Tom's Stock No. 2

Ascena Retail Group

To some, it would be akin to naming your new restaurant Gluttony, or rolling out the new Chrysler Guzzler line of SUV. Yet dressbarn has somehow overcome the unfortunate imagery of its name to successfully run nearly 2,500 dressbarn, maurices, and Justice retail stores that sell fashionable clothes to women and girls.

The company recently rebranded itself as Ascena Retail Group (Nasdaq: ASNA) to reflect that it's more than just dressbarn, but those stores will keep the farm-centric moniker.

Ascena and its founding family have been building relationships with shoppers for more than four decades, and it's well-positioned for continued success. But the market has put the stock on the discount rack.

Roslyn Jaffe opened the first Dress Barn store in 1962 as a place for working women to find stylish clothes at value prices. Soon her husband joined in, and today he and his son David -- with Roslyn sitting on the board -- are expanding Ascena, offering women and tween girls low-priced clothing under three brands: dressbarn, maurices, and Justice.

Tailoring a Business

Echoing Danaher's ability to bring in a new business and improve operations, Ascena has shown it has a repeatable process on the retail side. Its maurices stores (another family business before the Jaffes acquired it five years ago) aim to serve young women with a "twentysomething attitude" who live in small-town markets. Sales doubled not long after Ascena bought the chain. Justice, which was acquired when Ascena bought Tween Brand, focuses on the tween girl market. Justice's business should start benefiting from economies of scale in inventory sourcing, real estate, and logistics.

Overall, the company has a proven concept led by a family that has delivered for shareholders for years -- and with 20% ownership of the company, they have every incentive to continue to deliver. (The top-notch small-cap Royce fund family owns another 6.7%.)

Bargain Basement

 Investors today can buy the stock for less than 14 times trailing earnings. Once the Justice stores are fully integrated, Ascena's free cash flow should grow to be $180 million to $200 million per year (including lease expenses). If that happens, the stock will resume its upward march.

Catalysts

• The Tween Brands acquisition cost Ascena shareholders $415 million (including bank debt) in shares and cash (about 7 times operating profit). The Jaffes need to integrate sourcing clothes and back-office systems to make it worthwhile. The company successfully integrated maurices a few years ago, so we have faith.
• The American consumer is fickle these days, and Ascena depends on discretionary spending to deliver for shareholders. History is on our side, though, because the Jaffes have thrived through tough days before.

Tom also likes the growth prospects of another company that isn't exactly feeling the market's love. Which brings us to...