Let me preface this column by saying that this idea is a long shot. It is a retail name that currently trades as though it were an option - in this case, an option that the company will stay afloat. Unlike most of my dumpster diving ideas, this is not one that I stumbled upon through my own research. In fact, I'm sure I passed over it because there's no way it would have shown up in any of my value screens.
An analyst/Real Money reader reached out to me several weeks ago, because he knew I am enamored at times with out of favor retail names, and asked if I knew the story behind Ascena Retail Group (ASNA) , parent of Ann Taylor, Loft, Lane Bryant, Catherine's, Justice and the soon to be shuttered Dress Barn. Other than the fact that the stock was trading for less than a buck, and seemingly had lots of debt, I did not.
I was prompted to dig deeper, and validated the story that was relayed to me. The conclusion is that this may indeed be a very misunderstood name, with a potentially asymmetric payoff. Let's get one thing straight, this is a very risky name, and the market is pricing it for bankruptcy. In addition, there is significant debt, to the tune of $1.3 billion, primarily a $1.2 million term loan due in 2022. The closing of Dress Barn has been another huge weight on the stock, due to the store leases, and how they will be settled. Add in the overall rough environment for retail, and you've got a stock that the market believes is going to $0.
However, there are several nuggets of information that lead me to believe that the market may have this story wrong. First, back in May, ANSA sold just over 50% of its interest in clothing retailer Maurice's for $300 million, which has liquefied the company. In fact, it ended last quarter with $328 million, or $1.66 per share in cash. Secondly, in terms of the debt, the company has prepaid its required quarterly interest payments through November, 2020.
Fears leading into fourth quarter results were driven by immediate bankruptcy concerns, uncertainty about lease fallout from the Dress Barn closure, as well as liquidity concerns. With cash ending the quarter at $328 million, the immediate bankruptcy (and liquidity concerns) were put at ease for now. While it is still unclear what will happen with the Dress Barn leases, management has been rather calm on this issue, suggesting an orderly process with leaseholders that are willing to work with the company, and are not at odds with it, but time will tell.
Adding intrigue from a trading perspective is this: As of 10/31, there were still more than 37 million shares of ASNA sold short. That's down from about 52 million at the end of August, but the latest figure represents more than 21% of ASNA's float, setting the stock up for short covering, if it can prove to the market that it's viable.
ASNA's current enterprise value (Market Cap + Debt - Cash) is just over $1 billion, but the market cap is just $77 million. The stock got a boost after the October 3rd earnings release, rising more than 60% over the next two weeks, but has since given some of that gain back. No analysts currently cover the name, which has increased the uncertainty, and perhaps the fear associated with the name, but also the opportunity.
So, there is just 500 words or so on ASNA, a story that would take 10,000 words to do it justice. In the end, I became convinced that it was worth taking a position. It could go to $0, not a long way down from Tuesdays $.39 close, or, it could go to a few dollars, or more.