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Bear of the Day: Ascena Retail (ASNA)

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Brick and mortar retail apparel companies have been under pressure over the past several quarters due to increased competition from online retailers. Customers are utilizing online retailers more frequently, which has put an immense strain on the traditional store’s same store sales, comparable sales, and margins.  These are some of the reasons why Ascena Retail (asna) is the Zacks Bear of the Day.  

This Zacks Rank #5 (Strong Sell) company operates as a specialty retailer of apparel, shoes, and accessories for women and tween girls in the United States, Canada, and Puerto Rico. The company operates through six segments: ANN, Justice, Lane Bryant, Maurices, Dressbarn, and Catherines. It creates, designs, and develops a range of merchandise, including apparel, accessories, footwear, and intimates; lifestyle products comprising cosmetics, bedroom furnishings, and electronics; and wear-to-work, casual sportswear, footwear, and social occasion apparel. The company also offers casual clothing, career wear, dressy apparel, and active wear, as well as special occasion and classic apparel.

Recent Earnings Data

Ascena reported Q4 16 results in the middle of September where they significantly missed the Zacks Consensus Earnings estimate ($0.08 vs. expected $0.17), but they did beat the Zacks Consensus Revenue estimate.  The most glaring issue was same store sales, which fell by -5.0% overall.  On the year over year basis comparable sales declined in almost every segment; ANN fell by -6.0%, Justice dropped -4%, Maurices plummeted down -9%, Dressbarn fell by -7%, and Catherines was down -5%.  On the positive, Lane Bryant improved +1%.  

The biggest drags on Ascena were Maurices, and Dressbarn, both of whom saw large comparable sales declines combined with contacting EBITDA margins (more than 200 basis points).  To make matters even more difficult, Dressbarn’s CEO recently left the company.  

Management’s Take

According to David Jaffe, President and CEO, “Fiscal 2016 was a challenging year for ascena, characterized by a highly competitive selling environment and significant store traffic headwinds. While we are seeing good customer demand during peak periods, off-peak demand has been inconsistent, and fourth quarter financial performance fell well below our expectations."

Price and Consensus Graph

As you can see in the price and earnings consensus graph below, both Ascena’s stock price and future earnings expectations have been declining for the past two years.  

Declining Estimates

Over the past 30 days, estimates for Q1 17, Q2 17, FY 17 and FY 18 have all seen significant declines; Q1 17 fell from $0.39 to $0.23, Q2 17 dropped from $0.05 to $0.01, FY 17 declined from $0.86 to $0.62, and FY 18 was reduced from $1.20 to $0.80.  

What Management is Doing to Fix Their Issues

In the beginning of October 2016, management announced a major enterprise transformation that includes a company reorganization, and a new Change for Growth program.  The company is expecting the Change for Growth program to bring in between $100 million and $150 million in savings by optimizing their operating model.  The reorganization has reduced their eight brands into four operating segments which is designed to streamline their management structure.  The announced initiatives are expected to deliver these savings by FY 19.

Bottom Line

While this is a great move by the company, it will take a bit of time to come to fruition.  So if you are inclined to invest in the Retail Apparel/Shoe segment, you would be best served by looking into Urban Outfitters (urbn), American Eagle (aeo), and or Tillys Inc. (Tlys), all of which carry a Zacks Rank #1.

More Stocks to Sell. Now.

Beyond our Bear Stock of the Day, today's list of 220 Zacks Rank #5 Strong Sells demand even more urgent attention. If any are lurking in your portfolio or Watch List, they should be removed immediately. Many appear to be sound investments but, since 1988, such stocks have actually performed more than 11X worse than the S&P 500.

See today's Zacks "Strong Sells" absolutely free >>.


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