Ascena Retail Group Inc. took a hit on Wall Street Monday following last week’s fiscal 2015 downward earnings revision based on weakness at Dressbarn and aggressive markdowns at Justice to prepare the selling floors for new back-to-school merchandise and pricing.
This story first appeared in the July 14, 2015 issue of WWD. Subscribe Today.
The stock plummeted 12.8 percent, or $2.09, to $14.28 on the Nasdaq Monday.
Some investors expressed concerns about strategic pricing and marketing changes at Justice beginning July 19 and that Ascena’s growing portfolio of retail brands poses new challenges to a management with a full plate of concerns at the Justice and Dressbarn divisions. For the third fiscal quarter ended April 25, earnings from continuing operations were 15 cents per diluted share, down from 22 cents a year ago, and comparable sales were down 1 percent.
Still, some other analysts expressed confidence in Ascena’s future and its mix of specialty chains filling different niches. Ascena in May agreed to acquire Ann Inc. in a deal valued at $2.15 billion and representing a step up in prices and style for the company. With the addition of Ann, Ascena will exceed $7.3 billion in revenues.
Last Friday, after the market closed, Ascena lowered its earnings outlook for the fiscal year ending July 25 to between 57 cents and 60 cents from a prior estimate of between 70 cents and 75 cents. Ascena also plans to take a noncash, pretax goodwill and asset impairment charge in the fourth quarter in the range of $275 million to $325 million in connection with Lane Bryant, as well as a pretax charge of $50 million for future settlement of the previously disclosed Justice class-action litigation.
“We remain very excited about Justice and wanted to make sure we are completely clean going into the new strategy,” David Jaffe, president and chief executive officer of Ascena, told WWD on Monday. “Dressbarn was a disappointment last spring though we see opportunities to improve the business going forward. If you put those two factors together, that’s what led to our forecasting earnings downward.”
The impairment charge at Lane Bryant is considered an accounting issue and not a reflection of any change in operating performance at the plus-size chain. Lane Bryant is aggressively trying to increase volume through designer collaborations, updated advertising and pumping up certain categories.
The Justice lawsuit, filed in February in a federal district court in Philadelphia, alleged that Justice advertised discounts, although the prices were supposedly never discounted.
The Telsey Advisory Group characterized Ascena’s update on Friday as “disappointing” and reiterated its view that the Ann acquisition, posed “increased execution risk for the company at a time when the Street was becoming more comfortable with management’s strategy to drive greater profitability and cash flow generation over the next several years.”
Telsey also said that the slowdown in trends at Dressbarn is a concern, and the reduced profitability outlook for the quarter at Justice “highlights the depth and challenges to turning the business around while retraining the customer to respond to a lower promotional environment. Management has a lot of “balls in the air” at the moment, and we, therefore, take a more cautious view on the shares,” Telsey said in its report.
Cowen, in a report, said it “eagerly awaits the back-to-school floorset at Justice… but do[es] caution traffic recovery may be slow given misexecution on product and pricing for the last two years.” At a time when malls continue to get more and more promotional in the teen/tween sector, Cowen questioned the strategy at Justice to pull back on promotions and shift to everyday low pricing. “As a silver lining, we do acknowledge the poor customer response was related to merchandise from the old regime, carryover inventory is expected to be down significantly by July 19, and Justice is moving in the right direction of recovery with new brand president Brian Lynch. We eagerly await the arrival of the new back-to-school product and measuring the subsequent traffic response by customers.”
“While we believe Justice could continue to pressure in the near term as it shifts its strategy, we remain bullish on the longer-term Ascena outlook,” FBR Capital Markets & Co. said in its report which cited $150 million in expected synergies attained through the Ann acquisition, as well as savings from initiatives at Ann alone, and a in direct sourcing, omni-channel, distribution and transportation functions at Ascena.
“We see potential for $1 billion in earnings before interest, taxes, depreciation, and amortization by FY18, including Ann’s initiatives and Ann/Ascena synergies. …We continue to be buyers of Ascena, particularly on any weakness, reflecting combined Ascena/Ann earnings power that we believe will drive upside to shares.”
On July 19, the $1.4 billion, 1,000-unit Justice chain will drop prices 40 percent on core products, curtail promotions, and show fewer over-the-top styles, thereby heating up the competition against arch rivals J.C. Penney Co. Inc. and Kohl’s Corp. Justice caters to girls seven to 14 years old and also competes heavily against Wal-Mart, Target, Gymboree, The Children’s Place and Old Navy.
At Justice, 40 percent off the entire store events — which the chain became known for — have been eliminated. Last fall, Justice was at least 40 percent off every day of the season, damaging margins.