Retail On Sale

Includes: ASNA, DLTR, ROST
by: Ron Sommer

The economy is showing signs of stabilizing, if not improving. This has not stopped Americans from being prudent going into the December sales period. U.S. retail sales rose a paltry 0.1% in December, over the previous month. Department store sales actually declined. Stores started their holiday sales earlier in the fall and consumers took advantage of this early start on holiday shopping. Some chains did better than others.

Ascena Retail Group (NASDAQ:ASNA) is a leading national specialty retailer of apparel for women and tween girls, operating, through its wholly owned subsidiaries, the dressbarn, maurices and Justice brands. The company operates through its subsidiaries nearly 2,500 stores throughout the United States and Canada, with revenue of more than $2.8 billion.

Dressbarn stores offer casual, career and special occasion fashion apparel and accessories at value prices for women ages 35-55, operating 838 stores in 47 states. Maurices stores offer casual and career apparel and accessories at great values to the fashion-conscious woman, ages 17-34 with a 20-something attitude, and operate over 758 stores in 44 states. Justice stores offer trend-right apparel and accessories at value prices for tween girls ages 7-12 and operate 891 stores in 46 states, Puerto Rico and Canada.

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Ascena reported comparable store sales for December, increased 14% on a consolidated basis. By brand, dressbarn increased by 12%, maurices increased by 6% and Justice increased by 19%. The company raised its guidance for FY12 to the range of $2.60 to $2.70 per diluted share, compared with its previous guidance of $2.55 to $2.65. Ascena's 1Q12 net dropped by 1.0% though the company posted revenue of $768.3 million, 7.7% above the prior year sales of $713.3 million. EPS diluted was flat at $0.60 in each period. Same-store sales increased by 4.0%.

Average shares outstanding declined by 1.2 million to 76.9 million shares. Gross margins, at 42.1% are above the five-year average of 40.3% but down slightly from 42.3% in FY11. The five-year average operating margin is 8.9%. In FY11, Ascena reported operating margins of 9.8% and for the twelve months ending 10/29/11, the operating margin was 9.6%.

The company has a clean balance sheet with no debt. In also does not pay a dividend. With free cash and no debt, the company has the ability to pay a dividend. Ascena's profitability, as measured by ROIC, is impressive and exceeds our cost of capital estimate. On an enterprise value to sales basis, the shares seem to be on sale. Analysts are placing a target price in the range of $29 to $43 with a median value of $37. We think the company can surprise most investors and reach a share price as high as $60 based on our analysis of sales growth rates, ROIC and the lack of debt.

Dollar Tree (NASDAQ:DLTR) is the largest and most successful single-price- point retailer in the country, operating thousands of stores in all 48 contiguous states and nine distribution centers. The company is in the process of repurchasing $300 million of its common shares under a variable maturity accelerated share repurchase program. Dollar Tree will acquire these common shares under the $1.5 billion share repurchase program announced on October 7, 2011. As of 10/29/11, average shares outstanding were down to 119.8 million from 127.1 million in FY11. In FY07, the average shares outstanding was 154.8 million

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Consolidated net sales for the third quarter were $1.60 billion, an 11.9% increase compared with $1.43 billion reported for the quarter ended October 30, 2010 ("third quarter 2010"). Comparable store sales increased 4.8%, on top of an 8.7% increase for third-quarter 2010.

Earnings per diluted share for the third quarter were $0.87, an increase of 19.2% compared with the $0.73 earnings per diluted share reported for the quarter ended October 30, 2010. The company carries a moderate amount of debt and does not pay a dividend. Cash and short-term investments total 280.2 million. Inventories, as a percentage of sales increased to 15.7% from 13.7% in FY11 and 13.0% in FY10. This is not an encouraging development as the increase, in percentage terms, exceeds revenue growth.

Gross margins are about 35.8%, better than the five-year average margin of 34.8% and operating margins have expanded significantly to 11.5% from the five-year average of 8.8%.

Analysts are placing price targets in the range of $70 to $95.60 with a median value of $88.50. Our own analysis places value at the high end of this range, $93.75.

Our last entry is Ross Stores (NASDAQ:ROST), the nation's second-largest off-price retailer with fiscal 2010 revenue of $7.9 billion. As of January 29, 2011, the company operated 988 Ross Dress for Less® stores in 27 states and Guam and 67 dd's DISCOUNTS® locations in California, Texas, Florida, and Arizona. Ross Dress for Less offers first-quality, in-season, name brand and designer apparel, accessories, footwear and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. DD's DISCOUNTS features a more moderately priced assortment of first-quality, in-season, name brand and fashion apparel, accessories and footwear for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices as well as similar savings on a wide assortment of merchandise for the home.

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For the December holiday season, Ross Stores reported a 14% increase in sales, to $1.149 billion from $1.08 billion for the period ending January 1, 2011. Same-store sales grew 5%. The company upped its guidance for the quarter ending January 2012 to $0.82 to $0.83.

The company pays a small dividend, $0.41 per share, which increases every year. At the current share price, the yield is less than 1.0%. The company's growth has slowed in recent years. We also note that inventory to sales has increased to 14.8% in the trailing twelve months from 13.8% in FY11 and 12.1% in FY10. The balance sheet is solid with little debt. At 27.5%, the company's gross margin has risen above its five-year average gross margin of 24.4% and the operating margin, at 12.0%, is above the five-year average of 8.7%. The current ratio is weak at 1.5X but has held steady at this level over the years.

The company's profitability ratios, as shown above, are all very strong and valuations based on EV/EBITDA and EV/Sales are not out of line. There was a 2-for-1 stock split in December 2011. Price targets from the analysts range from $50 to $67 and the median is $50. Our target value is $64 based on our expectations for continued robust sales growth, strong operating margins and low debt.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.