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Battered by increased promotional and markdown activity along with higher operating expenses, Ascena Retail Group Inc.’s (ASNA - Snapshot Report) adjusted earnings of 26 cents per share for third-quarter fiscal2013 declined 23.5% from the comparable year-ago quarter number of 34 cents. Moreover, quarterly earnings came below the Zacks Consensus Estimate of 31 cents per share.

On a reported basis, including the effect of one-time items and discontinued operations, the company’s earnings were 19 cents per share versus 31 cents in the year-ago same quarter.

Quarter in Detail

Benefiting from the acquisitions of Lane Bryant and Catherines businesses, Ascena’s net sales for the quarter grew approximately 46% year over year to $1,142.2 million. However, the figure fell short of the Zacks Consensus Estimate of $1,173.0 million.

Comparable store sales (comps) dropped 1%, as positive comps at the company’s e-Commerce business (up 37%) was more than offset by weakened comps at its stores (down 4%). Brand-wise, comps at Justice, Lane Bryant, maurices and dressbarn declined by 4%, 6%, 3% and 7%, respectively, partially offset by an 8% growth registered across its Catherines brand.

Gross profit increased 43.0% to $657.8 million from $459.9 million in the prior-year period. However, gross profit margin contracted 110 basis points (bps) to 57.6% from the year-ago level. The decline in gross margin was mainly due to increased markdowns and promotional activity, especially at dressbarn.

During the quarter, a 60.4% increase in buying, distribution and occupancy expenses (BD&O) and 51.6% rise in selling, general and administrative expenses (SG&A) led to a year-over-year decline of 22.9% in operating income of $65.8 million. Consequently, operating margin plummeted 510 bps to 5.8%. On an adjusted basis, Ascena’s operating income came at $72.7 million or 6.4% of sales.

Balance Sheet

Ascena ended the third quarter of fiscal 2013 with cash and short-term investments of $206.1 million compared with $168.9 million at the end of the fiscal 2012. Total debt at quarter-end was $155.6 million compared with $326.6 million at the end of fiscal 2012.

During the quarter, Ascena increased its revolving credit facility to $500 million of which it used $279.3 million to repay its outstanding principal balance of term loan.

Fiscal 2013 Outlook Revised

Disappointing quarterly performance compelled management to lower its earnings guidance for fiscal 2013 to $1.10–$1.15 per share from $1.20–$1.30 forecasted earlier. The company’s earnings guidance for fiscal 2013 excludes the one-time, financing and acquisition related charges toward integration, restructuring and purchase accounting of the Charming Shoppes Inc. acquisition.

Further, Ascena expects comps for the remaining period of fourth-quarter fiscal 2013 to be in the range of flat to up low-single-digits. Moreover, it projects to open net 50–60 new stores during the spring season.

Other Stocks to Consider

Currently, Ascena carries a Zacks Rank #4 (Sell). Better performing stocks among apparel/shoe retailers include American Apparel, Inc.(APP - Snapshot Report), Gap Inc.(GPS - Analyst Report) and Stein Mart Inc. , all of which have a Zacks Rank #2 (Buy).

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