In its most recent quarter Ann Inc grew its revenue by 7% compared to the second quarter of 2011, most of which was driven by growth in same-store sales at both its Ann Taylor and LOFT locations. As a result, the company was able to grow its earnings by 24% for the quarter and had delivered $1.21 in earnings per share in the first half of 2012 versus 99 cents for the same period last year. This was partly due to the repurchasing of shares; over half of cash flow from operations in the first six months of the year was used to buy back stock. According to the company’s most recent report, it had about $100 million left in its repurchasing program.
At a $1.7 billion market capitalization, Ann Inc trades at 20 times trailing earnings but the company’s growth makes it look like a considerably better value. Merely annualizing the YTD numbers gives a P/E of 15, and it trades at 14 times forward earnings estimates. Brian Jackelow’s SAB Capital Management increased its stake in Ann by 33% during the second quarter of the year, closing June with 4.6 million shares of the company in its portfolio. This gave it over $100 million invested in the stock at that time, making it SAB’s second largest 13F holding (find more of SAB’s favorite stocks).
We would compare Ann to specialty women’s apparel companies Limited Brands, Inc. (NYSE:LTD) and Chico’s FAS, Inc. (NYSE:CHS) as well as to more general retailers Macy’s, Inc. (NYSE:M) and The Gap Inc. (NYSE:GPS). Limited, which owns the Victoria’s Secret brand, has a similar profile to Ann in terms of multiples: its trailing and forward P/Es are 21 and 15, respectively. The company has a considerably larger market cap and a moderate dividend yield of 2%, though its business suffered in its most recent quarter. Read our analysis of Limited Brands from earlier this month. Chico’s, which might also be known for its White House Black Market brand, is also in the same valuation range with earnings multiples that are actually identical to Ann’s. Its recent growth has been about as impressive as Ann’s on the earnings side- 23% higher last quarter than they were a year ago- but its revenue growth rate of 16% was considerably higher.
Gap has more than doubled in value over the last year, shrugging off concerns about low consumer spending, and Macy’s is up as well. Gap has risen to the point where it has achieved the same valuation multiples as Limited (21x on a trailing basis, 15x on a forward basis) and therefore trades at a premium over Ann. Gap did grow its earnings 29% in its last quarter versus the same period last year, so perhaps it does deserve to trade at similar levels to what are generally considered more premium brands. Macy’s represents the most conventional value pick of the lot: it trades at only 13 times trailing earnings, has also been experiencing growth, and pays a 2% dividend yield. That discount- which remains on a forward basis, as the P/E there is 10x- seems a bit steep to us and therefore it might be the best buy.
Retail stores, including Ann and its peers, seem to generally be trading in a very narrow valuation window. With this particular insider also selling recently, we’re reluctant to take his purchase as a bullish sign. In fact, we would think that Macy’s makes for the cheapest stock out of those we’ve discussed here.
