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 August 4, 2018 (the "Fiscal 2018 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 2018. 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 and Current Outlook
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.
While we experienced positive consolidated comparative sales performance in the first half of Fiscal 2019, individual brand performance was mixed. In that regard, we saw significantly positive comparable sales performance at our
LOFT
and
Ann Taylor
brands, which was offset by mid-single digit declines at
Lane Bryant.
Our
Justice
brand experienced slowing store traffic trends as we moved through the second quarter, resulting in aggressive inventory clearance activities and significant margin erosion.
As we entered the third quarter of Fiscal 2019, a broad decline in store traffic across all of the Company's brands negatively impacted February's performance. We are currently operating with reduced forward visibility on sales trends, especially into the fourth quarter of Fiscal 2019, due largely to what we believe are near-term macro-economic factors. Given the level of declines experienced in February, the Company is currently expecting comparative sales in the third quarter of Fiscal 2019 to be in the range of down 4% to down 2%. We continue to reduce overall spending and investment levels where possible, refine our operating model and implement new capabilities to ensure we remain competitive in this rapidly evolving sector.
Change for Growth Program
During the second quarter of Fiscal 2019, activities under the Change for Growth transformation program included (i) operating expense reductions in the areas of professional services, travel and facilities management, among others, (ii) transition of certain transaction process functions to an independent third-party managed-service provider, and (iii) re-negotiation of store leases under the fleet optimization program.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
We realized approximately $50 million in cost savings related to Change for Growth program actions during the six months ended
February 2, 2019
, primarily reflecting Selling, general and administrative expense ("SG&A") savings. We expect to realize additional cost savings related to these actions of approximately $40 million for the remainder of Fiscal 2019. Subsequent to Fiscal 2019, we expect to realize approximately $10 to $35 million in annual cost savings through Fiscal 2020, bringing the total expected annual cost savings from these actions, when combined with the $200 million cost savings achieved through Fiscal 2018, to a range of $300 to $325 million. These savings are expected to be realized in our segment operating results generally in proportion to their sales.
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. Actions associated with the program are currently expected to continue through Fiscal 2019.
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
The Company's
Premium Fashion
segment, which historically has followed the National Retail Federation calendar, recognized an extra week during the second quarter of Fiscal 2018, consistent with other retail companies already on that calendar. The Company's other segments recognized their extra week in the fourth quarter of Fiscal 2018 due to reporting systems constraints.
As a result, the three and six month periods ended January 27, 2018 include the results of the
Premium Fashion
segment for 14 and 27-weeks, respectively, while the results of the
Value Fashion
,
Plus Fashion
, and
Kids Fashion
segments reflect 13 and 26-weeks, respectively. The resulting shift in the financial calendar impacted the comparability of financial results. In that regard, when compared to the second quarter of Fiscal 2018, the second quarter of Fiscal 2019 included one less week of higher volume pre-holiday sales at the beginning of the second quarter and replaced it with a lower volume week at the end of the second quarter, which generally has lower margin sales. The impact of the shift experienced during the first half of Fiscal 2019 is expected to be mostly recovered in the second half of Fiscal 2019.
Second Quarter Summary and Key Developments
Operating highlights for the second quarter are as follows:
|
|
•
|
Comparable sales increased by
2%
, reflecting increases at our
Premium Fashion
and
Kids Fashion
segments, offset in part by a decline at our
Plus Fashion
segment. Comparable sales at our
Value Fashion
segment were essentially flat;
|
|
|
•
|
Operating loss was
$51.8 million
compared to
$35.6 million
in the year-ago period; and
|
|
|
•
|
Net loss per diluted share was
$0.36
, compared to
$0.20
in the year-ago period.
|
Liquidity highlights for the six-month period ended
February 2, 2019
are as follows:
|
|
•
|
Cash provided by operations was
$44.4 million
in Fiscal 2019 compared to
$155.5 million
in the year-ago period; and
|
|
|
•
|
Capital expenditures were $
68.9 million
compared to
$91.8 million
in the year-ago period.
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
RESULTS OF OPERATIONS
Three Months Ended
February 2, 2019
compared to Three Months Ended
January 27, 2018
The following table summarizes operating results for certain financial statement line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 2, 2019
|
|
January 27,
2018
|
|
$ Change
|
|
% Change
|
|
(millions, except per share data)
|
|
|
|
|
|
Net sales
|
$
|
1,692.8
|
|
|
$
|
1,719.0
|
|
|
$
|
(26.2
|
)
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
(810.0
|
)
|
|
(790.4
|
)
|
|
(19.6
|
)
|
|
(2.5
|
)%
|
Cost of goods sold as % of net sales
|
47.8
|
%
|
|
46.0
|
%
|
|
|
|
|
|
|
Gross margin
|
882.8
|
|
|
928.6
|
|
|
(45.8
|
)
|
|
(4.9
|
)%
|
Gross margin as % of net sales
|
52.2
|
%
|
|
54.0
|
%
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Buying, distribution and occupancy expenses
|
(317.6
|
)
|
|
(326.1
|
)
|
|
8.5
|
|
|
2.6
|
%
|
BD&O expenses as % of net sales
|
18.8
|
%
|
|
19.0
|
%
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(519.4
|
)
|
|
(526.2
|
)
|
|
6.8
|
|
|
1.3
|
%
|
SG&A expenses as % of net sales
|
30.7
|
%
|
|
30.6
|
%
|
|
|
|
|
|
|
Acquisition and integration expenses
|
—
|
|
|
(3.3
|
)
|
|
3.3
|
|
|
NM
|
|
Restructuring and other related charges
|
(14.3
|
)
|
|
(18.8
|
)
|
|
4.5
|
|
|
23.9
|
%
|
Depreciation and amortization expense
|
(83.3
|
)
|
|
(89.8
|
)
|
|
6.5
|
|
|
7.2
|
%
|
Total other operating expenses
|
(934.6
|
)
|
|
(964.2
|
)
|
|
29.6
|
|
|
3.1
|
%
|
Operating loss
|
(51.8
|
)
|
|
(35.6
|
)
|
|
(16.2
|
)
|
|
(45.5
|
)%
|
Operating loss as % of net sales
|
(3.1
|
)%
|
|
(2.1
|
)%
|
|
|
|
|
|
|
Interest expense
|
(26.9
|
)
|
|
(27.2
|
)
|
|
0.3
|
|
|
1.1
|
%
|
Interest income and other income, net
|
1.2
|
|
|
1.6
|
|
|
(0.4
|
)
|
|
(25.0
|
)%
|
Loss before benefit for income taxes
|
(77.5
|
)
|
|
(61.2
|
)
|
|
(16.3
|
)
|
|
(26.6
|
)%
|
Benefit for income taxes
|
6.0
|
|
|
21.9
|
|
|
(15.9
|
)
|
|
(72.6
|
)%
|
Effective tax rate
(a)
|
7.7
|
%
|
|
35.8
|
%
|
|
|
|
|
|
|
Net loss
|
$
|
(71.5
|
)
|
|
$
|
(39.3
|
)
|
|
$
|
(32.2
|
)
|
|
(81.9
|
)%
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.36
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.16
|
)
|
|
(80.0
|
)%
|
Diluted
|
$
|
(0.36
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.16
|
)
|
|
(80.0
|
)%
|
_______
|
|
(a)
|
Effective tax rate is calculated by dividing the Benefit for income taxes by the Loss before benefit for income taxes.
|
(NM)
Not meaningful.
Net Sales.
Total net sales decreased by
$26.2 million
, or
1.5%
, to
$1,692.8 million
for the three months ended
February 2, 2019
. The Net sales decrease was due to the extra week recorded at our
Premium Fashion
segment in the second quarter of Fiscal 2018, which contributed an incremental
$24.6 million
, and a non-comparable sales decrease of
$57.1 million
, reflecting a lower store count resulting from the Company's fleet optimization program, and the impact of a one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018. These items were mostly offset by a
2%
comparable sales increase and an increase in other revenues of
$17.9 million
, or
30%
to
$78.0 million
, primarily reflecting higher wholesale revenues, higher shipping revenues and favorable timing related to the adoption of the new revenue recognition accounting standard, which is discussed more fully in Note 3 to the unaudited condensed consolidated financial statements. The changes in Net sales on a segment-by-segment basis are discussed in more detail below.
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
|
|
|
|
February 2,
2019
|
|
January 27,
2018
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
638.9
|
|
|
$
|
609.6
|
|
|
$
|
29.3
|
|
|
4.8
|
%
|
Value Fashion
|
421.4
|
|
|
439.3
|
|
|
(17.9
|
)
|
|
(4.1
|
)%
|
Plus Fashion
|
305.8
|
|
|
340.5
|
|
|
(34.7
|
)
|
|
(10.2
|
)%
|
Kids Fashion
|
326.7
|
|
|
329.6
|
|
|
(2.9
|
)
|
|
(0.9
|
)%
|
Total net sales
|
$
|
1,692.8
|
|
|
$
|
1,719.0
|
|
|
$
|
(26.2
|
)
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
Comparable sales
(a)(b)(c)
|
|
|
|
|
|
|
|
|
|
2
|
%
|
_______
(a)
Comparable sales represent combined store comparable sales and direct channel sales. Store comparable sales generally refers to the growth of sales in stores only 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. Direct channel sales refer to growth of sales from our direct channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, we report a single, consolidated comparable sales metric, inclusive of store and direct channels.
(b)
Incremental revenues of approximately $25 million due to the inclusion of the extra week at the
Premium Fashion
segment for the second quarter of Fiscal 2018 are excluded from the calculation of comparable sales.
|
|
(c)
|
During the second 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 14 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
10%
comparable sales increase of
$37.5 million
at
LOFT
and a
10%
comparable sales increase of
$17.2 million
at
Ann Taylor
during the three months ended
February 2, 2019
;
|
|
|
•
|
a $24.6 million decline due to the inclusion of the 14
th
week in the year-ago period;
|
|
|
•
|
an
$11.3 million
decline in non-comparable sales, comprised of:
|
|
|
–
|
a
$7.2 million
decline from
10
net
LOFT
store closures in the last twelve months, and
|
|
|
–
|
a
$4.1 million
decline from
13
net
Ann Taylor
store closures
in the last twelve months; and
|
|
|
•
|
a
$10.5 million
increase in other revenues primarily reflecting higher shipping revenues and favorable timing related to the adoption of the new revenue recognition accounting standard.
|
Value Fashion
net sales
performance primarily reflected:
|
|
•
|
comparable sales that were essentially flat with a
1%
comparable sales decline of
$2.3 million
at
dressbarn
and a
1%
comparable sales increase of
$2.3 million
at
maurices
during the three months ended
February 2, 2019
;
|
|
|
•
|
a
$21.6 million
decline in non-comparable sales, comprised of:
|
|
|
–
|
a
$9.8 million
decline from
67
dressbarn
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018, and
|
|
|
–
|
an
$11.8 million
decline from
50
maurices
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018; and
|
|
|
•
|
a
$3.7 million
increase in other revenues primarily reflecting higher revenue from the segment's private label credit card program.
|
Plus Fashion
net sales
performance primarily reflected:
|
|
•
|
an
8%
comparable sales decline of
$20.6 million
at
Lane Bryant
and a
4%
comparable sales decline of
$2.8 million
at
Catherines
during the three months ended
February 2, 2019
;
|
|
|
•
|
a
$9.2 million
decline in non-comparable sales, comprised of:
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
|
|
–
|
a
$6.0 million
decline from
18
net
Lane Bryant
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018, and
|
|
|
–
|
a
$3.2 million
decline from
17
Catherines
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018; and
|
|
|
•
|
a
$2.1 million
decline in other revenues primarily reflecting lower revenue from the segment's private label credit card program.
|
Kids Fashion
net sales
performance primarily reflected:
|
|
•
|
a
2%
comparable sales increase of
$6.3 million
at
Justice
during the three months ended
February 2, 2019
;
|
|
|
•
|
a
$15.0 million
decline in non-comparable sales primarily due to
29
Justice
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018; and
|
|
|
•
|
a
$5.8 million
increase in other revenues primarily due to higher wholesale revenues.
|
Gross Margin.
Gross margin in terms of dollars was primarily lower as a result of a decline in rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales. Gross margin rate is dependent upon a variety of factors, including brand sales mix, product mix, channel mix, 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 decreased by
180
basis points from the year-ago period to
52.2%
for the three months ended
February 2, 2019
, resulting from lower margins at our
Kids Fashion
,
Plus Fashion
, and
Premium Fashion
segments, which were partially offset by increased margins at our
Value Fashion
segment. Gross margin rate highlights on a segment basis are as follows:
|
|
•
|
Premium Fashion
gross margin rate
performance declined by approximately 40 basis points primarily reflecting higher shipping costs related to increased direct channel penetration.
|
|
|
•
|
Value Fashion
gross margin rate
performance increased approximately 80 basis points, caused by:
|
|
|
–
|
a 270 basis point increase at
dressbarn
, primarily reflecting lower levels of promotional selling versus the year-ago period resulting from sell-offs of seasonal markdown inventory during the first quarter of Fiscal 2019, partially offset by
|
|
|
–
|
a 50 basis point decline at
maurices
, primarily reflecting higher shipping costs related to increased direct channel penetration.
|
|
|
•
|
Plus Fashion
gross margin rate
performance declined by approximately 220 basis points, caused by:
|
|
|
–
|
a 320 basis point decline at
Lane Bryant,
primarily
reflecting the need for greater levels of promotional selling and markdown requirements to clear under-performing inventory receipts, and higher shipping costs related to increased direct channel penetration, partially offset by
|
|
|
–
|
a 140 basis point increase at
Catherines
, reflecting lower markdown requirements versus the year-ago period, partially offset by higher shipping costs related to increased direct channel penetration.
|
|
|
•
|
Kids Fashion
gross margin
rate
performance declined approximately 760 basis points primarily due to significant markdown requirements needed to clear excess inventory of seasonal non-apparel product categories, and higher shipping costs related to increased direct channel penetration.
|
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
$8.5 million
, or
2.6%
, to
$317.6 million
for the three months ended
February 2, 2019
. The reduction in expenses was driven by lower occupancy expenses resulting primarily from our fleet optimization program, partially offset by higher variable distribution costs related to the increased penetration of our direct business. BD&O expenses as a percentage of net sales decreased by
20
basis points to
18.8%
for the three months ended
February 2, 2019
.
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.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
SG&A expenses decreased by
$6.8 million
, or
1.3%
, to
$519.4 million
for the three months ended
February 2, 2019
. The decrease in SG&A expenses was primarily due to lower store expenses resulting from our fleet optimization program, approximately $15 million in cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings, and the impact of the extra week recorded during the second quarter of Fiscal 2018 at our
Premium Fashion
segment. These declines were offset in part by inflationary increases and higher marketing expenses. SG&A expenses as a percentage of net sales increased by 10 basis points to
30.7%
for the three months ended
February 2, 2019
.
Depreciation and Amortization Expense
decreased by
$6.5 million
, or
7.2%
, to
$83.3 million
for the three months ended
February 2, 2019
. The decrease was across all of our segments and was driven by a lower level of store-related fixed-assets, offset in part by incremental depreciation from capital investments.
Operating Loss
was
$51.8 million
for the three months ended
February 2, 2019
compared to
$35.6 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
|
|
|
|
February 2,
2019
|
|
January 27,
2018
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
13.0
|
|
|
$
|
4.5
|
|
|
$
|
8.5
|
|
|
188.9
|
%
|
Value Fashion
|
(32.7
|
)
|
|
(38.4
|
)
|
|
5.7
|
|
|
14.8
|
%
|
Plus Fashion
|
(19.1
|
)
|
|
1.0
|
|
|
(20.1
|
)
|
|
NM
|
|
Kids Fashion
|
1.3
|
|
|
19.4
|
|
|
(18.1
|
)
|
|
(93.3
|
)%
|
Unallocated acquisition and integration expenses
|
—
|
|
|
(3.3
|
)
|
|
3.3
|
|
|
NM
|
|
Unallocated restructuring and other related charges
|
(14.3
|
)
|
|
(18.8
|
)
|
|
4.5
|
|
|
23.9
|
%
|
Total operating loss
|
$
|
(51.8
|
)
|
|
$
|
(35.6
|
)
|
|
$
|
(16.2
|
)
|
|
(45.5
|
)%
|
_______
(NM)
Not meaningful.
Premium Fashion
operating income increased by
$8.5 million
primarily driven by an increase in comparable sales, partially offset by higher operating expenses primarily associated with higher variable distribution costs, increased performance-based compensation, and marketing expenses.
Value Fashion
operating results improved by
$5.7 million
primarily due to an increase in gross margin rate and a decrease in operating expenses, offset in part by the impact of lower sales volume due to a reduced store count. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program.
Plus Fashion
operating results decreased by
$20.1 million
primarily due to a decline in comparable sales and gross margin rate, offset in part by a decline in operating expenses. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program.
Kids Fashion
operating income decreased by
$18.1 million
primarily due to the decline in gross margin rate, partially offset by an increase in comparable sales and lower operating expenses. Operating expense reductions were primarily driven by lower occupancy expenses associated with our fleet optimization program, as well as lower SG&A expenses associated with decreased performance-based compensation.
Unallocated Acquisition and Integration Expenses
of
$3.3 million
for the three months ended
January 27, 2018
primarily reflected costs associated with the post-acquisition integration of
ANN
's distribution operations. There were no such expenses during the three months ended
February 2, 2019
.
Unallocated Restructuring and Other Related Charges
of
$14.3 million
for the three months ended
February 2, 2019
reflects costs associated with the Change for Growth program and included $13.2 million of professional fees incurred in connection with the
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
identification and implementation of the transformation initiatives and $1.1 million related to severance and other related charges reflecting additional severance accruals associated with previously announced initiatives as well as the true up of estimates to amounts actually paid. The
$18.8 million
in the year-ago period also reflected costs associated with the Change for Growth program and included $12.9 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives and $2.7 million of severance and other related charges, as well as an asset impairment of $3.2 million primarily related to the write-down of a building.
Interest Expense
decreased by
$0.3 million
, or
1.1%
, to
$26.9 million
for the three months ended
February 2, 2019
caused by a lower average outstanding term loan balance as a result of repayments in the last 12 months, mostly offset by a higher interest rate on our variable rate term loan during the three months ended
February 2, 2019
.
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
February 2, 2019
, we recorded a tax benefit of
$6.0 million
on a pre-tax loss of
$77.5 million
, for an effective tax rate of
7.7%
, which was lower than the statutory tax rate primarily due to GILTI (as discussed in Note 10 to the unaudited condensed consolidated financial statements), state and local taxes and non-deductible executive compensation. In the year-ago period, we recorded a tax benefit of
$21.9 million
on a pre-tax loss of
$61.2 million
for an effective tax rate of
35.8%
, which reflects the provisional impact of recording the tax effects associated with the 2017 Act, partially offset by a valuation allowance on certain state deferred tax assets ("DTA") and accounting for the tax effects of share-based compensation.
Net Loss
increased by
$32.2 million
to
$71.5 million
for the three months ended
February 2, 2019
. The increase was primarily due to the lower operating income and the decrease in the benefit for income taxes, both discussed above.
Net Loss per Diluted Common Share
was
$0.36
per share for the three months ended
February 2, 2019
, compared to
$0.20
per share in the year-ago period.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Six
Months Ended
February 2, 2019
compared to Six Months Ended
January 27, 2018
The following table summarizes operating results for certain financial statement line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
February 2,
2019
|
|
January 27,
2018
|
|
$ Change
|
|
% Change
|
|
(millions, except per share data)
|
|
|
|
|
|
Net sales
|
$
|
3,284.6
|
|
|
$
|
3,308.7
|
|
|
$
|
(24.1
|
)
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
(1,456.2
|
)
|
|
(1,415.0
|
)
|
|
(41.2
|
)
|
|
(2.9
|
)%
|
Cost of goods sold as % of net sales
|
44.3
|
%
|
|
42.8
|
%
|
|
|
|
|
|
|
Gross margin
|
1,828.4
|
|
|
1,893.7
|
|
|
(65.3
|
)
|
|
(3.4
|
)%
|
Gross margin as % of net sales
|
55.7
|
%
|
|
57.2
|
%
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Buying, distribution and occupancy expenses
|
(632.3
|
)
|
|
(644.2
|
)
|
|
11.9
|
|
|
1.8
|
%
|
BD&O expenses as % of net sales
|
19.3
|
%
|
|
19.5
|
%
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(1,021.5
|
)
|
|
(1,019.0
|
)
|
|
(2.5
|
)
|
|
(0.2
|
)%
|
SG&A expenses as % of net sales
|
31.1
|
%
|
|
30.8
|
%
|
|
|
|
|
|
|
Acquisition and integration expenses
|
—
|
|
|
(5.4
|
)
|
|
5.4
|
|
|
NM
|
|
Restructuring and other related charges
|
(22.2
|
)
|
|
(41.0
|
)
|
|
18.8
|
|
|
45.9
|
%
|
Depreciation and amortization expense
|
(165.3
|
)
|
|
(179.8
|
)
|
|
14.5
|
|
|
8.1
|
%
|
Total other operating expenses
|
(1,841.3
|
)
|
|
(1,889.4
|
)
|
|
48.1
|
|
|
2.5
|
%
|
Operating (loss) income
|
(12.9
|
)
|
|
4.3
|
|
|
(17.2
|
)
|
|
NM
|
|
Operating (loss) income as % of net sales
|
(0.4
|
)%
|
|
0.1
|
%
|
|
|
|
|
|
|
Interest expense
|
(52.9
|
)
|
|
(53.8
|
)
|
|
0.9
|
|
|
1.7
|
%
|
Interest income and other income, net
|
2.0
|
|
|
1.8
|
|
|
0.2
|
|
|
11.1
|
%
|
Loss before (provision) benefit for income taxes
|
(63.8
|
)
|
|
(47.7
|
)
|
|
(16.1
|
)
|
|
(33.8
|
)%
|
(Provision) benefit for income taxes
|
(1.8
|
)
|
|
15.0
|
|
|
(16.8
|
)
|
|
NM
|
|
Effective tax rate
(a)
|
(2.8
|
)%
|
|
31.4
|
%
|
|
|
|
|
|
|
Net loss
|
$
|
(65.6
|
)
|
|
$
|
(32.7
|
)
|
|
$
|
(32.9
|
)
|
|
NM
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.33
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.16
|
)
|
|
(94.1
|
)%
|
Diluted
|
$
|
(0.33
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.16
|
)
|
|
(94.1
|
)%
|
_______
|
|
(a)
|
Effective tax rate is calculated by dividing the (Provision) benefit for income taxes by the Loss before (provision) benefit for income taxes.
|
(NM)
Not meaningful.
Net Sales.
Total net sales decreased by
$24.1 million
, or
0.7%
, to
$3,284.6 million
for the six months ended
February 2, 2019
. The Net sales decrease was primarily attributable to the extra week recorded at our
Premium Fashion
segment in the second quarter of Fiscal 2018, which contributed an incremental
$24.6 million
, and a non-comparable sales decrease of
$103.9 million
, reflecting a lower store count resulting from the Company's fleet optimization program, and the impact of a one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018. These items were mostly offset by a
3%
comparable sales increase and an increase in other revenues of
$15.4 million
, or
14%
to
$128.6 million
, primarily reflecting higher wholesale and shipping revenues. The changes in Net sales on a segment-by-segment basis are discussed in more detail below.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Net sales data for our four operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
February 2,
2019
|
|
January 27,
2018
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
1,234.9
|
|
|
$
|
1,164.7
|
|
|
$
|
70.2
|
|
|
6.0
|
%
|
Value Fashion
|
865.8
|
|
|
910.6
|
|
|
(44.8
|
)
|
|
(4.9
|
)%
|
Plus Fashion
|
591.2
|
|
|
644.7
|
|
|
(53.5
|
)
|
|
(8.3
|
)%
|
Kids Fashion
|
592.7
|
|
|
588.7
|
|
|
4.0
|
|
|
0.7
|
%
|
Total net sales
|
$
|
3,284.6
|
|
|
$
|
3,308.7
|
|
|
$
|
(24.1
|
)
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
Comparable sales
(a)(b)(c)
|
|
|
|
|
|
|
|
|
|
3
|
%
|
_______
(a)
Comparable sales represent combined store comparable sales and direct channel sales. Store comparable sales generally refers to the growth of sales in stores only 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. Direct channel sales refer to growth of sales from our direct channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, we report a single, consolidated comparable sales metric, inclusive of store and direct channels.
(b)
Incremental revenues of approximately $25 million due to the inclusion of the extra week at the
Premium Fashion
segment for the six months of Fiscal 2018 are excluded from the calculation of comparable sales.
|
|
(c)
|
During the first quarter of Fiscal 2019 and the six 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 14 to the unaudited condensed consolidated financial statements, continued to be redeemed through October 2018. Comparable sales related to these transactions includes the transaction value in excess of the voucher value.
|
Premium Fashion
net sales
performance primarily reflected:
|
|
•
|
a
9%
comparable sales increase of
$68.8 million
at
LOFT
and a
9%
comparable sales increase of
$29.5 million
at
Ann Taylor
during the six months ended
February 2, 2019
;
|
|
|
•
|
a $24.6 million decline due to the inclusion of the 14
th
week in the year-ago period;
|
|
|
•
|
an
$11.0 million
decline in non-comparable sales, comprised of:
|
|
|
–
|
a $2.6 million decline from 10 net
LOFT
store closures in the last twelve months, and
|
|
|
–
|
an $8.4 million decline from 13 net
Ann Taylor
store closures
in the last twelve months; and
|
|
|
•
|
a
$7.5 million
increase in other revenues primarily reflecting higher shipping revenues.
|
Value Fashion
net sales
performance primarily reflected:
|
|
•
|
a
3%
comparable sales decline of
$9.6 million
at
dressbarn
and a
1%
comparable sales decline of
$4.5 million
at
maurices
during the six months ended
February 2, 2019
;
|
|
|
•
|
a
$35.0 million
decline in non-comparable sales, comprised of:
|
|
|
–
|
an
$18.3 million
decline from
67
dressbarn
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018, and
|
|
|
–
|
a
$16.7 million
decline from
50
maurices
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018; and
|
|
|
•
|
a
$4.3 million
increase in other revenues primarily reflecting higher revenue from the segment's private label credit card program.
|
Plus Fashion
net sales
performance primarily reflected:
|
|
•
|
a
5%
comparable sales decline of
$24.4 million
at
Lane Bryant
and a
4%
comparable sales decline of
$5.0 million
at
Catherines
during the six months ended
February 2, 2019
;
|
|
|
•
|
a
$17.0 million
decline in non-comparable sales, comprised of:
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
|
|
–
|
a
$13.5 million
decline from
18
net
Lane Bryant
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018, and
|
|
|
–
|
a
$3.5 million
decline from
17
Catherines
store closures in the last twelve months and the impact of the one week calendar shift resulting from the 53
rd
week recorded at the end of Fiscal 2018; and
|
|
|
•
|
a
$7.1 million
decline in other revenues primarily reflecting unfavorable timing related to the adoption of the new revenue recognition accounting standard and lower revenue from the segment's private label credit card program.
|
Kids Fashion
net sales
performance primarily reflected:
|
|
•
|
a
6%
comparable sales increase of
$34.2 million
at
Justice
during the six months ended
February 2, 2019
;
|
|
|
•
|
a
$40.9 million
decline in non-comparable sales primarily due to Fiscal 2019 including one less week of peak sales during the back-to-school shopping period compared to Fiscal 2018, which resulted from the 53
rd
week recorded at the end of Fiscal 2018, as well as
29
Justice
store closures in the last twelve months; and
|
|
|
•
|
a
$10.7 million
increase in other revenues primarily due to higher wholesale revenues.
|
Gross Margin.
Gross margin in terms of dollars was primarily lower as a result of a decline in rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales. Gross margin rate is dependent upon a variety of factors, including brand sales mix, product mix, channel mix, 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 decreased by
150
basis points from the year-ago period to
55.7%
for the six months ended
February 2, 2019
, resulting from lower margins at our
Kids Fashion
,
Plus Fashion
, and
Value Fashion
segments, which were partially offset by increased margins at our
Premium Fashion
segment. Gross margin rate highlights on a segment basis are as follows:
|
|
•
|
Premium Fashion
gross margin rate
performance improved by approximately 30 basis points, reflecting strong product acceptance at both
LOFT
and
Ann Taylor
, which resulted in a higher mix of full price selling, offset in part by higher shipping costs related to increased direct channel penetration.
|
|
|
•
|
Value Fashion
gross margin rate
performance declined approximately 60 basis points, caused by:
|
|
|
–
|
an 80 basis point improvement at
dressbarn
, primarily reflecting lower levels of promotional selling versus the year-ago period partially offset by
|
|
|
–
|
a 170 basis point decline at
maurices
, reflecting greater markdown requirements to clear under-performing inventory receipts from the transitional August and September period, and higher shipping costs related to increased direct channel penetration.
|
|
|
•
|
Plus Fashion
gross margin rate
performance declined by approximately 240 basis points, caused by:
|
|
|
–
|
a 290 basis point decline at
Lane Bryant
reflecting the need for greater levels of promotional selling and markdown requirements to clear under-performing inventory receipts, and higher shipping costs related to increased direct channel penetration, and
|
|
|
–
|
an 80 basis point decline at
Catherines
primarily reflecting higher shipping costs related to increased direct channel penetration.
|
|
|
•
|
Kids Fashion
gross margin
rate
performance declined approximately 560 basis points as a result of the shift of a high margin, peak back-to-school selling week from the first quarter of Fiscal 2019 to the fourth quarter of Fiscal 2019 as a result of the 53
rd
week recorded at the end of Fiscal 2018 and significant markdown requirements to clear excess inventory of seasonal non-apparel product categories, and higher shipping costs related to increased direct channel penetration.
|
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
$11.9 million
, or
1.8%
, to
$632.3 million
for the six months ended
February 2, 2019
. The reduction in expenses was driven by lower occupancy expenses resulting primarily from our fleet optimization program, partially offset by higher variable distribution costs related to the increased penetration of our direct business. BD&O expenses as a percentage of net sales decreased by
20
basis points to
19.3%
for the six months ended
February 2, 2019
.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Selling, General and Administrative ("SG&A") Expenses
consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
SG&A expenses increased by
$2.5 million
, or
0.2%
, to
$1,021.5 million
for the six months ended
February 2, 2019
. The increase in SG&A expenses was primarily due to inflationary increases, higher performance-based compensation, and higher marketing expenses. These increases were essentially offset by lower store expenses resulting from our fleet optimization program, approximately $30 million in cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings, and the impact 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 increased by
30
basis points to
31.1%
for the six months ended
February 2, 2019
.
Depreciation and Amortization Expense
decreased by
$14.5 million
, or
8.1%
, to
$165.3 million
for the six months ended
February 2, 2019
. The decrease was across all of our segments and was driven by a lower level of store-related fixed-assets, offset in part by incremental depreciation from capital investments.
Operating (Loss) Income.
Operating loss was
$12.9 million
for the six months ended
February 2, 2019
compared to operating income of
$4.3 million
in the year-ago period and is discussed on a segment basis below.
Operating results for our four operating segments are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
February 2,
2019
|
|
January 27,
2018
|
|
$ Change
|
|
% Change
|
|
(millions)
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
$
|
67.6
|
|
|
$
|
43.0
|
|
|
$
|
24.6
|
|
|
57.2
|
%
|
Value Fashion
|
(38.9
|
)
|
|
(27.5
|
)
|
|
(11.4
|
)
|
|
(41.5
|
)%
|
Plus Fashion
|
(31.1
|
)
|
|
0.1
|
|
|
(31.2
|
)
|
|
NM
|
|
Kids Fashion
|
11.7
|
|
|
35.1
|
|
|
(23.4
|
)
|
|
(66.7
|
)%
|
Unallocated acquisition and integration expenses
|
—
|
|
|
(5.4
|
)
|
|
5.4
|
|
|
NM
|
|
Unallocated restructuring and other related charges
|
(22.2
|
)
|
|
(41.0
|
)
|
|
18.8
|
|
|
45.9
|
%
|
Total operating (loss) income
|
$
|
(12.9
|
)
|
|
$
|
4.3
|
|
|
$
|
(17.2
|
)
|
|
NM
|
|
_______
(NM)
Not meaningful.
Premium Fashion
operating income increased by
$24.6 million
driven by an increase in comparable sales and gross margin rate, partially offset by higher operating expenses primarily associated with higher variable distribution costs, performance-based compensation and marketing expenses.
Value Fashion
operating results decreased by
$11.4 million
primarily due to a decline in comparable sales and gross margin rate, partially offset by a decrease in operating expenses. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program.
Plus Fashion
operating results decreased by
$31.2 million
primarily due to a decline in comparable sales and gross margin rate, offset in part by a decline in operating expenses. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program, and lower marketing expenses.
Kids Fashion
operating income decreased by
$23.4 million
primarily due to the decline in non-comparable sales associated with the shift of a peak back-to-school selling week and a significantly lower gross margin rate, partially offset by an increase in comparable sales and lower operating expenses. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Unallocated Acquisition and Integration Expenses
of
$5.4 million
for the six months ended
January 27, 2018
primarily reflected costs associated with the post-acquisition integration of
ANN
's distribution operations. There were no such expenses during the six months ended
February 2, 2019
.
Unallocated Restructuring and Other Related Charges
of
$22.2 million
for the six months ended
February 2, 2019
reflects costs associated with the Change for Growth program and included $21.6 million of professional fees incurred in connection with the identification and implementation of the transformation initiatives and $0.6 million related to severance and other related charges reflecting additional severance accruals associated with previously announced initiatives as well as the true up of estimates to amounts actually paid. The
$41.0 million
in the year-ago period also reflected costs associated with the Change for Growth program and included $30.1 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives and $6.6 million of severance and other related charges, as well as an asset impairment of $4.3 million primarily related to the write-down of a building.
Interest Expense
decreased by
$0.9 million
, or
1.7%
, to
$52.9 million
for the six months ended
February 2, 2019
caused by a lower average outstanding term loan balance as a result of repayments in the last 12 months, mostly offset by a higher interest rate on our variable rate term loan during the six months ended
February 2, 2019
.
(Provision) 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 six months ended
February 2, 2019
, we recorded a tax provision of
$1.8 million
on a pre-tax loss of
$63.8 million
, for an effective tax rate of
(2.8)%
, which was lower than the statutory tax rate primarily due to GILTI (as discussed in Note 10 to the unaudited condensed consolidated financial statements), state and local taxes and non-deductible executive compensation. In the year-ago period, we recorded a tax benefit of
$15.0 million
on a pre-tax loss of
$47.7 million
for an effective tax rate of
31.4%
, which reflects the provisional impact of recording the tax effects associated with the 2017 Act, partially offset by a valuation allowance on certain DTAs and accounting for the tax effects of share-based compensation.
Net Loss
increased by
$32.9 million
to
$65.6 million
for the six months ended
February 2, 2019
. The increase was primarily due to lower operating income and the change in the (provision) benefit for income taxes, as discussed above.
Net Loss per Diluted Common Share
was
$0.33
per share for the six months ended
February 2, 2019
, compared to
$0.17
per share in the year-ago period.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
The table below summarizes our cash flows and is presented as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
February 2,
2019
|
|
January 27,
2018
|
|
(millions)
|
Net cash provided by operating activities
|
$
|
44.4
|
|
|
$
|
155.5
|
|
Net cash used in investing activities
|
(68.5
|
)
|
|
(44.6
|
)
|
Net cash used in financing activities
|
(0.2
|
)
|
|
(22.8
|
)
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
$
|
(24.3
|
)
|
|
$
|
88.1
|
|
Net cash provided by operating activities
.
Net cash provided by operations was
$44.4 million
for the six months ended
February 2, 2019
, compared to
$155.5 million
in the year-ago period. Cash flow from operations was lower in the first six months of Fiscal 2019 primarily due to lower net income before non-cash expenses, higher inventory purchases, and unfavorable timing of operating expense payments, offset in part by favorable timing of store rent expense payments. The higher inventory purchases primarily reflect a change in receipt timing compared to the prior year and incremental receipts to support strategic initiatives.
Net cash used in investing activities
.
Net cash used in investing activities for the six months ended
February 2, 2019
was
$68.5 million
, consisting primarily of capital expenditures of
$68.9 million
. Net cash used in investing activities in the year-ago period was
$44.6 million
, consisting of capital expenditures of
$91.8 million
, offset in part by $46.9 million of proceeds from the sale of
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
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 financing activities
.
Net cash used in financing activities was
$0.2 million
for the six months ended
February 2, 2019
primarily reflecting tax payments related to share-based compensation. Net cash used in financing activities in the year-ago period was
$22.8 million
, consisting primarily of
$22.5 million
of principal repayments of our term loan debt.
Capital Spending
Capital expenditures during the six months ended
February 2, 2019
were
$68.9 million
which included spending for non-routine capital investments primarily including 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 2018 10-K.
We expect that total capital spending for Fiscal 2019 will be in the range of $170-$200 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 flows 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 inventory purchases and other working capital requirements, retail store expansion, construction and renovation of stores, investment in technological and supply chain infrastructure, acquisitions, debt service, stock repurchases, dividends, contingent liabilities (including uncertain tax positions) and other corporate activities. Management believes that our existing sources of liquidity will be sufficient to support our operating needs, capital requirements and any debt service requirements for the foreseeable future.
As of
February 2, 2019
, approximately $32 million, or 15%, of our available cash and cash equivalents was held overseas by our foreign subsidiaries, which represents a significant reduction in our offshore cash and cash equivalents balance from the year ago period resulting from repatriation activity that was enabled by the 2017 Tax Cuts and Jobs Act. The remaining offshore cash balances are primarily required to meet the working capital needs of the Company's offshore businesses. We continue to evaluate various alternatives for our remaining foreign held cash balances and will repatriate any excess cash balances as necessary.
As of
February 2, 2019
, we had
$380.7 million
of availability under the Amended Revolving Credit Agreement.
Debt
For a detailed description of the terms and restrictions under our amended and restated revolving credit agreement dated February 27, 2018 (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 2018 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
February 2, 2019
. 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.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Term Loan
During Fiscal 2018, we repaid a total of $225.0 million term loan debt of which $180.0 million was applied to future quarterly scheduled payments such that we are not required to make a quarterly payment until November of calendar 2020. 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.
Additionally, we expect to incur cash interest expense of approximately $48 million on the Term Loan during the remainder of Fiscal 2019 based on the outstanding balance and interest rates in effect as of
February 2, 2019
. 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 six months ended
February 2, 2019
under the repurchase program. For a complete description of our 2016 Stock Repurchase Program, see Note 16 to the audited consolidated financial statements included in the Fiscal 2018 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.
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 2018 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 2018 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 2018 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 2018 10-K. Other than the below update, there have been no material changes to our critical accounting policies since August 4, 2018.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of Fiscal 2018, we performed our annual goodwill and indefinite-lived intangible impairment assessment (the "Fiscal 2018 Valuation"). While
dressbarn
does not have goodwill or indefinite-lived intangible assets and the fair values of
ANN
,
Lane Bryant
, and
Justice
were all significantly in excess of their respective book values, the fair values of the
maurices
and
Catherines
reporting units exceeded their book values by less than 15%. In addition, while the fair value of most of our indefinite-lived intangible assets significantly exceeded their respective book values, the fair values of the
LOFT
and
maurices
trade names exceeded their respective book value by approximately 15% or less.
It is possible that a shortfall in the cash flows from the amounts estimated in the Fiscal 2018 Valuation may result in a future impairment loss. During the six months of Fiscal 2019, our brands subject to the 2018 Valuation generally performed in line with the cash flow projections supporting the 2018 Valuation, as any shortfall in operating cash flows was principally offset by a decrease
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
in capital expenditures. However, as discussed earlier in
Overview,
while our consolidated comparative sales for the first six months of Fiscal 2019 were positive, individual brand performance was mixed 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 2018 Valuation. Such trends may also have a negative impact on some of the other key assumptions used in the 2018 Valuation, 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 plans to conduct its 2019 assessment of goodwill and indefinite-lived intangible assets as of the beginning of the fourth quarter of Fiscal 2019.
Should declines in our performance or our expectations regarding future performance occur, it could adversely impact the valuation of our goodwill and/or other indefinite-lived intangible assets, particularly at the
maurices
or
Catherines
reporting units and the
LOFT
and
maurices
trade names. It could also adversely impact our other reporting units that exceeded or substantially exceeded their respective carrying values, including our
Lane Bryant
reporting unit which experienced a mid-single digit comparative sales decline in the first half of Fiscal 2019. As a result, we may be required to undertake impairment testing earlier than the fourth quarter of Fiscal 2019. Any such declines could also adversely impact our other long-lived assets, such as property and equipment, particularly at our
Plus 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 affected the Company in Fiscal 2018 and beyond. Determinations made in applying the 2017 Act require significant judgment by management and the Company believes it made reasonable estimates in recording provisional amounts during Fiscal 2019 and 2018. In that regard, the SEC staff issued Staff Accounting Bulletin Number 118 ("SAB 118"), which provided guidance on accounting for the tax effects of the 2017 Act. SAB 118 provided 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"). That period expired during the second quarter of Fiscal 2019. During the second quarter of Fiscal 2019, the Company completed its accounting for the impact of the 2017 Act and increased its Fiscal 2018 estimate of the one-time federal and state transition tax by
$2.3 million
to
$26.9 million
and by
$0.2 million
to
$0.9 million
, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 3 to the accompanying unaudited condensed consolidated financial statements for a description of certain recently adopted or issued accounting standards which may impact our financial statements in future reporting periods.