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Ascena Retail Group Inc. (ASNA - Snapshot Report) posted adjusted earnings for the second quarter of fiscal 2013 of 26 cents per share, above the Zacks Consensus Estimate of 24 cents per share. However, quarterly earnings fell short of the year-ago quarter’s adjusted earnings of 40 cents.

On a reported basis, including the effect of one-time items, the company’s earnings were 23 cents per share.

Quarter in Detail

Benefiting from the addition of the newly acquired Lane Bryant and Catherines businesses, Ascena’s net sales for the quarter grew approximately 44% year over year to $1,237.5 million. However, sales for the quarter slightly missed the Zacks Consensus Estimate of $1,239 million.

Comparable store sales (comps) for the reported quarter increased 2%, primarily driven by positive comps at the company’s e-Commerce business (up 27%), offset by weakened comps at its stores. By brands, comps at Justice and Catherines brands remained positive at 4% and 6%, respectively, offset by negative comps for its Lane Bryant (down 5%), maurices (down 1%) and dressbarn  (down 6%) brands.

Gross profit increased 38.7% to $662.1 million from $477.3 million reported in the prior-year period. However, gross profit margin contracted 190 basis points (bps) to 53.5% from the year-ago level. The decline in gross margin mainly resulted from increased markdowns and promotional activity, specifically at dressbarn.

During the quarter, a 53.1% increase in buying, distribution and occupancy expenses (BD&O) and 56.7% rise in selling, general and administrative expenses (SG&A) led to a year-over-year decline of 13.7% in operating income. The company’s operating income came at $68.3 million compared with $100.0 million in the second-quarter of fiscal 2012. Consequently, operating margin plummeted 610 bps to 5.5%.

Balance Sheet

Ascena ended the second quarter of fiscal 2013 with cash and short-term investments of $325.7 million compared with $168.9 million at the end of the previous fiscal year. Total debt at quarter-end was $277.4 million compared with a total debt of $326.6 million at the end of fiscal 2012. The second quarter of fiscal 2013 marked advance payments on the company’s outstanding principal balance of term loan to the tune of about $20 million.

Fiscal 2013 Outlook Reaffirmed

Assuming nil to 3% growth in comps at stores as well as 25% growth in e-Commerce comps during the spring season, Ascena retained its fiscal 2013 adjusted earnings forecast of $1.20–$1.30 per share. The company’s earnings guidance for fiscal 2013 excludes the one-time, financing and acquisition related charges towards integration, restructuring and purchase accounting of the Charming Shoppes Inc. acquisition.

Moreover, this Zacks Rank #5 (Strong Sell) company intends to open 100–120 new stores, while it plans close down 40–60 stores during the spring season.

Stocks performing well among the apparel/shoe retailers include Express Inc. (EXPR - Snapshot Report), which has a Zacks Rank #1 (Strong Buy), Foot Locker Inc. (FL - Snapshot Report) and Urban Outfitters Inc. (URBN - Analyst Report), both of which have a Zacks Rank #2 (Buy).

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