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Ascena (ASNA) Falls on Lower Q3 Earnings & Sales, View Cut

Zacks Equity Research

Ascena Retail Group Inc. ASNA reported third-quarter fiscal 2016 results, wherein the top and bottom lines fell year over year.  Though earnings beat expectations, revenues missed the same. Consequently, the stock tumbled 4.4% in after-hours trading yesterday.

Adjusted earnings from continuing operations of 15 cents per share fell 6.3% year over year but came in ahead of the Zacks Consensus Estimate of 13 cents. This included results of ANN INC., which was acquired in the fiscal first quarter.

Ascena Retail Group Inc. (ASNA) Street Actual & Estimate EPS - Last 5 Quarters | FindTheCompany

Bottom-line results in the quarter were mainly impacted by transaction costs, higher interest expense on term loan and accounting adjustments, all associated with the ANN buyout. Additionally, higher provision for income taxes affected results.

On a reported basis, the company’s earnings of 8 cents per share fell 46.7% year over year from 15 cents per share in the year-ago quarter.

Quarter in Detail

Net sales soared roughly 45.1% year over year to $1,669 million. Including ANN’s results, the company’s adjusted sales slipped 4.5% to $1,670 million. Sales for the quarter missed the Zacks Consensus Estimate of $1,751 million on the back of soft comparable store sales (comps).

Consolidated comps at Ascena were down 4%, while it fell 2% on excluding the planned decline at Justice due to its new strategy that advocates less promotional selling.

During the quarter, comps declined at all of the company’s brands, with Justice recording the highest decline of 11%. This was followed by comps declines of 8% and 6% at Catherines and maurices, respectively. Also, comps for the company’s Lane Bryant store were down 1%, while dressbarn recorded a 2% comps decline.

Adjusted gross profit grew nearly 1% to $1,018 million, with the adjusted gross margin expanding 320 basis points (bps) to 60.9% from the year-ago level. The gross margin expansion was fuelled by stringent inventory across all brands, along with successful adoption of the new selling model at the Justice brand, and improved full-price selling and lower product costs at ANN.

During the reported quarter, adjusted buying, distribution and occupancy expenses fell marginally to $324 million, while as a percentage of sales the same expanded 80 bps to 19.4%. The decline in dollar terms was due to lower distribution expenses that stemmed from continued supply chain synergies from legacy ascena brands, partially offset by higher expenses related to merchandising and design function capability.

Adjusted selling, general and administrative expenses were $534 million, up about 1% from the year-ago quarter, as higher general administrative costs and marketing investments related to its brand building for various brands were almost offset by a decline in store expenses for Justice brand, selling, general and administrative expenses (SG&A) optimization savings at ANN and synergies from the ANN acquisition. As a percentage of sales, SG&A expanded 180 bps to 32%.

Consequently, Ascena’s adjusted operating income increased 6.8% year over year to $78 million. Also, adjusted operating margin grew 50 bps to 4.7%.

Balance Sheet

Ascena ended the fiscal third quarter with cash and cash equivalents of $246 million, and total debt of $1.78 billion million. Shareholders’ equity at the end of the quarter was $1,850.9 million.

Outlook

Keeping the current retail environment in mind, the company lowered its revenue and earnings guidance for fiscal 2016. The company now expects total revenue of $7.1 billion and earnings per share of 67–70 cents in fiscal 2016.

Other assumptions for the fiscal include comps decline in the 2–3% range, gross margin of 57.5–58.0% and EBITDA in the range of $655–$665 million. Depreciation expense is projected to be about $333–$335 million and interest expense of $100–$105 million, along with an effective tax rate of 39%.

Further, the company expects capital expenditures for fiscal 2016 to come in the range of $375–$400 million. In fiscal 2016, the company expects store count to be flat or modestly down.

Zacks Rank

Ascena currently carries a Zacks Rank #4 (Sell). A couple of better-ranked stocks in the same industry include The Children’s Place Inc. PLCE and Destination XL Group Inc. DXLG, each sporting a Zacks Rank #2 (Buy). Another favorably ranked stock in the related industry include Delta Apparel Inc. DLA, with a Zacks Rank #1 (Strong Buy).

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