Thoughts on Ascena (ASNA) Guidance Cut

Last Friday after the market closed with traders already having left their desks and most others focused on macro issues related to Greece and China, ASNA quietly cut guidance sharply: Guided FY2015 (ends in July) EPS $0.57-$0.60 vs prior guidance of $0.70-$0.75 vs street estimate of $0.70. The company expects FY adjusted EBITDA $365-$375M vs street estimate of $397.5M.

The part we find most troubling is on June 2 they reported Q3 earnings showing comp sales of -1% vs. +2% street estimate as 3 out of 5 brands saw sharp deceleration. But the stock jumped sharply despite that awful quarter as management reiterated guidance in line with street expectations. They got shorts to cover and the bulls to get excited about potential turnaround. Five weeks later, last Friday they pooh-poohed on those lofty expectations by cutting guidance. This management has no credibility in our view and we expect the stock to trade back to low teens in coming months. It also wouldn’t surprise us to see put activity pick up as we saw during late 2014 as stock went from $17 to $10.

For what it’s worth, here is management explanation for cutting guidance:

“While we expected a challenging quarter at Justice due to the sell-down of Spring/Summer merchandise coupled with a significant reduction in promotional activity, our revised Q4 expectation incorporates a more complete exit from the existing season’s merchandise mix. After careful consideration, we have determined that an even more aggressive sell-down of Spring/Summer goods at Justice is prudent, and will result in a cleaner selling floor and a well-communicated value proposition for the Fall season. We expect our actions will enable a better start to fiscal year 2016 performance at Justice. We are excited to better align our product, pricing, and marketing initiatives, and expect ultimately to see a strong, sustainable improvement in store-level performance across the chain.”