Ann Inc. Has 21% Profit Increase In Spite Of Margin Decline

Wall Street Journal
By Elizabeth Holmes and Melodie Warner

Savvy sourcing by the parent of Ann Taylor and Loft means those chains won't see any increase in the cost of their merchandise later this year, even as their mall peers struggle with rising prices for cotton and overseas labor.

Ann Inc. said Friday it expects its average cost per item to be flat for the rest of the year compared with a year earlier. The comments, just a day after Gap Inc. shocked investors by forecasting an unexpectedly big increase in costs for the second half, underscores how retailers are showing vastly different impacts from pressures the entire industry is facing.

Gap, which also operates Banana Republic and Old Navy, said its costs would rise by as much as 20% later this year, a hike that it won't be able to fully pass along to customers. Teen retailer Aeropostale Inc. said it will also raise prices this fall. Both companies saw shares tumble Friday on the news.

Ann says its costs will hold steady, the result of long-term strategy that included placing early orders for fabric and buying off-season factory time. It will only selectively raise prices at its Ann Taylor division, which are the result of in-demand styles not higher input prices, the company said.

"It was no one silver bullet, for sure, but I think we got way ahead of it a year ago," Chief Executive Kay Krill said in an interview. "I hope that this will tremendously benefit us in the back part of the year."

Ann said earnings rose 21% for its fiscal first quarter and raised its full-year sales estimate, though the clothing retailer's margins contracted.

For the quarter ended April 30, the company reported a profit of $27.3 million, or 51 cents a share, up from $22.6 million, or 38 cents, a year earlier.

Ann has seen sales rebound from depressed levels even as consumers remain cautious. Sales at stores open at least a year, a crucial measure of a retailer's health, rose 7.8% in the first quarter from a year earlier. Ann Taylor brand same-store sales were up more than 15%, with Loft up 2.4%. Net sales jumped 10% to $523.6 million, topping the company's March projection of $510 million.

The New York-based company raised its full-year sales estimate to $2.2 billion from its March forecast of $2.18 billion.

Ann used promotions to pull in reluctant customers during the quarter. Demand was damped by cool weather and a late Easter, leading gross margin to narrow to 57.3% from 59.4%. Easter is a bigger shopping holiday than Christmas for the company, which tends to attract women buying for themselves, Ms. Krill said.

Going forward, the company plans to offer fewer promotions, as inventories fall in line with sales and the weather become more seasonable.

Major Capital Investments Planned By Retailers

by Evan Clark
From WWD Issue 05/16/2011

Retail’s cash spigot has opened up again.

Fashion chains are boosting capital expenditures by tens and even hundreds of millions of dollars this year, looking beyond the questionable consumer spending outlook as they vie for market share by bolstering both online operations and old-line stores.

A WWD analysis of spending plans at 10 major retailers — from Macy’s Inc. to Limited Brands Inc. to Tiffany & Co. — shows their capital expenditures are slated to increase by about a third this year, growing by up to a total of $1.52 billion. The dollars will be used to develop e-commerce capacity with new distribution centers, spruce up stores, add outlets and, in some instances, open new full-price doors.

After two years of downturn, when chains dramatically cut spending and loaded cash onto their balance sheets, retailers and other types of companies have plenty of money to spend and lots of catching up to do. But the massive infusion of cash might say more about retailers’ confidence in themselves than their outlook on the consumer. Many companies also are spending their cash hoards on massive share-buyback plans that goose earnings per share and can benefit investors, but do nothing to grow operations.

“The forward-looking retailers are fortifying their positions for the future,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon. “There’s really no room for delay when you’re competing for market share in a low-growth marketplace. You have to be fast and nimble and take advantage of every opportunity.”

Much of the spending is going toward online operations, which are the fastest growing part of the business.

Macy’s Inc.’s capital expenditures are set to increase by 58.4 percent to $800 million without a single new full-price store planned. Instead the company is gearing up to support online sales, which shot up 38.3 percent in the first quarter.

Macy’s is building a Martinsburg, W. Va., online fulfillment center that will encompass 1.3 million square feet and employ 1,200 people year-round and an additional 700 around the holidays. The company broke ground at the 92-acre site last month and plans to have it ready to ship goods to online customers in June 2012.

Terry Lundgren, chairman, president and chief executive officer, sees investment in Macy’s online business as vital.

“This is a business that thrives on unrelenting creativity and innovation,” Lundgren said in January, when the company laid out plans to hire more merchandising and marketing specialists for its online business. “Having the right talent in the right place is vital as we seek to sustain and accelerate our sales growth online, as well as in the stores.”

And retailers are also investing in their physical stores — the bread and butter of their income statements.

Kohl’s Corp., which is boosting spending by 31.4 percent to $1 billion this year, has earmarked $250 million to remodel and relocate stores and another $120 million on fixtures and store improvements. The firm is expanding its use of electronic signage, making it easier and cheaper to adjust prices.

Kohl’s is just a part of it. Gap Inc. is continuing to refurbish its Old Navy stores, and The TJX Cos. Inc. is laying out $317 million on store renovations.

“A lot of the stores that were built 10 years ago, eight years ago, need to be improved,” said Antony Karabus, retail adviser with PwC, formerly referred to as PricewaterhouseCoopers, in Toronto.

Fixing up aging stores and updating supply chains will help retailers get more out of their existing businesses.

“Most apparel retailers do not have the capabilities in-house that they need in…merchandising, product development, global sourcing, design,” Karabus said. “There’s a lot of hurry-up-and-get-the-capability.”

All of this spending, though, is coming under scrutiny of more watchful chief financial officers.

“The cfo’s are putting their personal hand on it, making sure there’s a clear accountability and [return on investment],” Karabus said.

And some still see traction in new stores, even as others, such as Charming Shoppes Inc. and The Talbots Inc., continue to trim their portfolios.

Kohl’s, for instance, will spend $290 million to open 40 new doors, most of them employing a smaller, 64,000-square-foot format.

In the specialty sector, Chico’s FAS Inc. plans to add 100 to 110 stores, while Ann Inc., which operates the Ann Taylor and Loft chains, will grow its door count by 48 and Limited Brands Inc. will cut the ribbon on another 35 doors in North America. Macy’s is opening three new Bloomingdale’s outlets for fall.

When chains do expand, they’re being careful to better understand the demographics of the markets they enter.

“Retailers are asking for more information,” said Alan Shor, president and co-founder of real estate firm The Retail Connection. “They’re trying to be much more precise in their site selection.”

Companies continue to look closely at demographic information such as income, education and gender, but they are also digging deeper.

“They’re doing a better job of understanding who their customer is,” Shor said. “What is the customer buying? When is the customer buying it? Social media has [also] become much more of a factor in data mining.”

Marie Driscoll, an equity analyst at Standard & Poor’s, said retailers are “confident in themselves and their growth strategies,” not the U.S. market.

“The bulk of [spending] is either going to be international, e-commerce fulfillment and [distribution centers] and all that and then the outlet channel,” Driscoll said. “Capex includes IT expenditures, which includes maintaining your Internet presence, which is the biggest store.”

Gap, Ann Inc. CEOs Receive Pay Hikes

by Arnold J. Karr
From WWD Issue 04/06/2011

Glenn Murphy’s sacrifices in 2009 came back to him with interest in 2010.

Murphy, chairman and chief executive officer of Gap Inc., saw his overall pay package grow 18 percent last year, to $5.9 million from $5 million in 2009. After he voluntarily reduced his salary 15 percent, or $225,000, in 2009, it returned to its regular level of $1.5 million in 2010. And in appreciation of both his stewardship of the San Francisco-based firm and his willingness to earn less “given a highly uncertain business environment,” Gap’s compensation committee awarded him a special bonus of $635,000.

Although his nonequity incentive plan compensation was cut by slightly more than half to $1.7 million, he was granted $1.8 million in stock awards, versus none the year before. He received no option awards in 2009 or 2010. Other compensation expanded 18 percent to $281,000 from $163,000.

Because of fluctuating stock prices and vesting schedules, stock and option awards aren’t necessarily realized by the named executive officer, but companies are required to include them in the compensation tables when submitting proxies to the Securities and Exchange Commission, as Gap did on Tuesday.

Last year, Gap’s profits increased 9.3 percent, to $1.1 billion, while sales rose 3.3 percent, to $14.66 billion, and improved 1 percent on a same-store basis.

In a another SEC filing Tuesday, Ann Inc. reported that Kay Krill registered a 13.4 percent increase in total compensation last year, as her bonus and stock awards followed the company’s earnings trajectory upward.

Krill, president and ceo of the company previously known as AnnTaylor Stores Corp., earned a total of $10.3 million last year, up from $9.1 million in 2009. Her salary was unchanged at $1.2 million, but her bonus grew 18.9 percent to $5.2 million, from $4.3 million, and the sum of her stock and option awards was up 14.5 percent to $3.9 million, from $3.4 million, despite a 30.4 percent decline in option awards to $1.2 million.

Krill’s “other” compensation dropped to $16,000 from $101,000 in 2009. Last year, car service accounted for just under $10,000 of that total, down from $36,000 in 2009, and the reimbursement for taxes in connection with car service, nearly $29,000 in 2009, was waived entirely.

The proxy highlighted the recent improvement in Ann’s performance, noting that while its operating profit rose 352 percent and its stock price was up 74 percent last year, the total compensation for all “named executive officers, including the ceo,” was up a far more modest 11 percent and the ceo’s total compensation grew 13 percent.

In the fiscal year ended Jan. 29, the company swung to a profit of $73.4 million from a net loss of $18.2 million in 2009, while revenues increased 8.3 percent to $1.98 billion.

Why Are Fitting Rooms So Awful?

Stores Try To Beautify Spaces, 'Seduce' Shoppers to Buy More With Better Lighting, Mirrors, Design.

Wall Street Journal
By Elizabeth Holmes and Ray A. Smith

You spot a gorgeous dress on a hanger and, hopes high, make your way to the fitting room.

It's downhill from there. The door doesn't fully shut, the lighting makes you look ill and the frock looks frumpy in a mirror fit for a fun house.

The retail dressing room can be a total sales killer.

Now stores are making a big push to transform the dingy fitting room into a more flattering space. It's part of an ongoing struggle by retailers to coax consumers to spend more. Having saturated the market with stores over the last decade, they can't expand to increase sales. Instead, companies are trying to squeeze more profits out of their current fleet.      

    

Customers who try on clothes in fitting rooms have a conversion rate—meaning they ultimately buy something they tried on—of 67%, according to retail consultant Envision Retail Ltd., of Surrey, England, based on observations of more than 8,000 shoppers. Customers who don't use the fitting rooms have only a 10% conversion rate. Shoppers who use the fitting rooms spend a third of their in-store time there.

Aesthetically, the dressing-room makeovers are an attempt to go from bland and barren to comfortable and inviting, as if the shopper is trying on clothing in her own home. Chandeliers are cropping up in luxurious anterooms, where racks of camisoles hang waiting to smooth the unexpected bulge. Inside the fitting rooms, wallpaper and back-lit mirrors aim to flatter, not frighten.

Stores are focusing their design efforts on dressing rooms in the women's clothing sections. Men tend to buy without trying on in the store, says Paco Underhill, founding president of Envirosell, a retail behavioral research and consultancy firm, who has timed men's visits in stores.

The new design at Ann Taylor, a division of Ann Inc., is intended to replicate a shopper's walk-in closet, says Samantha Dorfman, senior vice president of store development, design and facilities. A huge chandelier and larger-than-life marketing poster fill the entrance to "seduce" customers back to the space, Ms. Dorfman says. It's an about-face from the barren, beige entrance to the fitting rooms in the current layout.

Old Navy, the bargain-priced division from Gap Inc., moved fitting rooms to the center of its new store design. The relocation came after customers referred to the old tucked-away location as the "dungeon," says Tom Wyatt, Old Navy's president. To further cater to its target customer—a time-starved, young mother—the chain added what it calls "quick change" areas. The half-circle spaces are enclosed by a curtain.

Noticing that many women like to go into a fitting room together, Anthropologie, a division of Urban Outfitters Inc., makes sure each room can accommodate more than one person. "They consider it a little bit of a party," says Co-President Wendy B. McDevitt.

For women shopping with children or a boyfriend or husband, department store chain Macy's Inc. has been gradually updating its stores to add communal waiting spots with flat-screen TVs tuned to either sports or cartoons and upholstered seating. The theory: Parking a husband, boyfriend or kids in that spot helps a shopper feel "less rushed and stressed," a Macy's spokeswoman said in an email.

Clothing stores typically allot about 20% of the square footage towards fitting rooms and storage and 80% towards displaying the merchandise, says Robin Kramer, head of Kramer Design Group, a retail branding and design firm which works with clients from Talbots to Alexander Wang. She has lobbied stores to dedicate more space to their fitting rooms. "It's the moment where you put the brand on your body and decide if that's what you want," Ms. Kramer says.

Some retailers are filling the fitting room area with merchandise. At Ann Taylor, racks and drawers in the lounge area display undergarments such as shapewear and camisoles. Its sister division, Loft, also includes a bar of belts and jewelry. Sales associates manning the fitting room are able to sell more items to a customer without leaving the space.

Lighting is a critical component. "Any woman who goes into a fitting room that has really bad lighting, you look at yourself, you look at your skin and you're completely distracted," says Anthropologie's Ms. McDevitt. "Then you lose the real reason why you were in there."

The new Ann Taylor rooms have six sources of lighting and three types of bulbs, compared to one source and type of lighting in the old design. The mixture of ceramic metal halide, compact fluorescent and low-voltage bulbs is more flattering, Ms. Dorfman says.

Bloomingdale's has installed rear-lit three-way mirrors, which allow customers to see themselves from a variety of angles. There is also a ceiling-mounted light three feet back from the mirror to eliminate shadows on the shopper's face, says Jack Hruska, executive vice president of creative services at Bloomingdale's.

Personal touches at Old Navy include labels placed over a trio of bright yellow hooks, helping shoppers organize their haul. "I love it!" and "Not for me," the signs read. Anthropologie writes shoppers' first names on the fitting room door, making it easier for sales staff to refer to them by name. That one-on-one time with a customer helps the store to engage shoppers on an intimate level, Ms. McDevitt says.

Because fitting rooms are highly trafficked areas, stores must make the design durable as well aesthetically pleasing. At Ann Taylor, the gray tones of the custom-designed floral wallpaper mask scuffs. The leather benches were chosen for the material's resistance to stains, like lipstick.

To help shoppers get the attention of salespeople, some fitting rooms at Bloomingdale's, such as those in the intimates departments, have phones. Customers are automatically connected to a sales associate to obtain another size, or ask questions regarding fit. Bloomingdale's says the phones are used frequently.

Victoria's Secret, a lingerie chain from Limited Brands Inc., is testing buttons in a small number of its fitting rooms which, when pushed, alert a sales associate via headset. The system also keeps track of how many people use the fitting rooms, how long they stay and how many times they ask for help, says Marge Laney, president of Houston-based manufacturer Alert Technologies, which installed the Victoria's Secret system.

Talbots Swings to Loss, Accelerates Store Re-Imaging Plan

Wall Street Journal
By Karen Talley

Struggling women's retailer Talbots Inc. provided a ray of hope by reporting a fourth-quarter loss that was less-than-expected and saying it was confident enough in its store remodeling plan to step up its pace.

The company, which has lagged behind rivals Ann Inc. and Chico's FAS Inc. in achieving a turnaround from fashion mistakes and the recession, still has more work to do, Chief Executive Trudy Sullivan said.

"Weaker-than-anticipated customer response to our merchandise assortment and high levels of competitive promotional activity were key factors impacting our results" in the fourth quarter, Ms. Sullivan told analysts during a conference call.

There was little expected from Talbots coming into Thursday's report after the company reduced its fiscal fourth-quarter earnings estimate in January on worse-than-expected preliminary sales figures. Talbots' ability to beat its expectations sent shares up 25% to $5.98 in recent trading.

Talbots has been working hard to make its merchandise look more contemporary and to broaden its appeal from being thought of just as a venue for more mature women. The retailer is doing this without a merchandising chief or a leader for its stores, spots the company is working on filling after departures. Efforts under Ms. Sullivan, who joined the company in 2007 after being president of Liz Claiborne Inc., include using a broader array of models in catalogues, including actress Julianne Moore, and doing more to appeal to plus-size women.

The retailer is also trying to give its stores a more modern feel. Talbots this year plans to renovate about 70 stores, up from earlier plans for 50, and open 20 upscale outlets. Talbots said it plans to step up its previously announced store closure plan, shuttering roughly 90 to 100 stores and consolidating or shrinking 15 to 20 stores over two years, at an estimated cost of $18 million, with a majority expected to be completed in 2011. The company also expects to open 20 upscale outlets in 2011.

"While the merchandise offerings have shown improvement from prior years, I feel the transformation has been too radical for the core customer and that the company has not yet succeeded in attracting enough younger consumers to offset the loss of sales to the core group," said Margaret Whitfield, retail analyst at Sterne Agee.

The company said sales trends and customer traffic in the current quarter have improved from the fourth quarter, but top-line sales are down about 4% over the previous year despite increased promotions.

Talbots reported a loss of $2.8 million, four cents a share, for the quarter ended Jan. 29, compared with a profit of $4.1 million, or seven cents a share, a year earlier. Excluding a net gain of $6.8 million for special items, the adjusted loss widened to 14 cents a share from 13 cents a share. The company had expected a loss from continuing operations of 15 cents to 19 cents a share.

Sales dropped 7.4% to $292.6 million, as same-store sales slipped 7.3%. Analysts polled by Thomson Reuters forecast sales of $295 million.