Ascena Q4 Earnings Beat Estimates

Shares of Ascena Retail Group Inc. (ASNA) surprisingly rose approximately 16.5% in the after hour trading session to $20.17, after the company posted better-than-expected financial results for fourth-quarter fiscal 2013. Ascena’s adjusted earnings of 34 cents per share from its continuing operations increased 17.2% year over year and beat the Zacks Consensus Estimate of 21 cents as well.

The year-over-year rise in quarterly adjusted earnings of this apparel retailer for women and teenage girls came on the back of increased sales, reduced markdown and lower effective tax rate. On a reported basis, including the effect of one-time items and discontinued operations, the company’s earnings were 18 cents per share versus a penny in the year-ago same quarter.

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 27.5% year over year to $1,197.7 million. Moreover, the figure came ahead of the Zacks Consensus Estimate of $1,161.0 million. E-commerce sales rose 81.0% year over year to 103.0 million in the quarter.

Comparable-store sales (comps) including e-Commerce comps for the quarter improved 4% primarily driven by robust performance of the Lane Bryant and Catherines brands as well as a 30% rise in e-Commerce comps. Brand-wise, comps at Justice, Lane Bryant, and Catherines increased 1%, 6% and 12%, respectively, partially offset by a 2% fall registered across its dressbarn brand. Further, excluding e-Commerce sales on a comparable basis, the company’s comps improved 2%.

On an adjusted basis, gross profit increased 30.4% to $671.6 million from $515.1 million in the prior-year period. Moreover, gross profit margin expanded 130 basis points (bps) to 56.1% from the year-ago level. The increase in gross margin was mainly due to lower markdowns, especially at dressbarn and Catherines brands.

During the quarter, buying, distribution and occupancy (BD&O) expenses rose 33.5% year over year to $209.4 million, while as a percentage of sales it increased 80 bps to 17.5%. The year-over-year rise in BD&O expenses as a percentage of sales was mainly due to the acquisition of Lane Bryant and Catherines brands, which have higher BD&O expenses as a percentage of sales in comparison to Ascena’s heritage brands.

Selling, general and administrative (SG&A) expenses were $335.9 million, up 31.1% from the year-ago comparable quarter while as a percentage of sales, it increased 70 bps to 28.0%. The rise in SG&A expenses as a percentage of sales was due to duplicative overhead structure related to the purchase of Charming Shoppes, Inc.

During the quarter, Ascena’s operating income on an adjusted basis rose 24.8% year over year to $87.0 million on an adjusted basis. However, operating margin contracted 10 bps to 7.3% as the benefit of higher gross margin was more than offset by increased operating expenses as a percentage of sales.

Fiscal 2013 in Brief

For fiscal 2013, Ascena’s net sales rose 40.6% to $4,714.9 million and beat the Zacks Consensus Estimate of $4,677.0 million primarily due to inclusion of Lane Bryant and Catherines businesses and robust e-Commerce sales. However, due to higher operating expenses, the company’s earnings declined 6.0% to $1.25 per share from $1.33 earned in fiscal 2012. However, earnings per share fared better than the Zacks Consensus Estimate of $1.13 per share.

Balance Sheet

Ascena ended the fiscal 2013 with cash and investments of $189.4 million compared with $168.9 million at the end of the fiscal 2012. Total debt at fiscal-end was $135.6 million compared with $326.6 million at the end of fiscal 2012.

Fiscal 2014 Outlook

Ascena expects comps for fiscal 2014 to increase in the low single-digit range and effective tax rate to be 39%. Further, the company intends to incur capital expenditure in the range of $425–$450 million. Moreover, it projects to open 180–190 new stores during the fiscal 2014 while shuttering 115–125 stores.

Based on above-mentioned assumptions and citing ongoing macroeconomic headwinds, Ascena anticipates adjusted earnings to come in the range of $1.25 to $1.30 per share in fiscal 2014. The company’s earnings guidance for fiscal 2014 excludes the one-time, financing and acquisition related charges toward integration and restructuring.

Other Stocks to Consider

Currently, Ascena carries a Zacks Rank #4 (Sell). Better-performing stocks among apparel/shoe retailers include Citi Trends, Inc. (CTRN), ANN INC. (ANN) and DSW Inc. (DSW). While Citi Trends carries a Zacks Rank #1 (Strong Buy), both ANN and DSW have a Zacks Rank #2 (Buy).

Read the Full Research Report on DSWRead the Full Research Report on CTRNRead the Full Research Report on ANNRead the Full Research Report on ASNAZacks Investment Research