Foolish Forecast: Dress Barn's Familiar Note

While most retailers are still obsessed with the fashionable 2007 earnings, women's apparelier Dress Barn (Nasdaq: DBRN  ) slips into a new fiscal year come Tuesday. But will investors flock to the new fall (bottom) line?

What analysts say:

  • Buy, sell, or waffle? Nine analysts window-shop at Dress Barn, giving the stock six buy ratings and three holds.
  • Revenue. On average, they're looking for 3% sales growth to $370.3 million.
  • Earnings. Profits, however, are predicted to fall 20% to $0.32 per share.

What management says:
What a difference six months make. Two quarters back, when Dress Barn was reporting its fiscal Q3 2007 numbers, management credited strong sales of such warm-weather ware as "knit dresses and cotton sundresses" for increasing earnings guidance from a high of $1.35 to a new high of $1.40. (In fact, Dress Barn earned $1.45 per share.)

Fast-forward about 180 days, and by Nov. 1, Dress Barn was lamenting that "unseasonably warm weather during September and October" [emphasis added] hurt sales in fiscal Q1 2008. As a result, management warned investors to expect worse earnings this year than last -- $1.25 to $1.35 per share in all. More immediately, management predicted that Tuesday's news may bring analysts' hoped-for $0.32, but it might bring as little as $0.30 earned in the first quarter.

What management does:
Mind you, management says it is "optimistic for an improved business performance during the second half of our fiscal year." But even if this optimism proves to be warranted, it looks like we'll see at least a six-month long break in the trend of generally rising gross, operating, and net margins at Dress Barn.

Pity. Dress Barn was just catching up to Kohl's (NYSE: KSS  ) in the margins race (although Kohl's has its own problems lately). Now, it looks like Dress Barn will be moving down toward the single-digit operating margins of rival retailers such as AnnTaylor (NYSE: ANN  ) , J.C. Penney (NYSE: JCP  ) , and Macy's (NYSE: M  ) .

Margins

4/06

7/06

10/06

2/07

5/07

7/07

Gross

39.8%

40.5%

40.6%

40.5%

40.6%

41%

Operating

9.2%

10.4%

10.4%

10.1%

10.2%

11%

Net

7%

6.1%

6.4%

6.5%

6.6%

7.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
November's earnings warning sounded a familiar note: "Our focus remains on controlling costs and balancing our dressbarn stores' inventory." For the record, my fellow Fool Jeremy MacNealy has been sounding the alarm on this issue for two quarters running.

To review, here's an outline of the problem: In the second half of last fiscal year, Dress Barn grew its sales 9%. Inventories, however, were up 14%. Building up piles of clothes and then failing to sell them is a pretty inefficient way to manage cash flow, and this trend is making itself felt on -- where else? -- Dress Barn's cash flow statement. Free cash flow in the second fiscal half of 2007 was down 23% in comparison to H2 2006. Meanwhile, GAAP net "profits" increased 28%. As is so often the case, the problem that surfaced on Dress Barn's cash flow statement late last year seems destined to make itself felt on the income statement this year.

How the mighty have fallen. Track Dress Barn's rise and fall in:


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