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Why Ascena Retail Group Stock Jumped Another 9% on Monday

By Rich Smith – Jun 12, 2017 at 8:14PM

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Ascena's stock price gets bigger by shrinking.

What happened

After a big day on Friday last week, shares of Ascena Retail Group (ASNA) were on the move once again on Monday, rising to close the day up 8.6%.

So what

Ascena shares ascended despite the company's report of a massive $1.3 billion asset writedown and a huge $5.29-per-share loss for its business last quarter on Friday. The reason: Apparently, Ascena will be doing less business in the future -- and perhaps, therefore, losing less money.

Ascena has told investors to expect to see the closing  of some 250 underperforming Loft, Lane Bryant, Dress Barn, and other stores over the next two years. In addition, the company will be seeking rent reductions on a further 400 locations. Under one scenario, therefore, Ascena's operating costs could be going down if the rent reductions are forthcoming. Even in the worst case, though, if landlords refused to negotiate, Ascena may decide not to renew its leases -- and so will avoid losing money on those businesses.

An animated figure points to a rising stock chart.

Earnings are over. So why is Ascena's stock still going up? Image source: Getty Images.

Now what

Any cost savings Ascena enjoys from this "fleet optimization program" will take time to materialize, of course. Analysts  who follow the company still expect Ascena to lose money this current fiscal fourth quarter and to end the year with profits of only $0.13 or so per share.

Granted, at Ascena's current stock price of $2.39 per share, this works out to a likely valuation of about 18.4 times current year earnings on the stock -- which hardly sounds cheap. On the other hand, though, if Ascena can maintain its current rate of free cash flow production -- and indeed, management is promising to deliver additional "working capital benefits" from its "fleet optimization" -- the stock is selling for only about 2.6 times cash profits.

That's not a high price. Even after two days of "winning," Ascena stock could go up some more.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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