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How to Play Ascena Ahead of Q4 Earnings

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A consumer sentiment report showed that jobholders are more confident about the economy. This should benefit retails stores like Ascena in the near future.

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MINYANVILLE ORIGINAL Ascena Retail Group (ASNA) is a specialty retailer of apparel for women and tween girls and it operates three different brands. In June the company acquired Charming Shoppes, a women's plus-size apparel store, adding to its list of brands, which already included Justice, Maurices, and Dressbarn.

Justice, the tween clothing retail store, gained almost 2% of the 7- to 12-year-old girls clothing market in 2012, with estimated revenue growth of $2 million for fiscal year 2012, after 8% growth in 2011. Justice is Ascena's biggest growing retail shop. Maurices focuses on high-school and college-aged girls to working and family women between the ages of 17-34, while Dressbarn focuses on older women younger than 55. Both had less success than the tween store, but are still showing revenue growth, which is expected for the 2012 fiscal year as well.

The company expects consolidation of back-end operations as well an operational initiative to outsource its CRM database, which should cut costs across all of the retail brands. The acquisitions increased net debt, which will push back any dividends, but cash flow has still been growing. Besides acquisitions, the company plans to expand into Canada as well as grow its e-commerce revenue.

Ascena is scheduled to report its Q4 earnings on September 19, 2012 before the markets open. The expected earnings per share are a $0.29 gain from last year's earnings of $0.24. Both quarter one and two of 2012 surprised investors at $0.33 and $0.41 respectively. Q3 earnings failed to meet estimates at $0.34, a 9.1% drop from the previous year's Q3 results. Expected annual earnings for 2012 are $1.35.

A consumer sentiment report released Friday, September 14, a survey of 500 households' financial conditions and attitudes about the economy, had a sharp increase for the month of August. Although jobs reports are weak, the consumer sentiment report showed that jobholders are more confident about the economy despite rising gas prices and a possible rise in food prices. This is good news for retail stores and, if true, should benefit Ascena Retail Group in the near future.

Ascena opened today at $21.21 and in the first half of trading is down -$0.39. Currently, Ascena sits one and a half points below its 52-week high of $22.62 in late March. The stock moved slightly down since then but stayed at least $5.00 to $6.00 above the yearly low of $12.00. Ascena's market cap is 2.34 billion.

My trade is to sell the Dec 20-18 put spread for around $0.60 with a risk of $1.40 and a possible reward of the price of the put spread. My breakeven is $19.40.


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