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“Taylor”ing for Success

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1 “Taylor”ing for Success
Ann Taylor Market Strategy Santa Clara University MBA March 10, 2010 By Kathleen Cronin

2 50 Years Designing Clothes for Well Dressed Woman
Background 50 years: Evolved to become nationally recognized brand Two businesses: Ann Taylor and LOFT Designs clothes for well dressed woman, “ANN” Ann Taylor: Chic, professional Loft: Casual needs of same customer segment Generates $2B in annual revenue 50 Years Designing Clothes for Well Dressed Woman

3 Why Strategic Change Required?
Strategic Restructuring Program announced in Feb 2008 Objective: Reduce costs and improving operating margins Primary Focus: Enhance brand value and refine marketing campaigns Totaled $140M in planned investment costs Expected annualized savings of $125M Harsh decline in Net Income in 2009 Economic conditions Company cost structure issues Failure of design team to meet customer trends Too focused on expansion Ann Taylor Quarterly Net Income: Excludes $286 M goodwill impairment charge in Jan 09 Strategic Restructuring Program Announced Restructuring Program Expansion 1 Restructuring Program Expansion 2 Kay Krill named as CEO

4 Specialty Women’s Retail Industry Five Force Analysis
MEDIUM / HIGH BUYER POWER -Low switching costs -Rewards program deters switching -Trends easily imitable -Low backward integration MEDIUM THREAT OF NEW ENTRANTS -Create subsidiaries to leverage distribution channels -Word of mouth drives buying decisions -No switching cost -High capital requirements - Import restrictions could drive manufacture in-house Low Power of Suppliers -Asian suppliers cheap; make small profit -Low supplier concentration: multiple manufacturers make clothes -Low threat to forward integrate -Medium for Lack of substitutes Medium Threat of Substitutes -Changing lifestyles allow less time to shop -Increasing usage of e-shopping -Economic decline caused switch to discount stores -V-P tradeoff: Low, but promotions will increase V-P HIGH COMPETITIVE RIVALRY -Multiple competitors -Low industry growth -Low exit barriers due to mfg -Fairly transparent strategies (latest trends) Industry Sales in ‘09: $38B High 1-Competitive Rivalry 2-Buyer Power 3-New Entrants 4-Substitution Threat Low 5-Supplier Power Mature, Fragmented, Unattractive Market

5 Macro Economic Analysis
Global -Expanding internationally -Asia, Middle East, Russia growing markets -European market continues to lead w/ fashion -International firms entering U.S. Government/Regulatory -Reduced trade regulation -Reduced cost benefit with offshore manufacturing -Free Trade Agreement lowering tariffs -Ship fabric without import duties -Promotion of operations in certain regions (tax breaks) Environmental -Push to “Go-Green” in supply chain, product offerings -Eco-friendly causes transformation on customers -Now part of brand image -Develop brands specific to eco-friendly materials -Causes better material selection -Monitoring supplier qualification processes Technological -Point of sale via use of bar code scanners -Online marketplace allows for real-time transactions -Social networking primary educational tool -Hear of product launches, compare prices, -New sites allow purchases at more of a discount -Less brand loyalty with internet sales Economic Factors Driving Increased Competition

6 Customer Analysis: Market Penetration
Potential Market (All Females) Total Available Market 282M Avg Household Income $32K (25 or older) 144M (51%) 22M (16% of all females) Avg Income $26K (25 or older) Defined as women with income >$35K Ages 25 & up Total U.S. Population (in Millions) Served Market 11M (50% of TAM) Defined as women ages 25-44 Income $35K and up U.S. Social Class Breakdown Upper Class $500K+): 1% Upper Middle (>$100K): 15% Lower Middle($35-$75K): 32% Working Class($16-30K): 32% Lower Class (<$16K): 14% 135M Age Breakout >65 = 13.5% 55-64 = 9.4% 35-54 = 29.6% 25-34 = 13.5% 15-24 = 13.5% < = 20.5% 55&above = 20% 45-54 = 31% 35-44 = 29% 25-34= 20% Income data from: Potential market-those in total population who have interest in acquiring product Available Market-those in potential market who have enough money to buy product Qualified Available market-those in available market who legally permitted to buy product Target market-segment of qualified available market that firm has decided to serve (served market) Penetrated market-those in target market who have purchased the product (share of market) (avg income of US) avg income of $55K Segmentation Variables Demographics: Median age of females: 29.3 yrs 67 million females age 15-64 Income level: A/B Class (>$2579/mo) – 15.5% of population C Class ($ /mo) – 52% of population D/E Class (<$617/mo) – 32% of population Location: urban, rural 86% urbanization in Brazil ANN Targets 50% of U.S. Market

7 Customer Segmentation of Women’s Apparel Industry
DEMOGRAPHIC BENEFIT SOUGHT (Key Values) 1 Fashion Forward, Chic Primary Age Group: 15-36 “Hip Singles” Always up to date on latest trends Frequent shoppers Often accessorize w/ outfit Shops for clothes at primarily specialty retail stores Embrace new trends, extension of personality Educated about new fashion Become knowledgeable before purchase Top preferred product offerings: Style, proper fit, style, discounts offered Spend significant portion of income on clothes 2 Modern, Updated Classic Primary Age Group: “Professional career woman” Simplicity but occasional wardrobe update Sometimes accessorize w/ outfit – this increasing Shops for clothes at mixture of specialty retail stores, department stores, discounted stores Proper fit, style, price, ability to mix/match Looks for versatile, modern clothing staples Prefer non-iron pieces and ability to wash versus Spends discretionary income on clothes Reside in middle; Stay with moderate updates Less likely to jump on anything trendy 3 Traditional, Conservative Primary Age Group: 35+ “Suburban Mother” or “Conservative Retiree” Sticks to basics Rarely accessorizes w/ outfit Occasional shopper Desire to save money on clothes Proper fit, versatility, price, location, & durability Does not follow latest trends Little desire to stand out or make statement Looks for all-in-one store at good price Looks for one clothing that works everywhere Target Segment: Modern / Updated Classic

8 Market Share of Top 15 Competitors
Total Market Value: $107B Values in % Ann Taylor Stores Macy’s (US) Other Women’s Retail The women’s apparel industry is highly competitive with 2009 sales estimated at approximately $107.1 billion (Exhibit 2). AnnTaylor competes with geographically diverse department stores, specialty stores, discount stores, and catalog and internet businesses that offer similar categories of merchandise (AnnTaylor, 10-K Filings, 2008). The variety of products available in a company’s store depends on the size of the store, and buying behavior of the customers in the location. Fifteen competitors were selected based on store location, distribution channels, targeted customer, product offerings, and price. It was important to choose primary competitors external to the Women’s Specialty Apparel Industry as well, like department stores, since a customer is likely to shop at multiple stores found in a similar location. Other Department Stores Very Saturated Market

9 Classic. Versatile. Fresh.
Video: THE NEW ANN Classic. Versatile. Fresh.

10 Corporate Leadership New Leadership Since 2008 Kay Krill
President and CEO Appointed Oct 2005 Michael Nicholson Executive Vice President CFO and Treasurer Appointed Jul 2008 Barbara Eisenberg General Counsel and Corp Sec Appointed Mar 2005 Christine Beauchamp President, Ann Taylor Appointed Aug 2008 Gary Muto President, LOFT Appointed Nov 2008 Brian Lynch President, Corporate Operations Mary Kay O’Connor Wente Senior Vice President Director of Stores Appointed Oct 2008 Lisa Axelson Design Paula Zusi Chief Supply Chain Officer Appointed Sept 2008 Michael Kingston Chief Information Officer Appointed May 2006 New Leadership Since 2008

11 Increased Organic Development
Corporate Timeline Beauchamp becomes Ann Taylor President LOFT Maternity pulled from stores, only online Beauty line introduced Plans for “Modern Boomers” division began Strategic restructuring plan began 2005 2006 2007 2008 2009 2010 Kay Krill appointed CEO Celebrations line introduced Axelson became SVP of Design LOFT Outlet introduced Collections line introduced LOFT Maternity line introduced Increased Organic Development

12 Ann Taylor Competitive Advantage
Ann Taylor is superior to other clothing lines because it provides the professional woman with a chic, sophisticated look using high quality materials for professional and special occasions. Loft is superior to other clothing lines because it provides the professional woman with casual, fashionable and fun styles for professional and special occasions. From the top fifteen competitors, six companies were selected as the primary competitors to Ann Taylor and LOFT and its associated outlet stores. These were selected based on average age range targeted (25-44 years), types of clothing (work and/or casual), sizes offered (petites, misses, plus sizes) and geographical location. Ann Taylor Possesses Premium brand equity uneasy to imitate High marketing and promotional costs to achieve value advantage Solid Sourcing operations J.Crew, Macy’s, and Talbots are prime competitors for both Ann Taylor and LOFT. Ann Taylor’s primary competitors also include Banana Republic (under Gap, Inc), Anne Klein (under Jones Apparel), and Nordstrom. LOFT’s primary competitor also includes Gap (under Gap, Inc). The top competitors are likely to change as more international brands infiltrate the U.S. market, like Zara and Mango Inc. Jones Apparel Competitive Market Drives Need for Strategic Change

13 Sales Growth: Ann Taylor Vs. Competition
Over the past three years, the industry revenues declined from 1% in 2006 to -5.5% in Here you’ll see Sales growth graphs that highlight this downward trend. Among the worst performers has been Talbots, which saw its sales drop by almost 53% in Sales for AnnTaylor, Gap and Jones Apparel have each dropped around 9%. Clearly, the pace and quality of bottom line growth will be a key component moving forward. Future Profitability Dependent on Pace and Quality of Bottom Line Growth

14 FCF Across Competitors: ’05 – ‘09
Gap and Macy’s have a clear advantage over other competitors with close to $1B in FCF. Macy’s is planning a localization initiative and focusing on reinventing the brand by making the store more relevant to the younger demography. Gap, on the other hand has recently announced plans to launch retail operations in China and open its e-commerce platform in the European continent. Nordstrom and Talbots have had negative FCF’s in the recent years as they struggle to re-position their brands with customers. Although AnnTaylor has a positive FCF, the company shows a negative ROE demonstrating a poor performance. ANN Shows Poor Performance with Negative ROE

15 Distribution Channels
AnnTaylor Stores Corporation (US & Puerto Rico) Corporate Provide modern styles that are versatile across all occasions and needs Total Employees: 18,400 employees Total Stores: 935 stores 31% of Revenue* 411 Stores Chic, sophisticated feminine clothing for professional & special occasions LOFT Outlet LOFT Online Maternity Casual and Professional Clothing 50% of Revenue* 524 Stores Ultimate casual, fashionable & fun retail destination 510 Stores 14 Stores Accessories Businesses (Brands) Ann Taylor 320 Stores 91 Stores Distribution Ann Taylor Ann Taylor Factory Ann Taylor Online Products Beauty Lingerie Professional and Casual Clothing Accessories Sleepwear Wedding *Based on 2008 revenue; 19% of revenue is “Other” category Distribution channels: Malls, urban/suburban centers Outlets centers Online stores Strong Distribution Channels

16 Small Presence on Social Media
Social Media Fan Count Ann Taylor Brands = 4% Company Fan Count Ann Taylor 13,000 Loft 38,000 Talbots 15,000 Macy's 374,000 Nordstrom 56,000 J. Crew 219,000 Gap 537,000 Small Presence on Social Media

17 Recommendations: Short-Term
Better communicate refreshed brand image Improve social networking site Offer frequent promotions Increase online advertising Offer in-store networking/product launch events Build customer relationships Track customer engagement Continue to use MarketWorks to track trends Refine use of ATLAS system Sustain cost parity Invest in Radio Frequency Identification (RFID) Improve operational efficiencies with inventory Improve Value Position with Customers

18 Recommendations: Long-Term
Partner with supply chain management firm Provides company with new process knowledge Diversifies sourcing risk Identify higher quality materials Expand store size and accessories market Follows trend of outfit diversification Allows for larger variety of accessories Creates destination to find more of their wardrobe Broaden customer segment into Boomer Market Fast growing market with high discretionary income Leverage resources to achieve expansion Leverage Core Competencies and Resources


20 Vertical Integration: ANN : Competitors

21 Value-Price-Cost Wedge Ann Taylor : Competition
$290 $105 Numbers inside the blue and red boxes are to indicate relative sizes of the V-P and P-C wedges with respect to Ann Taylor and LOFT. The numbers for Ann Taylor are normalized to 100 and those for LOFT are normalized to 50 just to indicate the relative sizes of the wedges. Numbers next to each bar indicate the price point of the apparels that were used for comparison. Average Value Minus Cost Position

22 Profitability Ratios This is reflected in the overall industry's net profit margin of 2%. Amongst the competitors, Gap and Nordstrom have managed to keep losses in check. Gap has seen a return to its 7% Net Profit margin, while Nordstrom comes as a close second with 5% in Net Profit margin. Most companies in the sector have been able to retain their Gross Margin with tight inventory management that is reflected in their COGS, but have been unsuccessful in reigning in SG&A expenses. As a result, all four companies show a negative Net Profit margin.

23 Activity Ratios

24 Liquidity Ratios / Z-Scores

25 Competitive Price Comparisons

26 Ann Taylor VRIO Analysis

27 Competitors’ VRIO Analysis

28 Competitors’ VRIO Analysis

Value Chain Analysis INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING & SALES SERVICE LEGEND: Value driver impact Cost Driver impact INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT 1. Get finished clothes from outsourced manufacturing suppliers and store in Louisville distribution center 1. Design clothes to meet market trends 1. Customize inventory carried in store 2. Breadth of line 3. Operated under mutiple brands - Ann Taylor, LOFT and outlets 2. Drive in-store operational efficiency 3. Increase inventory turnover ratio 1. Multiple locations 2. Multiple channels 1. In-store customer service 2. Reduced shipping time 3. Personalized recommendations 4. Credit Card loyalty program 3. Personalized recommendations and database driven marketing 1. Over 900 store locations 2. Multiple retail channels - stores, online, phone 2. Enforce ethical guidelines with suppliers 3. Young models such as Heidi Klum to target younger customer base 3. Procure non-merchandize items TECHNOLOGY PROCUREMENT 1. Marketworks, customer-database 2. Partnership with Cisco for inventory management system 1. Leadership focused on operational efficiencies 2. Strong design team 3. ATLAS, in-store operational efficiency monitoring program 3. Employee training 1. Centralized non-merchandize procurement system 2. Centralized distribution center in Louisville 3. Diversified sourcing network with multiple suppliers 4. Credit card loyalty program

30 Boomer Implementation Timeline

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