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Why Ascena Retail Stock Dropped 15% This Morning

By Rich Smith – Updated Apr 18, 2019 at 5:40PM

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It's called an "earnings warning," but it's also kind of a debt warning.

What happened

Ascena Retail (ASNA), owner of the Justice, Lane Bryant, Ann Taylor, and Dress Barn brands, saw its share price pummeled this morning in response to an earnings warning on Q2 results. Ascena stock fell more than 15% early trading and was still down 7.1% as of 3:30 p.m. EST.

Defying early hopes that the Christmas 2018 sales season was going to be uniformly good news for retailers, Ascena announced today that while same-store sales were up at its Ann Taylor, LOFT, Maurices, and Dress Barn chains -- and even up a bit at Justice -- sales plunged at Lane Bryant and Catherines. Combined with "elevated clearance activity" at the latter three chains, Ascena was forced to lower guidance for Q2 earnings to a loss of $0.23 to $0.28 per share.

Two girls shopping for tops

It could be hard finding good news in Ascena's latest earnings report. Image source: Getty Images.

So what

Investors had been bracing for bad news as Ascena, with most analysts calling for a decline in profitability to a loss of $0.19 per share, from a $0.12 loss a year ago, but this latest news was even worse than they had been expecting. Losses are now almost certain to be twice as bad as they were one year ago.

Now what

Ascena's not in a great financial position to be putting up losses on its scorecard right now. On one hand, its purchase of Ann Taylor in 2015  has added a strong performer to Ascena's stable of brands. Ann Taylor and LOFT comps look to be up a combined 12% in Q2, and performing more strongly than any other chain Ascena owns.

On the other hand, though, the $2.2 billion Ascena spent to acquire Ann Taylor back then has left the company with a large debt load of $1.3 billion, which compares unfavorably with the less than $200 million in cash on Ascena's balance sheet. The company's been working hard to apply free cash flow to whittling away at that debt in the years since, but weakening sales are going to make it hard for Ascena to progress further in the near future.

Check out the latest Ascena Retail Group earnings call transcript.

Rich Smith has no position in any of the 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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