Ascena Retail Shares Plunging: What Wall Street's Saying

NEW YORK (TheStreet) - Shares of Ascena Retail Group's (ASNA) hit a 52-week-low on Tuesday following the company's disappointing fourth-quarter results as well as a cautious outlook for its fiscal 2015.

The Mahwah, N.J.-based parent company of plus-sized retailer Lane Bryant and dressbarn as well as owner of tween store, Justice, among other brands in its portfolio, reported quarterly net earnings of 10 cents a share for the July-ending quarter, down from 18 cents a share a year earlier. Adjusted earnings from continuing operations were 13 cents a share compared to 34 cents a share in the year-ago quarter. Analysts had expected earnings of 37 cents a share on revenue of $1.25 billion.

Ascena's net sales for the quarter slipped 1% to $1.18 billion led by "challenging tween market conditions" at Justice and inventory-related issues at Lane Bryant, "partially offset by positive comp growth at maurices and Catherines and new store growth at maurices," the company said in a statement. For fiscal 2015, Ascena forecast full-year earnings of 90 cents to $1 a share. Earnings are based on total comp growth of "flat to modest positive" for the year vs. estimates of $1.05 a share, according to Thomson Reuters.

"We have yet to see sustained evidence of market improvement, and as a result, are maintaining a conservative outlook as we enter the Fall season," Ascena CEO David Jaffe said in the company's earnings statement. "Fiscal 2015 will see the continuation of a critical, multi-year investment to build out our omnichannel platform. We continue to create a business model that will drive sustainable long term value for our shareholders."

At last check, Ascena's stock traded down 17% to $13.75, with more than 7 million shares changing hands, more than 8 times the three-month daily trading volume of 917,000 shares.

Following the results, analysts were largely negative. Here's what a few of them had to say:

Edward Yruma, KeyBanc Capital Markets (Hold)

Justice has yet to stabilize and trends remain difficult across most of the portfolio; Ascena's infrastructure may serve it well long term, but a tepid top line remains problematic. Challenges at the Justice banner continued (EBITDA at the division fell from $32.7 million in 4Q13 to an adjusted $0.5 million in 4Q14) and Lane Bryant's turnaround efforts may have stalled. But more importantly, we found the weakening consumer response to traditional promotional activity concerning, especially given the high level of dependence retailers have placed on promotions to drive traffic. We expect issues at Justice and Lane Bryant to continue to pressure results into 2015. There were some bright spots this quarter: comps at dressbarn and Catherine's both showed improvement, and maurices posted another positive quarterly comp. The company reported 4Q14 EPS of $0.13, well below the consensus estimate of $0.18 and our estimate of $0.19, due largely to weaker top-line trends and greater than expected margin contraction. We are lowering our 2015 EPS estimate to $0.95 from $1.14, consistent with management's initial 2015 guidance range of $0.90-$1.00, to reflect ongoing sales and margin pressure. Near-term headwinds and a 17.0x P/E on our 2015 calendarized EPS vs. 15.2x P/E for the specialty retail group leave us sidelined.

Anna Andreeva, Oppenheimer (Outperform; $19 PT)

ASNA lagged YTD, and coming into fiscal '15, Justice (<40% total EBITDA) managing business for profitability with inventories down LSD and promotional cadence pulled back vs. LY, while synergies ahead of plan (raised by $5M--upside in transportation). Initial '15 guide for down EPS appears conservative ($0.18 to our estimate from higher D&A and tax rate)--gross margin upside offset by expense deleverage (IT, store openings, higher headcount for omni-channel). While getting all five brands working simultaneously is difficult, new brands (30% sales) seeing profitability inflect, company specific initiatives driving margins at legacy brands maurices & dressbarn (42% sales), and tighter inventories at Justice should help stem margin pressure. Lowering EPS estimate and PT (from $22 to $19); expectations re-set as comparisons ease post 1Q15.

New '15 EPS of $1.00 based on flattish comps and EBIT margins at 5.4% (five-year average 8.3% and pre-CHRS acquisition peak of 10.4% just three years ago). Promotional activity at LB/Justice, increased SG&A spend and occupancy deleverage biggest drags on earnings, synergies from freight and new DC (estimated $0.11) offsets. Bar is being re-set; longer-term story, e-comm growth and synergy story all still compelling.

Neely J.N. Tamminga, Piper Jaffray (Overweight; $18 PT)

We are lowering our estimates and price target on ASNA shares following the company's FQ4 earnings release in which results were in line with management's expectations (when excluding an impairment charge), yet management offered a muted outlook for FY15. We are moving our price target to $18 (versus prior $22) based on 6x EV/EBITDA (same basis)--relative to the post-market trading price of approximately $14.60. As such, we are maintaining our Overweight rating in the belief that the shares still represent an opportunity for upside. That said, we believe the next three to four months are critical as we assess the gross margin prospects for Justice (which historically represents nearly 75% of operating income dollars in the fall). According to management, FQ1 trends are tracking negative -LSD% for Justice and flat to slightly positive for all other divisions giving us confidence that ASNA's turnaround story hasn't fallen apart.

TheStreet Ratings team rates ASCENA RETAIL GROUP INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ASCENA RETAIL GROUP INC (ASNA) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and increase in net income. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • ASNA's revenue growth has slightly outpaced the industry average of 0.0%. Since the same quarter one year prior, revenues slightly increased by 0.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • ASNA's debt-to-equity ratio is very low at 0.13 and is currently below that of the industry average, implying that there has been very successful management of debt levels.
  • Net operating cash flow has increased to $68.30 million or 14.21% when compared to the same quarter last year. Despite an increase in cash flow, ASCENA RETAIL GROUP INC's cash flow growth rate is still lower than the industry average growth rate of 24.41%.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. In comparison to the other companies in the Specialty Retail industry and the overall market, ASCENA RETAIL GROUP INC's return on equity is significantly below that of the industry average and is below that of the S&P 500.
  • In its most recent trading session, ASNA has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. This company's share value has not moved any higher or lower since its value 12 months ago.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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