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Ascena (ASNA) Tops Q1 Earnings, Down 9.3% on Sales Miss

Zacks Equity Research
Updated

Ascena Retail Group Inc. ASNA reported first-quarter fiscal 2016 results, including the outcome of ANN INC., which the company acquired recently.

Backed by robust sales at maurices and Lane Bryant, coupled with gross margin recovery at the underperforming brands, Ascena’s quarterly adjusted earnings from continuing operations rose 9.1% year over year to 36 cents per share, beating the Zacks Consensus Estimate of 29 cents.
 
On a reported basis, however, the company incurred a loss of 10 cents per share as against earnings of 32 cents per share in the year-ago quarter. The bottom line was mainly impacted by transaction costs and adjustments associated with ANN’s buyout.

Quarter in Detail

Net sales soared roughly 40% year over year to $1,672 million. Including ANN’s results, the company’s adjusted sales slipped 2.6% to $1,794 million. Sales for the quarter missed the Zacks Consensus Estimate of $1,796.2 million. Shares of the company fell 9.3% in the after-market session following the lower-than-expected sales results.

Consolidated comparable store sales (comps) at Ascena were down 3%, as strength noted at Lane Bryant and maurices was more than offset by declining comps at Justice, dressbarn and Catherines. However, management stated that despite delivering negative comps for the quarter, the Justice brand recorded significant progress and is well on track for a turnaround.  

Brand-wise, total comps at Justice stores declined 15%, while dressbarn and Catherines comps dropped 5% and 1%, respectively. However, the company’s Lane Bryant and maurices stores posted comps growth of 4% and 7%, respectively.

Adjusted gross profit grew 2.2% to $1073 million, with the adjusted gross margin expanding 280 basis points (bps) to 59.8% from the year-ago level. The gross margin expansion was mainly fuelled by solid progress made at the Justice brand, which witnessed margin growth of more than 700 bps.

During the reported quarter, adjusted buying, distribution and occupancy expenses inched up marginally to $321.5 million, while as a percentage of sales the same expanded 50 bps to 17.9%. The increase was due to elevated buying expenses at most brands, offset by a decline in distribution expenses.

Adjusted selling, general and administrative expenses were $526.6 million, up 0.4% from the year-ago comparable quarter, while as a percentage of sales the same expanded 90 bps to 29.4%.

Backed by gross margin expansion, Ascena’s adjusted operating income increased 12% year over year to $142.5 million. Moreover, the adjusted operating margin grew 100 bps to 7.9%.

We note that on Aug 21, Ascena successfully closed its previously announced deal to buy ANN INC. in a transaction combining cash and stock. The combination of these two companies with complementary businesses lifted Ascena to the position of the third-largest specialty apparel retailer and the largest U.S.-based retailer focused exclusively on female consumers.

Balance Sheet

Ascena ended the first quarter with cash and cash equivalents of $322.9 million, and total debt of nearly $1,887 million. Shareholders’ equity at the end of the quarter was $1,861.3 million.

Fiscal 2016 Outlook

Management remains pleased with the start to fiscal 2016. The company believes that it is well on track to integrate ANN’s operations into its business. Further, management is impressed with the margin recovery witnessed at Justice, Ann Taylor and LOFT, though dressbarn continued to disappoint. The company remains hopeful of delivering future growth, given its compelling assortments, favorable mix and effective inventory management strategies.

Consequently, for fiscal 2016, the company now envisions gross margin to expand in a range of 56.3%–56.8%, up from its previous prediction of 55.0%–55.5%. Ascena also reiterated its earnings guidance for the fiscal, still projecting earnings in the band of 75–80 cents per share.

Zacks Rank

Ascena currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the Retail- Apparel/Shoe industry include Abercrombie & Fitch Co. ANF, with a Zacks Rank #1 (Strong Buy), American Eagle Outfitters, Inc. AEO and Foot Locker, Inc. FL, each carrying a Zacks Rank #2 (Buy).

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