Item 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements made within this Form 10-Q and in oral statements made from time to time by us or on our behalf may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Forward-looking statements are statements related to future, not past, events, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "estimate," "forecast," "target," "preliminary," or "range." The Company does not undertake to publicly update or review its forward-looking statements even if experience or future changes make it clear that our projected results expressed or implied will not be achieved.
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended July 29, 2017 (the "Fiscal 2017 10-K"). Other than the update provided in Part II, Item 1A — "Risk Factors" of this Form 10-Q, there are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A — "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
OVERVIEW
Our Business
ascena retail group, inc., a Delaware corporation (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls, with annual revenue of approximately
$6.6 billion
for Fiscal 2017. We and our subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
General Business Conditions
Our performance is subject to macroeconomic conditions and their impact on levels and patterns of consumer spending. Some of the factors that could negatively impact discretionary consumer spending include general economic conditions, high unemployment, lower wage levels, reductions in net worth, higher energy and other prices, increasing interest rates and low consumer confidence.
Retailers, particularly those in the specialty apparel sector, continue to face intense competition and channel disruption as consumer spending habits continue to indicate an increasing preference to purchase digitally as opposed to in traditional brick-and-mortar retail stores. Competition for consumer spending remains strong and, accordingly, we expect store traffic headwinds and the highly promotional operating environment to continue in the fourth quarter of Fiscal 2018. In response to this expected operating environment, we continue to scale back overall spending levels where possible, and refine our operating model and implement new capabilities to ensure we remain competitive in this rapidly evolving sector.
Change for Growth Program
During the third quarter of Fiscal 2018, we continued activities under the Change for Growth transformation program which included (i) continued operating expense reductions in the areas of professional services, travel and facilities management, among others, (ii) continued transition of certain transaction process functions to an independent third-party managed-service provider, and (iii) continued re-negotiation of store leases under the fleet optimization program.
We realized approximately $105 million in cost savings, including $15 million in Cost of goods sold, $10 million in Buying, distribution and occupancy expenses ("BD&O"), and $80 million in Selling, general and administrative expenses ("SG&A") during the nine months ended
April 28, 2018
related to Change for Growth program actions. We also expect to realize additional cost savings related to these actions of approximately $30 million for the remainder of Fiscal 2018. Subsequent to Fiscal 2018, we expect to realize an additional $75 to $125 million in annual cost savings though Fiscal 2020, bringing the total expected annual cost savings from these actions, when combined with the $65 million achieved during Fiscal 2017, to a range of $275 to $325 million. These savings are expected to be realized in our segment operating results generally in proportion to their sales.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
We may incur significant additional charges and capital expenditures in future periods as we more fully define incremental Change for Growth program initiatives, and move into the execution phases of associated projects; however the benefits of such initiatives and related charges and required capital expenditures are not quantifiable at this time. Actions associated with the Change for Growth program are currently expected to continue through Fiscal 2019.
Integration of ANN
During the first nine months of Fiscal 2018, we realized cost savings of approximately $35 million, which consisted of $20 million in product cost savings primarily related to our ongoing cost of goods sold initiative at our
Premium Fashion
segment, and approximately $15 million in SG&A synergies primarily related to non-merchandise procurement savings. We expect to realize additional synergies of approximately $10 million during the remainder of Fiscal 2018. Thereafter, we expect to realize approximately $25 million in Fiscal 2019 and approximately $5 million in Fiscal 2020. Annual synergies and cost savings related to the integration of ANN INC.
("
ANN
" and the "
ANN
integration"), including $160 million achieved through Fiscal 2017, are expected to total approximately $235 million by Fiscal 2019.
Impact of Hurricanes
During the first quarter of Fiscal 2018, the south-central and southeast areas of the United States, as well as Puerto Rico, were impacted by three hurricanes that disrupted normal operations at approximately 600 of our retail stores. While almost all of these stores have resumed operations, many of these stores were impacted by the hurricanes, either as a result of damage incurred, or they experienced declines in customer traffic. We have substantially completed our assessment of the damages associated with these events and estimate that our results were negatively impacted by approximately $11 million of sales losses during these events, a portion of which may be recovered through business interruption insurance claims. Recoveries from these insurance claims of approximately $1 million have been received through the end of the third quarter. Other than the impact of the sales losses, the hurricanes did not have a material impact on the Company.
Private Label and Co-branded Credit Card Programs
Our brands offer various credit card programs to eligible customers in the United States. In January 2017, our
Value Fashion
segment replaced its previous private label credit card arrangement with a new arrangement offered under an agreement with Capital One, National Association ("Capital One"). Accordingly, Capital One began offering private label credit cards to new and existing customers at our
Value Fashion
segment, which recognized approximately $24 million of revenue under the Program during the first nine months of Fiscal 2018 compared to approximately $15 million of revenue recognized in the first nine months of Fiscal 2017 after the program's January 2017 start date.
Seasonality of Business
Our individual segments are typically affected by seasonal sales trends primarily resulting from the timing of holiday and back-to-school shopping periods. In particular, sales at our
Kids Fashion
segment tend to be significantly higher during the fall season, which occurs during the first and second quarters of our fiscal year, as this includes the back-to-school period and the December holiday season. Our
Plus
Fashion
segment tends to experience higher sales during the spring season, which includes the Easter and Mother's Day holidays. Our
Premium Fashion
and
Value Fashion
segments have relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix.
Summary of Financial Performance
Fiscal Period
As disclosed in Note 2 to the unaudited condensed consolidated financial statements, the Company's
Premium Fashion
segment, recognized an extra week during the second quarter of Fiscal 2018 whereas, the Company's
Value Fashion
,
Plus Fashion
, and
Kids Fashion
segments will recognize an extra week in the fourth quarter of Fiscal 2018. As a result, the three and nine months ended
April 28, 2018
included the results of the
Value Fashion
,
Plus Fashion
, and
Kids Fashion
segments for 13 and 39-weeks,
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
respectively, while the results of the
Premium Fashion
segment are included for 13 and 40-weeks, respectively. The three and nine months ended
April 29, 2017
were 13 and 39-week periods, respectively, for all segments.
Third Quarter Summary and Key Developments
Operating highlights for the third quarter are as follows:
|
|
•
|
Comparable sales decreased by
3%
, reflecting declines at our
Premium Fashion
,
Value Fashion
and
Plus Fashion
segments, offset in part by an increase at our
Kids Fashion
segment;
|
|
|
•
|
Selling, general and administrative expenses for the third quarter includes a
$17.1 million
non-cash charge to write-down store-related fixed assets at our d
ressbarn
brand;
|
|
|
•
|
Operating loss was
$23.1 million
compared to a loss of
$1,311.8 million
in the year-ago period; and
|
|
|
•
|
Net loss per diluted share was
$0.20
, compared to a loss of
$5.29
in the year-ago period.
|
Liquidity highlights for the
nine
-month period ended
April 28, 2018
are as follows:
|
|
•
|
Cash provided by operations was
$142.2 million
compared to
$194.9 million
in the year-ago period;
|
|
|
•
|
Capital expenditures were $
132.3 million
compared to
$207.3 million
in the year-ago period; and
|
|
|
•
|
Term loan repayments totaled $
22.5 million
during the nine months ended
April 28, 2018
.
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
RESULTS OF OPERATIONS
Three Months Ended
April 28, 2018
compared to Three Months Ended
April 29, 2017
The following table summarizes operating results for certain financial statement line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
$ Change
|
|
% Change
|
|
(millions, except per share data)
|
|
|
|
|
|
Net sales
|
$
|
1,503.3
|
|
|
$
|
1,565.1
|
|
|
$
|
(61.8
|
)
|
|
(3.9
|
)%
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
(620.3
|
)
|
|
(616.7
|
)
|
|
(3.6
|
)
|
|
(0.6
|
)%
|
Cost of goods sold as % of net sales
|
41.3
|
%
|
|
39.4
|
%
|
|
|
|
|
|
|
Gross margin
|
883.0
|
|
|
948.4
|
|
|
(65.4
|
)
|
|
(6.9
|
)%
|
Gross margin as % of net sales
|
58.7
|
%
|
|
60.6
|
%
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Buying, distribution and occupancy expenses
|
(312.5
|
)
|
|
(313.4
|
)
|
|
0.9
|
|
|
0.3
|
%
|
BD&O expenses as % of net sales
|
20.8
|
%
|
|
20.0
|
%
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(490.6
|
)
|
|
(506.3
|
)
|
|
15.7
|
|
|
3.1
|
%
|
SG&A expenses as % of net sales
|
32.6
|
%
|
|
32.3
|
%
|
|
|
|
|
|
|
Acquisition and integration expenses
|
—
|
|
|
(3.8
|
)
|
|
3.8
|
|
|
100.0
|
%
|
Restructuring and other related charges
|
(18.1
|
)
|
|
(15.9
|
)
|
|
(2.2
|
)
|
|
(13.8
|
)%
|
Impairment of goodwill
|
—
|
|
|
(596.3
|
)
|
|
596.3
|
|
|
100.0
|
%
|
Impairment of other intangible assets
|
—
|
|
|
(728.1
|
)
|
|
728.1
|
|
|
100.0
|
%
|
Depreciation and amortization expense
|
(84.9
|
)
|
|
(96.4
|
)
|
|
11.5
|
|
|
11.9
|
%
|
Total other operating expenses
|
(906.1
|
)
|
|
(2,260.2
|
)
|
|
1,354.1
|
|
|
59.9
|
%
|
Operating loss
|
(23.1
|
)
|
|
(1,311.8
|
)
|
|
1,288.7
|
|
|
98.2
|
%
|
Operating loss as % of net sales
|
(1.5
|
)%
|
|
(83.8
|
)%
|
|
|
|
|
|
|
Interest expense
|
(28.4
|
)
|
|
(25.8
|
)
|
|
(2.6
|
)
|
|
(10.1
|
)%
|
Interest income and other expense, net
|
—
|
|
|
(0.2
|
)
|
|
0.2
|
|
|
100.0
|
%
|
Loss before benefit for income taxes
|
(51.5
|
)
|
|
(1,337.8
|
)
|
|
1,286.3
|
|
|
96.2
|
%
|
Benefit for income taxes
|
11.3
|
|
|
307.1
|
|
|
(295.8
|
)
|
|
(96.3
|
)%
|
Effective tax rate
(a)
|
21.9
|
%
|
|
23.0
|
%
|
|
|
|
|
|
|
Net loss
|
$
|
(40.2
|
)
|
|
$
|
(1,030.7
|
)
|
|
$
|
990.5
|
|
|
96.1
|
%
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.20
|
)
|
|
$
|
(5.29
|
)
|
|
$
|
5.09
|
|
|
96.2
|
%
|
Diluted
|
$
|
(0.20
|
)
|
|
$
|
(5.29
|
)
|
|
$
|
5.09
|
|
|
96.2
|
%
|
_______
|
|
(a)
|
Effective tax rate is calculated by dividing the Benefit for income taxes by the Loss before benefit for income taxes. The rate for Fiscal 2018 reflects a pro-rata impact of the 2017 Act as discussed in more detail herein.
|
Net Sales.
Total net sales decreased by
$61.8 million
, or
3.9%
, to
$1,503.3 million
for the three months ended
April 28, 2018
from
$1,565.1 million
in the year-ago period. The Net sales decline was primarily attributable to a
3%
comparable sales decline that mainly resulted from reduced store traffic at our
Value Fashion
segment; non-comparable sales decreased by
$10.1 million
, or
27%
, to
$27.6 million
from $
37.7 million
as discussed on a segment basis below; and other revenues decreased by
$3.1 million
, or
8%
, to
$38.1 million
from $
41.2 million
.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Net sales data for our four operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
532.7
|
|
|
$
|
535.8
|
|
|
$
|
(3.1
|
)
|
|
(0.6
|
)%
|
Value Fashion
|
424.0
|
|
|
485.1
|
|
|
(61.1
|
)
|
|
(12.6
|
)%
|
Plus Fashion
|
312.8
|
|
|
328.6
|
|
|
(15.8
|
)
|
|
(4.8
|
)%
|
Kids Fashion
|
233.8
|
|
|
215.6
|
|
|
18.2
|
|
|
8.4
|
%
|
Total net sales
|
$
|
1,503.3
|
|
|
$
|
1,565.1
|
|
|
$
|
(61.8
|
)
|
|
(3.9
|
)%
|
|
|
|
|
|
|
|
|
Comparable sales
(a)(b)
|
|
|
|
|
|
|
|
|
|
(3
|
)%
|
_______
(a)
Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales refer to growth of sales from our ecommerce channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, we report a single comparable sales metric, inclusive of store and ecommerce channels.
|
|
(b)
|
During the third quarter of Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the
Justice
pricing litigation, discussed more fully in Note 13 to the unaudited condensed consolidated financial statements, continued to be redeemed. Comparable sales related to these transactions includes the transaction value in excess of the voucher value.
|
Premium Fashion
net sales
performance primarily reflected:
|
|
•
|
a
7%
comparable sales decline of
$12.7 million
at
Ann Taylor
and a
1%
comparable sales decline of
$5.3 million
at
LOFT
during the three months ended
April 28, 2018
;
|
|
|
•
|
a
$12.6 million
increase in non-comparable sales primarily reflecting the net positive impact at
LOFT
of
18
new store openings in the last twelve months offset by
18
store closures, offset in part by the negative impact of
19
net store closures at
Ann Taylor
; and
|
|
|
•
|
a
$2.3 million
increase in other revenues.
|
Value Fashion
net sales
performance primarily reflected:
|
|
•
|
a
14%
comparable sales decline of
$29.6 million
at
dressbarn
and a
5%
comparable sales decline of
$11.6 million
at
maurices
during the three months ended
April 28, 2018
;
|
|
|
•
|
a
$12.7 million
decline in non-comparable sales primarily at
dressbarn
due to
52
store closures in the last twelve months; and
|
|
|
•
|
a
$7.2 million
decline in other revenues primarily due to the lower revenue from the segment's credit card program.
|
Plus Fashion
net sales
performance primarily reflected:
|
|
•
|
a
1%
comparable sales decline of
$3.3 million
at
Lane Bryant
and a
9%
comparable sales decline of
$6.4 million
at
Catherines
during the three months ended
April 28, 2018
;
|
|
|
•
|
a
$3.2 million
decline in non-comparable sales at
Lane Bryant
due to
15
net store closures in the last twelve months, and a
$1.9 million
decline in non-comparable sales at
Catherines
due to
12
net store closures in the last twelve months; and
|
|
|
•
|
a
$1.0 million
decrease in other revenues.
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Kids Fashion
net sales
performance primarily reflected:
|
|
•
|
a
10%
comparable sales increase of
$20.3 million
at
Justice
during the three months ended
April 28, 2018
;
|
|
|
•
|
a
$4.9 million
decline in non-comparable sales primarily due to
63
net store closures in the last twelve months; and
|
|
|
•
|
a
$2.8 million
increase in other revenues.
|
Gross Margin.
Gross margin, in terms of dollars decreased primarily as a result of the decline in comparable sales. Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, decreased by
190
basis points from the year-ago period to
58.7%
for the three months ended
April 28, 2018
. The decrease was primarily due to significantly lower margins at our
Value Fashion
segment, as discussed below. Also contributing to the decrease were lower margins at our
Premium Fashion
and
Kids Fashion
segments, which were partially offset by increased margins at our
Plus Fashion
segment. On a consolidated basis, gross margin reflects higher shipping costs of approximately $9 million across the segments as a result of an increase in ecommerce orders and higher air freight costs, and was offset by the realization of approximately $10 million in synergies and cost savings benefits achieved from product sourcing and transportation costs.
Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, and the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.
Gross margin rate highlights on a segment basis are as follows:
|
|
•
|
Premium Fashion
gross margin rate
performance declined by approximately 50 basis points, primarily reflecting higher shipping costs related to increased ecommerce penetration, and incremental promotions required to sell through remaining fall product, offset in part by the segment's cost of goods sold initiative.
|
|
|
•
|
Value Fashion
gross margin rate
performance declined approximately 620 basis points primarily reflecting an 820 basis point decline at
dressbarn
resulting from lower average selling price on non-performing Fall and early Spring fashion clearance and higher markdowns reflecting lower expectations for certain slow-turning product categories. Also contributing to the gross margin rate decline was a 470 basis point decline at
maurices,
resulting from increased promotional selling.
|
|
|
•
|
Plus Fashion
gross margin rate
performance improved by approximately 90 basis points, primarily reflecting improved product acceptance and lower levels of promotional selling, offset in part by higher shipping costs related to increased ecommerce penetration.
|
|
|
•
|
Kids Fashion
gross margin
rate
performance declined approximately 100 basis points as a result of incremental freight expenses necessary to meet higher in-season product demand.
|
Buying, Distribution and Occupancy ("BD&O") Expenses
consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
BD&O expenses decreased by
$0.9 million
, or
0.3%
, to
$312.5 million
for the three months ended
April 28, 2018
from
$313.4 million
in the year-ago period and reflects lower occupancy expenses resulting from our fleet optimization program, which were mostly offset by higher variable distribution costs related to the increased penetration of our direct business. BD&O expenses as a percentage of net sales increased by
80
basis points to
20.8%
for the three months ended
April 28, 2018
from
20.0%
in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.
Selling, General and Administrative ("SG&A") Expenses
consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
SG&A expenses decreased by
$15.7 million
, or
3.1%
, to
$490.6 million
for the three months ended
April 28, 2018
from
$506.3 million
in the year-ago period. The decrease in SG&A expenses was primarily due to approximately $30 million in synergies and cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings, lower store expenses resulting from our fleet optimization program, and lower performance-based compensation. These items were offset in part by inflationary increases and higher write-downs of store-related fixed assets, primarily at the
Value Fashion
segment.
SG&A expenses as a percentag
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
e of net sales increased by
30
basis points to
32.6%
for the three months ended
April 28, 2018
from
32.3%
in the year-ago period, as the de-leveraging effect of lower comparable sales was substantially offset by reduced expenses.
Depreciation and Amortization Expense
decreased by
$11.5 million
, or
11.9%
, to
$84.9 million
for the three months ended
April 28, 2018
from
$96.4 million
in the year-ago period. The decrease was primarily due to a reduction in store count resulting from our fleet optimization program, offset in part by incremental depreciation from capital investments in our omni-channel platform.
Operating Loss.
Operating loss was
$23.1 million
for the three months ended
April 28, 2018
compared to
$1,311.8 million
in the year-ago period and is discussed on a segment basis below.
Operating results for our four operating segments are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
30.1
|
|
|
$
|
22.2
|
|
|
$
|
7.9
|
|
|
35.6
|
%
|
Value Fashion
|
(48.1
|
)
|
|
23.1
|
|
|
(71.2
|
)
|
|
NM
|
|
Plus Fashion
|
13.4
|
|
|
10.3
|
|
|
3.1
|
|
|
30.1
|
%
|
Kids Fashion
|
(0.4
|
)
|
|
(23.3
|
)
|
|
22.9
|
|
|
98.3
|
%
|
Unallocated acquisition and integration expenses
|
—
|
|
|
(3.8
|
)
|
|
3.8
|
|
|
100.0
|
%
|
Unallocated restructuring and other related charges
|
(18.1
|
)
|
|
(15.9
|
)
|
|
(2.2
|
)
|
|
(13.8
|
)%
|
Unallocated impairment of goodwill
|
—
|
|
|
(596.3
|
)
|
|
596.3
|
|
|
100.0
|
%
|
Unallocated impairment of other intangible assets
|
—
|
|
|
(728.1
|
)
|
|
728.1
|
|
|
100.0
|
%
|
Total operating loss
|
$
|
(23.1
|
)
|
|
$
|
(1,311.8
|
)
|
|
$
|
1,288.7
|
|
|
(98.2
|
)%
|
_______
(NM)
Not meaningful.
Premium Fashion
operating income increased by
$7.9 million
primarily due to lower SG&A expenses, partially offset by a decline in comparable sales and gross margin rate, as discussed above. SG&A expense reductions were primarily driven by lower performance-based compensation and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Value Fashion
operating results decreased by
$71.2 million
primarily due to a decline in comparable sales and gross margin rate, as previously discussed, as well as an increase in operating expenses, which primarily reflects a
$17.1 million
non-cash charge to write down store-related fixed assets at its
dressbarn
brand as further discussed in Note 5 to the unaudited condensed consolidated financial statements included herein. Partially offsetting that charge, operating expenses reflect lower occupancy and variable store expenses associated with our fleet optimization program.
Plus Fashion
operating income increased by
$3.1 million
, driven by an increase in gross margin rate, as previously discussed, and a decrease in SG&A expenses, which were mostly offset by the decline in comparable sales also discussed above. The decrease in SG&A expenses was primarily driven by a decrease in marketing expenses.
Kids Fashion
operating results improved by
$22.9 million
primarily as a result of comparable sales growth, as previously discussed, along with a decrease in operating expenses, offset in part by a decrease in gross margin rate also discussed above. Operating expense reductions were primarily driven by lower occupancy expenses and lower store expenses associated with our fleet optimization program, lower marketing expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Unallocated Acquisition and Integration Expenses
of
$3.8 million
for the three months ended
April 29, 2017
included $0.2 million of severance and retention-related expenses and $3.6 million of costs associated with the post-acquisition integration of
ANN
's operations.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Unallocated Restructuring and Other Related Charges
of
$18.1 million
for the three months ended
April 28, 2018
primarily included $13.1 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives and $5.6 million for charges primarily reflecting decisions within the Company's fleet optimization program to close certain under-performing stores. The
$15.9 million
in the year-ago period primarily included $5.3 million for charges related to the fleet optimization program and $10.9 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program.
Unallocated Impairment of Goodwill
reflects the prior year write-down of the carrying values of the reporting units to their fair values and is included in our operating segments as follows: $428.9 million at our
Premium Fashion
segment, $107.2 at our
Value Fashion
segment
and $60.2 million at our
Plus Fashion
segment.
Unallocated Impairment of Other Intangible Assets
reflects the prior year write-down of the Company's trade name intangible assets to their fair values as follows: $210.0 million of our
Ann Taylor
trade name, $356.3 million of our
LOFT
trade name and $161.8 million of our
Lane Bryant
trade name.
Interest Expense
increased by
$2.6 million
, or
10.1%
, to
$28.4 million
for the three months ended
April 28, 2018
from $
25.8 million
in the year-ago period, caused by a higher interest rate on our term loan.
Benefit for Income Taxes
represents federal, foreign, state and local income taxes. We record income taxes based on the estimated effective tax rate for the year. For the three months ended
April 28, 2018
, we recorded a benefit of
$11.3 million
on a pre-tax loss of
$51.5 million
, for an effective tax rate of
21.9%
, which primarily reflects the federal and state statutory rate as well as the impact of permanent and discrete items, including the impact of the 2017 Act, as discussed in Note 9 to the unaudited condensed consolidated financial statements. We anticipate an effective tax rate of approximately
23%
before the impact of discrete items for the remainder of Fiscal 2018. In the year-ago period, we recorded a benefit of
$307.1 million
on a pre-tax loss of
$1,337.8 million
for a
23.0%
effective tax rate. The expected annual tax rate for the year-ago period is lower than the statutory federal and state tax rate primarily as $526.5 million of the impairment of goodwill is non-deductible for income tax purposes and is treated as a permanent difference.
Net Loss
decreased by
$990.5 million
to
$40.2 million
for the three months ended
April 28, 2018
from
$1,030.7 million
in the year-ago period. The decrease was primarily due to the impairment of goodwill and intangible assets, net of the income tax benefit, recorded in the year-ago period, as discussed above.
Net Loss per Diluted Common Share
was
$0.20
per share for the three months ended
April 28, 2018
, compared to
$5.29
per share in the year-ago period.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Nine Months Ended
April 28, 2018
compared to Nine Months Ended
April 29, 2017
The following table summarizes operating results for certain financial statement line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
$ Change
|
|
% Change
|
|
(millions, except per share data)
|
|
|
|
|
|
Net sales
|
$
|
4,812.0
|
|
|
$
|
4,991.7
|
|
|
$
|
(179.7
|
)
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
(2,035.3
|
)
|
|
(2,083.5
|
)
|
|
48.2
|
|
|
2.3
|
%
|
Cost of goods sold as % of net sales
|
42.3
|
%
|
|
41.7
|
%
|
|
|
|
|
|
|
Gross margin
|
2,776.7
|
|
|
2,908.2
|
|
|
(131.5
|
)
|
|
(4.5
|
)%
|
Gross margin as % of net sales
|
57.7
|
%
|
|
58.3
|
%
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
Buying, distribution and occupancy expenses
|
(956.7
|
)
|
|
(954.1
|
)
|
|
(2.6
|
)
|
|
(0.3
|
)%
|
BD&O expenses as % of net sales
|
19.9
|
%
|
|
19.1
|
%
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(1,509.6
|
)
|
|
(1,568.8
|
)
|
|
59.2
|
|
|
3.8
|
%
|
SG&A expenses as % of net sales
|
31.4
|
%
|
|
31.4
|
%
|
|
|
|
|
|
|
Acquisition and integration expenses
|
(5.4
|
)
|
|
(31.6
|
)
|
|
26.2
|
|
|
82.9
|
%
|
Restructuring and other related charges
|
(59.1
|
)
|
|
(48.0
|
)
|
|
(11.1
|
)
|
|
(23.1
|
)%
|
Impairment of goodwill
|
—
|
|
|
(596.3
|
)
|
|
596.3
|
|
|
100.0
|
%
|
Impairment of other intangible assets
|
—
|
|
|
(728.1
|
)
|
|
728.1
|
|
|
100.0
|
%
|
Depreciation and amortization expense
|
(264.7
|
)
|
|
(286.6
|
)
|
|
21.9
|
|
|
7.6
|
%
|
Total other operating expenses
|
(2,795.5
|
)
|
|
(4,213.5
|
)
|
|
1,418.0
|
|
|
33.7
|
%
|
Operating loss
|
(18.8
|
)
|
|
(1,305.3
|
)
|
|
1,286.5
|
|
|
98.6
|
%
|
Operating loss as % of net sales
|
(0.4
|
)%
|
|
(26.1
|
)%
|
|
|
|
|
|
|
Interest expense
|
(82.2
|
)
|
|
(76.1
|
)
|
|
(6.1
|
)
|
|
(8.0
|
)%
|
Interest income and other income, net
|
1.8
|
|
|
0.1
|
|
|
1.7
|
|
|
NM
|
|
Loss before benefit for income taxes
|
(99.2
|
)
|
|
(1,381.3
|
)
|
|
1,282.1
|
|
|
92.8
|
%
|
Benefit for income taxes
|
26.3
|
|
|
329.8
|
|
|
(303.5
|
)
|
|
(92.0
|
)%
|
Effective tax rate
(a)
|
26.5
|
%
|
|
23.9
|
%
|
|
|
|
|
|
|
Net loss
|
$
|
(72.9
|
)
|
|
$
|
(1,051.5
|
)
|
|
$
|
978.6
|
|
|
93.1
|
%
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.37
|
)
|
|
$
|
(5.40
|
)
|
|
$
|
5.03
|
|
|
93.1
|
%
|
Diluted
|
$
|
(0.37
|
)
|
|
$
|
(5.40
|
)
|
|
$
|
5.03
|
|
|
93.1
|
%
|
_______
(a)
Effective tax rate is calculated by dividing the Benefit for income taxes by the Loss before benefit for income taxes. The rate for Fiscal 2018 reflects a pro rata impact of the 2017 Act as discussed in more detail herein.
(NM)
Not meaningful.
Net Sales.
Total net sales decreased by
$179.7 million
, or
3.6%
, to
$4,812.0 million
for the
nine
months ended
April 28, 2018
from
$4,991.7 million
in the year-ago period. The Net sales decline was primarily caused by a
4%
comparable sales decline that mainly resulted from reduced store traffic at our
Value Fashion
and
Plus Fashion
segments as well as product assortment challenges during the first half of Fiscal 2018 experienced by the
Premium Fashion
segment; non-comparable sales declined by
$42.0 million
, or
32.1%
, to
$88.9 million
from
$130.9 million
as discussed on a segment basis below; and other revenues increased by
$10.5 million
, or
7.5%
, to
$151.2 million
from
$140.7 million
. Net sales at our
Premium Fashion
segment also reflect incremental revenues of approximately $25 million from the extra week recorded during the second quarter of Fiscal 2018 as previously discussed.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Net sales data for our four operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
1,697.4
|
|
|
$
|
1,723.2
|
|
|
$
|
(25.8
|
)
|
|
(1.5
|
)%
|
Value Fashion
|
1,334.6
|
|
|
1,470.8
|
|
|
(136.2
|
)
|
|
(9.3
|
)%
|
Plus Fashion
|
957.5
|
|
|
993.6
|
|
|
(36.1
|
)
|
|
(3.6
|
)%
|
Kids Fashion
|
822.5
|
|
|
804.1
|
|
|
18.4
|
|
|
2.3
|
%
|
Total net sales
|
$
|
4,812.0
|
|
|
$
|
4,991.7
|
|
|
$
|
(179.7
|
)
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
Comparable sales
(a)(b)(c)
|
|
|
|
|
|
|
|
|
|
(4
|
)%
|
_______
(a)
Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales refer to growth of sales from the Company's ecommerce channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, the Company reports a single, consolidated comparable sales metric, inclusive of store and ecommerce channels.
(b)
Incremental revenues of approximately $25 million due to the inclusion of the extra week at the
Premium Fashion
segment are excluded from the calculation of comparable sales.
|
|
(c)
|
During the first nine months of Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the
Justice
pricing litigation, discussed more fully in Note 13 to the unaudited condensed consolidated financial statements, began to be redeemed. Comparable sales related to these transactions includes the transaction value in excess of the voucher value
|
Premium Fashion
net sales
performance primarily reflected:
|
|
•
|
a
7%
comparable sales decline of
$39.1 million
at
Ann Taylor
and a
3%
comparable sales decline of
$32.9 million
at
LOFT
during the nine months ended
April 28, 2018
;
|
|
|
•
|
a $24.6 million increase due to the inclusion of the extra week as previously discussed;
|
|
|
•
|
a
$10.4 million
increase in non-comparable sales primarily reflecting the net positive impact at
LOFT
of
18
new store openings in the last twelve months offset by
18
store closures, offset in part by the negative impact of
19
net store closures at
Ann Taylor
; and
|
|
|
•
|
a
$11.2 million
increase in other revenues primarily related to higher gift card breakage and higher credit revenue.
|
Value Fashion
net sales
performance primarily reflected:
|
|
•
|
a
12%
comparable sales decline of
$75.5 million
at
dressbarn
and a
5%
comparable sales decline of
$38.2 million
at
maurices
during the nine months ended
April 28, 2018
;
|
|
|
•
|
a
$24.1 million
decline in non-comparable sales substantially all at
dressbarn
which reflects
52
store closures in the last twelve months; and
|
|
|
•
|
a
$1.6 million
increase in other revenues.
|
Plus Fashion
net sales
performance primarily reflected:
|
|
•
|
a
2%
comparable sales decline of
$13.0 million
at
Lane Bryant
and a
6%
comparable sales decline of
$11.6 million
at
Catherines
during the nine months ended
April 28, 2018
;
|
|
|
•
|
a
$8.0 million
decline in non-comparable sales at
Lane Bryant
due to
15
net store closures in the last twelve months, and a
$5.0 million
decline in non-comparable sales at
Catherines
due to
12
net store closures in the last twelve months; and
|
|
|
•
|
a
$1.5 million
increase in other revenues.
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Kids Fashion
net sales
performance primarily reflected:
|
|
•
|
a
5%
comparable sales increase of
$37.5 million
at
Justice
during the nine months ended
April 28, 2018
;
|
|
|
•
|
a
$15.3 million
decline in non-comparable sales primarily due to
63
net store closures in the last twelve months; and
|
|
|
•
|
a
$3.8 million
decline in other revenues primarily due to lower wholesale revenue.
|
Gross Margin.
Gross margin, in terms of dollars decreased primarily as a result of the decline in comparable sales. Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, decreased by
60
basis points from the year-ago period to
57.7%
for the nine months ended
April 28, 2018
. Improved performance at our
Plus Fashion
and
Kids Fashion
segments was offset by declines at the
Premium Fashion
and
Value Fashion
segments. On a consolidated basis, gross margin reflects higher shipping costs of approximately $22 million across the segments as a result of an increased mix of ecommerce sales and higher air freight costs, offset by the realization of approximately $35 million in synergies and cost savings benefits achieved from product sourcing and transportation costs.
Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, and the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.
Gross margin rate highlights on a segment basis are as follows:
|
|
•
|
Premium Fashion
gross margin rate
performance declined by approximately 110 basis points reflecting higher shipping costs related to increased ecommerce penetration and increased level of promotional selling resulting from soft product acceptance during the first half of Fiscal 2018, offset in part by the segment's cost of goods sold initiative.
|
|
|
•
|
Value Fashion
gross margin rate
performance declined approximately 170 basis points caused primarily by a 320 basis point decline at
dressbarn
. The decline at
dressbarn
reflects higher markdown requirements to maintain appropriate inventory levels as well as a higher level of promotional selling due to lower than expected customer demand. In addition, both brands were impacted by higher shipping costs and benefited from improved economics related to the segment’s credit card program which went into effect in January 2017.
|
|
|
•
|
Plus Fashion
gross margin rate
performance improved by approximately 80 basis points primarily reflecting improved product acceptance and lower levels of promotional selling, offset in part by higher shipping costs related to increased ecommerce penetration.
|
|
|
•
|
Kids Fashion
gross margin
rate
performance improved approximately 60 basis points as a result of improved product acceptance, offset in part by incremental freight expenses necessary to meet higher product demand.
|
Buying, Distribution and Occupancy ("BD&O") Expenses
consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
BD&O expenses increased by
$2.6 million
, or
0.3%
, to
$956.7 million
for the nine months ended
April 28, 2018
from
$954.1 million
in the year-ago period. Higher variable distribution costs related to the increased penetration of our direct business were mostly offset by lower occupancy expenses related to our fleet optimization program, which provided approximately $10 million of cost savings during the first nine months of Fiscal 2018. BD&O expenses as a percentage of net sales increased by
80
basis points to
19.9%
for the nine months ended
April 28, 2018
from
19.1%
in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.
Selling, General and Administrative ("SG&A") Expenses
consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
SG&A expenses decreased by
$59.2 million
, or
3.8%
, to
$1,509.6 million
for the nine months ended
April 28, 2018
from
$1,568.8 million
in the year-ago period. The decrease in SG&A expenses was primarily due to approximately $95 million in synergies and cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings. Also contributing to the decrease were lower store expenses resulting from fleet optimization, and lower performance-based compensation. These items were offset in part by inflationary increases, higher write-downs of store-related fixed assets, primarily at the
Value Fashion
segment, and the impac
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
t of the extra week recorded during the second quarter of Fiscal 2018 at our
Premium Fashion
segment
.
SG&A expenses as a percentage of net sales remained flat at
31.4%
as the de-leveraging effect of lower comparable sales was fully offset by reduced expenses.
Depreciation and Amortization Expense
decreased by
$21.9 million
, or
7.6%
, to
$264.7 million
for the nine months ended
April 28, 2018
from
$286.6 million
in the year-ago period. The decrease was primarily due to a reduction in store count resulting from our fleet optimization program, offset in part by incremental depreciation from capital investments in our omni-channel platform.
Operating Loss.
Operating loss was
$18.8 million
for the nine months ended
April 28, 2018
compared to an operating loss of
$1,305.3 million
in the year-ago period and is discussed on a segment basis below.
Operating results for our four operating segments are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
73.1
|
|
|
$
|
88.5
|
|
|
$
|
(15.4
|
)
|
|
(17.4
|
)%
|
Value Fashion
|
(75.6
|
)
|
|
15.4
|
|
|
(91.0
|
)
|
|
NM
|
|
Plus Fashion
|
13.5
|
|
|
6.5
|
|
|
7.0
|
|
|
NM
|
|
Kids Fashion
|
34.7
|
|
|
(11.7
|
)
|
|
46.4
|
|
|
NM
|
|
Unallocated acquisition and integration expenses
|
(5.4
|
)
|
|
(31.6
|
)
|
|
26.2
|
|
|
82.9
|
%
|
Unallocated restructuring and other related charges
|
(59.1
|
)
|
|
(48.0
|
)
|
|
(11.1
|
)
|
|
(23.1
|
)%
|
Unallocated impairment of goodwill
|
—
|
|
|
(596.3
|
)
|
|
596.3
|
|
|
100.0
|
%
|
Unallocated impairment of other intangible assets
|
—
|
|
|
(728.1
|
)
|
|
728.1
|
|
|
100.0
|
%
|
Total operating loss
|
$
|
(18.8
|
)
|
|
$
|
(1,305.3
|
)
|
|
$
|
1,286.5
|
|
|
(98.6
|
)%
|
_______
(NM)
Not meaningful.
Premium Fashion
operating income decreased by
$15.4 million
primarily due to lower comparable sales and gross margin rate as discussed above, offset in part by a decrease in SG&A expenses. SG&A expense reductions were primarily driven by lower performance-based compensation, and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Value Fashion
operating results decreased by
$91.0 million
primarily due to lower comparable sales and gross margin rate, as previously discussed, and an increase in operating expenses which included the
$17.1 million
non-cash charge to write down store-related fixed assets as previously discussed. Mostly offsetting the charge were operating expense reductions primarily driven by lower occupancy expenses and lower store expenses associated with our fleet optimization program, and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Plus Fashion
operating income increased by
$7.0 million
primarily due to the increase in gross margin rate, as discussed above, and a decrease in SG&A expenses, which were offset in part by a decrease in comparable sales, also discussed above. SG&A expense reductions were primarily driven by a decrease in administrative payroll costs, lower marketing expenses, and other cost savings initiatives, mainly associated with the Change for Growth program.
Kids Fashion
operating results increased by
$46.4 million
as a result of an increase in comparable sales and gross margin rate, as previously discussed, as well as lower operating expenses. Operating expense reductions were primarily driven by lower occupancy expenses and lower store expenses associated with our fleet optimization program, lower marketing expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Unallocated Acquisition and Integration Expenses
of
$5.4 million
for the
nine
months ended
April 28, 2018
primarily reflected costs associated with the post-acquisition integration of
ANN
's distribution operations, including the closure of the former
ANN
distribution facility in Louisville, Kentucky as well as the gain on the related sale, which occurred in the first quarter of Fiscal 2018. The
$31.6 million
in the year-ago period included $8.0 million of settlement charges and professional fees related to the
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
termination of the pension plan acquired in the
ANN
Acquisition, $10.7 million of severance and retention costs and $12.9 million of other costs associated with the post-acquisition integration of
ANN
's operations.
Unallocated Restructuring and Other Related Charges
of
$59.1 million
for the
nine
months ended
April 28, 2018
included $43.2 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program, $6.0 million of severance and other related expenses and asset impairments of $9.9 million reflecting decisions within the Company's fleet optimization program to close certain under-performing stores as well as the write-down of a building. The
$48.0 million
in the year-ago period included $20.0 million of severance and other related expenses, $5.3 million for charges related to the fleet optimization program and $22.7 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program.
Unallocated Impairment of Goodwill
reflects the prior year write-down of the carrying values of the reporting units to their fair values and is included in our operating segments as follows: $428.9 million at our
Premium Fashion
segment, $107.2 at our
Value Fashion
segment
and $60.2 million at our
Plus Fashion
segment.
Unallocated Impairment of Other Intangible Assets
reflects the prior year write-down of the Company's trade name intangible assets to their fair values as follows: $210.0 million of our
Ann Taylor
trade name, $356.3 million of our
LOFT
trade name
and $161.8 million of our
Lane Bryant
trade name.
Interest Expense
increased by
$6.1 million
, or
8.0%
, to
$82.2 million
for the
nine
months ended
April 28, 2018
from
$76.1 million
in the year-ago period, caused by a higher interest rate on our term loan.
Benefit for Income Taxes
represents federal, foreign, state and local income taxes. The Company records income taxes based on the estimated effective tax rate for the year. For the nine months ended April 28, 2018, we recorded a benefit of
$26.3 million
on a pre-tax loss of
$99.2 million
, for an effective tax rate of
26.5%
, which reflects the provisional impact of recording the tax effects associated with the 2017 Act discussed in Note 9 to the unaudited condensed consolidated financial statements. This was offset by the impact of recording a valuation allowance on certain state DTAs discussed in Note 9 to the unaudited condensed consolidated financial statements and accounting for the tax effects of share-based compensation discussed in Note 3 to the unaudited condensed consolidated financial statements. We anticipate an effective tax rate of approximately
23%
before the impact of discrete items for the remainder of Fiscal 2018. In the year ago period, we recorded a benefit of
$329.8 million
on a pre-tax loss of
$1,381.3 million
for a
23.9%
effective tax rate. The expected annual tax rate for the year-ago period is lower than the statutory federal and state tax rate primarily as $526.5 million of the impairment of goodwill is non-deductible for income tax purposes and is treated as a permanent difference.
Net Loss
decreased by
$978.6 million
to
$72.9 million
for the
nine
months ended
April 28, 2018
from
$1,051.5 million
in the year-ago period, primarily due to impairment of goodwill and intangible assets, net of the related income tax benefit, recorded in the year-ago period, as discussed above.
Net Loss per Diluted Common Share
was
$0.37
per share for the
nine
months ended
April 28, 2018
compared to
$5.40
per share in the year-ago period.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
The table below summarizes our cash flows and is presented as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
April 28,
2018
|
|
April 29,
2017
|
|
(millions)
|
Net cash provided by operating activities
|
$
|
142.2
|
|
|
$
|
194.9
|
|
Net cash used in investing activities
|
(81.2
|
)
|
|
(217.8
|
)
|
Net cash used in financing activities
|
(23.8
|
)
|
|
(48.8
|
)
|
Net increase (decrease) in cash and cash equivalents
|
$
|
37.2
|
|
|
$
|
(71.7
|
)
|
Net cash provided by operating activities
.
Net cash provided by operations was
$142.2 million
for the nine months ended
April 28, 2018
, compared to net cash provided by operations of
$194.9 million
in the year-ago period. Cash provided by operations was lower in the first nine months of Fiscal 2018 primarily due to lower net income before non-cash expenses and higher working capital outflows in Fiscal 2018 related to the timing of payments for store rent expenses.
Net cash used in investing activities
.
Net cash used in investing activities for the nine months ended
April 28, 2018
was
$81.2 million
, consisting primarily of capital expenditures of
$132.3 million
, offset in part by
$51.3 million
of proceeds from the sale of assets, which substantially reflects the redemption of the cash surrender value on certain company-owned life insurance policies during the second quarter of Fiscal 2018. Net cash used in investing activities in the year-ago period was
$217.8 million
, consisting of capital expenditures of
$207.3 million
and the purchase of an intangible asset of
$11.3 million
.
Net cash used in financing activities
.
Net cash used in financing activities was
$23.8 million
for the nine months ended
April 28, 2018
, consisting primarily of
$22.5 million
of principal repayments of our term loan debt. Net cash used in financing activities in the year-ago period was
$48.8 million
, consisting primarily of
$122.5 million
of principal repayments of our term loan debt, offset in part by net borrowings of debt under our amended revolving credit agreement of $72.5 million.
Capital Spending
Capital expenditures during the
nine
months ended
April 28, 2018
were
$132.3 million
which included spending for non-routine capital investments primarily including our omni-channel platform and initiatives identified with the Change for Growth program as well as routine spending in connection with our digital initiatives, infrastructure, and our retail store network. For a detailed discussion of our significant non-routine capital investments, see Part II, Item 7 as specified in the
Capital Spending
section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Fiscal 2017 10-K.
We expect that total capital spending for Fiscal 2018, including the items discussed above, will be in the range of $190-$220 million for the full fiscal year. Our routine and non-routine capital requirements are expected to be funded primarily with available cash and cash equivalents, operating cash flows and, to the extent necessary, borrowings under the Company’s amended revolving credit agreement which is discussed below.
Liquidity
Our primary sources of liquidity are the cash flow generated from our operations, remaining availability under our amended revolving credit agreement after taking into account outstanding borrowings, letters of credit and the collateral limitation and available cash and cash equivalents. These sources of liquidity are used to fund our ongoing cash requirements, including working capital requirements, retail store expansion, construction and renovation of stores, any future dividend requirements, investment in technological and supply chain infrastructure, acquisitions, debt servicing requirements, stock repurchases, contingent liabilities (including uncertain tax positions), and other corporate activities. Management believes that our existing sources of liquidity will be sufficient to support our operating needs, capital requirements and any debt service requirements for the foreseeable future.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
As of
April 28, 2018
, we had Cash and cash equivalents of $362.8 million. Approximately $279 million, or 77%, of our available cash and cash equivalents was held overseas by our foreign subsidiaries. The 2017 Act, in particular the Transition Tax liability assessable in our Fiscal 2018 tax year, substantially reduced the need for the Company to maintain a deferred tax liability on unrepatriated earnings. For the most part, the Company's offshore cash can be repatriated without significant additional U.S. income tax cost. In that regard, subsequent to the end of the third quarter of Fiscal 2018, the Company repatriated approximately $225 million of its foreign cash back to the U.S. Based on our current understanding of the impact of the 2017 Act, we believe there is only a requirement to record deferred taxes associated with future dividend distributions from foreign jurisdictions for state income taxes and foreign jurisdictional withholding taxes, which has been provided for in the second and third quarters of Fiscal 2018 to cover the provisional estimate of this liability. The Company continues to evaluate various alternatives for its remaining foreign held cash balances, including repatriating substantially all of the remaining overseas cash to the U.S. for general corporate purposes.
As of
April 28, 2018
, we had
$471.3 million
of availability under the amended revolving credit agreement.
Debt
For a detailed description of the terms and restrictions under the amended revolving credit agreement and the $1.8 billion seven-year term loan (the "Term Loan"), see Note 12 to the audited consolidated financial statements included in the Fiscal 2017 10-K.
Amended Revolving Credit Agreement
We believe that our amended revolving credit agreement is adequately diversified with no undue concentrations in any one financial institution. We were in compliance with all financial covenants contained in the amended revolving credit agreement as of
April 28, 2018
. We believe the amended revolving credit agreement will provide sufficient liquidity to continue to support our operating needs and capital requirements for the foreseeable future.
Term Loan
For the
nine
months ended
April 28, 2018
, we repaid a total of
$22.5 million
, which was due in May 2018. In addition, subsequent to the end of the third quarter, the Company repaid an additional $112.5 million, which was applied to future quarterly scheduled payments such that the Company is not required to make its next quarterly payment until November 1, 2019. We may from time to time seek to repay or purchase our outstanding debt through open market transactions, privately negotiated transactions or otherwise depending on prevailing market conditions and our liquidity requirements, subject to any restrictions under our debt arrangements, among other factors.
We expect to incur cash interest expense of approximately $35 million on the Term Loan during the remainder of Fiscal 2018 based on the outstanding balance and interest rates in effect as of
April 28, 2018
. Such interest and principal payments are expected to be funded with our cash flows from operations.
Common Stock Repurchase Program
There were no purchases of common stock by us during the
nine
months ended
April 28, 2018
under our repurchase program. For a complete description of our 2016 Stock Repurchase Program, refer to Note 16 to the audited consolidated financial statements included in the Fiscal 2017 10-K.
We may from time to time continue to repurchase additional shares depending on prevailing market conditions and our liquidity requirements, subject to any restrictions under our debt agreements, among other factors.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Contractual and Other Obligations
Firm Commitments
There have been no material changes during the period covered by this report to the firm commitments specified in the contractual and other obligations section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Fiscal 2017 10-K.
Off-Balance Sheet Arrangements
There have been no material changes during the period covered by this report to the off-balance sheet arrangements specified in the contractual and other obligations section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Fiscal 2017 10-K.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Notes 3 and 4 to the audited consolidated financial statements included in the Fiscal 2017 10-K. For a detailed discussion of our critical accounting policies, see the “Critical Accounting Policies” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Fiscal 2017 10-K. Other than the below update, there have been no material changes to our critical accounting policies since July 29, 2017.
Impairment of Goodwill and Other Intangible Assets
As a result of the goodwill impairment charge recorded during the third quarter of Fiscal 2017 (the "2017 Interim Test"), there was no excess of fair value over carrying value for our
ANN
,
Lane Bryant
or
maurices
reporting units. Our
Justice
reporting unit only exceeded its carrying value by 8% as of our 2017 Interim Test. The fair value of our
Catherines
reporting unit substantially exceeded its carrying value and was not at risk of impairment as of our 2017 Interim Test.
It is possible that a shortfall in the cash flows from the amounts estimated in the Fiscal 2017 Interim Test may result in a future impairment loss. During the first nine months of Fiscal 2018, our brands subject to the 2017 Interim Test generally performed in line with the cash flow projections supporting the 2017 Interim Test, as the shortfall in operating cash flows was principally offset by a decrease in capital expenditures. However, as discussed earlier in
Overview,
our brick and mortar store traffic remained a headwind during the first nine months of Fiscal 2018 and we continued to experience a highly promotional operating environment. Accordingly, we will continue to monitor macroeconomic conditions, industry and market trends and entity-specific risks and evaluate their impact on the valuation of our reporting units. For example, if we continue to experience sustained periods of declines or shifts in consumer spending, or fail to realize the anticipated cost savings associated from the Change for Growth Program, it could adversely impact the long-term assumptions used in the 2017 Interim Test. Such trends may also have a negative impact on some of the other key assumptions used in the 2017 Interim Test, including anticipated gross margin and operating income margin as well as the weighted average cost of capital rate. These assumptions are highly judgmental and subject to change. The Company will conduct its 2018 assessment of goodwill and intangible assets as of the beginning of the fourth quarter of Fiscal 2018.
Should the declines in our performance continue, or if our expectations regarding future performance decline, it could adversely impact the valuation of our goodwill and/or other indefinite-lived intangible assets, particularly at the
ANN
,
Lane Bryant
or
maurices
reporting units, but also at our other reporting units that exceeded or substantially exceeded their respective carrying values. These declines could also adversely impact our other long-lived assets, such as property and equipment, particularly at our
Premium Fashion
and
Value Fashion
segments, as well as our ability to realize our deferred tax assets. Such changes, if material, may require us to incur additional material impairment charges for such goodwill and/or other indefinite-lived intangible assets and property and equipment, and may also require us to write-off all or a portion of our deferred tax assets in future periods.
Income Taxes
In December 2017, the 2017 Tax Cuts and Jobs Act (the "2017 Act") was signed into law. The 2017 Act makes broad and complex changes to the U.S. tax code that will affect the Company in Fiscal 2018. The Company is still in the process of determining the
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
full impact of the 2017 Act, however, based on its current interpretation of the 2017 Act, the Company made reasonable estimates to record provisional amounts during the second and third quarters of Fiscal 2018. In that regard, the SEC staff issued Staff Accounting Bulletin Number 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the 2017 Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Act enactment date of December 22, 2017 for companies to complete the accounting under Accounting Standards Codification Topic 740, “Income Taxes” ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the 2017 Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Act. The determinations made in applying the 2017 Act require significant judgment by management. The Company will continue to refine its estimates within the measurement period allowed, which will be completed no later than December 2018. See Note 9 to the unaudited condensed consolidated financial statements included herein for more information.
RECENTLY ISSUED ACCOUNTING PROUNCEMENTS
See Note 3 to the accompanying unaudited condensed consolidated financial statements for a description of certain recently issued or proposed accounting standards which may impact our financial statements in future periods.