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Ascena Q2 Earnings Beat Ests, Down Y/Y

Zacks Equity Research

Battered by soft performance of Justice brand and higher operating expenses, Ascena Retail Group Inc.’s (ASNA) adjusted earnings of 23 cents per share from continuing operations for the second quarter of fiscal 2014 registered a year-over-year decline of 11.5%. However, quarterly earnings came ahead of the Zacks Consensus Estimate of 20 cents per share.

On a reported basis, including the effect of one-time items and discontinued operations, the company’s earnings were 19 cents per share, against 23 cents in the comparable quarter last fiscal.

Quarter in Detail

Benefiting from acquisitions of the Lane Bryant and Catherines businesses as well as robust growth in e-Commerce sales, Ascena’s net sales for the quarter grew approximately 2.3% year over year to $1,266.5 million. Moreover, sales were almost in line with the Zacks Consensus Estimate of $1,267.0 million. E-commerce sales rose 28.0% year over year to 149.0 million in the quarter.

Comparable-store sales (comps) including e-Commerce comps, remained flat primarily due to soft performance at the company’s Justice, maurices and dressbarn brands. However, excluding e-Commerce sales on a comparable basis, the company’s comps declined 3%.

Brand-wise, comps at Justice and maurices were down 5% and 1%, respectively while comps at dressbarn were flat. However, the newly acquired brands, Lane Bryant and Catherines, continued with their robust performance and registered year-over-year comps growth of 8% and 10%, respectively.

Gross profit increased approximately 4.0% to $688.3 million from $662.1 million in the prior-year period while as a percentage of sales, it expanded 80 basis points (bps) to 54.3% from the year-ago level. The year-over-year rise in gross profit mainly benefited from the timing of markdown as well as rate improvement at most brands. These were partially offset by inventory-related markdown at Justice brand.

During the quarter, buying, distribution and occupancy (BD&O) expenses rose 17.1% year over year to $232.0 million, while as a percentage of sales it increased 230 bps to 18.3%. The year-over-year rise in BD&O expenses was mainly due to increased investments related to store growth and personnel recruitment.

Selling, general and administrative (SG&A) expenses were $354.6 million, up 1.7% from the year-ago comparable quarter while as a percentage of sales, it contracted 20 bps to 28.0%. The rise in SG&A expenses in dollar terms was due to investment in e-Commerce capabilities and rise in employee headcount.

During the quarter, Ascena’s operating income on an adjusted basis fell 21.4% year over year to $59.0 million. Moreover, operating margin contracted 140 bps to 4.7% since improvement in the top line and gross margin was more than offset by increased operating expenses and depreciation as a percentage of sales.

Balance Sheet

Ascena ended the quarter with cash and investments of $173.7 million and long-term debt of $131.0 million. Shareholder equity at the end of quarter was $1,671.6 million.

Fiscal 2014 Outlook

Though the company posted better-than-expected second-quarter results, it has lowered earnings expectations for fiscal 2014 after witnessing lower-than-anticipated year-to-date performance across all brands. Ascena now projects fiscal earnings per share to range between $1.00 and $1.05, down from its previous guidance of $1.10 to $1.15. This excludes the one-time, financing and acquisition-related charges toward integration and restructuring.

However, the revised earnings guidance is below the Zacks Consensus Estimate of $1.14 per share. This conservative fiscal outlook came as a surprise for investors, and led the stock price to fall 6.2% in the after-hour trading session.

Further, Ascena continues to expect comps for fiscal 2014 to increase in the low single digit range. Effective tax rate is now anticipated to be 36% instead of 38.5% projected earlier. Moreover, the company now intends to incur capital expenditure in the range of $475–$500 million, up from its guidance of $425–$450 million. Moreover, it projects to open 50–70 net new stores during fiscal 2014.

Other Stocks to Consider

Currently, Ascena carries a Zacks Rank #3 (Hold). Some better-performing stocks among apparel retailers include Christopher & Banks Corp. (CBK), Hanesbrands Inc. (HBI) and Michael Kors Holdings Ltd. (KORS). All of these have a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on HBI
Read the Full Research Report on KORS
Read the Full Research Report on CBK
Read the Full Research Report on ASNA

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