NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
ascena retail group, inc., a Delaware corporation (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls. On August 21, 2015, the Company acquired ANN INC. ("
ANN
"), a retailer of women’s apparel, shoes and accessories sold primarily under the
Ann Taylor
and
LOFT
brands (the "
ANN
Acquisition"). The Company operates, through its
100%
owned subsidiaries, ecommerce operations and approximately
4,900
stores throughout the United States, Canada and Puerto Rico. The Company had annual revenues for the fiscal year ended July 30, 2016 of approximately
$7.0 billion
. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
In connection with the Change for Growth program, as more fully described in Note 7, effective with the beginning of Fiscal 2017, the Company reorganized into four operating segments:
Premium Fashion
,
Value Fashion
,
Plus
Fashion
and
Kids Fashion
. All of our segments sell fashion merchandise to the women's and girls' apparel market across a wide range of ages, sizes and demographics. Our segments consist of specialty retail, outlet and ecommerce as well as licensed franchises in international territories at our
Kids Fashion
segment. Our segment brand-based activities are as follows: our
Premium Fashion
segment consists of our
Ann Taylor
and
LOFT
brands; our
Value Fashion
segment consists of our
maurices
and
dressbarn
brands; our
Plus Fashion
segment consists of our
Lane Bryant
and
Catherines
brands; and our
Kids Fashion
segment consists of our
Justice
brand. For a more detailed description of each brand's products and markets in which they serve, see Part I, Item 1 "Business" in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016 (the "Fiscal 2016 10-K").
The Company's brands had the following store counts as of
October 29, 2016
:
Ann Taylor
340
stores;
LOFT
683
stores;
maurices
1,006
stores;
dressbarn
809
stores;
Lane Bryant
776
stores;
Catherines
370
stores; and
Justice
936
stores.
2. Basis of Presentation
Interim Financial Statements
These interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and are unaudited. In the opinion of management, however, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the condensed consolidated financial condition, results of operations, comprehensive income (loss) and cash flows of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report as permitted by the SEC’s rules and regulations. However, the Company believes that the disclosures herein are adequate to ensure that the information is fairly presented.
The condensed consolidated balance sheet data as of July 30, 2016 is derived from the audited consolidated financial statements included in the Company’s Fiscal 2016 10-K, which should be read in conjunction with these interim financial statements. Reference is made to the Fiscal 2016 10-K for a complete set of financial statements.
Fiscal Period
The Company utilizes a 52-53 week fiscal year ending on the last Saturday in July. Fiscal year 2017 will end on July 29, 2017 and will be a 52-week period (“Fiscal 2017”). Fiscal year 2016 ended on July 30, 2016 and was a 53-week period (“Fiscal 2016”). The
three
months ended
October 29, 2016
and the three months ended
October 24, 2015
are both 13-week periods.
Our
Premium Fashion
segment, which represents the results of
Ann Taylor
and
LOFT
for the post-acquisition period from August 22, 2015 to October 31, 2015 have been included herein for the ascena three-month period ended October 24, 2015, resulting in a one-week reporting lag for the first quarter of Fiscal 2016. The effect of this one-week reporting period difference is not material to the condensed consolidated financial statements for the
three
months ended
October 24, 2015
. As of the end of Fiscal 2016, our
Premium Fashion
segment is on the same fiscal calendar as the rest of the Company's operating segments.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Reclassification
During the third quarter of Fiscal 2016, the Company determined that, for the first six months of Fiscal 2016, an expense for our
Premium Fashion
segment, which should have been classified as Buying, distribution and occupancy expenses, had been incorrectly classified as Cost of goods sold. As a result, the Company restated its prior period information by reclassifying
$6.6 million
of these costs for the first quarter of Fiscal 2016 to Buying, distribution and occupancy expenses from Cost of goods sold, thereby increasing Gross margin. This change had no effect on the previously reported Operating loss or Net loss.
3. Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The guidance simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and the classification in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods therein, with early adoption permitted. The Company is currently evaluating the guidance and its impact on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." The guidance requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company is currently evaluating the guidance and its impact on the Company's condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in FASB Accounting Standards Codification ("ASC"), "Revenue Recognition (Topic 605)." The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The guidance, which was deferred in July 2015, is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. The guidance may be applied retrospectively to each period presented or with the cumulative effect recognized as of the initial date of application. The Company is currently evaluating the guidance and its impact on the Company's condensed consolidated financial statements.
4. Acquisition of ANN INC.
On August 21, 2015, the Company acquired
100%
of the outstanding common stock of
ANN
for an aggregate purchase price of approximately
$2.1 billion
. The purchase price consisted of approximately
$1.75 billion
in cash and the issuance of
31.2 million
shares of the Company's common stock valued at approximately
$345 million
, based on the Company's stock price on the date of the acquisition. The cash portion of the purchase price was funded with borrowings under a
$1.8 billion
seven
-year, variable-rate term loan described in Note 8. The acquisition is intended to diversify our portfolio of brands that serve the needs of women of different ages, sizes and demographics.
The Company expensed
$20.5 million
of transaction costs during the first quarter of Fiscal 2016, which are included within Acquisition and integration expenses in the condensed consolidated statements of operations. In addition, as a result of the write-up of
ANN
's assets and liabilities to fair value, the Company expensed
$11.0 million
and
$110.7 million
during the three months ended
October 29, 2016
and
October 24, 2015
, respectively. The expenses in the three months ended
October 29, 2016
reflect
$7.8 million
of depreciation and amortization expense associated with the write-up of
ANN
's customer relationships and property and equipment and
$3.2 million
of other purchase accounting adjustments which are primarily lease-related. The expenses in the three months ended
October 24, 2015
reflect
$104.2 million
recorded to Cost of goods sold related to the write-up of
ANN
's inventory and
$6.5 million
of depreciation and amortization.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
There were no measurement-period adjustments recorded during the first quarter of Fiscal 2017 and the allocation of the purchase price is final. The following table summarizes the final allocation of fair values of the identifiable assets acquired and liabilities assumed in the
ANN
Acquisition.
|
|
|
|
|
|
|
|
Final Allocation, as of October 29, 2016
|
|
(millions)
|
Cash and cash equivalents
|
|
$
|
257.6
|
|
Inventories
|
|
398.3
|
|
Prepaid expenses and other current assets
|
|
118.5
|
|
Property and equipment
|
|
453.3
|
|
Goodwill
|
|
959.6
|
|
Other intangible assets:
|
|
|
Trade names
|
|
815.0
|
|
Customer relationships
|
|
51.5
|
|
Favorable leases
|
|
38.4
|
|
Other assets
|
|
3.5
|
|
Total assets acquired
|
|
3,095.7
|
|
|
|
|
Accounts payable
|
|
155.6
|
|
Accrued expenses and other current liabilities
|
|
209.0
|
|
Deferred income
|
|
46.0
|
|
Lease-related liabilities
|
|
175.0
|
|
Deferred income taxes
|
|
374.1
|
|
Other non-current liabilities
|
|
38.8
|
|
Total liabilities assumed
|
|
998.5
|
|
|
|
|
Total net assets acquired
|
|
$
|
2,097.2
|
|
The following pro forma information has been prepared as if the
ANN
Acquisition and the issuance of stock and debt to finance the acquisition had occurred as of the beginning of Fiscal 2015:
|
|
|
|
|
|
Three Months Ended
|
|
October 24,
2015
|
|
(millions, except per share data)
|
|
(unaudited)
|
Pro forma net sales
|
$
|
1,794.0
|
|
Pro forma net income
|
$
|
51.9
|
|
Pro forma net income per common share:
|
|
Basic
|
$
|
0.27
|
|
Diluted
|
$
|
0.26
|
|
The Fiscal 2016 pro forma amounts reflect the historical operational results for ascena as well as those of
ANN
for the three-week stub period preceding the close of the transaction on August 21, 2015. The pro forma amounts also reflect the effect of pro forma adjustments of
$70.0 million
, net of taxes, for the
three
months ended
October 24, 2015
. These adjustments primarily reflect transaction costs and the amortization of the fair value adjustment to inventory, which are currently included in the reported results and are excluded from the Fiscal 2016 pro forma amounts due to their non-recurring nature.
The pro forma weighted-average number of common shares outstanding assumes that
31.2 million
shares of ascena common stock issued in connection with the acquisition had been issued as of the beginning of Fiscal 2015. The pro forma weighted-average number of diluted shares outstanding for the first quarter of Fiscal 2016 includes the potential dilutive shares of
1.9 million
, which are excluded from the reported weighted-average diluted shares outstanding due to the net loss incurred during the period.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The pro forma financial information is not indicative of the operational results that would have been obtained had the transactions actually occurred as of that date, nor is it necessarily indicative of the Company’s future operational results.
5. Inventories
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
|
July 30,
2016
|
|
(millions)
|
Premium Fashion
|
$
|
250.3
|
|
|
$
|
198.6
|
|
Value Fashion
|
231.8
|
|
|
188.8
|
|
Plus Fashion
|
194.0
|
|
|
154.4
|
|
Kids Fashion
|
131.7
|
|
|
107.5
|
|
Total inventories
|
$
|
807.8
|
|
|
$
|
649.3
|
|
6. Long-Lived Assets Impairment
The charges below reduced the net carrying value of certain long-lived assets to their estimated fair value, which was determined based on discounted expected cash flows. These impairment charges were primarily related to the lower-than-expected operating performance of certain retail stores. Impairment losses for retail store-related assets and finite-lived intangible assets are included as a component of Selling, general and administrative expenses in the condensed consolidated statements of operations for all periods. There were no finite-lived intangible asset impairment losses recorded for any of the periods presented.
Impairment charges related to long-lived tangible assets by segment are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2016
|
|
October 24,
2015
|
|
(millions)
|
Premium Fashion
|
$
|
0.7
|
|
|
$
|
—
|
|
Value Fashion
|
2.1
|
|
|
1.6
|
|
Plus Fashion
|
1.1
|
|
|
—
|
|
Kids Fashion
|
0.8
|
|
|
0.3
|
|
Total impairment charges
|
$
|
4.7
|
|
|
$
|
1.9
|
|
7. Restructuring and Other Related Charges
In October 2016, the Company initiated a restructuring plan with the objective of delivering sustainable long-term growth and shareholder value (the "Change for Growth" program). The Change for Growth program is expected to (i) refine the Company's operating model to increase its focus on key customer segments, (ii) improve time-to-market, (iii) reduce working capital and (iv) enhance the Company's ability to serve customers on any purchasing platform, all while better leveraging the Company's shared service platform. The Company's new operating model is designed to focus on enhancing customer-facing capabilities while eliminating organization overlap. As part of refining the operating model, the Company made organizational changes resulting in the creation of the
Premium Fashion
,
Value Fashion
,
Plus Fashion
and
Kids Fashion
operating segments.
As a result of the Change for Growth program, the Company eliminated a number of executive positions which resulted in a charge of
$11.9 million
during the first quarter of Fiscal 2017. The charge consisted of
$8.1 million
of severance and other related expenses and
$3.8 million
of professional fees and is recorded within Restructuring and other related charges in the condensed consolidated statement of operations. The remaining severance-related liability is
$7.4 million
at
October 29, 2016
and is expected to be paid by the end of Fiscal 2017. The Company is still evaluating various potential opportunities and additional charges may be required in future periods as these plans are identified and executed.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. Debt
|
|
|
|
|
|
|
|
|
Debt consists of the following:
|
October 29,
2016
|
|
July 30,
2016
|
|
(millions)
|
Revolving credit facility
|
$
|
49.4
|
|
|
$
|
—
|
|
Less: unamortized debt issuance costs
(a)
|
(5.4
|
)
|
|
(5.8
|
)
|
|
44.0
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
Term loan
|
1,619.0
|
|
|
1,719.0
|
|
Less: unamortized debt issuance costs
(b)
|
(28.9
|
)
|
|
(30.1
|
)
|
unamortized original issue discount
(b)
|
(33.1
|
)
|
|
(34.6
|
)
|
|
1,557.0
|
|
|
1,654.3
|
|
|
|
|
|
|
|
Less: current portion
|
—
|
|
|
(54.0
|
)
|
Total long-term debt
|
$
|
1,601.0
|
|
|
$
|
1,594.5
|
|
_______
(a)
The unamortized debt issuance costs are amortized on a straight-line basis over the life of the amended revolving credit agreement.
(b)
The original issue discount and debt issuance costs for the term loan are amortized over the life of the term loan using the interest rate method based on an imputed interest rate of approximately
6.3%
.
Amended Revolving Credit Agreement
The Company's amended revolving credit agreement (the “Amended Revolving Credit Agreement”) provides aggregate revolving commitments up to
$600 million
, with an optional increase of up to
$200 million
and expires in August 2020. There are no mandatory reductions in aggregate revolving commitments throughout the term of the Amended Revolving Credit Agreement. However, borrowing availability under the Amended Revolving Credit Agreement (the "Availability") is limited by the amount of eligible cash, inventory and receivables as defined in the Amended Revolving Credit Agreement.
The Amended Revolving Credit Agreement may be used for the issuance of letters of credit, to fund working capital requirements and capital expenditures and for general corporate purposes. The Amended Revolving Credit Agreement includes a
$350 million
letter of credit sub-limit, of which
$100 million
can be used for standby letters of credit, and a
$30 million
swing loan sub-limit.
Throughout the term of the Amended Revolving Credit Agreement, the Company can elect to borrow either Alternative Base Rate Borrowings ("ABR Borrowings") or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using the LIBOR for such Interest Period plus an applicable margin ranging from
125 basis points
to
150 basis points
based on the Company’s average availability during the previous fiscal quarter. ABR Borrowings bear interest at a variable rate determined using a base rate equal to the greatest of (i) prime rate, (ii) federal funds rate plus
50 basis points
, or (iii) one-month LIBOR plus
100 basis points
; plus an applicable margin ranging from
25 basis points
to
50 basis points
based on the average availability during the previous fiscal quarter. As of
October 29, 2016
, borrowings under the Amended Revolving Credit Agreement consisted of
$40.0 million
of Eurodollar Borrowings at a rate of
1.81%
and
$9.4
million of ABR Borrowings at a rate of
3.75%
.
Under the terms of the Amended Revolving Credit Agreement, the unutilized commitment fee ranges from
20 basis points
to
25 basis points
per annum based on the Company's average utilization during the previous fiscal quarter.
As of
October 29, 2016
, after taking into account the
$49.4 million
of revolving debt outstanding and the
$27.6 million
in outstanding letters of credit, the Company had
$523.0 million
of availability under the Amended Revolving Credit Agreement.
Term Loan
In connection with the
ANN
Acquisition, the Company entered into a
$1.8 billion
variable-rate term loan (the "Term Loan"), which was issued at a
2%
discount and provides for an additional term facility of
$200 million
. The Company is also eligible to borrow an unlimited amount, as long as the Company maintains a minimum senior secured leverage ratio as defined in the Term Loan (the "Senior Secured Leverage Ratio") among other factors.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Term Loan matures on August 21, 2022 and requires quarterly repayments of
$4.5 million
in calendar 2016 and
$22.5 million
thereafter, with a remaining balloon payment of approximately
$1.2 billion
required at maturity. In August 2016, the Company repaid
$100 million
and in October 2016, subsequent to the end of the first quarter, the Company repaid an additional
$22.5 million
. These payments were applied to the future quarterly scheduled payments such that the Company is not required to make its next quarterly payment until May 2018. The Company is also required to make mandatory prepayments in connection with certain prepayment events, including (i) commencing with the fiscal year ending July 29, 2017 if the Company has excess cash flow, as defined in the Term Loan, for any fiscal year and the Senior Secured Leverage Ratio for such fiscal year exceeds certain predetermined limits and (ii) from Net Proceeds, as defined in the Term Loan, of asset dispositions and certain casualty events that are greater than
$25 million
in the aggregate in any fiscal year and not reinvested (or committed to be reinvested) within
one year
, in each case subject to certain conditions and exceptions. The Company has the right to prepay the Term Loan in any amount and at any time with no prepayment penalties.
At the time of initial borrowings and renewal periods throughout the term of the Term Loan, the Company may elect to borrow either ABR Borrowings or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using LIBOR (subject to a
75 basis points
floor) plus an applicable margin of
450 basis points
. ABR Borrowings bear interest at a variable rate determined using a base rate (subject to a floor of
175 basis points
) equal to the greatest of (i) prime rate, (ii) federal funds rate plus
50 basis points
, or (iii) LIBOR plus
100 basis points
, plus an applicable margin of
350 basis points
. As of
October 29, 2016
, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of
5.25%
.
Restrictions under the Term Loan and the Amended Revolving Credit Agreement (collectively the "Borrowing Agreements")
Under the Amended Revolving Credit Agreement, the Company is required to maintain a fixed charge coverage ratio, as defined in the Amended Revolving Credit Agreement, of at least
1.00
to 1.00 any time in which the Company is in a covenant period, as defined in the Amended Revolving Credit Agreement (the "Covenant Period"). Such Covenant Period is in effect if Availability is less than the greater of (a)
10%
of the Credit Limit (the lesser of total Revolving Commitments and the Borrowing Base) and (b)
$45 million
for
three
consecutive business days and ends when Availability is greater than these thresholds for
30
consecutive days. The Covenant Period was not in effect as of
October 29, 2016
.
The Borrowing Agreements contain customary negative covenants, subject to negotiated exceptions, on (i) liens and guarantees, (ii) investments, (iii) indebtedness, (iv) significant corporate changes including mergers and acquisitions, (v) dispositions and (vi) restricted payments, cash dividends, stock repurchases and certain other restrictive agreements. The Borrowing Agreements also contain customary events of default, such as payment defaults, cross-defaults to certain material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation of the Company’s business, in each case subject to customary grace periods.
The Company's Amended Revolving Credit Agreement allows us to make restricted payments, including dividends and share repurchases subject to the Company satisfying certain conditions set forth in the Company's Amended Revolving Credit Agreement, notably that at the time of and immediately after giving effect to the restricted payment, (i) there is no default or event of default and (ii) Availability is not less than
20%
of the aggregate revolving commitments. The Company's Term Loan allows us to make restricted payments, including dividends and share repurchases up to a predetermined dollar amount. The dollar amount limitation is waived upon the satisfaction of certain conditions under the Term Loan, notably that at the time of and immediately after giving effect to such restricted payment, (i) there is no default or event of default and (ii) the total leverage ratio, as defined in the Term Loan agreement, is below predetermined limits. Dividends are payable when declared by our Board of Directors.
The Company’s obligations under the Borrowing Agreements are guaranteed by certain of its domestic subsidiaries (the “Subsidiary Guarantors”). As collateral under the Borrowing Agreements and the guarantees thereof, the Company and the Subsidiary Guarantors have granted to the administrative agents for the benefit of the lenders a first priority lien on substantially all of their tangible and intangible assets, including, without limitation, certain domestic inventory and certain material real estate.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Maturities of Debt
The Company's debt matures as follows:
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
(millions)
|
2017
|
|
$
|
—
|
|
2018
(a)
|
|
44.0
|
|
2019
|
|
90.0
|
|
2020
|
|
90.0
|
|
2021
|
|
139.4
|
|
Thereafter
|
|
1,305.0
|
|
Total maturities
|
|
$
|
1,668.4
|
|
_______
(a)
In October 2016, subsequent to the end of the first quarter, the Company repaid
$22.5 million
and is not required to make its next quarterly payment until May 2018. The table above does not reflect the effect of the
$22.5 million
payment.
9. Fair Value Measurements
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In evaluating the fair value measurement techniques for recording certain financial assets and liabilities, there is a three-level valuation hierarchy under which financial assets and liabilities are designated. The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs used that are significant to the fair value measurement as of the measurement date as follows:
|
|
|
Level 1
|
Quoted prices for identical instruments in active markets;
|
Level 2
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are recently traded (not active); and
|
Level 3
|
Instruments with little, if any, market activity are valued using significant unobservable inputs or valuation techniques.
|
As of
October 29, 2016
and July 30, 2016, the Company believes that the carrying values of cash and cash equivalents, available-for-sale investments, accounts and other receivables and accounts payable approximates their estimated fair values due to the short maturities of these financial instruments. As the Company’s revolving credit facility is variable rate, the Company believes that there is no significant difference between the estimated fair value and the carrying value as of
October 29, 2016
and July 30, 2016. The fair value of the Term Loan was determined to be
$1.583 billion
as of
October 29, 2016
and
$1.683 billion
as of July 30, 2016 based on quoted market prices from recent transactions, which are considered Level 2 inputs within the fair value hierarchy.
The Company’s non-financial instruments, which primarily consist of goodwill, intangible assets and property and equipment, are not required to be measured at fair values on a recurring basis and are reported at their carrying values. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be recoverable (and at least annually for goodwill and other indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to (and recorded at) fair values.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10. Equity
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Summary of Changes in Equity
:
|
October 29,
2016
|
|
October 24,
2015
|
|
(millions)
|
Balance at beginning of period
|
$
|
1,863.3
|
|
|
$
|
1,518.1
|
|
Net income (loss)
|
14.4
|
|
|
(18.1
|
)
|
Common stock issued in connection with the
ANN
Acquisition (Note 4)
|
—
|
|
|
344.9
|
|
Total other comprehensive income
|
0.5
|
|
|
1.2
|
|
Common stock issued and equity grants made pursuant to stock-based compensation plans
|
5.7
|
|
|
15.2
|
|
Other
|
(0.3
|
)
|
|
—
|
|
Balance at end of period
|
$
|
1,883.6
|
|
|
$
|
1,861.3
|
|
Common Stock Repurchase Program
In December 2015, the Company’s Board of Directors authorized a
$200 million
share repurchase program (the “2016 Stock Repurchase Program”). Under the 2016 Stock Repurchase Program, purchases of shares of common stock may be made at the Company’s discretion from time to time, subject to overall business and market conditions. Currently, share repurchases in excess of
$100 million
are subject to certain restrictions under the terms of the Company's Borrowing Agreements, as more fully described in Note 8. Repurchased shares are retired and treated as authorized but unissued. The excess of repurchase price over the par value of common stock for the repurchased shares is charged entirely to retained earnings.
There were no repurchases of common stock by the Company during the
three
months ended
October 29, 2016
. The remaining availability under the 2016 Stock Repurchase Program was approximately
$181.4 million
at
October 29, 2016
.
Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing the net income (loss) applicable to common shares after preferred dividend requirements, if any, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share adjusts basic net income (loss) per common share for the effects of outstanding stock options, restricted stock, restricted stock units and any other potentially dilutive financial instruments, only in the periods in which such effect is dilutive under the treasury stock method.
The weighted-average number of common shares outstanding used to calculate basic net income (loss) per common share is reconciled to those shares used in calculating diluted net income (loss) per common share as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2016
|
|
October 24, 2015
(a)
|
|
(millions)
|
Basic
|
194.4
|
|
|
184.8
|
|
Dilutive effect of stock options and restricted stock units
|
0.9
|
|
|
—
|
|
Diluted shares
|
195.3
|
|
|
184.8
|
|
(a)
There was no dilutive effect of stock options, restricted stock and restricted stock units for the first quarter of Fiscal 2016 as the impact of these items was anti-dilutive because of the Company's net loss incurred during the period.
Options to purchase shares of common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive, and therefore not included in the computation of diluted net income (loss) per common share. In addition, the Company has outstanding restricted stock units that are issuable only upon the achievement of certain service conditions. Any performance or market-based restricted stock units outstanding are included in the computation of diluted shares only to the extent the underlying performance or market conditions (a) are satisfied prior to the end of the reporting period or (b) would be satisfied if the end of the reporting period was the end of the related contingency period, and the result would be dilutive under the treasury stock method. Potentially dilutive instruments are not included in the computation of net loss per share for the
three
months ended
October 24, 2015
as the impact of those items would have been anti-dilutive due to the net loss incurred
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
for the period. For the three months ended
October 29, 2016
and
October 24, 2015
, respectively,
19.6 million
and
17.6 million
shares of anti-dilutive options and/or restricted stock units were excluded from the diluted share calculations.
11. Stock-based Compensation
As of
October 29, 2016
, there were approximately
15.1 million
shares remaining under the 2016 Omnibus Incentive Plan available for future grants. The Company issues new shares of common stock when stock option awards are exercised and restricted stock units vest.
Impact on Results
A summary of the total compensation expense and associated income tax benefit recognized related to stock-based compensation arrangements is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2016
|
|
October 24,
2015
|
|
(millions)
|
Compensation expense
|
$
|
7.0
|
|
|
$
|
4.8
|
|
Income tax benefit
|
$
|
(2.6
|
)
|
|
$
|
(1.8
|
)
|
Stock Options
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2016
|
|
October 24,
2015
|
Expected term (years)
|
3.0
|
|
|
3.0
|
|
Expected volatility
|
37.3
|
%
|
|
35.1
|
%
|
Risk-free interest rate
|
1.2
|
%
|
|
1.5
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
Weighted-average grant date fair value
|
$
|
1.94
|
|
|
$
|
4.25
|
|
A summary of the stock option activity under all plans during the
three
months ended
October 29, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Terms
|
|
Aggregate
Intrinsic
Value
(a)
|
|
(thousands)
|
|
|
|
|
(years)
|
|
(millions)
|
Options outstanding – July 30, 2016
|
14,813.4
|
|
|
$
|
14.33
|
|
|
4.8
|
|
$
|
0.9
|
|
Granted
|
5,714.2
|
|
|
5.56
|
|
|
|
|
|
Exercised
|
(13.0
|
)
|
|
8.14
|
|
|
|
|
|
Canceled/Forfeited
|
(1,207.2
|
)
|
|
12.90
|
|
|
|
|
|
Options outstanding – October 29, 2016
|
19,307.4
|
|
|
$
|
11.83
|
|
|
5.2
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at October 29, 2016
(b)
|
18,731.6
|
|
|
$
|
11.98
|
|
|
4.2
|
|
$
|
—
|
|
Options exercisable at October 29, 2016
|
10,034.6
|
|
|
$
|
14.48
|
|
|
4.2
|
|
$
|
—
|
|
_______
|
|
(a)
|
The intrinsic value is the amount by which the market price at the end of the period of the underlying share of stock exceeds the exercise price of the stock option.
|
|
|
(b)
|
The number of options expected to vest takes into consideration estimated expected forfeitures.
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of
October 29, 2016
, there was
$26.3 million
of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of
2.2
years. The total intrinsic value of options exercised during the
three
months ended
October 29, 2016
was de minimus and during the
three
months ended
October 24, 2015
was approximately
$7.0 million
. The total grant date fair value of options that vested during the
three
months ended
October 29, 2016
was approximately
$12.8 million
and during the
three
months ended
October 24, 2015
was approximately
$12.7 million
.
Restricted Equity Awards
A summary of restricted equity awards activity during the
three
months ended
October 29, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Service-based
Restricted Equity Awards
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
|
(thousands)
|
|
|
Nonvested at July 30, 2016
|
2,258.8
|
|
|
$
|
13.62
|
|
Granted
|
2,072.6
|
|
|
5.59
|
|
Vested
|
(493.3
|
)
|
|
13.89
|
|
Cancelled/Forfeited
|
(325.2
|
)
|
|
13.00
|
|
Nonvested at October 29, 2016
|
3,512.9
|
|
|
$
|
8.91
|
|
As of
October 29, 2016
, there was
$21.5 million
of total unrecognized compensation cost related to the service-based Restricted Equity Awards, which is expected to be recognized over a remaining weighted-average vesting period of
2.7 years
.
12. Employee Benefit Plans
Long-Term Incentive Plan
During Fiscal 2016, the Company created a long-term incentive program ("LTIP") for vice presidents and above under the 2016 Omnibus Incentive Plan. The LTIP entitles the holder to either a cash payment, or a stock payment for certain officers at the Company's option, equal to a predetermined target amount earned at the end of a performance period and is subject to (a) the grantee’s continuing employment and (b) the Company’s achievement of certain performance goals over a one, two or three-year performance period. Compensation expense for the LTIP is recognized over the related performance periods based on the expected achievement of the performance goals.
The Company recognized
$3.7 million
in compensation expense for the three months ended
October 29, 2016
and
$0.8 million
for the three months ended
October 24, 2015
which was recorded within Selling, general and administrative expenses in the condensed consolidated financial statements. As of
October 29, 2016
, there was
$39.9 million
of expected unrecognized compensation cost related to the LTIP, which is expected to be recognized over a remaining weighted-average vesting period of
2.3 years
. As of
October 29, 2016
, the liability for LTIP Awards was
$13.4 million
, of which
$4.1 million
was classified within Accrued expenses and other current liabilities and
$9.3 million
was classified within Other non-current liabilities in the condensed consolidated balance sheets. In addition, the Company paid
$10.4 million
to settle such liabilities during the three months ended
October 29, 2016
.
Defined Benefit Plan
In connection with the
ANN
Acquisition, the Company assumed
ANN
's pension plan which was frozen and for which the accumulated benefit obligation exceeded the plan's assets by approximately
$12 million
as of July 30, 2016. In Fiscal 2016, the Company made a decision to terminate the plan. The liquidation of the trust began during the first quarter of Fiscal 2017 and was completed early in the second quarter of Fiscal 2017 with the remaining obligation transferred to a third-party and settled through a non-participating annuity contract. Under the terms of liquidation, some participants elected to receive lump-sum payments while the others elected to remain in the plan. During the first quarter of Fiscal 2017, the Company expensed
$3.3 million
to reflect settlement charges associated with the lump sum payments to its participants and
$0.6 million
for professional fees which were expensed as incurred, both of which are included within Acquisition and integration expenses in the condensed consolidated
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
statement of operations. As the transfer to the third party discussed above did not occur prior to the end of the first quarter of Fiscal 2017, the accumulated actuarial loss of
$4.1 million
(less an income tax benefit of
$1.6 million
) remained within Accumulated other comprehensive loss as of
October 29, 2016
and will be reclassified to Acquisition and integration expenses during the second quarter of Fiscal 2017. At that time, the trust will be fully liquidated.
13. Commitments and Contingencies
Legal Matters
Justice Pricing Litigation
The Company is a defendant in a number of class action lawsuits that allege that
Justice
’s promotional practices violated state comparative pricing laws in connection with advertisements promoting a
40%
discount. The plaintiffs further allege false advertising, violation of state consumer protection statutes, breach of contract, breach of express warranty and unfair benefit to
Justice
. The plaintiffs seek to stop
Justice
’s allegedly unlawful practice and obtain damages for
Justice
’s customers in the named states. They also seek interest and legal fees.
In July 2015, an agreement was reached with the plaintiffs in the
Rougvie
case to settle the lawsuits on a class basis with all
Justice
customers who made purchases between January 1, 2012 and February 28, 2015 for approximately
$51 million
, including payments to members of the class, payment of legal fees and expenses of settlement administration. As a result, the Company established a reserve for approximately
$51 million
during Fiscal 2015.
The proposed Settlement Agreement was filed with the United States District Court for the Eastern District of Pennsylvania for preliminary approval on September 24, 2015 and received preliminary approval by the court on October 27, 2015. The Company paid approximately
$51 million
representing the agreed settlement amount into an escrow account on November 16, 2015. Formal notice of settlement was sent to the class members on December 1, 2015. The final approval hearing was held on May 20, 2016, and on July 29, 2016, the Court granted the parties’ joint motion for final approval of settlement and dismissed the case with prejudice. In reaching this conclusion, the Court rejected virtually all of the objections to the settlement that had been raised, but did reduce the amount of attorneys’ fees to be paid to plaintiffs’ counsel, which will not affect the total amount of the settlement. The Court’s decision has been appealed to the United States Court of Appeals for the Third Circuit. Once there is a final non-appealable approval of the Settlement Agreement, it will resolve all claims in all of the outstanding class actions on behalf of customers who made purchases between January 1, 2012 and February 28, 2015.
Potential claims related to purchases made in 2010 and 2011 have been raised and it is possible that individual class members who excluded themselves from the settlement may seek to pursue their own individual or class claims not subject to the broader settlement. The Company believes it has strong defenses to any such claims and is prepared to defend against them. The Company believes that the liability associated with any such claims would not be material. If the matters described herein do not occur and the pricing lawsuits are not finally resolved, the ultimate resolution of these matters may or may not result in an additional material loss, which cannot be reasonably estimated at this time.
Reference is made to the Company’s Annual Report on Form 10-K for the fiscal year ended July 30, 2016 filed with the SEC on September 19, 2016, which includes a description of the lawsuits comprising the Justice pricing litigation and should be read in conjunction with the foregoing update.
Steven Linares v. ANN INC.
On December 29, 2015, plaintiff, Steven Linares, a former
ANN
sales associate, filed a class action complaint on behalf of all sales leads, sales associates and stock associates working in California from December 29, 2011 through the present, in Los Angeles County Superior Court. Plaintiff alleges on behalf of the class that
ANN
did not properly provide overtime pay, minimum wage pay, meal and rest breaks, and waiting time pay, among other claims under the California Business and Professions Code and California Labor Code.
At mediation, the parties agreed to settle all claims in the suit for a total of
$3.5 million
to settle both the pending claims and other wage-and-hour claims that could have been brought as part of the lawsuit (including claims for penalties under the Private Attorneys’ General Act). The Company believes that such amount reflects a liability that is both probable and reasonably estimable, thus a
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
reserve for approximately
$3.5 million
was established in the first quarter of fiscal 2017. The parties are currently preparing the Joint Stipulation for Class Action Settlement and Release. No date has been set for the Preliminary Approval Hearing.
Other litigation
The Company is involved in routine litigation arising in the normal course of business. In the opinion of management, such litigation is not expected to have a material adverse effect on the Company’s condensed consolidated financial statements.
14. Segment Information
Historically, the Company organized its businesses into six reportable segments following a brand-focused approach:
ANN
,
Justice
,
Lane Bryant
,
maurices
,
dressbarn
and
Catherines
. In connection with the Change for Growth program, the Company shifted from a brand-based focus to a customer-based focus in order to reduce organizational overlap and maximize operational efficiencies. In connection therewith, effective with the beginning of Fiscal 2017, the Company reorganized its businesses into four operating segments:
Premium Fashion
,
Value Fashion
,
Plus Fashion
and
Kids Fashion
. Each segment is led by a segment manager who is directly accountable for that segment's financial performance and maintains regular contact with the Company's chief operating decision maker (the "CODM") to review the operating activities, financial results, forecasts and business plans of the segment. Accordingly, the Company's CODM evaluates performance and allocates resources at the segment level. The
four
operating segments are as follows:
|
|
•
|
Premium Fashion
segment – consists primarily of the specialty retail, outlet and ecommerce operations of the
Ann Taylor
and
LOFT
brands.
|
|
|
•
|
Value Fashion
segment – consists of the specialty retail, outlet and ecommerce operations of the
maurices
and
dressbarn
brands.
|
|
|
•
|
Plus Fashion
segment – consists of the specialty retail, outlet and ecommerce operations of the
Lane Bryant
and
Catherines
brands.
|
|
|
•
|
Kids Fashion
segment – consists of the specialty retail, outlet, ecommerce and licensing operations of the
Justice
brand.
|
The accounting policies of the Company’s operating segments are consistent with those described in the Fiscal 2016 10-K. All intercompany revenues are eliminated in consolidation. Corporate overhead expenses are allocated to the segments based upon specific usage or other reasonable allocation methods.
Due to changes in the Company's operating segments discussed above, segment information for the three-month period ended
October 24, 2015
has been recast to conform to the current period's presentation. These changes related entirely to combining the previously reported brand-based segment information into the new customer-based operating model and had no impact on total net sales, total operating income or total depreciation and amortization expense.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net sales, operating income and depreciation and amortization expense for each operating segment are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2016
|
|
October 24,
2015
|
|
(millions)
|
Net sales:
|
|
|
|
|
|
Premium Fashion
(a)
|
$
|
579.2
|
|
|
$
|
501.2
|
|
Value Fashion
|
504.1
|
|
|
530.1
|
|
Plus Fashion
|
317.7
|
|
|
335.3
|
|
Kids Fashion
|
277.4
|
|
|
305.4
|
|
Total net sales
|
$
|
1,678.4
|
|
|
$
|
1,672.0
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
Premium Fashion
(a) (b)
|
$
|
43.6
|
|
|
$
|
(48.1
|
)
|
Value Fashion
|
12.1
|
|
|
35.0
|
|
Plus Fashion
|
6.2
|
|
|
3.4
|
|
Kids Fashion
|
13.2
|
|
|
40.2
|
|
Unallocated acquisition and integration expenses
|
(12.0
|
)
|
|
(42.5
|
)
|
Unallocated restructuring and other related charges
(c)
|
(11.9
|
)
|
|
—
|
|
Total operating income (loss)
|
$
|
51.2
|
|
|
$
|
(12.0
|
)
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
Premium Fashion
(a)
|
$
|
34.2
|
|
|
$
|
27.7
|
|
Value Fashion
|
26.4
|
|
|
25.0
|
|
Plus Fashion
|
16.1
|
|
|
12.8
|
|
Kids Fashion
|
17.2
|
|
|
17.0
|
|
Total depreciation and amortization expense
|
$
|
93.9
|
|
|
$
|
82.5
|
|
_______
|
|
(a)
|
The results of the
Premium
Fashion
segment for the post-acquisition period from August 22, 2015 to October 31, 2015 are included within the Company's condensed consolidated results of operations for the
three
months ended
October 24, 2015
.
|
|
|
(b)
|
The results of the
Premium Fashion
segment
for the
three
months ended
October 24, 2015
include an approximately
$104 million
non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value.
|
(c)
Restructuring and other related charges are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
October 29,
2016
|
|
October 24,
2015
|
|
(millions)
|
Restructuring and other related charges:
|
|
|
|
|
|
Restructuring charges
(i)
:
|
|
|
|
Premium Fashion
|
$
|
—
|
|
|
$
|
—
|
|
Value Fashion
|
2.3
|
|
|
—
|
|
Plus Fashion
|
1.7
|
|
|
—
|
|
Kids Fashion
|
0.7
|
|
|
—
|
|
Corporate
|
3.4
|
|
|
—
|
|
Other related charges
(ii)
|
3.8
|
|
|
—
|
|
Total restructuring and other related charges
|
$
|
11.9
|
|
|
$
|
—
|
|
(i)
During the first quarter of Fiscal 2017, the Company recorded severance-related charges from the elimination of a number of executive positions under the Company's Change for Growth program, as more fully described in Note 7.
(ii)
Other related charges consist of professional fees incurred in connection with the Change for Growth program.
ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15. Additional Financial Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Cash Interest and Taxes:
|
October 29,
2016
|
|
October 24,
2015
|
|
(millions)
|
Cash paid for interest
|
$
|
35.5
|
|
|
$
|
0.8
|
|
Cash paid for income taxes
|
$
|
2.1
|
|
|
$
|
2.0
|
|
Non-cash Transactions
In connection with the
ANN
Acquisition during the first quarter of Fiscal 2016, as more fully described in Note 4, the Company issued
31.2 million
shares of common stock valued at approximately
$345 million
, based on the Company's stock price on the date of the acquisition. Non-cash investing activities include accrued purchases of fixed assets in the amount of
$32.1 million
as of
October 29, 2016
and
$37.5 million
as of
October 24, 2015
.