A Clothing Retailer With Consistent Returns

by Lawrence Meyers | June 6, 2012 9:39 am

“I don’t do retail.” This is my father’s mantra when it comes to stock investing. The one exception was a company known as dressbarn, which he held for many years and with which he enjoyed solid returns. It’s hard to argue with Dad’s wisdom[1] given the dangerously fickle nature of retail [2]clothing[3] consumers[4]. You do not want to get in the middle of Christopher & Banks (NYSE:CBK[5]) or Chico’s (NYSE:CHS[6]). What you want is a solid niche player such as Jos. A Bank Clothiers (NASDAQ:JOSB[7]).

That’s why I’m always on the lookout for a stock that bucks the trends, and I’ve found one in Ascena Retail Group (NASDAQ:ASNA[8]), which I’d never heard of before.

Imagine my surprise when I discovered that it’s the parent company of dressbarn, among other chains. The company is a specialty retailer of apparel for women and tween girls in the U.S., Puerto Rico and Canada and also operates under the maurices and Justice brand names. Dressbarn and maurices stores offer casual and career fashion apparel and accessories; Justice stores provide apparel, accessories, footwear and intimates, as well as lifestyle products, such as bedroom furnishings and electronics, primarily for tween girls.

One of the reasons I believe Ascena has maintained a consistent record is because it relies on clothing that isn’t as susceptible to fashion swings[9] and caters to a demographic more concerned about price than trends.

This strategy is reflected in the company’s recent earnings report, which showed the all-important same-store sales up 5% across the entire chain, with Justice leading the way with an 8% increase. Net earnings rose 10% on an 8% sales jump.

Ascena has also recently made an aggressive strategic move, purchasing Charming Shoppes (NASDAQ:CHRS[10]), the parent company of Lane Bryant, Fashion Bug, and Catherines Plus Sizes. The buy adds some 1,800 stores to Ascena’s already large base and is a shot across the bow of all women’s retailers. Ascena’s huge cash hoard tops $600 million, which will help fund the acquisition. Charming Shoppes pushed out $60 million in FCF in 2011, though sales have been struggling. Ascena likely believes it has the knowledge to turn that ship around.

Ascena has guided FY12 earnings to $1.40 per share, a 20% increase, with analysts pegging 2013 earnings at $1.59, or 14%. Free cash flow is more than $200 million for the TTM, giving the company a solid base from which to maneuver.

Prior to the takeover of Charming, it carried no debt. Thus, I see a company growing at 14% to 16% annually trading for 13x. I think this is a good bet for those looking to get into a solid retail play.

Lawrence Meyers does not own shares in any company mentioned.

  1. hard to argue with Dad’s wisdom: https://investorplace.com/2011/12/the-danger-of-investing-in-retail-stocks/
  2. dangerously fickle nature of retail : https://investorplace.com/2012/05/clothing-stocks-its-all-about-timing-tjx-rost-jcp-smrt/
  3. clothing: https://investorplace.com/2012/05/clothing-stocks-its-all-about-timing-tjx-rost-jcp-smrt/
  4. consumers: https://investorplace.com/2012/05/clothing-stocks-its-all-about-timing-tjx-rost-jcp-smrt/
  5. CBK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBK
  6. CHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHS
  7. JOSB: http://studio-5.financialcontent.com/investplace/quote?Symbol=JOSB
  8. ASNA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ASNA
  9. clothing that isn’t as susceptible to fashion swings: https://investorplace.com/2012/05/kids-clothes-the-sweet-spot-in-retailing/
  10. CHRS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHRS

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