The Ascena Retail Group, grappling with negative traffic trends like other retailers, posted what executives characterized as a disappointing fourth quarter. While Ascena did post a net profit in the period versus a loss a year ago, it fell below company and Wall Street expectations.
Ascena, on a GAAP basis, reported net income of $14 million, or 7 cents a diluted share, in the fourth quarter of fiscal 2016, compared to a net loss of $323 million, or $1.98 a share, in the year-ago period. Retail analysts expected earnings of 17 cents a share, but the business started to drag in July.
Wall Street wasn’t pleased with the numbers, pushing the stock down about 23 percent, or $1.88 to $6.24, in after-hours trading Monday.
Net income for the fourth quarter of fiscal 2016 includes the impact of about $15 million of income, or 8 cents a diluted share, from the 53rd week, and about $17 million of expense, or 9 cents a diluted share, related to acquisition and integration costs as well as the impact of non-cash purchase accounting adjustments related to the acquisition of Ann Inc. For the full year, Ascena reported a loss of 6 cents a diluted share as a result of acquisition and integration costs, and the effect of non-cash purchase accounting adjustments, all due to the Ann acquisition.
Net sales for the fourth quarter were $1.81 billion, compared to $1.17 billion a year ago, with the increase driven by Ann, which was not included in the prior year. Fiscal 2016 also includes $82 million in sales associated with the 53rd week.
Comparable sales (excluding Ann) were down 4 percent for the quarter.
Sales for the year were nearly $7 billion compared to $4.8 billion in the year before.
Asked about the negative traffic trends, David Jaffe, president and chief executive officer of Ascena, told WWD, “We think there are a lot of macro factors at play. The customer is more interested in experiences rather than apparel. Millennials are more interested in doing things and fashion is less of a focus for them. We are seeing spending on cars, home improvement and travel continue to be pretty strong. Apparel has been challenging.”
He also cited consumers saving more of their money and some fashion misses at the company “here and there but overall early results for fall are favorable. When we have new product on the floor, we get new responses. Certain categories the customer is responding to, though there are a few clunkers. But generally we don’t feel we don’t have the right product or missed any key categories.”
Among the best areas are jeggings; light gauge sweaters and woven tops at Maurices; activewear; dresses; the new Girlcare line at Justice, and active and intimates at Lane Bryant. Sweaters have been disappointing; layering pieces are working better.
Ascena, unlike most retailers, has been working hard to reduce promotions, which could lead to some traffic attrition while on the other hand benefiting margins. Justice last year dramatically decreased promotions, while other brands at Ascena were less dramatic but still significant so, for example, discounts might be 30 percent off instead of 40 percent, sales would cover select categories instead of being storewide, and could last two days instead of three. The idea, Jaffe explained, is to “slowly reduce promotions and enhance the attractiveness of the product.” The company has been shifting the emphasis from market goods to designing and developing more product in house.
“We are trying to evolve our model, not just the promotional cadence. We want to have wonderful product, give her an extraordinary experience and create seamless commerce” between online and bricks-and-mortar.
Jaffe characterized the last quarter as “very disappointing,” adding, “Traffic is down, which led to lower sales which led to lower profits,” though he added, “As we look out we got a lot of reason to be optimistic.”
Ascena recently took its omnichannel platform in house so it’s operating its own web site and from there is rolling out the ability to ship products from stores to customers. Justice began the service last spring and Maurices is rolling it out. Other divisions will start rolling it out next year.
The Dress Barn division is expected to appoint a new ceo soon, and also has an opening in marketing. “We feel fresh blood will improve the performance overall,” Jaffe said during a conference call.
“The traffic number is really a tough one. People assure us, particularly mall developers, that it has bottomed out but we haven’t seen that,” Jaffe said.
He did say Ascena’s store base is “actually pretty healthy. Only 3 percent of our fleet is not cash-positive and those we are working out of…We are really slowing down our new store openings,with the exception of Maurices which still has very strong economics.”
Jaffe said the company is evaluating the impact of online on stores and vice versa. “When we open a new store we find our online [business] in that market goes up. What happens when we close a store, that’s the analysis that we are working through. We don’t see dropping hundreds of stores. It’s more about optimization and refinement of our fleet that will continue to occur gradually over the next number of years. The fleet is fairly profitable.” He cited a “low single-digit store count reduction year over year, except for Maurices. We expect that trend to continue for foreseeable future.”
For Lane Bryant, he said the gross margin is very strong on the Cacique business; LB’s marketing is resonating and its online business is good, but bricks-and-mortar is challenging.
He also said he was pleased with Loft, which posted gross margin growth despite a sales decline.