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Ascena Beats, Guides Fiscal 2013

Zacks Equity Research

Driven by strong sales along with improved margins, Ascena Retail Group Inc.’s (ASNA) adjusted earnings for the fourth quarter of fiscal 2012 surged over 29% to 31 cents per share from the year-ago quarter’s adjusted earnings of 24 cents. Quarterly earnings were also above the Zacks Consensus Estimate of 28 cents per share.

On a reported basis, including the effect of one-time items, the company’s earnings were a penny. Further, the prior-year adjusted earnings per share have been calculated after considering the impact of two-for-one stock split done in April 2012.

Quarter in Detail

As a result of strong sales from the company’s newly opened stores and e-commerce platform along with improved comparable store sales (comps), Ascena’s adjusted sales for the quarter grew approximately 8% year over year to $783.6 million. Moreover, adjusted sales figure were ahead of the Zacks Consensus Estimate of $780 million.

Comps for the reported quarter increased 3%, primarily driven by positive comps at each of the company’s brands. Comps at Justice, Lane Bryant, maurices, dressbarn and Catherines brands improved 5%, 3%, 1%, 1% and 11%, respectively.

Adjusted gross profit during the quarter increased 8.4% to $433.7 from $400.2 million reported in the prior-year period. The increased gross profit is benefited from the lower cost of goods sold as a percentage of net sales. Consequently, gross profit margin improved 20 basis points (bps) to 55.3% from the year-ago level.

Leveraged occupancy, distribution and buying expenses (OD&B) and selling, general and administrative expenses (SG&A) led to a year-over-year increase of 12.5% in adjusted operating income. The company’s adjusted operating income came at $70.4 million compared with adjusted operating income of $62.2 million in the fourth-quarter of fiscal 2011. Consequently, adjusted operating income expanded 40 bps to 9%.

Fiscal 2012 summary

Ascena’s adjusted net sales for fiscal 2012 grew 9.7% to $3,197.2 million from the previous fiscal’s net sales of $2,914 million, beating the Zacks Consensus Estimate of $3,193 million. The year-over-year improved sales were a result of 5% increase on comps and strong sales derived from the company’s newly opened stores and e-commerce platform.

As a benefit from the above-mentioned factors, along with leveraged operating expenses, Ascena’s adjusted earnings for the fiscal increased 15.5% to $1.34 per share compared with the prior-fiscal adjusted earnings of $1.16. However, adjusted earnings fell short of the Zacks Consensus Estimate by a penny.

Balance Sheet

The company ended the fiscal with cash and short-term investments of $168.9 million compared with $436.1 million in the previous fiscal year. The year-over-year decline in cash and short-term investment was a result of use of funds for Charming Shoppes acquisition. Moreover, due to the acquisition, the company raised debt of $325 million and ended the fiscal with a total debt of $326.6 million compared with no debt in fiscal 2011.

Fiscal 2013 Outlook

Assuming growth of mid-single-digit in comps, the company expects adjusted earnings to be in the range of $1.45–$1.55 per share during fiscal 2013. Moreover, the company anticipates touching the $5 billion sales mark during the fiscal. Further, Ascena intends to open 180–200 new stores while closing 100–120 stores in the fiscal, bringing the total store count to about 3,900.

Our Recommendation

We believe that the acquisition of Charming Shoppes will be accretive to the company’s top and bottom lines. Moreover, the combined sales of both the companies are expected to touch the company’s guided range.

Ascena Retail Group, Inc. operates as a specialty retailer of apparel for women and teen girls in the United States, Puerto Rico and Canada. The company operates its stores under the Dressbarn, maurices and Justice brand names. Ascena operated approximately 3,800 stores in 48 states of United States, Puerto Rico and Canada.

Ascena, which competes with Aeropostale Inc. (ARO) and Kohl’s Corporation (KSS), has a Zacks #4 Rank, which implies a short-term Sell rating. This short-term rating is supported by our long-term Underperform recommendation on the stock.

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