Is Ascena Retail Group’s Price Tag a Bargain?

Source: Thinkstock

Source: Thinkstock

Ascena Retail Group Inc. (NASDAQ:ASNA) is a leading specialty retailer offering clothing, shoes, and accessories for missy and plus-size women under the Lane Bryant, Cacique, Maurice’s, Dressbarn, and Catherine’s brands. It also has products for tween girls and boys under the Justice and Brothers brands. Ascena operates through its subsidiaries approximately 3,900 stores throughout the United States, Puerto Rico, and Canada. The stock has been a poor performer. Its sitting at a 52-week low right now of $16.15. But is the stock an opportunity at these levels? Based on its trading range it seems so, but what about its fundamentals?

Well, for the third-quarter of fiscal 2014, earnings from continuing operations of Ascena were $0.22 per diluted share. This compares to earnings from continuing operations of $0.20 per diluted share in the same period of fiscal 2013. Adjusted earnings from continuing operations in the third-quarter of fiscal 2014 were $0.27 per diluted share, compared to $0.26 per diluted share in the prior year’s gross margin for the third quarter of fiscal 2014 increased to $675.0 million, or 58.9 percent of sales, compared to $657.8 million, or 57.6 percent of third-quarter sales last year. The gross margin rate increase was primarily due to a lower level of markdown activity across most of the company’s brands.

It is important to note that buying, distribution, and occupancy costs for the third-quarter of fiscal 2014 were $219.6 million, or 19.2 percent of sales, compared to $208.1 million, or 18.2 percent of third quarter sales last year. The increase was primarily related to investments in merchandising and design functions, increased freight and fulfillment costs supporting strong e-commerce growth, and the impact of new store growth at Justice and Maurice’s. The company continues to anticipate the capture of certain integration-related efficiencies in its distribution structure over time as it implements its centralized logistics and distribution strategy. Selling, general, and administrative expenses for the third-quarter of fiscal 2014 were $340.4 million, or 29.7 percent of sales, compared to $332.4 million, or 29.1 percent of third-quarter sales last year. The growth in total expense to last year was due to increased marketing and headcount to support top line growth and synergy initiatives.

Operating income for the third-quarter of fiscal 2014 was $53.7 million, or 4.7 percent of sales, compared to $65.8 million, or 5.8 percent of sales last year. On an adjusted basis, operating income for the third-quarter of fiscal 2014 was $68.1 million, or 5.9 percent of sales compared to $72.7 million, or 6.4 percent of sales last year. The effective tax rate for the third-quarter of fiscal 2014 was 30.6 percent, which was lower than the company’s expectations. The effective tax rate was 40.3 percent in the third-quarter last year.

Income from continuing operations for the third-quarter of fiscal 2014 was $35.6 million as compared to $32.9 million in the prior year’s third-quarter. On an adjusted basis, income from continuing operations for the third-quarter of fiscal 2014 was $44.8 million, as compared to $42.2 million in the prior year’s third-quarter. Again, the company is doing better as it reported earnings from continuing operations of $0.22 per diluted share, a loss from discontinued operations of $0.02 per diluted share and net income of $0.20 per diluted share.

I should also point out that the company ended the third-quarter of fiscal 2014 with cash and investments of $216.8 million and total debt of $225 million, compared to $189.4 million of cash and investments and $135.6 million of debt at the end of fiscal 2013. So this is a bit of a rough patch here as the company falls further into debt. David Jaffe, President and Chief Executive Officer stated the following:

Third-quarter [earnings were] above our expectations and slightly above last year primarily due to lower than anticipated [expenses]. Q3 sales were challenging, and that trend continued into the start of Q4. As a result, we are implementing promotional strategies and receipt flow adjustments to ensure our inventories are conservatively positioned for the fall season. We continue to make good progress on our longer range strategic priorities. Four of our five brands are now operating in our retail distribution center in Ohio, and we expect all brands to be operating out of that DC by fall, on schedule. In addition, our new e-commerce fulfillment center opened in the third quarter and we are on track to migrate all brands into operations in that facility by spring of calendar 2015.

So, looking ahead, the company reaffirmed annual guidance between $1.00 and $1.05. This guidance excludes any one-time, acquisition-related integration, and restructuring costs that may be incurred during the fiscal year. The company noted that its guidance is based upon a few assumptions. First is that total comparable sales are expected to be up slightly. Second, the company’s effective tax rate is expected to be 35 percent. Third, investment in capital expenditures is expected in the range of $475 to $500 million. Finally, the company sees net new store growth in the range of 40 to 60 units. The company beat earnings this quarter by 8 cents, but missed revenues by $30 million and were flat year-over. However, despite these results, the stock is attractive at current levels. I think it is too low. Thus, I recommend it as a buy and assign a $20 price target.

Disclosure: Christopher F. Davis holds no position in theAscena Retailand has no plans to initiate a position in the next 72 hours. He has a holdrating on the stock and a $20 price target.

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