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Controlling a Niche Market = Strong Potential

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Maybe you have never heard of Ascena Retail Group (NASDAQ: ASNA  ) . There's a good chance you have heard of Lane Bryant, Justice, maurices, dressbarn, or Catherines.

Ascena Retail Group bought Charming Shoppes and now owns Lane Bryant and Catherines, which broadens Ascena Retail Group's exposure to female consumers, and makes it the market leader in plus-size attire for females.

Any company with a stronghold in a niche should be considered as a long-term investment opportunity, but in today's world, concerns exist, and this doesn't just pertain to the macroeconomic environment. For Ascena Retail Group, there's an even bigger threat.

Controlling a Niche Market
Ascena Retail Group sells apparel to females from ages seven and up. Consider the target ages for each brand:

  • Justice: 7-14
  • Lane Bryant: 25-45
  • maurices: 17-34
  • dressbarn: 35-55
  • Catherines: 45+

These are all value-oriented stores, which is a big positive considering today's value-conscious consumer. Also consider the human factor.

In regards to Lane Bryant and Catherines, some plus-size consumers feel more comfortable walking into a store where all available products match what they're looking for, instead of walking into a trendy retail store where a Barbie-like 20-something is looking for a bikini, or where other shoppers might be judgmental.

When a plus-size consumer walks into a store like Lane Bryant, they're going to feel accepted right away. Of course, this should be the case in any retail store, but humans aren't always so kind. This comforting environment is a positive for Lane Bryant, Catherines, and Ascena Retail Group. In other words, yes, this human factor can help drive sales.

The integration of Charming Shoppes should take approximately two years to complete in regards to strategic cost structure alignment, streamlined overhead, paralleled technology, and supply chain operations. Considering Ascena Retail Group's strong management and fiscal discipline, investors should be more confident than concerned about this integration. There's something else investors should be more concerned about.

Not Controlling a Niche Market
Before revealing this big concern, let's first cover a more obvious threat, which is the macroeconomic environment. In the company's 10-K, Ascena Retail Group stated that traffic was lower over the past year, primarily due to increased taxes, high unemployment levels, and weather. Let's break this down real quick.

Increased taxes pertains to the payroll tax jumping 2%, and this makes sense. However, unemployment has declined annually since 2010. Therefore, this doesn't seem to justify lower traffic. That said, underemployment (people working for lower wages because they have no other choice) has been a growing concern. As far as weather goes, it's a temporary event. Though not the case here, whenever you see unfavorable weather knock the stock price down for a quality company, you should look at it as a buying opportunity. Ascena Retail Group is a quality company, but the risks here go beyond weather. 

Now ... getting to that bigger threat. Ascena Retail Group also mentioned something very important on its 10-K. Its competition consists of Wal-Mart, Macy's, Kohl's (NYSE: KSS  ) , Old Navy, American Eagle Outfitters, Target, and more. That's a nasty list that a company with 3.23-billion market cap will have difficulty contending with. Of course, at the moment, Ascena Retail Group controls the plus-size market. If one of the companies above were to enter that market -- with its deeper pockets and much greater marketing power -- Ascena Retail Group would be in trouble.

The Gap (NYSE: GPS  ) , owner of Old Navy, isn't likely to take on such a venture. It has successfully turned itself around, and it's not going to take on any unnecessary risks. In fact, the company is still in the process of divesting its underperforming locations. At the same time, it's focused on international and digital growth, which has been effective. The company already targets a broad range of consumers, and despite poor stock performance over the past several months, The Gap is back. 

Kohl's has been doing its best to keep up with increased competition itself. Therefore, it's also not likely to take on any new projects outside of its current business strategy. Kohl's is more focused on growing its brand and improving its customer service than anything else. It recently opened three new stores and remodeled 10 others, with 20 more being remodeled by the end of the fall. This remodeling includes updated checkout and customer service areas, new shopping carts, revamped fitting rooms, and WiFi. Additionally, Kohl's aims to fuel growth with the recent addition of the Catherine Malandrino designer collection to its DesigNation.

Out of that list of competitors above, the two companies that might enter the plus-size market at some point in the future are Wal-Mart and Target, simply because they like to attack smaller markets and steal share, especially Wal-Mart. However, this still isn't likely.

The Bottom Line
Despite macroeconomic and competitive threats, Ascena Retail Group should remain a long-term winner thanks to its control over a niche market, brand diversification, strong management, and fiscal discipline.


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5/31/2016 10:42 AM
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