Ascena Retail Group: Buy On Dips For Long-Term Capital Gains

Sep.25.12 | About: Ascena Retail (ASNA)

Ascena Retail Group Inc (NASDAQ:ASNA), the national specialty apparel retailer targeting women and girl teens, reported its fourth quarter results on Wednesday last week. Shares of the company climbed almost 3% higher over the week.

Fourth Quarter Results

Ascena Retail reported fourth quarter revenues of $939.7 million, up 29% on the year. On an adjusted basis, revenues came in at $783.6 million, up 8%. On average, analysts expected adjusted revenues of $725.8 million. Sales growth was driven by comparable sales growth of 2%, new store openings and e-commerce operations.

Income from continuing operations came in at $11.2 million, down from $28.2 million last year. Consequently, earnings per diluted share fell from $0.18 to $0.07. Including discontinued operations from Fashion Bug and Figi's, net income fell to $1.6 million, or $0.01 per diluted share.

Adjusted operating earnings rose from $28.2 million to $49.0 million. Adjusted earnings per share came in at $0.31. Earnings beat analysts consensus by three cents. The net earnings picture was distorted by the acquisition of Charming Shoppes.

Adjusted gross margins increased by 30 basis points to 55.4%, due to a strong performance at Justice and Maurices, offset partially by Dressbarn. Occupancy and distribution costs fell by 60 basis points to 16.1%, as a result of positive operating leverage. Adjusted selling, general & administrative expenses fell by 70 basis points to 26.9%.

CEO David Jaffe commented on the results:

"We are pleased to have completed a landmark year in the history of our company. In addition to executing well at each of our business and maintaining a solid pace of quarterly results, we completed yet another transformative acquisition. We are developing detailed, thoughtful plans to fully integrate Lane Bryant and Catherines, eliminating redundancy and capturing meaningful cost savings. We are confident that these moves will drive significant accretion to our future results."

Segmental Information

Ascena's most important brand, Justice, reported a 5% same store sales growth. Total revenues increased by 11% to $291.7 million.

Maurice reported a 1% same store sales growth, boosting sales growth to 10% to $201.5 million amidst new store openings.

Dressbarn reported revenues of $290.4 million, up 4% on the year. Same store sales for the unit were up by 1%.

The acquired Lane Bryant and Catherinas brands added $119.7 million and $36.4 million in quarterly revenues, respectively.

Outlook

For the fiscal year of 2013, Ascena now anticipates adjusted earnings per diluted share of $1.45-$1.55. This excludes acquisition, integration and restructuring costs related to the Charming acquisition. The earnings guidance came in slightly below analysts consensus of $1.56 per share.

The company anticipates a mid-single digit increase in comparable store sales. New store openings are expected to come in between 180-200, while the company expects to close 100-120 stores. In total, Ascena's 3,900 stores are targeted at achieving approximately $5 billion in sales.

Valuation

Ascena Retail ended its final quarter with $165 million in cash, equivalents and short-term investments. The company operates with $326 million in short and long-term debt, for a net debt position of $161 million. For the full year of 2012, Ascena generated net sales of $3.35 billion. The company net earned $162.2 million, or $1.02 per diluted share.

Currently, the market values the firm at $3.4 billion or 1.0 times 2012's annual revenues. The company trades at 21 times trailing revenues. The revenue multiple is expected to come down to 0.7 times the annual revenues for 2013. Ascena trades at 14 times 2013's expected annual earnings.

Currently, Ascena Retail does not pay a dividend.

Investment Thesis

Year to date, shares of Ascena Retail have risen almost 50%. Shares quickly rose from $15 to $22 in the first few months of the year, after the company raised its full year forecast. In May, the company announced it would acquire Charming Shoppes for $890 million. Shares fell back to $18 in the summer, but have recovered to $22 at the moment.

Over the past five years, the company has aggressively grown its business. Annual revenues more than doubled from $1.5 billion in 2009 to $3.4 billion in 2012. Net income rose from $67 million to $162 million. Earnings per diluted share doubled from $0.53 to $1.08, as the number of shares outstanding increased by roughly a quarter over the period.

Investors seem pleased with the good operating performance, and the $890 million acquisition of Charming Shoppes back in May. The acquisition gave the company an important footprint in the market for overweight women.

An investment in Ascena is for investors with a little higher risk tolerance. The company is aggressively expanding through acquisitions and its shares do not offer the safety of a dividend "cushion". On the other hand, the shares trade at 14 times forecasted earnings, not too expensive, given the firm's decent acquisition track record.

I will be a buyer on dips.

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.