Notable Calls

- UBS is upgrading ANN to Buy from Neutral and raising their target to $15 (prev. $12) saying they believe the Street is laser focused on a potential turn at the company’s heritage Ann Taylor business, with little mention of Loft. However, they view Loft as the division that should be in the spotlight for two key reasons: one, Loft is currently and will continue to be a more meaningful contributor to total sales, and two, the still very challenging environment could allow Loft to gain share from customers who continue to trade down, especially as the fashion and fits have improved meaningfully, in firm's view.

Loft is currently 50% of sales, Ann Taylor only 30%, with balance at Factory. Loft has become a significant piece of the total business, now representing about 50% of total company sales, up from just 37% in 2003. This compares with Ann Taylor at currently 30% of sales and down from its peak of 55% in 2003

UBS notes their recent channel checks at Loft show positive customer response to new fashion and fit. They have become increasingly impressed with Loft’s product assortment, which has shifted from more basic items to modern, fashion-right and feminine looks under the helm of President Gary Muto (joined Nov ’08).

UBS Q3 est of $0.14 is well above the Street's $0.05; they believe the key difference is in gross margin. They assume 380 bps of GM improvement, which is 200 bps of erosion vs Q2 on a 3-yr stacked basis (despite better product/leaner inventory). ANN’s model is highly sensitive; 15 pts of GM in 3Q equals ~$0.01 to EPS. They are raising their 2009 EPS estimate to $(0.29) from $(0.34) and 2010 to $0.21 from $0.19.

- Piper Jaffray is raising their target to $17 (prev. $11) reiterating Overweight.

In view of what Piper believes will likely begin a pattern of besting consensus expectations in the back half of this year, they are reiterating their Overweight rating on ANN shares ahead of the company's second-quarter earnings report slated for Friday, August 21. That said, they are aware that the market has not been kind to retailers thus far in the second-quarter earnings cycle and they would, as such, use any stock price weakness to begin or accumulate to ANN positions.

Product Holding Price Akin To The Days Of Margin Gains Seen In Fall 2005 and Fall 2006. Firm analyzed five years of product flows and promotional activity for the Ann Taylor division to assess the relationship between "product launch" and initial "price breaks." They found that thus far in Fall 2009, Ann Taylor Stores is carrying the product at full price longer similar to the margin-expanding Fall seasons of 2005 and 2006.

Piper's store checks point to a noticeable step up in higher-priced blouses/woven tops versus the knit dominance in the tops category over the last few fall seasons. In looking at a group of six women's apparel retailers this fall, woven tops carry a higher average unit retail price point over casual knit tops by a factor of 1.8x. They believe this mix bias is tied to new fashion trends and could be a catalyst for overall increases in same-store sales vis-a-vis average price increases.

FQ2 Earnings Report Slated For Friday, August 21st Likely To Highlight Cost-Savings Initiatives & Early Fall Reads. For Q2 Piper is published at $0.02 which is in-line with consensus and compares to management's pre-announcement that EPS could come in "slightly better than breakeven" (announced 7/30/2009). For the year, they remain significantly above consensus at a loss-per-share of ($0.02) versus consensus of ($0.35). For FY11, they are published at $1.10 versus consensus of $0.19.

Notablecalls: While UBS' upgrade looks 'OK', it's the comments from Piper Jaffray's Neely Tamminga that fascinate me. The fact ANN has been able to carry product at full prices in this environment makes me quite positive ahead of results on August 21.

Note that short interest stands at close to 18% in the name, making a squeeze quite possible even ahead of the earnings release. Let's see what happens. The general market isn't doing us any favours so one needs to keep an eye on that.

All in all, I think ANN can trade towards $12 level today (and possibly higher if the market doesn't dump).