The retail space definitely scares me right now. While the stock market has rebounded nicely off its lows, the average person continues to face headwinds and remains unwilling to spend anywhere near what they were wiling to a few years back particularly on apparel. In addition, the competition for shoppers is fierce and cost cutting has become commonplace among chains big and small.
With that in mind today I would like to touch on Ann Taylor (NYSE:ANN) ahead of its third quarter earnings release, which is due out later this week.
The Broad Brush View
I'm not overly excited about the near-term prospects for many retailers in general, and these concerns extend to Ann Taylor. In short, while women tend to like its merchandise, more and more women, even those on the higher end of the income chain, seem to be motivated by or focused intensely on price. In my mind, this may make the earnings results over the next few quarters a bit bumpy.
The Nitty Gritty
It is also hard for me to get excited about the very near-term earnings outlook for the company. Analysts expect the company to lose 23 cents this year and to earn 34 cents next year. The investment community would be happy to see the company generate a profit next year, but the simple fact is that as a person who places a large amount of emphasis on earnings, I find it hard to get excited by the meager bottom line that is expected, particularly since the stock is trading above $13.
And while the optimists will argue that the company has exceeded expectations over the last two quarters, that doesn't overly intrigue me. In fact, I would like to see several more quarters of it beating expectations before I'll be willing to change my tune. Note that the Street expects the company to earn 6 cents per share in its third quarter. I think it will meet that number.
Where I'd Rather Play
I do think that there are better plays in retail. As most of you know by now I am extremely interested in, follow and actively write up major discount stores that most Americans have probably heard of, including giants like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). This is mainly because they have a great deal of appeal to the cost conscious, and I am also constructive on Gap (NYSE:GPS). Gap has several things going for right now: it trades at about 15 times this year's estimate and it is expected to grow its earnings per share a little over 9% from this year to next. It also seems to be winning over investors as it trades near its 52-week high.
Hot Topic (Nasdaq:HOTT) is a company that I am keeping a tremendously close eye on as well, and I think it could end up being a good play at some point. It has clearly come off its highs and I think it could get hit even further by tax loss selling in the weeks ahead. But if a sell off does happen, it could present a good opportunity as the company is expected to earn 39 cents this year and 47 cents next year.
Bottom Line
While Ann Taylor clearly has a good name, it is not at the top of my list from an investment standpoint. The company does not trade at what I think is a reasonable multiple of expected earnings and very simply, I think that there are other opportunities in apparel retail that deserve a look. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
