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Ascena Retail Group’s Exploring Opportunities, But What?

Ascena Retail Group Inc. posted disappointing second-quarter earnings results and the company is exploring opportunities within its portfolio that’ll let it focus on its better-performing brands.

In a Nutshell: David Jaffe, Ascena’s chairman and chief executive officer, wasn’t happy with the quarter’s results, which included a wider loss and a profit shortfall for the third quarter compared with initial forecasts.

While the company is accelerating plans to address profitability issues, Jaffe also said: “We are committed to addressing performance at our under-performing brands, and continue to explore opportunities within our portfolio that can allow us to focus capital and management attention on those brands that we believe can deliver sustained growth and profitability by maintaining a differentiated position in the marketplace.”

But what does that mean? A look at the net sales for each of the four divisions indicates that it was the plus-size fashion group that was hit the hardest in the reported quarter. And when companies explore opportunities connected to its focus of capital and management attention, that usually means closing stores, checking to see if it could be sold or maybe even shutting down an operation. In the case of Ascena, store closures are a likely bet. There are 747 Lane Bryant doors, and 345 that are under the Catherines nameplate. Both nameplates are likely facing pressures from competitors, including hipper direct-to-consumer brands, that are growing their focus on the plus-size market. Jaffe also cited Justice as a business, along with the plus fashion group, where the company “must deliver more consistent execution.” There are 845 Justice stores. Another option could be moving some product from one group and including it as a merchandise offering in the stores of another group to leverage the consumer markets and hopefully grab the attention of a new consumer while helping to hold own overall operating costs at the back-end.

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Sales: Net sales slipped 1.5 percent to $1.69 billion from $1.72 billion. That missed Wall Street’s expectations of $1.171 billion for the quarter. The company said comparable sales for the three months ended Feb. 2 were up 2 percent. By division, the premium group consisting of Ann Taylor and Loft saw sales rise 4.8 percent to $438.9 million, with comps up at 10 percent. The value fashion group consisting of the Maurices and Dressbarn nameplates saw sales slip 4.1 percent to $421.4 million and comps at 0 percent, while the kids fashion group comprised of Justice was down 0.9 percent to $326.7 million, although comps were up 2 percent. It was the plus fashion group, Lane Bryant and Catherines, that saw sales drop 10.2 percent and comps down 8 percent.

Earnings: The net loss nearly doubled to $71.5 million, or 36 cents a diluted share, compared with a net loss of $39.3 million, or 20 cents, a year ago. On an adjusted basis, diluted earnings per share (EPS) were 26 cents.

Wall Street was expecting adjusted EPS of 26 cents on revenues of $1.71 billion. Even though Ascena met adjusted EPS estimates, investors weren’t happy with either the substantially wider loss or the shortfall in projected third-quarter profits. They sent shares of Ascena down 21.7 percent in after hours trading to $1.48. Ascena reported earnings results after the equity markets ended the day’s trading sessions.

Ascena now expects a non-GAAP loss of 35 cents to 45 cents. It also is projecting net sales of between $1.43 billion to $1.46 billion, and comp sales down between 4 percent to 6 percent.

The company said it wasn’t issuing an update to full year guidance because of the lack of visibility on sales trends. It also said it believes the current sales trends are due to “temporary, macro-related factors.”

CEO’s Take: Jaffe said the third-quarter outlook represents an “unacceptable profit shortfall” to company guidance at the beginning of the fiscal year. “As a result, we are working to accelerate plans that were already in development to take much more fundamental action to address our cost structure,” he said.