Ascena Retail Group (NASDAQ:ASNA) operates, through its subsidiaries, several retail stores offering women's apparel. The primary markets for the company are the U.S. and Canada. The company has been significantly affected by the recent economic downturn, resulting in a decline in consumers' disposable income. Over the past few quarters the company has seen a moderate increase in demand, primarily due to the acquisition of Charming Shoppes Inc., but at the same time has experienced a significant decline in its operating margins.
As can be seen from the graphs above, consumer disposable income dropped significantly in early 2012 for both countries. However, disposable income in the U.S. and Canada has increased slightly ever since the dip in early 2012.
Another factor contributing to a fall in demand for the company's goods over the last few quarters has been a gradual decline in consumer confidence. Coupled with a slow growth in disposable income, the result was devastating for the retail industry as a whole, which was also felt by ASNA.
As can be seen from the graphs above, retail industry demand in both countries has been very volatile. In such circumstances, discretionary items such as apparel generally face sluggish demand. This is why demand for ASNA's products has been slow.
The future of the retail industry in both the countries is expected to remain bleak in the short term. Despite low inflation and low interest rates, consumer spending has not seen substantial growth over the past few quarters. Also adding to the mix is the high unemployment rate in both economies. However, in the long run I expect the retail market to improve as consumers' disposable incomes improve and consumer confidence in both countries increases.
The primary reason for the decline in the company's margin in the past few quarters has been due to the cost incurred in relation to its acquisition of Charming Shoppes Inc. The acquisition added two more brands to the company's portfolio and helped it enhance its revenues significantly. The newly acquired business contributed a significant portion of the total net sales of the company and is likely to see good growth in the future. Once the acquisition costs have been completely absorbed and the company's ratios restored to their normal levels, the company might be able to earn good profits. However, the economic outlook of the U.S. and Canada is expected to remain sluggish over the short term. This would diminish the company's ability to earn profits.
Compared to the industry, ASNA has been able to achieve a significantly greater growth in revenues than the industry and has a relatively lower debt level, but its profitability has deteriorated as compared to the industry. The company also seems to be overvalued compared to the industry, based on multiples. The company has also been able to increase its operating cash flows over the improving liquidity position of the company. ASNA has also seen a rapid growth in its net income, greater than its industry peers, and with the addition of new brands and the divestiture of low-performing brands, the company is likely to perform better than the market in regards to net income growth.
I believe the company has good future prospects, but the slow economic growth is a huge hurdle for the company. ASNA has started to operate in other markets, such as Kuwait, but its presence in those markets is quite insignificant. However an expansion into other markets, where economic prospects are good, is a viable opportunity for the company. The general market expectation with regards to the coming earnings of the company is in the range of $0.30 per share. I expect the company's reported margins to improve slightly in this earnings call and consequently expect the company to beat the market estimates. This is why I will rate this company a long-term buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.