Ascena Retail Group Deserves a Closer Look

Investing in specialty retail companies hasn't been rewarding for investors as of late. Industry players are finding it difficult to increase sales. As investors are losing interest in specialty retailers, industry players such as Abercrombie & Fitch (NYSE: ANF  ) , Aeropostale (NYSE: ARO  ) and Ascena Retail Group (NASDAQ: ASNA  ) have been witnessing stock price declines since the beginning of the year.

ASNA Chart

Ascena Retaildata by YCharts

All the three retailers have been witnessing lower demand for their products, which is resulting in lower sales and disappointing performance. Both Abercrombie and Aeropostale reported a weak back-to-school season, leading to lower quarterly numbers. Ascena Retail Group, however, seems to be doing better than its peers with an over 15% increase in its share price in the past month. Ascena Retail Group has a more diversified product portfolio compared to Aeropostale and Abercrombie & Fitch, which I will come to later. Its stock price bounced back in September after it posted great quarterly numbers. This company has been performing well and its recently reported quarter beat the Street's expectations.

Driven by an increase in transaction size and contribution from new stores, revenue surged 27% to $1.2 billion over last year's quarter. Earnings for the quarter were $0.34 per share compared to $0.29 per share in the previous year. Same-store sales grew 2%, helped by higher promotions and marketing efforts.

Attractions
The retailer's e-commerce segment posted growth of 30% during the period, boosting the top line. Its online sales increased for all brands with Maurices and Dressbarn registering more than 50% growth, driven by higher demand for cooler-weather products. In fact, the overall e-commerce business has been growing well in the U.S. and is estimated to grow by another 15% in the fall season . This growth in U.S e-commerce sales should lead to higher sales for the specialty retailer, too. The company also increased its product prices, which was one of the primary reasons behind higher sales of Justice Brand products.

Same-store sales for Lane Bryant increased 9% due to new product launches and increased promotions for the same. One of the ways of promoting its business is Ascena's Take Ten loyalty program which was launched in September last year. The program is growing continuously by providing discount coupons to its loyal customers through mailers and the company's email database has increased to 3.4 million.

The retailer added a large number of new stores, which led to an increase in revenue from each brand. For example, Ascena added 14 new Justice stores during the quarter and plans to open another 23 in the current one.

Looking forward
Ascena has been making the right moves. It has been adding new stores, increasing its marketing efforts, and acquiring new businesses. Its acquisition of Justice and Charming Shoppes has been bearing fruit as reflected by increasing sales for these businesses.

Moreover, the company is well placed strategically since its different brands cater to different age groups of women. From casual apparels to trendy wear for tweens and "plus-size" apparels for older and obese people, the retailer covers a plethora of consumer demands. On the other hand, companies such as Abercrombie & Fitch, which focuses in younger people, do not offer plus-size apparels. Even Aeropostale mainly targets women between the ages of 14 to 17 years old although it has a wider variety of offerings online. Hence, Ascena enjoys a competitive advantage. Also, the specialty retailer plans to open 55 to 75 new stores in the current year and expects to reach annual sales of $5 billion.

Key numbers
Considering Ascena Retail Group's P/E ratio (on a trailing-12 month basis), the company might look expensive. Its P/E multiple is 22.7 whereas Abercrombie & Fitch has a P/E ratio of 12.5. However, Ascena is expected to perform much better than its peer as reflected by the forward P/E ratio of those two companies. Ascena's forward P/E multiple stands at 10.3, far below its trailing P/E multiple as well as Abercrombie's forward P/E multiple of 12.1. The PEG ratio for Ascena Retail Group and Abercrombie is 0.9 and 1.3, respectively. Hence, Ascena is cheaper than its peers and is estimated to grow much faster than Abercrombie.

Bottom line
Although specialty retailers are not doing very well, Ascena Retail Group stands out. It has been making efforts to attract customers with promotions such as its Take Ten loyalty program and other marketing strategies, which will help the retailer boost its top line.

Moreover, it is expanding its footprint and is trying to maintain lower inventory levels in order to offer fresh products in the fall season. These strategies, along with decent valuation numbers, make this company attractive. Investors should take advantage of this opportunity and strengthen their portfolio with this retailer.

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