A Trio of Retailers Report Disappointing Quarterly Results

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Wednesday of last week, after the closing bell, a trio of retailers reported their quarterly earnings results. The reports raised questions about the state of the American consumer as all three companies slashed their forward looking guidance. Another specialty retail company, Francesca's Holdings, reported sales that missed Wall Street expectations. That stock was trading down around 9% on Thursday afternoon. Although it would be a mistake to read too much into one quarter's financial results for the companies, the market was clearly surprised.

Shares of both Ascena Retail Group (NASDAQ: ASNA) and Vera Bradley (NASDAQ: VRA) were both trading down sharply on Thursday, with Ascena losing around 9% and Vera Bradley shares shedding 8%. The third retailer to cut its outlook, rue2 (NASDAQ: RUE), was unchanged due to a buyout agreement reached with private equity firm Apax Partners in late May. That deal values the company at $1.1 billion, including the assumption of debt.

Is the Market Getting Ahead of Itself?

Although the stock market has been on a tear for most of 2013, volatility has been on the rise in recent days and investors have to wonder if share prices have gotten ahead of themselves. While corporate earnings were strong in the fiscal first-quarter, top-line growth has been stagnant. This could be a warning sign that the ongoing economic recovery is stalling in spite of the Federal Reserve's massive stimulus programs.i

The results from Ascena, Vera Bradley, and rue21 highlight that the American consumer is still feeling the pain of a sluggish job market, lukewarm economic growth, high prices for food and energy, and the residual effects of the housing crisis. Below, we take a closer look at the most recent earnings reports from these three retailers.

Ascena Misses Earnings and Revenue Estimates; Cuts Full-Year EPS Guidance

For the company's fiscal third-quarter, the retailer reported adjusted earnings per share of $0.26 versus consensus estimates of $0.30. Although net sales in the period were up 46% to $1.14 billion, this too came in below Wall Street revenue expectations of $1.17 billion.

Ascena also reaffirmed that it was cutting its full-year EPS guidance to a range of $1.10 to $1.15 compared to its earlier outlook calling for earnings of $1.20 to $1.30 per share. The losses in the stock in the wake of the disappointing results have sent Ascena into negative territory for the year, with a loss of around 2% as of Thursday's close.

Looking farther ahead, there could be an opportunity to buy Ascena shares on a deeper pullback. The company has posted very impressive revenue and earnings growth over the last 5 years and analysts are projecting a better than 25% rise in EPS for fiscal 2014.

Another Bump in the Road For Vera Bradley

This is a company that has been struggling significantly in recent years and has reported a string of earnings disappointments. Although the retailer topped analysts' profit and sales estimates, it too cut its full-year outlook. Vera Bradley also delivered fiscal Q2 guidance that was below current expectations.

For the first-quarter, the company reported EPS of $0.23 versus consensus estimates of $0.21. Sales were $123 million compared to $117 million last year. This also came in ahead of Wall Street revenue estimates of $121.01 million. Looking ahead, however, Vera Bradley's guidance was hardly reassuring.

For Q2, the company guided for EPS of $0.31 to $0.33 on revenue of $123 million to $126 million. This is well below current consensus estimates calling for EPS of $0.39 on revenue of $136.20 million for the fiscal second-quarter.

Furthermore, the clothing retailer also slashed its full-year outlook. The company now expects EPS of $1.74 to $1.78 on revenue of $570 million to $575 million. Earlier, Vera Bradley had forecast EPS of $1.83 to $1.88 on sales of $585 million to $590 million for fiscal 2014. Not surprisingly, this is well below current consensus calling for earnings of $1.81 per share on revenue of $591.12 million.

Given the problems that have beset Vera Bradley in recent quarters, this would appear to be a risky stock. Nevertheless, the stock trades at less than 11 times forward earnings estimates and the company does have a very impressive history of revenue growth and stable profit margins. Consider, for example, that sales at Vera Bradley have gone from just $289 million in fiscal 2010 to $541 million in its most recent fiscal year.

Disappointing Results at rue21 Not an Issue for Investors as Buyout Deal Struck in May

Although rue21's weak first-quarter results had nearly no effect on the stock price since the company will soon be taken private at $42.00 per share, the report did not engender much confidence in the retail sector. Not only did rue21 miss both consensus earnings and revenue estimates, it also slashed its earnings outlook for fiscal 2013 -- an unwelcome trend it would seem.

In Q1, the company reported net income of $0.44 per share versus consensus EPS estimates of $0.46. Sales were also light with the company reporting net revenue of $224.38 million versus Wall Street expectations of $229.83 million.  

Interestingly, while rue21 cut its full-year outlook, its second-quarter earnings guidance was ahead of current estimates. For Q2, the company sees EPS of $0.51 to $0.53 versus current consensus of $0.40. For the full-year, however, the retailer guided for EPS of $1.98 to $2.03 versus its previous outlook calling for earnings of $2.00 to $2.05 per share. Currently, Wall Street is modeling full-year earnings per share of $2.02 at rue21.

Although rue21 has agreed to be acquired by Apax Partners, the terms of the deal provided for a 40-day "go shop" period under which the company can solicit superior offers. Since the transaction was announced on May 23, this so-called "go shop" period is still in effect and there is the possibility that a higher bid could emerge. With the stock holding slightly under the $42 deal price, investors could purchase the shares on the hope that another buyer does materialize, while assuming relatively little risk.

Retail Warning?

So far in 2013, retail stocks have ridden the broader market momentum to nice gains. Improving consumer confidence and a strengthening economy should help retailers, but this is clearly not the case across the board. The recent earnings reports from Ascena Retail, Vera Bradley, and rue21, along with Francesca's less than inspiring report, suggest that the consumer environment may be deteriorating once again. For this reason, traders and investors may want to re-consider being overexposed to the retail sector heading into the Summer and adopt a modestly more conservative position.

Ryan Glosier 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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