Why Ascena Retail Group, Inc. Stock Soared

By Daniel Sparks Markets Fool.com

What happened

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Following its first-quarter earnings report for fiscal year 2017, shares of specialty apparel retailer Ascena (NASDAQ: ASNA) soared as much as 29%. At the time of this writing, shares are up about 21% Friday.

Image source: Getty Images.

The stock's rise is particularly interesting considering the company's results were, across the board, below analyst expectations.

So what

Ascena reported revenue of $1.68 billion and non-GAAP EPS of $0.18. On average, analysts were expecting Ascena to report revenue and non-GAAP EPS of $1.72 billion and $0.20, according to forecasts compiled by Thomson Reuters. Further, Ascena's guidance for second-quarter non-GAAP EPS to be between a loss of $0.05 and $0.00 was also below analysts' consensus estimate for second-quarter non-GAAP EPS of $0.01.

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The optimistic response to the earnings report may be because the stock's 67% three-year decline leading up to this report has possibly left investors not actually expecting the company to live up to analysts' estimates. Ascena's ability to only slightly perform analysts estimates, therefore, may be viewed by some investors as positive news at this point.

In addition to Ascena stock likely benefiting from low expectations, there were a few things for investors to be optimistic about.

First, despite sales and margin coming in lower than management was expecting, non-GAAP EPS was still in the middle of its guidance range for the quarter as the company reacted to unfavorable selling activity with aggressive, targeted promotions, which proved to be effective. In addition, the company is reducing operating costs and capital expenditures -- a move that will help full-year EPS and free cash flow.

Finally, the majority of the company's same-store sales metrics' declines were more moderate than respective store traffic declines, suggesting the shoppers at Ascena's retail stores are more valuable.

Now what

Going forward, Ascena plans to focus on more effective and efficient business execution.

Ascena CEO David Jaffe detailed the company's plans and priorities in the company's first-quarter press release:

Market conditions are challenging, and at this time, we believe it is prudent to assume that they will remain so. We are focused on the areas of the business that we can control. We expect to drive down inventory levels, execute cost controls, and build a more flexible and responsive organization in general. While these actions will support our near-term performance, we will also continue to aggressively work on our enterprise transformation to create sustainable performance for the longer term through enhanced customer facing capabilities. The tough environment certainly highlights the necessity of the transformation we are executing, and we are working to ensure that ascena emerges as a strong competitor that can simultaneously drive value to a demanding customer and produce the returns expected by our shareholders.

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