The retail intrigue continues, at least for this value investor. It's an industry that is enduring big changes and will never be what it once was, but the prospects for extinction of brick-and-mortar stores continue to leave shorter-term opportunities in its wake.
On Tuesday, Ascena Retail Group (ASNA) , which owns Ann Taylor, Loft, Lane Bryant, Catherine's and Justice and is in the process of shutting down Dressbarn, released surprisingly good first-quarter results. The market has seemingly presumed bankruptcy for Ascena due to declining results and a debt load seen as unmanageable, but the company is making the case that it may not be dead yet.
While same-store sales were flat (excluding Dressbarn, which saw those sales up 10%), Ascena earned 16 cents per share from continuing operations. Unfortunately, the company no longer garners any analyst coverage, so while there were no estimates for comparison, it looked like a decent quarter overall. ASNA ended the quarter with $262 million in cash, which was down from $328 million at the end of last quarter, primarily due to building its inventory in anticipation of the holiday shopping season.
There was an encouraging sign on the debt front; subsequent to the end of the quarter, Ascena repurchased $80 million of its term loan (due 2022) for $50 million. That tells you a couple things. First, the debt is trading at a deep discount due to bankruptcy fears, and second, the company is confident enough to spend $50 million of its cash to take advantage of the discount. Ascena's debt stood at $1.34 billion at the end of the quarter, and the company has prepaid quarterly interest payments through November 2020.
Market reaction to Tuesday's results was interesting to say the least. Ascena shares were up as much as 35% in pre-market trading, opened 25% higher, were up as much as 43% during the day, but closed up just 2%. Volume of more than 17 million shares was more than five times average volume.
Clearly, there's a lot going on here. Ascena is a distressed name for sure, but one that is in better shape than the market presumes. In addition, there has been a great deal of short interest, to the tune of 32.7 million shares, or nearly 19% of the float, as of Nov. 29. I presume there was some short covering on Tuesday, but we'll know when the new short interest figures are released. So there's the real possibility of a short squeeze.
However, Ascena's shares are down 82% year to date, and there may be negative pressure on the stock as we head into the end of the year due to tax-loss selling. Finally, there is the possibility that the stock may need to undergo a reverse split in order to stay listed. Shareholders approved a reverse split at Tuesday's annual meeting. This was not a surprise; ASNA has until Jan. 27 to regain compliance and must close above $1.00 for at least 10 consecutive days to do so. At Tuesday's close, its shares sold for 45 cents apiece.
While fraught with risk, Ascena may be the epitome of asymmetric payoffs. I believe the stock is either going to $0 or to the low single digits -- exclusive of the expected reverse split, that is. Buyer beware; as I've built my position I've done so with the Tums always in reach.