Ascena (ASNA) Down To Rank #5 On Dismal Q3, Lowered View

On Jun 17, 2016, Zacks Investment Research downgraded New Jersey-based apparel retailer, Ascena Retail Group Inc. (NASDAQ:ASNA) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Ascena's stock has been on a downtrend ever since it reported dismal third-quarter fiscal 2016 results. Shares slipped 2.8% since the announcement. In fact, the company’s stock price has been declining for a while now, as is evident from its year-to-date plunge of 33.2%.

Coming to the third-quarter results, including adjustments related to ANN INC.’s acquisition, which was concluded in the fiscal first quarter – the company’s top and bottom lines declined year over year, while sales also fell short of the Zacks Consensus Estimate.

Bottom-line results in the third quarter were mainly impacted by transaction costs, higher interest expense on term loan and accounting adjustments, all associated with the ANN buyout. Additionally, higher provision for income taxes affected results. The top line was impacted by soft comparable store sales (comps), which were down 4% on a consolidated basis. During the quarter, comps declined at all of the company’s brands, with Justice recording the highest decline.

The disappointing quarterly performance, along with a tough retail environment led management to lower its earnings and sales outlook for fiscal 2016. The company now expects total revenue of $7.1 billion and earnings per share of 67–70 cents for fiscal 2016.

We believe that all the aforementioned factors led to the downward revisions in Ascena’s estimates. Evidently, over the past 7 days, the Zacks Consensus Estimate dropped 10.4% for both fiscal 2016 and fiscal 2017, to 69 cents per share and 86 cents per share, respectively.

Apart from this, Ascena faces intense competition from other women’s and girls’ apparel retailers at a local and national level. We believe that such competition is likely to pressurize the company’s pricing strategy and force it to incur higher marketing expenditure to keep pace with other retailers, in fear of losing market share. This may dent its operational and financial results.

Stocks to Consider

Better-ranked stocks in the same space include The Children's Place, Inc. (NASDAQ:PLCE) , Christopher & Banks Corporation (NYSE:CBK) and Destination XL Group, Inc. (NASDAQ:DXLG) , each with a Zacks Rank #2 (Buy).

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