Third Avenue Management Comments on Ascena
Ascena Retail Group (ASNA) is a specialty retailer primarily serving the female demographic within the U.S. While history has shown that retailing can be a very tough business over the long-term, there are multiple elements of Ascena we find unusually attractive. That we had owned its predecessor, Dress Barn, nearly 10 years ago and have followed the company's development in more recent years, only increased our comfort level.
• Portfolio of niche brands. By operating a portfolio of diversified brands, Ascena is not overly reliant on the success of any one of them. Moreover, each of the brands operates separate stores within niche markets and faces very little in the way of direct competition, unlike most apparel retailers. Ascena's primary brands are Dress Barn, Lane Bryant, Catherines, Maurices and Justice and each cater to different niches of the female population based on age, geography, and size (with multiple brands targeting plus size customers, for example). While each brand largely operates autonomously, Ascena employs a unique shared services model whereby the back office functions of all the brands are centralized, thus driving efficiencies across the portfolio and allowing the brands to focus on their customers.
• Strong, aligned management. Ascena's management team owns a significant piece of the company and has a long track record of successfully growing the company by identifying, acquiring and integrating brands into its portfolio without compromising Ascena's strong financial position. While the most recent acquisition of Lane Bryant and Catherines (via the acquisition last year of their holding company Charming Shoppes) has experienced hiccups, we believe Management will ultimately prove successful with its integration strategy and that the current integration period will ultimately prove to just be a pause in the company's long-term track record of creating value for shareholders. Encouragingly, Ascena announced a new president for Lane Bryant shortly following our investment in the company. The new president has been well-received given her stellar track record running The Limited for the last six years and removes a significant question mark as the brand had been without a president since last fall.
• Attractive valuation. Shares of Ascena were purchased at a relatively undemanding 6x EBITDA,equating to roughly a 6% to 7% free cash flow yield.
From Third Avenue Management's semi-annual 2013 commentary.