Dress Barn Goes Into Markdown Mode

About the only item of concern for me regarding Dress Barn (Nasdaq: DBRN  )  last quarter was its inventory, which was up 15.5% at the time on a square-footage basis. The ramp-up in merchandise to prepare for new apparel launches at its maurices stores did alleviate some of my worry. With the release of the company's fourth-quarter results, we now know that the high inventory level was indeed a predictor of good things to come for maurices, but not so much for Dress Barn stores.

Working against weak comparable same-store sales figures this time last year, maurices charged ahead with a 13% increase in comps in the fourth quarter. The positive momentum is carrying forward into the fall months, as we learned in the quarterly earnings conference call. The combination of healthy sales across "all" categories as well as appropriate inventory levels -- inventories on an average store basis are currently up 9% for the concept -- should equate to solid profitability as the brand moves into fiscal 2008.

While Dress Barn stores continued to benefit from dresses -- a category of major significance this past year for it and retailers including Chico's (NYSE: CHS  ) (and its White House/Black Market), Ann Taylor (NYSE: ANN  ) , and Guess? (NYSE: GES  ) -- the strength of this category could not offset softness in casual wear. As a result of the mixed sales environment, comps were up just 1% in the quarter, improving marginally from the same period a year ago, when comps were up 12%.

With softer sales, Dress Barn resorted to increased promotional activity to move excess merchandise. Higher markdowns normally put a pinch on profits, but we did not see that in this case. Management attributed Dress Barn's increase in gross profits as a percentage of sales -- to 42.6%, up from 41.9% last year -- to higher initial markups that were more than able to counter later markdown activity.

That's the good news. The bad news is that management is still uneasy about inventory levels at Dress Barn stores, which increased 10% on an average store basis by quarter's end. With continued softness in sales as it enters the fall season, we can expect more clearance activity. The expectation is that gross margins "will be affected by this action." Dress Barn is now calling for fiscal 2008 earnings to come in at $1.40 to $1.50 per share, below Wall Street's current expectation of roughly $1.53 per share. It is worth noting that the company's forecast is not factoring in the impact of its share buyback program; management is currently seeking board approval for another buyback plan, this one in the amount of $100 million.

It's certainly mixed news coming out of Dress Barn right now, leading to uncertainty among investors in recent months. Recent trading action, however, might suggest that investors are finding renewed confidence, particularly in the new share-buyback plan. Plus, Dress Barn is predicting that dresses will again be the hot item in the upcoming year, suggesting some upside potential, particularly in the spring as the retailer works against weaker comparisons. We will not have greater visibility until the close of the first quarter, but it looks like investors see enough here to at least take a closer look. This Fool agrees.


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