Just when you think retail is ready to throw in the towel, someone comes along with an earnings report that blows away expectations. Ann Inc. (NYSE:ANN) reported second quarter earnings August 17 that were exceptional. Only 30 months ago, its business was mired in losses and its stock was trading for less than $5. Today, it's within 7% of its five-year high and within 24% of its all-time high of $45.15 back in October 2006. Up 13.56% year-to-date, investors likely want to know if it can keep it going. I think it can and I'll explain why.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

To be a successful retailer these days, you must have a strong online business. What constitutes strong? For me, it means growing quickly and delivering at least 10% of the overall business. In the first six months of the year, the Ann Taylor brand saw e-commerce revenues on a comparable basis grow 18% over the same six months in 2011. The Loft brand saw an increase of 22.4% in the first half of the year.

Combined, the two brands generated $125.7 million in online sales in Q1 and Q2; on a percentage basis, that's 10.9%. Breaking out the first and second quarter numbers separately, the Loft brand had a huge first quarter - up 29%, while its second quarter was not quite as impressive - only up 14.6%. The Ann Taylor brand was the exact opposite, with a second quarter increase of 29% and a first quarter improvement of just 9.6%. Most importantly, e-commerce sales in the first half of 2012, as a percentage of overall revenue, improved 130 basis points. If it can grow its e-commerce revenue as a percentage of total revenue by 1% to 2% each quarter for the next 24 to 36 months, its profits should be at least 30 to 40% higher, if not more.

Less Promotions
Avoiding huge chain-wide promotions in the second quarter by offering its customers lower-entry price points, Ann was able to deliver record gross margins of 55.8%, 90 basis points higher than the second quarter in 2011, also a record. Operating profits increased 27% to $52.9 million, which resulted in an operating margin of 8.9%, 140 basis points higher than the previous year. If it can maintain this level of gross margins, it should have no trouble hitting double-digit operating margins sometime in 2013. It hasn't done that since 2004.

Piper Jaffrey analyst Neely Tamminga believes Ann's fall and holiday offerings along with improved inventory management should continue to drive earnings growth. The company's exceeded earnings expectations for eight straight quarters. It's definitely on a roll experiencing higher full-price sell-throughs.

SEE: Understanding The Income Statement

Living in Canada, I'm very aware of the success American retailers are having north of the border. I've advocated for several years that more of them enter our market because we're ripe for the picking. In the past year, Canadian women's chain Tabi closed all 76 locations due to poor sales. Several others have downsized due to an inability to compete with Canadian retailers like Lululemon (Nasdaq:LULU) and Aritzia as well as many American chains.

Ann will open up two Ann Taylor locations in Toronto in the next two quarters as well as a Loft location in Toronto in the final quarter of the year. Not only is Canada's economy stronger, but the country is underserved when it comes to retail (23 square feet of retail space per capita in the U.S. compared to 14 in Canada), despite the influx of American and European retailers in the past few years. Not to mention annual sales for every square foot of retail space is $580 compared to $309 in the U.S.

SEE: Earning Forecasts: A Primer

The Bottom Line
The second quarter brought renewed strength to the Ann Taylor brand, as its smaller concept store is really gaining acceptance and its Loft brand continues to perform exceptionally. The combination should continue to drive a strong business into 2013 and beyond. An all-time high is likely too much to ask for in 2012. Look for it sometime in 2013.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  2. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  3. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  4. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  5. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  6. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  7. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  8. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  9. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  10. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  1. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!