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Consumer Confidence? Bah! The Ladies Who Shop at Dress Barn Aren’t Cowering

A short while back, I wrote that shares of Ann Inc., (ANN) owner of Ann Taylor stores, seem undervalued. Same goes, in an even bigger way, for Ascena Retail Group (ASNA).

Oh, pardon me. You probably know Ascena by its old corporate name: Dress Barn. The Dressbarn chain, with 800 stores nationwide, is owned by Ascena. Two years ago the company’s managers switched to the new name to add a little panache and to remind investors that it also owns two other retail chains. The other two are Maurices (750 stores) and a tweens-clothing chain called Justice (900 stores).

Anyway, Ascena happens to be one of the most solid retail chains around. You won’t see a lot of buff, spendy Abercrombie & Fitch (ANF) types bouncing into Dressbarn or Maurices. But Ascena’s infinitely less-sexy stores attract hordes of sober, middle-class women who are eager to stay on a budget and who also often—not always—wear larger sizes.

But before we even study the cash cow that is Dressbarn, we must answer a bigger question: why buy shares of retailers in the middle of these economic doldrums?

They’ve been on the rise lately, quietly outperforming the S&P 500 in the past few months.

^INX Chart

^INX data by YCharts

Retail stocks are also a potentially smart contrarian play. See, at the end of last month, the University of Michigan and Thompson Reuters released their latest index of “consumer sentiment.” The index dropped 7.7%, to a level of 73.2, prompting headlines like “Consumer Sentiment In U.S. Falls To Lowest Since December” and “Consumer spending, confidence fall to lowest levels of the year.”

Alarmists. Fact is, the index still reads roughly in line or above most of the levels we’ve seen since early 2008. You can see the press releases for yourself here. And you can compare it to the Conference Board’s Consumer Confidence Index here.

At the least, it’s too soon to know what’s really happening with these confidence and sentiment indexes. But retail spending looks reasonably healthy for now.

US Retail Sales Chart

US Retail Sales data by YCharts

Meanwhile, thanks to all this nervousness about consumers and their confidence, retail stocks are appealingly cheap. For example, Wal-Mart Stores’ (WMT) sales per share has zoomed ahead, but the stock’s P/E ratio hasn’t.

WMT PE Ratio Chart

WMT PE Ratio data by YCharts

I think the claims that the U.S. consumer is dead are so overblown. Economist Nouriel Roubini was claiming a few years ago that Americans would boost their savings rates as high as 10%. In fact, the U.S. Department of Commerce reports, Americans aren't even socking away half of what Roubini expected.

US Personal Saving Rate Chart

US Personal Saving Rate data by YCharts

Anyway, back to Dressbarn—I mean Ascena. The company is a steady earner:

ASNA Earnings Per Share TTM Chart

ASNA Earnings Per Share TTM data by YCharts

It’s fairly large, with a large market capitalization:

ASNA Market Cap Chart

ASNA Market Cap data by YCharts

And it has maintained very low debt:

ASNA Debt to Equity Ratio Chart

ASNA Debt to Equity Ratio data by YCharts

Ascena stock chart has had a pretty good 12 months compared to other retailers:

ASNA Chart

ASNA data by YCharts

But what I like most about Ascena is that it is cheap. If I persuaded you that Ann Taylor owner Ann Inc. was cheap, Ascena is even cheaper. Like Ann, Ascena has shares with a PE ratio well below those of similarly-sized retailers like Abercrombie & Fitch, Aeropostale (ARO) and American Eagle Outfitters (AEO).

ASNA PE Ratio Chart

ASNA PE Ratio data by YCharts

But unlike Ann, Ascena didn’t report any significant losses during the recent economic meltdown.

ASNA Earnings Per Share Chart

ASNA Earnings Per Share data by YCharts

Ascena is projected to earn roughly $1.36 a share this year and nearly $1.60 a share next year. That’s healthy, 15% to 17% growth. When stocks are cheap, that kind of EPS growth can be quite meaningful.

Now, I know what you’re thinking. Ascena’s trailing P/E ratio of 15 doesn’t seem very cheap compared to that of most blue-chip stocks. According to Barron’s, the Dow Jones Industrials’ average ratio is 14.2 and that the S&P 500’s ratio is 15.3.

But don’t forget: Ascena is a no-debt stock. Its $1.1 billion in current assets, which include $610 million in cash and equivalents, dwarf the company’s $713 million in liabilities.

It’s pretty common for retailers to have low debt. (They’re wise to avoid it, since they sign lots of long-term leases on their stores. Those long-term leases are not all the different from off-balance-sheet mortgages.) But still, no-debt stocks should trade at a much, much higher P/E ratio than debt-laden stocks.

Unless you’re really bearish on the economy or you believe the nonsense about the death of U.S. consumers, then Ascena shares are worth a closer look. As the fear of another recession dissipates, the stock price could easily track the company’s earnings growth and perhaps see some expansion in P/E ratio.

Stephane Fitch is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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