David Jaffe Financo Forum 2016

The Ascena Retail Group Inc., keeping costs down and inventories under control, turned profitable in its first quarter, reporting net earnings of $14 million, compared to a net loss of $18 million last year.

The reversal of fortune came despite a 5 percent comparative sales decline and tough traffic patterns in the fiscal quarter that ended Oct. 29.

However, executives cited improvement in the sales trend since after the election, including a 2 percent gain in comp sales and merchandise margins in the nine days up to Cyber Monday, and were upbeat compared to the dour report of just a quarter ago.

“Though Black Friday doesn’t give you any firm indication, I think we are well positioned for the holidays,” David Jaffe, president and chief executive officer, told WWD, right after the firm’s conference call with analysts on the quarter’s performance.

“We feel good. The weather is cooler than last year. There are two extra days between Thanksgiving and Christmas. Traffic did get better. Business got better. It had been very tough since late summer. There were good weeks and lot of really tough weeks. We can blame it on the election. We can blame it on the warm weather. But the sense now is that a lot of that is behind us and that we got a good Black Friday period under our belt. People like our product and we are not over-inventoried.”

In after market trading, Ascena’s stock rose to $6.05, up 22 cents or 3.77 percent on Nasdaq, indicating that Wall Street was OK with the results.

On a diluted share basis, earnings reached 7 cents compared to a loss of 10 cents a year ago. The results include integration and acquisition costs, some associated with non-cash purchase accounting adjustments from the acquisition of Ann Inc. completed in August 2015.

Net sales for the first quarter were $1.68 billion compared to $1.67 billion in the year-ago period, which excluded roughly $122 million of Ann sales in the stub period that preceded the Ann acquisition date. The increase in sales from the inclusion of Ann for the full quarter was offset by the impact of the 5 percent comparable-sales decline.

Jaffe said the company reacted “decisively to unfavorable selling trends in September through more aggressive, but targeted and effective promotional activity. We also reduced operating costs and planned capital expenditures that will benefit full-year earnings and free cash flow.”

In a statement, Jaffe said “challenging” market conditions presumably will remain so, and the company will continue to drive down inventory levels, execute cost controls, and build “a more flexible and responsive organization in general.” Only the Justice division experienced “a blip” in inventories which were on the high side.

In the conference call, Jaffe said performance was challenged by “ongoing traffic headwinds, increasing customer price sensitivity, warmer weather. Ultimately we were disappointed with our sales performance. Sales and margins did not come in as hoped, but earnings came in the middle of guidance range.”

He said the integration of Ann Inc. continues to go well with resulting cost reductions on track, as the rollout of Ascena’s omnichannel platform.

Ascena has reduced its capex plan, to $235 million to $260 million from $295 million to $325 million.

Comp sales are expected to continue to outpace the decline in store traffic.

Jaffe said he sees “a lot of price sensitivity. We recognize pricing has to be competitive with the big boxes out there as well as Amazon.…Our customers are really for fashion and value. She wants what she wants now. Buy-now-wear-now new fashion and great value may have been there before, but they really came into focus in a big way this fall.”

Ascena is working actively on assessing its store fleet, and sees the potential to possibly operate with fewer stores.

Developing more unique product is also on the agenda, as sales were best with differentiated products, particularly those sold at Justice and with the Cacique intimates label at Lane Bryant. Active apparel also performed well. On the other hand, sweaters and denim sales were down.

Some price reductions are under consideration at Maurices to be more competitive.

Ascena operates Ann Taylor, Loft, Justice, Dressbarn, Lane Bryant, Catherines, Maurices and Lou & Grey.

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