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Benefiting from improved gross margin and lower-than-anticipated expenses, Ascena Retail Group Inc.’s (ASNA - Snapshot Report) adjusted earnings from continuing operations advanced 3.8% year over year to 27 cents per share in the third quarter of fiscal 2014. Quarterly earnings also cruised ahead of the Zacks Consensus Estimate of 19 cents per share.

However, Ascena’s selling, general and administrative (SG&A) expenses and its buying, distribution and occupancy (BD&O) costs increased on a year-over-year basis, impacting earnings to some extent.

On a reported basis, including the effect of one-time items and discontinued operations, the company’s earnings were 22 cents per share, up from 20 cents in the comparable quarter last fiscal.

Quarter in Detail

Ascena’s net sales for the quarter inched up 0.3% year over year to $1,145.1 million, yet missed the Zacks Consensus Estimate of $1,174.0 million.

Sales were primarily augmented by greater comparable-store sales (comps) at the company’s Catherines, Lane Bryant and maurices brands, and store enhancements at its Justice and maurices brands. However, the effect was mostly negated by a fall in comps at the company’s Justice and dressbarn brands and slow traffic across all its brands.

Comps at Justice and dressbarn were down 4% each, while Lane Bryant, maurices and Catherines registered year-over-year comps growth of 1%, 2% and 4%, respectively.

Ascena’s company wide comps, including e-commerce comps slipped 1% year over year, as a result of a 3% dip in store comps, partly compensated by 19% growth in e-commerce comps. E-commerce comps were boosted by new Web innovations, exclusive online offers and promotions.

Further Insight

Gross profit climbed approximately 2.6% to $675.0 million from $657.8 million in the prior-year period, while as a percentage of sales, it expanded 130 basis points (bps) to 58.9% from the year-ago level. The year-over-year rise in gross profit mainly benefited from a fall in markdown operations across all its brands.

During the quarter, BD&O expenses rose 5.5% year over year to $219.6 million, while as a percentage of sales, it increased 100 bps to 19.2%. The surge in BD&O expenses was attributable to investments in designing and merchandising, costs associated with store growth and a hike in freight and fulfillment expenses.

SG&A expenses were $340.4 million, up 2.4% from the year-ago comparable quarter, while as a percentage of sales, it expanded 60 bps to 29.7%. SG&A expenses rose due to soaring marketing expenses, increased headcount and initiatives undertaken to achieve synergies.

During the quarter, Ascena’s operating income on an adjusted basis fell 6.3% year over year to $68.1 million. Moreover, operating margin contracted 50 bps to 5.9% since improvements in the top line and gross margin were more than offset by increased operating expenses.

Balance Sheet

Ascena ended the quarter with cash and investments of $216.8 million and total debt of $225.0 million. Shareholder equity at the end of the quarter was $1,713.9 million.

Fiscal 2014 Outlook

Despite healthy quarterly results, the company indicated that challenging macroeconomic trends might spill over into the next quarter. This caused the market to react negatively with shares falling 4.6% during afterhours trading session yesterday.

Ascena reiterated its earnings per share forecast for fiscal 2014. It continues to envision earnings in the range of $1.00 and $1.05. This excludes the one-time, financing and acquisition-related charges toward integration and restructuring. The Zacks Consensus Estimate for the same period is currently pegged at $1.04 per share.

Further, Ascena continues to expect fiscal 2014 comps to increase marginally. Effective tax rate is now anticipated to be 35% instead of the 36% projected earlier. The company intends to incur capital expenditure in the range of $475–$500 million, as planned earlier. Moreover, it expects to open 40–60 net new stores during fiscal 2014.

Ascena remains focused on undertaking its long-term strategic plans. Most of the brands are already operational in the company’s Ohio distribution center, and it expects all its brands to be fully operational by Fall 2014. Also, the company introduced its e-commerce fulfillment center during the reported quarter and its efforts of taking all its brands there by Spring 2015 are underway.

Other Stocks to Consider

Currently, Ascena carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Citi Trends, Inc. (CTRN - Analyst Report), American Apparel, Inc. (APP - Snapshot Report) and Foot Locker, Inc. (FL - Snapshot Report). While Citi Trends carries a Zacks Rank #1 (Strong Buy), both American Apparel and Foot Locker carry a Zacks Rank #2 (Buy) each.
 

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