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Ascena Rises on Q4 Earnings Beat; Provides FY16 Outlook

Ascena Retail Group Inc.ASNA reported better-than-expected results for the fourth quarter of fiscal 2015. The company's adjusted earnings from continuing operations came in at 6 cents per share, which surpassed the Zacks Consensus Estimate by a penny. Also, the company provided a modest outlook for fiscal 2016. Consequently, shares of this specialty apparel retailer jumped 11.8%.

However, adjusted earnings declined 53.8% from 13 cents earned in the prior-year quarter.

Ascena Retail Group Inc. - Earnings Surprise | FindTheBest

On a reported basis, the company incurred a loss of $1.98 per share as against earnings of 10 cents per share in the year-ago quarter. Earnings were battered by higher non-operating expenses associated with a goodwill and trade name impairment charge of $306 million at the company's Lane Bryant brand. Further, earnings were impacted by costs related to litigation activity (roughly $50 million) at the company's Justice brand.

Quarter in Detail

Ascena's net sales for the quarter were $1,169.8 million, down 1.1% from $1,182.4 million in the prior-year quarter but above the Zacks Consensus Estimate of $1,153.7 million. The top line grew on the back of new store growth at maurices and positive comps at Lane Bryant, maurices and Catherines brands. These benefits, however, were offset by negative comps at Justice and dressbarn.

The company's total comps, including stores as well as eCommerce, were down 2% from the prior-year quarter owing to choppy performance of its physical stores, largely offset by double-digit growth in eCommerce. Comps at the company's stores were down 4%, while eCommerce comps grew 12%.

Brand-wise, total comps at the Justice stores declined 17% while dressbarn comps were down 3%. However, the company's Lane Bryant, maurices and Catherines stores posted comps growth of 3%, 8% and 3%, respectively.

Gross profit fell 1.5% to $637.6 million while gross margin contracted 20 basis points (bps) to 54.5% from the year-ago level. The decline was due to reduced sales and transitional products issues at Justice brand coupled with assortment mix issues at dressbarn brand. This decrease, however, was mostly offset by strong gross margin growth at Lane Bryant and maurices stores.

During the quarter, buying, distribution and occupancy (BD&O) expenses rose 2.6% year over year to $211.9 million, while as a percentage of sales it increased 60 bps to 18.1%. The increase was due to elevated store occupancy expenses at maurices and dressbarn, offset by a decline in distribution expense rate.

Adjusted selling, general and administrative (SG&A) expenses were at $348.9 million, up nearly 1.7% from the year-ago comparable quarter, while as a percentage of sales it expanded 70 bps to 29.8%.

During the quarter, Ascena's adjusted operating income fell 35.1% year over year to $21.1 million. Moreover, operating margin contracted 90 bps to 1.8%.

We note that on Aug 21, Ascena successfully closed its previously announced deal to buy ANN INC. in a transaction combining cash and stock. The combination of these two companies with complementary businesses lifted Ascena to the position of the third largest specialty apparel retailer and the largest US-based retailer focused exclusively on female consumers.

Balance Sheet

Ascena ended the fourth quarter with cash and cash equivalents of $240.6 million and long-term debt of $116 million. Shareholders' equity at the end of the quarter was $1,518.1 million.

Fiscal 2016 Outlook

For fiscal 2016, the company projected earnings per share in the range of 75 cents to 80 cents. Management expects sales for fiscal 2016 to be in the range of $7.3 billion to $7.4 billion. Additionally, the company intends to incur capital expenditure in the range of $375-$400 million. This guidance includes the impact of the acquisition of ANN INC. but excludes any one-time, financing and acquisition-related, integration and restructuring charges that may be incurred during the year.

Now excluding the impact of the ANN INC. acquisition, management expects sales for fiscal 2016 to be in the range of $4.78 billion to $4.84 billion. Further, Ascena expects comps in the range of flat to up low-single digits in fiscal 2016. Additionally, the company intends to incur capital expenditure in the range of $250-$275 million.

Currently, Ascena carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the same industry include Express Inc. EXPR , Destination XL Group, Inc. DXLG and Foot Locker, Inc. FL . All three stocks carry a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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