Item 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Various statements in this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "project," "we believe," "is or remains optimistic," "currently envisions" and similar words or phrases and involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking statements.
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016 (the "Fiscal 2016 10-K"). There are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A — "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
Our 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 results of
ANN
are represented by our
Premium Fashion
segment. The Company had annual revenue 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.
General Business Conditions
Our performance is subject to macroeconomic conditions and their impact on levels and patterns of consumer spending. Some of the factors that could negatively impact discretionary consumer spending include general economic conditions, high unemployment, lower wage levels, reductions in net worth, higher energy and other prices, increasing interest rates and low consumer confidence.
In addition, consumer spending habits continue to shift on an accelerated pace towards an increasing preference to purchase merchandise digitally as opposed to in traditional brick-and-mortar retail stores. These factors could have a material negative effect on our business, operational results, financial condition and cash flows.
During our second quarter of Fiscal 2017, the U.S. economy continued to show signs of recovery. However, improved employment and modest wage growth have not translated into higher spending in nondurable goods, as consumer spending continues to shift towards experiences, services, health care and durable goods such as automotive and home improvements. Although retail sales experienced modest growth during the holiday season, brick-and-mortar retailers continued to face intense competition and channel disruption. Consequently, consumer store traffic remained relatively weak and inconsistent during the quarter. Since store sales still comprise a majority of our sales mix, store traffic declines resulted in lower comparable sales which, in turn, led to a more promotional operating environment. We expect negative store traffic trends to continue during the remainder of Fiscal 2017, and as described under the section
Change for Growth Program
below, we have responded by scaling back overall spending levels and we continue to refine our operating model to ensure we remain competitive in our rapidly evolving sector.
Change for Growth Program
In October 2016, the Company initiated a restructuring plan with the objective of supporting sustainable long-term growth and increasing 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) reduce the time to bring product to market, (iii) reduce working capital requirements, and (iv) enhance the Company's ability to serve customers on any purchasing platform, all while better leveraging the Company's shared service platform.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
During the first quarter of Fiscal 2017, the Company eliminated a number of executive positions and made organizational changes resulting in the creation of the
Premium Fashion
,
Value Fashion
,
Plus Fashion
and
Kids Fashion
operating segments. The Company's new operating model is designed to allow its operating segments to focus on enhancing customer-facing capabilities while eliminating organization overlap. During the second quarter of Fiscal 2017, the Company announced further consolidation of certain support functions into its shared service group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection. The changes are expected to further reduce organizational redundancies and integrate processes within the Company. As a result of these changes, the Company recorded a $32.1 million charge during the
six
months ended
January 28, 2017
, including $20.3 million of severance and other related expenses and $11.8 million of professional fees incurred in connection with the identification and implementation of transformation initiatives. During the three months ended
January 28, 2017
, $20.2 million was expensed in connection with the Change for Growth program.
The Company realized approximately $10 million in cost savings related to the Change for Growth program for the
six
months ended
January 28, 2017
and expects to realize additional cost savings of approximately $35 million for the remainder of Fiscal 2017 and approximately $105 million over Fiscal 2018 and Fiscal 2019, bringing the total expected annual cost savings to $150 million. These savings are expected to be achieved through (i) operating expense reductions in the areas of professional services, travel and facilities management, among others and (ii) further refinement of our operating model to eliminate organization redundancies and increase utilization of our shared services functions. These savings are expected to be realized in our operating segment results generally in proportion to their sales.
The Company expects to incur significant additional charges, and incremental capital expenditures may be required, in future periods as restructuring plans are fully defined and executed. However, certain identified plans are in their preliminary stages as of January, 28, 2017 and additional charges and capital expenditures are not able to be quantified at this time. Actions associated with the Change for Growth program are expected to continue until substantial completion in Fiscal 2019.
See Notes 7 and 14 to the accompanying unaudited condensed consolidated financial statements for additional information on the charges incurred in connection with the Change for Growth program.
Integration of ANN
During Fiscal 2017, the Company (i) completed the integration of our
Premium Fashion
segment’s ecommerce fulfillment into our Greencastle facility, (ii) negotiated favorable contracts with vendors and (iii) realized cost reductions from sourcing merchandise through third-party buying agents. As a result of these initiatives, the Company has realized cost savings of approximately $50 million for the
six
months ended
January 28, 2017
, with approximately $30 million in freight and product cost savings related to the Company's ongoing supply chain integration and cost of goods sold initiative at the
Premium Fashion
segment, approximately $5 million in Buying, distribution and occupancy synergies related to the consolidation of the
Premium Fashion
segment brands into the Company's ecommerce fulfillment center and approximately $15 million in Selling, general and administrative synergies primarily related to the elimination of overlapping leadership and non-merchandise procurement savings. We expect to realize additional synergies of approximately $45 million during the remainder of Fiscal 2017 and approximately $75 million in Fiscal 2018, bringing the total annual synergies and cost savings, including amounts achieved in Fiscal 2016, to approximately $235 million.
Seasonality of Business
Our individual segments are typically affected by seasonal sales trends primarily resulting from the timing of holiday and back-to-school shopping periods. In particular, sales at our
Kids Fashion
segment tend to be significantly higher during the fall season, which occurs during the first and second quarters of our fiscal year, as this includes the back-to-school period and the December holiday season. Our
Plus
Fashion
segment tends to experience higher sales during the spring season, which include the Easter and Mother's Day holidays. Our
Premium Fashion
and
Value Fashion
segments have relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Summary of Financial Performance
Second Quarter Summary and Key Developments
Operating highlights for the second quarter are as follows:
|
|
•
|
Comparable sales decreased by
4%
and were down at all four segments primarily due to declines in store traffic;
|
|
|
•
|
Gross margin, in terms of dollars, decreased primarily as a result of the decrease in comparable sales. Gross margin rate increased by
150
basis points to
54.1%
from
52.6%
in the year-ago period, mainly due to an approximately $23 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value in the year-ago period in our
Premium Fashion
segment;
|
|
|
•
|
Operating loss was
$44.7 million
compared to an operating loss of
$16.8 million
in the year-ago period mainly due to operational declines resulting from the comparable sales decreases, offset in part by
ANN
Acquisition synergies and savings associated with the Change for Growth transformation program; and
|
|
|
•
|
Net loss per diluted share was
$0.18
, compared to net loss per diluted share of
$0.12
in the year-ago period.
|
Liquidity highlights for the six month period ended
January 28, 2017
are as follows:
|
|
•
|
Cash provided by operations was
$215.0 million
compared to
$161.2 million
in the year-ago period;
|
|
|
•
|
Capital expenditures were
$155.1 million
compared to $173.2 million in the year-ago period, which also had cash usage of
$1.495 billion
, net of cash acquired, for the
ANN
Acquisition; and
|
|
|
•
|
Term loan repayments totaled
$122.5 million
.
|
Transactions Affecting Comparability of Results of Operations and Financial Condition
The comparability of the Company's operational results for the periods presented herein has been affected by certain transactions. A summary of the effect of these items on pretax income for each applicable period presented is noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
January 28,
2017
|
|
January 23,
2016
|
|
January 28,
2017
|
|
January 23,
2016
|
|
(millions)
|
Acquisition and integration expenses
(a)
|
$
|
(15.8
|
)
|
|
$
|
(16.0
|
)
|
|
$
|
(27.8
|
)
|
|
$
|
(58.5
|
)
|
Restructuring and other related charges
(b)
|
(20.2
|
)
|
|
—
|
|
|
(32.1
|
)
|
|
—
|
|
Non-cash inventory expense associated with the purchase accounting write-up of
ANN
's inventory to fair market value
|
—
|
|
|
(22.7
|
)
|
|
—
|
|
|
(126.9
|
)
|
(a)
Fiscal 2017 primarily represented settlement charges and professional fees related to a pension plan acquired in the
ANN
Acquisition and severance and retention costs associated with the post-acquisition integration of
ANN
's operations. Fiscal 2016 primarily represented costs related to the acquisition and integration of
ANN
.
(b)
Fiscal 2017 primarily represented severance and other related expenses and professional fees incurred in connection with the identification and implementation of transformation initiatives associated with the Change for Growth program.
The preceding discussion highlights, as necessary, the significant changes in operating results arising from these items and transactions. However, unusual items or transactions may occur in any period. Accordingly, investors and other financial statement users should individually consider the types of events and transactions that have affected operating trends.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
RESULTS OF OPERATIONS
Three Months Ended
January 28, 2017
compared to Three Months Ended
January 23, 2016
The following table summarizes operating results for certain financial statement line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
January 28,
2017
|
|
January 23,
2016
|
|
$ Change
|
|
% Change
|
|
(millions, except per share data)
|
|
|
|
|
|
Net sales
|
$
|
1,748.2
|
|
|
$
|
1,841.8
|
|
|
$
|
(93.6
|
)
|
|
(5.1
|
)%
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
(802.4
|
)
|
|
(873.8
|
)
|
|
71.4
|
|
|
8.2
|
%
|
Cost of goods sold as % of net sales
|
45.9
|
%
|
|
47.4
|
%
|
|
|
|
|
|
|
Gross margin
|
945.8
|
|
|
968.0
|
|
|
(22.2
|
)
|
|
(2.3
|
)%
|
Gross margin as % of net sales
|
54.1
|
%
|
|
52.6
|
%
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Buying, distribution and occupancy expenses
|
(320.1
|
)
|
|
(329.9
|
)
|
|
9.8
|
|
|
3.0
|
%
|
BD&O expenses as % of net sales
|
18.3
|
%
|
|
17.9
|
%
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(538.1
|
)
|
|
(549.5
|
)
|
|
11.4
|
|
|
2.1
|
%
|
SG&A expenses as % of net sales
|
30.8
|
%
|
|
29.8
|
%
|
|
|
|
|
|
|
Acquisition and integration expenses
|
(15.8
|
)
|
|
(16.0
|
)
|
|
0.2
|
|
|
1.3
|
%
|
Restructuring and other related charges
|
(20.2
|
)
|
|
—
|
|
|
(20.2
|
)
|
|
NM
|
|
Depreciation and amortization expense
|
(96.3
|
)
|
|
(89.4
|
)
|
|
(6.9
|
)
|
|
(7.7
|
)%
|
Total other operating expenses
|
(990.5
|
)
|
|
(984.8
|
)
|
|
(5.7
|
)
|
|
(0.6
|
)%
|
Operating loss
|
(44.7
|
)
|
|
(16.8
|
)
|
|
(27.9
|
)
|
|
NM
|
|
Operating loss as % of net sales
|
(2.6
|
)%
|
|
(0.9
|
)%
|
|
|
|
|
|
|
Interest expense
|
(25.0
|
)
|
|
(27.8
|
)
|
|
2.8
|
|
|
10.1
|
%
|
Interest income and other income (expense), net
|
0.4
|
|
|
(0.8
|
)
|
|
1.2
|
|
|
NM
|
|
Gain on extinguishment of debt
|
—
|
|
|
0.8
|
|
|
(0.8
|
)
|
|
NM
|
|
Loss before benefit for income taxes
|
(69.3
|
)
|
|
(44.6
|
)
|
|
(24.7
|
)
|
|
(55.4
|
)%
|
Benefit for income taxes
|
34.1
|
|
|
22.0
|
|
|
12.1
|
|
|
55.0
|
%
|
Effective tax rate
(a)
|
49.2
|
%
|
|
49.3
|
%
|
|
|
|
|
|
|
Net loss
|
$
|
(35.2
|
)
|
|
$
|
(22.6
|
)
|
|
$
|
(12.6
|
)
|
|
(55.8
|
)%
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.18
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
(50.0
|
)%
|
Diluted
|
$
|
(0.18
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
(50.0
|
)%
|
_______
(a)
Effective tax rate is calculated by dividing the Benefit for income taxes by Loss before benefit for income taxes.
(NM)
Not meaningful.
Net Sales.
Total Company net sales decreased by
$93.6 million
, or
5.1%
, to
$1.748 billion
for the three months ended
January 28, 2017
from
$1.842 billion
in the year-ago period. Net sales were down across all of our operating segments caused primarily by a
4%
comparable sales decline that resulted from reduced store traffic; non-comparable sales decreased by
$17.7 million
, or
27%
, to
$47.3 million
from
$65.0 million
as discussed on a segment basis below; and wholesale, licensing and other revenues decreased by
$4.2 million
, or
7%
, to
$55.5 million
from
$59.7 million
.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Net sales data for our four operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
January 28,
2017
|
|
January 23,
2016
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
608.2
|
|
|
$
|
637.5
|
|
|
$
|
(29.3
|
)
|
|
(4.6
|
)%
|
Value Fashion
|
481.6
|
|
|
513.2
|
|
|
(31.6
|
)
|
|
(6.2
|
)%
|
Plus Fashion
|
347.3
|
|
|
363.6
|
|
|
(16.3
|
)
|
|
(4.5
|
)%
|
Kids Fashion
|
311.1
|
|
|
327.5
|
|
|
(16.4
|
)
|
|
(5.0
|
)%
|
Total net sales
|
$
|
1,748.2
|
|
|
$
|
1,841.8
|
|
|
$
|
(93.6
|
)
|
|
(5.1
|
)%
|
|
|
|
|
|
|
|
|
Comparable sales
(a)
|
|
|
|
|
|
|
|
|
|
(4
|
)%
|
_______
(a)
Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales refer to growth of sales from the Company's ecommerce channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, the Company reports a single, consolidated comparable sales metric, inclusive of store and ecommerce channels.
Premium Fashion
net sales
performance primarily reflected:
|
|
•
|
a decrease of
9%
in comparable sales at
Ann Taylor
and a decrease of
2%
in comparable sales at
LOFT
during the three months ended
January 28, 2017
; and
|
|
|
•
|
18
net store closures at
Ann Taylor
and
3
net store closures at
LOFT
in the last twelve months.
|
Value Fashion
net sales
performance primarily reflected:
|
|
•
|
a decrease of
$21.0 million
, or
8%
, in comparable sales at
maurices
and a decrease of
$6.9 million
, or
3%
, in comparable sales at
dressbarn
during the three months ended
January 28, 2017
;
|
|
|
•
|
an increase of
$3.4 million
in non-comparable sales
due to
36
net store openings at
maurices
in the last twelve months and a decrease of
$7.8 million
due to
26
net store closures at
dressbarn
in the last twelve months; and
|
|
|
•
|
an increase of
$0.7 million
in other revenues.
|
Plus Fashion
net sales
performance primarily reflected:
|
|
•
|
a decrease of
$12.1 million
, or
5%
, in comparable sales at
Lane Bryant
and a decrease of
$0.2 million
, or essentially flat comparable sales at
Catherines
during the three months ended
January 28, 2017
;
|
|
|
•
|
essentially flat non-comparable sales at
Lane Bryant
due to the timing of its
7
net store openings in the last twelve months and a
decrease of
$2.8 million
in non-comparable sales due to
7
net store closures at
Catherines
in the last twelve months; and
|
|
|
•
|
a decrease of
$1.2 million
in other revenues.
|
Kids Fashion
net sales
performance primarily reflected:
|
|
•
|
a decrease of
$3.3 million
, or
1%
, in comparable sales at
Justice
during the three months ended
January 28, 2017
;
|
|
|
•
|
a decrease of
$8.1 million
in non-comparable sales caused by
29
net store closures in the last twelve months; and
|
|
|
•
|
a decrease of
$5.0 million
in wholesale, licensing operations and other revenues.
|
Gross Margin.
Gross margin, in terms of dollars decreased primarily as a result of the decrease in comparable sales. Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by
150
basis points from the year-ago period to
54.1%
for the three months ended
January 28, 2017
. The increase was mainly due
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
to an approximately $23 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded during the second quarter of Fiscal 2016 in our
Premium Fashion
segment. Excluding the prior year impact of the inventory amortization, gross margin rate increased by 30 basis points to
54.1%
from 53.8%, primarily due to improved performance at our
Premium Fashion
and
Plus Fashion
segments, offset in part by the impact of higher markdown levels at our
Value Fashion
and
Kids Fashion
segments. On a consolidated basis, gross margin benefited from the realization of approximately $20 million in combined deal synergies and cost savings related to the Company's ongoing supply chain integration and the cost of goods sold initiative at its
Premium Fashion
segment.
Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.
Gross margin rate highlights on a segment basis are as follows:
|
|
•
|
Premium Fashion
gross margin
performance reflected significant gross margin rate improvement at both
Ann Taylor
and
LOFT
. Both brands benefited from tighter inventory control, realization of synergies related to the Company's ongoing supply chain integration, and the segment's cost of goods sold initiative.
|
|
|
•
|
Value Fashion
gross margin
performance reflected a decline in gross margin rate at
maurices
caused by a higher level of promotional selling, offset in part by rate improvement at
dressbarn
, mainly due to the benefit of increased mix of internally sourced product.
|
|
|
•
|
Plus Fashion
gross margin
performance reflected significant gross margin rate improvement at
Lane Bryant
mainly due to tighter inventory control and more targeted promotional strategies.
|
|
|
•
|
Kids Fashion
gross margin
rate performance declined as a result of a higher level of promotional selling to address soft performance of its more casual apparel assortment. Gross margin also declined due to additional shipping costs related to increased omni-channel ship-to-home transactions that were fulfilled by our stores. The omni-channel platform has been live for roughly six months at
Justice
, and we expect to address increased shipping costs in future periods through refined omni-channel platform logic.
|
Buying, Distribution and Occupancy ("BD&O") Expenses
consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
BD&O expenses decreased by
$9.8 million
, or
3.0%
, to
$320.1 million
for the three months ended
January 28, 2017
from
$329.9 million
in the year-ago period. The decrease in BD&O expenses was primarily due to lower occupancy expenses resulting from ongoing fleet optimization, lower performance-based compensation and approximately $1 million in synergies related to the
ANN
Acquisition, associated with the consolidation of the
Premium Fashion
segment brands into the Company's ecommerce fulfillment center. BD&O expenses as a percentage of net sales increased by
40
basis points to
18.3%
for the three months ended
January 28, 2017
from
17.9%
in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.
Selling, General and Administrative ("SG&A") Expenses
consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
SG&A expenses decreased by
$11.4 million
, or
2.1%
, to
$538.1 million
for the three months ended
January 28, 2017
from
$549.5 million
in the year-ago period. The decrease in SG&A expenses was primarily due to lower store variable expenses associated with the decrease in sales volume, operating expense reductions, lower performance-based compensation and approximately $15 million in synergies and transformation initiatives, primarily due to the elimination of overlapping leadership and non-merchandise procurement savings. These factors were offset in part by inflationary increases. SG&A expenses as a percentage of net sales increased by
100
basis points to
30.8%
for the three months ended
January 28, 2017
from
29.8%
in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.
Depreciation and Amortization Expense
increased by
$6.9 million
, or
7.7%
, to
$96.3 million
for the three months ended
January 28, 2017
from
$89.4 million
in the year-ago period. The increase was primarily due to the Company's ecommerce platform investment.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Operating Loss.
Operating loss increased by
$27.9 million
to
$44.7 million
for the three months ended
January 28, 2017
from
$16.8 million
in the year-ago period primarily due to the operating results discussed on a segment basis below. The operating loss also reflected a
$20.2 million
increase in Restructuring and other related charges, which was mostly offset by lower non-cash purchase accounting expenses of approximately
$18 million
recorded by our
Premium Fashion
segment.
Operating results for our four operating segments are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
January 28,
2017
|
|
January 23,
2016
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
22.7
|
|
|
$
|
(5.8
|
)
|
|
$
|
28.5
|
|
|
NM
|
|
Value Fashion
|
(19.8
|
)
|
|
(1.3
|
)
|
|
(18.5
|
)
|
|
NM
|
|
Plus Fashion
|
(10.0
|
)
|
|
(6.9
|
)
|
|
(3.1
|
)
|
|
(44.9
|
)%
|
Kids Fashion
|
(1.6
|
)
|
|
13.2
|
|
|
(14.8
|
)
|
|
NM
|
|
Unallocated acquisition and integration expenses
|
(15.8
|
)
|
|
(16.0
|
)
|
|
0.2
|
|
|
1.3
|
%
|
Unallocated restructuring and other related charges
|
(20.2
|
)
|
|
—
|
|
|
(20.2
|
)
|
|
NM
|
|
Total operating loss
|
$
|
(44.7
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
(27.9
|
)
|
|
NM
|
|
_______
(NM)
Not meaningful.
Premium Fashion
operating results improved by
$28.5 million
as a result of lower non-cash purchase accounting expenses of approximately
$18 million
due primarily to the write-up of
inventory to fair market value recorded in the year-ago period. Operating results also improved as a result of increased gross margin rate and decreased operating expenses, which more than offset the impact of a decrease in comparable sales. Operating expense reductions were driven by lower performance-based compensation, synergies savings associated with the transition into the Company's ecommerce fulfillment center, and lower occupancy expenses resulting from ongoing fleet optimization, which were partially offset by inflationary increases.
Value Fashion
operating results decreased by
$18.5 million
, primarily as a result of the decrease in comparable sales and lower gross margin rates, both discussed above, offset in part by lower operating expenses. The decrease in operating expenses resulted primarily from lower performance-related compensation and lower store variable expenses resulting from the decrease in sales volume.
Plus Fashion
operating results decreased by
$3.1 million
, with significant improvement in gross margin rate and decreases in operating expenses mostly offsetting the impact of a decrease in comparable sales. The decrease in operating expenses was mainly due to lower occupancy expenses resulting from ongoing fleet optimization and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Kids Fashion
operating results decreased by
$14.8 million
primarily due to the decline in gross margin rate and a decrease in comparable sales, both discussed above, offset in part by a decrease in operating expenses. The decrease in operating expenses was mainly as a result of lower occupancy expenses resulting from ongoing fleet optimization and lower performance-based compensation.
Unallocated Acquisition and Integration Expenses
of
$15.8 million
for the three months ended
January 28, 2017
included $4.1 million of settlement charges and professional fees related to termination of the pension plan acquired in the
ANN
Acquisition, $8.2 million of severance and retention costs and $3.5 million of other costs associated with the post-acquisition integration of
ANN
's operations. The
$16.0 million
in the year-ago period represents costs related to the
ANN
Acquisition consisting of $10.9 million of severance and retention-related expenses and $5.1 million of integration costs to combine the operations and infrastructure of the
ANN
business into the Company's.
Unallocated Restructuring and Other Related Charges
of
$20.2 million
for the three months ended
January 28, 2017
included $12.2 million of severance and other related expenses and $8.0 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Interest Expense
decreased by
$2.8 million
, or
10.1%
, to
$25.0 million
for the three months ended
January 28, 2017
from $
27.8 million
in the year-ago period. The decrease was mainly the result of the principal redemptions and repayments of the term loan.
Gain on Extinguishment of Debt.
During the year-ago period, the Company repurchased $65.0 million of the outstanding principal balance of the term loan at an aggregate cost of $61.6 million through open market transactions, resulting in a $0.8 million pre-tax gain, net of the proportional write-off of unamortized original discount and debt issuance costs of $2.6 million.
Benefit for Income Taxes
represents federal, foreign, state and local income taxes. The Company records income taxes based on the estimated effective tax rate for the year. Income tax benefit increased by
$12.1 million
, to
$34.1 million
for the three months ended
January 28, 2017
from
$22.0 million
in the year-ago period as the Company had a higher pre-tax loss in the current period. The effective tax rate was
49.2%
for the three months ended
January 28, 2017
and the effective tax rate was
49.3%
in the year-ago period. The expected annual tax rate for the second quarter of Fiscal 2017 and the year-ago period is higher than the statutory federal and state tax rate primarily due to the impact of permanent items on a relatively low level of pretax income and the impact of the earnings mix on the overall state effective rate.
Net Loss
increased by
$12.6 million
to
$35.2 million
for the three months ended
January 28, 2017
from
$22.6 million
in the year-ago period. The increase in net loss was primarily due to the higher operating loss, offset in part by the higher income tax benefit, as discussed above.
Net Loss per Diluted Common Share
increased by
$0.06
to
$0.18
per share for the three months ended
January 28, 2017
from
$0.12
per share in the year-ago period, primarily as a result of the higher net loss, as discussed above.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Six Months Ended
January 28, 2017
compared to Six Months Ended
January 23, 2016
The following table summarizes operating results for certain financial statement line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
January 28,
2017
|
|
January 23,
2016
|
|
$ Change
|
|
% Change
|
|
(millions, except per share data)
|
|
|
|
|
|
Net sales
|
$
|
3,426.6
|
|
|
$
|
3,513.8
|
|
|
$
|
(87.2
|
)
|
|
(2.5
|
)%
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
(1,466.8
|
)
|
|
(1,643.1
|
)
|
|
176.3
|
|
|
10.7
|
%
|
Cost of goods sold as % of net sales
|
42.8
|
%
|
|
46.8
|
%
|
|
|
|
|
|
|
Gross margin
|
1,959.8
|
|
|
1,870.7
|
|
|
89.1
|
|
|
4.8
|
%
|
Gross margin as % of net sales
|
57.2
|
%
|
|
53.2
|
%
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
Buying, distribution and occupancy expenses
|
(640.7
|
)
|
|
(632.9
|
)
|
|
(7.8
|
)
|
|
(1.2
|
)%
|
BD&O expenses as % of net sales
|
18.7
|
%
|
|
18.0
|
%
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(1,062.5
|
)
|
|
(1,036.2
|
)
|
|
(26.3
|
)
|
|
(2.5
|
)%
|
SG&A expenses as % of net sales
|
31.0
|
%
|
|
29.5
|
%
|
|
|
|
|
|
|
Acquisition and integration expenses
|
(27.8
|
)
|
|
(58.5
|
)
|
|
30.7
|
|
|
52.5
|
%
|
Restructuring and other related charges
|
(32.1
|
)
|
|
—
|
|
|
(32.1
|
)
|
|
NM
|
|
Depreciation and amortization expense
|
(190.2
|
)
|
|
(171.9
|
)
|
|
(18.3
|
)
|
|
(10.6
|
)%
|
Total other operating expenses
|
(1,953.3
|
)
|
|
(1,899.5
|
)
|
|
(53.8
|
)
|
|
(2.8
|
)%
|
Operating income (loss)
|
6.5
|
|
|
(28.8
|
)
|
|
35.3
|
|
|
NM
|
|
Operating income (loss) as % of net sales
|
0.2
|
%
|
|
(0.8
|
)%
|
|
|
|
|
|
|
Interest expense
|
(50.3
|
)
|
|
(48.3
|
)
|
|
(2.0
|
)
|
|
(4.1
|
)%
|
Interest income and other income (expense), net
|
0.3
|
|
|
(0.2
|
)
|
|
0.5
|
|
|
NM
|
|
Gain on extinguishment of debt
|
—
|
|
|
0.8
|
|
|
(0.8
|
)
|
|
NM
|
|
Loss before benefit for income taxes
|
(43.5
|
)
|
|
(76.5
|
)
|
|
33.0
|
|
|
43.1
|
%
|
Benefit for income taxes
|
22.7
|
|
|
35.8
|
|
|
(13.1
|
)
|
|
(36.6
|
)%
|
Effective tax rate
(b)
|
52.2
|
%
|
|
46.8
|
%
|
|
|
|
|
|
|
Net loss
|
$
|
(20.8
|
)
|
|
$
|
(40.7
|
)
|
|
$
|
19.9
|
|
|
48.9
|
%
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.11
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.10
|
|
|
47.6
|
%
|
Diluted
|
$
|
(0.11
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.10
|
|
|
47.6
|
%
|
_______
(a)
For our
Premium Fashion
segment, the Fiscal 2017 period reflected a 26-week period and the Fiscal 2016 period reflected the 23-week post-acquisition period.
(b)
Effective tax rate is calculated by dividing the Benefit for income taxes by the Loss before benefit for income taxes.
(NM)
Not meaningful.
Net Sales.
Total Company net sales decreased by
$87.2 million
, or
2.5%
, to
$3.427 billion
for the
six
months ended
January 28, 2017
from
$3.514 billion
in the year-ago period. Net sales for the
Premium Fashion
segment increased by
$48.7 million
primarily as the six-month period in Fiscal 2017 reflected a 26-week period whereas the year-ago period reflected the 23-week post-acquisition period, which was offset in part by a comparable sales decrease of
5%
. Net sales were down across all of our other operating segments caused primarily by a
4%
comparable sales decline that resulted from reduced store traffic; non-comparable sales decreased by
$33.3 million
, or
33.1%
, to
$67.4 million
from
$100.7 million
as discussed on a segment basis below; and wholesale, licensing and other revenues decreased by
$10.2 million
, or
12.3%
, to
$72.7 million
from
$82.9 million
.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Net sales data for our four operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
January 28,
2017
|
|
January 23,
2016
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
1,187.4
|
|
|
$
|
1,138.7
|
|
|
$
|
48.7
|
|
|
4.3
|
%
|
Value Fashion
|
985.7
|
|
|
1,043.3
|
|
|
(57.6
|
)
|
|
(5.5
|
)%
|
Plus Fashion
|
665.0
|
|
|
698.9
|
|
|
(33.9
|
)
|
|
(4.9
|
)%
|
Kids Fashion
|
588.5
|
|
|
632.9
|
|
|
(44.4
|
)
|
|
(7.0
|
)%
|
Total net sales
|
$
|
3,426.6
|
|
|
$
|
3,513.8
|
|
|
$
|
(87.2
|
)
|
|
(2.5
|
)%
|
|
|
|
|
|
|
|
|
Comparable sales
(a)
|
|
|
|
|
|
|
|
|
|
(5
|
)%
|
_______
(a)
Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales refer to growth of sales from the Company's ecommerce channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, the Company reports a single, consolidated comparable sales metric, inclusive of store and ecommerce channels.
Premium Fashion
net sales
performance primarily reflected:
|
|
•
|
a 26-week period in the first quarter of Fiscal 2017 compared to the 23-week post-acquisition period in the first quarter of Fiscal 2016;
|
|
|
•
|
a decrease of
10%
in comparable sales at
Ann Taylor
and a decrease of
3%
in comparable sales at
LOFT
; and
|
|
|
•
|
18
net store closures at
Ann Taylor
and
3
net store closures at
LOFT
in the last twelve months.
|
Value Fashion
net sales
performance primarily reflected:
|
|
•
|
a decrease of
$38.1 million
, or
7%
, in comparable sales at
maurices
and a decrease of
$18.9 million
, or
4%
, in comparable sales at
dressbarn
during the
six
months ended
January 28, 2017
;
|
|
|
•
|
an increase of
$12.0 million
in non-comparable sales due to
36
net store openings at
maurices
in the last twelve months and a decrease of
$11.5 million
due to
26
net store closures at
dressbarn
in the last twelve months; and
|
|
|
•
|
a decrease of
$1.1 million
in other revenues.
|
Plus Fashion
net sales
performance primarily reflected:
|
|
•
|
a decrease of
$21.7 million
, or
4%
, in comparable sales at
Lane Bryant
and a decrease of
$7.4 million
, or
5%
, in comparable sales at
Catherines
during the
six
months ended
January 28, 2017
;
|
|
|
•
|
a decrease of
$0.5 million
in non-comparable sales at
Lane Bryant
due to the timing of its
7
net store openings in the last twelve months and a
decrease of
$2.1 million
in non-comparable sales due to
7
net store closures at
Catherines
in the last twelve months; and
|
|
|
•
|
a decrease of
$2.2 million
in other revenues.
|
Kids Fashion
net sales
performance primarily reflected:
|
|
•
|
a decrease of
$6.3 million
, or
1%
, in comparable sales at
Justice
during the
six
months ended
January 28, 2017
;
|
|
|
•
|
a decrease of
$31.2 million
in non-comparable sales caused by
29
net store closures in the last twelve months as well as the shift of a peak back to school week from the first week of the fiscal year to the last week of the fiscal year due to the 53
rd
week recognized at the end of Fiscal 2016; and
|
|
|
•
|
a decrease of
$6.9 million
in wholesale, licensing operations and other revenues.
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Gross Margin.
Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by
400
basis points from the year-ago period to
57.2%
for the
six
months ended
January 28, 2017
. The increase was mainly due to an approximate $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded during the
six
months ended
January 23, 2016
in our
Premium Fashion
segment. Excluding the prior year impact of the inventory amortization, gross margin rate increased by 30 basis points to
57.2%
from 56.9%, primarily due to improved performance at our
Premium Fashion
and
Plus Fashion
segments, offset in part by the impact of higher markdown levels at our
Value Fashion
and
Kids Fashion
segments. On a consolidated basis, gross margin benefited from the realization of approximately $30 million in combined deal synergies and cost savings related to the Company's ongoing supply chain integration and the cost of goods sold initiative at its
Premium Fashion
segment.
Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.
Gross margin rate highlights on a segment basis are as follows:
|
|
•
|
Premium Fashion
gross margin
performance reflected significant gross margin rate improvement at both
Ann Taylor
and
LOFT
. Both brands benefited from tighter inventory control, realization of synergies related to the Company's ongoing supply chain integration, and the segment's cost of goods sold initiative.
|
|
|
•
|
Value Fashion
gross margin
performance primarily reflected a decline in gross profit margin rate at
maurices
caused by a higher level of promotional selling, offset in part by a rate improvement at
dressbarn
, mainly due to the benefit of increased mix of internally sourced product.
|
|
|
•
|
Plus Fashion
gross margin
performance reflected gross margin rate improvement at both
Lane Bryant
and
Catherines
, mainly due to tighter inventory control and more targeted promotional strategies.
|
|
|
•
|
Kids Fashion
gross margin
rate performance declined as a result of a higher level of promotional selling to address soft performance of its more casual apparel assortment. Gross margin also declined due to additional shipping costs related to increased omni-channel ship-to-home transactions that were fulfilled by our stores. The omni-channel platform has been live for roughly six months at Justice, and we expect to address increased shipping costs in future periods through refined omni-channel platform logic.
|
Buying, Distribution and Occupancy ("BD&O") Expenses
consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
BD&O expenses increased by
$7.8 million
, or
1.2%
, to
$640.7 million
for the
six
months ended
January 28, 2017
from
$632.9 million
in the year-ago period. BD&O expenses for the
Premium Fashion
segment increased by $19.2 million primarily as the results reflected a 26-week period in Fiscal 2017 compared to the 23-week post-acquisition period in Fiscal 2016. For our other segments, BD&O expenses decreased by $11.4 million primarily due to lower occupancy expenses resulting from ongoing fleet optimization and lower performance-based compensation. On a consolidated basis, BD&O expenses also included approximately $5 million in synergies related to the
ANN
Acquisition, associated with the consolidation of the
Premium Fashion
segment brands into the Company's ecommerce fulfillment center. BD&O expenses as a percentage of net sales increased by
70
basis points to
18.7%
for the
six
months ended
January 28, 2017
from
18.0%
in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.
Selling, General and Administrative ("SG&A") Expenses
consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
SG&A expenses increased by
$26.3 million
, or
2.5%
, to
$1.063 billion
for the
six
months ended
January 28, 2017
from
$1.036 billion
in the year-ago period. SG&A expenses for the
Premium Fashion
segment increased by $37.5 million primarily as the results reflected a 26-week period in Fiscal 2017 compared to the 23-week post-acquisition period in Fiscal 2016. For our other segments, SG&A expenses decreased by $11.2 million primarily due to lower store variable expenses associated with the decrease in sales volume, operating expense reductions and a decrease in administrative payroll costs mainly associated with the Change for Growth program, and lower performance-based compensation. On a consolidated basis, SG&A expenses also included
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
approximately $25 million in synergies and transformation initiatives, primarily due to the elimination of overlapping leadership and non-merchandise procurement savings, which were offset in part by inflationary increases. SG&A expenses as a percentage of net sales increased by
150
basis points to
31.0%
for the
six
months ended
January 28, 2017
from
29.5%
in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.
Depreciation and Amortization Expense
increased by
$18.3 million
, or
10.6%
, to
$190.2 million
for the
six
months ended
January 28, 2017
from
$171.9 million
in the year-ago period. Depreciation and amortization expense for the
Premium Fashion
segment increased by
$8.5 million
primarily as the results reflected a 26-week period in Fiscal 2017 compared to the 23-week post-acquisition period in Fiscal 2016. For our other segments, depreciation and amortization expense increased by
$9.8 million
primarily due to the Company's ecommerce platform investment.
Operating Income (Loss).
Operating results increased by
$35.3 million
to operating income of
$6.5 million
for the
six
months ended
January 28, 2017
from an operating loss of
$28.8 million
in the year-ago period primarily due to lower non-cash purchase accounting expenses of approximately
$120 million
recorded by our
Premium Fashion
segment, offset in part by the operating results discussed on a segment basis below.
Operating results for our four operating segments are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
January 28,
2017
|
|
January 23,
2016
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
66.3
|
|
|
$
|
(53.9
|
)
|
|
$
|
120.2
|
|
|
NM
|
|
Value Fashion
|
(7.7
|
)
|
|
33.7
|
|
|
(41.4
|
)
|
|
NM
|
|
Plus Fashion
|
(3.8
|
)
|
|
(3.5
|
)
|
|
(0.3
|
)
|
|
(8.6
|
)%
|
Kids Fashion
|
11.6
|
|
|
53.4
|
|
|
(41.8
|
)
|
|
(78.3
|
)%
|
Unallocated acquisition and integration expenses
|
(27.8
|
)
|
|
(58.5
|
)
|
|
30.7
|
|
|
52.5
|
%
|
Unallocated restructuring and other related charges
|
(32.1
|
)
|
|
—
|
|
|
(32.1
|
)
|
|
NM
|
|
Total operating income (loss)
|
$
|
6.5
|
|
|
$
|
(28.8
|
)
|
|
$
|
35.3
|
|
|
NM
|
|
_______
(NM)
Not meaningful.
Premium Fashion
operating results improved by
$120.2 million
as a result of lower non-cash purchase accounting expenses of approximately
$120 million
due primarily to the write-up of
inventory to fair market value recorded in the year-ago period. The operating results for the
six
months ended
January 28, 2017
reflected a 26-week period and the
six
months ended
January 23, 2016
reflected the 23-week post-acquisition period. In addition, the operating results for the
six
months ended
January 28, 2017
reflected a decrease in comparable sales, partially offset by a significant improvement in gross margin rate, both discussed above. Operating expenses for the
six
months ended
January 28, 2017
reflected lower performance-based compensation, synergies savings associated with the transition into the Company's ecommerce fulfillment center, and lower occupancy expenses resulting from ongoing fleet optimization, which were partially offset by inflationary increases.
Value Fashion
operating results decreased by
$41.4 million
, primarily as a result of the decrease in comparable sales and lower gross margin rates, both discussed above, offset in part by lower operating expenses. The decrease in operating expenses resulted primarily from lower performance-based compensation, lower store variable expenses resulting from the decrease in sales volume, and a decrease in administrative payroll costs mainly associated with the Change for Growth program, partially offset by incremental marketing investments.
Plus Fashion
operating results decreased by
$0.3 million
, as an increase in gross margin rate and decreases operating expense essentially offset the impact of a decrease in comparable sales, as discussed above. The decrease in operating expenses was mainly due to lower occupancy expenses resulting from ongoing fleet optimization, reduced marketing expenses, and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Kids Fashion
operating results decreased by
$41.8 million
primarily due to the decline in gross margin rate, the decrease in comparable sales, and the shift of the peak back-to-school week, discussed above, offset in part by a decrease in operating expenses.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
The shift of the peak back-to-school week negatively impacted results by approximately $10 million. The decrease in operating expenses was mainly a result of lower occupancy expenses relating to ongoing fleet optimization and lower performance-based compensation.
Unallocated Acquisition and Integration Expenses
of
$27.8 million
for the
six
months ended
January 28, 2017
included $8.0 million of settlement charges and professional fees related to termination of the pension plan acquired in the
ANN
Acquisition, $10.5 million of severance and retention costs and $9.3 million of other costs associated with the post-acquisition integration of
ANN
's operations. The
$58.5 million
in the year-ago period represents costs related to the
ANN
Acquisition consisting of $20.5 million of legal, consulting and investment-banking related transaction costs, $30.7 million of severance and retention-related expenses and $7.3 million of integration costs to combine the operations and infrastructure of the
ANN
business into the Company's.
Unallocated Restructuring and Other Related Charges
of
$32.1 million
for the
six
months ended
January 28, 2017
included $20.3 million of severance and other related expenses and $11.8 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program.
Interest Expense
increased by
$2.0 million
, or
4.1%
, to
$50.3 million
for the
six
months ended
January 28, 2017
from
$48.3 million
in the year-ago period. The increase was mainly the result of an additional three weeks of interest expense on the term loan for the
six
months ended
January 28, 2017
due to the timing of the
ANN
Acquisition, offset in part by the impact of the principal redemptions and repayments of the term loan.
Gain on Extinguishment of Debt.
During the year-ago period, the Company repurchased $65.0 million of the outstanding principal balance of the term loan at an aggregate cost of $61.6 million through open market transactions, resulting in a $0.8 million pre-tax gain, net of the proportional write-off of unamortized original discount and debt issuance costs of $2.6 million.
Benefit for Income Taxes
represents federal, foreign, state and local income taxes. The Company records income taxes based on the estimated effective tax rate for the year. Income tax benefit decreased by
$13.1 million
, to
$22.7 million
for the
six
months ended
January 28, 2017
from
$35.8 million
in the year-ago period as the Company had a lower pre-tax loss in the current period. The effective tax rate was
52.2%
for the
six
months ended
January 28, 2017
and the effective tax rate was
46.8%
in the year-ago period. The expected annual tax rate for Fiscal 2017 and the year-ago period is higher than the statutory federal and state tax rate primarily due to the impact of permanent items on a relatively low level of pretax income and the impact of the earnings mix on the overall state effective rate.
Net Loss
decreased by
$19.9 million
to
$20.8 million
for the
six
months ended
January 28, 2017
from
$40.7 million
in the year-ago period. The decrease was primarily due to the change in operating results, offset in part by a lower income tax benefit, as discussed above.
Net Loss per Diluted Common Share
decreased by
$0.10
to
$0.11
per share for the
six
months ended
January 28, 2017
from
$0.21
per share in the year-ago period, primarily as a result of a decrease in net loss, as discussed above.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
The table below summarizes our cash flows and is presented as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
January 28,
2017
|
|
January 23,
2016
|
|
(millions)
|
Net cash provided by operating activities
|
$
|
215.0
|
|
|
$
|
161.2
|
|
Net cash used in investing activities
|
(165.6
|
)
|
|
(1,642.2
|
)
|
Net cash (used in) provided by financing activities
|
(121.7
|
)
|
|
1,534.2
|
|
Net (decrease) increase in cash and cash equivalents
|
$
|
(72.3
|
)
|
|
$
|
53.2
|
|
Net cash provided by operating activities
.
Net cash provided by operations was
$215.0 million
for the
six
months ended
January 28, 2017
, compared to net cash provided by operations of
$161.2 million
in the year-ago period. Cash provided by operations was higher during Fiscal 2017 as there were certain non-recurring payments made during the year-ago period, including an escrow payment of approximately $51 million for the proposed
Justice
pricing litigation settlement, payment of approximately $44 million to a former
Justice
executive and payment of approximately $70 million in employee-related obligations assumed in the
ANN
Acquisition. These items were partially offset by lower net income before non-cash expenses such as depreciation and amortization expense and the amortization of the acquisition-related inventory write-up as well as timing differences of other working capital payments in the current period.
Net cash used in investing activities
.
Net cash used in investing activities for the
six
months ended
January 28, 2017
was
$165.6 million
, consisting primarily of capital expenditures of
$155.1 million
and the purchase of an intangible asset of
$11.3 million
. Net cash used in investing activities in the year-ago period was
$1.642 billion
, consisting primarily of
$1.495 billion
of cash paid in the
ANN
Acquisition and
$173.2 million
of capital expenditures, offset in part by
$25.6 million
of net proceeds from the sale of investments.
Net cash (used in) provided by financing activities
.
Net cash used in financing activities was
$121.7 million
for the
six
months ended
January 28, 2017
, consisting primarily of
$122.5 million
of principal repayments of our term loan debt. Net cash provided by financing activities in the year-ago period was
$1.534 billion
, consisting primarily of $1.8 billion of borrowing under our term loan and
$8.8 million
of proceeds relating to our stock-based compensation plans, offset in part by net repayments of debt under our amended revolving credit agreement of
$116.0 million
,
$61.6 million
of redemptions of our term loan debt and
$42.4 million
of payments made for deferred financing costs related to the borrowing arrangements entered into as a result of the
ANN
Acquisition.
Capital Spending
Capital expenditures during the
six
months ended
January 28, 2017
were
$155.1 million
, which included both routine spending in connection with our retail store network, construction and renovation of our existing portfolio of retail stores as well as spending for non-routine capital investments including our omni-channel platform, fit-out of our Riverside, California distribution center and integration activity related to the
ANN
Acquisition. For a detailed discussion of our significant non-routine capital investments, see Part II, Item 7 as specified in the
Capital Spending
section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Fiscal 2016 10-K.
The Company continually assesses its capital forecast and priority of projects. During the first quarter of Fiscal 2017, the Company lowered its full year outlook of planned store openings and, as a result, lowered its full year capital spending outlook for Fiscal 2017 to a range of $235 million to $260 million. Our capital requirements are expected to be funded primarily with available cash and cash equivalents, operating cash flows and, to the extent necessary, borrowings under the Company’s Amended Revolving Credit Agreement which is discussed below.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Liquidity
Our primary sources of liquidity are the cash flow generated from our operations, remaining availability under our Amended Revolving Credit Agreement (as defined below) after taking into account outstanding borrowings, letters of credit and the collateral limitation and available cash and cash equivalents. These sources of liquidity are used to fund our ongoing cash requirements, including working capital requirements, retail store expansion, construction and renovation of stores, any future dividend requirements, investment in technological and supply chain infrastructure, acquisitions, debt servicing requirements, stock repurchases, contingent liabilities (including uncertain tax positions), and other corporate activities. Management believes that our existing sources of liquidity will be sufficient to support our operating needs, capital requirements and any debt service requirements for the foreseeable future.
As of
January 28, 2017
, the Company had Cash and cash equivalents of
$299.5 million
. Approximately $228 million, or 76%, of our available cash and cash equivalents was held overseas by our foreign subsidiaries. As such, for the Company to have access to those cash and cash equivalents in the U.S, we would incur a current U.S. tax liability of between 15% and 20% of any such cash repatriated. A U.S. tax liability has been previously provided for in the provision for income taxes for the portion that is not permanently reinvested and is currently classified within Deferred income taxes on the accompanying unaudited condensed consolidated balance sheets. We continue to assess options for use of our overseas cash and cash equivalents.
As of
January 28, 2017
, we had
no
borrowings outstanding under the Amended Revolving Credit Agreement. After taking into account the
$25.1 million
in outstanding letters of credit, the Company had
$404.6 million
of availability under the Amended Revolving Credit Agreement.
Debt
For a detailed description of the terms and restrictions under the amended revolving credit agreement ("Amended Revolving Credit Agreement") and the $1.8 billion seven-year term loan (the "Term Loan"), see Note 8 to the accompanying unaudited condensed consolidated financial statements.
Amended Revolving Credit Agreement
We believe that our Amended Revolving Credit Agreement is adequately diversified with no undue concentrations in any one financial institution. Upon the closing of the Amended Revolving Credit Agreement, there were seven financial institutions participating in the Amended Revolving Credit Facility, with no one participant maintaining a maximum commitment percentage in excess of 25%. Management has no reason at this time to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the Amended Revolving Credit Agreement in the event of our election to draw funds in the foreseeable future. The Company was in compliance with all financial covenants contained in the Amended Revolving Credit Agreement as of
January 28, 2017
. The Company believes the Amended Revolving Credit Agreement will provide sufficient liquidity to continue to support the Company’s operating needs and capital requirements for the foreseeable future.
Term Loan
For the six months ended
January 28, 2017
, the Company repaid a total of $122.5 million, which was applied to future quarterly scheduled payments such that the Company is not required to make its next quarterly payment until May 2018. We may from time to time seek to repay or purchase our outstanding debt through open market transactions, privately negotiated transactions or otherwise depending on prevailing market conditions and our liquidity requirements, subject to any restrictions under our debt arrangements, among other factors.
The Company expects to incur cash interest expense of approximately $42 million on the Term Loan during the remainder of Fiscal 2017 based on the outstanding balance and interest rates in effect as of
January 28, 2017
. Such interest and principal payments are expected to be funded with our cash flows from operations.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Common Stock Repurchase Program
There were no purchases of common stock by the Company during the
six
months ended
January 28, 2017
under its repurchase program. For a complete description of the Company's 2016 Stock Repurchase Program, see Note 10 to the accompanying unaudited condensed consolidated financial statements.
We may from time to time continue to repurchase additional shares depending on prevailing market conditions and our liquidity requirements, subject to any restrictions under our debt agreements, among other factors.
Contractual and Other Obligations
Firm Commitments
The following table summarizes certain of the Company's aggregate contractual obligations as of
January 28, 2017
and the estimated timing and effect that such obligations are expected to have on the Company's liquidity and cash flows in future periods. The Company expects to fund the firm commitments with operating cash flow generated in the normal course of business and, if necessary, availability under its Amended Revolving Credit Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Remainder of Fiscal
2017
|
|
Fiscal 2018-
2019
|
|
Fiscal 2020-
2021
|
|
Fiscal 2022
and
Thereafter
|
|
Total
|
|
|
(millions)
|
Long-term debt
|
|
$
|
—
|
|
|
$
|
111.5
|
|
|
$
|
180.0
|
|
|
$
|
1,305.0
|
|
|
$
|
1,596.5
|
|
Interest payments on long-term debt
|
|
42.4
|
|
|
165.6
|
|
|
147.8
|
|
|
71.7
|
|
|
427.5
|
|
Total
|
|
$
|
42.4
|
|
|
$
|
277.1
|
|
|
$
|
327.8
|
|
|
$
|
1,376.7
|
|
|
$
|
2,024.0
|
|
The following is a description of the Company's material, firmly committed contractual obligations as of
January 28, 2017
:
|
|
•
|
Long-term debt
represents contractual payments of outstanding borrowings under our borrowing agreements as of
January 28, 2017
.
|
|
|
•
|
Interest payments on long-term debt
represent interest payments related to our borrowing agreements. Interest payments on our Amended Revolving Credit Agreement, if any, were calculated based on the outstanding balance and the interest rates in effect as of
January 28, 2017
, as if the borrowings remain outstanding until mandatory repayment is required at expiration in August 2020. Interest payments on our Term Loan were calculated based on the interest rates in effect as of
January 28, 2017
and the estimated outstanding balance, giving effect to the contractual payments in future periods.
|
Off-Balance Sheet Arrangements
There have been no material changes during the period covered by this report to the off-balance sheet arrangements specified in the contractual and other obligations section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Fiscal 2016 10-K.
CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Notes 3 and 4 to the audited consolidated financial statements included in the Fiscal 2016 10-K. For a detailed discussion of the Company's critical accounting policies, see the “Critical Accounting Policies” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Fiscal 2016 10-K. There have been no material changes to the Company’s critical accounting policies since July 30, 2016. Below is an update regarding the Company’s goodwill and intangible assets.
The impairment assessment of goodwill and other indefinite-lived intangible assets is performed at the level of each brand, which constitutes an individual reporting unit. During the fourth quarter of Fiscal 2016, the Company performed its annual impairment
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
assessment (the "Fiscal 2016 Valuation"). As disclosed in our Fiscal 2016 10-K, the Company had goodwill of $1,279.3 million, of which $733.9 million related to
ANN
, $169.4 million related to
Justice
, $126.0 million related to
Lane Bryant
, $200.7 million related to
maurices
and $49.3 million related to
Catherines
. While the results of that assessment indicated the fair values of
Justice
,
maurices
and
Catherines
all significantly exceeded their respective book values, the fair value of the Company's
ANN
and
Lane Bryant
reporting units exceeded their book value by less than 20% and are discussed in more detail below.
In the Fiscal 2016 Valuation, the fair value of
ANN
exceeded its book value by 12% and the fair value of
Lane Bryant
exceeded its book value by 16%. For the
six
months ended
January 28, 2017
, both
ANN
and
Lane Bryant
have performed in line with the cash flow projections supporting the Fiscal 2016 Valuation as the shortfall in operating cash flows was principally offset by a decrease in capital expenditures.
Several factors could impact the reporting units' ability to achieve the future cash flows contemplated in the Fiscal 2016 Valuation including, but not limited to: (i) achieving comparable sales and profitability assumptions, (ii) successful implementation of the reporting unit's marketing and merchandising strategies, (iii) optimization of store fleet productivity and (iv) the continued identification and successful implementation of cost-reduction and growth initiatives. Given the relatively small excess of fair value over carrying value as of the Fiscal 2016 Valuation, declines in the long-term growth and profitability trends or market multiples from those that were expected in the Fiscal 2016 Valuation may result in an impairment of the reporting unit's goodwill in future periods to the extent the carrying value of the reporting unit exceeds its estimated fair value. Such charges may be material. The Company will continue to monitor macroeconomic conditions, industry and market trends and entity-specific risks and evaluate their impact on the valuation of its reporting units.
RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
See Note 3 to the accompanying unaudited condensed consolidated financial statements for a description of certain recently issued or proposed accounting standards which may impact our financial statements in future periods.