Ascena Retail Group Is A Buy Around $38

| About: Ascena Retail (ASNA)

With gas prices nearing $4 across many parts of the nation, Americans continue to look for ways to cut spending. A popular option could be fewer trips to the mall, or to buy cheaper quality clothes. Both of these possibilities could impact Ascena Retail Group (NASDAQ:ASNA) both positively and negatively.

One age group that does not typical cut spending is the teenage girls group. Justice, one of three retail brands owned by Ascena, saw strength in its sales as it is the number one leader in the 7-14 age group for girls.

Second-quarter earnings per share for Ascena increased 56% to $0.81, from $0.52 in the second quarter in fiscal 2011. Net sales rose 15% to $862 million. On the net sales, Ascena saw net income increase by 50% to $63.7 million. Two of the biggest contributing factors to increases in net sales and revenue were e-commerce sales, gaining 61% to $52 million, and a rise in same-store sales (open one year or more) of 8%.

Justice sells clothing and jewelry to girls through its 917 stores. The stores, predominantly in shopping malls, are in 46 states, Canada, and Puerto Rico. Ascena has put 1100 as the saturation point for Justice stores in the United States. The company will open 65 Justice stores during fiscal 2012. Justice had ssales of $407.2 million in the second quarter, and saw a same stores sales gain of 12%.

Maurices caters to women aged 17-34, especially focusing on women in their 20s. The brand has 803 stores in 44 states. Maurices are in cities with populations typically in the 25,000 to 150,000 range. Sixty new stores are targeted for fiscal 2012 for the Maurices brand. Maurices is split more evenly between malls (35%) and strip malls (47%). Ascena has targeted 1100 total Maurices stores in the United States. Maurices saw same store sales rise 3% in the second quarter. Sales for the retail brand were $224.6 million for the second quarter.

Dress Barn operates 825 stores in 47 states. The brand that started the company aims to capture women looking for value priced clothing targeting ages 35-55 years old. Dress Barn stores are typically a part of strip malls (72%) or large outlet malls (22%). Twenty-two new stores are targeted for fiscal 2012 as part of the company's goal to have 1000 Dress Barn stores open in the United States. Dress Barn had same store sales growth of 8% for the second quarter. The brand saw sales rise to $230.2 million during the second quarter.

Ascena plans on opening a total of 145 stores during fiscal 2012 and close around 55, placing an ending number around 2600 for the company's three brands. The strength of the three brands saw same store sales growth of 8% on average for stores open more than a year. Ascena raised 2012 guidance to a range of $2.75 to $2.80 per share. Previous company guidance was in the $2.60 to $2.70 range. Ascena also has $89.9 million left on a share repurchase program that at today's price could take out 21 million shares. With 79.2 million shares currently traded, a buyback of this size could dramatically raise the share price. During the first two quarters of 2012, Ascena bought $37.2 million worth of its own shares.

On Monday's Mad Money program, Jim Cramer called Ascena's three clothing brands "value concepts," and he is absolutely right. Cramer pointed out how investors were surprised by the earnings beat, but also by the fact that the company once known by Dress Barn changed to a lesser-known brand name. (The company changed its name after acquiring both Justice and Maurice's.)

Back in November, I took a look at stores from a local mall to see who was worth buying before the holiday season. In the article, which was published November 30th, I recommended buying shares of Ascena at a price of $25.39. Shares are up 63% since that recommendation. I pointed out that the 2009 acquisition of Justice spread Ascena across three unique age demographics. At the time, the company had $300 million in cash and zero long-term debt on its books. I called for another acquisition, and still believe that is possible.

I would have loved to acquired shares back in November for $25 a share, but unfortunately I did not follow my own recommendation. I am looking for shares to drop down below $40 before thinking about purchasing. Shares were up Tuesday on a day when the market was mostly down, because of the earnings beat and a Cramer recommendation. Shares traded up 10% after the earnings beat and are now close to a fifty-two week high. The momentum will cool off in a week or two, and that will represent the perfect opportunity for a company that could consistently beat earnings in the future. Buying target price for me is $38, with a target price of $60 by the end of 2013.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ASNA over the next 72 hours.