Ascena Profit Up, Weak Sales Trend Lingers

Justice tween brand feels greatest pressure as sales, profits contract.

Ascena Retail Group Inc. increased third-quarter profits as expense control and a lower tax rate helped it combat lower comparable sales, particularly in the Justice tween business.

“While sales improved somewhat during the combined March-April period, the choppy sales trends continued into the fourth quarter,” David Jaffe, president and chief executive officer, told analysts on a late afternoon conference call Tuesday.

Although not directly involved in the beleaguered teen sector, Ascena felt the pressure of the youth market through its stewardship of the Justice tween chain, which had a sales decline of 2.1 percent, to $291.7 million, on a 4 percent drop in comps. “While we are pleased we maintained our top market share position,” the ceo said, “we needed a higher level of markdowns to clear inventory, resulting in a drop in gross margin and operating income rates for the quarter versus last year.”

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Justice’s operating profit shrank 31.7 percent to $14.2 million during the quarter. Ascena doesn’t break out gross margin by brand but, aided by a 3 percent reduction in cost of goods sold and margin improvement at most of its other brands, including Dress Barn, gross margin overall expanded to 58.9 percent of sales from 57.6 percent in the year-ago period.

The Brothers male tween concept was in place in 156 Justice stores at the end of the quarter, and Jaffe reported “high-single-digit increases with no decline in the girls’ business.”

“This brand will be approaching a scale in 2015 to make a meaningful contribution to overall Justice results,” he said.

In the three months ended April 26, net income improved 6.4 percent to $33.2 million, or 20 cents a diluted share, from $31.2 million, or 19 cents, in the year-ago period. Adjusted earnings per share, eliminating discontinued operations and other nonrecurring items, were 27 cents, 8 cents above analysts’ consensus estimates.

Revenues expanded 0.3 percent, to $1.15 billion from $1.14 billion, $25 million below consensus and led by 6.8 percent growth at Maurices, to $251.7 million, and 2 percent growth at Catherines, to $85.7 million.  While the Lane Bryant brand’s sales were up 0.8 percent to $269.3 million, the Dress Barn nameplate saw sales decline 4.1 percent to $246.7 million. Overall, comparable sales fell 1 percent with a 3 percent decline in same-store sales offset by a 19 percent advance in e-commerce. Like Justice, Dress Barn had a 4 percent decline in comps while other nameplates were up.

The company reaffirmed previous guidance for full-year EPS of $1 to $1.05, excluding special items.

With sales trends improved but still difficult, Jaffe said Ascena is “implementing promotional strategies and receipt-flow adjustments to ensure our inventories are conservatively positioned for the fall season,” which corresponds to the company’s first quarter.

Inventories at the end of the third quarter stood at $564.7 million, 4.9 percent above their year-ago level.