Research

Zacks Investment Research downgraded ANN Inc. (ANN) to a Zacks Rank #5 (Strong Sell) on Aug 14, 2014.

Why the Downgrade?

ANN has witnessed sharp downward estimate revisions after the company updated its business outlook for the second quarter of fiscal 2014 due to dismal preliminary comparable store sales (comps) and gross margin results.

ANN’s second-quarter preliminary results point to sales of $648 million as against $670 million projected earlier. The decline is due to a 2.3% decrease in comps for the second quarter compared with a marginal improvement guided previously.

The company blamed the weaker-than-anticipated comps on soft traffic trends and a highly promotional environment across the industry in the latter half of the quarter. However, the company noted that sales trends remained positive through mid-June.

Coming to segment performance, the company remains encouraged by the positive comps delivered at Ann Taylor, while comps at LOFT were dismal due to soft demand for its basic knit tops which form a key component of LOFT's summer collection.

Comps at the Ann Taylor brand rose 0.7% driven by a 2.0% rise at Ann Taylor, offset by a 1.9% decline in the Ann Taylor Factory channel. Meanwhile, the company posted a 4.1% decline in comps for LOFT resulting from a 5.2% decline at LOFT marginally offset by a 0.3% gain in the LOFT Outlet Channel.

Further, the company expects gross margin of 52.4% compared with 53.5% guided earlier. The built-up pressure on gross margin was due to the measures taken by the company to clear summer inventory which resulted in clean inventories at both brands although it weighed on margins.

The company expects selling, general and administrative (SG&A) expenses to be $286 million while the company had earlier projected SG&A expense of roughly $295 million. Shares outstanding for the second quarter is anticipated at 46.9 million when taking into account the effect of participation in securities and buyback of 1.3 million shares during the quarter.

Given the soft preliminary results, we remain less constructive on the company’s earnings results for the second quarter, slated to be released on Aug 22, 2014.

The Zacks Consensus Estimate for second-quarter 2014 and fiscal 2014 decreased 14.6% and 10.9%, respectively, to 70 cents and $2.13 per share over the last 7 days. For 2015 as well, most of the estimates were revised downward over the same time frame with the Zacks Consensus Estimate declining 7.6% to $2.56 per share.

Other Stocks to Consider

Not all stocks in the retail sector are performing as disappointingly as ANN. Better-ranked stocks among apparel and shoe retailers include Citi Trends Inc. (CTRN), The Men’s Wearhouse Inc. (MW) and Kate Spade & Co. (KATE), all carrying a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CTRN
Read the Full Research Report on MW
Read the Full Research Report on ANN
Read the Full Research Report on KATE

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