NOTES TO 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.
The Company had the following reportable segments and store counts as of July 30, 2016:
ANN
1,022
stores;
Justice
937
stores;
Lane Bryant
772
stores;
maurices
993
stores;
dressbarn
809
stores; and
Catherines
373
stores.
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
ANN
segment offers modern feminine classics and versatile fashion choices, sold primarily under the
Ann Taylor
and
LOFT
brands. Our
Justice
segment offers fashionable apparel in an environment designed to match the energetic lifestyle of tween girls. Our
Lane Bryant
segment offers fashionable and sophisticated plus-size apparel, including its exclusive intimates label,
Cacique
. Our
maurices
segment offers up-to-date fashion including core and plus-size offerings, with stores concentrated in small markets (approximately
25,000
to
150,000
people). Our
dressbarn
segment offers moderate-to-better quality career, special occasion and casual fashion for working women. Finally, our
Catherines
segment offers classic apparel and accessories for wear-to-work and casual lifestyles in a full range of plus sizes.
2. Basis of Presentation
Basis of Consolidation
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and present the financial position, operational results, comprehensive (loss) income and cash flows of the Company and its
100%
owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include: the determination of the fair values of assets acquired and liabilities assumed in a business combination; the realizability of inventory; reserves for litigation and other contingencies; useful lives and impairments of long-lived tangible assets; evaluation of goodwill and other intangible assets for impairment; accounting for income taxes and related uncertain tax positions; the valuation of stock-based compensation and related expected forfeiture rates; and the self-insured insurance reserves.
Fiscal Year
The Company utilizes a 52-53 week fiscal year ending on the last Saturday in July. As such, fiscal year 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016"); fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015"); and fiscal year 2014 ended on July 26, 2014 and reflected a 52-week period (“Fiscal 2014”). The results of the Company's newly acquired
ANN
segment for the post-acquisition period from August 22, 2015 to July 30, 2016 have been included in the Company's consolidated statements of operations for Fiscal 2016. All references to “Fiscal 2017” refer to our 52-week period that will end on July 29, 2017.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Discontinued Operations
On June 14, 2012, the Company acquired the
Figi’s
business in connection with the acquisition of the
Lane Bryant
and
Catherines
businesses. Contemporaneously with the acquisition of these businesses, the Company announced its intent to sell the acquired
Figi’s
business. The sale of
Figi’s
closed during the first quarter of Fiscal 2014 and resulted in pretax charges of
$4.6 million
to reflect transaction costs and the adjustment of certain liabilities which existed at the date it was sold as well as the operating results for the
Figi’s
business (including
$7.4 million
of revenues for the first quarter of Fiscal 2014). These charges have been classified as components of discontinued operations in the accompanying consolidated statements of operations.
3. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, price has been fixed or is determinable and collectability is reasonably assured.
Retail store revenue is recognized net of estimated returns at the time of sale to consumers. Ecommerce revenue from sales of products ordered through the Company’s retail Internet sites and revenue from direct-mail orders are recognized upon delivery and receipt of the shipment by our customers. Such revenue also is reduced by an estimate of returns.
Reserves for estimated product returns are recorded based on historical return trends and are adjusted for known events, as applicable. Reserves for estimated product returns were
$17.3 million
and
$9.2 million
as of the end of Fiscal 2016 and Fiscal 2015, respectively.
Gift cards, gift certificates and merchandise credits (collectively, “gift cards”) issued by the Company are recorded as a deferred income liability until they are redeemed, at which point revenue is recognized. Gift cards do not have expiration dates. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Gift card breakage is recognized in Net sales over time based on the historical redemption patterns and historically has not been material.
Revenue associated with merchandise shipments to other third-party retailers is recognized at the time title passes and risk of loss is transferred to customers, which generally occurs at the date of shipment.
In addition to retail-store, ecommerce and third party sales, the Company's segments recognize revenue from (i) licensing arrangements with franchised stores, (ii) royalty payments received under license agreements for the use of their trade name and (iii) advertising and marketing arrangements with partner companies as they are earned in accordance with the terms of the underlying agreements.
The Company accounts for sales and other related taxes on a net basis, thereby excluding such taxes from revenue.
Cost of Goods Sold
Cost of goods sold (“COGS”) consists of all costs of merchandise (net of purchase discounts and vendor allowances), merchandise acquisition costs (primarily commissions and import fees) and freight to our distribution centers and stores. These costs are determined to be directly or indirectly incurred in bringing an article to its existing condition and location. Additionally, the direct costs associated with shipping goods to customers and adjustments to the carrying value of inventory related to realizability and shrinkage are recorded as components of COGS.
Our COGS and Gross margin may not be comparable to those of other entities. Some entities, like us, exclude costs related to their distribution network, buying function, store occupancy costs and depreciation and amortization expenses from COGS and include them in other operating expenses, whereas other entities include these costs in their COGS.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Buying, Distribution and Occupancy Expenses
Buying, distribution and occupancy expenses ("BD&O expenses") consist of store occupancy and utility costs (excluding depreciation), fulfillment expense (as defined below) and all costs associated with the buying and distribution functions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“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.
Acquisition and Integration Expenses
Acquisition and integration expenses consist of transaction expenses representing legal, consulting and investment banking-related costs that are direct, incremental costs incurred prior to the closing of an acquisition, costs to integrate the operations of newly acquired businesses into the Company's existing infrastructure and severance and retention-related expenses from integrating newly acquired businesses.
Shipping and Fulfillment
Shipping and fulfillment fees billed to customers are recorded as revenue. The direct costs associated with shipping goods to customers are recorded as a component of COGS. Costs associated with preparing the merchandise for shipping, such as picking, packing, warehousing and order charges ("fulfillment expense") are recorded as a component of BD&O expenses. Fulfillment expense was approximately
$50.5 million
in Fiscal 2016,
$37.8 million
in Fiscal 2015 and
$38.0 million
in Fiscal 2014.
Marketing and Advertising Costs
Marketing and advertising costs are included in SG&A expenses. Marketing and advertising costs are expensed when the advertisement is first exhibited. Marketing and advertising expenses were
$270.6 million
for Fiscal 2016,
$176.7 million
for Fiscal 2015 and
$160.1 million
for Fiscal 2014. Deferred marketing and advertising costs, which principally relate to advertisements that have not yet been exhibited or services that have not yet been received, were not material at the end of either Fiscal 2016 or Fiscal 2015.
Foreign Currency Translation and Transactions
The operating results and financial position of foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. The resulting translation gains or losses are included in the consolidated statements of comprehensive (loss) income, and in the consolidated statements of equity as a component of accumulated other comprehensive (loss) income (“AOCI”). Gains and losses on the translation of intercompany loans made to foreign subsidiaries that are of a long-term investment nature also are included within AOCI.
The Company recognizes gains and losses on transactions that are denominated in a currency other than the respective entity's functional currency. Foreign currency transaction gains and losses also result from intercompany loans made to foreign subsidiaries that are not of a long-term investment nature and include amounts realized on the settlement of certain intercompany loans with foreign subsidiaries. Net losses from foreign currency transactions amounted to
$1.5 million
in Fiscal 2016,
$0.9 million
in Fiscal 2015 and
$1.6 million
in Fiscal 2014. Such amounts are recognized in earnings and included as part of Interest income and other income (expense), net in the accompanying consolidated statements of operations.
Stock-Based Compensation
The Company expenses stock-based compensation to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures. The Company uses the Black-Scholes valuation method to determine the grant date fair value of its option-based compensation. Shares of restricted stock and restricted stock units are issuable with service-based, market-based or performance-based conditions (collectively, “Restricted Equity Awards”).
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Compensation expense for Restricted Equity Awards is recognized over the vesting period based on the grant-date fair values of the awards that are expected to vest based upon the service, market and performance-based conditions.
Cash Long-Term Incentive Plans
The Company maintains a long-term cash incentive program ("Cash LTIP") which entitles the holder to a cash payment equal to a 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 Cash LTIP is recognized over the related performance periods based on the expected achievement of the performance goals.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less and receivables from financial institutions related to credit card purchases due to the high-credit quality and short time frame for settlement of the outstanding amounts.
Concentration of Credit Risk
The Company maintains cash deposits and cash equivalents with well-known and stable financial institutions; however, there were significant amounts of cash and cash equivalents on deposit at overseas financial institutions as well as at financial institutions that were in excess of FDIC-insured limits at July 30, 2016.
Inventories
Retail Inventory Method
We hold inventory for sale through our retail stores and ecommerce sites. All of the Company's segments, other than
ANN
discussed below, use the retail method of accounting, under which inventory is stated at the lower of cost, on a First In, First Out (“FIFO”) basis, or market. Under the retail inventory method, the valuation of inventory at cost and the resulting gross margin are calculated by applying a calculated cost to retail ratio to the retail value of inventory. Inherent in the retail method are certain significant management judgments and estimates including, among others, initial merchandise markup, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins.
The Company continuously reviews its inventory levels to identify slow-moving merchandise and markdowns necessary to clear slow-moving merchandise, which reduces the cost of inventories to its estimated net realizable value. Consideration is given to a number of quantitative and qualitative factors, including current pricing levels and the anticipated need for subsequent markdowns, aging of inventories, historical sales trends, and the impact of market trends and economic conditions. Estimates of markdown requirements may differ from actual results due to changes in quantity, quality and mix of products in inventory, as well as changes in consumer preferences, market and economic conditions. The Company’s historical estimates of these costs and its markdown provisions have not differed materially from actual results.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Weighted-average Cost Method
The
ANN
segment uses the weighted-average cost method to value inventory, under which inventory is valued at the lower of average cost or market, at the individual item level. Inventory cost is adjusted when the current selling price or future estimated selling price is less than cost.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property and Equipment, Net
Property and equipment, net, is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:
|
|
|
Buildings and improvements
|
5-40 years
|
Distribution center equipment and machinery
|
3-20 years
|
Leasehold improvements
|
Shorter of the useful life or expected term of the lease
|
Furniture, fixtures, and equipment
|
2-10 years
|
Information technology
|
2-10 years
|
Certain costs associated with computer software developed or obtained for internal use are capitalized, including internal costs. The Company capitalizes certain costs for employees that are directly associated with internal use computer software projects once specific criteria are met. Costs are expensed for preliminary stage activities, training, maintenance and all other post-implementation stage activities as they are incurred.
Property and equipment, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. In evaluating long-lived assets for recoverability, including finite-lived intangible assets as described below, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. Assets to be disposed of and for which there is a committed plan of disposal are reported at the lower of carrying value or fair value less costs to sell.
Goodwill and Other Intangible Assets, Net
At acquisition, the Company estimates and records the fair value of purchased intangible assets, which primarily consist of certain trade names, customer relationships, favorable leases, proprietary software and franchise rights. The fair value of these intangible assets is estimated based on management's assessment, considering independent third-party appraisals, when necessary. The excess of the purchase consideration over the fair value of net assets acquired is recorded as goodwill.
Goodwill and certain other intangible assets deemed to have indefinite useful lives, including trade names and certain franchise rights, are not amortized. Rather, goodwill and such indefinite-lived intangible assets are assessed for impairment at least annually based on comparisons of their respective fair values to their carrying values.
Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and performance of the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
The impairment test for other indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. The fair value of indefinite-lived intangible assets is primarily determined using the relief-from-royalty approach. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the excess. In addition, in evaluating finite-lived intangible assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company performs its annual impairment assessment of goodwill and indefinite-lived intangible assets using a quantitative approach on the first day of its fourth quarter of each fiscal year.
Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets (as discussed above), are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. Refer to the Company's accounting policy for long-lived asset impairment as described earlier under the caption
"Property and Equipment, Net."
Insurance Reserves
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation and employee healthcare benefits. Liabilities associated with these risks are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Such liabilities are capped through the use of stop-loss contracts with insurance companies. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. As of July 30, 2016 and July 25, 2015, these reserves were
$70.4 million
and
$48.5 million
, respectively. The Company is subject to various claims and contingencies related to insurance and other matters arising out of the normal course of business. The Company is self-insured for expenses related to its employee medical and dental plans, and its workers’ compensation plan, up to certain thresholds. Claims filed, as well as claims incurred but not reported, are accrued based on management’s estimates, using information received from plan administrators, historical analysis and other relevant data. The Company’s stop-loss insurance coverage limit for individual claims under these policies is
$350,000
. The Company believes its accruals for claims and contingencies are adequate based on information currently available. However, it is possible that actual results could differ significantly from the recorded accruals for claims and contingencies.
Income Taxes
Income taxes are provided using the asset and liability method. Under this method, income taxes (i.e., deferred tax assets and liabilities, current taxes payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the current year, and include the results of any differences between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of certain net operating loss, capital loss and general business credit carry forwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The Company accounts for the financial effect of changes in tax laws or rates in the period of enactment.
Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. Tax valuation allowances are analyzed periodically and adjusted as events occur, or circumstances change, that warrant adjustments to those balances.
In determining the income tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more-likely-than-not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than
50%
likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and the Company often obtains assistance from external advisors. To the extent that the Company’s estimates change or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made. If the initial assessment fails to result in the recognition of a tax benefit, the Company regularly monitors its position and subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, (ii) the statute of limitation expires or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency. Uncertain tax positions are classified as current only when the Company expects to pay cash within the next twelve months. Interest and penalties, if any, are recorded within the (provision) benefit for income taxes in the Company’s accompanying consolidated statements of operations and are classified on the accompanying consolidated balance sheets with the related liability for uncertain tax positions.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Leases
The Company leases certain facilities and equipment, including its retail stores. Most of the Company's leases contain renewal options, rent escalation clauses and/or landlord incentives. Rent expense for non-cancelable operating leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date. The effective lease commencement date represents the date on which the Company takes possession of, or controls the physical use of, the leased property. The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred rent liability and is classified on the consolidated balance sheets within Lease-related liabilities.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
4. 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” (“ASU 2016-09”). 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 consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). 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 consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The guidance requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods therein. The guidance can be applied either prospectively or retrospectively, with early application permitted. The Company early adopted this guidance in the second quarter of Fiscal 2016 and, as a result, classified all deferred tax assets and liabilities as non-current as of July 30, 2016. As the Company elected to apply this guidance prospectively, no changes were made to the consolidated balance sheet as of July 25, 2015.
In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under this guidance, the acquirer must recognize measurement-period adjustments in the period in which the amounts are determined, including the effect on earnings of any amounts that would have been recorded in previous periods, as if the accounting had been completed at the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company elected to early adopt this ASU in the first quarter of Fiscal 2016. During Fiscal 2016, the Company recorded certain measurement-period adjustments for the
ANN
Acquisition, as more fully described in Note 5.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"), which requires inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective prospectively for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The recognition and measurement for debt issuance costs are not affected and will continue to be recognized over the life of the debt instrument. The guidance is effective for fiscal years beginning after December 15, 2015 and interim periods therein. The guidance is to be applied retrospectively, with early application permitted.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company early adopted this guidance in the first quarter of Fiscal 2016 and, as a result, reclassified unamortized debt issuance costs of
$9.5 million
as of July 25, 2015 from Other assets to a reduction of Long-term debt, less current portion in the accompanying consolidated balance sheet.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which supersedes the revenue recognition requirements in FASB Accounting Standards Codification ("ASC") Topic 605, "Revenue Recognition." 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, will be 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 new standard and its impact on the Company's consolidated financial statements.
5. 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 11. 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
$20.8 million
of transaction costs during Fiscal 2016 which are included within Acquisition and integration expenses in the Company’s accompanying consolidated statements of operations.
The Company accounted for the
ANN
Acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire such assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, which consists largely of the synergies and economies of scale expected from integrating
ANN
's operations. The Company allocated
$225.7 million
of the goodwill related to the
ANN
Acquisition to the Company's other reporting units where the anticipated benefits of the acquisition are expected to be achieved, as more fully described in Note 6. Goodwill is non-deductible for income tax purposes.
The allocation of the purchase price to the assets acquired and liabilities assumed, including the amount allocated to goodwill, was subject to change within the measurement period (up to
one
year from the acquisition date) as additional information that existed at the date of the acquisition related to the values of assets acquired and liabilities assumed is obtained. During Fiscal 2016, the Company recorded certain measurement-period adjustments. While no material adjustments are expected, the purchase price allocation is not yet final as the Company is completing its analysis of the opening balances related to deferred taxes. The allocation will be finalized during the first quarter of Fiscal 2017.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The assessment of fair values of assets acquired and liabilities assumed as of August 21, 2015, as adjusted through July 30, 2016, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Allocation as of the acquisition date
|
|
Measurement-Period Adjustments
|
|
Preliminary Allocation, as adjusted through July 30, 2016
|
|
(millions)
|
Cash and cash equivalents
|
$
|
257.6
|
|
|
$
|
—
|
|
|
$
|
257.6
|
|
Inventories
|
398.3
|
|
|
—
|
|
|
398.3
|
|
Prepaid expenses and other current assets
|
100.8
|
|
|
17.7
|
|
|
118.5
|
|
Property and equipment
|
451.0
|
|
|
2.3
|
|
|
453.3
|
|
Goodwill
|
953.2
|
|
|
6.4
|
|
|
959.6
|
|
Other intangible assets (Note 6):
|
|
|
|
|
|
Trade names
|
815.0
|
|
|
—
|
|
|
815.0
|
|
Customer relationships
|
51.5
|
|
|
—
|
|
|
51.5
|
|
Favorable leases
|
49.0
|
|
|
(10.6
|
)
|
|
38.4
|
|
Other assets
|
3.5
|
|
|
—
|
|
|
3.5
|
|
Total assets acquired
|
3,079.9
|
|
|
15.8
|
|
|
3,095.7
|
|
|
|
|
|
|
|
Accounts payable
|
155.6
|
|
|
—
|
|
|
155.6
|
|
Accrued expenses and other current liabilities
(a)
|
197.0
|
|
|
12.0
|
|
|
209.0
|
|
Deferred income
|
46.0
|
|
|
—
|
|
|
46.0
|
|
Lease-related liabilities
|
176.6
|
|
|
(1.6
|
)
|
|
175.0
|
|
Deferred income taxes
|
374.1
|
|
|
—
|
|
|
374.1
|
|
Other non-current liabilities
|
33.4
|
|
|
5.4
|
|
|
38.8
|
|
Total liabilities assumed
|
982.7
|
|
|
15.8
|
|
|
998.5
|
|
|
|
|
|
|
|
Total net assets acquired
|
$
|
2,097.2
|
|
|
$
|
—
|
|
|
$
|
2,097.2
|
|
_______
|
|
(a)
|
As part of the
ANN
Acquisition, the Company assumed employee-related obligations of approximately
$100 million
, including approximately
$95 million
paid during Fiscal 2016. The remaining approximately
$5 million
is expected to be paid in the first half of Fiscal 2017.
|
The values assigned to the
Ann Taylor
and
LOFT
trade names were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The
Ann Taylor
and
LOFT
trade names are deemed to have indefinite lives and are not amortized but subject to an impairment assessment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired.
The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized over
five
years based on the pattern of revenue expected to be generated from the use of the asset.
The values of favorable and unfavorable leasehold interests are determined by comparing the present value of the contract rent over the remaining lease term with that of the market rent, taking into account the type, size and location of the property. Favorable leasehold interests are included within Other intangible assets and unfavorable leasehold interests are included within Lease-related liabilities in the table above.
ANN
's historical lease-related liabilities of similar amounts were eliminated through purchase accounting.
The fair value of
ANN
's inventory as of the acquisition date was determined by using the estimated selling price, adjusted for the estimated costs of disposal and a reasonable profit margin. Approximately
$127 million
related to the write-up of inventory to its
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
fair value was fully amortized to COGS in the accompanying consolidated statement of operations in Fiscal 2016 as the acquired inventory was sold.
The results of
ANN
for the post-acquisition periods from August 22, 2015 to July 30, 2016 included in the Company’s accompanying consolidated statement of operations for Fiscal 2016 consist of the following:
|
|
|
|
|
|
For the period from August 22, 2015 to July 30, 2016
|
|
(millions)
|
Net sales
|
$
|
2,330.9
|
|
Net loss
|
$
|
(40.3
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
July 30,
2016
|
|
July 25,
2015
|
|
(millions, except per share data)
(unaudited)
|
Pro forma net sales
|
$
|
7,119.1
|
|
|
$
|
7,332.6
|
|
Pro forma net income (loss)
|
$
|
70.3
|
|
|
$
|
(254.0
|
)
|
Pro forma net income (loss) per common share:
|
|
|
|
Basic
|
$
|
0.36
|
|
|
$
|
(1.31
|
)
|
Diluted
|
$
|
0.36
|
|
|
$
|
(1.31
|
)
|
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
$82.2 million
, net of taxes. The 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 Fiscal 2015 pro forma amounts reflect the historical operational results for ascena and
ANN
and the effect of pro forma adjustments of
$(87.1) million
, net of taxes. These adjustments primarily reflect charges for incremental interest expense related to the term loan and incremental depreciation and amortization expense related to the write-up of
ANN
’s tangible and intangible assets to fair market value that were not reflected in the historical results.
The pro forma weighted-average number of common shares outstanding for each period 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 Fiscal 2016 includes potentially dilutive shares of
1.2 million
, which are excluded from the reported amount due to the net loss reported for the year.
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.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Goodwill and Other Intangible Assets
Goodwill
The following details the changes in goodwill for each reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANN
|
|
Justice
|
|
Lane Bryant
|
|
maurices
|
|
Catherines
|
|
Total
|
|
|
(millions)
|
Balance at July 26, 2014
|
|
$
|
—
|
|
|
$
|
103.6
|
|
|
$
|
319.1
|
|
|
$
|
130.7
|
|
|
$
|
28.0
|
|
|
$
|
581.4
|
|
Impairment losses
(a)
|
|
—
|
|
|
—
|
|
|
(261.7
|
)
|
|
—
|
|
|
—
|
|
|
(261.7
|
)
|
Balance at July 25, 2015
|
|
—
|
|
|
103.6
|
|
|
57.4
|
|
|
130.7
|
|
|
28.0
|
|
|
319.7
|
|
Acquisition-related activity (Note 5)
|
|
733.9
|
|
|
65.8
|
|
|
68.6
|
|
|
70.0
|
|
|
21.3
|
|
|
959.6
|
|
Balance at July 30, 2016
|
|
$
|
733.9
|
|
|
$
|
169.4
|
|
|
$
|
126.0
|
|
|
$
|
200.7
|
|
|
$
|
49.3
|
|
|
$
|
1,279.3
|
|
(a)
Represents accumulated impairment losses as of
July 30, 2016
and
July 25, 2015
.
As described in Note 5, the Company recorded goodwill of
$959.6 million
for the
ANN
Acquisition. During the
fourth
quarter of Fiscal
2016
, the Company assigned
$225.7 million
of goodwill from our
ANN
reporting unit to the Company's other reporting units as an analysis of the expected synergies was completed. The allocation of goodwill was based on specific identification or other reasonable allocation methodologies for expected cost savings related to procurement, fulfillment, distribution and shared services. The amount of goodwill assigned to a reporting unit represents the difference between the fair value of that reporting unit before and after the acquisition using a with-and-without analysis that measures the fair values of the expected synergies under the income approach.
Other Intangible Assets
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
|
|
July 25, 2015
|
Description
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Intangible assets subject to amortization
:
|
|
(millions)
|
Proprietary technology
|
|
$
|
5.3
|
|
|
$
|
(5.3
|
)
|
|
$
|
—
|
|
|
$
|
5.8
|
|
|
$
|
(5.8
|
)
|
|
$
|
—
|
|
Customer relationships
|
|
54.2
|
|
|
(19.9
|
)
|
|
34.3
|
|
|
2.7
|
|
|
(2.7
|
)
|
|
—
|
|
Favorable leases
|
|
38.2
|
|
|
(7.1
|
)
|
|
31.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Trade names
|
|
5.3
|
|
|
(5.3
|
)
|
|
—
|
|
|
5.3
|
|
|
(5.3
|
)
|
|
—
|
|
Total intangible assets subject to amortization
|
|
103.0
|
|
|
(37.6
|
)
|
|
65.4
|
|
|
13.8
|
|
|
(13.8
|
)
|
|
—
|
|
Intangible assets not subject to amortization
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands and trade names
|
|
1,192.4
|
|
|
—
|
|
|
1,192.4
|
|
|
377.4
|
|
|
—
|
|
|
377.4
|
|
Franchise rights
|
|
10.9
|
|
|
—
|
|
|
10.9
|
|
|
10.9
|
|
|
—
|
|
|
10.9
|
|
Total intangible assets not subject to amortization
|
|
1,203.3
|
|
|
—
|
|
|
1,203.3
|
|
|
388.3
|
|
|
—
|
|
|
388.3
|
|
Total intangible assets
|
|
$
|
1,306.3
|
|
|
$
|
(37.6
|
)
|
|
$
|
1,268.7
|
|
|
$
|
402.1
|
|
|
$
|
(13.8
|
)
|
|
$
|
388.3
|
|
Amortization
The Company recognized amortization expense on finite-lived intangible assets, excluding favorable leases discussed below, of
$17.2 million
in Fiscal
2016
,
$2.4 million
in Fiscal
2015
and
$2.7 million
in Fiscal
2014
, which is classified within Depreciation and amortization expense in the accompanying consolidated statements of operations. The Company amortizes customer relationships recognized as part of the
ANN
Acquisition over
five
years based on the pattern of revenue expected to be generated from the use of the asset.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The expected amortization of customer relationships is as follows:
|
|
|
|
|
|
Expected Amortization
|
|
(millions)
|
2017
|
$
|
12.5
|
|
2018
|
9.4
|
|
2019
|
7.0
|
|
2020
|
5.4
|
|
Total
|
$
|
34.3
|
|
Favorable leases are amortized into either Buying, distribution and occupancy expenses or Selling, general and administrative expenses over a weighted-average lease term of approximately
four
years. The Company recognized amortization expense on favorable leases of
$7.3 million
in Fiscal 2016. The expected amortization for each of the next five fiscal years is as follows: fiscal
2017
:
$7.2 million
; fiscal
2018
:
$6.8 million
; fiscal
2019
:
$6.3 million
; fiscal
2020
:
$5.8 million
; and fiscal
2021 and thereafter
:
$5.0 million
.
Goodwill and Other Indefinite-lived Intangible Assets Impairment Assessment
As discussed in Note 3, the Company performs its annual impairment assessment of goodwill and indefinite-lived intangible assets during the fourth quarter of each fiscal year. The impairment test for other indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the excess. Based on the results of the Company’s annual impairment testing of goodwill and indefinite-lived intangible assets for Fiscal
2016
, no impairment charges were deemed necessary.
Fiscal 2015 Lane Bryant Impairment
During the fourth quarter of Fiscal 2015, due to lower-than-expected performance since the acquisition, management lowered certain key assumptions in its long-term projections used in the Fiscal 2015 valuation. As a result,
Lane Bryant
recorded an impairment loss of
$261.7 million
to write down the carrying value of its goodwill to its implied fair value, as if the reporting unit had been acquired in a business combination. In addition,
Lane Bryant
recorded an impairment loss of
$44.7 million
to write down the carrying value of its trade name to its fair value, which was determined using the relief-from-royalty method (Level 3 measurement). Such impairment losses have been included within Impairment of goodwill and Impairment of intangible assets, respectively, in the accompanying consolidated statements of operations.
Fiscal 2014 Studio Y Impairment
During the fourth quarter of Fiscal 2014, Management at
maurices
reached a decision to stop selling product under its Studio Y label. As a result,
maurices
recorded a non-cash impairment charge of
$13.0 million
to write-off the entire carrying value of the Studio Y trade name. This impairment loss has been included within Impairment of intangible assets in the accompanying consolidated statements of operations.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Inventories
Inventories substantially consist of finished goods merchandise. Inventory by brand is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
|
(millions)
|
ANN
|
|
$
|
198.6
|
|
|
$
|
—
|
|
Justice
|
|
107.5
|
|
|
136.0
|
|
Lane Bryant
|
|
125.8
|
|
|
126.5
|
|
maurices
|
|
102.0
|
|
|
103.8
|
|
dressbarn
|
|
86.8
|
|
|
93.3
|
|
Catherines
|
|
28.6
|
|
|
29.7
|
|
Total inventories
|
|
$
|
649.3
|
|
|
$
|
489.3
|
|
8. Property and Equipment
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
|
(millions)
|
Property and Equipment:
|
|
|
|
|
|
|
Land
|
|
$
|
32.0
|
|
|
$
|
30.4
|
|
Buildings and improvements
|
|
250.8
|
|
|
189.3
|
|
Leasehold improvements
|
|
948.7
|
|
|
652.7
|
|
Furniture, fixtures and equipment
|
|
718.2
|
|
|
572.7
|
|
Information technology
|
|
572.1
|
|
|
356.2
|
|
Construction in progress
|
|
155.1
|
|
|
148.6
|
|
|
|
2,676.9
|
|
|
1,949.9
|
|
Less: accumulated depreciation
|
|
(1,046.8
|
)
|
|
(779.9
|
)
|
Property and equipment, net
|
|
$
|
1,630.1
|
|
|
$
|
1,170.0
|
|
The increase in property and equipment is mainly due to the
ANN
Acquisition. In addition, buildings and improvements increased due to costs associated with the construction of a new headquarters building for
maurices
and certain shared services operations in Duluth, MN which was placed into service in Fiscal 2016. Information technology increased from costs associated with the development of our ecommerce platforms and centralized inventory management systems which were placed into service in Fiscal 2016.
Long-Lived Asset Impairments
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 accompanying consolidated statements of operations for all periods. There were no finite-lived intangible asset impairment losses recorded for any of the periods presented.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impairment charges related to long-lived tangible assets by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
(millions)
|
Justice
|
$
|
2.4
|
|
|
$
|
6.4
|
|
|
$
|
0.3
|
|
Lane Bryant
|
2.8
|
|
|
0.6
|
|
|
0.9
|
|
maurices
|
2.2
|
|
|
2.6
|
|
|
1.1
|
|
dressbarn
|
5.9
|
|
|
1.2
|
|
|
1.9
|
|
Total impairment charges
|
$
|
13.3
|
|
|
$
|
10.8
|
|
|
$
|
4.2
|
|
Depreciation
The Company recognized depreciation expense of
$341.5 million
in Fiscal 2016,
$215.8 million
in Fiscal 2015 and
$190.9 million
in Fiscal 2014, which is classified within Depreciation and amortization expense in the accompanying consolidated statements of operations.
In Fiscal 2015, the Company closed the
Brothers
brand, a separate brand operating within our
Justice
segment, which represented less than 1% of the Company's consolidated revenues for all periods presented. As a result, the depreciable lives of certain existing assets were adjusted to reflect a shortened useful life for the assets as a result of the closure. Thus, Fiscal 2015 included incremental depreciation expense for these assets of approximately
$5.9 million
which increased the net loss by approximately
$3.7 million
and diluted net loss per common share by approximately
$0.02
. Substantially all of these assets ceased depreciating during Fiscal 2015.
As a result of the Company’s integration of its supply chain and technology infrastructure, the depreciable lives of certain existing assets were adjusted to reflect a shortened useful life for the assets that were displaced as a result of these projects. Thus, Fiscal 2014 includes incremental depreciation expenses for these assets of approximately
$8.6 million
. This additional expense reduced income from continuing operations by approximately
$5.3 million
and diluted net income per common share from continuing operations by approximately
$0.03
for Fiscal 2014. Substantially all of these displaced assets ceased depreciating during Fiscal 2014.
9. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
|
(millions)
|
Prepaid expenses
|
|
$
|
132.1
|
|
|
$
|
45.6
|
|
Accounts and other receivables
|
|
84.7
|
|
|
70.8
|
|
Short-term investments
|
|
1.8
|
|
|
13.4
|
|
Other current assets
|
|
0.3
|
|
|
1.7
|
|
Total prepaid expenses and other current assets
|
|
$
|
218.9
|
|
|
$
|
131.5
|
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
|
(millions)
|
Accrued salary, wages and related expenses
|
|
$
|
183.8
|
|
|
$
|
176.9
|
|
Accrued operating expenses
|
|
161.6
|
|
|
202.1
|
|
Sales and other taxes payable
|
|
34.1
|
|
|
14.2
|
|
Other
|
|
34.2
|
|
|
10.0
|
|
Total accrued expenses and other current liabilities
|
|
$
|
413.7
|
|
|
$
|
403.2
|
|
11. Debt
Debt consists of the following:
|
|
|
|
|
|
|
|
|
Debt consists of the following:
|
July 30,
2016
|
|
July 25,
2015
|
|
(millions)
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
116.0
|
|
Less: unamortized debt issuance costs
(a)
|
(5.8
|
)
|
|
(3.8
|
)
|
|
(5.8
|
)
|
|
112.2
|
|
|
|
|
|
Term loan
|
1,719.0
|
|
|
—
|
|
Less: unamortized debt issuance costs
(b)
|
(30.1
|
)
|
|
(5.7
|
)
|
unamortized original issue discount
(b)
|
(34.6
|
)
|
|
—
|
|
|
1,654.3
|
|
|
(5.7
|
)
|
|
|
|
|
Less: current portion
|
(54.0
|
)
|
|
—
|
|
Total long-term debt
|
$
|
1,594.5
|
|
|
$
|
106.5
|
|
_______
(a)
The unamortized debt issuance costs in connection with the Amended Revolving Credit Agreement, as defined below, 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
In August 2015, in connection with the
ANN
Acquisition, the Company and certain of its domestic subsidiaries amended the revolving credit facility. The amendment increased the aggregate revolving commitments from
$500 million
to
$600 million
, with an optional increase of up to
$200 million
and extended the maturity date to August 2020 (the “Amended Revolving Credit Agreement”). 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 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
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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
July 30, 2016
, we had
no
borrowings outstanding under the Amended Revolving Credit Agreement. After taking into account the
$25.9 million
in outstanding letters of credit, the Company had
$441.6 million
of its availability under the Amended Revolving Credit Agreement.
Term Loan
Also 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.
The Term Loan matures on August 21, 2022, and has mandatory 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. During Fiscal 2016, the Company made all scheduled quarterly principal payments totaling
$9.0 million
. In August 2016, the Company repaid
$100 million
, which was applied to the remaining scheduled quarterly payments due in the second half of calendar 2016 and all scheduled payments for calendar 2017, such that the Company is not required to make its next quarterly scheduled payment until February 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 floor of
75 basis points
) 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
July 30, 2016
, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of
5.25%
.
During Fiscal 2016, the Company repurchased
$72.0 million
of the outstanding principal balance of the Term Loan at an aggregate cost of
$68.4 million
through open market transactions, resulting in
$0.8 million
in pre-tax gains, net of the proportional write-off of unamortized original discount and debt issuance costs of
$2.8 million
. Such net gain has been recorded as Gain on extinguishment of debt in the consolidated statements of operations.
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
July 30, 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)
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Maturities of Debt
The Company's debt matures as follows:
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
(millions)
|
2017
(a)
|
|
$
|
54.0
|
|
2018
(a)
|
|
90.0
|
|
2019
|
|
90.0
|
|
2020
|
|
90.0
|
|
2021
|
|
90.0
|
|
Thereafter
|
|
1,305.0
|
|
Total maturities
|
|
$
|
1,719.0
|
|
_______
(a)
In August 2016, the Company repaid
$100 million
, which was applied to the remaining mandatory quarterly repayments due in the second half of calendar 2016 and all required repayments for calendar 2017, such that the Company is not required to make its next quarterly repayment until calendar 2018. The table above does not reflect the effect of the
$100 million
payment.
12. Fair Value Measurements
Fair Value Measurements of Financial Instruments
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.
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The carrying values of cash and cash equivalents, accounts and other receivables and accounts payable approximates their estimated fair values due to the short maturities of these instruments.
The carrying amounts and fair values of the Company's available-for-sale investments and Long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
As of July 30, 2016
|
|
As of July 25, 2015
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
|
(millions)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments
(a)
|
Level 1
|
|
$
|
1.8
|
|
|
$
|
1.8
|
|
|
$
|
13.4
|
|
|
$
|
13.4
|
|
|
|
|
$
|
1.8
|
|
|
$
|
1.8
|
|
|
$
|
13.4
|
|
|
$
|
13.4
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Term Loan
(b)
|
Level 2
|
|
$
|
1,719.0
|
|
|
$
|
1,682.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Revolving credit facility
(c)
|
Level 2
|
|
—
|
|
|
—
|
|
|
116.0
|
|
|
116.0
|
|
|
|
|
$
|
1,719.0
|
|
|
$
|
1,682.5
|
|
|
$
|
116.0
|
|
|
$
|
116.0
|
|
(a)
Available-for-sale investments, included within Prepaid expenses and other current assets, consist of restricted cash and are recorded at fair value as of
July 30, 2016
and
July 25, 2015
.
(b)
The carrying amount of the Term Loan excludes unamortized original issue discount and debt issuance costs of
$64.7 million
as of
July 30, 2016
. The fair value of the Term Loan was determined based on quoted market prices from recent transactions which are considered Level 2 inputs within the fair value hierarchy.
(c)
The carrying amount of the revolving credit facility excludes unamortized debt issuance costs of
$5.8 million
as of
July 30, 2016
and
$3.8 million
as of
July 25, 2015
.
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. For further discussion of the determination of the fair value of non-financial instruments, see Notes 6 and 8.
13. Income Taxes
Taxes on Income
Domestic and foreign pretax (loss) income from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
|
(millions)
|
Domestic
|
|
$
|
(56.0
|
)
|
|
$
|
(303.1
|
)
|
|
$
|
144.7
|
|
Foreign
|
|
47.7
|
|
|
62.5
|
|
|
58.8
|
|
Total (loss) income from continuing operations before (provision) benefit for income taxes
|
|
$
|
(8.3
|
)
|
|
$
|
(240.6
|
)
|
|
$
|
203.5
|
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The provision (benefit) from continuing operations for current and deferred income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
Current:
|
|
(millions)
|
Federal
|
|
$
|
7.7
|
|
|
$
|
(20.8
|
)
|
|
$
|
15.2
|
|
State and local
|
|
10.2
|
|
|
8.8
|
|
|
13.5
|
|
Foreign
|
|
12.5
|
|
|
14.8
|
|
|
12.3
|
|
|
|
30.4
|
|
|
2.8
|
|
|
41.0
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(21.7
|
)
|
|
0.9
|
|
|
24.9
|
|
State and local
|
|
(3.2
|
)
|
|
(6.5
|
)
|
|
(0.2
|
)
|
Foreign
|
|
(1.9
|
)
|
|
(1.0
|
)
|
|
(0.4
|
)
|
|
|
(26.8
|
)
|
|
(6.6
|
)
|
|
24.3
|
|
Total provision (benefit) for income taxes from continuing operations
|
|
$
|
3.6
|
|
|
$
|
(3.8
|
)
|
|
$
|
65.3
|
|
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rate of
35%
and income taxes provided for continuing operations are as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
(millions)
|
(Benefit) provision for income taxes from continuing operations at the U.S. federal statutory rate
|
$
|
(2.9
|
)
|
|
$
|
(84.3
|
)
|
|
$
|
71.2
|
|
Increase (decrease) due to:
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
2.4
|
|
|
4.1
|
|
|
8.8
|
|
Tax benefit related to deferred compensation
|
—
|
|
|
(13.7
|
)
|
|
—
|
|
Goodwill impairment
|
—
|
|
|
91.6
|
|
|
—
|
|
Net change relating to uncertain income tax benefits
|
3.3
|
|
|
(0.7
|
)
|
|
(2.3
|
)
|
Indefinitely reinvested foreign earnings
|
0.1
|
|
|
1.7
|
|
|
(11.6
|
)
|
Other – net
|
0.7
|
|
|
(2.5
|
)
|
|
(0.8
|
)
|
Total provision (benefit) for income taxes from continuing operations
|
$
|
3.6
|
|
|
$
|
(3.8
|
)
|
|
$
|
65.3
|
|
The Company recorded a tax provision in Fiscal 2016 despite the net loss for the period primarily due to state and local taxes and certain expenses which are non-deductible for income tax purposes. The Company's effective tax rate for Fiscal 2015 is lower than the statutory rate principally as a result of a goodwill impairment loss of
$261.7 million
as discussed in Note 6, which is treated as a permanent non-deductible item, offset in part by a tax benefit related to previously deferred compensation of approximately
$35 million
, which became fully deductible in Fiscal 2015 under the terms of the retirement agreement for the former President and CEO of
Justice
.
Tax Incentives
In connection with the Company’s relocation of its
dressbarn
and corporate offices to New Jersey, as well as the expansion of its distribution centers in Ohio and Indiana, the Company was approved for various state and local tax incentives. In order to receive these incentives, the Company will generally need to meet certain minimum employment or expenditure commitments, as well as comply with periodic reporting requirements. These incentives, estimated to total approximately
$60 million
, are expected to be recognized over a
10
-
15
year period which began in Fiscal 2015. Approximately
$2.9 million
was recognized in Fiscal 2016 and
$2.0 million
in Fiscal 2015.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred Taxes
Significant components of the Company's net deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
July 30, 2016
(a)
|
|
July 25,
2015
|
Deferred tax assets:
|
|
(millions)
|
Inventories
|
|
$
|
31.4
|
|
|
$
|
18.7
|
|
Tax credits and net operating loss carryforwards
|
|
38.3
|
|
|
18.7
|
|
Accrued payroll and benefits
|
|
91.5
|
|
|
78.3
|
|
Legal reserve
|
|
—
|
|
|
21.0
|
|
Share-based compensation
|
|
24.8
|
|
|
23.7
|
|
Straight-line rent
|
|
57.3
|
|
|
45.7
|
|
Federal benefit of uncertain tax positions
|
|
19.4
|
|
|
14.7
|
|
Other
|
|
37.4
|
|
|
19.2
|
|
Total deferred tax assets
|
|
300.1
|
|
|
240.0
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation
|
|
148.9
|
|
|
113.0
|
|
Amortization
|
|
512.8
|
|
|
168.6
|
|
Foreign unremitted earnings
|
|
40.1
|
|
|
32.8
|
|
Other
|
|
22.7
|
|
|
14.0
|
|
Total deferred tax liabilities
|
|
724.5
|
|
|
328.4
|
|
Valuation allowance
|
|
(12.9
|
)
|
|
(4.9
|
)
|
Net deferred tax liabilities
|
|
$
|
(437.3
|
)
|
|
$
|
(93.3
|
)
|
_______
(a)
$4.9 million
of deferred tax assets are included within Other assets.
As of July 30, 2016, we have not provided deferred U.S. income taxes on approximately
$42.1 million
of undistributed earnings from non-U.S. subsidiaries, as these earnings are indefinitely reinvested. If the Company elects to distribute these foreign earnings in the future, they could be subject to additional income taxes. Determination of the amount of any unrecognized deferred income tax liability is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Net Operating Loss Carry Forwards
As of July 30, 2016, the Company had U.S. Federal net operating loss carryforwards of
$40.3 million
and state net operating loss carryforwards of
$120.1 million
that are available to offset future U.S. Federal and state taxable income. The U.S. Federal net operating losses have a
twenty
-year carryforward period, and expire in Fiscal
2036
. The state net operating losses have carryforward periods of
five
to
twenty
years, with varying expiration dates and amounts as follows:
$21.5 million
in
one
to
five
years,
$15.2 million
in
six
to
ten
years,
$34.7 million
in
eleven
to
fifteen
years and
$48.7 million
in
sixteen
to
twenty
years.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Uncertain Income Tax Benefits
Reconciliation of Liabilities
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, for each fiscal year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
|
(millions)
|
Unrecognized tax benefit beginning balance
|
|
$
|
34.1
|
|
|
$
|
29.9
|
|
|
$
|
31.2
|
|
Additions related to the
ANN
Acquisition
|
|
9.6
|
|
|
—
|
|
|
—
|
|
Additions related to current period tax positions
|
|
2.2
|
|
|
1.6
|
|
|
1.5
|
|
Additions related to tax positions in prior years
|
|
1.0
|
|
|
6.7
|
|
|
4.3
|
|
Reductions related to prior period tax positions
|
|
(3.0
|
)
|
|
(3.2
|
)
|
|
—
|
|
Reductions related to settlements with taxing authorities
|
|
—
|
|
|
(0.3
|
)
|
|
(1.5
|
)
|
Reductions related to expiration of statute of limitations
|
|
(0.7
|
)
|
|
(0.6
|
)
|
|
(5.6
|
)
|
Unrecognized tax benefit ending balance
|
|
$
|
43.2
|
|
|
$
|
34.1
|
|
|
$
|
29.9
|
|
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits for each fiscal year is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
|
(millions)
|
Accrued interest and penalties beginning balance
|
|
$
|
11.5
|
|
|
$
|
13.8
|
|
|
$
|
16.5
|
|
Additions related to the
ANN
Acquisition
|
|
4.3
|
|
|
—
|
|
|
—
|
|
Additions (reductions) charged to expense, net
|
|
1.4
|
|
|
(2.3
|
)
|
|
(2.7
|
)
|
Accrued interest and penalties ending balance
|
|
$
|
17.2
|
|
|
$
|
11.5
|
|
|
$
|
13.8
|
|
The Company’s liability for unrecognized tax benefits (including accrued interest and penalties), which is primarily included in Other non-current liabilities in the accompanying consolidated balance sheets, was
$56.8 million
as of July 30, 2016 and
$40.7 million
as of July 25, 2015.
Future Changes in Unrecognized Tax Benefits
The amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company anticipates that the balance of the liability for unrecognized tax benefits will decrease by approximately
$3.1 million
during the next twelve months. However, changes in the occurrence, expected outcomes and timing of those events could cause the Company’s current estimate to change materially in the future. The Company’s portion of gross unrecognized tax benefits that would affect its effective tax rate, including interest and penalties, is
$36.8 million
.
The Company files tax returns in the U.S. federal and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to Fiscal 2009.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Commitments and Contingencies
Lease Commitments
The Company leases all of its retail stores. Certain leases provide for additional rents based on percentages of net sales, charges for real estate taxes, insurance and other occupancy costs. Store leases generally have an initial term of approximately
ten
years with one or more
five
-year options to extend the lease. Some of these leases have provisions for rent escalations during the initial term.
The Company’s operating lease obligations represent future minimum lease payments under non-cancelable operating leases as of July 30, 2016. The minimum lease payments do not include common area maintenance ("CAM") charges or real estate taxes, which are also required contractual obligations under the operating leases. In the majority of the Company’s operating leases, CAM charges are not fixed and can fluctuate from year to year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of occupancy costs follows:
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
|
(millions)
|
Base rentals
|
|
$
|
608.1
|
|
|
$
|
404.4
|
|
|
$
|
395.5
|
|
Percentage rentals
|
|
33.7
|
|
|
20.5
|
|
|
23.2
|
|
Other occupancy costs, primarily CAM and real estate taxes
|
|
210.5
|
|
|
143.6
|
|
|
133.5
|
|
Total
|
|
$
|
852.3
|
|
|
$
|
568.5
|
|
|
$
|
552.2
|
|
The following is a schedule of future minimum rentals under non-cancelable operating leases as of July 30, 2016:
|
|
|
|
|
Fiscal Years
|
Minimum Operating
Lease Payments
(a) (b)
|
|
(millions)
|
2017
|
$
|
613.3
|
|
2018
|
531.9
|
|
2019
|
447.3
|
|
2020
|
388.8
|
|
2021
|
324.0
|
|
Thereafter
|
745.8
|
|
Total future minimum rentals
|
$
|
3,051.1
|
|
(a)
Net of sublease income, which was not significant in any period.
(b)
Although such amounts are generally non-cancelable, certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. All future minimum rentals under such leases have been included in the above table.
Employment Agreements
The Company has employment agreements with certain executives in the normal course of business which provide for compensation and certain other benefits. These agreements also provide for severance payments under certain circumstances.
Other Commitments
The Company enters into various cancelable and non-cancelable commitments during the year. Typically, those commitments are for less than a year in duration and are principally focused on the construction of new retail stores and the procurement of inventory. The Company normally does not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. Preliminary commitments with the Company’s private-label merchandise vendors typically are made
five
to
seven
months in advance of planned receipt date. A portion of these merchandise purchase commitments are cancelable up to
30
days prior to the vendor’s scheduled shipment date.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition, the Company has
$25.9 million
of outstanding letters of credit as of July 30, 2016.
Legal Matters
Justice Pricing Lawsuits
The Company is a defendant in a number of class action lawsuits that allege, among other claims, that
Justice
’s promotional practices violated state comparative pricing laws in connection with advertisements promoting a
40%
discount.
Mehigan v. Ascena Retail Group, Inc. and Tween Brands, Inc.
On February 12, 2015, Melinda Mehigan and Fonda Kubiak, both consumers, filed a purported class action proceeding (the “
Mehigan
case”) against Ascena Retail Group, Inc. and Tween Brands, Inc. (doing business as “
Justice
”) in the United States District Court for the Eastern District of Pennsylvania, on behalf of themselves and all similarly situated consumers who, in the case of Ms. Mehigan in the State of New Jersey, and in the case of Ms. Kubiak in the State of New York, made purchases at
Justice
from 2009 to 2015 (the “Alleged Class Period”). The lawsuit alleges that
Justice
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.
On February 17, 2015, the complaint in the
Mehigan
case was amended to add five more named individual plaintiffs and to add the same allegations against
Justice
in the States of California, Florida, Illinois and Texas.
On April 8, 2015, the complaint in the
Mehigan
case was amended a second time seeking to make the case a nationwide purported class action lawsuit. As amended, the case covers
Justice
customers in 47 states. The excluded states are Hawaii, Alaska and Ohio. During the Alleged Class Period,
Justice
did not operate any stores in Hawaii or Alaska. A similar class action lawsuit making substantially the same allegations as the
Mehigan
case was settled in December 2014 in Ohio.
Cowhey v. Tween Brands, Inc.
On February 17, 2015, Carol Cowhey, a consumer, filed a purported class action proceeding (the “
Cowhey
case”) against Ascena Retail Group, Inc. and Tween Brands, Inc. (doing business as “
Justice
”) in the Court of Common Pleas in Philadelphia, Pennsylvania on behalf of herself and all other similarly situated consumers who in the State of Pennsylvania made purchases at
Justice
during the Alleged Class Period. The allegations in the
Cowhey
case are substantially the same as those in the
Mehigan
case. The relief sought in the
Cowhey
case focuses on remedies available under Pennsylvania law, which the plaintiff claims include treble damages. On March 19, 2015,
Justice
removed the
Cowhey
case to federal court in the United States District Court for the Eastern District of Pennsylvania.
Consolidation of Mehigan and Cowhey Cases (Rougvie)
On April 8, 2015, the United States District Court for the Eastern District of Pennsylvania consolidated the
Cowhey
case and the
Mehigan
case. They are now consolidated for all pre-trial purposes in the federal court in the Eastern District of Pennsylvania.
On June 2, 2015, the court held a Rule 16 Conference and issued a Scheduling Order and Settlement Conference Order. The Scheduling Order sets a fact and expert discovery deadline of December 4, 2015, with trial scheduled for early 2016. In light of the settlement described below, the trial will not go forward.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Traynor-Lufkin v. Tween Brands, Inc.
On March 6, 2015, Katie Traynor-Lufkin and three other named plaintiffs, all consumers, filed a purported nationwide class action (the “
Traynor-Lufkin
case”) against Tween Brands, Inc. (doing business as “
Justice
”) in the Court of Common Pleas in Cuyahoga County, Ohio. The
Traynor-Lufkin
case purports to include a class of
Justice
customers in 47 states. As with the
Mehigan
case, the
Traynor-Lufkin
case excludes Hawaii, Alaska and Ohio. During the Alleged Class Period,
Justice
did not operate any stores in Hawaii or Alaska. In December 2014,
Justice
settled a similar class action lawsuit in the State of Ohio. The allegations and damages sought in the
Traynor-Lufkin
case are substantially the same as those in the
Mehigan
case.
Removal of Traynor-Lufkin Case and Motion to Transfer
On April 7, 2015,
Justice
removed the
Traynor-Lufkin
case to the United States District Court for the Northern District of Ohio. On April 13, 2015,
Justice
filed a motion under 28 U.S.C. § 1408(a) to transfer the
Traynor-Lufkin
case to the United States District Court for the Eastern District of Pennsylvania. In seeking the transfer,
Justice
argued that there were already two consolidated actions pending in the Eastern District of Pennsylvania and that a forum in Ohio is not appropriate because no Ohio consumers are involved in the case. The Eastern District of Pennsylvania was advised that the
Traynor-Lufkin
case was related to
Rougvie
, and the case was reassigned on May 27, 2015.
Consolidation of Traynor-Lufkin and Rougvie case
On June 18, 2015, the United States District Court for the Eastern District of Pennsylvania consolidated the
Cowhey
case and the
Mehigan
case (collectively referred to as
Rougvie
) and the
Traynor-Lufkin
matters. The Scheduling and Settlement Conference Orders issued in the
Rougvie
matter are applicable to all parties in the
Traynor-Lufkin
and
Rougvie
cases, including the Company and all of the named plaintiffs in the consolidated actions.
Metoyer v. Tween Brands, Inc.
On May 29, 2015, Theresa Metoyer, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the Central Division of California, Eastern Division, on behalf of herself and all other similarly situated consumers who made purchases from
Justice
stores located in California during the four years preceding the filing of the lawsuit. The allegations in the
Metoyer
case are substantially the same as those in the other Justice pricing lawsuits described above. The relief sought by plaintiff is substantially the same as that sought in the other lawsuits.
On June 18, 2015, Tween Brands, Inc. filed its Answer to the Complaint. The Court issued an Order setting a scheduling conference for August 24, 2015. On August 21, 2015, the Court issued an Order canceling the August 24 conference, directing the parties to file a joint status report, and indicating that the Court would consider resetting a status conference after review of the joint status report. On November 14, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
Gallagher v. Tween Brands, Inc.
On June 4, 2015, Robert Gallagher, a consumer, filed a lawsuit against Tween Brands, Inc. in the United States District Court for the Eastern District of Missouri, Eastern Division. This lawsuit includes both national and Missouri purported class actions. The plaintiff seeks monetary damages and reasonable costs and attorneys' fees. On August 27, 2015, the Company filed its Answer to the Complaint. On October 15, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
Kallay v. Tween Brands, Inc.
On June 5, 2015, Andrea Kallay, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the Southern District of Ohio, Eastern Division. This lawsuit includes both national and Wisconsin class actions. The plaintiff seeks monetary damages and reasonable costs and attorneys' fees. On August 28, 2015, the Company filed its Answer to the Complaint. On October 29, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Joiner v. Tween Brands, Inc.
On June 1, 2015, Rebecca Joiner, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the District of Maryland. This lawsuit includes putative national and Maryland classes. The plaintiff seeks monetary damages and reasonable costs and attorney’s fees. On August 28, 2015, the Company filed its Answer to the Complaint. On December 1, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
Loor v. Tween Brands, Inc.
On June 11, 2015, Yanetsy Loor, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the Middle District of Florida. This lawsuit includes putative national and Florida classes. The plaintiff seeks monetary damages and reasonable costs and attorney’s fees. On August 21, 2015, the Company filed its Answer to the Complaint. On December 1, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
Legendre v. Tween Brands, Inc.
On June 17, 2015, David Legendre, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the District of New Jersey. This lawsuit includes both national and New Jersey class actions. The plaintiff seeks monetary damages and reasonable costs and attorney’s fees. On August 28, 2015, the Company filed its Answer to the Complaint. On December 11, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
In re Tween Brands, Inc., Marketing & Sales Practices Litigation. MDL No. 2646
On June 1, 2015, Andrea Kallay, the plaintiff in
Kallay v. Tween Brands, Inc.,
filed a Motion to Transfer to the United State District Court for the Southern District of Ohio and for creation of a Multidistrict Litigation (“MDL”) proceeding styled
In re: Tween Brands, Inc., Marketing and Sales Practices Litigation
, MDL 2646. Responses to the Motion to Transfer were submitted on June 23, 2015. The majority of plaintiffs in the above listed cases filed response motions in support of transfer and consolidation to the Southern District of Ohio. The
Rougvie
plaintiffs filed a response motion opposing transfer to the Southern District of Ohio and arguing for transfer to the Eastern District of Pennsylvania.
Justice
filed a Response in Opposition, supporting transfer and consolidation but arguing that the proper venue for the MDL is the Eastern District of Pennsylvania. The JPML held a hearing on July 30, 2015 on the Motion to Transfer and subsequently denied the Motion to Transfer in an Order issued on August 7, 2015.
Settlement Agreed to at July 2, 2015 Mediation and Final Approval
In July 2015, an agreement in principle was reached with the plaintiffs in the
Rougvie
case to settle the lawsuit 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 (the "Settlement Agreement"). As such, 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.
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 overall 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.
Recently, 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 cases would not be material. If the matters described herein do not
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Steven Linares v. ANN INC.
On December 29, 2015, plaintiff, Steven Linares, a former 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. The case is in its early stages and formal fact discovery has not yet begun, therefore, we are not able to estimate a range of reasonably possible losses. Mediation is currently scheduled for September 20, 2016.
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 consolidated financial statements.
15. Equity
Capital Stock
The Company’s capital stock consists of one class of common stock and one class of preferred stock. There are
360 million
shares,
of common stock authorized to be issued and
100,000
shares of preferred stock authorized to be issued. There are
no
shares of preferred stock issued or outstanding.
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”), which replaced and canceled the share repurchase program originally announced in Fiscal 2010, as amended in Fiscal 2011, which had a remaining availability of
$89.9 million
. 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 11. 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.
Cumulative repurchases under the 2016 Stock Repurchase Program total
2.1 million
shares of common stock, all of which were repurchased at an aggregate cost of
$18.6 million
in Fiscal 2016. No shares of common stock were repurchased in Fiscal 2015 and Fiscal 2014. The remaining availability under the 2016 Stock Repurchase Program was approximately
$181.4 million
at July 30, 2016.
Net (Loss) Income Per Common Share
Basic net (loss) income per common share is computed by dividing the net (loss) income applicable to common shares after preferred dividend requirements, if any, by the weighted-average number of common shares outstanding during the period. Diluted net (loss) income per common share adjusts basic net (loss) income 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.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The weighted-average number of common shares outstanding used to calculate basic net (loss) income per common share is reconciled to those shares used in calculating diluted net (loss) income per common share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
(a)
|
|
July 25,
2015
(a)
|
|
July 26,
2014
|
|
|
(millions)
|
Basic
|
|
192.2
|
|
|
162.6
|
|
|
160.6
|
|
Dilutive effect of stock options, restricted stock and restricted stock units
|
|
—
|
|
|
—
|
|
|
4.5
|
|
Diluted shares
|
|
192.2
|
|
|
162.6
|
|
|
165.1
|
|
(a)
There was no dilutive effect of stock options, restricted stock and restricted stock units in Fiscal 2016 and Fiscal 2015 as the impact of these items was anti-dilutive because of the Company's net loss incurred during the years.
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 (loss) income 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 Fiscal 2016 and Fiscal 2015 as the impact of those items would have been anti-dilutive due to the net loss incurred for these periods. For Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively,
17.1 million
,
15.8 million
and
5.6 million
shares of anti-dilutive options and restricted stock units were excluded from the diluted share calculations.
Dividends
The Company has never declared or paid cash dividends on its common stock. However, payment of dividends is within the discretion of, and are payable when declared by, the Company’s Board of Directors. Additionally, payments of dividends are limited by the Company's borrowing arrangements as described in Note 11.
16. Stock-Based Compensation
Omnibus Incentive Plan
In November 2015, the Board of Directors approved the amendment and restatement of the Company’s 2010 Stock Incentive Plan, as amended in December 2012 (the "2010 Stock Incentive Plan"). The amended and restated 2010 Stock Incentive Plan (the “2016 Omnibus Incentive Plan”) was approved by the Company’s shareholders and became effective on December 10, 2015. The 2010 Stock Incentive Plan provided for granting of either incentive stock options or non-qualified options to purchase shares of common stock, as well as the award of shares of restricted stock and other stock awards (including restricted stock units). The 2016 Omnibus Incentive Plan generally incorporates the provisions of the 2010 Stock Incentive Plan and includes certain changes to (i) increase the aggregate number of shares that may be issued under the plan by an additional
19.5 million
shares to
70.5 million
, (ii) add the ability to grant performance-based cash incentive awards, (iii) retain the ability to grant performance-based stock awards for a period of
five
years and (iv) extend the term until November 2025.
As of July 30, 2016, there were approximately
23.6
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.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
|
(millions)
|
Compensation expense
|
|
$
|
26.2
|
|
|
$
|
18.2
|
|
|
$
|
30.6
|
|
Income tax benefit
|
|
$
|
(10.1
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
(11.5
|
)
|
Stock Options
Stock option awards outstanding under the Company’s current plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period of
three
,
four
or
five years
and expire at either
seven
or
ten years
after the grant date. The Company recognizes compensation expense ratably over the vesting period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:
Expected Term
— The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants.
Expected Volatility
— The expected volatility factor is based on the historical volatility of the Company's common stock for a period equal to the expected term of the stock option.
Risk-free Interest Rate
— The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock option.
Expected Dividend Yield
— The expected dividend yield is based on the Company's historical practice of not paying dividends on its common stock.
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the fiscal years presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
Expected term (years)
|
|
3.1
|
|
|
3.9
|
|
|
3.9
|
|
Expected volatility
|
|
35.4
|
%
|
|
38.8
|
%
|
|
40.0
|
%
|
Risk-free interest rate
|
|
1.5
|
%
|
|
1.8
|
%
|
|
1.5
|
%
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Weighted-average grant date fair value
|
|
$
|
4.14
|
|
|
$
|
4.97
|
|
|
$
|
7.11
|
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the stock option activity under all plans during Fiscal 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 25, 2015
|
|
14,103.9
|
|
|
$
|
14.13
|
|
|
5.1
|
|
$
|
17.3
|
|
Granted
|
|
3,556.3
|
|
|
12.89
|
|
|
|
|
|
|
Exercised
|
|
(1,305.2
|
)
|
|
6.99
|
|
|
|
|
|
|
Canceled/Forfeited
|
|
(1,541.6
|
)
|
|
15.39
|
|
|
|
|
|
|
Options outstanding – July 30, 2016
|
|
14,813.4
|
|
|
$
|
14.33
|
|
|
4.8
|
|
$
|
0.9
|
|
Options vested and expected to vest at July 30, 2016
(b)
|
|
14,667.1
|
|
|
$
|
14.34
|
|
|
4.8
|
|
$
|
0.8
|
|
Options exercisable at July 30, 2016
|
|
8,202.4
|
|
|
$
|
14.02
|
|
|
4.2
|
|
$
|
0.7
|
|
______
|
|
(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.
|
As of July 30, 2016, there was
$21.4 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
1.9 years
. The total intrinsic value of options exercised during Fiscal 2016, Fiscal 2015 and Fiscal 2014 was approximately
$7.3 million
,
$5.0 million
and
$17.1 million
, respectively. The total fair value of options that vested during Fiscal 2016, Fiscal 2015 and Fiscal 2014, was approximately
$13.7 million
,
$14.2 million
and
$14.1 million
, respectively.
Restricted Equity Awards
The 2010 Stock Plan also allowed for the issuance of shares of restricted stock and restricted stock units (“RSUs”) with service-based, market-based and performance-based conditions (collectively, “Restricted Equity Awards”). In the first quarter of Fiscal 2016, the Compensation Committee of the Board of Directors (the "Compensation Committee") approved the cancellation of the Company's performance-based and market-based Restricted Equity Awards. As a result, the previously unrecognized expense related to the market-based Restricted Equity Awards was expensed in the first quarter of Fiscal 2016. In addition, the previously accrued expense related to the performance-based Restricted Equity Awards was derecognized during the first quarter of Fiscal 2016. Such amounts were de minimis and have been included within Selling, general and administrative expenses in the accompanying consolidated financial statements.
Under the 2016 Omnibus Incentive Plan, shares of Restricted Equity Awards are issuable with service-based, market-based or performance-based conditions. Any shares of Restricted Equity Awards issued are counted against the shares available for future grant limit as
2.3
shares for every one Restricted Equity Award granted. In general, if options are canceled for any reason or expire, the shares covered by such options again become available for grant. If a share of restricted stock or a RSU is forfeited for any reason,
2.3
shares become available for grant.
Service-based Restricted Equity Awards entitle the holder to receive unrestricted shares of common stock of the Company at the end of a vesting period, subject to the grantee’s continuing employment. Service-based Restricted Equity Awards generally vest over a
three
or
four
year period of time.
Performance-based Restricted Equity Awards also entitle the holder to receive shares of common stock of the Company at the end of a vesting period. However, such awards are subject to (a) the grantee’s continuing employment and (b) the Company’s achievement of certain performance goals over a pre-defined performance period. Performance-based Restricted Equity Awards generally vest at the completion of the performance period.
The fair values of both service-based and performance-based Restricted Equity Awards are based on the fair value of the Company’s unrestricted common stock at the date of grant. Compensation expense for both service-based and performance-based Restricted Equity Awards is recognized over the vesting period based on the grant-date fair values of the awards that are expected to vest
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
based upon the service and performance-based conditions. As of July 30, 2016, there are no restricted stock or RSUs with performance-based conditions issued under the 2016 Omnibus Incentive Plan.
A summary of Restricted Equity Awards activity during Fiscal 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-based
Restricted Equity Awards
|
|
Performance-based
Restricted Equity Awards
|
|
Market-based
Restricted Equity Awards
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value Per
Share
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value Per
Share
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value Per
Share
|
|
(thousands)
|
|
|
|
(thousands)
|
|
|
|
(thousands)
|
|
|
|
Nonvested at July 25, 2015
|
1,101.9
|
|
|
$
|
16.13
|
|
|
449.1
|
|
|
$
|
17.20
|
|
|
184.8
|
|
|
$
|
16.84
|
|
Granted
|
1,783.9
|
|
|
12.72
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
(420.2
|
)
|
|
15.90
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled/Forfeited
|
(206.8
|
)
|
|
14.49
|
|
|
(449.1
|
)
|
|
17.20
|
|
|
(184.8
|
)
|
|
16.84
|
|
Nonvested at July 30, 2016
|
2,258.8
|
|
|
$
|
13.62
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Service-based
Restricted Equity Awards
|
Total unrecognized compensation expense at July 30, 2016 (millions)
|
$
|
15.8
|
|
Weighted-average period expected to be recognized over (years)
|
2.8
|
|
Additional information pertaining to Restricted Equity Awards activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
Service-based Restricted Equity Awards:
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of awards granted
|
|
$
|
12.72
|
|
|
$
|
13.96
|
|
|
$
|
19.23
|
|
Total fair value of awards vested (millions)
|
|
4.9
|
|
|
7.1
|
|
|
12.9
|
|
|
|
|
|
|
|
|
Performance-based Restricted Equity Awards:
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of awards granted
|
|
$
|
—
|
|
|
$
|
13.75
|
|
|
$
|
20.06
|
|
Total fair value of awards vested (millions)
|
|
—
|
|
|
1.4
|
|
|
2.6
|
|
|
|
|
|
|
|
|
Market-based Restricted Equity Awards:
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of awards granted
|
|
$
|
—
|
|
|
$
|
13.34
|
|
|
$
|
19.46
|
|
Total fair value of awards vested (millions)
|
|
—
|
|
|
—
|
|
|
0.6
|
|
Cash-Settled Long-Term Incentive Plan Awards
Cash-Settled LTIP Awards were stock-settled awards that entitled the holder to a cash payment equal to the value of the number of shares of the Company’s common stock earned at the end of a
three
-year performance period based on the Company’s achievement of certain performance goals over that three-year performance period.
In the first quarter of Fiscal 2016, the Compensation Committee approved the cancellation of the Company's Cash-Settled LTIP Awards. As a result, an aggregate of approximately
1.3 million
awards were canceled and previously accrued liabilities of
$1.7 million
were derecognized and recorded as a reduction of Selling, general and administrative expenses in the accompanying consolidated financial statements.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Employee Benefit Plans
Cash Long-Term Incentive Plans
During Fiscal
2016
, the Company created a long-term cash incentive program ("Cash LTIP") for vice presidents and above under the 2016 Omnibus Incentive Plan. The Cash LTIP entitles the holder to a cash payment 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 Cash LTIP is recognized over the related performance periods based on the expected achievement of the performance goals.
During Fiscal
2016
, the Company recognized
$20.1 million
in compensation expense under the Cash LTIP which was recorded within Selling, general and administrative expenses in the accompanying consolidated financial statements. As of
July 30, 2016
, there was
$21.2 million
of expected unrecognized compensation cost related to the Cash LTIP, which is expected to be recognized over a remaining weighted-average vesting period of
1.8
years. As of
July 30, 2016
, the liability for Cash LTIP Awards was
$20.1 million
, of which
$10.5 million
was classified within Accrued expenses and other current liabilities and
$9.6 million
was classified within Other non-current liabilities in the accompanying consolidated balance sheets.
Retirement Savings Plan (401(k))
The Company currently sponsors a defined contribution retirement savings plan (the "401(k)" plan). This plan covers substantially all eligible U.S. employees. Participating employees may contribute a percentage of their annual compensation, subject to certain limitations under the U.S Internal Revenue Code. The Company's contribution is made in accordance with a matching formula established prior to the beginning of each plan year. Effective with the plan year starting January 1, 2015, the Company will contribute a matching amount based on eligible salary contributed by an employee equal to
100%
of the first
3%
contributed and
50%
of the next
2%
contributed. Under the terms of the plan, such matching contributions are immediately vested. The Company incurred expenses relating to its contributions to and administration of its 401(k) plan of
$18.0 million
in Fiscal
2016
,
$8.8 million
in Fiscal
2015
and
$5.2 million
in Fiscal
2014
.
Defined Benefit Plan
In connection with the
ANN
Acquisition, the Company assumed
ANN
's pension plan which is frozen and for which the accumulated benefit obligation exceeded the plan's assets by approximately
$6 million
as of the acquisition date. In Fiscal
2016
, the Company made a decision, and has begun to, terminate the plan. The trust is anticipated to be fully liquidated by the end of calendar 2016. The Company recorded approximately
$6 million
, net of an income tax benefit of approximately
$2 million
within Accumulated other comprehensive loss during Fiscal
2016
mainly due to the change in discount rate during the period. As of
July 30, 2016
, the accumulated benefit obligation exceeded the plan's assets by approximately
$12 million
.
Executive Retirement Plan
The Company sponsors an Executive Retirement Plan (the “ERP Plan”) for certain officers and key executives. The ERP Plan is a non-qualified deferred compensation plan. The purpose of the ERP Plan is to attract and retain a select group of management and to provide them with an opportunity to defer compensation on a pretax basis above U.S. Internal Revenue Service limitations. ERP Plan balances cannot be rolled over to another qualified plan or IRA upon distribution. Unlike a qualified plan, the Company is not required to pre-fund the benefits payable under the ERP Plan.
ERP Plan participants can contribute up to
50%
of base salary and
75%
of bonuses, before federal and state taxes are calculated. The Company makes a matching contribution to the ERP Plan in the amount of
100%
on the first
1%
of base salary and bonus salary deferred up to
$265,000
. The Company makes an additional matching contribution to the ERP Plan in the amount of
100%
on the first
5%
of base salary and bonus salary deferred in excess of
$265,000
. Plan Employees vest immediately in their voluntary deferrals and are incrementally vested in their employer matching contributions over a
five
year vesting period after which they are
100%
vested. The Company incurred expenses related to its matching contributions of approximately
$1.9 million
in Fiscal
2016
,
$2.1 million
in Fiscal
2015
and
$3.4 million
in Fiscal
2014
relating to the ERP Plan. In addition, as the ERP Plan is unfunded by the Company, the Company is also required to pay an investment return to participating employees on all account balances in the ERP Plan based on
27
reference investment fund elections offered to participating employees. As a result, the Company’s obligations under the ERP Plan are subject to market appreciation and depreciation, which resulted in expense of
$1.4 million
in Fiscal
2016
,
$3.3 million
in Fiscal
2015
and
$7.2 million
in Fiscal
2014
. The Company’s obligations under the ERP Plan, including
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
employee compensation deferrals, matching employer contributions and investment returns on account balances, were
$75.4 million
as of
July 30, 2016
and
$70.7 million
as of
July 25, 2015
. As of
July 30, 2016
,
$4.5 million
was classified within Accrued expenses and other current liabilities and
$70.9 million
was classified within Other non-current liabilities in the accompanying consolidated balance sheets. As of
July 25, 2015
,
$3.8 million
was classified within Accrued expenses and other current liabilities and
$66.9 million
was classified within Other non-current liabilities in the accompanying consolidated balance sheets.
Employee Stock Purchase Plan
The Company also sponsors an Employee Stock Purchase Plan, which allows employees to purchase shares of the Company’s common stock during each quarterly offering period at a
15%
discount through payroll deductions. Expenses incurred during Fiscal
2016
, Fiscal
2015
and Fiscal
2014
relating to this plan were de minimis.
18. Segments
The Company’s segment reporting structure reflects an approach designed to optimize the operational coordination and resource allocation of its businesses across multiple functional areas including specialty retail, ecommerce and licensing. The
six
reportable segments described below represent the Company’s activities for which separate financial information is available and utilized on a regular basis by the Company’s executive team to evaluate performance and allocate resources. In identifying reportable segments and disclosure of product offerings, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, the Company reports its operations in
six
reportable segments as follows:
|
|
•
|
ANN
segment – consists primarily of the specialty retail, outlet and ecommerce operations of the
Ann Taylor
and
LOFT
brands.
|
|
|
•
|
Justice
segment – consists of the specialty retail, outlet, ecommerce and licensing operations of the
Justice
brand.
|
|
|
•
|
Lane Bryant
segment – consists of the specialty retail, outlet and ecommerce operations of the
Lane Bryant
brand and its
Cacique
intimates label.
|
|
|
•
|
maurices
segment – consists of the specialty retail, outlet and ecommerce operations of the
maurices
brand.
|
|
|
•
|
dressbarn
segment – consists of the specialty retail, outlet and ecommerce operations of the
dressbarn
brand.
|
|
|
•
|
Catherines
segment – consists of the specialty retail and ecommerce operations of the
Catherines
brand.
|
The accounting policies of the Company’s reporting segments are consistent with those described in Notes 3 and 4. All intercompany revenues are eliminated in consolidation. Corporate overhead expenses are allocated to the segments based upon specific usage or other reasonable allocation methods.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net sales and operating income (loss) for each segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
Net sales:
|
|
(millions)
|
ANN
(a)
|
|
$
|
2,330.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Justice
|
|
1,106.3
|
|
|
1,276.8
|
|
|
1,384.3
|
|
Lane Bryant
|
|
1,130.3
|
|
|
1,095.9
|
|
|
1,080.0
|
|
maurices
|
|
1,101.3
|
|
|
1,060.6
|
|
|
971.4
|
|
dressbarn
|
|
993.3
|
|
|
1,023.6
|
|
|
1,022.5
|
|
Catherines
|
|
333.3
|
|
|
346.0
|
|
|
332.4
|
|
Total net sales
|
|
$
|
6,995.4
|
|
|
$
|
4,802.9
|
|
|
$
|
4,790.6
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
ANN
(a)(b)
|
|
$
|
13.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Justice
|
|
29.0
|
|
|
(62.8
|
)
|
|
99.3
|
|
Lane Bryant
|
|
20.6
|
|
|
(308.0
|
)
|
|
(4.3
|
)
|
maurices
|
|
105.6
|
|
|
125.9
|
|
|
86.0
|
|
dressbarn
|
|
(13.6
|
)
|
|
10.7
|
|
|
39.4
|
|
Catherines
|
|
16.3
|
|
|
31.0
|
|
|
24.4
|
|
Unallocated acquisition and integration expenses
|
|
(77.4
|
)
|
|
(31.7
|
)
|
|
(34.0
|
)
|
Total operating income (loss)
|
|
$
|
93.8
|
|
|
$
|
(234.9
|
)
|
|
$
|
210.8
|
|
_______
|
|
(a)
|
The results of
ANN
for the post-acquisition period from August 22, 2015 to July 30, 2016 are included within the Company's consolidated results of operations for Fiscal 2016.
|
|
|
(b)
|
The results of
ANN
for Fiscal 2016 include approximately
$165 million
of non-cash expenses for purchase accounting adjustments, primarily related to the
$127 million
write-up of inventory to its fair value.
|
Depreciation and amortization expense and capital expenditures for each segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
Depreciation and amortization expense:
|
|
(millions)
|
ANN
(a)
|
|
$
|
128.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Justice
|
|
72.1
|
|
|
70.2
|
|
|
60.7
|
|
Lane Bryant
|
|
43.0
|
|
|
46.8
|
|
|
45.6
|
|
maurices
|
|
51.3
|
|
|
43.3
|
|
|
39.5
|
|
dressbarn
|
|
55.2
|
|
|
50.7
|
|
|
40.5
|
|
Catherines
|
|
9.1
|
|
|
7.2
|
|
|
7.3
|
|
Total depreciation and amortization expense
|
|
$
|
358.7
|
|
|
$
|
218.2
|
|
|
$
|
193.6
|
|
|
|
|
|
|
|
|
Capital expenditures
(b)
:
|
|
|
|
|
|
|
|
|
|
ANN
(a)
|
|
$
|
57.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Justice
|
|
19.8
|
|
|
51.5
|
|
|
93.5
|
|
Lane Bryant
|
|
30.5
|
|
|
47.9
|
|
|
53.5
|
|
maurices
|
|
70.4
|
|
|
56.3
|
|
|
54.0
|
|
dressbarn
|
|
20.2
|
|
|
47.6
|
|
|
93.5
|
|
Catherines
|
|
10.4
|
|
|
6.2
|
|
|
7.3
|
|
Corporate
(c)
|
|
158.2
|
|
|
103.0
|
|
|
175.7
|
|
Total capital expenditures
|
|
$
|
366.5
|
|
|
$
|
312.5
|
|
|
$
|
477.5
|
|
(a)
The results of
ANN
for the post-acquisition period from August 22, 2015 to July 30, 2016 are included within the Company's consolidated results of operations for Fiscal 2016.
(b)
Excludes ending accrued capital expenditures of
$61.9 million
in Fiscal 2016,
$50.8 million
in Fiscal 2015 and
$64.4 million
in Fiscal 2014.
(c)
Includes capital expenditures for technology and supply chain infrastructure and corporate office space.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s executive team does not regularly review asset information by operating segment and, accordingly, we do not report asset information by operating segment. In addition, the Company’s operations are largely concentrated in the United States and Canada. Accordingly, net sales and long-lived assets by geographic location are not meaningful at this time.
The Company’s revenues by major product categories as a percentage of total net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
|
(millions)
|
Apparel
|
|
87
|
%
|
|
84
|
%
|
|
83
|
%
|
Accessories and other
|
|
13
|
%
|
|
16
|
%
|
|
17
|
%
|
Total net sales
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
19. Additional Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
Cash Interest and Taxes:
|
|
July 30,
2016
|
|
July 25,
2015
|
|
July 26,
2014
|
|
|
(millions)
|
Cash paid for interest
|
|
$
|
76.3
|
|
|
$
|
4.6
|
|
|
$
|
4.6
|
|
Cash (received) paid for income taxes
|
|
$
|
(9.2
|
)
|
|
$
|
(5.9
|
)
|
|
$
|
42.1
|
|
Non-cash Transactions
In connection with the
ANN
Acquisition, as more fully described in Note 5, 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 the accrued purchases of fixed assets in the amount of
$61.9 million
as of July 30, 2016,
$50.8 million
as of July 25, 2015 and
$64.4 million
as of July 26, 2014.