A Few Reasons Why Ascena Retail Could Be a Good Pick

AscenaRetail is best known for its Lane Bryant and Dress Barn stores, as well as other brands such as Justice and Catherines. The retailer of women's and girls' apparel shot up tremendously last month after it posted better-than-expected fourth-quarter results. The company did well despite the failings of peers such as Aeropostale and Abercrombie & Fitch , which is impressive.

Ascena serves a larger demographic compared with Aeropostale and Abercrombie & Fitch, but this doesn't make it immune from the competitive pressures of these two retailers. The fact that teens are a picky group of shoppers, where fashion and favor can change at the drop of a hat, is yet another trend to be wary about for retailers such as Ascena.

For instance, the resurfacing of a seven-year old interview of Abercrombie & Fitch's CEO on a sensitive matter was a catalyst for the outrage against the brand, and this translated into a loss of customers. However, Abercrombie's loss created additional opportunity for Lane Bryant, Catherines and other brands in the plus-size segment that converted A&F's loss into their gains.

Ascena's prospects
Ascena was one such gainer. On the back of strong performances of its acquisitions made in 2012 -- Lane Bryant and Catherines -- as well as strong e-commerce sales, the company reported a 2% increase in in-store comps. E-commerce sales increased 30%, leading to a total same-store sales jump of 4% in the quarter.

Ascena posted impressive year over year revenue growth of 27.5% in the quarter to $1.2 billion, which beat consensus estimates by a whisker. Earnings from continuing operations came in at $0.34 per share. This was a gain of 17.2% from last year, and it was comfortably ahead of the consensus estimate of $0.21 per share.

With adult obesity at around one third of the total population as per the CDC, the market for plus-size garments and undergarments is around 18% of the total women's clothing market . With the acquisition of Lane Bryant and Catherines, which cater to the plus-size market, Ascena is nicely positioned to benefit from this segment.

Moreover, according to a survey, U.S. women who primarily wear plus sizes are twice as likely to shop online. In addition, those who primarily wear sizes 16 and above said that they buy over 50% of their clothing online. With the plus-size segment being an important part of the retailer's operation because of brands such as Lane Bryant and Catherines, Ascena could benefit from this market.

Driven by various tailwinds, Ascena expects comps to increase in the low single digits going forward. It also plans to open 180 to 190 stores and close 115 to 125 stores, ending the fiscal year with approximately 3,925 Justice, Lane Bryant, maurices, dressbarn and Catherines stores in operation.

Ahead in the game
Ascena's performance stands out in comparison with Aeropostale and others. Aeropostale has posted yet another abysmal quarter where it reported a loss  of $0.34 per share. The top line dropped 6% versus last year and revenue came in at $454 million. Comps, including e-commerce sales, declined by a huge 15%. Management blames the prevalent macro-economic conditions and a weak advertising strategy.

The problem, however, is that the merchandise isn't selling like it should be. Aeropostale seems to have lost connection with its target customers, who seem to have moved on to other retailers. The company is counting on its gojane.com acquisition to strengthen its e-commerce sales channel.

As stated above, Abercrombie has run into troubled times. After controversial remarks made years ago by the CEO years that "uncool" kids and "fat women" shouldn't be wearing the brand's clothes resurfaced, the company's results have taken a hit. Abercrombie's second-quarter results revealed a 20% drop in earnings. Domestic sales fell 8%, and comps crashed  10%.

Abercrombie expects this decline to continue going forward, and it couldn't even offer an outlook on its future. This could be good news for Ascena, as it could continue to gain from shoppers who used to shop at Abercrombie.

The bottom line
Ascena has been strategically opening new stores and the company has been focusing on its e-commerce business as well. It has been outperforming its peers and trades at a forward P/E ratio of just 12.66, which is a massive improvement from its trailing P/E ratio of 21.20. Analysts are expecting growth at Ascena. Investors who look to benefit from the apparel retail industry should take a look at the company.

Will Ascena rule retail?
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The article A Few Reasons Why Ascena Retail Could Be a Good Pick originally appeared on Fool.com.

Ayush Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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