Lofty Ambitions: Ann’s Response to Zara’s Fast Fashion Trend

Reggie AspelundMKTG 350-01

Prof. Seltzer Introduction:

Ann Taylor (ANN) has been dressing busy, socially upscale, women with its classic black dress styles

since 1954.1 For over forty years, Ann was a leader in Woman’s specialty clothes because of its total

wardrobing strategy, personalized service, and strong brand equity. During the 1990s as competition

increased along with ANN’s inability to predict fashion trends for the workplace, their appeal to its

longstanding customer base eroded. ANN’s business model depends on her ability to predict demand and

design “classic” fashion since manufacturing is outsourced with a six month lead time from design to

product in stores. In contrast, Zara has become one of the largest and successful retailers in the world.

Zara targets both young men and women who are highly sensitive to the latest fashion trends and have

revolutionary supply chain and distribution models that dramatically reduced traditional product lead

times from six months to two weeks. Despite the fact Zara has a different target market and value

proposition, ANN responded to this radical shift in the competitive environment that caused young

consumers an insatiable demand for the latest trends. This paper will explore ANN’s business model to

Zara and conclude that ANN’s response to fast fashion is her ability to maximize brand equity to create

brand extensions, i,e,, Loft, to meet the demand for more casual and trendy clothes while leveraging

‘scale’ to reduce costs in its supply chain and distribution.

I. Industry Analysis: Overview

The retail apparel industry is highly competitive with many companies trying to steal market share by

creating a product that is perceived by consumers as fashionable and trendy. Companies must find other

ways to differentiate their product(s) from the competition or provide value-added services such as

exceptional customer service and exceptional in-store and on-line experiences. Marketing strategies are

1 For the purpose of this paper, Ann Inc., parent company of Ann Taylor and LOFT, is referenced as ANN.

1

focused on the target market’s wants, needs, and perception in this industry because the end consumer has

the highest bargaining power (see Appendix for industry supply chain and distribution channel strategies).

1.1 Economic Environment

The state of the economy has a significant impact on the retail apparel industry. When the economic

conditions and consumer sentiments are perceived as doing well, consumers are more willing and able to

purchase new products. According to IBIS World, the economic forecast for industry revenue is expected

to grow 2.1% to reach $44.1 billion due to rising consumer confidence and increased discretionary

spending on dresses, accessories and other women's items.2 A positive trend of industry growth of 2.1% is

expected to continue through 2019 (See Appendix for full report).

1.2 Regulatory Environment

There are several trade regulations that are important to consider as part of the regulatory environment.

The North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico,

removed the majority of trade barriers since 2009.3 In 1995, the World Trade Organization’s “Agreement

and Textile and Clothing” allowed a reduction in import quotas. In 2005, this Agreement resulted in the

removal of all restriction on the import of textiles and clothing. On September 30, 2010, the Governor of

California signed into law the California Transparency in Supply Chains Act that profoundly changed the

industry sourcing practices.4 In 2009, the federal minimum wage (for nonexempt workers) was increased

to $7.25 by 10.6%. There is renewed pressure from President Obama for Congress to increase the federal

minimum wage to somewhere around $10.00 or more an hour sometime before 2015.5 Labor costs are

expected to increase in the short term.

2IBISWorld Industry Report 44812 (2014) Women’s Clothing Stores in the US, pg. 6.3 U.S. Department of Agriculture, North American Free Trade Agreement (NAFTA) http://www.ers.usda.gov/topics/international-markets-trade/countries-regions/nafta,-canada-mexico.aspx 4 "California Transparency in Supply Chains Act Takes Effect January 1, 2012." Corporate Law Report. JD Supra, 9 Sept. 2011. Web. 1 Sept. 2014.http://corporatelaw.jdsupra.com/post/california-transparency-in-supply-chains-takes-effect 5 Huetteman, Emmarie. "Obama Calls for Minimum Wage Rise and Equal Pay as Elections Approach." The New York Times. The New York Times, 01 Sept. 2014. Web. 1 Sept. 2014.http://www.nytimes.com/2014/09/02/us/politics/obama-takes-to-road-to-push-rise-in-minimum-wage.html?_r=0

2

1.3 Technology Environment

Technology is a critical infrastructural component of operations in this industry. Point-of-Sale (POS)

technologies to automate transactions, inventory levels to provide decision making support, are required

in order to stay competitive and lower costs in the supply chain. Retails are embracing and spending

significant amounts to create a strategic and logistical advantage or, in other cases, to even the playing

field with larger competitors and ensure network security. Increased spending is expected in the short

term (see Appendix for full report).

1.4 Social-Cultural Environment

We are in the midst of a radical shift in living patterns. People, particularly young professionals, are

moving away from the rural areas to major cities to be close to their jobs and enjoy the utility of various

retail, restaurants, sporting events, and other forms of entertainment offered in the city.6 According to

Pew Research Center, the population in the United State will rise to 438 million in 2050, and “82% of the

increase will be to immigrants arriving from 2005 to 2050.”7 As these tetanic shifts in demographics

occur in the United States and around the globe, understanding the micro market and retail activity is

imperative for strategic retail locations.8

II ANN’s Brand Strategy

6 ENGEN, JOHN. 2014. "HOT IN THE CITY." American Banker Magazine 124, no. 3: 18-25. Business Source Premier, EBSCOhost (accessed September 1, 2014).http://www.americanbanker.com/magazine/124_03/hot-in-the-city-what-the-urban-revival-means-for-banks-1066401-1.html 7 "U.S. Population Projections: 2005-2050." Pew Research Centers Social Demographic Trends Project RSS. Pew Research, 11 Feb. 2008. Web. 1 Sept. 2014. http://www.pewsocialtrends.org/2008/02/11/us-population-projections-2005-2050/ NOTE: The Hispanic population has leveled off since this report. However the Hispanic population is predicted remain the largest group of immigrants. See also: Passel, Jeffrey, D'vera Cohn, Jen Krustad, and Ana Gonzalez-Barrera. "As Growth Stalls, Unauthorized Immigrant Population Becomes More Settled." Pew Research Centers Hispanic Trends Project RSS. Pew Research Centers, 3 Sept. 2014. Web. 18 Sept. 2014: http://www.pewhispanic.org/2014/09/03/as-growth-stalls-unauthorized-immigrant-population-becomes-more-settled/; "Reports Consumer." Latina Power Shift. Nielsen, 1 Aug. 2014. Web. 19 Sept. 2014: http://www.nielsen.com/us/en/insights/reports/2013/latina-power-shift.html 8 "Reports Consumer." 2014 State of the Shopping Center. Nielsen, 18 May 2014. Web. 5 Sept. 2014.http://www.nielsen.com/us/en/insights/reports/2014/2014-state-of-the-shopping-center.html

3

In response to a shift in consumer behavior and increased competition, Ann Taylor Stores Corporation

changed its name to ANN Inc. The strategy is to position itself as a lifestyle brand that understand

women and their various roles and life stages with five platforms that appeal to various segments under

the strong brand name of Ann Taylor. ANN has four platforms for its omni-channel retailing strategy—

Ann Taylor, LOFT, Ann Taylor Factory9,LOFT Outlet, and Lou & Grey—with 1,025 stores and annual

revenues of $2.5 billion in 2013.10 Ann Taylor targets affluent women and is positioned as their “go-to

destination” for “wear-to-work wardrobe” and “special occasion needs.”11 While Loft on the other hand

targets younger women that are more price sensitive (elastic demand) and positioned as “[the] destination

for great everyday fashion at affordable prices.12 The LOFT brand contributes the most significant part of

the company’s sales revenue (see Figure 1).13 The latest brand extension is Lou & Grey that launched in

the fall of 2014. Lou & Gray is being positioned as a lifestyle brand to appeal to young women who are

more active but fashionable, as their tag line is: “Clothing for a comfortably confident life.”14 Lou &

Gray has received positive reviews since opening in selected cities and will continue to expand into 2015.

2.1 ANN’s Business Model

ANN is a specialty retailer of woman’s apparel, shoes and accessories. ANN’s mission is “to inspire

and connect with our clients to put their best selves forward every day.”15 In order to fulfill its mission,

ANN is a direct merchandiser and is in full control of its all of its marketing channels to ensure its brand

promise (see Appendix for channel map).

Originally its outlet channel, Ann Taylor Factory, carried overstocks that were sourced from

underperforming Ann Taylor and later LOFT stores. But since the company’s business model is to offer

full priced clothing with higher margins, ANN leveraged ‘scale’ and created separate merchandise for its

9 Ann Taylor Factory is an outlet store with a merchandising strategy similar to Ann Taylor but 30% less. 10 Ann Inc., 2013 Annual Report, pg. 3. 11 Ibid, pg.3. 12 Ibid, pg.3. 13 Ibid, pg. 22.14 Raczka, Rachel. "Lou & Grey: Part Startup, Part Established Retail Brand - The Boston Globe." BostonGlobe.com. Boston Globe Media Partners, LLC, 17 Sept. 2014. Web. 18 Sept. 2014.http://www.bostonglobe.com/lifestyle/style/2014/09/17/lou-grey-part-startup-part-established-retail-brand/tRoUuQA1vLxIIO5tO7sJnI/story.html 15 Ibid, pg.23.

4

outlet stores. With tighter inventory management controls, ANN is able to produce inventory for its

channels that is meant to sell at full price to sustain healthy profit margins. 16 This strategy created new

market segments to increase top line growth while minimizing channel conflicts, i.e., cannibalization of

sales.

2.2 Supply Chain & Inventory Management

ANN does not manufacture its apparel merchandise like most traditional retailers. But rather

develops its designs in-house and then outsources the production process to independent manufactures.17

In Fiscal 2013, ANN outsourced production to “133 manufacturers and vendors in 17 countries, and no

single supplier accounted for more than 10% of merchandise purchased on either a unit or cost basis” to

diversify its risk in the event of a disaster or disruption in the supply chain.18

ANN responded to the external ethical risks in the global supply chain by creating its (controllable)

Global Suppliers Principles and Guidelines.19 In January 2013, ANN joined the Sustainable Apparel

Coalition (SAC) making it the first woman’s retailer to join a trade association who are committed to

supply chain sustainability.20 These commitments are a result from ANN’s commitment to the fair

treatment of humans, sustainability of (natural) resources, and its environmental stewardship. They also

provide cost savings in the supply chain by creating efficiencies by developing standardization for

improvement of performance.21

To increase its global presence, ANN launched international shipping on its e-commerce sites

(anntaylor.com and loft.com) in March 2013. This strategy will not only increase its sales opportunities

but will also provide essential market research in global markets to determine further market expansion

strategies.22 ANN will continue to expand into foreign markets in North America in 2015.

16 Ann Taylor Stores, 2002 Annual Report, pg. 317 Ann Inc., 2013 Annual Report, pg. 3. 18 Ibid, pg. 27.19 See www.responsiblyann.com/downloads/GlobalSupplierGuidelines2012.pdf 20 Marketline, Ann Inc. Company Profile, September 2013, pg. 2021 ANN Inc., ANN INC. Furthers Commitment to Environmental Sustainability, Becoming First Women's Specialty Retailer to Join Sustainable Apparel Coalition, (2014). http://investor.anntaylor.com/phoenix.zhtml?c=78167&p=irol-newsArticle&ID=1772719&highlight 22 Ann Inc., 2013 Annual Report, pg. 3.

5

III. ANN’s Response to Zara (Fast Fashion)

ANN has many direct and indirect competitors. The top three direct competitors are J Crew Brand

Group, Banana Republic, Talbots, and New York Company.23 But one of the largest indirect global

competitors is Zara. Inditex, parent company of Zara, is one of the largest fashion retail groups in the

world with eight brands and over 6,460 stores in 88 global markets. Inditex revolutionized the industry

because it broke away from traditional outsourcing and manufactures half of its merchandise in its own

factories in Spain, Portugal, and Morocco.24 The six month production speed is dramatically reduced

from 6 months to two weeks that create efficiencies in its supply chain and minimize business risk

because its merchandise is always fresh and in demand. Zara’s value position is providing cheap chic,

meaning trendy clothing at a low price compared to full price designer items. Inditex’s business model

inspired Forever 21 and H&M that directly compete with ANN and traditional clothing brands.

While there is no explicit mention to a response to Inditex’s fast fashion business model in any of

ANN’s public statements, one can conclude by inference that ANN was aware of the impact Zara and

others have with the change in demand and their strategy to segment the market and target younger

women who are sensitive to price.25 But adapting to trendy fashions in a timely matter is not at the core of

what the real question that ANN must address. The real question presented to ANN from fast fashion is:

How can costs and lead times be reduced in the supply chain without compromising quality to maximize

full price retailing? As part of a three-year restructuring strategy, ANN focused on its onmi-channel

strategy that maximizes ANN’s ability to gain buying power by “buying fabrics and yearns early to

guarantee prices, utilizing off-cycle production, and ‘value engineering,” whereby vendors bid online for

production like an auction, and tweaking garments” that does not affect the quality to what matters most

to customers.26 ANN continues to examine ways to increase lead times but more importantly, focus on its 23 Ibid, pg. 6.24 Capell, Kerry. 2008. “Zara Thrives by Breaking All the Rules.” Businessweek no.4104:066. Business Source Premier, EBSCOhost (accessed May 15, 2014). 25 Merrick, Amy. "Once a Bellwether, Ann Taylor Fights Its Stodgy Image." The Wall Street Journal. Dow Jones & Company, 12 July 2005. Web. 1 Sept. 2014. http://online.wsj.com/articles/SB112113223375783015 26 Moin, David. 2011. “Growing Ann Taylor Get a New Moniker.” WWD: Women’s Wear Daily 201, no. 52: 8-1. Business Source Premier, EBSCOhost (accessed September 1, 2014). See also: Ann Inc., 2013 Annual Report, pg. 3.

6

core target market of professional women ages 25-45, who need appropriate attire for work but also have

various demands for their active lifestyle. ANN also is in the process of remodeling its Ann Taylor stores

making them smaller so increase productivity and designed to reflect ANN’s modern aspirational brand

aesthetic (see Appendix for the store pictures).27

IV. Current Situation

ANN has increased net sales incrementally since the Great Recession and is growing at a modest rate

because of its ability to adapt to the external environment, particularly by its brand extensions that attract

new customers while preserving its value position to its core customer base from Ann Taylor. ANN is in

its second phase of its omni-channel initiative aimed at providing a seamless shopping experience through

its channels.28 In Fiscal 2013, ANN increased sales by 5% ($118 million) due in part to an increase in

online sales but increased operating costs because of shipping.29 ANN’s gross margins for Fiscal 2013,

however, are within its historical level at 53.9%.30 However, Fiscal 2014 has been a challenging year for

ANN and for retailers in general.

In the first quarter of Fiscal 2014, ANN, faced challenging (external) environmental conditions with

severe winter weather (extreme cold temperatures) that resulted in soft traffic and higher than anticipated

promotional environment from its competitors.31 Comparable sales were down 2% overall and the gross

margin rate was 53.4%. ANN predicted that the second quarter of Fiscal 2014 would be offset the low

performance of the first quarter. The second quarter results were positive with strong first half results

(Easter as the primary driver for sales), however, the second half proved to be a “retailing hangover” with

soft traffic and an increase in promotional activity.32 Despite an increase of $11 million from last year in

27 Ann Inc., 2013 Annual Report, pg. 25.28 Ibid, pg. 41.29 Ibid, pg.24, 46.30 ANN’s historical level of gross margin is 52.5-53.5% see Appendix for ANN’s gross margin data since 2000. 31 "ANN INC. (ANN)." Ann Inc.'s (ANN) CEO Kay Krill on Q1 2014 Results. N.p., 30 May 2014. Web. 1 Sept. 2014. http://www.nasdaq.com/aspx/call-transcript.aspx?StoryId=2246003&Title=ann-inc-s-ann-ceo-kay-krill-on-q1-2014-results-earnings-call-transcript 32 "Ann Q2 Profit Down 8%, But Results Beat View; Lowers 2014 Sales Outlook." NASDAQ.com. N.p., 22 Aug. 2014. Web. 2 Sept. 2014. http://www.nasdaq.com/article/ann-q2-profit-down-8-but-results-beat-view-lowers-2014-sales-outlook-20140822-00212

7

the second quarter, comparable sales were down 2% due to a decrease in Ann Taylor Factory.33 While the

gross margin rate decreased to 52.4%, which is below ANN’s historical gross margin “sweet spot.” 34 A

decrease of 5% of LOFT is attributed to “a weakness in demand for knit tops which represented 20% of

the inventory of the assortment for the second quarter.”35 LOFT outlet, however, proved to be the hero

for ANN with an increase of 16% with higher UPTs that overcame a highly promotional environment in

the outlet store sector.36 For the third quarter of Fiscal 2014, ANN lowered its outlook for 2014 and its

stock price fell by almost 5% and prompted Engine Capital and Red Alder to publicly challenge ANN’s

management ability to adapt to the changing business environment and its lack of international

expansion.37 Consequently, ANN responded publicly and retained JPMorgan to shop the retailer around

and explore its options to meet its fiduciary obligation to its stakeholders.38 Speculation around potential

buyers are Acena Retail, Chicho’s FAS, and Fast Retailing despite ANN’s largest investor, Golden Gate

Capital is not looking to sell and is happy with ANN’s management team and strategy.

V. Recommendation

There are two primary challenges ANN has to overcome in the short term. ANN will need to address

its merchandising strategy with Ann Taylor and Ann Factory. Both channels underperformed in the

second quarter because the merchandise mix was off. ANN will examine its in-house design teams for

Ann Taylor and Ann Factory to ensure 2015 has the correct merchandise mix for its core customer.

Market research should be conducted to uncover the reason why knits were not selling to its main

customer base to determine if this is a momentary shift in demand or something permanent. Despite

Inditex using RDIF chips to determine demand and control in the supply chain, ANN does not need to

33 Ibid. 34 Ibid. 35 Ibid. 36 Ibid. 37 "Why Is Ann Being Pressed To Sell The Company?" - Ann, Inc. (NYSE:ANN). N.p., 28 Aug. 2014. Web. 2 Sept. 2014. http://seekingalpha.com/article/2456335-why-is-ann-being-pressed-to-sell-the-company38 Oran, Olivia, and Soyoung Kim. "Ann Taylor Parent Taps JPMorgan to Weigh Potential Sale: Sources." Reuters. Thomson Reuters, 26 Aug. 2014. Web. 3 Sept. 2014.http://www.reuters.com/article/2014/08/26/us-ann-inc-sale-idUSKBN0GQ1MG20140826

8

invest in RDIF chips at this time because of their niche market and much smaller stores and inventory. 39

ANN, however, will need to accelerate its onmi-channel strategy to that will reduce inventory risks and

leverage scale in order to increase full price sales by creating market models to predict demand of items

appropriate to the consumers within a retail trade area.

The second challenge for ANN is expanding into foreign markets to increase top line revenue growth.

ANN will continue to leverage its offering of international shipping to determine what foreign markets

are viable. While there is a sense of urgency from some investors to expand rapidly, ANN’s expansion

should not be done hastily. ANN is a very different brand that serves a niche market and sell full price

items. ANN would be better off moving cautiously into foreign markets because of the risk of moving

away from its business model of selling full price items. While Ann Taylor makes sense in Canada and

Mexico for 2014, full price outlet products should be the focus for international expansion. The global

trend for moderate priced items that are in fashion will be the “sweet spot” for ANN. But it is also the

long term prospect for ANN domestically. Lou & Grey has the most potential for ANN to increase top

line growth because of its appeal to younger women and ANN will continue to open stores in mid-level

markets.

ANN’s best prospect for continued growth is to either avoid sale (since the offer is undervalued) or to

go private.40 As ANN is being shopped around, senior management needs to explore a private equity

acquisition with its largest investor, Golden Gate Capital. ANN has one of the best management teams

under chief executive officer, Kay Krill. This management team has a proved track record of their agility

to respond to the external environment and provide all stakeholders value. But what is different about

39 Bjork, Christopher. "Zara Builds Its Business Around RFID: 'Fast Fashion' Meets Smarter Inventory; Retailer Learns From Others' Mistakes." The Wall Street Journal. Dow Jones & Company, 16 Sept. 2014. Web. 17 Sept. 2014.http://online.wsj.com/articles/at-zara-fast-fashion-meets-smarter-inventory-1410884519

40 If ANN were to remain in the public sector, many analysts feel the stock is undervalued when considering ANN has no debt and self-finances its remodeling and new stores openings. But other analysts are uncertain of ANN’s future and recommend investors to sell. While this paper is more focused on marketing channels, it approaches this question from a branding perspective and the equity ANN has in the market place and recommends ANN to go private to avoid external pressures from investors to generate profits in the short term and the issue of international expansion.

9

ANN and its management team is they understand women—its core client. Breaking up this management

team and this model in a sale at this point will be adverse for all stakeholders and the brand.

VI. Conclusion:

While looking at Inditex’s (Zara) ability to reduce costs and risks is fascinating, one should never

overlook the importance of creating a powerful brand. As The Economist eloquently reminded its

readers, “[b]rands are the most valuable assets many companies possess.” There is no question that if

ANN had not created the LOFT concept and started exploring new market segments and more affordable

products through its outlet stores, the company would not have been able to survive the Great Recession

and grow at the rate that it has. But the success of LOFT would not have been without the strong brand

equity of Ann Taylor. By maintaining full control of its marketing channels and distribution, ANN

preserved its brand equity.

Even though ANN’s future is uncertain, their strong brand equity along with the ability to cost costs,

leverage scale, will be the successful formula to accomplish its mission of “inspiring [and] connecting

with women to put their best selves forward every day” for generations to come.

Appendix:

Figure 1: Ann Inc.’s % of Total Sales

10

27%

12%51%

10%

Ann Inc. FY2013

Ann Taylor Ann Taylor Factory LOFT LOFT Outlet

1 2 3 4 5 6 7 8 9 10 11 12 13 14

1.2 1.3 1.41.6

1.92.1

2.3 2.42.2

1.82

2.22.4 2.5

NET SALES (in billions)

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

1 2 3 4 5 6 7 8 9 10 11 12 13 14

49.5 49.8

54.1 54.5

51.1 50.9

53.752.2

48.1

54.455.8

54.8 54.6 53.9

Gross Margin Rate(in percent)

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Source: Ann Inc., 2013 Annual Report. NOTE: Gross Margins is one of the major metrics in supply chain management because it reflects the

firm’s direct ability to control the direct cost of merchandise, which includes transportation. Zara’s gross margin rate was 56.5 percent in the

second quarter for 2014. Source: https://uk.news.yahoo.com/zara-owner-inditexs-first-half-profit-slips-beats-062425247--finance.html#cxefpoT

Ann’s Channel Map:

11

ANN INC.’s Distribution Strategy:

Our primary distribution center is located in Louisville, Kentucky, as discussed further in “Properties.” The majority of our merchandise is processed through our Louisville facility, which we own and operate. Additionally, we contract with third-party fulfillment vendors, utilizing a Bolingbrook, IL facility to fulfill online orders and a Toronto, Ontario facility for merchandise allocation to our Canadian stores. We also utilize a third-party distribution center bypass facility in Industry, CA. While a portion of our merchandise is processed through this bypass facility for direct distribution to our stores, it serves primarily as a trans-loading facility and a back-up distribution center in the event of a disaster.

Source: Ann Inc., 2013 Annual Report. Pg.27.

Economic Environment Report:

The Consumer Price Index (CPI) for Woman’s Apparel increased by 3.8% and overall

inflation exceeded expectations and increased by 2.1%.41 The Unites States

economy is improving but there are still many risk factors with housing, higher

student debt, and monetary policies that are volatile.42 Unemployment declined

41 U.S. Department of Commerce. U.S. Census Bureau Consumer Price Index.http://www.bls.gov/cpi/cpid1405.pdf 42 Goldman Sacks, United States Economic Outlook Midyear (June 2014).http://www.goldmansachs.com/our-thinking/outlook/jan-hatzius-economic-outlook-us-mid-yr-2014.html

12

DC arty

DC

3rd party

slightly to 6.1% and Gross Domestic Product (GDP) is expected to rise annual from 2

to 2.5% each year despite early indications of a decrease.43 The United States trade

deficit fell 0.6% to $40.5 billion that provide cautious optimism for the economy growth in part for the

global demand in U.S. food, beverages and automobiles.44 The U. S. Dollar has been appreciating against

other currencies, potentially lowering the input costs for producers that outsource manufacturing to, or

import from, other countries.45

Since Ann sells commodity items, the gradual growth in the economy is likely to have a positive

impact on Ann’s operating results despite soft sales in Q2 and Q3 in FY2014.46 The increase in consumer

spending is likely to translate to increase in sales but the highly promotional season will likely pose a

threat to Ann’s gross margins. An appreciation in U.S. currency—Ann pays its international suppliers in

U.S. dollars—may buoy its operating results particularly since the world price for cotton has dramatically

fallen to less than 65 cents per pound.47

Technological Report:

The Internet poses both an opportunity and treat for retailers. The Internet provides firms operating in the

industry with a relatively lower-cost channel to reach its customers. But it also provides an easier entry

for new entrants that have increased competition, often in the form of cheaper alternatives or substitutes

that can steal market share from established brick-and-mortar retailers. Retailers must seek ways to

integrate its in-store experience and on-line experience to create its own competitive advantage or seek

niche markets in order to capture revenue.

43 Ibid. 44 U.S. News & World Report, US trade deficit falls slightly to 5-month low in July; export growth outpaces rise in imports (September 2014) http://www.usnews.com/news/business/articles/2014/09/04/us-trade-gap-narrows-in-july 45 FOREX Market News, US Dollar Poised for Further Appreciation versus Yen (September, 2014). http://www.dailyfx.com/forex/technical/ssi/usd-jpy/2014/09/04/ssi_usd-jpy.html 46 See http://seekingalpha.com/article/2246003-ann-inc-s-ann-ceo-kay-krill-on-q1-2014-results-earnings-call-transcript ; http://seekingalpha.com/article/2445325-anns-ann-ceo-kay-krill-on-q2-2014-results-earnings-call-transcript 47 Textile World, Cotton Prices, Consumer Confidence Create Concern (September/October 2014). http://www.textileworld.com/Issues/2014/September_October/Yarn_Market/Cotton_Prices_Consumer_Confidence_Create_Concern

13

The most disruptive technological innovation is the 3D printer. For the first time in New York

Fashion Week’s history, models walked down the runway in 3D printed clothing and accessories.48 This

technology will not only revolutionize trends, but will significantly reduce lead times from design to

production that will significantly reduce costs in the supply chain once the initial costs of investment have

been realized. Firms will have the ability to add mass customization to their existing business model and

even offer co-creating in the design process. As the technology for 3D printed clothing evolves, analysts

at Gartner predict the adoption is still three to five years away—sometime in 2020.49 This new

technology will dramatically and quite violently disrupt operations for clothing retailers, which is also a

treat and opportunity for retailers and manufactures and should be keenly watched as this technology

improves and adopts in the industry.

The biggest treat in the technological environment is the increase and success of cyber-attacks and

breaches in retailer’s networks. While there have been other cyber-attacks and security breaches in the

past, the 2013 Target data breach adversely affected revenues, brand equity, and missed opportunities.

Gartner is predicting that cost of global data security will increase to 7.9% or $71.1 billion dollars in

2014.50 Retailers are expected to increase spending on security that will adversely affect gross profits.

Ann Taylor New Store Aesthetic:

48 Time Warner News, 3D Printed Clothing Debuts on the Runway During Fashion Week (March 2014) http://www.ny1.com/content/lifestyles/tech_talk/203595/3d-printed-clothing-debuts-on-the-runway-during-fashion-week 49 3D Printing Industry, Consumer 3D Printing More than 5 Years Away from Mainstream Adoption, Says Gartner (2014). http://3dprintingindustry.com/2014/08/20/consumer-3d-printing-5-years-away-mainstream-adoption-says-gartner/ 50 Gartner, Gartner Worldwide IT Spending Forecast (2014). http://www.gartner.com/technology/research/it-spending-forecast/

14

Location: Southdale Mall, Edina MN.

NOTE: These stores are merchandised to replicate a woman’s walk-in closet to create the Ann Taylor experience. Since this

experience is a competitive advantage, ANN will not depart from its direct merchandising strategy.

15