How Special is This Retailer?

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Last year, Ascena Retail Group (NASDAQ: ASNA) bought Charming Shoppes, the parent company of Lane Bryant and Catherines, for $890 million. This acquisition was supposed to act as a growth driver, but last quarter’s numbers disappointed, and guidance is weak.  Let's take a look at what went wrong, if there’s any potential moving forward, and if one of the company's peers offers a better investment opportunity. 

Recent results and expectations

Ascena’s weak third quarter can be attributed to increased promotions, markdowns, and operating expenses. Ascena, like many other retailers, also used poor weather as an excuse for sub-par foot traffic. This argument might seem justifiable, but if poor weather acted as a catalyst for poor results, then why did several retailers see increased foot traffic during the same time period?

Between Justice, Lane Bryant, Maurices, Dressbarn, and Catherines, Ascena owns 3,800 stores in the United States, Puerto Rico, and Canada. It’s not likely every region suffered from inclement weather at the same time. 

Ascena’s comps didn’t impress last quarter either. Below are the increases and declines on a year over year basis:

  • Justice: Down 4%
  • Lane Bryant: Down 6%
  • Maurices: Down 3%
  • Dressbarn: Down 7%
  • Catherines: Up 8%

Ascena had some merchandising misses with Lane Bryant and Dressbarn, and looking at the big picture, middle-income consumers seem to be struggling.  High-income consumers are doing well, but everyday workers are dealing with lower wages. This, in turn, has led to some difficult times for retailers that target those middle-income consumers. It’s also part of the reason Ascena has reduced its full-year EPS guidance from $1.20-$1.30 to $1.10-$1.15.

That said, some positives exist for Ascena. Any company that has established a stronghold in a niche is likely to perform well over the long haul. In this case, the company’s niche is fashionable plus-size clothing for women. Ascena actually has a broad range, selling products to women of all sizes, but it’s a very strong player in the fashionable plus-size niche. According to Alexa.com, the global traffic rank for LaneBryant.com has moved up 451 spots from 7,865 to 7,488 over the past three months -- a good sign.

Another positive for Ascena is its consistent annual revenue growth. EPS slightly declined in 2012, but EPS (diluted) has traded in a healthy range of $0.56 and $1.05 over the past five years.

Is there a better option?

Aeropostale (NYSE: ARO) is a specialty retailer with a focus on the 14-17 age demographic. The company sells casual apparel and accessories, and its stores are found all over the United States, Puerto Rico, and Canada. Revenue growth has been sporadic over the past several years, and earnings have declined over the past two years.

It seems as though the brand needs to be reinvigorated. According to Alexa.com, the traffic rank for Aeropostale.com has dropped 490 spots from 6,806 to 7,296 over the past three months.  Because of a shrinking net profit line, the stock is trading at a whopping 96 times earnings.  The balance sheet is phenomenal, but with a fickle consumer and a miniscule profit margin, of 0.52%, this looks to be a high-risk investment.

Kohl’s (NYSE: KSS) isn’t a specialty retailer. Rather, it sells apparel and home products to all age groups. Revenue and earnings have consistently improved, its profit margin is solid at 5.09%, its debt management has been respectable, and the stock is only trading at 12 times earnings.  And it currently yields a 2.8% dividend.

On the other hand, Kohl’s also targets the middle-income consumer, which isn’t the place to be in today’s economy. According to Alexa.com, the global traffic ranking for Kohls.com has dropped 76 spots from No. 791 to No. 867 over the past three months. On the positive side, Kohl’s is likely to hold up best of the three aforementioned companies if the stock market suffers a steep drop. For example, during the recent financial crisis, Kohl’s “only” dropped 25%, whereas Aeropostale and Ascena plummeted approximately 50%.

Conclusion

Ascena has a strong grasp on a niche, which is likely to lead to long-term success.  But its middle-class consumer is likely to face some difficult times and that's due to a lack of wage growth, increased taxes, and rising mortgage rates. Ascena is also trading at 23 times earnings, making it expensive. Aeropostale is likely to bounce back at some point, but it looks to be high risk right now.

Ultimately, Kohl’s may be the safest option of the bunch.  It's well diversified and it has been fairly resistant to a poor economy in the past.  Perhaps it's time you took a deeper look. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Ascena Retail Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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