Ann Taylor's changing insurance needs and risk exposure

Risk and Insurance

Over the last several years, Ann Taylor would face a number of different challenges. Where, the company would go from having a consistent amount of improving earnings, to having their bottom line face a number of different challenges going forward. This is problematic, because changes in the company's underlying business model mean that risks could be increasing. As result, their insurance needs are changing to reflect, the challenges that the company is facing. To fully understand the overall scope of these issues requires: identifying the company's risk exposures, the likely perils they could face and obvious hazards. Together, these different elements will provide the greatest insights, as to how these changes in earnings could have an impact upon their insurance needs.

Ann Taylor's Risk Exposure

Ann Taylor is involved in retailing various: specialty shoes, clothing and apparel for women in the United States. Where, they focus on offering women a number of different products to include: career / casual separates, dresses, tops, weekend wear, shoes, and accessories. These are sold through the Ann Taylor retail locations, the Loft discount stores and over the internet. Currently, the company operates a total of 907 retail stores this includes: 291 Ann Taylor stores, 506 Loft stores, 92 Ann Taylor factory outlet stores and 35 Loft outlet locations. ("Ann Taylor Stores") This is important, because it shows how the company is largely dependent upon consumer spending, to maintain its earnings estimates. During times when there has been a severe contraction, this can cause earnings to become very volatile. A good example of this can be seen by comparing the recent earnings per share that the company has reported over the last year, as they would range from $ -.01 cents to $.37 cents. ("Ann Taylor Stores") This is important, because when earnings become volatile, is the point that the company can begin laying off employees and closing down locations. At which point, this will have an effect on the insurance needs for the company, as their risks have increased and needs have begun to change. When you put these two different elements together, this highlights how the company could be facing a number of changes in their insurance needs, due to the severity of the contraction and lack of spending taking place.

Ann Taylor's risk exposure will come from sudden changes in the economic cycle. Given the fact that the economy has been facing a number of different challenges, the company has been attempting to adjust to the changes that are taking place. Where, they have been increasing their cash and the various assets that they are holding. Evidence of this, can be seen by looking no further than the 10Q that was filed for the third quarter. Where, the cash equivalents would increase from $203 million in 2009 to $262 million for 2010. At the same time, the total current assets would increase from $482 million in 2009 to $571 million in 2010. Yet, when you a look a little further at these numbers, you can see how there is large amounts of volatility occurring. This can be seen by looking no further than, the total assets that the company was holding between 2009 and 2010. Where, they would decline from $976 million in 2009 to $947 million in 2010. This is important, because it underscores how the company is facing constant exposure, to slowdowns in consumer spending. ("10Q")

To corroborate these different views, you would compare short-term liabilities and net cash used for investing (the purchase of marketable securities, sale of marketable securities and purchase of new property / equipment). When you examine the two different figures, they show a divergence that is occurring within the company itself. As the short-term liabilities have been consistently increasing from $64 million to $93 million. At the same time, the net cash used for investing has continued to be negative, as it would come in at -$26 million for 2009 and -$13 million for 2010. This is important, because it confirms a divergence that is occurring in the company's investing activities and the amount of money that they owe. ("10Q")

When you look at: the cash equivalents, the total current assets, short-term liabilities and net cash for investing; it is clear that Ann Taylor is facing a number of different financial challenges. From a risk assessment standpoint, this means that their coverage is changing, with this increasing because of the deteriorating financial condition of the company. At the same time, the fact that the Ann Taylor is seeing increases in their short-term liabilities means that their needs are changing. Where, the company is focused on those businesses and locations that are most profitable for them. As a result, these changes mean that the risks have increased, along with the needs of the business (which more than likely require a change in insurance coverage). To mitigate these risks managers, must keep taking actions to shore up the balance sheet over the long-term by reducing the overall liabilities.

Obvious Hazards

The obvious hazards that Ann Taylor could be facing is: changes in consumer tastes and a lack of focus on the part of management. The reason why is because, retail sales industry is very fickle, meaning that fashion trends and tastes are constantly changing. This is problematic for all retailers, as they must struggle to constantly reinvent themselves. Where, they will have to sell those products that are in most demand. Those organizations that do not keep on top of these changes could see sudden shifts that would occur in their balances sheets. As they are using a strategy that has worked in past, but is no longer working due to the change trends and tastes that are occurring. Once this begins to take place, it can mean that an organization will have a cancer eating away at its foundation. At which point, new strategies that are being utilized to help turn the negative trends around, can be difficult to implement. This is because the company has experienced such a large implosion in its customer base. A good example of this can be seen with Gap Stores. What happened was the company would assume that their relaxed style clothing would continue to be in demand when the company was having their clothes worn to the Oscars in 1998. Then, they would go into a consistent decline, as consumer tastes began to change and management did not adapt. To rebuild their image, the company would try a number of different strategies, none of which would prove to be successful. This would hurt the market share of Gap to the point that many analysts now believe that it may be advantageous to spin off the company's: Old Navy, Banana Republic and Gap stores. What this shows, is how a company can begin to lose its way when it is not focused on adjusting to changes in consumer tastes and trends. In the case of Ann Taylor, they need to be aware of this hazard, as it can have an adverse impact on the long-term viability of their business. (Reingold)

A second challenge that Ann Taylor can be wrestling with is a lack of focus on the part of management. In this case, managers must understand the role that their decisions will have on their organization. Where, executives must clearly evaluate their actions to ensure that they are helping their organization, to prepare for the underlying challenges that they will be facing in the future. This is important, because the focus of managers will determine the ability of the company to be able increase the financial stability. For example, in 2009 managers were focused on reducing the effects that costs and the slowdown in consumer spending would have on the company. To reduce this as much as possible, they would begin closing a number of different stores and limiting the amounts of expansions that were taking a place. Evidence of this, can be seen by looking no further than total number of stores that were open between 2009 (which was 933) to 2010 (which was 894). At the same time, company would halt all new store expansions in 2009 and they would close five different locations in 2010. This is significant, because it shows how management was focused on identifying the changes that were occurring in their business model. In many ways, once could argue that the focus and insights of managers would play a major role in determining how they would adapt to host of situations that they were facing. Evidence of this can be seen by looking at the operating income that the company would report between 2009 and 2010. As this would come in at: -$20 million for 2009 and $41 million for 2010. ("10Q") This is significant, because it shows how the underlying focus of managers would help Ann Taylor to be able to withstand the implosion in consumer spending.

When you look at these two hazards, it is obvious that Ann Taylor will have to constantly remain focused on the issues of: consumer trends / tastes and ensuring that managers are always focused. As these two elements will help the company be able to quickly adapt to the various challenges that they will constantly face on a regular basis. In many ways, one could argue that these elements are interconnected, as they will play a vital role in determining what will happen with the earnings of the company in the future. As a result, Ann Taylor must be prepared for these hazards to ensure that they can adapt to underlying challenges that they are facing. This is important, because the effects from these obvious hazards will cause their overall amounts of insurance coverage to change. Where, actions that managers could take to prevent a situation from becoming worse, could cause the underlying risks and costs to increase. However, over the long-term these actions could cause the overall amounts of coverage to change, as the underlying risks will more than likely improve. This is important, because it highlights how the insurance needs of Ann Taylor, can change based upon issues affecting their business. To mitigate this underlying risk, managers must be observant of what changes are taking place in the industry.

Clearly, Ann Taylor's earnings are being impacted by changes in consumer spending and the economic cycle. This important, because it means that the underlying challenges facing the company will have an effect on its insurance coverage. As it will cause the overall amounts of risks to increase, because of changes in the company's profitability and needs. Over the course of time, this will have an impact on the company's overall rates that they are paying, as they more than likely will have to be adjusted upward. At the same time, the company is facing the peril of a double dip recession occurring, as a secondary slowdown could increase the risks and change their underlying insurance needs. However, the fact that that the company has large amounts of cash in comparison to their debt, means that they are in stronger position to protect themselves vs. competitors. The obvious hazards of: changing consumer trends and the focus of management, will determine the ability of the company to be able to overcome the different challenges that they are facing. As this will play a role how quickly the organization responds to changes that occurring. This is important, because it highlights how Ann Taylor can face changes in their business model that can literally come out of nowhere. When you put these different elements together, this highlights how all of the above factors will play an interconnected role, in determining the underlying risks and amounts of insurance company that it will require. This significant, because it highlights how all organizations will go through stages as their insurance need will change.