Ann Taylor Stores

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.

Ann Taylor Stores (ANN) Company Business Ann Taylor Stores is an specialty retailer of women's apparel, shoes, and accessories under their "Ann Taylor" brand and their "LOFT" brand. Ann Taylor is a luxury brand targeted towards working women while LOFT is a more affordable clothing brand and focuses on providing casual clothing. They also sell merchandise online through both of their two brands' e-commerce sites. As of January 29, 2011 there were 896 stores in the US, the District of Columbia and Puerto Rico, which included 266 Ann Taylor stores, 502 LOFT stores, 92 Ann Taylor factory stores, and 36 LOFT Outlet stores. Additional Notes: They currently have no bank debt Share buybacks: o Fiscal 2010 - repurchased 4.2 million shares at a cost of $100 million o Fiscal 2009 - no shares were repurchased o Fiscal 2008 - repurchase 4.1 million shares at a cost of $100.8 million o As of March 8, 2011, $259.1 million are available to be repurchased under the repurchase program The reason for the huge decrease in net income for 2009 was mainly due to the goodwill impairment charge and restructuring program as a result of the poor economy in 2008

Brand Analysis:

E-commerce show huge signs of same sales growth compared to 2010. Big recovery from 2010 levels

Future Outlook - Expectations Plan to keep growing in the US markets by opening up more stores o In 2008, they restructured their business and as a result closed 225 underperforming stores over a 3 year period which ended January 29, 2011 Fiscal 2011 - Quarterly Updates Q1 2011 Net income increased by 20.77% due to an increase in revenues of 9.96% and profit margin increased from 4.75% to 5.22% Cash as a % of Assets decreased from 22.21% to 12.28% due to: o 3.32x more spent on capex vs. Q1 2010 o Repurchase of 19.72x more shares than Q1 2010 Inventories as a % of Sales increased from 21.41% to 26.33% Same store analysis overall was very good for the quarter

Q2 2011 Net income increased 33.20% mainly due to a 15.46% increase in revenue Cash as a % of Assets decreased from 27.74% to 16.05% due to: o 3.23x more spent on capex vs. Q2 2010 o Repurchase of 19.5x more shares than Q2 2010 Inventories as a % of Sales increased from 19.13% to 23.63% Same store sales growth was strong once again

Q3 2011 Net income increased 33.41% mainly due to a 11.62% increase in revenue Cash as a % of Assets decreased from 23.18% to 14.49% due to: o 2.64x more spent on capex vs. Q3 2010 o Repurchase of 4.15x more shares than Q3 2010 Inventories as a % of Sales increased from 24.05% to 28.90% Same store sales growth was strong once again

Historical Ratio Analysis **If the value is green than the number is believed to be better than the previous number, vice versa if the value is
red

Profitability Ratios
ROE ROA ROIC CROIC

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

4.8% 3.3% 4.2% 0.2%

11.2% 7.9% 9.4% 10.3%

12.2% 8.8% 10.3% 8.6%

6.8% 4.8% 5.6% -0.3%

7.9% 5.5% 6.0% -0.1%

13.6% 9.1% 10.0% 6.5%

11.6% 7.0% 11.4% 6.9%

-80.2% -34.8% -8.1% -0.9%

-4.4% -2.0% 3.0% 10.0%

17.3% 7.9% 12.3% 16.3%

Profitability ratios have been mediocre at best over the years, however they had a very strong year in 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Solvency Ratios
Quick Ratio Current Ratio Total Debt/Equity Ratio Long Term Debt/Equity Ratio Short Term Debt/Equity Ratio

1.07 2.39 0.44 0.19 0.00

1.78 3.01 0.41 0.17 0.00

2.51 3.57 0.39 0.15 0.00

1.47 2.41 0.43 0.00 0.00

1.83 2.63 0.44 0.00 0.00

1.53 2.31 0.49 0.00 0.00

0.82 1.62 0.66 0.00 0.00

0.82 1.39 1.31 0.00 0.00

1.22 1.83 1.16 0.00 0.00

1.26 1.95 1.19 0.00 0.00

Total debt/Equity may raise some concerns as it is above 1

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Efficiency Ratios
Asset Turnover Cash % of Revenue Receivables % of Revenue SG&A % of Revenue R&D % of Revenue

1.47 2.3% 5.0% 44.4% 0.0%

1.37 15.4% 0.8% 44.4% 0.0%

1.38 21.2% 0.8% 43.7% 0.0%

1.40 3.4% 0.7% 45.5% 0.0%

1.39 18.4% 0.8% 44.6% 0.0%

1.49 15.4% 0.7% 44.1% 0.0%

1.72 5.6% 0.7% 44.4% 0.0%

2.28 5.1% 0.6% 47.9% 0.0%

2.03 11.2% 2.4% 52.9% 0.0%

2.14 11.4% 2.2% 49.4% 0.0%

Were able to reduce SG&A as % of Sales even with a economy of rising costs o Probably be around 48-51% for the next 2 years
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Liquidity Ratios
Receivables Turnover Days Sales Outstanding Days Payable Outstanding Inventory Turnover Average Age of Inventory (Days) Intangibles % of Book Value Inventory % of Revenue

0.45 18.3 35.8 3.37 108.41 46.8% 13.9%

2.12 2.7 35.9 3.17 115.07 40.1% 13.4%

8.84 2.9 28.6 3.73 97.98 34.5% 10.8%

5.05 2.5 39.3 4.09 89.31 30.9% 12.4%

5.52 3.0 38.9 4.21 86.70 27.7% 9.9%

8.52 2.6 39.7 4.47 81.59 27.3% 10.0%

5.82 2.6 44.5 4.25 85.94 34.1% 10.5%

-21.52 2.3 39.2 4.80 76.07 0.0% 7.9%

-0.62 8.8 38.5 4.26 85.67 0.0% 9.3%

1.66 8.1 45.5 4.30 84.80 0.0% 9.8%

2008

2009

2010

2011

P/E P/S P/BV P/CF P/FCF

14.19 - 0.99 - 48.34 0.58 0.15 0.48 1.64 0.80 2.11 7.48 0.15 7.10 18.63 - 57.02 14.00

22.37 0.83 3.88 10.31 15.64 Ignore all negative values

Overall the price multiples show ANN to be expensive relative to the last 4 years

Relative Ratio Comparison ANN does not classify its direct competitors on their latest's annual statement. However, I believe there competitors to consist of Liz Clairborne (LIZ), Talbots (TLB), Abercrombie & Fitch (ANF), The Gap (GPS), and American Eagle Outfitters (AEO).
Stock Price Mkt Cap ($M) EV 52 Wk High 52 Wk Low % off 52Wk Low $ $ $ $ $ GPS 24.97 12,190.00 11,750.00 26.00 15.08 65.6% 15.6 0.8 4.4 8.9 20.7 6.0 2.0% 0.0% 7.1% 28.0% -1.9% 0.8% -1.8% -25.7% -16.9% 10.1% 1.3 2.0 0.58 0.60 36.3% 38.0% 9.9% 11.0% 5.7% 6.8% 11.5% 12.9% 24.4% 23.0% 0.0 5.7 2.0 ANN $ 25.70 $ 1,350.00 $ 1,170.00 $ 32.49 $ 19.00 35.3% 14.8 0.6 3.1 7.1 16.1 4.7 0.0% 0.0% 0.0% 0.0% 11.6% 0.6% -0.9% 49.1% 56.6% 1.8% 0.9 1.9 0.00 0.00 55.4% 52.7% 7.1% 1.0% 4.3% -0.4% 9.6% -0.6% 19.8% -1.2% 72.4 3.8 2.2 $ $ $ $ $ AEO 15.74 3,050.00 2,530.00 16.37 10.00 57.4% 20.1 1.0 2.2 10.3 56.3 5.9 2.8% 0.0% 9.5% 56.3% 13.8% 1.0% 2.5% -40.8% -14.5% -14.5% 2.2 3.2 0.00 0.00 35.7% 40.4% 7.3% 12.0% 4.8% 7.8% 7.9% 12.0% 11.0% 16.6% 82.0 6.0 1.7 $ $ $ $ $ ANF 49.71 4,270.00 3,540.00 78.25 40.25 23.5% 21.8 1.1 2.2 9.6 58.7 6.8 1.5% 1.3% 3.1% 30.6% 21.5% 1.1% 4.6% 2.1% 67.5% -15.6% 1.1 2.1 0.01 0.01 62.9% 65.8% 7.8% 13.5% 5.0% 8.6% 6.7% 11.4% 10.6% 17.9% 46.3 2.5 1.3 LIZ $ $ $ $ $ 11.80 1,190.00 1,440.00 11.84 4.02 193.5% 12.2 0.8 0.0 5.5 0.0 68.2 0.0% 1.0% 0.0% 0.0% -2.6% 0.8% -19.5% 1413.8% 190.0% -8.5% 0.8 1.3 0.00 0.00 53.3% 47.9% 12.9% -8.9% 9.5% -9.4% 13.1% -12.2% 0.0% -38.9% 9.3 2.9 1.4 $ $ $ $ $ TLB 2.89 203.77 349.57 10.40 1.46 97.9% 0.0 0.2 10.9 0.0 0.0 29.3 0.0% 2.9% 0.0% 0.0% -6.6% 0.2% -7.7% -235.5% -951.7% -42.3% 0.5 1.1 0.00 0.96 30.5% 33.7% -4.3% 1.0% -5.4% -1.3% -8.3% -1.7% -39.1% -8.9% 6.9 4.0 1.6

Multiples
P/E(TTM) P/S(TTM) P/Tang BV(MRQ) P/CF P/FCF(TTM) EV/EBITDA(TTM)

Dividends
Div Yld Div Yld - 5yr avg Div 5yr Grth Payout Ratio(TTM)

Growth Rates
Sales(MRQ) v 1yr ago Sales(TTM) v 1yr ago Sales 5yr Grth EPS(MRQ) v 1yr ago EPS(TTM) v 1yr ago EPS 5yr Grth

Balance Sheet
Quick Ratio(MRQ) Current Ratio(MRQ) LTD/Eq(MRQ) Tot D/Eq(MRQ)

Margins
Gross %(TTM) Gross % 5yr Op %(TTM) Op % 5yr avg Net %(TTM) Net % 5yr avg

Returns
ROA(TTM) ROA 5yr avg ROE(TTM) ROE 5yr avg

Efficiency
Rec Turnover(TTM) Inv Turnover(TTM) Asset Turnover(TTM)

On a relative basis, ANN looks to be about slightly under-valued to fairly valued in relation to the multiples The margins look slightly more attractive than all its competitors, excluding Abercrombie Overall, on a relative basis ANN looks to be fairly valued

Investment Valuations Reverse DCF Starting with a reverse DCF valuation, I will assume a discount rate of 12% and a terminal growth rate of 2.5%. (The terminal growth rate of any company should never be higher than the growth rate of the economy.) A reverse DCF valuation should be used just to see a rough picture of where the market has currently priced ANN based on fundamentals. Based on my assumptions the market has currently priced ANN to have a owners earnings FCF growth rate of around a 16% year after year for the next 10 years with it gradually decreasing over the years, where then it will grow at its terminal growth rate. This is a rough estimate number, however this is well above its 5 year and above its 10 year historical averages. FCF growth is best to be looked at over multi-year periods as it is very volatile on a year to year basis. Actual Owners Earnings DCF This is the heart of my valuation of a company. Management has been unable to successfully provide investors with an increase in FCF over time. I believe that a more reasonable estimate of around 5% to 6% growth for the next 10 years. However, I most likely would not invest unless market price was lower than a 0% growth rate. Under my assumptions, I believe the intrinsic value to be around $12.38 on the safe side and on the more optimistic side with increasing growth it can be up to $16.59.

50 45 40 35 30 25 20 15 10 5 0 27/06/2005

5 Yr Price vs Intrinsic Value

27/06/2007
Historical Price

27/06/2009
Intrinsic Value

27/06/2011
Buy Price

Intrinsic Value would be fairly valued without adjusting FCF lower to adjust for average and TTM. I am hesitant of a greater than 0% growth rate in FCF due to ANN's prior record

FCFE Valuation The growth rate for this model is built around fundamentals, where it is equal to the non-cash return on equity multiplied by the equity reinvestment rate which gives us a net income growth rate of 74.9%!! Reason being that we do not want to just guess a growth rate and it is better to get one from fundamentals, obviously the option to adjust these ratios can occur if needed. An adjustment in my opinion is clearly needed as I do not see ANN growing at this high rate and a better growth would be around 12% for the next 10 years with it decreasing as the years progress. According to this model, the intrinsic value is roughly around $15.31, which is in line with our actual owner's earnings DCF. Even 12% growth is on the optimistic side in my opinion. Technical Analysis See the chart below for S&R lines.

Overview ANN has seen a huge reverse growth story ever since its big hit in 2009 and I believe shareholders have overconfidence with this stock and do not believe it will sustain the growth the market has priced it at. I do not see myself placing any trade on this stock for a long time unless something drastically happens. On a relative multiple basis it is fairly valued and it is definitely over value on a fundamental basis. Best Regards, Matthew

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.