Why Shares of ANN Inc Popped Today

By Alex Dumortier, CFAFool.com

Source: Wikipedia

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Shares of ANN rose as much as 11% on Friday after the company announced a surprise profit in its fiscal fourth quarter, which ended Jan. 31.

So what: In sending the shares up today, the market appears to be focusing on the fiscal-fourth-quarter earnings beat despite the fact that those results have already been banked. Indeed, by my calculations, based on the assumptions provided by the company in its outlook, earnings-per-share guidance for the current quarter and the full fiscal year are lower than and in line with consensus estimates, respectively, and revenue guidance was in line with estimates as well:

*Adjusted Source: Thomson Financial Network, Author's calculations based on assumptions provided by ANN.

The other possible explanation for the pop is the surprisingly strong showing with regard to fourth-quarter revenues, which were 3.3% higher than expectations. Finally, investors will no doubt have been encouraged by the company's announcement that it is launching a cost-cutting program that it expects will produce $35 million in annualized cost savings by 2016.

Now what: Although ANN's shares do not appear to be priced outrageously, it's far from clear that the information contained in today's results and guidance merited an upward revaluation of this magnitude . Furthermore, retail is a notoriously difficult sector, particularly when it is tied to fashion. I would advise investors to remain cautious in considering the shares at these levels and ask themselves whether they present an adequate margin of safety before purchasing them.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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