Ascena Retail Group: This Is What Catastrophe Looks Like

| About: Ascena Retail (ASNA)
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Summary

Just one month ago, I reiterated my call to avoid this name.

News is out today of updated guidance based on holiday sales, halting shares, which I discuss.

I cover recent earnings trends and weigh in on what has happened.

Over a year ago, I initiated coverage on Ascena Retail Group (NASDAQ:ASNA) and told you the stock was to be avoided. Then, about a month ago when the stock was spiking, I chimed in once again and told you that you should still not be in the name, even if it looked like there was value. Turns out this has been a good call, with shares completely imploding today on the back of weak updated guidance. It is a shame as I never root against a company or stock even if my call is negative. 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 is facing ever increasing competition from similar retailers, big box stores and, of course, e-commerce. The stock has been a terrible performer. And it is only going to get worse as shares were halted to prevent catastrophe.

But is there any preventing this major selloff? Well to address this question we must understand what happened. It all comes down to two or three key data points which management knows will punish the stock. First, many companies like to update guidance based on expected holiday sales. Generally, this happens when the news is positive, but occasionally a negative situation arises. For Ascena, it was the latter, with comparable sales down 3.1% for the holiday period, and down 4.4% for the key months of November and December. I have said this many times, comparable sales are one of the most critical metrics for any retail company. AS a results of the sales decline, the company now believes annual earnings will be a paltry $0.37-$0.42, compared to $0.60 to $0.65. That is a death blow. Speaking on the situation, CEO David Jaffe stated:

"Outside of discrete peaks during the holiday season, we experienced stronger than expected store traffic headwinds. As a result, we were forced into a more highly promotional stance in order to move through inventory in the face of softer overall consumer demand."

Say what you will, but this continues a strong of weakness. Now in fairness the company's fiscal Q1 2017 earnings were slightly better than I had expected, with income from continuing operations of Ascena hitting $0.07 per share. This compares to a loss from continuing operations of $0.10 per share in the same period of fiscal 2016. That is a nice turn around. Of course this gave the stock life in the late fall. 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 first quarter of fiscal 2017 were $0.18 per share. It is worth noting that this actually missed analyst estimates by $0.02 per share, which surprised me given the stock action. But the key has been sales.

Here's the thing. Absolute sales were up year-over-year, but this is entirely due to the ANN purchase. Net sales were $1.678 billion versus $1.672 billion last year. Sales account for an additional $122 million in sales from a long period of owning ANN, as the deal closed last year mid Q1 2016. Despite the increase in sales, they still missed estimates by $40 million. The increase in sales was hit by a strong comparable sales decline of 5%. Let me repeat, comparable sales were down. They were down for the holidays. This is enough to bring the stock sub $5.

While this news is dire, what still seems positive is longer-term, the company took strong action to respond to unfavorable selling trends in the fall via more aggressive, but targeted and effective promotional activity. Unfortunately this activity had to continue during the holiday period to keep merchandise moving. One positive is cost controls, and this is something the company can build on. In the last few quarters the company also reduced operating costs and planned capital expenditures that will benefit full year earnings and free cash flow. All that said, I am rooting for the name, but would avoid this catastrophe, even as a trade.

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.