Ascena Retail (ASNA, Financial) reported poor fourth quarter financial results earlier this year. The weakness of Ascena’s Justice brand led profit to fall 15% year over year, affected by colder winter weather across much of the U.S.
Looking at the Results
Even its peer Macy’s, which successfully tapped shoppers during the holiday season, lost sales due to store closures. Macy’s, also in the business of selling apparel and accessories for women, had to face problems due to a cold winter. Due to the slump in January, Macy’s had to shut down 244 Macy's and Bloomingdale's stores, equal to 30% of its entire store base.
However, the company posted strong e-commerce growth of 28% and slight revenue growth in quarter four.
Despite a 3% drop in same-store sales, Ascena’s top line remained stable and it reported growth of 2% in revenue, driven by new stores and its e-commerce platform. Thus gross margin increased by 4% against the previous quarter results primarily due to lower mark down on certain inventory and better performance from four of its five brands.
Bright Spots
Except the Justice brand, Ascena reported strong performance across almost all other brands. The lower customer footprint and increasing inventory resulted in 5% decline in same-store sales and 47% decline in operating income.
According to Ascena’s management, it has a base of 898 stores at present compared to 850 last year, and these new stores are giving good returns. Moreover, the company is planning to open 13 new stores in the current quarter, after opening 12 new stores in the previous quarter which is exciting news for investors.
Ascena’s successful efforts of penetrating through various channels like direct mail, online, bounce back coupons and in-store marketing are directed upon increasing sales. Going forward these moves are expected to improve Ascena’s sales and margins. Other focus areas for engaging the existing and new customers are social networking, e-mail campaigns and mobile channels. The construction of a national retail distribution center by Ascena will make its e-commerce fulfillment moves more effective and efficient. Around 7.4 million customers have already enrolled in Ascena’s loyalty program.
Peer Comparison and Conclusion
The worsening condition of fellow retailers such as Abercrombie & Fitch, with sales down 12%, could provide a boost to Ascena’s business.
Due to low diversification of Abercrombie’s business and its lessening interest in its target market — the tweens —Â it is taking big hits to its financials. Moreover, the deflection of customers away from Abercrombie is bound to benefit Ascena’s Justice in the future.
Ascena could be a good buy for the long run though it experienced some weakness in the previous quarter. This is evident from its strong initiatives to grow the business, especially e-commerce. Moreover, Ascena is cheap at a forward P/E of 13.5 and its earnings growth CAGR of 16.7% for the next five years looks impressive. Hence, investors must consider buying Ascena on its promising results.
