Ascena Retail Group Inc (ASNA): How Special is This Retailer?

Last year, Ascena Retail Group Inc (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 Retail Group Inc (NASDAQ:ASNA), 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 Retail Group Inc (NASDAQ:ASNA) 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 Retail Group Inc (NASDAQ:ASNA) 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, Inc. (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.