Ascena Beats Q1 Earnings Despite Soft Comps, Retains View

Ascena Retail Group Inc. (ASNA) reported first-quarter fiscal 2015 adjusted earnings from continuing operations of 28 cents per share, a penny ahead of the Zacks Consensus Estimate and in line with the company’s expectations. However, adjusted earnings fell 22.2% from the prior-year earnings of 36 cents per share due to negative comparable store sales (comps) performance and increased costs, related to store expansion, capability building initiatives and strategic investments.

Ascena Retail Group Inc - Earnings Surprise | FindTheBest

On a reported basis, including the effect of one-time items and discontinued operations, the company’s earnings were 32 cents per share, in line with the comparable quarter last year.

Quarter in Detail

Ascena’s net sales for the quarter were $1,194.2 million, almost in line with the prior-year sales of $1,196.6 million and the Zacks Consensus Estimate of $1,194 million. Flat sales during the quarter were a result of new store growth at Justice and maurices, fully offset by negative comps at Justice.

The company’s total comps, including stores as well as eCommerce, fell 2% from the prior-year quarter’s comps owing to soft traffic and choppy performance of its physical stores, largely offset by double-digit eCommerce growth. Comps at the company’s stores were down 4%, while eCommerce comps grew 16%.

Brand-wise, total comps at Justice stores declined 7%, reflecting a modest improvement from the prior quarter’s fall of 10% but remained challenging when compared with last year. Further, the company’s Lane Bryant, maurices and dressbarn stores managed to post flat comps despite negative mid-single digit traffic trends. However, comps at Catherines improved 4% driven by positive customer response to its new trendy assortments.

Gross profit grew marginally to $694.5 million from $693.2 million in the prior-year period, while as a percentage of sales it expanded 30 basis points (bps) to 58.2% from the year-ago level. The rise in gross profit margin is mainly attributed to rate improvement at dressbarn, Catherines and maurices brands, partly offset by reduced gross margin at Justice and Lane Bryant brands. The decline in Lane Bryant’s margins was because of increased clearance activities designed to attain desired level of inventory position.

During the quarter, buying, distribution and occupancy (BD&O) expenses rose 3.3% year over year to $214.4 million, while as a percentage of sales it increased 70 bps to 18%. The surge in BD&O expenses was due to costs associated with the growth of Justice and maurices stores, coupled with investments in designing and merchandising capabilities.

Selling, general and administrative (SG&A) expenses were $354.5 million, up 1.8% from the year-ago comparable quarter, while as a percentage of sales it expanded 60 bps to 29.7%. SG&A expenses rose due to store expansion, higher marketing costs and support of the growing direct channel.

During the quarter, Ascena’s operating income on an adjusted basis fell 19.4% year over year to $75.6 million. Moreover, operating margin contracted 150 bps to 6.3% mainly due to soft sales and higher operating expenses.

Balance Sheet

Ascena ended the first quarter with cash and investments of $164.1 million and long-term debt of $236 million. Shareholder equity at the end of the fiscal was $1,797.17 million.

Fiscal 2015 Outlook Intact

Ascena retained its earnings and comps forecasts for fiscal 2015. The company projects earnings to come in the range of 90 cents to $1 per share. This excludes any one-time, financing and acquisition-related, integration and restructuring charges incurred during the year. Further, Ascena expects comps to remain flat or increase modestly in fiscal 2015.

The company now intends to incur capital expenditure at the lower end of its previously projected range of $350–$375 million.

Other Stocks to Consider

Currently, Ascena carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include American Eagle Outfitters Inc. (AEO), L Brands Inc. (LB) and Foot Locker Inc. (FL), all carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on AEO
Read the Full Research Report on FL
Read the Full Research Report on ASNA
Read the Full Research Report on LB


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