Ascena Retail Group: Now That Is Jaw Dropping

| About: Ascena Retail (ASNA)
This article is now exclusive for PRO subscribers.

Summary

Over a year ago, I initiated coverage on Ascena Retail Group and told you the stock was to be avoided.

A jaw dropping 25% hair cut is hitting the stock.

Earnings weren't terrible but guidance was devastating, which I discuss.

Over a year ago, I initiated coverage on Ascena Retail Group (NASDAQ:ASNA) and told you the stock was to be avoided. Turns out this has been a good call, with shares completely imploding today on the back of weak guidance. It is a shame, though I had anticipated it. While the company has an impressive portfolio as a leading specialty retailer offering clothing, shoes, and accessories for plus-size women under the Lane Bryant, Cacique, Maurice's, Dressbarn, and Catherine's brands, the name has struggled. The company has a niche which certainly needs to be filled, but it is facing ever increasing competition from similar retailers, big box stores and, of course, e-commerce. The stock has been a terrible performer, despite its just reported Q4 earnings beating on sales. Let us check back in on the name.

In fiscal Q4 2016, earnings from continuing operations of Ascena were $0.07 per share. This compares to a loss from continuing operations of $1.98 per share in the same period of fiscal 2015. That is a nice turn around. Of course, there were some lingering integration and purchasing costs of the ANN acquisition. When we factor this in, adjusted earnings from continuing operations in the fourth quarter of fiscal 2014 were $0.08 per share. This actually missed analyst estimates badly, by a wide $0.08 per share, which surprised me. The point is that the group's earnings trajectory is negative. So what is going on here?

The problem is sales. Here's the thing. Absolute sales were up year over year, but this is entirely due to the ANN purchase. Net sales were $1.812 billion versus $1.170 billion last year. If we look at the sales on an adjusted basis, however, sales were $1.731 billion, showing little growth. The decline stems from comparable sales dropping 4%. Gross margin was a lone bright spot, which increased to $1.041 billion, or 57.5% of sales compared to $638 million, or 54.5% of fourth-quarter sales last year. The gross margin rate increase was primarily due to strong performance in certain brands, less promotional spending and strong inventory management.

Despite sales coming in above guidance this quarter, earnings were weak. But now the stock is completely tanking. Why? Well, the outlook is poor. the company reduced its full-year outlook, citing traffic concerns. First, it went back it guiding on a GAAP basis. It sees GAAP earnings coming in at $0.46 to $0.51 per share, with adjusted earnings coming in at $0.60 to $0.65. This is way below an $0.83 analyst consensus. Further, revenues are seen at $7 billion, well below the consensus $7.17 billion. This guidance was enough for a 25% hair cut in shares. The name should still be avoided. Don't buy.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we 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.