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Investors in Ascena Retail Group Inc Stock Should Look Elsewhere

Ascena stock's speculative upside is no longer viable

By Lawrence Meyers, InvestorPlace Contributor

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Investors in Ascena Stock Should Look Elsewhere

Source: Brandonink2001 via Flickr (Modified)

Ascena Retail Group Inc (NASDAQ:ASNA) has been struggling for quite some time. The company has reorganized and hired new management, and investors have been hoping that it might begin to turn around. The goal of any kind of turnaround is to first get the company out of any financial difficulty.

Ascena stock has been trading right around $2 for quite some time, and it offered the possibility for substantial upside, for aggressive investors and speculators.

As often happens with situations like this, Ascena stock rose about 20% over the past few weeks in anticipation that the earnings report for the fourth quarter would be strong. After all, a lot of retail companies reported better-than-expected earnings this period.

Alas, ASNA disappointed. The quarterly loss grew from seven cents per share to $0.12 per share, although comparable store sales only fell 2% compared to 4% in the same period last year.

Let me stop right here and point out the importance of comparable store sales.

If a retail operation is able to manage 2% or 3% comparable sales growth, then that’s generally considered pretty good and leads to a good deal stability at the retailer. Anything more than that is often considered a gift, and if the company is able to hit something like 7%, such as Home Depot Inc (NYSE:HD) has recently, it’s astonishing.

However, a decline in same-store sales means that the company has either lost pricing power, is seeing reduced traffic in its stores, or both. That does not bode well for the present state of affairs.

Even worse, the declines were across the board. In the premium fashion division, Taylor saw a whopping 8% decline in comps, albeit at a slight improvement over last year’s 9% decline. LOFT saw a 1% decline in comps, also an improvement over last year’s 2% decline.

In the value fashion division, DressBarn was absolutely destroyed. Comps were down 12%, a drop from last year’s 3% decline. Maurice’s experienced a 5% decline in comps, an improvement from last year’s 8% decline.

In the plus division, Lane Bryant saw flat comps, substantial improvement from last year’s decline of 5%. Alas, Catherine’s saw a 5% decline compared to last year’s flat comps. Only the kids fashion division saw an increase, a terrific increase in comps of 7% compared to last year’s 1% decline.

ASNA is trying to cut the fat out of operations. Ascena closed 110 stores across all divisions, reducing the total number of outlets to 4,690. I think this is a good move.

It also is notable that the company is not in a terrible financial position. It has $414 million in cash and $836 million in liquidity. Ascena has 5.5 times interest coverage as far as the cash flow that it generates. So even though total debt is $1.58 billion, the company is easily meeting debt service obligations.

Bottom Line for Ascena Stock

ASNA stock is likely to be stuck in neutral, or possibly reverse, for some time to come. The company’s guidance wasn’t terribly encouraging, with comp sales projections of -3% to -5%, operating income of no more than $20 million, and a quarterly loss of between seven cents and $0.12 per share.

What this tells me is that management apparently wants to try to cut expenses and right the ship before embarking on any kind of strategic turnaround. The good news for Ascena stock is that the company is not in bad financial shape. So now management probably wants to try to improve operating efficiency and execution.

Then in phase 3, the real difficulty begins. It means somehow having a unique vision for the future of the company that allows it to transform from its current operations into something enticing and different.

Therefore, the aforementioned aggressive speculators may want to take their money elsewhere, since it seems like Ascena stock is going to be going nowhere for quite some time.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/investors-in-ascena-stock-should-look-elsewhere/.

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