The Company is a leading national specialty retailer of apparel for women and tween girls. The Company operates, throughCompany's operations consist of its 100% owned subsidiaries, ecommercedirect channel operations and approximately 4,9004,600 stores throughoutin the United States, Canada and Puerto Rico. The Company had annual revenuerevenues for the fiscal year ended July 30, 2016Fiscal 2018 of approximately $7.0$6.6 billion. The

In Fiscal 2017, the Company announced that it was beginning a multi-year transformation plan with the objective of supporting sustainable long-term growth and increasing shareholder value (the "Change for Growth" program). In Fiscal 2017, the Company (i) refined its operating model to increase the focus on key customer segments, (ii) developed initiatives which will optimize the flow of product through the Company's distribution channels, including its direct channel and its subsidiaries are collectively referredbrick-and-mortar retail locations, (iii) consolidated certain support functions into its brand services group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, and (iv) began a review of its store fleet with the goal of reducing the number of under-performing stores through either rent reductions or store closures, in an effort to hereinincrease the overall profitability of the remaining store portfolio and convert sales from these stores into direct channel sales or to nearby store locations. In Fiscal 2018, in addition to continuing a number of the activities started in Fiscal 2017, the Company (i) began to develop new capabilities such as markdown optimization, size pack optimization and localized inventory planning with the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unlessgoal of allowing it to better compete in the context indicates otherwise.shifting

The tables below present net sales and operating income (loss) by operating segment for the last three fiscal years:

 

Over the past five fiscal years, we havethe Company has invested approximately $4.1$3.4 billion in acquisitions, capital improvements, supply chain integration and technology infrastructure improvements, which were funded through cash, debt and the issuance of common stock. We intend to continue to execute our long-term strategies, which include, among other things, growth through selective acquisitions, investment in our operational infrastructure and expansion of our omni-channel businesses and technology platforms.

The Company's marketing and loyalty programs become increasingly integrated to maintain customer relationships and improve traffic and conversion rates both in-store and online.

of 667 target stores. The Company has recently expanded its target store list to 864 stores, and its total annualized savings target to $60 million. Of the total 864 target stores, 256 have been closed through July 2018. Store Count by Segment

 

Our principal ownedThe Company has U.S. Trademark Registration Certificates and trademark applications pending for the operating names of the Company's stores and its major private label merchandise brands. The Company believes its trademarks include:

The Company's brands source their products through a varietyone of three channels - ascena's internal sourcing channels.group (ascena Global Sourcing ("aGS")), third-party buying agents, or directly from market vendors. Factors affecting the selection of sourcing channels include cost, speed-to-market,speed to market, merchandise selection, vendor capacity and fashion trends.

The Company's sourcing entity operates under the name Ascena Global Sourcing (“AGS”). Through AGS’sOperating through offices located in Seoul, South Korea, Shanghai, China, India and Hong Kong, AGSBangladesh, aGS maintains direct relationships with manufacturing partners, enabling AGS todesired product quality control the quality of goods, while achievingand speed to market, andalong with favorable pricing. AGS has registered various trademarks relatedpricing as compared to the Company’s brands in foreign countries to the degree necessary to protect these marks, although there may be restrictions on the use of these marks in a limited number of foreign jurisdictions.

We continueThe Company continues to focus on building ourits merchandising and design functions to align with ourits market positions and support ourits direct souringsourcing model. OurThe merchandising and design teams determine the selection andinventory needs of inventory for the upcoming season in response to fast changing fashion trends and customer preferences. Over the last few years, wethe Company has made substantial investment in acquiringinvestments to acquire and retainingretain merchandising and design talent allowing it to differentiate its fashion offering, which has resulted in improved merchandise selection and better inventory management.it believes is a critical enabler for long-term success.

 

For a detailed discussion of ourthe Company's office and distribution centers, see Part I, Item 2 “Properties” in this Annual Report on Form 10-K.10-K, which information is incorporated by reference herein.

Advertising and Marketing 

We useThe Company uses a combination of broad-based and targeted marketing and advertising strategies to effectively define, evolve, and promote our brands. These strategies are designed to deliver a personalized and relevant shopping experience for our customers and include customer research, advertising and promotional events, window and in-store marketing materials, direct mail marketing, Internet and social media marketing, lifestyle magazines, catazines and other means of communication. Also, as a result of the growth of our omni-channel strategy, we increasingly focus on personalized email communications and social media marketing.

The retail apparel industry is highly competitive and fragmented,increasingly fragmented. The Company competes with numerous competitors,retailers, including department stores, off-price retailers, specialty stores discount stores, mass merchandisers and Internet-based retailers, many of which have substantially greater financial, marketingon pricing, styles and other resources than us. Many of our competitors are able to engage in aggressive promotions, including reducing their selling prices. Some of our competitors are Walmart, Macy’s, JCPenney, Kohl’s, Old Navy, Target, TJX Companies and Amazon. Other competitors may move into the markets that we serve.fulfillment capability. Our business is vulnerable to demand and pricing shifts, channel shifts and to changes in customer tastespreferences. Some of our competitors operate at a lower cost structure, and preferences.are able to offer better pricing; others have more sophisticated direct channel or omni-channel capabilities. Examples of our competitive set include but are not limited to Gap Inc., Amazon, Walmart, Macy’s, JCPenney, Target and TJX Companies. Other competitors may enter the markets we serve. If we failthe Company fails to compete successfully, weit could face lower netcontinued sales declines and may need to offer greater discounts to our customers, which could result in decreased profitability. We believe that we have establishedThe Company is working aggressively to differentiate our brands and reinforced our image as a source of fashion andassortments to reinforce the value proposition it delivers by focusing on our target customers and by offering up-to-date fashion, unique experiences, superior customer service and shopping convenience across our multiple sales channels.

 

 

We purchase ourThe Company purchases its merchandise from many domestic and foreign suppliers. We haveIt has no long-term purchase commitments or arrangements with any of our suppliers, and believebelieves that we areit is not dependent on any one supplier as no third-party supplier accounts for more than 10% of our merchandise purchases. We believeThe Company believes that we haveit has good working relationships with ourits suppliers.

 

 

The following table sets forth the name, age and position of our Executive Officers:

Mr. John Pershing became Executive Vice President, Chief Human Resources Officer in 2015.  He joined the Company in 2011 as Senior Vice President, Human Resources of both the corporate sharedbrand services group and dressbarn., and became Executive Vice President in 2012. Prior to joining the Company, Mr. Pershing spent over 20 years at Best Buy in a variety of leadership roles and was most recently Executive Vice President, Human Capital.

There are risks associated with an investment in our securities. The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our prospects, our operational results, our financial condition, our liquidity, the trading prices of our securities, and the actual outcome of matters as to which forward-looking statements are made in this report. The risk factors generally have been separated into four groups: (1) Macroeconomic and Industry Risks; (2) Operational Risks; (3) Capital Risks; and (4) Legal and Regulatory Risks. Based upon information currently known to us, the Company believes that the following information identifies the most significant risk factors affecting our Company and our securities. However, the risks and uncertainties are not limited to those set forth in the risk factors described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. We may also be adversely affected by additional risks not presently known to us or that we currently believe are immaterial.

Our performance is subject to macroeconomic conditions that are beyond the identification of suitable markets and sites for new stores, implementation of our omni-channel strategy, ability to maintain the appropriate store fleet size given the growthCompany’s control that could impact consumer discretionary spending. Some of the ecommerce businessfactors negatively impacting consumer spending include volatility in national and its diversioninternational financial markets, consumer confidence, fiscal and monetary policies of sales from brick-and-mortar stores, negotiation of leases on acceptable terms, construction or renovation of sitesgovernment, high unemployment, lower wage levels, increased taxation, credit availability, high consumer debt, reductions in a timely manner at acceptable costs and maintenance of the productivity of our existing store base. We also must be able to effectively renew our existing store leases. We must be able to hire, train and retain competent managers and personnel and manage the systems and operational components of our growth. Our failure to open new stores on a timely basis, obtain acceptance in markets in which we currently have limited or no presence, attract qualified management and personnel or appropriately adjust operational systems and procedures could have an adverse effect on our growth prospects. In addition, the challenges of declining store traffic and the inability to achieve acceptable results in new and existing store could lead to store closures and/or asset impairment charges, which could negatively impact our operational results, financial position and cash flows.

In addition, continued consolidationthere is a risk that consumer sentiment may decline as a result of market disruptions caused by severe or unseasonable weather conditions, natural disasters, public health concerns, terrorist activities, political crises or other major events or the prospect of these events. Such macroeconomic and other factors could have a negative effect on consumer spending in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation continue, a large portion of our store base could be concentrated with one or fewer landlords that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable lease terms with these landlords, this could affect our ability to profitably operate our stores,U.S., which in turn could have a material effect on our business, operational results, financial conditionposition and cash flows.

The women’s and girls'girls’ retail apparel industry is highly competitive. Although the Company is one of the nation’s largest specialty retailers, we have numerous and varied competitors at the national, regional and local level, primarily consisting of department stores, off-price retailers, other specialty stores, discount stores, mass merchandisers, Internetboutiques, and mail-order retailers,the Internet, some of whom have advantages over us, including substantially greater financial, marketing or promotional resources. Many retailers, such as department stores, also offer a broader selection of merchandise than we offer, and continue to be promotional and reduceby reducing their selling prices, and in some cases are expanding into markets in which we have a significant presence. As a result of this competition, we may experience pricing pressures, increased marketing expenditures and loss of market share, which could have a material adverse effect on our business, operational results, financial position and cash flows.

In addition, the growth and prominence of fast-fashion and value-fashion retailers and expansion of off-price retailers have fundamentally shifted customers’ expectations of affordable pricing of well-known brands and exacerbated the continued promotional pressure. The rise of these retailers as well as the shift in shopping preferences away from brick-and-mortar stores to the ecommercedirect channel, where online-only businesses or those with robust ecommercedirect channel capabilities continue to grow,can facilitate competitive entry and comparison shopping in our brands, have increased the difficulty of maintaining and gaining market share. A downturn or an uncertain outlookThe Company’s execution of its own omni-channel strategy to adapt to these changes, in relation to its competitors’ actions as well as to its customers’ adoption of new technology, presents a specific risk. Further, unanticipated changes in pricing and other practices of the women’sCompany’s competitors, including promotional activity, such as free shipping and girls’ specialty retail sector in which our brands sell their productspricing pressures, could have a material adverse effect on our business, operational results, financial position and cash flows.

Our success is largely dependent on our ability to maintain, enhance and protect our brand image and reputation is integral toand our business as well as the implementation of strategies to expand it.customers’ connections with our brands. Maintaining, promoting and growing our brands will depend largely on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high-quality customer experience. In addition, while most of our brands are mature and we have extensive customer lists, our success depends, in part, on our ability to keep existing customers, while engaging and attracting new customers to shop our brands. Our business and results of operations could be adversely affected if we fail to achieve these objectives for any of our brands and failurebrands. Failure to achieve consistent, positive performance at several of our brands simultaneously could have an adverse effect on our sales and profitability. In addition,

Further, the use of social media by the Company and consumers has also increased the risk that the Company’s image and reputation could be negatively impacted. The availability of information, reviews and opinions on social media is immediate, as is its impact. The opportunity for dissemination of information, including inaccurate and inflammatory information and opinion, is nearly infinite. Even if we react quickly and appropriately to negative social media about us or our abilitybrands, our reputation and customers’ perception of our brands could be negatively impacted. Damage to address the challengesbrand image and reputation of declining store traffic, including at strip shopping centers, shopping malls, outlet centers and other retail centers,the Company in any aspect of its operations could have a highly promotional, low growth environment may impact our ability to maintain and gain market share and also impactmaterial adverse effect on our business, operational results, financial position and cash flows.

Customer traffic and demand for our merchandise is influenced by our advertising, marketing and promotional activities, the name recognition and reputation of our brands, and the location and service offered in our stores.stores, in addition to many initiatives focused on direct channel and mobile applications, including social media. Although we use marketing, advertising and promotional programs to attract customers through various media, including social media, database marketing and print, if our competitors may spend moreincrease their spending on marketing, advertising and promotional programs, if our marketing, advertising and promotional expenses increase, if our programs become less effective than that of our competitors, or use different approaches, which could provide them with aif we do not adequately leverage technology and data analytic capabilities needed to generate concise and effective competitive advantage. Our promotional activity and other programs may not be effective, may be perceived negatively or could require increased expenditures, which could adversely impactinsight, our business, operational results, financial position and cash flows.flows could be adversely impacted.

Our success may be adversely impacted if we are not able to attract, retain and develop talent and future leaders, including our ability to executesenior executives and associates. Our senior executive team closely supervises all major aspects of our business strategy depend largely onincluding the effortsdesign, development, and procurement of merchandise; operation of our current management teams at the Companyinformation technology platforms, supply chain, and the respective brands. Executives at the Companystore network; development and the brands haveretention of critical talent; and financial planning, reporting and compliance. Our senior executive team has substantial experience and expertise in theour retail business, and have made significant contributions toserve an integral role in the growth and successsupport of our business. Thebrands. In addition, several of our strategic objectives and initiatives, as more fully described in Note 7, require that we hire and/or develop associates with appropriate experience. If we were to lose the leadership of multiple senior executives or other personnel, our business could be adversely affected. In addition, if significant unexpected turnover occurs at the associate level, the loss of the services of onethese individuals, or moreany resulting negative perceptions of our key personnelbusiness, could have a material adverse effect ondamage our business, asreputation and our business. Competition for such qualified talent is intense, and we may notcannot be sure we will be able to find suitable management personnel to replace departing executives onattract, retain and develop a timely basis. Competition for key personnelsufficient number of qualified individuals in the retail industry is intense, and our operations could be adversely affected if we fail to attract, hire, motivate and retain qualified personnel or if we fail to attract additional qualified individuals.

Our international operations subject us to additional risks which could have an adverse effect on our results of operations and may impair our ability to operate effectively. We purchase a significant portionnearly all of our merchandise directly from foreign sources, both directly in foreign markets including Asia, the Middle East and Africa, and indirectly through domestic vendors with foreign sources. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult for goods sourced outside the United States. Additionally, through outsourcing arrangements, we have engaged in efforts to reduce our costs by utilizing lower-cost labor outside the U.S. in countries which may be subject to higher degrees of political and/or social instability than the U.S. and may lack the infrastructure to withstand events that may disrupt their business. Such disruptions could impact our ability to deliver our products and services on a timely basis, if at all, and to a lesser extent could decrease efficiency and increase our costs.

We face a variety of risks generally associated with doing business in and outsourcing certain services to foreign markets and importing large quantities of merchandise from abroad, including, but not limited to:

New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, could increase the cost of products purchased from suppliers in such countries or restrict the importation of products from such countries. The future performance of our business depends on foreign suppliers and services providers, and may be adversely affected by the factors listed above, all of which are beyond our control. The foregoing may impact our ability to deliver our products and services on a timely basis, increase costs, negate or offset any cost savings anticipated from operating outside the U.S., decrease our efficiency or result in our inability to obtain sufficient quantities of merchandise or increase our costs.merchandise.

We require our independentvendors, manufacturers and other service providers to operate in compliance with applicable laws and regulations, including the FCPA and other anti-corruption laws, and our internal requirements. Our vendor code of conduct, guidelines and other compliance programs promote ethical business practices, and we monitor compliance with them; however, we do not control

these vendors or manufacturers, their labor practices or business practices, the health and safety conditions of their facilities, or their sources of raw materials. Any violation of labor, health, environmental, safety (e.g., buildingmaterials, and fire codes)from time to time these vendors, manufactures or other service providers may not be in compliance with these standards or applicable laws. Significant or continuing noncompliance with such standards and laws by any of the independentone or more vendors, manufacturers that we useor other service providers could damagehave a negative impact on our reputation and our business, and could have a material adverse effect on our business.subject us to liability in the form of substantial financial penalties, sanctions or otherwise.

Any of the aforementioned risks, independently or in combination with others, could have an adverse effect on our business, operational results, financial position and cash flows.

Most of our merchandise is produced in foreign countries, including China, Vietnam, Indonesia, India, Guatemala, Sri Lanka and Bangladesh, making the price and availability of our merchandise susceptible to international trade risks and other international conditions. The imposition of tariffs, duties, border adjustment taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other trade restrictions by other countries. Recently, the current U.S. administration and China have imposed significant tariffs on goods imported from the other's country, and have threatened the imposition of additional tariffs in retaliation. In addition, the United States may withdraw from or renegotiate the North American Free Trade Agreement (“NAFTA”) with Mexico and Canada. If the current administration follows through with such tariffs, withdraws from or renegotiates NAFTA, or if additional tariffs or trade restrictions are implemented by the United States or other countries, the resulting trade barriers could have a significant adverse impact on our business. We are not able to predict future trade policy of the United States or of any foreign countries in which we operate or purchase goods, or the terms of any renegotiated trade agreements, or their impact on our business. The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact demand for our products, our costs, our customers, our suppliers and the world economy, which in turn could have a material adverse effect on our business, operational results, financial position and cash flows.

We do not own or operate any manufacturing facilities and therefore depend upon independent third-parties for the manufacture of all of the goods that we sell. Both domestic and international manufacturers produce these goods. The Company is at risk for increases in manufacturing costs, and we cannot be certain that we will not experience operational difficulties with these third-party manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control and failure to meet production deadlines. In addition, we cannot predict the impact of world-wide events, including inclement weather, natural or man-made disasters, public health issues, strikes, acts of terror or political, social or economic conditions on our major suppliers. Our suppliers could also face economic pressures as a result of rising wages and inflation or be affected by trade wars or increases in tariffs materially impacting their business or experience difficulty obtaining adequate credit or access to liquidity to finance their operations, which could lead to vendor consolidation. A manufacturer's failureinability to continue to work with us, ship orders in a timely manner or to meet our cost, safety, quality and social compliance standards could result in supply delays, shortages, failure to meet customer expectations and damage to our brands, which could have a material adverse impact on our business, operational results, financial position and cash flows.

Nearly all of the merchandise we purchase is shipped directly to ourWe operate three distribution and fulfillment centers where it is prepared for shipmentto manage the receipt, storage, sorting, packing and distribution of our merchandise to the appropriate stores or to the customer directly through our ecommercedirect channel. We depend in large part on the orderly operation of our receiving and distribution process, which depends, in turn, on adherence to shipping schedules, proper functioning of our information technology and inventory control systems and overall effective management of our distribution and fulfillment centers. The Company utilizes primarily one contract carrier to ship merchandise to its stores and direct-to-consumer customers in the U.S., Canada and Puerto Rico. As a result of damage to, or prolonged interruption of, operations at any of these facilities, or with respect to our primary contract carrier, due to a work stoppage, operations significantly below historical efficiency levels, supply chain disruption, inclement weather, natural or man-made disasters, system failures, slowdowns or strikes, acts of terror or other unforeseen events, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores or customers, during the time it takes for us to reopen or replace any of these facilities, which in turn could have a material adverse effect on our business, operational results, financial position operational results and cash flows. Refer to Item 2. Properties, for a listing of the distribution and fulfillment centers that we rely on.

Although we maintain business interruption and property insurance for these facilities, management cannot be assured that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us, if our distribution or fulfillment centers are shut down or interrupted for any unplanned reason.

Raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high or low demand for fabrics, labor conditions, trade wars and higher tariffs, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, economic inflation, market speculation and other unpredictable factors. Increases in the demand for and price of cotton, wool and other raw materials used in the production of fabric and accessories, as well as increases in labor and energy costs or shortages of skilled labor, could result in increases for the costs of our products as well as their distribution to our distribution centers, retail locations and to our customers. The Company is also susceptible to fluctuations in the cost of transportation. Additionally, freight costs are impacted by changessubstantially increased uncertainty with respect to trade relations, such as the imposition of unilateral tariffs on imported products, could result in fuel prices. Fuel prices affect freight costs on inbound freight from vendors to the distribution centers, outbound freight from the distribution centers to our storestrade wars, higher barriers and shipments directly to our customers. Highertariffs, and higher product costs, which could have a negativematerial adverse effect on our gross profit marginbusiness, operational results, financial position and increased selling prices could have a negative effect on our sales volume.cash flows.

We currently ship the vast majority of our products by ocean. If a disruption occurs in the operation of ports through which our products are imported, we and our vendors may have to ship some or all of our products from Asia or other regions by air freight or to alternativealternate shipping destinations in the United States. Shipping by air is significantly more expensive than shipping by ocean and our profitability could be reduced. Similarly, shipping to alternativealternate destinations in the United States could lead to increased lead times and costs for our products. A disruption at ports (domestic or abroad) through which our products are imported could have a material adverse effect on our business, operational results, financial position and cash flows.

The successful operation of our ecommercedirect channel business depends on our ability to maintain the efficient and continuous operation of our ecommerce websites and our associated fulfillment operations, and to provide a shopping experience that will generate orders and return visits to our sites. Our ecommercedirect channel services are subject to numerous risks, including:

We relyOur success depends, in part, on the secure and uninterrupted performance of our existing information technology systems in operating, supporting and monitoring all major aspects of our business, including sales, warehousing, fulfillment, distribution, purchasing, inventory control, merchandise planning and replenishment, and financial systems. We regularly evaluate and from

time to time make investments to upgrade, enhance or replace these systems, including those that relate to point-of-sale, direct channel, merchandising, planning, sourcing, logistics, inventory management and support systems, which are utilized by our human resources, finance and other groups on a company-wide basis, as well as leverage new technologies to support our growth strategies. Any delays We are aware of inherent risks associated with operating, replacing and modifying these systems, including inaccurate system information and system disruptions. We believe we are taking appropriate action to mitigate the risks through testing, training, staging implementation and in-sourcing certain processes, as well as securing appropriate commercial contracts with third-party vendors supplying such replacement and redundancy technologies; however, there is a risk that information technology system disruptions and inaccurate system information, if not anticipated and/or difficulties transitioning to new systems or integrating them with current systems in an orderly and timely fashionappropriately mitigated, could have a material adverse effect on our business, operational results, financial position and cash flows.

The reliability and capacity of our information technology systems (including third-party hardware and software systems or services) are critical to our continued operations. Despite our precautionary efforts, our information technology systems, as well as those of our services providers, are vulnerable from time to time to damage or interruption from among other things,a variety of sources, including natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses, andmalicious human acts, security breaches and similar disruptive problems, which may require significant investment to fix or replace, and we may suffer loss of critical data and interruptions or delays to our operations in the interim. While, to our knowledge, we have not experienced any material loss or other unauthorized disclosure of confidential or personally identifiable information (“PII”) as a result of a security breach, or cyber-attack, such an event could adversely affect our business and operations, including our reputation and our relationships with our customers, employees and investors, expose us to risks of litigation and liability, and could impact our operational results, financial position and cash flows.operations.

While we believe that we are diligent in selecting vendors, systems and services to assist us in maintaining the integrity of our information technology systems, we realize that there are risks and that no guaranteeassurance can be made that future disruptions, service outages, service outages/failures or unauthorized intrusions will not occur. Certain of our information technology support functions are performed by third-parties in overseas locations. Failure by any of these third-parties to implement and/or manage our information systems and infrastructure effectively and securely could impact our operational results, financial position and cash flows.

Our business and that of our third-party service providers employ systems and websites that allow us to process credit card transactions containing PII,personally identifiable information ("PII"), perform online ecommercedirect channel and social media activities, and store and transmit proprietary or confidential customer, employee, job applicant and other personal confidential information.information, as well as the information of our vendors and suppliers. Security and/or privacy breaches, acts of vandalism or terror, computer viruses, misplaced or lost data, programming and/or human error or other similar events could expose us to a risk of loss or misuse of this information, litigation and potential liability. Because the techniques used to obtain unauthorized access to our systems are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we or our third-party service providers may not be able to anticipate these techniques or implement sufficient preventative measures. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks or intrusions. Attacks may be targeted at us,We, our customers and our third-party services providers face an evolving threat landscape in which cybercriminals, among others, employ a complex array of techniques designed to access PII and other information, including for example, the use of fraudulent or others whostolen access credentials, malware, ransomware, phishing, denial of service and other types of attacks. These types of cyber-attacks are becoming more prevalent, have entrusted us with information.occurred in our systems in the past, and may occur in our systems in the future. While we have implemented and intend to continue to implement what we believe to be appropriate cyber practices and cyber security systems and controls, these systems may prove to be inadequate and result in the disruption, failure, misappropriation or corruption of our systems and infrastructure. Actual or anticipated attacks may cause us to incur significant and additional costs, including, but not limited to the costs to deploy additional personnel and protection technologies, training employees, engaging third-party experts and consultants and compliance costs associated with various applicable laws or industry standards regarding use and/or unauthorized disclosure of PII. We may also incur significant remediation costs, including liability for stolen clientcustomer, job applicant or employee information, repairing system damage or providing credit monitoring or other benefits to affected clientscustomers, job applicants or employees. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data from being breached or compromised. becoming obsolete.

In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by our third-party service providers that result in the unauthorized release of personal or confidential information. information, employee error or malfeasance,

Although we maintain cyber-security insurance there can be no assurance that our insurance coverage will cover the particular cyber incident at issue or that such coverage will be sufficient, or that insurance proceeds will be paid to us in a timely manner.

The protection of customer, employee and Company PII and other data is critical. The regulatory environment surrounding information securitycritical, and privacy is demanding, with the frequent imposition of new and changing requirements. In addition,our customers have a high expectation that we will adequately protect their personal information. Any actual or perceived misappropriation, unauthorized disclosure or breach involving this data could attract negative media attention, cause substantial harm to our reputation or brand and result in significant liability (including but not limited to mandatory notifications, fines, substantial penalties or lawsuits), any of which could have a material adverse effect on our operational results, financial position and cash flows.

We intend to expand our operations and presence in existing and new countries in the future. Currently, severalSeveral of our brands have expanded their presence into Canada as well as certain countries in the Middle East, Southeast Asia, Central America and South America, either through their own retail operations or through franchise or other licensing operations.

As we expand internationally, we may incurThe risks associated with expansion into international markets include difficulties in attracting customers due to lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market and the significant costs associated with the start-up and maintenance of foreign operations. Costs may include, but are not limited to, obtaining locations for stores, setting up foreign offices, hiring experienced management and maintaining good relations with associates. We have limited experience operating or franchising in some of these locations and may be unable to open and operate new stores successfully, or we may face operational issues that delay our intended pace of international store growth. Further, entry into new markets may bring us into competition with competitors with established market presence. In any such case, our expansion may be limited, unless we can:

and trends may differ in many of these locations and, as a result, the sales of our merchandise may not be successful or result in the margins we anticipate, and sales of our products and the margins on those sales may not be in line with our expectations. If our international expansion plans are unsuccessful, or do not deliver an appropriate return on our investments, it could adversely affect our ability to achieve acceptable operating margins from new stores.the objectives that we have established.

In addition, franchisedwe have certain licensed franchises in international territories. Franchised stores are independently owned and operated, and franchisees are not our employees. Consequently, franchisees may not operate in accordance with our standards or requirements or in a manner consistent with applicable law. The quality of franchised operations may be diminished by any number of factors beyond our control. The failurecontrol, such as the ability of these third-parties to meet their projections regarding store openings and sales and their compliance with our franchisees to operate franchises successfully could havestandards or requirements or in a material adverse effect on our reputation, operational results, financial position and cash flow.manner consistent with applicable law.

Other challenges may include facing established competitors, as well as general economic conditions in specific countries or markets, disruptions or delays in shipments, changes in diplomatic and trade relationships and political instability. In addition,associated with international expansion may divertinclude diverting financial, operational and managerial resources from our existing operations and/or result in increased costs, which could adversely impact our financial condition and results of operations.operations, as well as increased exposure to risks associated with international operations described above in this Item 1A. Failure to successfully implement our international expansion plan consistent with our internal expectations, whether as a result of one or more of the factors listed above or other factors, could adversely affect our ability to achieve the objectives that we have established.

We believe that our core trademarks and service marks, as described in Item 1. Business, are importantessential to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and service marks on a worldwide basis, including in the countries in which we have business operations or plan to have business operations. Because we have not registered all of our trademarks in all categories, or in all foreign countries in which we currently, or may in the future, source or offer our merchandise, our international expansion and our merchandising of products using these marks could be negatively impacted. We are not aware of any material claims of infringement or material challenges to our right to use any of our trademarks in the United States or Canada. Nevertheless, the actions we have taken, including to establish and protect our trademarks and service marks, may not be adequate to prevent others from imitating our products or to prevent others from seeking to block sales of our products.products, which could be detrimental to the image of our brands. Also, others may assert proprietary rights in our intellectual property and we may not be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Any litigation regarding our trademarks could be time-consuming and costly. The loss of exclusive use of our trademarks could have a material adverse effect on our business, operational results, financial position and cash flows.

The products our brands sell are regulated by many different governmental bodies, including but not limited to the Consumer Product Safety Commission and the Food and Drug Administration in the U.S., Health Canada in Canada, and similar state, provincial and internationalforeign regulatory authorities. Although we generally test the products sold in our brands’ stores and on our brands’ websites, selected products still could present safety problems of which our brands are not aware. This could lead one or more of our brands to recall selected products, either voluntarily or at the direction of a governmental authority, and may lead to a lack of consumer acceptance or loss of consumer trust. Product safety concerns, recalls, defects or errors could result in the rejection of our products by customers, significant damage to our reputation, lost sales, product liability litigation and increased costs, any or all of which could harm our business and have a material adverse effect on our financial position, operational results and cash flows.

The cost of compliance with current requirements and any future requirements of federal, state or internationalforeign regulatory authorities could have a material adverse effect on our financial position, operational results and cash flows. Examples of these requirements include regulatory testing, certification, packaging, labeling, advertising and reporting requirements affecting broad categories of consumer products. In addition, any failure of one or more of our brands to comply with such requirements could result in significant penalties, require one or more of our brands to recall products and harm our reputation, any or all of which could have a material adverse effect on our business, operational results, financial position and cash flows.

Our businessability to effectively obtain store locations depends on the availability of real estate that meets our criteria for consumer traffic, square footage, co-tenancies, lease economics, demographics, and other factors. Many of our stores are located in strip shopping centers, shopping malls and other retail centers that, historically, have benefited from their proximity to “anchor” retail tenants,

generally large department stores, and other attractions, which generate consumer traffic in the vicinity of our stores. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of, or continued decline of, anchor stores that drive consumer traffic or changes in customer shopping preferences. There has been a decline in the popularity of strip shopping center or mall shopping among our target customers, and a continuation of such decline in the popularity of strip shopping centers and mall shopping could sufferhave a material adverse effect from extremeon customer traffic and our operational results. In order to leverage customer traffic and the shopping preferences of our customers, we need to maintain or unseasonable weather conditions.acquire stores in desirable consumer locations, however competition for such suitable store locations is intense.

Extreme weather conditionsIn addition, continued consolidation in the areascommercial retail real estate market could affect our ability to seek to downsize, consolidate, reposition, relocate, or close some of our stores. Several large landlords dominate ownership of prime retail real estate and should significant consolidation continue, a large portion of our store base could be concentrated with one or fewer landlords that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable lease terms with these landlords, this could affect our ability to profitably operate our stores, which the Company's stores are locatedin turn could negatively affect the Company'shave a material effect on our business, operational results, financial position and cash flows. Frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over an extended period could make it difficult for our customers to travel to our stores, and may cause a disruption in the shipment or receipt of our merchandise, which could negatively impact the Company's operational results. The Company's business is also susceptible to unseasonable weather conditions, which could influence customer trends, consumer traffic and shopping habits. For example, extended periods of unseasonably warm temperatures during the winter season or cool temperatures during the summer season could reduce demand and thereby would have an adverse effect on our operational results, financial positioncondition and cash flows.

The threat, or actual acts,Acts of terrorism continue to beremain a significant riskthreat to the global economy. Terrorism and potential military responses, political unrest, natural disasters, pandemics and other health issues have disrupted or could in the future disrupt commerce, impact our ability to operate our stores, offices or distribution and fulfillment centers in the affected areas or impact our ability to provide critical functions or services necessary to the operation of our business.business, including our and our third-party vendors’, suppliers’ and other providers’ systems and the networks as well as the utilities and telecommunications infrastructure on which our business depends. A disruption of commerce, or an inability to recover critical functions or services from such a disruption, could interfere with the production, shipment or receipt of our merchandise in a timely manner or increase our costs to do so, which could have a material adverse impact on our business, operational results, financial position and cash flows. In addition, any of the above disruptions could undermine consumer confidence, which could negatively impact consumer spending or customer traffic, and thus have an adverse effect on our operational results.

Our ability to mitigate the adverse impact of any of the above disruptions also depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster or other catastrophic situation. In addition, although we maintain insurance coverage, there can be no assurance that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us.

Our common stockability to make cash payments on our indebtedness, as well as our ability to fund planned capital expenditures and operating or strategic initiatives, will depend on our ability to generate significant operating cash flow in the future, which is, quoted on the NASDAQ Global Select Market. Our stock price, like that of other retail companies, isto a significant extent, subject to significant volatility due to many factors, including, but not limited to general economic, conditions, stockfinancial, competitive, legislative, regulatory and credit market conditions,other factors that will be beyond our operating performancecontrol.

Our business may not generate sufficient cash flow from operations to enable us to pay our indebtedness or fund our other liquidity needs. In any such circumstance, we may need to refinance all or a portion of our indebtedness, on or before maturity, or incur additional debt subject to the restrictions of our borrowing agreements. We may not be able to refinance any indebtedness or incur additional debt on commercially reasonable terms or at all. If we cannot service our indebtedness or incur additional debt, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions and public perceptioninvestments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness may restrict our ability to sell assets and our use of the prospects for our brands or for the women’s or girls' apparel industries in general, quarter to quarter variations in our actual or anticipated financial results and investor sentiment. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies.proceeds from such sales.

If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, and the lenders under the term facility, the revolving facility and other indebtedness, or any replacement facilities in respect thereof, could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against the Company’s assets, and we could be forced into bankruptcy or liquidation.

Changes in the credit and capital markets, including market expectations, particularlydisruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict the Company’s access to potential sources of future liquidity. As a result of general unpredictability in the global financial markets, there can be no assurance that our liquidity will not be affected or that our capital resources will at all times be sufficient to satisfy our liquidity needs. Although we believe that our existing cash and cash equivalents, cash provided by operations, and our availability under our amended revolving credit agreement, will be adequate to satisfy our capital needs for the foreseeable future, any renewed tightening of the credit or capital markets could make it more difficult for us to access funds, enter into an agreement for new indebtedness or obtain funding through the issuance of our securities. Our borrowing agreements also have financial convents and certain restrictions which, if not met, may limit our ability to access funds.

In addition, we also have cash and cash equivalents on deposit at overseas financial institutions as well as at FDIC-insured financial institutions that are currently in excess of FDIC-insured limits. As a result, we cannot be assured that we can access the cash and cash equivalents overseas when we are in need of liquidity, or that we will not experience losses with respect to sales, operating margins, net income and earnings per share, it could result in a decline in the market value of our stock. Further, if the analysts that regularly follow the Company’s performance lower their ratings or lower their projections for future growth andcash on deposit at these financial performance, the Company’s stock price could be adversely impacted.institutions.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regards to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, leases, impairment of goodwill and intangible assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change or increase volatility of our reported or expected financial performance or financial condition. See Note 4, “Recently Issued Accounting Standards,” in the Notes to our Consolidated Financial Statements included herein for a description of recently issued accounting pronouncements, and “Critical Accounting Policies,” included herein which discusses accounting policies considered to be important to our operational results and financial condition. These and other future changes to accounting rules or regulations or interpretations thereof.could have an adverse impact on our business, operational results, financial position and cash flows.

 

None.

 

We lease space for all our retail stores in various domesticstore locations. Terms of our new store leases vary and international locations. Store leases generallymay have an initial term of up to ten years, with onealthough certain leases are cancelable if specified sales levels are not achieved or more optionsco-tenancy requirements are not being satisfied, providing us greater flexibility to extendclose under-performing stores. Over half of our leases have terms that either expire, or have upcoming lease action dates available to us within the lease. next two years, which provides us the opportunity to aggressively negotiate new lease terms while continuing to shorten our overall portfolio average lease life.

The table below, covering all open store locations leased by us on July 30, 2016,August 4, 2018, indicates the number of leases expiring during the period indicated and the number of expiring leases with and without renewal options:

 

Our store leases generally provide for a base rent per square foot per annum. Certain leases have formulas requiring the payment of additional rent as a percentage of sales, generally when sales reach specified levels. Our aggregate minimum rentalslease payments under

 

Our investment in new stores consists primarily of inventory, leasehold improvements, fixtures and equipment, and information technology. We generally receive tenant improvement allowances from landlords to offset a portion of these initial investments in leasehold improvements.