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Ascena Shares Up on Q1 Earnings Beat

Zacks Equity Research

Shares of Ascena Retail Group Inc. (ASNA) rose 4.2% to $21.76 in the after-hour trading session, following the company’s higher-than-expected financial results for first-quarter fiscal 2014. Ascena’s adjusted earnings of 36 cents per share beat the Zacks Consensus Estimate of 32 cents.

However, the company’s quarterly adjusted earnings declined 7.7% from the comparable prior-year quarter figure of 39 cents. The year-over-year fall in earnings was primarily due to increased depreciation charges resulting from growth and infrastructure investments.

On a reported basis, including the effect of one-time items and discontinued operations, the company’s earnings were 32 cents per share, against 27 cents in the comparable quarter last year.

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 5.2% year over year to $1,196.6 million. Moreover, sales came ahead of the Zacks Consensus Estimate of $1,184.0 million. E-commerce sales rose 27.0% year over year to 106.0 million in the quarter.

Comparable-store sales (comps) including e-Commerce comps improved 4%, primarily driven by robust performance at the company’s every brand as well as a 27% rise in e-Commerce comps. Brand-wise, comps at Catherines, Lane Bryant, Justice, maurices and dressbarn increased 11%, 7%, 3%, 2% and 1%, respectively. Further, excluding e-Commerce sales on a comparable basis, the company’s comps improved 2%.

On an adjusted basis, gross profit increased approximately 5.0% to $710.0 million from $676.5 million in the prior-year period. However, gross profit margin contracted 20 basis points (bps) to 59.3% from the year-ago level. The marginal decline in gross margin was mainly due to higher promotional activity.

During the quarter, buying, distribution and occupancy (BD&O) expenses rose 6.0% year over year to $219.3 million, while as a percentage of sales it increased 10 bps to 18.3%. Selling, general and administrative (SG&A) expenses were $353.2 million, up 6.1% from the year-ago comparable quarter while as a percentage of sales, it increased 20 bps to 29.5%. 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., marketing, and investments in e-Commerce capabilities.

During the quarter, Ascena’s operating income on an adjusted basis fell 5.4% year over year to $93.8 million on an adjusted basis. Moreover, operating margin contracted 90 bps to 7.3% as the benefit of strong top-line performance was more than offset by lower gross margin and increased operating expenses and depreciation as a percentage of sales.

Balance Sheet

Ascena ended the quarter with cash and investments of $202.0 million and long-term debt of $188.0 million. Shareholder equity at the end of quarter was $3,018.6 million.

Fiscal 2014 Outlook

The company has reaffirmed its fiscal 2014 earnings guidance range of $1.25–$1.30 per share. This excludes the one-time, financing and acquisition related charges toward integration and restructuring. Currently, the Zacks Consensus Estimate for the fiscal is $1.31 per share, which is above the company’s guidance range.

Further, Ascena continues to expect comps for fiscal 2014 to increase in low single digit range and effective tax rate to be 38.5%. The company intends to incur capital expenditure in the range of $425–$450 million. Moreover, it projects to open 180–190 stores during fiscal 2014 while shuttering 130–140 stores.

Other Stocks to Consider

Currently, Ascena carries a Zacks Rank #3 (Hold). Better-performing stocks among apparel/shoe retailers include Finish Line Inc. (FINL), Fossil Group, Inc. (FOSL) and Michael Kors Holdings Ltd. (KORS). All these stocks hold a Zacks Rank #2 (Buy).

Read the Full Research Report on FOSL
Read the Full Research Report on KORS
Read the Full Research Report on FINL
Read the Full Research Report on ASNA

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