Ascena Retail Group Earnings Call Insights: Spring to Summer, Boys’ Retail

On Thursday, Ascena Retail Group, Inc. (NASDAQ:ASNA) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Spring to Summer

Anna Andreeva – FBR Capital Markets: Follow-up on May to-date, you said that was up low single-digits. Are you guys seeing similar results by brand, and I guess what give you confidence that comps will improve through mid-singles as we go through the quarter? Is it just a virtue of comparisons getting easier in June and July; maybe talk about that?

David R. Jaffe – Preseident and CEO: Sure. Yes, you’re absolutely right. It is easier comps as we get into June and July and the results for May were pretty much the same across all three brands.

Anna Andreeva – FBR Capital Markets: So maurices did improve from negative 1?

David R. Jaffe – Preseident and CEO: Yes.

Anna Andreeva – FBR Capital Markets: Since we’re talking about maurices, can you maybe talk about what happed in this division? I think at the beginning of the quarter you guys talked about being pretty pleased with spring and some of the color and newness working in that division just maybe what happened in April?

David R. Jaffe – Preseident and CEO: I don’t think it was just April. I think the season has some challenges. We mentioned that accessories was down. That turned out to be a more difficult business. And even though it’s a good margin business, if the customer doesn’t want it, she really doesn’t want it at any price. So, we had some inventory issues there that we worked our way out of for the most part, and certainly we’ll get clean as we get into back-to-school, and at the same time some of the other challenges we had with merchandise, we’ve dealt with, we’ve got new products in, color has been great, we are well-positioned for color as we turn the corner into back-to-school. So we feel much more confident about the next few months at maurices than we had for spring.

Anna Andreeva – FBR Capital Markets: Just, Armand, I’m not sure if I missed this. Could you break down the components of the gross margin decline, just occupancy leverage versus markdowns? I guess just trying to understand why gross margins were down in 3Q after being up nicely in the second quarter despite easier comparisons and how should we expect gross margins to look like in the fourth quarter?

Armand Correia – EVP and CFO: So, as far as the gross profit rate decline of 60 basis points, actually we had gotten some leverage on buying occupancy of 30bps, so merchandise margins overall were down 90 bps. As far as kind of the quarter and looking at the fourth quarter, if I look at the fourth quarter, the margin opportunities are primarily in the maurices and dressbarn divisions. If you look at last year’s fourth quarter, you will see that maurices has had a decline of about 250 basis points in gross profit with dressbarn declining 130 basis points. So, I look at kind of the quarter as kind of the opportunity in those two brands to certainly improve upon those types of numbers.

Session 2:

Scott Krasik – BB&T Capital Partners: Just a couple of questions. I guess, first, a bigger picture; maybe you talk about why you decided to bring the boys merchandise into the stores? I think you’ve always made a point of emphasis that girls of that age feel safe and want to shop without the distraction of boys. What was the thinking there?

David R. Jaffe – Preseident and CEO: I think it’s a really good point. At this age, we think that it’s really mom buying the clothes. You may not even say that many boys in the store, but what we’ve done is develop a test where we are looking at a prototype for this – the Brothers business, a prototype store within the store. So in about a third of the situations it will have a separate entrance and in the other two-thirds it will kind of be in a corner of the store, Scott, and it will have its own little entryway. So, it really will be very isolated and when you walk into that section, it will feel like a little boys club. It won’t feel anything like the girls area and it’s going to have its own obviously separate fitting room and access and so you really won’t feel like you’re shopping with your little brother. I think as mom is buying most of the clothes, it’s maybe a mute point, but even if his little brother or big brother is in there, that environment is going to have a big video screen with all sorts of fun boy videos playing, it will be captivating for that boy.

Scott Krasik – BB&T Capital Partners: Accordingly you must have been pleased with the website production – productivity?

David R. Jaffe – Preseident and CEO: Well, I think the website was a great learning opportunity. I won’t say that it was huge results. I think the opportunity is to leverage the box that we currently have, and the fact that we’ve got mom coming into the store, and once we can establish it as a brick-and-mortar, I think that’s actually going to help drive e-commerce and vice-versa.

Scott Krasik – BB&T Capital Partners: And then, Armand, you might have touched on it, but maybe give us a little bit more confidence of why you expect to see such healthy gross margin improvement year-over-year in the fourth quarter maybe by division?

Armand Correia – EVP and CFO: Yeah, I touched upon it with Anna’s question. If you go back to the fourth quarter last year, you’re going to see that dressbarn and maurices are really the brands that we believe have the opportunity for improved margins in Q4 given the decline that we saw last year.

Scott Krasik – BB&T Capital Partners: But including – so based on these sales trends, so just less markdowns?

Armand Correia – EVP and CFO: Yes.

Scott Krasik – BB&T Capital Partners: Okay. And then just in terms of SG&A, is there incremental SG&A associated with moving into the new headquarters and then running it on an ongoing basis that maybe you have been considering?

David R. Jaffe – Preseident and CEO: We don’t think so.

Armand Correia – EVP and CFO: We don’t think so.

Scott Krasik – BB&T Capital Partners: Okay, all right.

David R. Jaffe – Preseident and CEO: We will need to drill down on that, but we don’t have enough information yet to be specific, but it’s going to be immaterial, Scott.

Scott Krasik – BB&T Capital Partners: Okay, well, congratulations. Good luck.

David R. Jaffe – Preseident and CEO: Thanks.