One Bad Quarter Doesn’t Make This Retailer a Bad Investment

Ascena Retail Group (NASDAQ: ASNA  ) reported its fourth-quarter financial results earlier this month, and the numbers weren't very good. Ascena's profit fell 15% year over year as weakness at its Justice brand offset growth seen in other areas. Also, like most retailers have complained of late, Ascena's performance was affected by colder winter weather across much of the U.S. 

Even peer Macy's (NYSE: M  ) , which successfully tapped shoppers during the holiday season, lost sales as a result of store closures. Macy's, which is also in the business of selling apparel and accessories for women, had to face problems due to a cold winter. Macy's had to shut down 244 Macy's and Bloomingdale's stores in January, equal to 30% of its entire store base. 

Bright spots
However, not everything was bad for Ascena, as the company saw robust e-commerce growth of 28% in the fourth quarter and was able to post slight revenue growth. 

Ascena reported 2% revenue growth, driven by new stores and its e-commerce platform. Thus, despite a 3% drop in same-store sales, Ascena's top line wasn't affected much. The gross margin was up 4% in comparison to the year-ago quarter. The increase in the gross margin was mainly due to lower markdowns on certain inventory and better performance from four of its five brands. 

Ascena saw strong performance across almost all brands, except for Justice. Same-store sales at Justice were down 5% and operating income declined 47% amid soft traffic and inventory markdowns. This was the only dark spot on an otherwise strong quarter for Ascena. 

The good news for investors is that the company is planning to open 13 new stores in the current quarter after opening 12 new stores in the previous quarter. At present, Ascena has a base of 898 stores compared to 850 last year, and it has already started getting good returns from these new stores, according to management. 

More positives
Ascena is also focusing on increasing sales through various channels, such as direct mail, online, bounce-back coupons, and in-store marketing. These moves should help Ascena improve sales and margins going forward. It is also focusing on increasing the engagement of its existing and new customers through social networking, email campaigns, and mobile channels. Ascena has also constructed a national retail-distribution center that will make its e-commerce fulfillment moves more effective and efficient. Also, Ascena's loyalty program is growing at a good pace, with 7.4 million customers already enrolled.

Ascena could see a boost in business due to the woes of fellow retailers, including Abercrombie & Fitch (NYSE: ANF  ) . Ascena's Justice brand is a direct competitor of Abercrombie, as both target the tween segment. However, Abercrombie seems to have fallen behind in recent times, as its results show. Its sales were down 12% in the fourth quarter as earnings plunged 58%.

Abercrombie has lost sight of its target market -- the tweens -- and since there is not much diversification about its business, it is taking big hits to its financials. Moreover, the defection of customers away from Abercrombie could benefit Ascena's Justice in the future.

Bottom line
Although Ascena saw some weakness in the most recent quarter, I think it could be a good buy for the long run. It is undertaking numerous initiatives to grow the business, especially in e-commerce. Also, Ascena is cheap at a forward P/E of 13.5 and its earnings compound annual growth rate of 16.7% for the next five years looks impressive. So, investors should consider buying Ascena on its post-earnings weakness, as it looks promising.

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  • Report this Comment On March 12, 2014, at 3:04 PM, dmontieth wrote:

    Good article - I agree Ascena has tremendous potential especially in reducing costs of each of their 5 divisions by consolidating their distribution centers, computer centers and other "back of the house" operations to one location. Over the last 10 years their average annual increase in stock price has been about 15%. A rare increase for any retailer!

    One correction - Ascena's total store count is just under 4,000.

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