Ascena Retail Group (ASNA) is a diversified specialty retailer that has shown impressive top-line growth over the past several years. Unlike many retailers, it has also reported comps improvements. Additionally, net sales improved in its first quarter for each of its brands. As if that's not enough good news, it's a fiscally responsible company with a iron clad balance sheet and strong cash flow. Let's get to the details and see if the company is worth consideration by Foolish investors.
Highly diversified
When you think of a company like Aeropostale (AROPQ), you likely think of teen apparel. In addition to hesitant spending among today's teens, the lack of the company's diversification is part of the reason it has had such a difficult time surviving, let alone thriving, in a challenging economic environment.
Fortunately, Ascena Retail is diversified. It's also well-balanced. For instance, its Justice brand has 984 stores, catering to girls between the ages of seven and 14 as well as boys in the same age range with its Brothers brand.
The company's Lane Bryant brand has 790 locations, targeting plus-size females between the ages of 25 and 45. Lane Bryant's merchandise is known to be fashionable and sophisticated, giving Ascena Retail a stronghold on the under-penetrated market.
maurices has 866 locations, targeting women between the ages of 17 and 34. It's possible that you don't know much about maurices. That's because these stores are purposely placed in small markets where populations range between 25,000 and 100,000. Once again, Ascena Retail finds a way to target a market where competition will be minimal, this time on a geographical basis.
Dressbarn has 842 stores, primarily targeting women between the ages of 35 and 55. How many retailers do you know that focus on this specific demographic? In today's economic environment, a retailer must offer differentiation, and Ascena Retail accomplishes this on multiple accounts.
Then there is the Catherines brand, which is purposely smaller on a store-count basis. You can find 390 Catherines locations. The reason for the smaller store count is because the company is targeting a smaller market -- plus-size women 45 and older.
These are only some of the company's key brands.
Diversification and differentiation don't guarantee success and future potential. That being the case, let's take a look at some numbers.
Results and peer comparisons
In Ascena Retail's first quarter, net sales increased 5.2% to approximately $1.2 billion; the company experienced increased sales for all of its key brands. On a year-over-year basis, net sales increased at Justice (7%), Lane Bryant (7.8%), maurices (7.8%), dressbarn (2.1%), and catherines (5.9%). However, if you follow retail, then you likely want to know the comps.
Consolidated comps for stores increased 2%, and consolidated e-commerce comps jumped 27%. The company views brick-and-mortar stores as a comlpetely seperate entity from its e-commerce sites but combining stores and e-commerce yields a 4% increase in comps.
Net income in the first quarter came in at $54.3 million versus $46.2 million in the year-ago quarter. This was primarily due to a 17.4% jump in operating income to $85.6 million, thanks to lower losses for discontinued brands.
Has Ascena Retail been under-performing peers like Aeropostale or the more-diversified Gap (GPS 0.55%) on the top line over the past five years?
Gap revenue (trailing-12 months) data by YCharts
Nope. Ascena Retail's business model drives consistent demand.
Ascena Retail sports a positive balance sheet, with $189.4 million in cash and short-term equivalents versus $135.6 million in long-term debt. And it generated $450 million in operating cash flow in the past 12 months.
Considering there's no dividend, Ascena Retail has plenty of money to put back into its business. And while the company's profit margin of 3.2% isn't outstanding, it's stronger than Aeropostale's negative profit margin of 0.9%. However, Gap steals the show in this regard, showing off an impressive 8.1% profit margin -- high for a retailer.
Gap also pays a dividend, yielding 1.9%. In regards to fiscal strength, Gap has $996 million in cash and short-term equivalents versus $1.2 billion in long-term debt. Slightly negative, but it generated approximately $1.7 billion in operating cash flow in the past year. Therefore, it should be easy for Gap to reinvest in its business, pay down debt (if necessary), and reward shareholders.
Aeropostale has an ideal balance sheet, with $100.3 million in cash and no long-term debt. This could make it appealing to potential suitors. Aeropostale generated positive operating cash flow of $75.9 million over the past year. This is all positive for Aeropostale, but assuming there's no sale of the company, that capital doesn't do much good if demand continues to wane.
As far as a potential negative for Ascena Retail, one does exist. In the company's most recent 10-Q filing, it reported concern about weak consumer wages, increased taxation, high consumer debt, reductions in net worth for some consumers (due to real estate), low consumer confidence, and volatility in financial markets.
These types of concerns are often written in a 10-Q, but these are real threats for Ascena Retail or almost any other retailer. While Ascena Retail should hold up better to weakening conditions than many other retailers thanks to its target markets, it shouldn't be classified as resilient.
The bottom line
Ascena Retail's diversified portfolio of brands and highly strategic target markets make it a company that should be on any investor's watch list. It's currently showing strength in every area, and while the company is sensitive to economic conditions, any significant changes would likely take a while to play out. As always Foolish investors should do their own research before making any investment decisions.
