Ascena Retail Group Inc.

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.

Ascena Retail Group Inc. (ASNA) Company Business Ascena Retail Group became the successor reporting company to The Dress Barn, effective January 1, 2011. Ascena is a women and tween (7-14) girls apparel retailer operating through its wholly owned subsidiaries, the dressbarn, maurices, and Justice brands. They currently have over 2,500 stores through the US, Puerto Rico, and Canada. Brands Dress barn: Includes 830 retail and outlet stores an an e-commerce website which was launched in Q1 Fiscal 2011 Targeted towards female working consumers in mid 30's to mid 50's age range Maurices: Includes 784 retail and outlet stores along with an e-commerce website Targeted towards 17 to 34 year old females with stores concentrated in small markets Have casual, working, and dressy clothing Justice: Includes 902 retail and outlet stores, an e-commerce website, and licensed franchises in international markets Targeted to tween girls aged 7 to 14 During the Q3 Fiscal 2011, Justice launched the Brothers brand, via an e-commerce website, which offers apparel to boys age 7 to 14 Entered Canada during Fiscal 2011 and opened 6 stores Brand Growth:

All brands have had positive net sales growth over the past 2 years with dressbarn only having a small amount of growth in fiscal 2011

Additional Notes: Share buybacks: o Fiscal 2011 - ASNA repurchased 2.5 million shares at a cost of $72.9 million o Fiscal 2010 - repurchased 1.6 million shares at a cost of $37.9 million o Fiscal 2009 - 0.5 million shares repurchased at a cost of $4.7 million

As of July 30, 2011 ASNA has $127.1 million available to repurchase under the 2010 Stock repurchase program.

Future Outlook - Expectations Plan to grow globally o Fiscal 2012 - Open Maurice stores in Canada o Fiscal 2013 - Open dressbarn stores in Canada Fiscal 2012 - expected to open 100 net new stores across all brands Potential Risks: They do not hedge their foreign exchange risk o They purchase a lot of their apparel directly from foreign markets

Historical Ratio Analysis **If the value is green than the number is believed to be better than the previous number, vice versa if the value is
red

Profitability Ratios
ROE ROA ROIC CROIC

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

11.4% 8.3% 9.7% 9.4%

2002

3.5% 1.9% 13.9% -1.5%

2003

11.5% 6.5% 10.3% 7.0%

2004

16.8% 7.3% 3.5% 18.2%

2005

19.3% 9.3% 12.7% 11.8%

2006

19.9% 10.3% 15.5% 13.6%

2007

13.3% 7.2% 9.9% 8.2%

2008

11.1% 6.2% 8.6% 7.9%

2009

13.1% 8.1% 10.6% 11.1%

2010

14.7% 9.3% 11.9% 10.9%

2011

Solvency Ratios
Quick Ratio Current Ratio Total Debt/Equity Ratio Long Term Debt/Equity Ratio Short Term Debt/Equity Ratio

1.95 2.86 0.37 0.00 0.00

2002

0.98 1.66 0.86 0.15 0.00

2003

1.17 1.87 0.77 0.12 0.00

2004

0.28 1.14 1.29 0.50 0.00

2005

0.79 1.54 1.07 0.35 0.00

2006

0.74 1.29 0.93 0.06 0.23

2007

0.74 1.30 0.84 0.05 0.21

2008

1.03 1.57 0.81 0.04 0.19

2009

1.10 1.99 0.63 0.02 0.00

2010

1.03 1.99 0.59 0.15 0.00

2011

Efficiency Ratios
Asset Turnover Cash % of Revenue Receivables % of Revenue SG&A % of Revenue R&D % of Revenue

1.56 10.6% 0.0% 26.0% 0.0%

2002

1.67 5.3% 0.0% 27.2% 0.0%

2003

1.63 2.0% 0.0% 27.5% 0.0%

2004

1.40 4.2% 0.0% 28.7% 0.0%

2005

1.54 2.6% 0.0% 27.2% 0.0%

2006

1.45 4.7% 0.0% 26.9% 0.0%

2007

1.41 8.8% 0.0% 27.5% 0.0%

2008

1.32 16.1% 0.0% 28.3% 0.0%

2009

1.44 10.1% 0.0% 29.1% 0.0%

2010

1.58 8.4% 0.0% 29.2% 0.0%

2011

Liquidity Ratios
Receivables Turnover Days Sales Outstanding Days Payable Outstanding Inventory Turnover Average Age of Inventory (Days) Intangibles % of Book Value Inventory % of Revenue
2008

0.00 0.0 50.4 4.01 90.92 0.0% 15.8%

0.00 0.0 52.2 4.07 89.79 0.0% 15.6%

0.00 0.0 50.6 4.24 86.10 0.0% 15.5%

0.00 0.0 63.6 4.34 84.07 77.9% 16.8%

0.00 0.0 57.2 4.57 79.85 59.3% 13.1%

0.00 0.0 58.0 4.58 79.71 47.0% 13.8%

0.00 0.0 49.9 4.61 79.20 42.9% 12.9%

0.00 0.0 60.9 4.82 75.79 37.7% 13.0%

0.00 0.0 46.9 5.41 67.47 40.9% 13.5%

0.00 0.0 39.5 4.91 74.38 36.1% 12.5%

2009

2010

2011

P/E P/S P/BV P/CF P/FCF

13.31 0.68 1.77 11.15 17.31

16.07 0.75 1.79 12.12 18.43

13.47 0.76 1.77 9.34 12.48

12.80 0.75 1.88 9.94 13.80

All financial ratios are at least average to better compared to historical averages o Not any concerns with regards to the ratios Price multiples state it is fairly to a bit underpriced when compared to historical

Relative Ratio Comparison ASNA classifies its direct competitors on their latest's annual statement as Walmart (WMT), Macy's (M), Kohl's (KSS), Target (TGT), and Aeropostale (ARO).
Stock Price Mkt Cap ($M) EV 52 Wk High 52 Wk Low % off 52Wk Low $ $ $ $ $ ASNA 42.50 3,260.00 2,800.00 43.00 24.00 77.1% 17.7 1.1 3.9 11.4 14.2 6.5 0.0% 0.0% 0.0% 0.0% 14.6% 1.1% 17.5% 54.3% 8.1% 12.9% 1.5 2.4 0.00 0.00 42.2% 40.7% 10.2% 9.0% 6.2% 5.6% 10.5% 8.9% 16.3% 15.5% 0.0 6.1 1.7 M $ 39.67 $ 16,430.00 $ 21,360.00 $ 39.83 $ 22.50 76.3% 13.6 0.6 10.3 7.0 13.9 6.2 2.0% 1.7% -4.6% 13.4% 5.5% 0.6% -0.4% 12.2% 48.0% 10.1% 0.6 1.4 1.12 1.31 40.4% 40.4% 9.1% 2.2% 4.8% -1.1% 5.9% -1.2% 21.9% -4.2% 74.8 3.2 1.2 KSS $ 50.24 $ 12,730.00 $ 15,650.00 $ 57.39 $ 42.14 19.2% 11.5 0.7 2.0 6.6 13.5 5.3 2.6% 0.5% 0.0% 22.7% -0.3% 0.7% 3.8% 8.6% 18.3% 5.4% 0.6 1.8 0.64 0.65 38.2% 37.6% 11.5% 11.0% 6.2% 6.0% 8.1% 8.3% 16.2% 15.1% 0.0 3.7 1.3 WMT $ 60.08 $ 205,760.00 $ 252,710.00 $ 62.63 $ 48.31 24.4% 13.2 0.5 4.1 8.4 36.1 7.3 2.7% 2.1% 16.9% 32.0% 5.9% 0.5% 5.1% 7.1% 8.2% 9.2% 0.2 0.9 0.66 0.75 25.0% 25.1% 5.9% 5.9% 3.7% 3.6% 8.8% 8.7% 22.6% 21.4% 81.1 8.7 2.4 $ $ $ $ $ TGT 57.69 38,610.00 55,300.00 57.80 45.28 27.4% 13.5 0.6 2.4 7.6 122.2 7.4 2.1% 0.0% 20.1% 26.5% 3.0% 0.6% 3.3% 0.3% 6.9% 6.0% 0.6 1.2 0.87 1.11 30.9% 30.5% 6.4% 6.3% 4.2% 4.1% 6.5% 6.1% 18.7% 17.7% 11.6 6.2 1.6 $ $ $ $ $ ARO 19.55 1,580.00 1,470.00 26.30 9.16 113.4% 23.0 0.7 3.9 0.0 0.0 5.2 0.0% 0.0% 0.0% 0.0% -3.7% 0.7% 10.6% -66.1% -66.2% -0.7% 1.4 2.3 0.00 0.00 26.0% 34.0% 4.9% 12.8% 3.0% 7.7% 9.2% 23.8% 16.5% 45.4% 0.0 10.8 3.1

Multiples
P/E(TTM) P/S(TTM) P/Tang BV(MRQ) P/CF P/FCF(TTM) EV/EBITDA(TTM)

Dividends
Div Yld Div Yld - 5yr avg Div 5yr Grth Payout Ratio(TTM)

Growth Rates
Sales(MRQ) v 1yr ago Sales(TTM) v 1yr ago Sales 5yr Grth EPS(MRQ) v 1yr ago EPS(TTM) v 1yr ago EPS 5yr Grth

Balance Sheet
Quick Ratio(MRQ) Current Ratio(MRQ) LTD/Eq(MRQ) Tot D/Eq(MRQ)

Margins
Gross %(TTM) Gross % 5yr Op %(TTM) Op % 5yr avg Net %(TTM) Net % 5yr avg

Returns
ROA(TTM) ROA 5yr avg ROE(TTM) ROE 5yr avg

Efficiency
Rec Turnover(TTM) Inv Turnover(TTM) Asset Turnover(TTM)

On a relative basis, ASNA looks to be overvalued in relation to the multiples The growth rates are exceptionally better than its competitors The margins look slightly more attractive than all its competitors ROE is not as attractive as its competitors ROE

Investment Valuations Reverse DCF Starting with a reverse DCF valuation, I will assume a discount rate of 12% and a terminal growth rate of 2.5%. (The terminal growth rate of any company should never be higher than the growth rate of the economy.) A reverse DCF valuation should be used just to see a rough picture of where the market has currently priced AEO based on fundamentals. Based on my assumptions the market has currently priced ASNA to have a owners earnings FCF growth rate of around a 14% - 16% year after year for the next 10 years with it gradually decreasing over the years, where then it will grow at its terminal growth rate. The range of the FCF growth is given due to the difference between TTM, annual, and average owners earning FCF input. This is a rough estimate number, however this is slightly above its 5 year and 10 year historical averages. FCF growth is best to be looked at over multi-year periods as it is very volatile on a year to year basis. Actual Owners Earnings DCF This is the heart of my valuation of a company. I believe that a more reasonable estimate of around 17% for the next 10 years with it slowing down in the later years. It has over the years successfully been able to deliver free cash flows to the shareholders. Under my assumptions, I believe the intrinsic value to be around $44.14 on the safe side and on the more optimistic side with increasing growth it can be up to $50.54.

60 50 40

5 Yr Price vs Intrinsic Value

30 20
10 0 27/06/2005 27/06/2007
Historical Price

27/06/2009
Intrinsic Value

27/06/2011
Buy Price

FCFE Valuation The growth rate for this model is built around fundamentals, where it is equal to the non-cash return on equity multiplied by the equity reinvestment rate which gives us a net income growth rate of 13.62%. Reason being that we do not want to just guess a growth rate and it is better to get one from fundamentals, obviously the option to adjust these ratios can occur if needed. According to this model, the intrinsic value is roughly around $40.53 to $43.33, which is in line with our actual owner's earnings DCF. Technical Analysis Looking at the chart below, the stock has clearly shot up ever since the start of the year and there is a good chance it is overbought. There is clearly a pivot point at $27.50 and this may be a future entry point.

Overview ASNA has very good fundamentals and looks to perform very well headed into the future especially as the economy improves in the future. However, I believe it is around fairly valued and I am not comfortable going long on this stock anytime soon unless a major price drop scenario were to occur. If the price were to hit around $27.50, which is the previous obvious long-term support line I would reevaluate to see if the stock is attractive. Any price below that and I would really consider entering into a position and exiting around the $40 level. Best Regards, Matthew

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.