UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended July 29, 2017August 3, 2019
or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-11736
ASCENA RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | 30-0641353 (I.R.S. Employer Identification No.) |
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933 MacArthur Boulevard, Mahwah, New Jersey (Address of principal executive offices) | 07430 (Zip Code) |
(551) 777-6700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Classeach class | Trading Symbol(s) | Name of Each Exchangeeach exchange on Which Registeredwhich registered |
Common Stock, $0.01 par value $0.01 per share | ASNA | The NASDAQNasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ý¨ | Accelerated filer ¨ý |
Non-accelerated filer ¨ | (Do not check if a smaller reporting company) |
| Smaller reporting company ¨ |
| | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $0.8 billion$400 million as of January 28, 2017,February 2, 2019, based on the last reported sales price on the NASDAQNasdaq Global Select Market on that date. As of September 21, 2017, 195,276,654October 8, 2019, 199,247,000 shares of voting common shares were outstanding.
Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on December 7, 201710, 2019 are incorporated by reference into Part III of this Form 10-K.
ASCENA RETAIL GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 29, 2017AUGUST 3, 2019
TABLE OF CONTENTS
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| PART I | | | | |
| | Item 1. | | Business | | |
| | Item 1A. | | Risk Factors | | |
| | Item 1B. | | Unresolved Staff Comments | | |
| | Item 2. | | Properties | | |
| | Item 3. | | Legal Proceedings | | |
| PART II | | | | |
| | Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | |
| | Item 6. | | Selected Financial Data | | |
| | Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
| | Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk | | |
| | Item 8. | | Financial Statements and Supplementary Data | | |
| | Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | | |
| | Item 9A. | | Controls and Procedures | | |
| | Item 9B. | | Other Information | | |
| PART III | | | | |
| | Item 10. | | Directors, Executive Officers and Corporate Governance | | |
| | Item 11. | | Executive Compensation | | |
| | Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | |
| | Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | |
| | Item 14. | | Principal Accounting Fees and Services | | |
| PART IV | | | | |
| | Item 15. | | Exhibits, Financial Statement Schedules | | |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the section labeled Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and the risk factors that we have included elsewhere in this report. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our results, level of activity, performance or achievements to be materially different from any future results, level of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. We generally identify these statements by words or phrases such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “may,” “should,” “estimate,” “predict,” “project,” “potential,” “continue,” "remains“remains optimistic,"” or the negative of such terms or other similar expressions.
Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed below under Item 1A. Risk Factors, and other factors discussed in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. We disclaim any intent or obligation to update or revise any forward-looking statements as a result of developments occurring after the period covered by this report.
WEBSITE ACCESS TO COMPANY REPORTS
We maintain our corporate Internet website at www.ascenaretail.com. The information on our Internet website is not incorporated by reference into this report. We make available, free of charge through publication on our Internet website, a copy of our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, including any amendments to those reports, as filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after they have been so filed or furnished. Information relating to corporate governance at Ascena Retail Group, Inc., including our Code of Ethics for the Chief Executive Officer and Senior Financial Officers, information concerning our directors, committees of the Board of Directors, including committee charters, and SEC filings reporting transactions in Ascena Retail Group, Inc. securities by directors and executive officers, is also available at our website.
In this Annual Report on Form 10-K, references to “ascena,” “ourselves,” “we,” “us,” “our” or “Company” or other similar terms refer to Ascena Retail Group, Inc. and its subsidiaries, unless the context indicates otherwise. Fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period (“Fiscal 2019”); fiscal year 2018 ended on August 4, 2018 and reflected a 53-week period (“Fiscal 2018”) as the Company conformed its fiscal period ends to the calendar of the National Retail Federation; and fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”); fiscal year 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016”); and fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015”). All references to “Fiscal 2018”2020” refer to our 53-week52-week period that will end on August 4, 2018 when the Company conforms its fiscal period ends to the calendar of the National Retail Federation.1, 2020.
PART I
Item 1. Business.
General
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 4,8003,400 stores in the United States, Canada and Puerto Rico.Rico as of August 3, 2019. The Company had annual revenuerevenues for Fiscal 20172019 of approximately $6.6$5.5 billion.
Change for Growth ProgramEnterprise Transformation
InOperational-related transformation
Retailers, especially those in the first quarterspecialty apparel sector, continue to face intense competition, particularly as consumer spending habits continue to indicate an increasing preference to purchase digitally as opposed to in traditional brick-and-mortar retail stores. This preference has resulted in increased direct channel sales, but has continued to put pressure on our retail store sales. As a result of these fundamental changes, we are continuing our previously announced strategic review of our brands and operations with the goal to enhance shareholder value. We believe that structural and strategic changes are necessary to successfully compete in the changing retail landscape.
To that end, over the past few years, the Company has undergone an extensive transformation of its business. This transformation began during Fiscal 2017, when the Company initiatedannounced 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 connection withActions completed under this long-term transformation focused on (i) refinements to the program, the Company (i) refined itsCompany's operating model by eliminating a number of executive positions and making organizational changes resulting into increase the creation of the Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion operatingfocus on key customer segments, (ii) further consolidateddeveloping initiatives designed to optimize the flow of product through the Company's distribution channels, including its direct channel and its brick-and-mortar retail locations, including areas related to markdown optimization, size pack optimization and localized inventory planning, (iii) consolidating certain support functions into its brandshared services, group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, (iii) began(iv) transitioning certain transaction processing functions within the brand services group to an independent third-party managed-service provider, and (iv) conducted a review of(v) optimizing its store fleet with the goal of reducing the number of marginally profitableunder-performing stores through either rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprintportfolio and convert sales from these stores into ecommercedirect channel sales or to nearby store locations ("Fleet Optimization").locations. The Company realized cumulative savings of approximately $65$290 million during Fiscal 2017 and we expect to realize an
additional $185-$235 million in cost savings through fiscal 2020. Activities associated withfrom the Change for Growth program through the end of Fiscal 2019, substantially all of which are currently expectedreflected in the results of our continuing operations, and which have served to continue through fiscal 2019.offset ongoing inflationary pressure and required reinvestment to support key incremental business initiatives.
IntegrationThe Company will continue to focus on identifying additional cost reduction opportunities to right-size the cost structure. In the third quarter of ANNFiscal 2019, we announced an incremental cost reduction target and on June 4, 2019, we actioned our initial round of savings towards achieving that target with the goal of realizing the majority of the anticipated savings in Fiscal 2020. We will continue to formulate plans and take actions to achieve the remainder of that target and look for additional opportunities. These opportunities represent a critical component of our enterprise transformation.
Structural-related transformation
On August 21, 2015,May 6, 2019, the Company acquired 100%and Maurices Incorporated, a Delaware corporation (“maurices”) and wholly owned subsidiary of ascena, completed the transaction contemplated by the previously-announced Stock Purchase Agreement with Viking Brand Upper Holdings, L.P., a Cayman Islands exempted limited partnership (“Viking”) and an affiliate of OpCapita LLP, providing for, among other things, the sale by ascena of maurices to Viking (the “Transaction”). Effective upon the closing of the outstanding common stock of ANN INC. ("ANN"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands, for an aggregate purchase priceTransaction, ascena received cash proceeds of approximately $2.1 billion (the "$210 million and a 49.6% ownership interest in the operations of ANNmaurices Acquisition"), as more fully describedconsisting of interests in Note 5 to the accompanying consolidated financial statements. The acquisition is intended to diversify our portfolio of brands that serve the needs of women of different ages, sizesViking preferred and demographics.common stock.
On May 20, 2019, the Company announced the wind down of its Dressbarn brand. The wind down is currently expected to be completed in the first half of Fiscal 2020. During Fiscal 2017, integration activities continued as2019, the Company (i) completedrecorded severance, professional fees, and non-cash asset impairments and currently expects to incur additional wind down costs during the integrationfirst half of Fiscal 2020, primarily related to severance, inventory liquidation and closure of ANNDressbarn’s ecommerce operations into its Greencastle fulfillment center, (ii) negotiated favorable contracts with vendors and (iii) realized cost reductions from sourcing merchandise through third-party buying agents. retail stores. As a result of these initiatives,actions, once the wind down of Dressbarn is complete, the Company has realized cumulative integration-related cost savings of approximately $160 million through Fiscal 2017. We expect to realize additional synergies of approximately $75 million related to the integration ofwill have exited its ANNValue Fashion in Fiscal 2018 and fiscal 2019.segment.
Our On May 1, 2019 the Company announced changes to its senior leadership team. These changes included the retirement of the Company's Chief Executive Officer, the departure of the Company's Chief Operating Officer, as well as the appointment of a new Chief Executive Officer and Interim Executive Chair of the Board. On August 4, 2019 the Senior Vice President, Finance and Chief Accounting Officer, was promoted to Executive Vice President and Chief Financial Officer upon the resignation of the former Executive Vice President and Chief Financial Officer. We believe that these changes will continue to support our structure-related transformation activities as the new management team seeks additional ways to optimize our brand portfolio and distribution framework which will allow us to better compete in the changing retail landscape.
Brands and Products
In connection with the Change for Growth programThe Company brands, described above, effective the first quarter of Fiscal 2017, the Company reorganizedin more detail below, are organized into four operating segments:reportable segments as follows: Premium Fashion, ValuePlus Fashion, PlusKids Fashion and KidsValue Fashion.
Premium Fashion
The Premium Fashion segment consists of the Ann Taylor and LOFT brands.
Ann Taylor includes 322293 specialty retail and outlet stores and ecommercedirect channel operations. Ann Taylor has been at the forefront of American fashion, leading the way with the idea that style shouldn’t be work, and getting dressed should be about getting ready for really big days and those just as important small moments. Ann Taylor isfeatures polished, modern feminine classics with an iconic style point of view for every aspect of her life. Its retail stores are predominantly located in mall locations, lifestyle centers and outlet centers.
LOFT includes 678669 specialty retail and outlet stores, ecommercedirect channel operations and certain licensed franchises in international territories. LOFT offers modern, feminine and versatile clothing for a wide range of women with one common goal: to help them look and feel confident, wherever the day takes them. From everyday essentials to attainable trends, LOFT consistently serves up head-to-toe outfits and perfect pieces that make getting dressed feel effortless. Its retail stores are predominantly located in mall locations, lifestyle centers and outlet centers.
Value Fashion
The Value Fashion segment consists of the maurices and dressbarn brands.
maurices includes 1,005 specialty retail and outlet stores and ecommerce operations, offering up-to-date core and plus-size fashion apparel. maurices stores are concentrated in small markets (approximately 25,000 to 150,000 people), and cater to local market preferences through a core merchandise assortment that is refined to reflect individual store demands. Through its proprietary label, the maurices product line encompasses women’s casual clothing, career wear, dressy apparel, active wear and accessories. maurices retail stores are typically located near large discount and department stores to capitalize on the traffic those retailers generate, while differentiating itself by offering a wider selection of style, color and current fashion, along with an elevated customer shopping experience.
dressbarn includes 779 specialty retail and outlet stores and ecommerce operations, offering moderate-to-better quality career, special occasion and casual fashion for working women in a comfortable, easy-to-shop environment staffed by friendly, service oriented associates. dressbarn’s individual store assortments vary depending on local demographics, seasonality and past sales patterns. dressbarn retail stores are located primarily in convenient strip shopping centers in major trading and high-density markets and in surrounding suburban areas.
Plus Fashion
The Plus Fashion segment consists of the Lane Bryant and Catherines brands.
Lane Bryant includes 764721 specialty retail and outlet stores and ecommercedirect channel operations. Lane Bryant is a widely recognized brand name in plus-size fashion with stores concentrated in suburban and small towns, offering fashionable and sophisticated apparel at a moderate price point to female customers in plus-sizes 14-28 through its namesake and Cacique intimates private labels, along with select national brands. Merchandise assortment offerings include intimate apparel, wear-to-work and casual apparel sportswear,as well as accessories and select footwear and social occasion apparel.footwear. Lane Bryant retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers.
Catherines includes 359320 specialty retail stores and ecommercedirect channel operations, offering a full range of plus sizes (16-34) and (0x-5x) and extended sizes (28-34)(28-34 and 4x-5x). Catherines offers classic and fashionable apparel and accessories to female customers in thefor women at moderate price range forprices that includes casual apparel, wear-to-work apparel, intimate apparel and casual lifestyles.wide-width footwear. Catherines retail stores are concentrated in suburban and small towns and are primarily located in strip shopping centers.
Kids Fashion
The Kids Fashion segment, which consists of the Justice brand, includes 900826 specialty retail and outlet stores, ecommercedirect channel operations and certain licensed franchises in international territories. The Justice brand offers fashionable apparel to girls who are ages 6 to 12 in an environment designed to match the energetic lifestyle of tween girls. Justice's merchandise mix represents the broad assortment that itsa girl wants in her store - a mix of apparel, accessories, footwear, intimates and lifestyle products, such as cosmetics and bedroom furnishings,accessories, to meet all of her needs. Justice retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers.
Value Fashion
The Value Fashion segment consists of our Dressbarn brand. As discussed in Note 2 to the accompanying consolidated financial statements included herein, the Company completed the sale of its maurices brand on May 6, 2019, which previously was included in the Value Fashion segment and announced plans to wind down its Dressbarn brand in the first half of Fiscal 2020. Dressbarn operates 616 specialty retail and outlet stores and direct channel operations, offering moderate-to-better quality career, special occasion and casual fashion for working women in a comfortable, easy-to-shop environment. Dressbarn retail stores are located primarily in strip shopping centers in major trading and high-density markets and in surrounding suburban areas.
The tables below present net sales and operating (loss) incomeloss by operating segment for the last three fiscal years:
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| | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015 |
| Net sales: | | (millions) |
Premium Fashion (a) | | $ | 2,322.6 |
| | $ | 2,330.9 |
| | $ | — |
|
| Value Fashion | | 1,950.2 |
| | 2,094.6 |
| | 2,084.2 |
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| Plus Fashion | | 1,353.9 |
| | 1,463.6 |
| | 1,441.9 |
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| Kids Fashion | | 1,023.1 |
| | 1,106.3 |
| | 1,276.8 |
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| Total net sales | | $ | 6,649.8 |
| | $ | 6,995.4 |
| | $ | 4,802.9 |
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| | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2015 |
| Operating (loss) income: | | (millions) |
Premium Fashion (a) (b) | | $ | 140.9 |
| | $ | 13.3 |
| | $ | — |
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| Value Fashion | | 12.2 |
| | 92.0 |
| | 136.6 |
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| Plus Fashion | | 15.5 |
| | 36.9 |
| | 29.4 |
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| Kids Fashion | | (36.7 | ) | | 29.0 |
| | (62.8 | ) |
| Unallocated acquisition and integration expenses | | (39.4 | ) | | (77.4 | ) | | (31.7 | ) |
| Unallocated restructuring and other related charges | | (81.9 | ) | | — |
| | — |
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| Unallocated impairment of goodwill | | (596.3 | ) | | — |
| | (261.7 | ) |
| Unallocated impairment of intangible assets | | (728.1 | ) | | — |
| | (44.7 | ) |
| Total operating (loss) income | | $ | (1,313.8 | ) | | $ | 93.8 |
| | $ | (234.9 | ) |
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(a)
| The results of the Premium Fashion segment for the post-acquisition period from August 22, 2015 to July 30, 2016 are included within the Company's consolidated results of operations for Fiscal 2016.
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(b)
| The results of the Premium Fashion segmentfor Fiscal 2016 include approximately $126.9 million of non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value.
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Over the past five fiscal years, the Company has invested approximately $3.5 billion in acquisitions, capital improvements, supply chain integration and technology infrastructure improvements, which were funded through cash, debt and the issuance of common stock. As a result, net sales increased to approximately $6.6 billion in Fiscal 2017 from $4.7 billion in Fiscal 2013. |
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| | | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
| Net sales: | | (millions) |
Premium Fashion | | $ | 2,415.1 |
| | $ | 2,317.8 |
| | $ | 2,322.6 |
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| Plus Fashion | | 1,240.5 |
| | 1,340.0 |
| | 1,353.9 |
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| Kids Fashion | | 1,079.1 |
| | 1,100.0 |
| | 1,023.1 |
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| Value Fashion | | 758.7 |
| | 808.6 |
| | 917.7 |
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| Total net sales | | $ | 5,493.4 |
| | $ | 5,566.4 |
| | $ | 5,617.3 |
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| | | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
| Operating loss: | | (millions) |
Premium Fashion | | $ | 72.7 |
| | $ | 102.3 |
| | $ | 129.6 |
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| Plus Fashion | | (71.4 | ) | | 0.6 |
| | (12.7 | ) |
| Kids Fashion | | (42.4 | ) | | 18.7 |
| | (60.5 | ) |
| Value Fashion | | (101.7 | ) | | (128.5 | ) | | (56.0 | ) |
| Unallocated restructuring and other related charges | | (127.7 | ) | | (76.6 | ) | | (78.1 | ) |
| Unallocated impairment of goodwill | | (276.0 | ) | | — |
| | (489.1 | ) |
| Unallocated impairment of other intangible assets | | (134.9 | ) | | — |
| | (728.1 | ) |
| Unallocated acquisition and integration expenses | | — |
| | (5.4 | ) | | (39.4 | ) |
| Total operating loss | | $ | (681.4 | ) | | $ | (88.9 | ) | | $ | (1,334.3 | ) |
Omni-channel
The Company continues to invest in initiatives that support ourits omni-channel strategies. During Fiscal 2017, weIn recent years, the Company has completed the consolidation of all brands into its shared distribution network and the transition of all brands onto our new ecommerce platform with our dressbarn, Lane Bryant and Catherines brands added to theits direct channel platform. The aforementioned initiatives allow ourplatform allows the brands to (i) provide customers a seamless omni-channel shopping experience in-store and online, (ii) integrate ourtheir marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance ourthe capability to collect and analyze customer transaction data to support strategic decisions. These efforts have increased the Company's e-commerce penetration from 19% in Fiscal 2016 to 31% in Fiscal 2019. Additionally, the Company's newCompany has made significant investments in its supply chain capability, and maintains highly efficient distribution center in Riverside, California commenced west coast brick-and-mortar distribution this past spring. The Company's distributionand fulfillment centers in Etna, Ohio, Greencastle, Indiana, and Riverside, California, and its fulfillment center in Greencastle, Indiana, are expected to enhance its fulfillment capability and distribution efficiency.California.
Our
The Company's brands sell products online through social media and their ecommercedirect channel sites:
Ann Taylor – www.anntaylor.comand factory.anntaylor.com
LOFT – www.LOFT.com, outlet.loft.com and www.louandgrey.com
Justice– www.shopjustice.com
Lane Bryant – www.lanebryant.com
maurices– www.maurices.com
dressbarn– www.dressbarn.com
Catherines – www.catherines.com
Justice– www.shopjustice.com
Dressbarn– www.dressbarn.com
Store Locations
OurThe Company's stores are typically open seven days a week and most evenings. As of July 29, 2017, weAugust 3, 2019, the Company operated approximately 4,8003,400 stores in the United States, Canada and Puerto Rico. Ann Taylor and LOFT have stores in 41 and 46 states, respectively, as well as the District of Columbia, Canada and Puerto Rico. In addition, LOFT has five international franchise stores. Justice has stores in 48 states and Canada as well as 87 international franchise stores, while maurices has stores in 45 states and Canada. dressbarn has stores in 48 states and the District of Columbia. Lane Bryant and Catherines have stores located in 47 and 44 states, respectively.
During Fiscal 2017, no store accounted for more than 1% of our total sales. The table below indicates the type of shopping facilityJustice has stores in which our47 states and Canada as well as 80 international franchise stores. Dressbarn has stores were located as of July 29, 2017:
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| Type of Facility | | Ann Taylor | | LOFT | | Justice | | Lane Bryant | | maurices | | dressbarn | | Catherines | | Total |
| Strip Shopping Centers | | 3 | | 53 | | 195 | | 380 | | 583 | | 582 |
| | 349 | | 2,145 |
| Enclosed Malls | | 118 | | 219 | | 503 | | 187 | | 344 | | 47 |
| | 6 | | 1,424 |
| Outlet Malls and Outlet Strip Centers | | 125 | | 155 | | 114 | | 115 | | 57 | | 150 |
| | 1 | | 717 |
| Lifestyle Centers and Downtown Locations | | 76 | | 251 | | 88 | | 82 | | 21 | | — |
| | 3 | | 521 |
| Total | | 322 | | 678 | | 900 | | 764 | | 1,005 | | 779 |
| | 359 | | 4,807 |
As of July 29, 2017, ourAugust 3, 2019, the Company's stores had a total of 26.419.1 million square feet consisting of Ann Taylor with 1.71.6 million square feet, LOFT with 3.9 million square feet, Justice with 3.8 million square feet, Lane Bryant with 4.24.0 million square feet, mauricesCatherines with 5.11.3 million square feet, dressbarnJustice with 6.23.5 million square feet, and CatherinesDressbarn with 1.54.9 million square feet. All of ourthe Company's store locations are leased. Some of ourthe leases contain renewal options and termination clauses, particularly in the early years of a lease, which are exercisable if specified sales volumes are not achieved.
Store Count by Brand
| | | | | Fiscal 2017 | | Fiscal 2019 |
| | | Ann Taylor | | LOFT | | Justice | | Lane Bryant | | maurices | | dressbarn | | Catherines | | Total | | Ann Taylor | | LOFT | | Lane Bryant | | Catherines | | Justice | | Dressbarn | | maurices | | Total |
| Beginning of Period | | 340 |
| | 682 |
| | 937 |
| | 772 |
| | 993 |
| | 809 |
| | 373 |
| | 4,906 |
| | 304 |
| | 672 |
| | 749 |
| | 348 |
| | 847 |
| | 730 |
| | 972 |
| | 4,622 |
|
Stores reduced from sale of maurices | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (972 | ) | | (972 | ) |
| Opened | | 3 |
| | 15 |
| | 2 |
| | 8 |
| | 28 |
| | 6 |
| | 1 |
| | 63 |
| | 1 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
|
| Closed | | (21 | ) | | (19 | ) | | (39 | ) | | (16 | ) | | (16 | ) | | (36 | ) | | (15 | ) | | (162 | ) | | (12 | ) | | (9 | ) | | (28 | ) | | (28 | ) | | (21 | ) | | (114 | ) | | — |
| | (212 | ) |
| End of Period | | 322 |
| | 678 |
| | 900 |
| | 764 |
| | 1,005 |
| | 779 |
| | 359 |
| | 4,807 |
| | 293 |
| | 669 |
| | 721 |
| | 320 |
| | 826 |
| | 616 |
| | — |
| | 3,445 |
|
| | | | | Fiscal 2016 | | Fiscal 2018 |
| | | Ann Taylor | | LOFT | | Justice | | Lane Bryant | | maurices | | dressbarn | | Catherines | | Total | | Ann Taylor | | LOFT | | Lane Bryant | | Catherines | | Justice | | Dressbarn | | maurices | | Total |
| Beginning of Period | | — |
| | — |
| | 978 |
| | 765 |
| | 951 |
| | 824 |
| | 377 |
| | 3,895 |
| | 322 |
| | 678 |
| | 764 |
| | 359 |
| | 900 |
| | 779 |
| | 1,005 |
| | 4,807 |
|
Stores added from ANN Acquisition | | 359 |
| | 680 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,039 |
| |
| Opened | | 6 |
| | 15 |
| | 8 |
| | 30 |
| | 52 |
| | 15 |
| | 3 |
| | 129 |
| | 1 |
| | 8 |
| | 2 |
| | 1 |
| | 2 |
| | — |
| | 14 |
| | 28 |
|
| Closed | | (25 | ) | | (13 | ) | | (49 | ) | | (23 | ) | | (10 | ) | | (30 | ) | | (7 | ) | | (157 | ) | | (19 | ) | | (14 | ) | | (17 | ) | | (12 | ) | | (55 | ) | | (49 | ) | | (47 | ) | | (213 | ) |
| End of Period | | 340 |
| | 682 |
| | 937 |
| | 772 |
| | 993 |
| | 809 |
| | 373 |
| | 4,906 |
| | 304 |
| | 672 |
| | 749 |
| | 348 |
| | 847 |
| | 730 |
| | 972 |
| | 4,622 |
|
As discussed above, inIn connection with the Change for Growth program in Fiscal 2017,Company's efforts to right-size the cost structure, the Company conducted a strategic review of its store fleet with the goal of improving overall profitability and cash flows of its store portfolioportfolio. The Company launched its fleet optimization program in January of 2017, with an annualized savings target of $50 million through either rent concessions orand closure of stores. In Fiscal 2018, the Company expanded its total annualized savings target to $60 million. As of the end of Fiscal 2019, the program has generated total annualized savings to our continuing operations in excess of the $60 million target. The Company will continue to seek opportunities to optimize its store closures. That review identified 667 stores for action, of which 120 were closed in Fiscal 2017. Store actions under the Change for Growth program are expected to continue through fiscal 2019.portfolio and achieve rent reductions whenever possible.
Trademarks
We haveThe Company has U.S. Trademark Registration Certificates and trademark applications pending for the operating names of ourthe Company's stores and ourits major private label merchandise brands. We believe ourThe Company believes its trademarks such as ANN TAYLOR®, LOFT®, ANN TAYLOR LOFT®, LOU & GREY®, JUSTICE®, LANE BRYANT®, LANE BRYANT OUTLET®, CACIQUE®, RIGHT FIT®, MAURICES®, DRESSBARN®, CATHERINES®, CATHERINES PLUS SIZES® and DRESSBAR® and 6th & LANE®"&®" are essential to the continued success of ourits business. We intendThe Company intends to maintain ourits trademarks and related registrations and vigorously protect them against infringement.
International Operations
As of July 29, 2017, August 3, 2019, the Company operated stores across three brands in Canada (Ann TaylorJustice (41), LOFT(9), and Ann Taylor (4)). Additionally, as of August 3, 2019, Justice and maurices LOFThad 4, 9, 3980 and 37 company-operated5 international franchise stores, in Canada, respectively. Additionally,respectively, operated under franchise agreements where we earn licensing revenue through international franchise stores operated under franchise arrangements. Licensing revenue is less than 1% of our consolidated annual net sales. As of July 29, 2017, LOFT and Justice had 5 and 87 international franchise stores, respectively. We continue to explore international opportunities for our brands.revenue. International revenue from company-ownedcompany-operated stores and franchised stores accounts for approximately 2% of our consolidated annual net sales.
Sourcing
The Company's brands source their products either through itsone of three channels - ascena's internal sourcing operations, Ascena Global Sourcing (“AGS”), or throughgroup, third-party buying agents.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.
Operating through offices primarily located in Seoul, South Korea, Shanghai, China, India and Hong Kong, AGSBangladesh, the Company maintains direct relationships with manufacturing partners, enabling desired product quality control and speed to market, along with favorable pricing as compared to market vendors.
Merchandise Vendors
The Company also sources somepurchases its merchandise from many domestic and foreign suppliers. It has no long-term purchase commitments or arrangements with any of its suppliers, and believes that it is not dependent on any one supplier as no third-party supplier accounts for more than 10% of our merchandise through third-party buying agents based mainly in Asia.purchases. The Company partnersbelieves that it has good working relationships with these agents to inform product development by leveraging insight into fashion trends and customer preferences. In certain instances (e.g. sourcing in developing countries, or for specific product attribute or unique capability), this buying-agent sourcing network provides favorable cost, quality and/or flexibility for the Company's merchandising teams.its suppliers.
Merchandising and Design
We continueThe Company continues to focus on building ourits merchandising and design functions to align with ourits market positions and support our direct sourcing model. Ourposition. The merchandising and design teams determine inventory needs for the upcoming season in response to fast changing fashion trends and customer preferences. Over the last few years, we havethe Company has made substantial investment in acquiringinvestments to acquire and retainingretain merchandising and design talent to allow usallowing it to differentiate ourits fashion offering,offerings, which we believeit believes is a critical enabler for our long-term success.
Office and Distribution Centers
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.
Information Technology Systems
We continueThe Company continues to make ongoing investments in ourits information technology systems to support ourits strategies in omni-channel, strategy, merchandise procurement, inventory management and supply chain integration.chain. Our information technology systems make the design, marketing, importing and distribution of our products more efficient by providing common platforms for, among other things, order processing, product and design information, and financial information.
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.
Customer Relationship Management
We continueThe Company continues to focus on building our customer relationships and promoting customer loyalty through various programs including brand-specific loyalty and credit card programs. Customers shopping at our brands who are enrolled in our loyalty programs earn reward points that are redeemable toward future purchases. Our brands also offer credit card programs to eligible customers inproviding additional discounts and promotional offers. During Fiscal 2019, the United States. To encourage customers to apply for a credit card, we provide a discount to approved card members on all purchases made withCompany launched new loyalty programs at its Premium Fashion and Plus Fashion segments. This follows the rollout of a new card onloyalty program at the day of application acceptance. Rewards points are then earned on purchases made with the credit card at that brand. In addition, under the co-branded credit card program, certain of our brands offer the customer the option of earning additional reward points for purchases made at any other businessKids Fashion segment in which the card is accepted.
Fiscal 2018. These programs provide useful information that allows usopportunities to attract new customers, retain and enhance our existing customer relationship management capabilities. Using data analytic tools, we obtainrelationships, and deliver a more insightful information aboutpersonalized shopping experience through a better understanding of our customercustomers' preferences and shopping behaviors, allowing us to deliver a more targeted and personalized shopping experience.behaviors.
Community Service
ascena and its brands have a rich history of giving. This is demonstratedTogether, the Company has a shared commitment to our associates and the women and girls whom we serve. We support our associates through ascena cares,our ascenaCARES programs, which reflects our culture and the extraordinary philanthropic efforts taking place within our organization. Together, we have a shared commitment for making the world a better place for the women and girls we serve, for the communities where we live and work and for our dedicated associates. The Company is also proud to sponsor the Roslyn S. Jaffe Awards, in whichprograms that provide leadership development, training, and mentoring along with monetary grants are awarded to female social entrepreneurs whoentrepreneurs. Through cause-marketing campaigns, our brands are making a meaningful difference for womencommitted to the communities in which we live and children.work. Whether through collective partnerships or individual brand outreach, efforts, ascena supports thewe are committed to supporting women who buy, make and sell our products.girls to live confidently in their own unique ways. More information about the history of our charitable giving, including the charitiesnon-profit partners we support, is available at www.ascenacares.com.www.ascenaretail.com.
Competition
The retail apparel industry is highly competitive and increasingly fragmented. We competeThe Company competes with numerous retailers, including department stores, off-price retailers, specialty stores and Internet-based retailers, on pricing, styles and fulfillment capability. Our business is vulnerable to demand and pricing shifts, channel shifts and changes in customer preferences. Some of our competitors operate at a lower cost structure, and are able to offer better pricing; others have more sophisticated ecommercedirect channel or omni-channel capacities. Somecapabilities. Examples of our competitorscompetitive set include but are not limited to Gap Inc., Amazon, Walmart, Macy’s, JCPenney, Target and TJX Companies. Other competitors may enter the markets that we serve. If we failthe Company fails to compete successfully, weit could face continued sales declines and may need to offer greater discounts to our customers, which could result in decreased profitability. We areThe Company is working aggressively working to differentiate our brands and our assortments to reinforce the
value proposition we deliverit 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.
Merchandise Vendors
We purchase our merchandise from many domestic and foreign suppliers. We have no long-term purchase commitments or arrangements with any of our suppliers, and believe that we are not dependent on any one supplier as no third-party supplier accounts for more than 10% of our merchandise purchases. We believe that we have good working relationships with our suppliers.
Employees
As of July 29, 2017, weAugust 3, 2019, the Company had approximately 64,00053,000 employees, 48,00040,000 of whom worked on a part-time basis. WeThe Company typically addadds temporary employees during peak selling periods, which vary throughout the year at each of ourits brands, and adjustadjusts the hours they work to coincide with holiday shopping patterns. NoneAdditionally, none of our otherthe Company's employees are covered by any collective bargaining agreement, at the end of Fiscal 2017 except for approximately 6085 employees of Lane Bryant that werewho are represented by unions. We believeThe Company believes that we haveit has good working relations with ourits employees and unions.
Information About Our Executive Officers of the Registrant
The following table sets forth the name, age and position of our Executive Officers:
|
| | | | |
| Name | | Age | | Positions |
David JaffeCarrie Teffner | | 5952 | | ChiefInterim Executive Officer and ChairmanChair of the Board |
Brian Lynch | | 59 | | President and Chief Operating Officer |
| Gary Muto | | 5860 | | President and Chief Executive Officer-ascena BrandsOfficer |
John PershingDan Lamadrid | | 46 | | Executive Vice President, Chief Human Resources Officer |
Duane D. Holloway | | 45 | | Executive Vice President, General Counsel and Assistant Secretary |
Robb Giammatteo | | 4544 | | Executive Vice President and Chief Financial Officer |
Daniel LamadridWendy Hufford | | 4258 | | Senior Vice President, General Counsel and Chief Accounting OfficerSecretary |
Mr. David JaffeMs. Carrie Teffner serves ashas been a director (since 2001), as our CEO (since 2002)member of the Company's Board of Directors since 2018 and as Chairmanbecame Interim Executive Chair of the Board (since 2016). Mr. Jaffe was appointed Chairman and Chief Executive Officer in July 2017. Previously, he had been President from 2002-2017, and Vice Chairman and Chief Operating Officer since 2001. Mr. Jaffe joined our Company in 1992May, 2019. Prior to that, Ms. Teffner served as Vice President, Business Development and became Senior Vice President in 1995, Executive Vice President in 1996Finance and Vice Chairman in 2001. Mr. Jaffe is the son of Elliot S. Jaffe, our co-founderStrategic Projects at Crocs, Inc. (“Crocs”) until April 2019, and Chairman Emeritus and Roslyn S. Jaffe, our co-founder and Company Secretary.
Mr. Brian Lynch becameserved as Executive Vice President and Chief OperatingFinancial Officerin 2017. of Crocs from December 2015 to August 2018. Prior to his most recent appointment, Mr. Lynchjoining Crocs, Ms. Teffner served as Chief Operating Officer of the Company. He joined our organization in 2015 asExecutive Vice President and Chief ExecutiveFinancial Officer of the Company’s Justice brand. Mr. Lynch has over 35 years of fashionat PetSmart, Inc. ("PetSmart") from 2013 to 2015 until it was sold to BC Partners, where she was responsible for finance and retail experience, having previouslyinformation technology. Prior to PetSmart, Ms. Teffner held a varietynumber of executive leadership positions with ANN INC., Gap Inc.roles at Weber Stephen Products LLC, The Timberland Company and The Walt Disney Company.Sara Lee Corporation.
Mr. Gary Muto became Chief Executive Officer in May 2019. Prior to that, Mr. Muto served as President and Chief Executive Officer, ascenaOfficer-ascena Brands in 2017. Prior to his most recent appointment, Mr. Mutofrom August 2017 until May 2019, served as President and Chief Executive Officer of the Company’s Premium Fashion segment sincefrom October 2016 to August 2017, and served as President and Chief Executive Officer of ANN, since INC. ("ANN") from October 2015.2015 to October 2016. Additionally, from 2008 to 2014 Mr. Muto served as President of ANN's LOFT brand, and then from 2014 to 2015, as President of ANN Brands. Mr. Muto has over 25 years of fashion and retail experience, having previously held a variety of executive leadership positions with Gap Inc.
Mr. John Pershing became Executive Vice President, Chief Human Resources Officerin 2015. He joined the Company in 2011 as Senior Vice President, Human Resources of both the corporate brand services group and dressbarn. 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.
Mr. Duane D. Holloway joined the Company in January 2016 as Senior Vice President, General Counsel and Assistant Secretary and became Executive Vice President, General Counsel and Assistant Secretary in July 2016. Prior to joining the Company, Mr. Holloway served as Vice President, Deputy General Counsel with CoreLogic, Inc., a leading publicly-traded real estate data, analytics and services company. Prior to CoreLogic, he held numerous leadership roles with publicly-traded Caesars Entertainment Corporation.
Mr. Robb GiammatteoDan Lamadrid became Executive Vice President and Chief Financial Officer in 2015. HeAugust 2019. Mr. Lamadrid joined the Companyour organization in 20132017 as the Senior Vice President, of FP&A and Investor Relations. Prior to joining the Company, Mr. Giammatteo was the Vice President of Corporate FP&A at VF Corporation, and before that, the Divisional CFO of VF Outlet. Prior to VF, he spent several years in a variety of financial leadership roles at Limited Brands and General Motors.
Mr. Daniel Lamadrid was appointed Senior Vice PresidentFinance and Chief Accounting Officer in August 2017.Officer. Mr. Lamadrid has responsibility for all Corporate Financial Planning activities as well as oversight of the Company's financial accounting and reporting operations. Prior to joining the Company, Mr. Lamadrid was thea Senior Vice President Chief Accounting Officer and Controller at Vitamin Shoppe, Inc. where he served as Controller from 2011 to 2012 and as Chief Accounting Officer from 2012 until 2017. Prior to Vitamin Shoppe, Mr. Lamadrid held various financial leadership roles at Polo Ralph Lauren, Hartz Mountain Corporation and Babies R Us, a division of Toys R Us. Mr. Lamadrid began his career in public accounting.
Ms. Wendy Hufford joined the Company in October 2018 and serves as Senior Vice President, General Counsel and Secretary. Ms. Hufford has responsibility for all legal, compliance, legal risk and government affairs matters affecting the Company. Prior to joining ascena, Ms. Hufford was the Chief Operating Officer, Legal Department & Vice President, US Litigation, Risk Management & Human Resources at Boehringer Ingelheim USA from 2015 to 2018. Ms. Hufford was previously Vice President, Deputy General Counsel and Assistant Secretary at ITT Corporation from 2010 to 2014 and Executive Vice President and Chief Litigation Counsel at Cardinal Health from 2006 to 2009. She also held in-house roles at GE Consumer Finance and Credit Suisse First Boston. Early in her career, she was in private practice at Davis Polk & Wardwell in New York and she served as a law clerk for the Honorable Robert J. Ward on the U.S. District Court of the Southern District Court of New York.
Effective on August 25, 2017, Mr. Kevin Trolaro, 47, Vice President, Financial Reporting, was designated as the Company’s interim Principal Accounting Officer for the purpose of signing the Company’s Fiscal 2017 Annual Report on Form 10-K. Immediately following the filing of the Fiscal 2017 Annual Report on Form 10-K Mr. Lamadrid, the Chief Accounting Officer of the Company, will assume the role of Principal Accounting Officer.
Item 1A. Risk Factors.
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 pricesprice 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. Our operational results, financial position and cash flows could be negatively impacted by a number of factors including, but not limited to, those described below. Many of these factors are outside of our control, currently believed to be immaterial and/or not presently known to us. If we are not successful in managing these risks, they could have a negative impact on our business, operational results, financial position and cash flows.
Macroeconomic and Industry Risks
General economic conditions and other factors beyond the Company’s control impacting consumer spending may adversely affect our business.
Our performance is subject to macroeconomic conditions and theirthat are beyond the Company’s control that could impact on levels of consumer discretionary spending. Some of the factors negatively impacting consumer spending and consumer sentiment include volatility in national and international financial markets, recession, inflation, deflation, consumer confidence, fiscal and monetary policies of government, high unemployment lowerand wage levels, increased taxation, credit availability, high consumer debt, reductions in net worth, higher fuel, energy and other prices, tax policies and changes in tax laws, increasing interest rates, severe or unseasonable weather conditions, natural disasters, public health concerns, civil disturbances, the threat of or actual terrorist attacks, military conflicts, the domestic or international political environment, and general uncertainty regarding the overall future economic environment. Lastly, consumer spending habits continue to shift on an accelerated pace towards an increasing preference to purchase merchandise digitallyenvironment as opposed to in traditional brick-and-mortar retail stores.well as the prospects of these factors and events. Such macroeconomic and other factors could have a negative effect on consumer spending in the U.S., which in turn could have a material effect on our business, operational results, financial conditionposition and cash flowsflows.
Existing and increased competition and fundamental shifts in the women’s and girls'girls’ retail apparel industry may reduce our net revenues, operational results and market share.
The women’s and 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-orderInternet retailers, 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, continue to be promotional by reducing their selling prices, and in some cases are expanding into markets in which we have a significant presence.
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 continuedhas resulted in the continuation of increased 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. Such competition,The 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.
These competitive factors, including unanticipated changes in pricing, promotional activity such as free shipping and pricing pressures, shopping preferences and lossother practices of market sharethe Company’s competitors could have a material adverse effect on our business, operational results, financial position and cash flows.
Our stock price may be volatile.
The market price of our stock has fluctuated substantially and may continue to fluctuate significantly. Future announcements or disclosures concerning us or any of our competitors, our strategic initiatives, our sales and profitability, our financial condition, any quarterly variations in actual or anticipated operating results or comparable sales, any failure to meet analysts’ expectations and sales of large blocks of our stock, among other factors, could cause the market price of our stock to fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks that have often been unrelated or disproportionate to the operating performance of these companies. This volatility could affect the priceDisruptions at which shares of our stock could be sold.
Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of the company’s securities. Such litigation could result in substantial costs, divert our management’s attention and resources and have a material adverse effect on our business, operational results, financial position and cash flows.
We may experience fluctuations in our tax obligations and effective tax rate.
We are subject to income taxes in the United States and numerous international jurisdictions. In addition, our merchandise is subjectports used to import and excise duties and/or sales or value-added taxes in certain jurisdictions. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and reserves are re-evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules, regulations or interpretations thereof.
Operational Risks
Our business is dependent upon our ability to accurately predict fashion trends and customer preferences in a timely manner.
Fashion apparel trends and customer preferences are volatile and tend to change rapidly, particularly for women and tween girls. Our success depends largely on our ability to anticipate and respond to changing merchandise trends and consumer preferences in a timely manner. Accordingly, any failure by us to anticipate, identify and respond to changing fashion trends could adversely affect consumer acceptance of the merchandise, which in turn could adversely affect our business and our image with our customers. Because we enter into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, price shifting, and the optimal selection and timing of merchandise purchases. If we miscalculate either the demand for our merchandise or our customers’ tastes or purchasing habits, we may be required to sell a significant amount of unsold inventory at below average markups over cost, or below cost, which would have an adverse effect on our business, operational results, financial position and cash flows.
We may not fully realize the expected cost savings and/or operating efficiencies from the Change for Growth program.
We have implemented, and plan to continue to implement the Change for Growth program, as described in Item 1 - Business. The Change for Growth program is designed to deliver long-term sustainable growth by enhancing our operating effectiveness and efficiency, rightsizing and increasing the quality of our distribution channels, and reducing our operating costs. The Change for Growth program presents significant potential risks that may impair our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise harm our business, including:
higher than anticipated costs in implementing planned workforce reductions;
higher than anticipated lease termination and store closure costs related to the Fleet Optimization, which is discussed below;
failure to meet operational targets or customer requirements due to the loss of employees or inadequate transfer of knowledge;
failure to maintain adequate controls and procedures while executing, and subsequent to, completing the Change for Growth program;
diversion of management’s attention and resources from ongoing business activities and/or a decrease in employee morale;
attrition beyond any planned reduction in workforce; and
damage to our reputation and brand image due to our restructuring-related activities, including certain store closures.
If we are not successful in implementing and managing the Change for Growth program, we may not be able to achieve targeted operating enhancements and/or cost reductions within the expected time frame, which could adversely impact our business, results of operations and financial condition. Our failure to achieve targeted operating enhancements and/or cost reductions could also result in the implementation of additional restructuring-related activities, which may be dilutive to our earnings in the short term.
We may not fully realize the benefits from the Fleet Optimization initiative as part of the Change for Growth program.
In Fiscal 2017, as part of its Change for Growth program, the Company completed the Fleet Optimization review. This review had the goal of reducing the number of marginally profitable stores, through rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprint. The estimated costs and benefits associated with this initiative may vary
materially based on various factors including: timing in execution, outcome of negotiations with landlords, and changes in management’s assumptions and projections. As a result of these events and circumstances, delays and unexpected costs may occur, which could result in our not realizing all, or any portion, of the anticipated benefits of the Fleet Optimization initiative.
Our ability to successfully implement and optimize our omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for our customers.
We are committed to growing our business through our omni-channel retail strategy. Our goal is to offer our customer seamless access to our brands and merchandise whenever and wherever they choose to shop. Accordingly, our success also depends on our ability to anticipate and implement innovations in sales and marketing strategies to appeal to existing and potential customers who increasingly rely on multiple portals, including mobile technologies, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our customers’ shopping preferences could significantly impair our ability to meet our strategic business and financial goals. Failing to successfully implement and optimize our omni-channel retail strategy could have a material adverse effect on our business, operational results, financial position and cash flows.
As we transition certain functions to an external managed service provider, we will become more dependent on the third party performing these functions.
As part of our long-term strategy, we look for opportunities to cost effectively enhance capability of business services. In some cases, this requires that we work with third parties to provide services and/or functions that can be provided more effectively by external third party providers, as more fully described in Note 7 to the accompanying consolidated financial statements. While we believe we conduct appropriate due diligence before entering into agreements with these third parties, the failure of any of these third parties to provide the expected services, provide them on a timely basis or to provide them at the prices we expect could disrupt or harm our business. Any significant interruption in the operations of these service providers, over which we have no control, could also have an adverse effect on our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.
Our international service providers and our own 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.
Recently, we engaged in efforts to reduce our costs by utilizing lower-cost labor outside the U.S. through outsourcing arrangements. It is likely that the countries where our outsourcing vendors are located may be subject to higher degrees of political and/or social instability than the U.S. and may lack the infrastructure to withstand political unrest or natural disasters. 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. Fluctuations of the U.S. dollar in relation to the currencies used and higher inflation rates experienced in these countries may also reduce the savings we planned to achieve. Furthermore, the practice of utilizing labor based in foreign countries has come under increased scrutiny in the U.S., which ultimately could have an adverse effect on our results of operations.
In addition, the U.S. or the foreign countries in which we have service provider arrangements or operate could adopt new legislation or regulations that would adversely affect our business by making it difficult, more costly or impossible for us to continue our foreign activities as currently being conducted. Furthermore, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act ("FCPA"). Any violations of FCPA or local anti-corruption laws by us, our subsidiaries or our local agents could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
Our ability to maintain our brand image, engage new and existing customers and gain market share.
Our ability to maintain our brand image and reputation is integral to our business as well as the implementation of strategies to expand it. 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, 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 failure to achieve consistent, positive performance at several of our brands simultaneously could have an adverse effect on our sales and profitability. In addition, our ability to address the challenges of declining store traffic at our brick-and-mortar stores, in a highly promotional, low growth environment may impact our ability to maintain and gain market share and also impact our business, operational results, financial position and cash flows.
Our business depends on effective marketing, advertising and promotional programs.
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. Although we use marketing, advertising and promotional programs to attract customers through various media, including social media, database marketing and print, our competitors may spend more or use different approaches, which could provide them with a competitive advantage. Our promotional activity and other programs may not be effective, may be perceived negatively or could require increased expenditures, which could adversely impact our business, operational results, financial position and cash flows.
We depend on key personnel in order to support our existing business and future initiatives and may not be able to retain or replace these employees, recruit additional qualified personnel or effectively manage succession.
We believe that we have benefited substantially from our leadership and the experience of our senior executives. The loss of the services of our senior executives could have a material adverse effect on our business and projects, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. In addition, as our business develops, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. Competition for senior management is intense and we may not be successful in attracting and retaining key personnel.
We rely on foreign sources of production.
We purchase a significant portion of our merchandise directly from foreign markets. 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. We face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad, including, but not limited to:
financial or political instability or terrorist acts in any of the countries in which our merchandise is manufactured, or the channels through which it passes;
fluctuations in the value of the U.S. Dollar against foreign currencies or restrictions on the transfer of funds to and from foreign countries;
inability of our manufacturers to comply with local laws, including labor laws, health and safety laws or labor practices;
increased security and regulatory requirements and inspections applicable to imported goods;
imposition or increases of duties, taxes and other charges on imports or exports;
imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our merchandise that may be imported into the United States from countries in regions where we do business;
impact of natural disasters, extreme weather, public health concerns or other catastrophes on our foreign sourcing offices and vendor manufacturing operations;
delays in shipping due to port security or congestion issues, labor disputes or shortages, local business practices, vendor compliance with applicable import regulations or weather conditions;
violations under the U.S. Foreign Corrupt Practices Act or similar laws or regulations; and
increased costs of transportation.
New legislative 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 may be adversely affected by the factors listed above, all of which are beyond our control. The foregoing may result in our inability to obtain sufficient quantities of merchandise or increase our costs.
We require our independent manufacturers to operate in compliance with applicable laws and regulations 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 manufacturers, their labor practices, the health and safety conditions of their facilities, or their sources of raw materials, and from time to time these manufactures may not be in compliance with these standards or applicable laws. Significant or continuing noncompliance with such standards and laws by one or more manufacturer could have a negative impact on our reputation and our business.
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.
Our business could suffer as a result of a third-party manufacturer’s inability to produce goods for us on time and to our specifications.
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 experience difficulty obtaining adequate credit or access to liquidity to finance their operations, which could lead to vendor consolidation. A manufacturer's failure to continue to work with us, ship orders in a timely manner or to meet our safety, quality and social compliance standards could result in supply 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.
Our business could suffer a material adverse effect if our distribution or fulfillment centers were shut down or disrupted.
Nearly all of the merchandise we purchase is shipped directly to our distribution and fulfillment centers, where it is prepared for shipment to the appropriate stores or to the customer directly through our ecommerce 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. As a result of damage to, or prolonged interruption of, operations at any of these facilities due to a work stoppage, 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, which in turn could have a material adverse effect on our business, financial position, operational results and cash flows.
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.
Our business could suffer as a result of increases in the price of raw materials, labor, energy, freight and trade relations.
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, 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, greater uncertainty with respect to trade relations, such as the imposition of unilateral tariffs on imported products, could result in higher product costs, which could have a material adverse effect on our business, operational results, financial position and cash flows.
Our business could suffer as a result of disruptions at ports used to import our products..
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 alternate 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 alternate 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.
Risks associated with ecommerce sales.
The successful operationIncreases in the price of our ecommerce business depends on our ability to maintain the efficientraw materials, labor, energy, freight 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 ecommerce services are subject to numerous risks, including:
computer system failures, including but not limited to, inadequate system capacity, human error, change in programming, website downtimes, system upgrades or migrations, Internet service or power outages;
cyber incidents, including but not limited to, security breaches and computer viruses;
reliance on third-party computer hardware/software fulfillment and delivery providers;
unfavorable federal or state regulations or laws;
violations of federal, state or other applicable laws, including those related to online privacy;
disruptions in telecommunication systems, power outages or other technical failures;
credit card fraud;
constantly evolving technology;
liability for online content; and
natural or man-made disasters or adverse weather conditions.
The Company's failure to successfully address and respond to any one or more of these risks could damage the reputation of our brands and have a material adverse effect on our business, operational results, financial position and cash flows.
Our business could suffer if our information technology systems fail to operate effectively, are disrupted or compromised.
We rely on 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 make investments to upgrade, enhance or replace these systems, as well as leverage new technologies to support our growth strategies. 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 appropriately mitigated,trade relations could have a material adverse effectimpact on our business operational results, financial position and cash flows..
The reliability and capacity ofRaw materials used to manufacture 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 are vulnerable from time to time to damage or interruption from, among other things, natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses and security breaches, which may require significant investment to fix or replace, and we may suffer loss of critical data and interruptions or delays to our 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 guarantee can be made that future disruptions, 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.
Wemerchandise are subject to cybersecurity risksavailability constraints and may incur increased expenses to mitigate our exposure.
Our businessprice volatility caused by high or low demand for fabrics, labor conditions, trade wars and thathigher tariffs, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, economic inflation, market speculation and other 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 third-party service providers employ systemsproducts as well as their distribution to our distribution centers, retail locations and websites that allow us to process credit card transactions containing personally identifiable information ("PII"), perform online ecommerce and social media activities, and store and transmit proprietary or confidential customer, employee, job applicant and other personal confidential information. Security and/or privacy breaches, actsour customers. The Company is also susceptible to fluctuations in the cost of vandalism or terror, computer viruses, misplaced or lost data, programming, and/or human error or other similar eventstransportation. Additionally, substantially increased uncertainty with respect to trade relations, such as the imposition of unilateral tariffs on imported products, could expose us to a risk of loss or misuse of this information, litigation and potential liability. 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, our customers, or others who have entrusted us with information. 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 customer, job applicant or employee information, repairing system damage or providing credit monitoring or other benefits to affected customers, 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. In addition, datatrade wars, higher barriers 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. We have recently identified signs of unauthorized access to a web application servertariffs, and engaged a third-party cyber-security firm to determine the nature and extent of such access. This investigation remains ongoing. At this time, the Company is not able to estimate thehigher product costs, or a range of costs, related to this incident. Although we maintain cyber-security insurance there can be no assur
ance 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 data is critical. The regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, customers have a high expectation that we will adequately protect their personal information. Any actual or perceived misappropriation or breach involving this data could attract negative media attention, cause harm to our reputation or result in liability (including but not limited to fines, penalties or lawsuits), any of which could have a material adverse effect on our business, operational results, financial position and cash flows.
We may be exposed to risks and costs associated with customer payment methods, including credit card fraud and identity theft, which would cause us to incur unexpected expenses and loss of revenues.
In the standard course of business, we process customer information, including payment information, through our stores and ecommerce sites. There is an increased concern over the security of PII transmitted over the Internet, consumer identity theft and user privacy. We endeavor to protect consumer identity and payment information through the implementation of security technologies, processes and procedures. It is possible that an individual or group could defeat our security measures and access sensitive consumer information. Actual or anticipated attacks may cause us to incur increased costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Incidents which result in exposure of customer data will be handled in accordance with applicable laws and regulations. Exposure of customer data through any means could materially harm the Company by, but not limited to, reputational damage, regulatory fines and costs of litigation.
On October 1, 2015 the payment cards industry began shifting liability for certain debit and credit card transactions to retailers who do not accept Europay, MasterCard and Visa (“EMV”) chip technology transactions. All ascena brands have implemented EMV chip technology in its stores and are in the final process of certification. Until we have final verification on certification, we may be liable for chargebacks related to counterfeit transactions generated through EMV chip enabled cards, which could negatively impact our operational results, financial position and cash flows.
Our ability to successfully integrate new acquisitions.
The success of our businesses depends on our ability to integrate and manage our expanding operations, to realize opportunities for revenue growth and to eliminate redundant and excess costs. Achieving the anticipated benefits of previous and future acquisitions, including the ANN Acquisition, may present a number of significant risks and considerations, including, but not limited to:
unsuccessful, delayed or more costly integration;
demands on management related to the increase in our size and the loss of key employees;
the diversion of management’s attention from the management of daily operations to the integration of operations;
expected cost savings not being achieved in full, or taking longer or requiring greater investment to achieve; and
not achieving the anticipated omni-channel growth potential.
Impairment to the carrying value of our goodwill or other intangible assets could result in significant non-cash charges.
Under generally accepted accounting principles, we review our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Identifiable intangible assets with an indefinite useful life, including goodwill, are not amortized but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. As described in Note 6 to the accompanying consolidated financial statements included elsewhere herein, in the third quarter of Fiscal 2017, we recorded impairment charges of $596.3 million related to goodwill and $728.1 million related to other intangible assets. As of July 29, 2017, we had approximately $1.2 billion of goodwill and other intangible assets related to the acquisitions of maurices in January 2005, Justice in November 2009, Lane Bryant and Catherines in June 2012 and ANN in August 2015. Current and future economic conditions, as well as the other risks noted in this Item 1A, may adversely impact our brands' ability to attract new customers, retain existing customers, maintain sales volumes and maintain margins. As discussed in our Critical Accounting Policies included elsewhere herein, these events could materially reduce our brands' profitability and cash flow which could, in turn, lead to a further impairment of our goodwill and other intangible assets. Furthermore, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. Any impairment could have a material effect on our operational results and financial condition.
Our gross margins could be adversely affected if we are unable to manage our inventory effectively.
Our profitability depends upon our ability to manage appropriate inventory levels and respond quickly to shifts in consumer demand patterns. We must properly execute our inventory management strategies by appropriately allocating merchandise among our stores and online, timely and efficiently distributing inventory to stores, maintaining an appropriate mix and level of inventory in stores and online, adjusting our merchandise mix between our brands, appropriately changing the allocation of our product categories to respond to customer demand and effectively managing pricing and markdowns. If we overestimate customer demand for our merchandise, we may need to sell the excess inventory at lower prices which would negatively impact our gross margins and could have a material effect on our business, operational results, financial condition and cash flows. If we underestimate customer demand for our merchandise, we may experience inventory shortages which may result in missed sales opportunities that could have a material effect on our business, operational results, financial condition and cash flows.
Our efforts to expand internationally may not be successful.
We intend to expand our operations and presence in existing and new countries in the future. Several 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 incur 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 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. In many of these new locations, we face major, established competitors. In addition, in many of these locations, the real estate, employment and labor, transportation and logistics, regulatory, and other operating requirements differ dramatically from those in the places where we have more experience. Consumer tastes 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. If our international expansion plans are unsuccessful or do not deliver an appropriate return on our investments, could adversely affect our ability to achieve the objectives that we have established.
In addition, 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 failure of our franchisees to operate franchises successfullyExtreme weather could have a material adverse effectimpact on our reputation, operational results, financial position and cash flow.business.
Other challenges associated with international expansionFrequent or unusually heavy snowfall, ice storms, hurricanes, rainstorms or other extreme or unseasonable weather conditions over an extended period could make it difficult for our customers to travel to our stores, may include diverting financial, operationalcause a disruption in the shipment or receipt of our merchandise, and managerial resources from our existing operations and/or result in increased costs,may influence customer trends, consumer traffic and shopping habits, which could adverselynegatively impact our financial condition and results of operations. Failure to 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 achieveCompany's operational results. Extreme weather conditions in the objectives that we have established.
As we continue to expand our international operations, we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as compliance with the laws of foreign countriesareas in which we operate. Violations of these lawsthe Company's stores are located could subject us to sanctions or other fines or penalties that would have an adverse effect on our reputation, operational results, financial position and cash flows.
We may be unable to protect our trademarks and other intellectual property rights.
We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources tonegatively affect 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. 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 operational results, financial position and cash flows.
We may suffer negative publicity and our business may be harmed if we need to recall any product we sell or if we fail to comply with applicable product safety laws.
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 international 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, 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 international 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 ourCompany's business, operational results, financial position and cash flows.
We depend on strip shopping center and mall traffic and our ability to identify suitable store locations.
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. A decline in the popularity of strip shopping center or mall shopping among our target customers could have a material adverse effect on customer traffic and our operational results. In order to leverage customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable consumer locations, however competition for such suitable store locations is intense.
In addition, continued consolidation 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, which in turn could have a material effect on our business, operational results, financial condition and cash flows.
Acts of terrorism, active shooter situations, effects of war, public health incidents, man-made and natural disasters, other catastrophes or political unrest could have a material adverse effect on our business.
The threat, or actual acts,Acts of terrorism continue to beand other catastrophic events remain a significant riskthreat to the global economy. Terrorism and potential military responses, active shooter situations, 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.
Operational Risks
OurRisks associated with our ongoing portfolio review and business transformation could sufferadversely affect our financial results.
The Company’s previously announced comprehensive portfolio review has resulted in the Company’s recent sale of the maurices brand, and the announcement of the wind down of the Dressbarn brand. As a result of these, and similar efforts, we may incur unexpected costs, reductions in available liquidity, diversion of management’s attention and resources from our business, stock price volatility, difficulty in negotiating, maintaining, or consummating business or strategic relationships or transactions, difficulty in recruiting, hiring, motivating, and retaining talented and skilled personnel, and disruptions in operations, supplier relationships and employee relations, which in turn could have a material adverse effect from extreme or unseasonable weather conditions.
Extreme weather conditions in the areas in which the Company's stores are located could negatively affect the Company'son our business, operational results, financial position and cash flows. Frequent
There are risks associated with the wind down of our Dressbarn brand.
On May 20, 2019, we reported that our Dressbarn brand announced plans to commence a wind down of Dressbarn’s operations. In connection with the Dressbarn brand wind down, retail store locations will continue to be closed in a phased approach; the e-commerce site, however, will remain active until the wind down is complete.
In connection with the Dressbarn brand wind down, we have incurred charges of approximately $50 million for the year ended August 3, 2019 primarily related to actions including employee-related costs (including estimates for severance), professional fees, and non-cash asset impairment charges, including costs associated with the write-down of Dressbarn's corporate office space. We expect to incur additional costs until the wind down is complete, which may include additional severance, inventory liquidation, non-cash asset impairments and contract assignment and termination costs, primarily with respect to store operating leases. The amount of actual restructuring and transition charges and impairment charges may materially exceed our estimates, when determined, due to various factors, many of which are outside of our control, including, without limitation, the actual outcomes of discussions and negotiations (a number of which are currently ongoing) with the counterparties to the contracts we intend to terminate or unusually heavy snowfall, ice storms, rainstormsmodify. In addition, because of uncertainties with respect to our wind down plan (including those described above), we may not be able to complete the wind down of Dressbarn in the timeframe, on the terms or in the manner we expect, and the costs incurred in connection with such wind down activities may exceed our estimates. If the actual restructuring charges or impairment charges exceed our estimates, when determined, this could adversely impact the Company’s business, operational results, financial position and cash flows.
Furthermore, because of the wind down of the Dressbarn brand and because of other factors that ordinarily influence consumer acceptance of our other brands’ products (many of which are outside of our control), we may not be able to sell our Dressbarn brand Fall 2019 products at prices that will generate a profit. If we incur losses relating to the sales of such products, this could adversely impact the Company’s business, operational results, financial position and cash flows.
In addition, the announced wind down involves numerous risks, including but not limited to:
the inability of the Dressbarn brand to retain qualified personnel necessary for the wind down during the wind down period;
potential disruption of the operations of the rest of our brands and businesses and diversion of management’s attention from such businesses and operations;
exposure to unknown, contingent or other extreme weather conditions over an extended period could make it difficult forliabilities, including litigation arising in connection with the Dressbarn brand wind down;
negative impact on our business relationships, including but not limited to potential relationships with our customers, to travelsuppliers, vendors, lessors, licensees and employees; and
unintended negative consequences from changes to our stores,business profile.
If any of these or other factors impair our ability to successfully implement the wind down, we may not be able to realize other business opportunities as we may be required to spend additional time and incur additional expense relating to the wind down that otherwise would be used on the development and expansion of our other businesses, which could adversely impact the Company’s business, operational results, financial position and cash flows.
Any divestitures, strategic investments, acquisitions, joint ventures or other transactions could fail to achieve strategic objectives and result in operating difficulties, liabilities and expenses.
We have undertaken, and may cause a disruptionundertake in the shipmentfuture, divestitures, strategic investments or receiptother transactions in connection with our comprehensive portfolio review, which has resulted in the Company’s recent sale of the maurices brand and the announcement of the wind down of the Dressbarn brand. In addition, as a company of portfolio consumer brands, our business model may include a certain level of acquisition, joint venture and/or divestiture activities. We must be able to successfully manage the impacts of these activities, while at the same time delivering against our business objectives.
Specifically, with respect to divestitures, our financial results could be adversely impacted by the dilutive impacts from the loss of earnings and corporate overhead contribution/allocation associated with divested brands. We may experience difficulty separating out portions of the entire business, incur potential loss of revenue or experience negative impact on margins, or we may not achieve the desired strategic and financial benefits from these transactions. Such transactions may also delay achievement of our strategic objectives, cause us to incur additional expenses, potentially disrupt customer or employee relationships, and expose us to unanticipated or ongoing obligations and liabilities, including any indemnification obligations, and divert management’s and our employees’ time and attention. Further, during the pendency of a divestiture, we may be subject to risks related to a decline in the business, loss of employees, customers, or suppliers and the risk that the transaction may not close, any of which would have a material adverse effect on the business to be divested and the Company. If a divestiture is not completed for any reason, we may not be able to find another buyer on the same terms, and we may have incurred significant costs without the corresponding benefit.
In May 2019, we completed the sale of our maurices brand to Viking Brand Upper Holdings, L.P. (“Viking”), an affiliate of OpCapita LLP, for approximately $210 million in cash and approximately 49.6% of the outstanding equity interests in Viking, which is now the owner of maurices. In connection with the closing of the sale of Maurices Incorporated, we entered into a managed services agreement pursuant to which we will continue to support maurices on our shared business services platform, including support for IT, supply chain, sourcing and certain back office functions pursuant to the managed services and/or transitional services agreements. In the course of performing our obligations under these agreements, we will allocate certain of our resources, including without limitation, assets, facilities, equipment and the time and attention of management and employees, for the benefit of maurices and not us, which may negatively impact our business, results of operations and financial condition.
Additionally, we now hold a minority investment in the maurices’ owner. Minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and compliance risks associated with the investments. Management or other investors in these entities may have business goals and interests that are not aligned with ours or may exercise their rights in a manner for which we do not approve. These circumstances could lead to delayed decisions or disputes and litigation, all of which could have a material adverse impact on our reputation, business, results of operations and financial condition. Refer to Note 9 to the accompanying consolidated financial statements for more information on our investment,
Our financial results could also be impacted in the event of acquisition or joint venture activities if changes in the cash flows or other market-based assumptions cause the value of acquired assets to decline below book value, or we are not able to deliver the expected cost and growth synergies associated with such acquisitions and joint ventures, which could also have an impact on goodwill and intangible assets.
Our business is dependent upon our ability to anticipate and respond to changing fashion trends and customer preferences in a timely manner.
Specialty fashion apparel trends and customer preferences tend to change rapidly, particularly for women and tween girls, and our business is dependent upon our ability to effectively manage our inventory. Our success depends largely on our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner. Accordingly, our failure to anticipate, identify and react to changing fashion trends or styles could adversely affect consumer acceptance of our merchandise, which in turn could negatively impactadversely affect our business and our image with our customers. Because the Company's operational results. The Company's business is also susceptiblelead times required for many of our design and purchase decisions must be made well in advance of the applicable selling season, we are vulnerable to unseasonable weather conditions,changes in consumer trends, preferences, price shifting, and the optimal selection and timing of merchandise purchases. A miscalculation of either the demand for our merchandise or our customers’ tastes or purchasing habits could lead to, among other things, inventory shortages or excess inventory that we may be required to sell at reduced prices, 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 business, operational results, financial position and cash flows.
We may not fully realize the expected cost reductions and/or operating efficiencies from the cost reduction initiatives.
The Company has undertaken various cost reduction initiatives to right-size its cost structure. The actions implemented through these initiatives present significant potential risks that may impair our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise harm our business, including:
higher than anticipated costs in implementing the program and/or initiative;
failure to meet operational targets or customer requirements due to the loss of employees or inadequate transfer of knowledge;
failure to maintain adequate controls and procedures while executing, and subsequent to completing the other cost reduction initiatives;
diversion of management’s attention and resources from ongoing business activities and/or a decrease in employee morale;
attrition beyond any planned reduction in workforce; and
damage to our reputation and brand image due to our restructuring-related activities, including certain store closures.
The estimated costs and benefits associated with the Company's cost reduction initiatives may vary materially based on various factors including: timing in execution, outcome of negotiations with landlords, and changes in management’s assumptions and projections. Any delays and unexpected or higher than anticipated costs could result in our not realizing all, or any portion, of the anticipated benefits of the cost reduction initiatives. As part of our cost-savings initiatives, we have reduced our headcount. These reductions, as well as employee attrition, could result in the potential loss of specific knowledge relating to our Company, operations and industry that could be difficult to replace. Also, we now operate with fewer employees, who have assumed additional duties and responsibilities. These workforce changes may negatively impact communication, morale, management cohesiveness
and decision-making, which could have an adverse impact on our business, operational results, financial position and cash flows. If we are not successful in implementing and managing the cost reduction initiatives while continuing to invest in our business growth, we may not be able to achieve targeted operating enhancements and/or cost reductions within the expected time frame or at all, which could adversely impact our business, operational results, financial position and cash flows, and could also result in the implementation of additional restructuring-related activities, which may be dilutive to our earnings in the short-term and present incremental risks as discussed above.
Our stock price may continue to be volatile.
The Company’s stock price has experienced volatility over time and this volatility may continue, in part due to factors such as those discussed in this Item 1A. Stock volatility may adversely affect stockholder confidence, as well as associate morale and retention for those associates who receive equity grants as part of their compensation packages, which could have a material adverse effect on our business, operational results, financial position and cash flows.
Additionally, future announcements or disclosures concerning us or any of our competitors, our strategic initiatives, our sales and profitability, our financial condition, any delisting, any quarterly variations in actual or anticipated operating results or comparable sales, any failure to meet analysts’ expectations and sales of large blocks of our stock, among other factors, could cause the market price of our stock to decrease or fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks that are unrelated or disproportionate to the operating performance of these companies.
Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. In June and July 2019, two purported securities law class actions were filed against the Company and certain of our officers and directors alleging certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company. See the information under Note 16 to the accompanying consolidated financial statements for more information. We deny the allegations in the lawsuit and intend to defend ourselves vigorously. However, no assurance can be given that the results of these matters will be favorable to us. In addition, we may be the target of securities-related litigation in the future, both related and unrelated to the existing class action lawsuit.Such litigation could result in substantial costs, divert our management’s attention and resources and have a material adverse effect on our business, operational results, financial position and cash flows. See below under “Our business may be affected by other regulatory, administrative and litigation developments” for additional risks associated with litigation against the Company.
We may be unable to successfully implement and optimize our omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for our customers.
One of our strategic priorities is to further develop and refine the omni-channel shopping experience for our customers through the integration of our store and direct shopping channels. Our omni-channel initiatives include cross-channel logistics optimization and exploring additional ways to develop an omni-channel shopping experience, including further direct channel integration, use of advance analytics, customer personalization, the assessment and implementation of emerging technologies. These initiatives involve significant investments in information technology systems, operational changes, and employee resources.
In addition, successful implementation of our omni-channel strategy is dependent on our ability to develop our direct channel capabilities in conjunction with optimizing our physical store operations (through our fleet optimization program) and market coverage, while maintaining profitability. The Company’s ability to optimize its store operations and market coverage requires active management of its real estate portfolio in a manner that permits store sizes, layouts, locations and offerings to evolve by brand over time. These efforts may involve the relocation or closing of existing stores or possibly the opening of additional stores, which could potentially increase the cost of doing business and the risk that the Company’s business practices could result in liabilities that could have a material effect on our business, operational results, financial position and cash flows.
In addition, our competitors are also investing in omni-channel programs, some of which may be more successful than our own. If the implementation of our customer, direct, and omni-channel initiatives are not successful, or we do not realize our expected return on our investment in these initiatives, we could experience a material adverse effect on our business, operational results, financial position and cash flows.
We may be unable to maintain our brand image, engage new and existing customers or gain market share.
Our success is largely dependent on our ability to maintain, enhance and protect our brand image and reputation and our 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, 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. Failure to achieve consistent, positive performance at several of our brands simultaneously could have an adverse effect on our sales and profitability.
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 brands, our reputation and customers’ perception of our brands could be negatively impacted. Damage to the brand image and reputation of the Company in any aspect of its operations could have a material adverse effect on our business, operational results, financial position and cash flows.
Our business depends on effective marketing, advertising and promotional programs.
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 of and service offered in our 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 increase their spending on marketing, advertising and promotional programs, if our marketing, advertising and promotional expenses increase, if our programs become less effective than those of our competitors, or if we do not adequately leverage technology and data analytic capabilities needed to generate concise and effective competitive insight, our business, operational results, financial position and cash flows could be adversely impacted.
We depend on key personnel in order to support our existing business and future initiatives and may not be able to retain or replace these employees, recruit additional qualified personnel or effectively manage succession.
In Fiscal 2019, the Company experienced a number of significant leadership changes, including appointing a new Chief Executive Officer, a new Interim Executive Chair of the Board and a new Chief Financial Officer and the departures of our President and Chief Operating Officer and Chief Human Resources Officer. Our success may be adversely impacted if we are not able to attract, retain and develop talent and future leaders, including our senior executives and associates. Our senior executive team closely supervises all major aspects of our business including the design, development, and procurement of merchandise; operation of our information technology platforms, supply chain, and store network; development and retention of critical talent; and financial planning, reporting and compliance. Our senior executive team has substantial experience and expertise in our retail business, and serves an integral role in the growth and support of our brands. In addition, several of our strategic objectives and initiatives require that we hire and/or develop associates with appropriate experience. If we were to lose the leadership of additional 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 these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business. Competition for such qualified talent is intense, and we cannot be sure we will be able to find suitable successors promptly, or at all, or to successfully integrate any successors, or that we will be able to attract, retain and develop a sufficient number of qualified individuals in future periods.
We are dependent on our vendors and factors for credit to acquire merchandise, and any disruption in our supply of merchandise would materially impact us.
Our business is dependent upon our ability to purchase merchandise at competitive terms through relationships with our vendors and their factors, as applicable, and we depend on our vendors to provide financing on our purchases of merchandise. Any significant change in vendor and factor financing or support could limit our ability to acquire desired merchandise at competitive prices or payment terms. In addition, any insolvency of our vendors or their inability to access liquidity could lead to their failure to deliver merchandise. Certain vendors finance their operations and reduce the risk associated with collecting accounts receivable by selling or “factoring” the receivables or by purchasing credit insurance or other forms of protection from loss, and the ability of vendors to do so is subject to the perceived credit quality of their customers. Our vendors’ ability to factor receivables or obtain credit protection in the future because of our perceived financial position and creditworthiness could be limited, which could reduce the availability of merchandise and increase the cost to us of the merchandise. Additionally, if we experience declining operating performance or liquidity challenges, vendors and their factors may seek protection against non-payment, such as accelerated payment terms, letters of credit and tighter limits on credit.
We have ongoing discussions with the vendor community and factors/third parties that offer various credit protection services to our vendors concerning our liquidity and financial position, including discussions regarding pricing, payment terms and ongoing
business arrangements. As of the date of this report, we have not experienced any significant disruption in our access to merchandise or our operations due to issues with our vendors. However, there can be no assurances that there will not be a disruption in the future, and such circumstances could have a material adverse effect on our business, financial condition and results of operations.
We rely on foreign sources of production and other international service providers.
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 nearly all of our merchandise from foreign sources, both directly in foreign markets 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:
financial or political instability or terrorist acts in any of the countries in which we operate, outsource services or acquire our merchandise, or through which our merchandise passes;
new and additional U.S. government initiatives may be proposed or implemented that may have an impact on the trading status of certain countries and may include retaliatory duties, tariffs 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;
fluctuations in the value of the U.S. Dollar against foreign currencies or higher inflation rates in these countries, or restrictions on the transfer of funds to and from foreign countries;
inability of our manufacturers to comply with local laws, including labor laws, health and safety laws or labor practices;
increased security and regulatory requirements and inspections applicable to imported goods;
enactment of tariffs, border adjustment taxes or increases in duties or quotas applicable to the merchandise we sell that could increase the cost and reduce the supply of products available to us;
impact of natural disasters, extreme weather, public health concerns or other catastrophes on our foreign sourcing offices and vendor manufacturing operations;
increased scrutiny in the U.S. of utilizing labor based in foreign countries;
delays in shipping due to port security or congestion issues, labor disputes or shortages, local business practices, vendor compliance with applicable import regulations or weather conditions;
violations under the U.S. Foreign Corrupt Practices Act (the “FCPA”) or similar laws or regulations by us, our subsidiaries or our local agents;
the adoption of new legislation or regulations in the U.S. or foreign countries that make it more difficult, more costly or impossible to continue our foreign activities;
violation of applicable laws or regulations; and
increased costs and/or capacities of transportation.
The future performance of our business depends on foreign suppliers and service providers, and may be adversely affected by the factors listed above, most 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 reductions anticipated from operating outside the U.S., decrease our efficiency or result in our inability to obtain sufficient quantities of merchandise.
We require our vendors, 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, and 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 one or more vendors, manufacturers or other service providers could have a negative impact on our reputation and our business, and could 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.
Changes in U.S. trade policies, including the imposition of tariffs and a potential resulting trade war, could have a material adverse impact on our business.
We source the majority of our merchandise from foreign countries, including Vietnam, Indonesia, China, India, Guatemala, Sri Lanka and Bangladesh, making the price and availability of our merchandise susceptible to international trade risks and other international conditions. In September 2018, the U.S. government implemented a 10% tariff on certain goods imported from China. In May 2019, these tariffs were increased to 25% and in October 2019, these tariffs are scheduled to be increased to 30%. In addition, the U.S. government has implemented tariffs on other goods from China.The imposition of such tariffs, or any future 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. The tariffs may in the future cause us to further increase prices to our customers which we believe may reduce demand for our products. Any such price increase may not be sufficient to fully offset the impact of the tariffs and result in lowering our margin on products sold. In addition, the current U.S. administration has indicated that it may withdraw the U.S. from the North American Free Trade Agreement (“NAFTA”) in order to encourage the U.S. Congress to vote on the ratification of the United States-Mexico-Canada Agreement (“USMCA”) which was signed in 2018 and which is intended to be the successor to NAFTA. If the current administration increases or implements additional tariffs, withdraws from NAFTA, the ratification and implementation of the USMCA is not completed promptly and effectively, or if additional tariffs or trade restrictions are implemented by the U.S. 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 U.S. 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 and U.S. economies, which in turn could have a material adverse effect on our business, operational results, financial position and cash flows.
Our business could suffer as a result of a third-party manufacturer’s inability to produce goods for us on time and to our specifications.
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 inability to 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.
We rely upon independent third-party transportation providers for substantially all of our merchandise shipments.
We currently rely primarily on one independent third-party transportation provider for substantially all of our merchandise shipments, including shipments to our stores and to the customer directly in the U.S., Canada and Puerto Rico through our direct channel. Our use of third-party delivery services for shipments is subject to risks, including increased fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact a shipper’s ability to provide delivery services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could adversely impact deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use, which could have a material adverse impact on our business, operational results, financial position and cash flows.
Our business could suffer a material adverse effect if our distribution or fulfillment centers were shut down, disrupted or fail to operate efficiently.
We operate three distribution and fulfillment centers to manage the receipt, storage, sorting, packing and distribution of our merchandise to the appropriate stores or to the customer directly through our direct 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. As a result of damage to, or prolonged interruption of, operations at any of these facilities, or with respect to our third-party transportation provider, 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, which in turn could have a material adverse effect on our business, operational results, financial position 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, there can be no assurance 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.
We also continue to explore ways to further optimize and leverage our integrated distribution network, which may include providing distribution and fulfillment services to third-party retailers. Any disruption of our distribution and fulfillment capabilities would also impact any third-party services we may provide in the future. There also can be no assurance that providing such distribution and fulfillment services to third parties would be successful or profitable for us.
Risks associated with direct channel sales.
The successful operation of our direct channel business depends on our ability to maintain the efficient and continuous operation of our websites and our associated fulfillment operations, and to provide a customer engaging shopping experience that will generate orders and return visits to our websites. Our direct channel services are subject to numerous risks, including:
system failures, including but not limited to, inadequate system capacity, human error, change in programming, website downtimes, system upgrades or migrations, Internet service or power outages;
cyber incidents, including but not limited to, security breaches and computer viruses;
reliance on third-party computer hardware/software fulfillment and delivery providers;
unfavorable federal or state regulations or laws;
violations of federal, state or other applicable laws, including those related to online privacy;
disruptions in telecommunication systems, power outages or other technical failures;
ability to anticipate and implement innovations in technology and logistics;
credit card fraud;
constantly evolving technology;
liability for online content;
challenges associated with recreating the in-store experience for our customers through our direct channels; and
natural or man-made disasters or adverse weather conditions.
Our failure to maintain efficient and uninterrupted order-taking and fulfillment operations or our failure to successfully address and respond to any one or more of these risks could damage the reputation of our brands and have a material adverse effect on our business, operational results, financial position and cash flows.
Our business could suffer if our information technology systems fail to operate effectively, are disrupted or are compromised.
Our 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 (including stores and direct channel services), 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. 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 appropriately 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 to damage or interruption from a variety of sources, including natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses, malicious 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.
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 assurance can be made that future disruptions, 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.
We are subject to cybersecurity risks and other risks associated with data security breaches, credit card fraud and identity theft, which may subject us to increased risk of liability and may cause us to incur increased expenses to mitigate our exposure or to address any such incidents.
During the course of our business, we obtain and transmit confidential customer, employee, vendor and Company information through our information technology systems, and we are subject to numerous laws, rules and regulations in the United States (both federal and state) and foreign jurisdictions to protect both individual identifiable information as well as personal health information. The protection of customer, employee, vendor and Company data is critical to our business. The regulatory environment surrounding information security and privacy is demanding, with frequent changes in requirements and heightened public awareness and scrutiny.
Our business and that of our third-party service providers employ systems and websites that allow us to process credit card transactions containing personally identifiable information ("PII"), perform online direct channel and social media activities, and store and transmit proprietary or confidential customer, employee, job applicant and other personal confidential 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, reputational harm, 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. We, our customers and our third-party service 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 stolen access credentials, malware, ransomware, phishing, denial of service and other types of attacks. These types of cyber-attacks are becoming more prevalent, have 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, train employees, engage 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 customer, job applicant or employee information, repairing system damage or providing credit monitoring or other benefits to affected customers, 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 becoming obsolete.
In addition, data and security breaches can also occur as a result of non-technical issues, including breaches by us or by our third-party service providers that result in the unauthorized release of personal or confidential information, employee error or malfeasance, faulty password management or other irregularities that may result in a defeat of our or our third-party providers’ security measures. We are also exposed to risks and costs associated with customer payment methods, including credit card fraud and identify theft, which may cause us to incur unexpected expenses and loss of revenues.
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, and 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 business, operational results, financial position and cash flows.
As we transition certain Human Resources and Finance functions to an externally managed service provider, we will become more dependent on the third-party performing these functions.
As part of our long-term strategy, we look for opportunities to cost-effectively enhance the capability of our business services. In some cases, this requires that we outsource certain services and/or functions to external third-party providers, as more fully described in Note 6 to the accompanying consolidated financial statements. While we believe we conduct appropriate due diligence before entering into agreements with these third parties, the failure of any of these third parties to provide the expected services on a timely basis, at the level of quality expected, or at the prices/savings expected could disrupt or harm our business. Any significant interruption in the operations of these service providers, over which we have no control, could also have an adverse effect on our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely or cost-effective basis on terms favorable to us.
Any further impairment to the carrying value of our goodwill or other intangible assets could result in significant non-cash charges and could have a material adverse effect on our operational results.
Under generally accepted accounting principles, identifiable intangible assets with an indefinite useful life, including goodwill, are not amortized, but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. As of August 3, 2019, we had approximately $590 million of goodwill and other intangible assets related to the acquisitions of Justice in November 2009, Lane Bryant and Catherines in June 2012 and ANN in August 2015. Current and future economic conditions, as well as the other risks noted in this Item 1A, may adversely impact our brands' ability to attract new customers, retain existing customers, maintain sales volumes and maintain margins. As discussed in our Critical Accounting Policies included elsewhere in this report, these events could materially reduce our brands' profitability and cash flows which could, in turn, lead to a further impairment of our goodwill and other intangible assets. Furthermore, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. Additionally, declines in our stock price, or the fair value of our term loan debt, could also be deemed to be triggering events, which would require an evaluation of goodwill and intangible assets. As described in Note 5 to the accompanying consolidated financial statements included herein, in Fiscal 2019 and Fiscal 2017, we recorded impairment charges of $276.0 million and $596.3 million, respectively, related to goodwill and $134.9 million and $728.1 million, respectively, related to other intangible assets. No impairments related to goodwill and other intangible assets were recorded in Fiscal 2018. There can be no assurance that we will not experience further impairment charges with respect to goodwill or other intangible assets in future periods. Any future impairment could have a material adverse effect on our operational results.
We may be unable to protect our trademarks and other intellectual property rights.
We believe that our core trademarks and service marks, as described in Item 1. Business, are essential 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, 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.
We may suffer negative publicity and our business may be harmed if we need to recall any product we sell or if we fail to comply with applicable product safety laws.
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 foreign regulatory authorities. Although our practice is to test (or have our suppliers test) the products sold in our brands’ stores and on our brands’ websites for compliance with applicable mandatory and industry standards, 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, non-compliance with standards, 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 and future requirements of federal, state or foreign 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.
We depend on strip shopping center and mall traffic and our ability to identify suitable store locations.
Our ability 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 could have a material adverse effect on customer traffic and our operational results. In order to leverage customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable consumer locations, however competition for such suitable store locations is intense.
In addition, continued consolidation in the commercial 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 a few 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 in turn could have a material adverse effect on our business, operational results, financial condition and cash flows.
Capital Risks
We have incurred significant additional indebtedness with significant payment obligations in connection with the ANN Acquisition, INC. acquisition, which could adversely affect us.
We substantially increased our indebtedness in connection with the completionacquisition of the ANN (the "ANN Acquisition,Acquisition") as described in Note 10 to the accompanying consolidated financial statements, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and further increasing our interest expense. We also incurred various costs and expenses associated with our financings. The amount of cash flows required to pay interest on our increased indebtedness, levels resulting from the ANN Acquisition, and thus the demands on our cash resources, will be greater than the amount of cash flows required to service our indebtedness prior to the transaction. The increased levels of indebtedness could alsomay reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savingsreductions from the acquisition or from our cost reduction initiatives, or if theour financial and operating performance of the combined company does not meet current expectations, our ability to service our indebtedness may be adversely impacted.
TheOur indebtedness incurred in connection with the acquisition bears interest at variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our operational results and cash flows. In March 2019, we entered into an interest rate swap designed to mitigate some of the risk associated with our variable rate debt. Refer to Item 7 "Interest Rate Risk Management" for more information.
In addition, our credit ratings affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. In connection with the debt financing, we received ratings from S&P and Moody’s. There can be no assurance that we will maintain particular ratings, or that we will not be subject to further downgrades, in the future.
Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures or acquisitions or for other general corporate requirements. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We cannot be assured that we will be able to obtain additional financing on terms acceptable to us or at all.
To service our indebtedness, after the ANN Acquisition,and to fund capital expenditures and other initiatives, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.
We currently have substantial indebtedness. Our ability to make cash payments on our indebtedness, as a result of the ANN Acquisition, 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 flowflows in the future, which is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that will beare beyond our control.control, as well as the successful execution of our transformational initiatives.
Our business may not generate sufficient cash flowflows 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 investments. Any such action, if necessary, may not be effected on commercially reasonable terms, within the timing needed, or at all. The instruments governing our indebtedness may restrict our ability to sell assets and our use of the proceeds from such sales.
If we are unable to generate sufficient cash flowflows 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.
Our Amended Revolving Credit Agreementamended revolving credit agreement and our Term Loanterm loan contain various covenants that impose restrictions on the Company and certain of its subsidiaries that may affect their ability to operate their businesses.
The Amended Revolving Credit Agreementamended revolving credit agreement and the Term Loanterm loan contain various affirmative and negative covenants that, may, subject to certain exceptions, restrict the ability of the Company and certain of its subsidiaries to, among other things, incur debt, have liens on their property, change the nature of their business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of their assets to any one person.person and also, under certain conditions, restrict our ability to pay dividends, repurchase common shares and make other restricted payments as defined in our borrowing agreements. In addition, the agreements that govern the financings containamended revolving credit agreement contains a financial covenantscovenant that, under certain circumstances, will require the Company to maintain compliance with certain financial ratios. The ability of the Company and its subsidiaries to comply with these provisions may be affected by our operating results as well as events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, couldwould give our lenders thereunder the ability to accelerate the Company’s repayment obligations.obligations and exercise other remedies.
InabilityA further downgrade in our credit rating could negatively impact our cost of and ability to access capital and could increase interest expense.
We receive credit ratings from the major credit rating agencies in the United States, which periodically review our capital structure and the quality and stability of our earnings. Our credit ratings may be impacted by certain factors, including debt levels, planned asset purchases or sales, near-term and long-term growth opportunities, liquidity, asset quality, cost structure, and product mix. In Fiscal 2019, the credit rating on certain of our outstanding debt instruments was downgraded and further downgrades may occur in the future. A deterioration in our capital structure or the quality and stability of our earnings could result in a further downgrade of our credit rating. Negative ratings actions could constrain the capital available to us or our industry, could limit our ability to access capital required to fund our operations at rates and on terms we determine to be attractive, or at all, and could likely cause our interest rates to increase. If our ability to access capital becomes constrained, it could negatively impact the Company's business, operational results, financial position and cash flows. Additionally, further changes to our credit rating could affect our future interest costs.
We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.
As of August 3, 2019 we had outstanding approximately $1,371.5 million of variable debt that is indexed to the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR rates by the end of 2021. It is unclear whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021, or whether any alternative reference rate will attain market acceptance as a
replacement for LIBOR. It is not possible to predict the further effect of the rules of the FCA, any changes in the methods by which LIBOR is determined or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or elsewhere. Any such developments may cause LIBOR to perform differently than in the past, or cease to exist. In addition, any other legal or regulatory changes made by the FCA, the European Commission or any other successor governance or oversight body, or future changes adopted by such body, in the method by which LIBOR is determined or the change from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination, and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. dollar LIBOR rate is unavailable after 2021, the interest rates on our debt which are indexed to LIBOR will be determined using an alternative method, which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S. dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the discontinuation or unavailability of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences could have a material adverse effect on our financing costs.
Our inability to access the credit or capital markets could adversely affect the Company's business, operational results, financial position or cash flows.
Changes in the credit and capital markets, including market disruptions, 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 $600 million Amended and Restated Credit Agreementamended revolving credit agreement, will be adequate to satisfy our capital needs for at least the foreseeable future,next twelve months, 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 cash on deposit at these financial institutions.
Legal and Regulatory Risks
Our inability to comply with the continued listing requirements of the Nasdaq Global Select Stock Market could result in our common stock being delisted, which would adversely affect the market price and liquidity of our securities and could have other material adverse effects.
On July 29, 2019, we received a letter from the Listing Qualifications staff of Nasdaq (the “Notification Letter”), indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer meets the requirement of the Nasdaq Global Select Market to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1).
The Notification Letter does not impact our listing on The Nasdaq Global Select Market at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until January 27, 2020, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to transfer to the Nasdaq Capital Market and seek an additional compliance period of 180 calendar days if we (i) meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and (ii) provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, including by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that we will not be eligible for the additional compliance period and our common stock will be subject to delisting. We would then be entitled to appeal the determination to a Nasdaq Listing Qualification Panel and request a hearing. We are considering our available options to regain compliance, including whether to effect a reverse stock split. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other Nasdaq listing requirements. If we do not regain compliance with Nasdaq continuing listing requirements, our common stock will be delisted from the Nasdaq Global Select Market (or Nasdaq Capital Market, if applicable) and it could be more difficult to buy or sell our securities and to obtain accurate quotations, and the price of our common stock
could suffer a material decline. In addition, a delisting would impair our ability to raise capital through the public markets, could deter broker-dealers from making a market in or otherwise seeking or generating interest in our securities and might deter certain institutions and persons from investing in our securities at all, any of which could have a significant negative impact on our business, operational results, financial position and cash flows.
Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations.
We are subject to income taxes in many U.S. and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes (“VAT”) in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations. Fluctuations in duties could also have a material impact on our financial condition, results of operations or cash flows. In some international markets, we are required to hold and submit VAT to the appropriate local tax authorities. Failure to correctly calculate or submit the appropriate amounts could subject us to substantial fines and penalties that could have an adverse effect on our financial condition, results of operations or cash flows. In addition, tax law may be enacted in the future, domestically or abroad, that impacts our current or future tax structure and effective tax rate. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act made broad and significantly complex changes to the U.S. corporate income tax system. Given the complexities associated with the Act, the estimated financial impact for Fiscal 2018was provisional and subject to further analysis, interpretation and clarification. In addition, the U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies could interpret or issue guidance in the future on how provisions of the Act will be applied or otherwise administered that differs from our interpretations and could result in changes to our assessment. SEC Staff Accounting Bulletin No. 118 (“SAB 118”) requires that the Company finalize its estimate of the impact of the Act by December 22, 2018. In the second quarter of Fiscal 2019, we finalized our assessment of the impact of the Act taking into account the published guidance and recorded the additional cost in the quarter. Refer to Note 15 to the accompanying consolidated financial statements for further discussion.
In June 2018, the U.S. Supreme Court ruled that states and local jurisdictions may require remote vendors to collect and remit sales tax on goods sold to buyers in the state, even if the seller has no physical presence in the state. A number of states have already begun, or have prepared to begin, requiring sales and use tax collection by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements vary from state to state. We are in the process of determining how and when our collection practices will need to change in certain jurisdictions. In the event we are required to collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect taxes, we could incur significant tax liabilities, including taxes on past sales, penalties and interest, which could negatively affect the Company's business, operational results, financial position and cash flows.
Our business may be affected by other regulatory, administrative and litigation developments.
Laws and regulations at the local, state, federal and international levels frequently change, and the ultimate cost of compliance cannot be reasonably estimated. In addition, we cannot predict the impact that may result from regulatory or administrative changes. Changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and marketing practices, product safety, transportation and logistics, healthcare, tax, accounting, privacy, operations or environmental issues, among others, could have an adverse impact on our business, operational results, financial position and cash flows.
While it is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will at all times comply with all such legal and regulatory requirements. A finding that we or our vendors or agents are out of compliance with applicable laws and regulations could subject us to civil remedies or criminal sanctions, which could have a material adverse effect on our business, reputationoperational results, financial position and stock price.cash flows. In addition, even the claim of a violation of applicable laws or regulations could negatively affect our reputation.
We are also involved from time to time in litigation, claims and assessments arising primarily in the ordinary course of business. Litigation matters may include, among other things, employment, commercial, intellectual property, advertising or shareholderstockholder claims, and any adverse decision in any such litigation or disputes could adversely impact our business, operational results, financial position and cash flows. Resolution of these matters can be prolonged and costly, and the ultimate resolutions are uncertain due to the inherent uncertainty in such proceedings. Moreover, our potential liabilities are subject to change over time due to new
developments, changes in settlement strategy or the impact of evidentiary requirements. While we maintain insurance for certain risks, it is not possible to obtain insurance to protect against all our operational risks and liabilities. Accordingly, in certain instances, we may become subject to or be required to pay damage awards or settlements that could have a material adverse effect on our results of operations, financial position, and cash flows. Certain of these proceedings could also have a negative impact on the Company's reputation or relations with its employees, customers or other third parties.
Regulation in the areas of privacy, data protection and information security could increase our costs and affect or limit our business opportunities and how we collect and/or use data.
As privacy, data protection and information security laws, including data localization laws, are interpreted and applied, compliance costs may increase, particularly in the context of providing adequate data protection and adequate data transfer mechanisms and addressing consumer rights to access and delete data. The United States, other countries in which we operate, and various states and other local jurisdictions are increasingly adopting or revising privacy, data protection and information security laws that could have significant impact on our current and planned data and information security-related practices, our collection, use, sharing, retention and safeguarding of customer and/or employee information, and some of our current or future business plans. New legislation or regulation, and the interpretation and application of existing laws and regulations, could increase our costs of compliance, technology and business operations, and could reduce revenues from certain business initiatives. Moreover, the application of existing or new laws to existing technology and practices can be uncertain and may lead to additional compliance risk and cost.
In recent years, there has been increasing regulatory enforcement and litigation activity in the area of privacy, data protection and information security in the United States and in various other countries in which we operate. Any failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, ongoing regulatory monitoring, increased reporting of compliance and security breaches, a mandated chief privacy officer or other structural changes to the organization, or other compliance requirements, and/or customer attrition, any of which could have a material adverse impact on our business, operational results, financial position and cash flows.
In 2016, the European Union (“EU”) adopted a comprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic Area Privacy Regulation, the General Data Protection Regulation ("GDPR"), which went into effect on May 25, 2018. The GDPR generally expands the scope of EU data protection law to foreign companies processing personal data of EU residents and imposes a strict data protection compliance regime, including new security breach notice obligations, with significant monetary penalties. There remain significant questions about the precise scope and application of the GDPR and the proposed EU ePrivacy Regulation that may affect our online marketing practices. Development, implementation, modification, and maintenance of compliance protocols for the GDPR and similar emerging and changing privacy and data protection requirements may cause us to incur substantial costs and may require us to change our business practices, which could have a material adverse impact on our business, operational results, financial position and cash flows.
In 2018, the state of California enacted the California Consumer Privacy Act (the “CCPA”), which provides significant rights to California consumers and greatly increases legally-mandated compliance obligations on companies, including providing consumers with access, deletion and opt-out rights. Complying with the CCPA and similar emerging and changing regulation by other states or the federal government may cause us to incur substantial costs and may require us to change our business practices, which could have a material adverse impact on our business, operational results, financial position and cash flows.
Increases in labor costs related to changes in employment laws or regulations could impact our business, operational results, financial position and cash flows.
Various foreign and domestic labor laws govern our relationship with our employees and affect our operating costs. These include minimum wage requirements, overtime and sick pay, paid time off, work scheduling, healthcare reform and the Patient Protection and Affordable Care Act (“ACA”), unemployment tax rates, workers’ compensation rates, and union organizations. A number of factors could adversely affect our operating costs, including additional government-imposed increases in minimum wages, overtime
and sick pay, paid leaves of absence and mandated health benefits, and changing regulations from the National Labor Relations Board or other agencies. Additionally, recent political changes could lead to the repeal of, or changes to, some or all of the ACA. Complying with any new legislation and/or reversing changes implemented under the ACA could be time-intensive and expensive and could have a material adverse impact on our business, operational results, financial position and cash flows.
Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact our business, the price of our common stock and market confidence in our reported financial information.
We must continue to document, test, monitor and enhance our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We cannot be assured that our disclosure controls and procedures and our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act will prove to be adequate in the future. Any failure to maintain the effectiveness of our disclosure controls or our internal control over financial reporting or to comply with the requirements of the Sarbanes-Oxley Act could have a material adverse impact on our business, operational results, financial position and cash flows.
Changes to accounting rules and regulations may adversely affect our operational results, financial position and cash flows.
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. SeeRefer to Note 4 “Recently Issued Accounting Standards,” into the Notes to our Consolidated Financial Statements included herein for a description of recently issued accounting pronouncements,accompanying consolidated financial statements and “Critical Accounting Policies,”Policies” included herein which discussesdiscuss accounting policies considered to be important to our operational results and financial condition. These and other future changes to accounting rules or regulations could have an adverse impact on our business, operational results, financial position and cash flows.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Retail Store Space
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 approximatelyup to ten years, although certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. Just oversatisfied, providing us greater flexibility to close under-performing stores. Over half of our leases have terms that either expire, or have upcoming lease action dates available to us within the next two years. As a result, our median lease life is approximately two years, as ofwhich provides us the end of Fiscal 2017, which will allow usopportunity to aggressively negotiate new lease terms and continuewhile continuing to shorten our overall portfolio average lease life.
The table below, covering all open store locations leased by us on July 29, 2017,August 3, 2019, indicates the number of leases expiring during the period indicated and the number of expiring leases with and without renewal options:
| | | Fiscal Years | | Leases Expiring | | Number with Renewal Options | | Number without Renewal Options | | Leases Expiring | | Number with Renewal Options | | Number without Renewal Options |
| 2018 | | 1,031 | | 320 | | 711 | |
| 2019 | | 799 | | 446 | | 353 | |
| 2020 | | 540 | | 311 | | 229 | | 861 | | 106 | | 755 |
| 2021 | | 469 | | 265 | | 204 | | 684 | | 274 | | 410 |
| 2022 | | 575 | | 221 | | 354 | | 581 | | 193 | | 388 |
| 2023 and thereafter | | 1,393 | | 645 | | 748 | |
| 2023 | | | 455 | | 192 | | 263 |
| 2024 | | | 334 | | 128 | | 206 |
| 2025 and thereafter | | | 530 | | 228 | | 302 |
| Total | | 4,807 | | 2,208 | | 2,599 | | 3,445 | | 1,121 | | 2,324 |
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
operating leases in effect at July 29, 2017August 3, 2019 and excluding locations acquired after July 29, 2017,August 3, 2019, are approximately $585.1$462.0 million for Fiscal 2018.2020. In addition, we are typically responsible under our store leases for our pro rata share of maintenance expenses and common area charges in strip shopping centers, lifestyle centers, outlet centers and enclosed malls.
Certain of the store leases have termination clauses, providing us greater flexibility to close under-performing stores. In particular, certain leases have termination clauses during the first few years of the lease if certain specified sales volumes are not achieved. In addition, others leases provide co-tenancy requirement clauses allowing us to terminate if they are not being met.
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.
Corporate Office Space
The Company owns the following facilities:
a 202,000 square foot campus which serves as the corporate office for the dressbarn brand and for ascena located in Mahwah, NJ;
a 280,000 square foot campus which serves as the corporate office for the Justice brand, located in New Albany, Ohio;
a 145,000202,000 square foot buildingcampus which serves as the corporate office for the CatherinesDressbarn brand and for ascena located in Bensalem, Pennsylvania;Mahwah, NJ;
a 200,000 square foot building in Duluth, Minnesota, the majority of which is subject to a lease to maurices which, as discussed earlier, was sold in May 2019. The building also serves as the corporate office for the maurices brand and for a portion of the Company's brand services operations, located in Duluth, Minnesota;operations; and
a 168,000 square foot building which serves as the corporate office for the majority of the Company's brand services operations, located in Etna Township, Ohio, adjacent to our distribution center.
The Company acquired leased corporate office facilities of approximately 308,000 square feet in New York City, NY and approximately 42,000 square feet in Milford, CT through the ANN Acquisition. The Company also leases approximately 135,000 square feet in Columbus, Ohio that serves as Lane Bryant’s and Catherinescorporate headquarters.
Internationally, the Company owns office space in Hong Kong and leases office space in Shanghai, China, and Seoul,leases office space in South Korea, to support our sourcing operations.India and Bangladesh.
Distribution and Fulfillment Facilities
The Company owns a 903,000 square foot fulfillment center in Greencastle, Indiana, which serves as the Company's primary direct channel fulfillment center, and a 695,000 square foot distribution center in Etna Township, Ohio, which serves as the Company's primary brick-and-mortar store distribution center.
The CompanyEtna facility also owns a 903,000 square foot fulfillment center in Greencastle, Indiana, which serves as the Company's primary ecommerce fulfillment center.is used to fulfill direct channel orders.
DuringIn Fiscal 2016, the Company entered into a ten-year lease for a 583,000 square foot distribution center in Riverside, California to serve as the receiving and west coast distribution hub for the Company's merchandise sourced from Asia. The Riverside facility began operations in March 2017.2017 and operates as a multichannel distribution facility.
During Fiscal 2016, as a result of the ANN Acquisition, the Company acquired a 256,000 square foot distribution center in Louisville, Kentucky. The Company has substantially completed the transition out of the distribution center and expects to sell the facility in the Fall of calendar 2017.
Item 3. Legal Proceedings.
Information regarding legal proceedings is incorporated by reference from Note 1516 to the accompanying consolidated financial statements.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Prices of Common Stock
The common stock of ascena retail group, inc.Ascena Retail Group, Inc. is quoted on the NASDAQNasdaq Global Select Market under the ticker symbol “ASNA.”
The table below sets forth the high and low prices as reported on the NASDAQNasdaq Global Select Market for the last eight fiscal quarters.
| | | | | Fiscal 2017 | | Fiscal 2016 | | Fiscal 2019 | | Fiscal 2018 |
| Fiscal | | High | | Low | | High | | Low | | High | | Low | | High | | Low |
| First Quarter | | $9.02 | | $4.75 | | $14.20 | | $10.73 | | $5.29 | | $3.46 | | $2.67 | | $1.69 |
| Second Quarter | | $8.11 | | $4.70 | | $13.98 | | $7.56 | | $4.55 | | $2.25 | | $2.69 | | $1.85 |
| Third Quarter | | $5.41 | | $3.64 | | $11.06 | | $6.48 | | $2.73 | | $0.97 | | $2.50 | | $1.79 |
| Fourth Quarter | | $3.91 | | $1.72 | | $9.44 | | $6.59 | | $1.50 | | $0.31 | | $4.74 | | $2.01 |
Number of Holders of Record
As of September 21, 2017,October 8, 2019, we had approximately 4,4144,297 holders of record of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock. However, payment of dividends is within the discretion of, and are payable only when declared by our Board of Directors. PaymentsAdditionally, payments of dividends are limited by our borrowing arrangements as described in Note 1210 to the accompanying consolidated financial statements.
Performance Graph
The following graph illustrates, for the period from July 28, 201227, 2014 through July 29, 2017,August 3, 2019, the cumulative total shareholder return of $100 invested (assuming that all dividends, if any, were reinvested) in (1) our common stock, (2) the S&P Composite-500 Stock Index and (3) the S&P Specialty Apparel Retailers Index.
The comparisons in this table are required by the rules of the SEC and, therefore, are not intended to forecast, or be indicative of, possible future performance of our common stock.
Securities Authorized for Issuance under Equity Compensation Plans
The information set forth in Item 12 of Part III of this Annual Report on Form 10-K is incorporated by reference herein.
Issuer Purchases of Equity Securities
The following table provides information about the Company’s repurchases of common stock during the quarter ended July 29, 2017.August 3, 2019.
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(a) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (a) | |
| | | | | | | | | | | | | |
Month # 1 (April 30, 2017(May 5, 2019 – May 27, 2017)June 1, 2019) | | | — | | | $— | | | — | | | $181 million | |
Month # 2 (May 28, 2017(June 2, 2019 – July 1, 2017)6, 2019) | | | — | | | $— | | | — | | | $181 million | |
Month # 3 (July 2, 20177, 2019 – July 29, 2017)August 3, 2019) | | | — | | | $— | | | — | | | $181 million | |
(a) InOn December 15, 2015, the Company’s Board of Directors authorizedannounced a $200 million share repurchase program (the “2016 Stock Repurchase Program”). Under the 2016 Stock Repurchase Program, purchases of shares of common stock may be made at the Company’s discretion from time to time, subject to overall business and market conditions. Currently, share repurchases in excess of $100 million are subject to certain restrictions under the terms of the Company's borrowing agreements, as more fully described in Note 1210 to the accompanying consolidated financial statements. Purchases, if any, will be made at prevailing market prices, through open market purchases or in privately negotiated transactions and will be subject to applicable SEC rules. No shares were repurchased under the 2016 Stock Repurchase Program in Fiscal 2017, Fiscal 2018 or Fiscal 2019.
Item 6. Selected Financial Data.
ThisThe following table sets forth selected historical financial information as of the dates and for the periods indicated.
The consolidated statement of operations data for each of the three fiscal years in the period ended August 3, 2019 has been derived from, and should be read in conjunction with, Item 7 —the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated statement of operations data for the fiscal years ended July 30, 2016 and July 25, 2015 has been derived from consolidated financial statements which have been recast to present "Management's Discussion and Analysis of Financial Condition and Results of Operations"maurices and Item 8 — "Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K. Historicalas a discontinued operation. The historical results mayare not benecessarily indicative of the results to be expected in any future results.period.
The consolidated balance sheet data as of August 3, 2019 and August 4, 2018 has been derived from, and should be read in conjunction with, the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated balance sheet data as of July 29, 2017, July 30, 2016 and July 25, 2015 has been derived from consolidated financial statements which have been recast to present maurices as a discontinued operation.
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended(a) |
| | August 3, 2019 (c) | | August 4, 2018 | | July 29, 2017 (c) | | July 30, 2016 (b) | | July 25, 2015 (c) |
| | (millions, except for share data) |
| Statement of Operations Data: | |
| Net sales | $ | 5,493.4 |
| | $ | 5,566.4 |
| | $ | 5,617.3 |
| | $ | 5,894.1 |
| | $ | 3,742.3 |
|
| Restructuring and other related charges | (127.7 | ) | | (76.6 | ) | | (78.1 | ) | | — |
| | — |
|
| Impairment of goodwill | (276.0 | ) | | — |
| | (489.1 | ) | | — |
| | (261.7 | ) |
| Impairment of other intangible assets | (134.9 | ) | | — |
| | (728.1 | ) | | — |
| | (44.7 | ) |
| Acquisition and integration expenses | — |
| | (5.4 | ) | | (39.4 | ) | | (77.4 | ) | | (32.8 | ) |
| Depreciation and amortization expense | (299.9 | ) | | (323.5 | ) | | (350.8 | ) | | (323.8 | ) | | (184.7 | ) |
| Operating loss | (681.4 | ) | | (88.9 | ) | | (1,334.3 | ) | | (80.9 | ) | | (411.2 | ) |
| Loss from continuing operations | (782.3 | ) | | (143.0 | ) | | (1,068.0 | ) | | (120.2 | ) | | (346.0 | ) |
| | | | | | | | | | |
| Net loss per common share - continuing operations: | | | |
| | |
| | |
| | |
|
| Basic | $ | (3.96 | ) | | $ | (0.73 | ) | | $ | (5.48 | ) | | $ | (0.63 | ) | | $ | (2.13 | ) |
| Diluted | $ | (3.96 | ) | | $ | (0.73 | ) | | $ | (5.48 | ) | | $ | (0.63 | ) | | $ | (2.13 | ) |
| | | | | | | | | | |
Balance sheet data (d): | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | 328.0 |
| | $ | 231.0 |
| | $ | 306.3 |
| | $ | 363.4 |
| | $ | 230.1 |
|
| Working capital | 356.8 |
| | 188.4 |
| | 150.5 |
| | 194.2 |
| | 212.6 |
|
| Total assets | 2,699.8 |
| | 3,169.2 |
| | 3,427.6 |
| | 4,931.4 |
| | 2,343.3 |
|
| Total debt | 1,338.6 |
| | 1,328.7 |
| | 1,538.1 |
| | 1,648.5 |
| | 106.5 |
|
| Total equity | 151.0 |
| | 798.5 |
| | 821.0 |
| | 1,863.3 |
| | 1,518.1 |
|
________
(a) Fiscal 2018 and Fiscal 2016 consisted of 53 weeks, which resulted in incremental revenue of approximately $94.8 million in Fiscal 2018 recognized across all segments and $64.4 million in Fiscal 2016 reflected at all segments except our Premium Fashion segment. Fiscal 2019, Fiscal 2017 and Fiscal 2015 each consisted of 52 weeks.
(b) Fiscal 2016 included the results of our Premium Fashion segment for the post-acquisition period from August 22, 2015 to July 30, 2016 and reflected a non-cash purchase accounting expense of approximately $126.9 million related to the amortization of the write-up of inventory to fair market value recorded at our Premium Fashion segment.
(c) Fiscal 2019 included non-cash impairments of goodwill and other intangible assets by segment as follows: $75.3 million of intangible assets at the Premium Fashion segment, $115.1 million of goodwill and $43.0 million of other intangible assets at the Plus Fashion segment, and $160.9 million of goodwill and $16.6 million of other intangible assets at the Kids Fashion segment. Fiscal 2017 included non-cash impairments of goodwill and other intangible assets by segment as follows: $428.9 million of goodwill and $566.3 million of other intangible assets at the Premium Fashion segment and $60.2 million of goodwill and $161.8 million of other intangible assets at the Plus Fashion segment. A Fiscal 2017 goodwill impairment at our Value Fashion segment of $107.2 million has been excluded from the table as it is included within income from discontinued operations in the accompanying consolidated statements of income. Fiscal 2015 included non-cash impairment charges of $261.7 million of goodwill and $44.7 million of other intangible assets at the Plus Fashion segment. Refer to Note 5 to the accompanying consolidated financial statements for additional information.
(d) Excludes balances related to discontinued operations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto, which are included elsewhere in this Annual Report on Form 10-K for Fiscal 20172019 (“Fiscal 20172019 10-K”). Fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period ("Fiscal 2019"). Fiscal year 2018 ended on August 4, 2018 ("Fiscal 2018") and reflected a 53-week period as the Company conformed its fiscal period ends to the calendar of the National Retail Federation; Fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”); fiscal year 2016 ended on July 30 2016 and reflected a 53-week period (“Fiscal 2016”); and fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015”). All references to “Fiscal 2018” refer to our 53-week2020” reflect a 52-week period that will end on August 4, 2018.1, 2020.
INTRODUCTION
MD&A is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our operational results, financial condition, liquidity and changes in financial condition. MD&A is organized as follows:
Overview. This section includes recent developments, our objectives and risks, and a summary of our financial performance for Fiscal 2017. In addition, this section includes a discussion of transactions affecting comparability that we believe are important in understanding our operational results and financial condition, and in anticipating future trends.2019.
Results of operations. This section provides an analysis of our operational results for Fiscal 2017,2019, Fiscal 20162018 and Fiscal 2015.2017.
Financial condition and liquidity. This section provides an analysis of our cash flows for Fiscal 2017,2019, Fiscal 20162018 and Fiscal 2015,2017, as well as a discussion of our financial condition and liquidity as of July 29, 2017.August 3, 2019. The discussion of our financial condition and liquidity includes (i) our available financial capacity under our revolving credit agreement, (ii) a summary of our capital spending, and (iii) a summary of our contractual and other obligations as of July 29, 2017.August 3, 2019.
Market risk management. This section discusses how we manage our risk exposures related to interest rates, foreign currency exchange rates and our investments, as well as the underlying market conditions as of July 29, 2017.August 3, 2019.
Critical accounting policies. This section discusses accounting policies considered to be important to our operational results and financial condition, which require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 3 to our accompanying consolidated financial statements.
Recently issued accounting pronouncements. This section discusses the potential impact to our reported operational results and financial condition of accounting standards that have been recently issued.
OVERVIEW
Our Business
ascena retail group, inc.Ascena Retail Group, Inc., a Delaware corporation, (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls. On August 21, 2015, as more fully described in Note 5 to the accompanying consolidated financial statements, the Company acquired ANN INC. ("ANN"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands (the "ANN Acquisition"). The results of ANN are represented by our Premium Fashion segment. The Company hadgirls with annual revenue of approximately $6.6$5.5 billion for Fiscal 2017. The Company2019. We and itsour subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
Objectives and Initiatives
Our performance is subjectRetailers, especially those in the specialty apparel sector, continue 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.
During the latter half of Fiscal 2017, the U.S. economy continued to show signs of recovery. However, improved employment and wage growth have not translated into higher spending in nondurable goods,face intense competition, particularly as consumer spending continueshabits continue to shift towards experiences, services, health careindicate an increasing preference to purchase digitally as opposed to in traditional brick-and-mortar retail stores. This preference has resulted in increased direct channel sales, but has continued to put pressure on our retail store sales. As a result of these fundamental changes, we are continuing our previously announced strategic review of our brands and durable goodsoperations with the goal to enhance shareholder value. We believe that such as home improvements. Brick-and-mortar retailers, particularly thosestructural and strategic changes are necessary to successfully compete in the changing retail landscape.
To that end, over the past few years, the Company has undergone an extensive transformation of its business. The more significant of these initiatives are described below.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Structural-related transformation
On May 6, 2019, the Company and Maurices Incorporated, a Delaware corporation (“maurices”) and wholly owned subsidiary of ascena, completed the transaction contemplated by the previously-announced Stock Purchase Agreement with Viking Brand Upper Holdings, L.P., a Cayman Islands exempted limited partnership (“Viking”) and an affiliate of OpCapita LLP, providing for, among other things, the sale by ascena of maurices to Viking (the “Transaction”). Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the specialty retail sector, continued to face intense competitionoperations of maurices, consisting of interests in Viking preferred and channel disruption which accelerated during the third quarter. common stock.
In addition, consumer spending habits continueon May 20, 2019, the Company announced its plan to shift on an accelerated pace towards an increasing preferencewind down its Dressbarn brand. The wind down is currently expected to purchase merchandise digitally as opposed tobe completed in traditional brick-and-mortar retail stores.the first half of Fiscal 2020. As a result store traffic remained relatively weak and inconsistent during Fiscal 2017. Store traffic declines pressured comparable sales which, in turn, resulted in a more promotional operating environment. We expect store traffic headwinds and the promotional operating environment to continue into Fiscal 2018. We have responded to the continued trends by scaling back overall spending levels and continuously refining our operating model to ensure we remain competitive in our rapidly evolving sector. The more significant of these initiatives are described below.actions, once the wind down of Dressbarn is complete, the Company will have exited its Value Fashion segment.
Change for Growth ProgramOn May 1, 2019 the Company announced changes to its senior leadership team. These changes included the retirement of the Company's Chief Executive Officer, the departure of the Company's Chief Operating Officer, as well as the appointment of a new Chief Executive Officer and Interim Executive Chair of the Board. On August 4, 2019 the Senior Vice President, Finance and Chief Accounting Officer, was promoted to Executive Vice President and Chief Financial Officer upon the resignation of the former Executive Vice President and Chief Financial Officer. We believe that these changes will continue to support our structure-related transformation activities as the new management team seeks additional ways to optimize our brand portfolio and extensive distribution framework which will allow us to better compete in the changing retail landscape.
Operational-related transformation
During the first quarter of Fiscal 2017, the Company initiatedannounced 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 connection withActions completed under this long-term transformation focused on (i) refinements to the program, the Company (i) refined itsCompany's operating model by eliminating a number of executive positions and making organizational changes resulting into increase the creation of the Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion operatingfocus on key customer segments, (ii) further consolidateddeveloping initiatives designed to optimize the flow of product through the Company's distribution channels, including its direct channel and its brick-and-mortar retail locations, including areas related to markdown optimization, size pack optimization and localized inventory planning, (iii) consolidating certain support functions into its brand services group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, (iii) began(iv) transitioning certain transaction processing functions within the brand services group to an independent third-party managed-service provider, and (iv) conducted a review of(v) optimizing its store fleet with the goal of reducing the number of marginally profitableunder-performing stores through either rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprintportfolio and convert sales from these stores into ecommercedirect channel sales or to nearby store locations ("Fleet Optimization"). Charges incurred as a result of these actions are described withinlocations. Cost reductions achieved from the section Results of Operations.
program have served to offset ongoing inflationary pressure and required reinvestment to support key incremental business initiatives. The Company realized cumulative annualized cost reductions of approximately $65$290 million in cost savings, including $55 million in Selling, general and administrative expenses ("SG&A") and $10 million in Buying, distribution and occupancy ("BD&O") during Fiscal 2017 related to Change for Growth program actions identified and in process as of the end of the Fiscal 2017. Subsequent to Fiscal 2017, the Company expects to realize an additional $185 to $235 million in cost savings through fiscal 2020, bringing the total expected annual cost savings from these actions to a range of $250 to $300 million. These savings are expected to be achieved through (i) operating expense reductions in the areas of professional services, travel and facilities management, among others, (ii) refinement of our operating model to eliminate duplicative overhead, and increase utilization of our brand services functions, (iii) creating a platform that reduces product costs and improves information technology efficiencies and (iv) Fleet Optimization. These savings are expected to be realized in our operating segment results generally in proportion to their sales.
As the Company continues to execute on the initiatives identified under the Change for Growth program we currently expect to incur additional charges inthrough the end of Fiscal 20182019, substantially all of approximately $35-$50 million. In addition, we have identified capital projects of approximately $40 million, which are expected to be incurred during Fiscal 2018.reflected in the results of our continuing operations. The Company may incur significant additional charges and capital expenditures in future periods as it more fully defines incremental Change for Growth program initiatives, and moves into the execution phases of those projects. Actions associated with the Change for Growth program are currently expected to continue through fiscal 2019.
Integration of ANN
During Fiscal 2017, the Company (i) completed the integration of its Premium Fashion segment’s ecommerce operations into its Greencastle fulfillment center, (ii) negotiated favorable contracts with vendors and (iii) realizedexpects that total annualized cost reductions from sourcing merchandise through third-party buying agents.the program benefiting our continuing operations will exceed the original program target of $300 million.
The Company will continue to focus on identifying additional cost reduction opportunities to right-size the cost structure. As a result, of these initiatives, the Company has realized cost savings of approximately $95 million during Fiscal 2017, with approximately $55 million in freight and product cost savings related to the Company's ongoing supply chain integration, and cost of goods sold initiative at its Premium Fashion segment, approximately $10 million in BD&O synergies related to the consolidation of its Premium Fashion segment brands into the Company's ecommerce fulfillment center and approximately $30 million in SG&A synergies primarily related to the elimination of redundant leadership and non-merchandise procurement savings. We expect to realize additional synergies of approximately $65 million in Fiscal 2018 and approximately $10 million in fiscal 2019. Annual synergies and cost savings related to the integration of ANN (the "ANN integration"), including amounts achieved from Fiscal 2016 through fiscal 2019, are expected to approximate $235 million.
Distribution and Fulfillment
As previously disclosed, our Justice, Lane Bryant, maurices, dressbarn and Catherines brands' distribution and fulfillment was centralized over the last few fiscal years into our brick-and-mortar store distribution facility in Etna, Ohio and our ecommerce
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
fulfillment facility in Greencastle, Indiana which has resulted in increased processing efficiencies. Additionally, during Fiscal 2017, the Company completed the integration of ANN's ecommerce fulfillment into our Greencastle facility and completed the integration of ANN's brick-and-mortar distribution from Louisville into our Etna facility.
During Fiscal 2016,the Company entered into a ten-year lease for a 583,000 square foot distribution center in Riverside, California to serve as the receiving and west coast distribution hub for merchandise sourced from Asia. During the third quarter of Fiscal 2017,2019, we announced an incremental cost reduction target and on June 4, 2019, we actioned our initial round of savings towards achieving that target with the Riverside facility became operational and is expected to further enhance our processing efficiencies.
We expect that shippinggoal of realizing the majority of the anticipated savings resulting from consolidation into these facilitiesin Fiscal 2020. We will continue during Fiscal 2018.
Sourcing
The Company's brands source their products throughto formulate plans and take actions to achieve the remainder of that target and look for additional opportunities. These opportunities represent a variety of sourcing channels including internally through our Ascena Global Sourcing ("AGS") subsidiary and externally through third-party buying agents based mainly in Asia. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends. We continue to increase the penetration of internally sourced products and manage our relationships with third-party buying agents.
Non-merchandise Procurement
During Fiscal 2017, we continued our efforts to leverage our volume of non-merchandise related goods and services purchases to negotiate favorable pricing. As part of these efforts, we are consolidating supplierscritical component of our brands across multiple areas, including information technology support contracts, facilities, marketing arrangements, and general services and suppliers, among others. Savings in this area are expected to continue to be achieved through Fiscal 2019.enterprise transformation.
Omni-channel Expansion
We continue to invest in initiatives that support our omni-channel strategies. During Fiscal 2017,Over the last couple of years, we completed the transition of all brands onto our new ecommerce platform with our dressbarn, Lane Bryant and Catherines brands addedhave continued to the platform. The aforementioned initiativesdevelop technology solutions which will allow our brands to (i) provide customers a seamless omni-channel shopping experience in-store and online, (ii) integrate our marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance our capability to collect and analyze customer transaction data to support strategic decisions. Additionally, in Fiscal 2018, we expanded the Company's newfunctionality of our Riverside, California distribution center and it supports both our brick-and-mortar and direct channel operations.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Distribution and Fulfillment
Over the last few years, (i) our brands' distribution and fulfillment capabilities were centralized into our brick-and-mortar store distribution facility in Etna, Ohio and our direct channel fulfillment facility in Greencastle, Indiana which has resulted in increased processing efficiencies, and (ii) we entered into a lease agreement for a distribution center in Riverside, California commencedto serve as the receiving and west coast distribution hub for merchandise sourced from Asia. In Fiscal 2018, we completed the expansion of our Riverside facility to include both brick-and-mortar and direct channel distribution, this past spring. The Company's distribution centers in Etna, Ohio and Riverside, California, and its fulfillment center in Greencastle, Indiana, are expected to enhance itswe introduced direct fulfillment capability at our Etna facility to further increase our capacity in this growing channel. We continue to explore ways to optimize and leverage our integrated distribution efficiency.network, which may include providing such services to third parties.
Sourcing
Private Label and Co-branded Credit Card Programs
Our brands also offer various credit card programssource their products through a variety of sourcing channels including our internal sourcing group and externally through third-party buying agents based mainly in Asia. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends. We continue to eligible customersmanage our relationships with vendors through our internal channel and with third-party buying agents to meet the needs of our brands.
Integration of ANN
In Fiscal 2018, we substantially completed our integration of ANN INC. ("ANN integration") into our existing operations. Total synergies and cost reductions related to the ANN integration, including amounts achieved from Fiscal 2016 through Fiscal 2019, were approximately $235 million, substantially all of which are reflected in the United States. In January 2017, the Company's Value Fashion segment replaced its previous private label credit card arrangement with a new arrangement offered under an agreement with Capital One, National Association ("Capital One"). Accordingly, Capital One began offering private label credit cards to new and existing customers (the “Program”) atresults of our Value Fashion segment, which recognized approximately $24 million of revenue under the Program during Fiscal 2017. The Company's Value Fashion segment expects to continue to recognize incremental revenue from this new arrangement through the second quarter of Fiscal 2018.continuing operations.
Seasonality of Business
Our individual segments are typically affected by seasonal sales trends primarily resulting from the timing of holiday and back-to-school shopping periods. In particular, sales at our Kids Fashion segment tend to be significantly higher during the fall season, which occurs during the first and second quarters of our fiscal year, as this includes the back-to-school period and the December holiday season. Our Plus Fashion segment tends to experience higher sales during the spring season, which include the Easter and Mother's Day holidays. Our Premium Fashion and Value Fashion segments have relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Summary of Financial Performance
Goodwill and Other Indefinite-lived Intangible Asset Impairment ChargesFiscal Period
As a result of the aforementioned negative business conditions which accelerated during the third quarter of Fiscal 2017, the Company performed an interim assessment of its goodwill and other intangible assets and recorded non-cash impairment charges to write down the carrying values of its trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade name and $161.8 million of our Lane Bryant trade name. In addition, the Company recognized the following goodwill impairment charges: $428.9 million at the ANN reporting unit, $107.2 million at the maurices reporting unit and $60.2 million at the Lane Bryant reporting unit to write down the carrying values of the reporting units to their fair values. These impairment charges are more fully describeddisclosed in Note 62 to the accompanying consolidated financial statements, we recognized an additional week in Fiscal 2018 as we conformed our fiscal calendar to that of the National Retail Federation.
Discontinued Operations
On May 6, 2019, the Company completed its sale of maurices. Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices. As the sale of maurices represented a major strategic shift, the Company's maurices business has been classified as a component of discontinued operations within the consolidated financial statements for all periods presented. Thus, the foregoing discussion of our results excludes maurices, which has been removed from the Value Fashion segment below, as discussed in Note 2 to the consolidated financial statements. In addition, shared expenses of $78 million, $96 million and $81 millionfor the fiscal years ended August 3, 2019, August 4, 2018 and July 29, 2017, respectively, which were previously allocated to maurices,have been reallocated to the remaining operating units.
Operating Results
Our Fiscal 2017 operating results reflected (i) weaker store traffic and a more promotional environment, (ii) the impairment of a substantial portion of goodwill and other intangible assets, (iii) costs and savings related to our Change for Growth program, (iv) costs and synergies from the continued integration of our Premium FashionDressbarn segment, which was acquired in Fiscal 2016, and (v) lower non-cash purchase accounting expenses in our Premium Fashion segment.Wind Down
Operating highlights for Fiscal 2017 are as follows:
Comparable sales decreased by 5%, and wereAs noted above, the Company has begun a wind down at all four segments, primarily dueof its Dressbarn brand. The wind down is currently expected to declines in store traffic;
Gross margin rate increased by 180 basis points to 58.0% primarily due to an approximately $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair value recordedbe completed in the year-ago period. Excludingfirst half of Fiscal 2020. During Fiscal 2019, the prior year impact of the inventory amortization, gross margin rate was essentially flat;
Operating loss was $1.314 billion compared to operating income of $93.8 million for the year-ago period, with the loss primarily due to the impairment of goodwill and other intangible assets; and
Net loss per diluted share of $5.48 in Fiscal 2017 (caused primarily by the aforementioned impairment charges), compared to net loss per diluted share of $0.06 for Fiscal 2016.
Liquidity highlights for Fiscal 2017 are as follows:
Cash from operations was $343.6 million, compared to $445.4 million in the year-ago period;
Cash used in investing activities for Fiscal 2017 was $268.9 million, consisting primarily of capital expenditures of $258.1 million, compared to $1.836 billion in the year-ago period, consisting primarily of $1.495 billion of cash paid in the ANN Acquisition and capital expenditures of $366.5 million; and
Cash used in financing activities for Fiscal 2017 was $120.9 million, consisting primarily of term loan repayments of $122.5 million, compared to cash provided by financing activities of $1.522 billion in the year-ago period, consisting primarily of $1.8 billion of borrowing under our new term loan, offset in part by net repayments of debt under our amended revolving credit agreement of $116.0 million, $77.4Company recorded approximately $50 million of redemptions and principal repayments of our term loan debt and $42.6costs, primarily reflecting $26 million of payments made for deferred financing costs.
severance costs as well as a non-cash impairment charge of approximately $20 million to write-down Dressbarn's
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Transactions Affecting Comparabilityheadquarters building to its fair market value. We also expect to record other closing costs during the first half of ResultsFiscal 2020, primarily related to severance, inventory liquidation and closure of OperationsDressbarn retail stores. Costs associated with the wind down, which could have a material impact on our results of operations and Financial Conditioncash flows in the first half of Fiscal 2020, are expected to be paid from cash flows from operations, available cash, and to any extent required, availability from our revolving credit facility.
Goodwill and Other Indefinite-lived Intangible Asset Impairment Charges
The comparabilitycontinued negative sales performance at our Plus Fashion segment, coupled with a significant decline in the Company's stock price, resulted in a conclusion that a triggering event had occurred in the third quarter of Fiscal 2019, thereby requiring us to test our goodwill and intangible assets for impairment. As a result of the assessment, we recorded non-cash impairment charges to write-down the carrying values of our Lane Bryant and Catherines trade name intangible assets to their fair values by $23.0 million and $2.0 million, respectively. In addition, we recognized goodwill impairment charges of $65.8 million and $49.3 million at the Lane Bryant and Catherines reporting units, respectively, to write-down the carrying values of the reporting units to their fair values. These impairment charges are more fully described in Note 5 to the accompanying consolidated financial statements.
Further, continued declines in the stock price and the fair value of the Company's operational resultsTerm Loan debt resulted in a conclusion that another triggering event occurred in the fourth quarter of Fiscal 2019, thereby requiring us to test our goodwill and intangible assets for the periods presented herein has been affected by certain transactions. A summaryimpairment. As a result of the effectassessment, we recorded non-cash impairment losses to write-down the carrying values of these items on pretax income for each applicable period presented is noted below:our trade name intangible assets to their fair values as follows: $15.0 million of our Ann Taylor trade name, $60.3 million of our LOFT trade name, $14.0 million of our Lane Bryant trade name, $4.0 million of our Catherines trade name and $16.6 million of our Justice trade name. In addition, the Company recognized a goodwill impairment charge of $160.9 million at the Justice reporting unit to write-down the carrying value of the reporting unit to its fair value.
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| | (millions) |
Acquisition and integration expenses (a) | $ | (39.4 | ) | | $ | (77.4 | ) | | $ | (31.7 | ) |
Restructuring and other related charges (b) | (81.9 | ) | | — |
| | — |
|
Impairment of goodwill and other intangible assets (c) | (1,324.4 | ) | | — |
| | (306.4 | ) |
Non-cash inventory expense associated with the purchase accounting write-up of ANN's inventory to fair market value | — |
| | (126.9 | ) | | — |
|
Justice Pricing Lawsuits | — |
| | — |
| | (50.8 | ) |
Inventory Update
(a) We experienced increases in inventory levels at our Premium Fashion, Plus Fashion and Kids Fashion segments, reflecting a decline in trends at those segments compared to when inventory was bought. While our inventory balance at the end of Fiscal 2017 primarily represented severance2019 only increased by 2% over that of Fiscal 2018, the efforts throughout Fiscal 2019 to reduce the excess inventory levels had a negative impact on our gross margin as discussed below. Those efforts included closer monitoring of brand inventory levels and retention costs associated with the post-acquisition integration of ANN's operations as well as costs associated with the post-acquisition integration of ANN's operations. Fiscal 2016 primarily represented costs relatedpurchases in relation to the acquisition and integration of ANN. Fiscal 2015 primarily represented costs related to the integration of the Company's supply chain and technology platforms.underlying sales trends.
Summary and Key Developments
Operating highlights for Fiscal 2019 are as follows:
(b) Comparable sales increased by 2%, reflecting increases at our Fiscal 2017 primarily represented severance and benefit costs, store asset impairment charges and professional fees incurred in connection with identification and implementation of the initiatives associated with the Change for Growth program.Premium Fashion
(c), Kids Fashion Fiscal 2017 representsand Value Fashion segments offset in part by a decrease at our Plus Fashion segment;
Gross margin rate decreased by 240 basis points to 55.7% primarily as a result of higher markdown requirements needed to address elevated inventory levels, along with competitive pricing pressures;
Operating loss of $681.4 million compared to $88.9 million for the impact of non-cash impairmentsyear-ago period, resulting primarily from the impairment of goodwill and other intangible assets by segment as follows: $428.9 millionand the decline in both net sales and gross margin; and
Loss from continuing operations per diluted share of goodwill and $566.3 million of other intangible assets at the Premium Fashion segment, $107.2 million of goodwill at the Value Fashion segment and $60.2 million of goodwill and $161.8 million of other intangible assets at the Plus Fashion segment.$3.96 in Fiscal 2015 represents the impact of non-cash impairments of $261.7 million of goodwill and $44.7 million other intangible assets at our Plus Fashion segment.2019, compared to $0.73 in Fiscal 2018.
The preceding discussion highlights, as necessary,Liquidity for Fiscal 2019 primarily reflected:
Cash flows provided by operations was $21.1 million, compared to $273.9 million in the significant changesyear-ago period;
Cash flows provided by investing activities for Fiscal 2019 was $67.7 million, consisting primarily of net proceeds from the sale of maurices of $203.2 million, offset in operating results arising from these itemspart by capital expenditures of $136.5 million, compared to net cash used in investing activities of $134.2 million in the year-ago period; and transactions. However, unusual items or transactions may occur
Cash flows provided by financing activities for Fiscal 2019 was $0.3 million, compared to net cash used in any period. Accordingly, investors and other financial statement users should individually considerfinancing activities of $226.2 million in the typesyear-ago period, consisting primarily of events and transactions that have affected operating trends.
term loan repayments of $225.0 million.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
RESULTS OF OPERATIONS
Fiscal 20172019 Compared to Fiscal 20162018
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
|
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | July 29,
2017 | | July 30,
2016 | | $ Change | | % Change |
| | | (millions, except per share data) | | |
| Net sales | | $ | 6,649.8 |
| | $ | 6,995.4 |
| | $ | (345.6 | ) | | (4.9 | )% |
| | | | | | | | | |
| Cost of goods sold | | (2,790.2 | ) | | (3,066.7 | ) | | 276.5 |
| | 9.0 | % |
| Cost of goods sold as % of net sales | | 42.0 | % | | 43.8 | % | | |
| | |
|
| Gross margin | | 3,859.6 |
| | 3,928.7 |
| | (69.1 | ) | | (1.8 | )% |
| Gross margin as % of net sales | | 58.0 | % | | 56.2 | % | | |
| | |
|
| Other operating expenses: | | |
| | |
| | |
| | |
|
| Buying, distribution and occupancy expenses | | (1,274.3 | ) | | (1,286.5 | ) | | 12.2 |
| | 0.9 | % |
| Buying, distribution and occupancy expenses as % of net sales | | 19.2 | % | | 18.4 | % | | |
| | |
|
| Selling, general and administrative expenses | | (2,068.5 | ) | | (2,112.3 | ) | | 43.8 |
| | 2.1 | % |
| SG&A expenses as % of net sales | | 31.1 | % | | 30.2 | % | | |
| | |
|
| Acquisition and integration expenses | | (39.4 | ) | | (77.4 | ) | | 38.0 |
| | 49.1 | % |
| Restructuring and other related charges | | (81.9 | ) | | — |
| | (81.9 | ) | | NM |
|
| Impairment of goodwill | | (596.3 | ) | | — |
| | (596.3 | ) | | NM |
|
| Impairment of intangible assets | | (728.1 | ) | | — |
| | (728.1 | ) | | NM |
|
| Depreciation and amortization expense | | (384.9 | ) | | (358.7 | ) | | (26.2 | ) | | (7.3 | )% |
| Total other operating expenses | | (5,173.4 | ) | | (3,834.9 | ) | | (1,338.5 | ) | | 34.9 | % |
| Operating (loss) income | | (1,313.8 | ) | | 93.8 |
| | (1,407.6 | ) | | NM |
|
| Operating (loss) income as % of net sales | | (19.8 | )% | | 1.3 | % | | |
| | |
|
| Interest expense | | (102.2 | ) | | (103.3 | ) | | 1.1 |
| | 1.1 | % |
| Interest and other income, net | | 1.8 |
| | 0.4 |
| | 1.4 |
| | 350.0 | % |
| Gain on extinguishment of debt | | — |
| | 0.8 |
| | (0.8 | ) | | NM |
|
| Loss before benefit (provision) for income taxes | | (1,414.2 | ) | | (8.3 | ) | | (1,405.9 | ) | | NM |
|
| Benefit (Provision) for income taxes | | 346.9 |
| | (3.6 | ) | | 350.5 |
| | NM |
|
Effective tax rate (a) | | 24.5 | % | | (43.4 | )% | | |
| | |
|
| Net loss | | $ | (1,067.3 | ) | | $ | (11.9 | ) | | $ | (1,055.4 | ) | | NM |
|
| | | | | | | | | |
| Net loss per common share: | | |
| | |
| | |
| | |
|
| Basic | | $ | (5.48 | ) | | $ | (0.06 | ) | | $ | (5.42 | ) | | NM |
|
| Diluted | | $ | (5.48 | ) | | $ | (0.06 | ) | | $ | (5.42 | ) | | NM |
|
_________
(a) Effective tax rate is calculated by dividing the benefit (provision) for income taxes by the loss before the benefit (provision) for income taxes.
(NM) Not meaningful.
Net Sales. Net sales decreased by $345.6 million, or 4.9%, to $6.650 billion in Fiscal 2017 from $6.995 billion in the year-ago period. The decline in net sales primarily reflected a 5% decline in comparable sales which was offset in part by three additional weeks of net sales for the Premium Fashion segment in Fiscal 2017 compared to Fiscal 2016 which included only the 49-week post-acquisition period. The comparable sales decline resulted from reduced store traffic. Non-comparable sales decreased by $23.5 million, or 14.0%, to $144.2 million from $167.7 million, as discussed on a segment basis below. Wholesale, licensing and other revenues increased by $8.8 million, or 6.1%, to $152.2 million from $143.4 million. Also contributing to the decline was the 53rd week in Fiscal 2016, which represented an incremental $82 million in net sales in the year-ago period. |
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | August 3,
2019 | | August 4,
2018 | | $ Change | | % Change |
| | | (millions, except per share data) | | |
| Net sales | | $ | 5,493.4 |
| | $ | 5,566.4 |
| | $ | (73.0 | ) | | (1.3 | )% |
| | | | | | | | | |
| Cost of goods sold | | (2,432.1 | ) | | (2,334.1 | ) | | (98.0 | ) | | (4.2 | )% |
| Cost of goods sold as % of net sales | | 44.3 | % | | 41.9 | % | | |
| | |
|
| Gross margin | | 3,061.3 |
| | 3,232.3 |
| | (171.0 | ) | | (5.3 | )% |
| Gross margin as % of net sales | | 55.7 | % | | 58.1 | % | | |
| | |
|
| Other operating expenses: | | |
| | |
| | |
| | |
|
| Buying, distribution and occupancy expenses | | (1,120.5 | ) | | (1,149.5 | ) | | 29.0 |
| | 2.5 | % |
| Buying, distribution and occupancy expenses as % of net sales | | 20.4 | % | | 20.7 | % | | |
| | |
|
| Selling, general and administrative expenses | | (1,783.7 | ) | | (1,766.2 | ) | | (17.5 | ) | | (1.0 | )% |
| SG&A expenses as % of net sales | | 32.5 | % | | 31.7 | % | | |
| | |
|
| Restructuring and other related charges | | (127.7 | ) | | (76.6 | ) | | (51.1 | ) | | (66.7 | )% |
| Impairment of goodwill | | (276.0 | ) | | — |
| | (276.0 | ) | | NM |
|
| Impairment of other intangible assets | | (134.9 | ) | | — |
| | (134.9 | ) | | NM |
|
| Acquisition and integration expenses | | — |
| | (5.4 | ) | | 5.4 |
| | 100.0 | % |
| Depreciation and amortization expense | | (299.9 | ) | | (323.5 | ) | | 23.6 |
| | 7.3 | % |
| Total other operating expenses | | (3,742.7 | ) | | (3,321.2 | ) | | (421.5 | ) | | (12.7 | )% |
| Operating loss | | (681.4 | ) | | (88.9 | ) | | (592.5 | ) | | NM |
|
| Operating loss as % of net sales | | (12.4 | )% | | (1.6 | )% | | |
| | |
|
| Interest expense | | (107.0 | ) | | (113.0 | ) | | 6.0 |
| | 5.3 | % |
| Interest and other income, net | | 3.4 |
| | 1.6 |
| | 1.8 |
| | NM |
|
| Loss on extinguishment of debt | | — |
| | (5.0 | ) | | 5.0 |
| | 100.0 | % |
| Loss from continuing operations before benefit for income taxes and loss from equity method investment | | (785.0 | ) | | (205.3 | ) | | (579.7 | ) | | NM |
|
| Benefit for income taxes from continuing operations | | 14.5 |
| | 62.3 |
| | (47.8 | ) | | (76.7 | )% |
Effective tax rate (a) | | 1.8 | % | | 30.3 | % | | |
| | |
|
| Loss from equity method investment | | (11.8 | ) | | — |
| | (11.8 | ) | | NM |
|
| Loss from continuing operations | | (782.3 | ) | | (143.0 | ) | | (639.3 | ) | | NM |
|
| Discontinued operations | | | | | | | | |
Income from discontinued operations, net of taxes (b) | | 76.4 |
| | 103.3 |
| | (26.9 | ) | | (26.0 | )% |
Gain on disposal of discontinued operations, net of taxes (c) | | 44.5 |
| | — |
| | 44.5 |
| | NM |
|
| Net loss | | $ | (661.4 | ) | | $ | (39.7 | ) | | $ | (621.7 | ) | | NM |
|
| | | | | | | | | |
| Net (loss) income per common share - basic: | | |
| | |
| | |
| | |
|
| Continuing operations | | $ | (3.96 | ) | | $ | (0.73 | ) | | $ | (3.23 | ) | | NM |
|
| Discontinued operations | | 0.61 |
| | 0.53 |
| | 0.08 |
| | NM |
|
| Total net loss per basic common share | | $ | (3.35 | ) | | $ | (0.20 | ) | | $ | (3.15 | ) | | NM |
|
| | | | | | | | | |
| Net (loss) income per common share - diluted: | | | | | | | | |
| Continuing operations | | $ | (3.96 | ) | | $ | (0.73 | ) | | $ | (3.23 | ) | | NM |
|
| Discontinued operations | | 0.61 |
| | 0.53 |
| | 0.08 |
| | NM |
|
| Total net loss per diluted common share | | $ | (3.35 | ) | | $ | (0.20 | ) | | $ | (3.15 | ) | | NM |
|
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
_________
(a) Effective tax rate is calculated by dividing the Benefit for income taxes from continuing operations by the Loss from continuing operations before the benefit for income taxes.
(b) Income from discontinued operations is presented net of income tax expense of $21.8 million and $20.5 million for the fiscal years ended August 3, 2019 and August 4, 2018, respectively.
(c) Gain on sale of discontinued operations is presented net of income tax benefit of $4.0 million for the fiscal year ended August 3, 2019.
(NM) Not meaningful.
Net sales. Total net sales decreased by $73.0 million, or 1.3%, to $5,493.4 million. The Net sales decrease was attributable to the additional week for all four segments in Fiscal 2018, which contributed an incremental $94.8 million, and a decrease in non-comparable sales of $109.5 million, or 73.2%, to $40.0 million, reflecting a lower store count resulting from the Company's fleet optimization program. These items were partly offset by a 2% increase in comparable sales, as well as an increase in other revenues of $33.6 million, or 17.5%, to $225.3 million, primarily reflecting higher wholesale and shipping revenues.
Net sales data for our four operating segments is presented below.
| | | | | Fiscal Years Ended | | | | |
| | Fiscal Years Ended | | | | |
|
| | | July 29,
2017 | | July 30,
2016 | | $ Change | | % Change | | August 3,
2019 | | August 4,
2018 | | $ Change | | % Change |
| | | (millions) | | | | |
| | (millions) | | | | |
|
| Net sales: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Premium Fashion | | $ | 2,322.6 |
| | $ | 2,330.9 |
| | $ | (8.3 | ) | | (0.4 | )% | | $ | 2,415.1 |
| | $ | 2,317.8 |
| | $ | 97.3 |
| | 4.2 | % |
| Value Fashion | | 1,950.2 |
| | 2,094.6 |
| | (144.4 | ) | | (6.9 | )% | |
| Plus Fashion | | 1,353.9 |
| | 1,463.6 |
| | (109.7 | ) | | (7.5 | )% | | 1,240.5 |
| | 1,340.0 |
| | (99.5 | ) | | (7.4 | )% |
| Kids Fashion | | 1,023.1 |
| | 1,106.3 |
| | (83.2 | ) | | (7.5 | )% | | 1,079.1 |
| | 1,100.0 |
| | (20.9 | ) | | (1.9 | )% |
| Value Fashion | | | 758.7 |
| | 808.6 |
| | (49.9 | ) | | (6.2 | )% |
| Total net sales | | $ | 6,649.8 |
| | $ | 6,995.4 |
| | $ | (345.6 | ) | | (4.9 | )% | | $ | 5,493.4 |
| | $ | 5,566.4 |
| | $ | (73.0 | ) | | (1.3 | )% |
| | | | | | | | | | | | | | | | | |
Comparable sales (a)(c) | | | | |
| | |
| | (5 | )% | | | | |
| | |
| | 2 | % |
_______
(a) Comparable sales represent combined store comparable sales and ecommercedirect channel sales. Store comparable sales generally refers to the growth of sales in stores only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. EcommerceDirect channel sales refer to growth of sales from the Company's ecommerceour direct channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, the Company reportswe report a single, consolidated comparable sales metric, inclusive of store and ecommercedirect channels.
(b) Incremental revenues of approximately $94.8 million due to the inclusion of the additional week in Fiscal 2018 are excluded from the calculation of comparable sales.
| |
(c) | During the first quarter of Fiscal 2019 and the first nine months of Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the Justice pricing litigation 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 in Fiscal 2019 primarily reflected:
a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in the year-ago period;
a decrease5% comparable sales increase of 7% in comparable sales$36.6 million at Ann Taylor, and a decrease6% comparable sales increase of 4% in comparable sales$92.9 million at LOFT; and
a $15.7 million decline in non-comparable sales, comprised of:
| |
| – | a $13.2 million decline from 11 net Ann Taylor18 net store closures, and |
| |
| – | a $2.5 million decline from 3 net LOFT storeclosures; |
a $24.6 million decline due to the inclusion of the additional week in the year-ago period; and
an $8.1 million increase in other revenues primarily reflecting higher shipping revenues.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Plus Fashionnet sales performance in Fiscal 2019 primarily reflected:
a 4% comparable sales decline of $37.3 million at Ann Taylor Lane Bryantand 4 net store closuresa 6% comparable sales decline of $14.5 million at LOFT Catherines;
a $28.1 million decline in non-comparable sales, primarily comprised of:
| |
| – | a $20.2 million decline from 28 Lane Bryant store closures, and |
| |
| – | a $7.9 million decline from28 Catherines store closures; |
a $20.7 million decline due to the inclusion of the additional week in the year-ago period; and
a $1.1 million increase in other revenues.
Kids Fashionnet sales performance in Fiscal 2017.2019 primarily reflected:
a 1% comparable sales increase of $12.5 million;
a $22.8 million decline in non-comparable sales primarily due to 21 Justice store closures;
a $35.1 million decline due to the inclusion of the additional week in the year-ago period; and
a $24.5 million increase in other revenues primarily due to higher wholesale revenue.
Value Fashion net sales performance in Fiscal 2019 primarily reflected:
a decrease of $88.7 million, or 9%, in1% comparable sales at maurices and a decrease of $46.6 million, or 5%, in comparable sales at dressbarn during Fiscal 2017;
an increase of $22.4$7.5 million;
a $42.9 million decline in non-comparable sales due to 12 net store openings at maurices in Fiscal 2017, offset in part by a decrease of $19.8 million due to 30 net store closures at dressbarn in Fiscal 2017;
| |
• | a decrease of $34.5 million due to the inclusion of the 53rd week in the year-ago period; and
|
an increase of $22.8 million in other revenues primarily due to 114 store closures;
a $14.4 million decline due to the segment's new private label credit card program.inclusion of the additional week in the year-ago period; and
a $0.1 million decline in other 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 240 basis points to 55.7% in Fiscal 2019 resulting from lower margin at our Kids Fashion, Plus Fashion, and Premium Fashion segments, which were partially offset by increased margins at our Value Fashion segment. On a consolidated basis, the gross margin rate reduction reflects higher shipping costs of approximately $30 million across the segments as a result of an increased mix of direct channel sales, and increased promotional selling and markdown requirements. Gross margin rate highlights on a segment basis are as follows:
Premium Fashiongross margin rate performance declined by approximately 200 basis points, primarily reflecting increased promotional selling to address elevated inventory levels along with higher shipping costs related to increased direct channel penetration.
Plus Fashion net salesgross margin rate performance primarily reflected:
a decreasedeclined by approximately 190 basis points, reflecting declines of $67.3 million, or 7%, in comparable sales160 basis points and 280 basis points at Lane Bryant and a decrease of $11.3 million, or 4%, in comparable sales at Catherines during Fiscal 2017;, respectively, primarily reflecting higher levels of promotional selling and markdown requirements to clear under-performing inventory receipts, and higher shipping costs related to increased direct channel penetration.
a decrease of $2.3 million in non-comparable sales due to 8 net store closures at Lane Bryant and 14 net store closures at Catherines in Fiscal 2017;
| |
• | a decrease of $23.0 million due to the inclusion of the 53rd week in the year-ago period; and
|
a decrease of $5.8 million in other revenues due to lower revenue from product sell-off and gift card breakage.
Kids Fashion net salesgross marginrate performance primarily reflected:declined approximately 580 basis points as a result of significant promotional selling and markdown requirements to address elevated inventory levels and clear under-performing assortment categories, higher shipping costs related to increased direct channel penetration and a higher mix of lower margin wholesale revenue.
a decreaseValue Fashion gross margin rate performance increased approximately 50 basis points primarily reflecting lower levels of $26.3 million, or 3%,promotional selling and markdowns versus the year-ago period. Markdowns in comparable sales at Justice during Fiscal 2017;the year-ago period reflected significant charges for certain slow-turning product categories.
a decrease
Buying, distribution and occupancy ("BD&O") expenses consist of $23.8 million in non-comparable sales caused by 37 net store closures in Fiscal 2017;
| |
• | a decrease of $24.9 million due to the inclusion of the 53rd week in the year-ago period; and
|
a decrease of $8.2 million in other revenue due to lower wholesaleoccupancy and licensing revenue.utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
BD&O expenses decreased by $29.0 million, or 2.5%, to $1,120.5 million in Fiscal 2019. The reduction in expenses was driven by lower occupancy expenses resulting primarily from our fleet optimization program, which provided approximately $25 million of cost reductions during Fiscal 2019, and was partially offset by higher variable distribution costs related to the increased penetration of our direct channel business. BD&O expenses as a percentage of net sales decreased by 30 basis points to 20.4% in Fiscal 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.
SG&A expenses increased by $17.5 million, or 1.0%, to $1,783.7 million in Fiscal 2019. The increase in SG&A expenses was primarily due to inflationary increases, higher marketing expenses, higher write-offs of store related fixed assets at the Plus Fashion segment, and the write-off of corporate-held fixed assets. These increases were offset in part by approximately $55 million in cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings, and the impact of the additional week recorded during Fiscal 2018 for all of the segments. SG&A expenses as a percentage of net sales increased by 80 basis points to 32.5% in Fiscal 2019.
Depreciation and amortization expense decreased by $23.6 million, or 7.3%, to $299.9 million in Fiscal 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. Operating loss was $681.4 million for Fiscal 2019 compared to $88.9 million in Fiscal 2018 and is discussed on a segment basis below.
Operating results for our four operating segments are presented below.
|
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | August 3,
2019 | | August 4,
2018 | | $ Change | | % Change |
| | | (millions) | | | | |
| Operating loss: | | |
| | |
| | |
| | |
|
| Premium Fashion | | $ | 72.7 |
| | $ | 102.3 |
| | $ | (29.6 | ) | | (28.9 | )% |
| Plus Fashion | | (71.4 | ) | | 0.6 |
| | (72.0 | ) | | NM |
|
| Kids Fashion | | (42.4 | ) | | 18.7 |
| | (61.1 | ) | | NM |
|
| Value Fashion | | (101.7 | ) | | (128.5 | ) | | 26.8 |
| | (20.9 | )% |
| Unallocated restructuring and other related charges | | (127.7 | ) | | (76.6 | ) | | (51.1 | ) | | (66.7 | )% |
| Unallocated impairment of goodwill | | (276.0 | ) | | — |
| | (276.0 | ) | | NM |
|
| Unallocated impairment of other intangible assets | | (134.9 | ) | | — |
| | (134.9 | ) | | NM |
|
| Unallocated acquisition and integration expenses | | — |
| | (5.4 | ) | | 5.4 |
| | 100.0 | % |
| Total operating loss | | $ | (681.4 | ) | | $ | (88.9 | ) | | $ | (592.5 | ) | | NM |
|
_______
(NM) Not meaningful.
Premium Fashion operating income decreased by $29.6 million primarily due to a decline in gross margin rate and higher variable distribution costs, employee-related costs and marketing expenses, partially offset by an increase in comparable sales and lower store expenses associated with our fleet optimization program.
Plus Fashion operating results decreased by $72.0 million primarily due to a decline in comparable sales and gross margin rate, and higher write-downs of store-related fixed assets, offset in part by lower occupancy and store expenses associated with our fleet optimization program.
Kids Fashion operating results decreased by $61.1 million primarily due to 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)
Value Fashion operating results improved by $26.8 million primarily due to an increase in comparable sales and in gross margin rate and a decrease in operating expenses, as discussed above. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program.
Unallocated restructuring and other related charges reflects costs incurred under the transformational programs discussed earlier. Expenses of $127.7 million for Fiscal 2019 primarily included $38.6 million for professional fees, reflecting costs incurred in connection with the identification and implementation of transformation initiatives under the Change for Growth program and the Dressbarn wind down, $43.0 million related to severance and other related charges, reflecting severance associated with the cost reduction actions taken in the fourth quarter of Fiscal 2019 as well as severance related to the Dressbarn wind down, and $45.4 million of non-cash asset impairments, reflecting the write-down of the Dressbarn corporate headquarters as a result of the wind down and the write-down of a corporate-owned office building in Duluth, MN to fair market value as a result of the sale of maurices. The $76.6 million of unallocated restructuring and other related charges in Fiscal 2018 reflect $59.2 million for professional fees incurred in connection with the identification and implementation of transformation initiatives, $5.7 million of severance and other related expenses and asset impairments of $11.7 million reflecting decisions within the fleet optimization program to close under-performing stores as well as the write-down of a building.
Unallocated impairment of goodwill reflects the Fiscal 2019 write-down of the carrying values of the Lane Bryant, Catherines and Justice reporting units to their fair values as follows: $65.8 million at Lane Bryant, $49.3 million at Catherines, and $160.9 million at Justice. There was no impairment of goodwill recorded in Fiscal 2018.
Unallocated impairment of other intangible assets reflects the Fiscal 2019 write-down of the Company's trade name intangible assets to their fair values as follows: $15.0 million at Ann Taylor, $60.3 million at LOFT, $37.0 million of our Lane Bryant trade name, $6.0 million of our Catherines trade name and $16.6 million of our Justice trade name. There was no impairment of other intangible assets recorded in Fiscal 2018.
Unallocated acquisition and integration expenses of $5.4 million for Fiscal 2018 primarily reflected costs associated with the post-acquisition integration of ANN's distribution operations, including the closure of the former ANN distribution facility in Louisville, Kentucky, as well as the gain on the related sale of that facility, which occurred in Fiscal 2018. There were no such expenses during Fiscal 2019.
Interest expense decreased by $6.0 million to $107.0 million for Fiscal 2019, primarily caused by a lower average outstanding term loan balance as a result of repayments in the third and fourth quarters of Fiscal 2018, mostly offset by a higher interest rate on our variable rate term loan.
Loss on extinguishment of debt. In Fiscal 2018, the Company made repayments of $180.0 million which were applied towards future scheduled quarterly payments of the outstanding principal balance of the term loan debt, resulting in a $5.0 million pre-tax loss reflecting the acceleration of deferred financing fees. There was no such extinguishment in Fiscal 2019.
Benefit for income taxes from continuing operations represents federal, foreign, state and local income taxes. We recorded a benefit of $14.5 million in Fiscal 2019 on a pre-tax loss of $785.0 million, for an effective tax rate of 1.8%, which was lower than the statutory tax rate primarily due to non-deductible impairments of goodwill, a partial federal valuation allowance, and GILTI. In Fiscal 2018, we recorded a benefit of $62.3 million on a pre-tax loss of $205.3 million for a 30.3% effective tax rate, which reflects the provisional impact of recording the tax effects associated with the 2017 Act. This was offset by the impact of recording a valuation allowance on certain state deferred tax assets. Refer to Note 15 to the accompanying consolidated financial statements.
Loss from continuing operations increased by $639.3 million to $782.3 million in Fiscal 2019, primarily due to the impairment of goodwill and intangible assets, as well as lower operating results, both discussed above.
Loss from continuing operations per diluted common share was $3.96 per share in Fiscal 2019 compared to $0.73 per share in the year-ago period, primarily a result of an increase in the loss from continuing operations, as discussed above.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Fiscal 2018 Compared to Fiscal 2017
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
|
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | August 4,
2018 | | July 29,
2017 | | $ Change | | % Change |
| | | (millions, except per share data) | | |
| Net sales | | $ | 5,566.4 |
| | $ | 5,617.3 |
| | $ | (50.9 | ) | | (0.9 | )% |
| | | | | | | | | |
| Cost of goods sold | | (2,334.1 | ) | | (2,333.4 | ) | | (0.7 | ) | | — | % |
| Cost of goods sold as % of net sales | | 41.9 | % | | 41.5 | % | | |
| | |
|
| Gross margin | | 3,232.3 |
| | 3,283.9 |
| | (51.6 | ) | | (1.6 | )% |
| Gross margin as % of net sales | | 58.1 | % | | 58.5 | % | | |
| | |
|
| Other operating expenses: | | |
| | |
| | |
| | |
|
| Buying, distribution and occupancy expenses | | (1,149.5 | ) | | (1,138.5 | ) | | (11.0 | ) | | (1.0 | )% |
| Buying, distribution and occupancy expenses as % of net sales | | 20.7 | % | | 20.3 | % | | |
| | |
|
| Selling, general and administrative expenses | | (1,766.2 | ) | | (1,794.2 | ) | | 28.0 |
| | 1.6 | % |
| SG&A expenses as % of net sales | | 31.7 | % | | 31.9 | % | | |
| | |
|
| Restructuring and other related charges | | (76.6 | ) | | (78.1 | ) | | 1.5 |
| | 1.9 | % |
| Impairment of goodwill | | — |
| | (489.1 | ) | | 489.1 |
| | 100.0 | % |
| Impairment of other intangible assets | | — |
| | (728.1 | ) | | 728.1 |
| | 100.0 | % |
| Acquisition and integration expenses | | (5.4 | ) | | (39.4 | ) | | 34.0 |
| | 86.3 | % |
| Depreciation and amortization expense | | (323.5 | ) | | (350.8 | ) | | 27.3 |
| | 7.8 | % |
| Total other operating expenses | | (3,321.2 | ) | | (4,618.2 | ) | | 1,297.0 |
| | 28.1 | % |
| Operating loss | | (88.9 | ) | | (1,334.3 | ) | | 1,245.4 |
| | 93.3 | % |
| Operating loss as % of net sales | | (1.6 | )% | | (23.8 | )% | | |
| | |
| Interest expense | | (113.0 | ) | | (102.2 | ) | | (10.8 | ) | | NM |
|
| Interest and other income, net | | 1.6 |
| | 1.0 |
| | 0.6 |
| | NM |
|
| Loss on extinguishment of debt | | (5.0 | ) | | — |
| | (5.0 | ) | | NM |
|
| Loss from continuing operations before benefit for income taxes | | (205.3 | ) | | (1,435.5 | ) | | 1,230.2 |
| | 85.7 | % |
| Benefit for income taxes from continuing operations | | 62.3 |
| | 367.5 |
| | (305.2 | ) | | 83.0 | % |
Effective tax rate (a) | | 30.3 | % | | 25.6 | % | | |
| | |
|
| Loss from continuing operations | | (143.0 | ) | | (1,068.0 | ) | | 925.0 |
| | 86.6 | % |
Income (loss) from discontinued operations, net of tax (b) | | 103.3 |
| | 0.7 |
| | 102.6 |
| | NM |
|
| Net loss | | $ | (39.7 | ) | | $ | (1,067.3 | ) | | $ | 1,027.6 |
| | 96.3 | % |
| | | | | | | | | |
| Net (loss) income per common share - basic: | | |
| | |
| | |
| | |
|
| Continuing operations | | $ | (0.73 | ) | | $ | (5.48 | ) | | $ | 4.75 |
| | 86.7 | % |
| Discontinued operations | | 0.53 |
| | — |
| | 0.53 |
| | NM |
|
| Total net loss per basic common share | | $ | (0.20 | ) | | $ | (5.48 | ) | | $ | 5.28 |
| | 96.4 | % |
| | | | | | | | | |
| Net (loss) income per common share - diluted: | | |
| | |
| | |
| | |
|
| Continuing operations | | $ | (0.73 | ) | | $ | (5.48 | ) | | $ | 4.75 |
| | 86.7 | % |
| Discontinued operations | | 0.53 |
| | — |
| | 0.53 |
| | NM |
|
| Total net loss per diluted common share | | $ | (0.20 | ) | | $ | (5.48 | ) | | $ | 5.28 |
| | 96.4 | % |
_________
(a) Effective tax rate is calculated by dividing the Benefit for income taxes from continuing operations by the Loss from continuing operations before the benefit for income taxes.
(b) Income from discontinued operations is presented net of income tax expense of $20.5 million and $20.6 million for the fiscal years ended August 4, 2018 and July 29, 2017, respectively.
(NM) Not meaningful.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Net sales. Net sales decreased by $50.9 million, or 0.9%, to $5,566.4 million in Fiscal 2018. The decline in net sales primarily reflected a 2% decline in comparable sales that mainly resulted from an 11.9% decline in net sales at our Value Fashion segment, as well as product assortment challenges during the first half of Fiscal 2018 experienced by the Premium Fashion segment, which returned to positive comparable sales performance in the second half of Fiscal 2018. Non-comparable sales declined by $70.5 million, or 47.0%, to $79.6 million, as discussed on a segment basis below. Other revenues increased by $6.3 million, or 3.4%, to $191.7 million. Net sales for all four segments also included incremental revenues of $94.8 million due to the inclusion of the additional week in Fiscal 2018 as previously discussed.
Net sales data for our four operating segments is presented below.
|
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
|
| | | August 4,
2018 | | July 29,
2017 | | $ Change | | % Change |
| | | (millions) | | | | |
|
| Net sales: | | |
| | |
| | |
| | |
|
| Premium Fashion | | $ | 2,317.8 |
| | $ | 2,322.6 |
| | $ | (4.8 | ) | | (0.2 | )% |
| Plus Fashion | | 1,340.0 |
| | 1,353.9 |
| | (13.9 | ) | | (1.0 | )% |
| Kids Fashion | | 1,100.0 |
| | 1,023.1 |
| | 76.9 |
| | 7.5 | % |
| Value Fashion | | 808.6 |
| | 917.7 |
| | (109.1 | ) | | (11.9 | )% |
| Total net sales | | $ | 5,566.4 |
| | $ | 5,617.3 |
| | $ | (50.9 | ) | | (0.9 | )% |
| | | | | | | | | |
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 $94.8 million due to the inclusion of the additional week in Fiscal 2018 are excluded from the calculation of comparable sales.
(b) During Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the Justice pricing litigation began to be redeemed. Comparable sales related to these transactions includes the transaction value in excess of the voucher value.
Premium Fashionnet sales performance in Fiscal 2018 primarily reflected:
a 5% comparable sales decline of $37.3 million at Ann Taylor, and a less than 1% comparable sales decline of $7.3 million at LOFT;
a $4.9 million increase in non-comparable sales primarily reflecting a net positive impact at LOFT, as the impact of 8 store openings more than offset the impact of 14 store closures, which was offset in part by the negative impact of 18 net store closures at Ann Taylor;
a $24.6 million increase due to the inclusion of the additional week period; and
a $10.3 million increase in other revenues primarily related to higher gift card breakage and higher credit revenue.
Plus Fashionnet sales performance in Fiscal 2018 primarily reflected:
a 1% comparable sales decline of $7.9 million at Lane Bryant and a 3% comparable sales decline of $9.6 million at Catherines;
an $11.0 million decline in non-comparable sales at Lane Bryant due to 15 net store closures and a $7.0 million decline in non-comparable sales at Catherines due to 11 net store closures;
a $20.7 million increase due to the inclusion of the additional week period; and
a $0.9 million increase in other revenues.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Kids Fashionnet sales performance in Fiscal 2018 primarily reflected:
a 7% comparable sales increase of $67.4 million;
a $21.7 million decline in non-comparable sales primarily due to 53 net store closures;
a $35.1 million increase due to the inclusion of the additional week period; and
a $3.9 million decline in other revenues primarily due to lower wholesale revenue.
Value Fashion net sales performance in Fiscal 2018 primarily reflected:
a 10% comparable sales decline of $86.8 million;
a $35.7 million decline in non-comparable sales due to 49 store closures;
a $14.4 million increase due to the inclusion of the additional week period; and
a $1.0 million decline in other revenues.
Gross Margin.margin. Gross margin, in terms of dollars, decreased as a result of the decline in comparable sales as well as a decline in gross margin rate. Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increaseddecreased by 18040 basis points from 56.2%to 58.1% in Fiscal 2016 to 58.0% in Fiscal 2017. The increase was due to an approximate $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded during Fiscal 2016 in our Premium Fashion segment. Excluding the prior year impact of the inventory amortization, gross margin rate was essentially flat, as improved2018. Improved performance at our PremiumPlus Fashionand Plusand Kid Fashion segments was offset by declines at our ValuePremium Fashion and KidsValue Fashion segments. On a consolidated basis, gross margin benefited fromreflects higher shipping costs of approximately $40 million across the segments as a result of an increased mix of direct channel sales and higher air freight costs, offset by the realization of approximately $55$35 million in combined integration synergies and cost savings related to the Company's ongoing supply chain integrationreduction benefits achieved from product sourcing and the cost of goods sold initiatives at its Premium Fashion segment.transportation costs.
Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.
Gross margin rate highlights on a segment basis are as follows:
Premium Fashion gross margin rate performance reflected an approximate $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory recorded during Fiscal 2016 discussed above. Excluding the prior year impact of the inventory amortization, gross margin rate performance improveddeclined by approximately 22060 basis points, reflecting significant improvement at both Ann Taylor and LOFT. Both brands benefited from realization of freight cost synergieshigher shipping costs related to increased direct channel penetration and an increased level of promotional selling resulting from soft product acceptance during the Company's ongoing supply chain integration andfirst half of Fiscal 2018, offset in part by the segment's cost of goods sold initiative.
Value Fashion gross margin rate performance declined approximately 110 basis points as a result of a higher level of promotional selling across the segment and increased markdown requirements to maintain appropriate inventory levels on lower than expected customer demand.
Plus Fashion gross margin rate performance improved by approximately 12030 basis points, mainly duereflecting improved product acceptance and lower levels of promotional selling, offset in part by higher shipping costs related to more effective inventory management at both Lane Bryant and Catherines.the increased direct channel penetration.
Kids Fashion gross margin rate performance improved approximately 90 basis points, resulting from improved product acceptance, offset in part by incremental freight expenses necessary to meet higher product demand.
Value Fashion gross margin rate performance declined approximately 370280 basis points, as a result of aresulting from higher level of promotional selling and increased markdown requirements to maintain appropriate inventory levels, ona higher level of promotional selling due to lower than expected customer demand.demand, and higher shipping costs related to the increased direct channel penetration.
Buying, Distributiondistribution and Occupancyoccupancy ("BD&O") Expensesexpenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
BD&O expenses decreasedincreased by $12.2$11.0 million, or 0.9%1.0%, to $1.274 billion$1,149.5 million in Fiscal 2017 from $1.287 billion in the year-ago period. BD&O expenses for the Premium Fashion segment increased by $14.7 million primarily as the results reflected a 52-week period in Fiscal 2017 compared2018. Higher buying costs and variable distribution costs related to the 49-week post-acquisition period in the year-ago period. Forincreased penetration of our other segments, BD&O expenses decreaseddirect channel business were partly offset by $26.9 million primarily due to lower occupancy expenses on a reduced store count and lower performance-based compensation. On a consolidated basis, BD&O expenses also includedrelated to our fleet optimization program, which provided approximately $10 million in transformation initiatives and approximately $10$15 million of synergies related to the ANN Acquisition associated with the consolidation of the Premium Fashion segment brands into the Company's ecommerce fulfillment center.cost reductions during Fiscal 2018. BD&O expenses as a percentage of net sales increased by 8040 basis points to 19.2%20.7% in Fiscal 2017 from 18.4% in the year-ago period,2018, primarily due to the de-leveraging effect of lower comparable sales.
Selling, Generalgeneral and Administrativeadministrative (“SG&A”) Expensesexpenses consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
SG&A expenses decreased by $43.8 million, or 2.1%, to $2.069 billion in Fiscal 2017 from $2.112 billion in Fiscal 2016. SG&A expenses for the Premium Fashion segment increased by $25.2 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in Fiscal 2016. For our other segments, SG&A expenses decreased by $69.0 million primarily due to store closures and the lower sales volume, reduced marketing expenses, lower performance-based compensation and a decrease in administrative payroll costs mainly associated with the Change for Growth program. On a consolidated basis, SG&A expenses also included approximately $85 million in synergies and transformation initiatives, primarily due to the elimination of redundant leadership and non-merchandise procurement savings. SG&A expenses as a percentage of net
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
SG&A expenses decreased by $28.0 million, or 1.6%, to $1,766.2 million in Fiscal 2018. The decrease in SG&A expenses was primarily due to $110 million in synergies and cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings. Also contributing to the decrease were lower store expenses, resulting from the fleet optimization program, and lower performance-based compensation. These items were offset in part by inflationary increases, higher write-downs of store related fixed assets, primarily at the Value Fashion segment, and the impact of the additional week in Fiscal 2018 recorded for all segments. SG&A expenses as a percentage of net sales increaseddecreased by 9020 basis points to 31.1%31.7% in Fiscal 2017 from 30.2%2018, and reflects the impact of the reduced expenses, offset in the year-ago period, primarily due topart by the de-leveraging effect of lower comparable sales.
Depreciation and Amortization Expenseamortization expense increaseddecreased by $26.2$27.3 million, or 7.3%7.8%, to $384.9$323.5 million in Fiscal 2017 from $358.7 million in the year-ago period. Depreciation and amortization expense for the Premium Fashion segment increased by $6.2 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in the year-ago period. For our other segments, depreciation and amortization expense increased by $20.0 million2018. The decrease was primarily due to the Company's ecommerce platform investment which was placeda reduction in servicestore count resulting from our fleet optimization program, offset in the third quarter of the year-ago period and investments in the Company's distribution network primarily to integrate the operations of ANN.part by incremental depreciation from capital investments.
Operating (Loss) Income.loss. Operating loss was $1.314 billion$88.9 million for Fiscal 2018 compared to $1,334.3 million for Fiscal 2017 compared to operating income of $93.8 million for the year-ago period primarily due to the impairment of goodwill and other intangible assets, as well as the decrease in operating resultsis discussed on a segment basis below. The operating results for the year-ago period reflected an approximately $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded in our Premium Fashion segment.
Operating results for our four operating segments areis presented below.
| | | | | Fiscal Years Ended | | | | | | Fiscal Years Ended | | | | |
| | | July 29,
2017 | | July 30,
2016 | | $ Change | | % Change | | August 4,
2018 | | July 29,
2017 | | $ Change | | % Change |
| | | (millions) | | | | | | (millions) | | | | |
| Operating (loss) income: | | |
| | |
| | |
| | |
| |
| Operating loss: | | | |
| | |
| | |
| | |
|
| Premium Fashion | | $ | 140.9 |
| | $ | 13.3 |
| | 127.6 |
| | NM |
| | $ | 102.3 |
| | $ | 129.6 |
| | $ | (27.3 | ) | | (21.1 | )% |
| Value Fashion | | 12.2 |
| | 92.0 |
| | (79.8 | ) | | (86.7 | )% | |
| Plus Fashion | | 15.5 |
| | 36.9 |
| | (21.4 | ) | | (58.0 | )% | | 0.6 |
| | (12.7 | ) | | 13.3 |
| | NM |
|
| Kids Fashion | | (36.7 | ) | | 29.0 |
| | (65.7 | ) | | (226.6 | )% | | 18.7 |
| | (60.5 | ) | | 79.2 |
| | NM |
|
| Unallocated acquisition and integration expenses | | (39.4 | ) | | (77.4 | ) | | 38.0 |
| | (49.1 | )% | |
| Value Fashion | | | (128.5 | ) | | (56.0 | ) | | (72.5 | ) | | NM |
|
| Unallocated restructuring and other related charges | | (81.9 | ) | | — |
| | (81.9 | ) | | NM |
| | (76.6 | ) | | (78.1 | ) | | 1.5 |
| | (1.9 | )% |
| Unallocated impairment of goodwill | | (596.3 | ) | | — |
| | (596.3 | ) | | NM |
| | — |
| | (489.1 | ) | | 489.1 |
| | NM |
|
| Unallocated impairment of intangible assets | | (728.1 | ) | | — |
| | (728.1 | ) | | NM |
| |
| Total operating (loss) income | | $ | (1,313.8 | ) | | $ | 93.8 |
| | $ | (1,407.6 | ) | | NM |
| |
| Unallocated impairment of other intangible assets | | | — |
| | (728.1 | ) | | 728.1 |
| | NM |
|
| Unallocated acquisition and integration expenses | | | (5.4 | ) | | (39.4 | ) | | 34.0 |
| | 86.3 | % |
| Total operating loss | | | $ | (88.9 | ) | | $ | (1,334.3 | ) | | $ | 1,245.4 |
| | 93.3 | % |
_______
(NM) Not meaningful.
Premium Fashion operating income increaseddecreased by $127.6$27.3 million as a result of lower non-cash purchase accounting expenses primarily due to approximately $127 million related to the write-up ofinventory to fair market value recorded in the year-ago period.gross margin, as discussed above, and higher operating expenses. The operating results for Fiscal 2017 reflectedexpense increase was primarily caused by higher BD&O expense reflecting increased penetration of our direct channel business.
Plus Fashion operating income increased by $13.3 million as a result of an improvementincrease in the gross margin rate, partiallyas discussed above, and a decrease in SG&A expenses, which were offset in part by higher BD&O expenses and a decrease in comparable sales, bothalso discussed above. OperatingThe higher BD&O expenses for Fiscal 2017primarily reflected lower performance-based compensation, synergies savings associated with the transition into the Company's ecommerce fulfillment center, lower occupancy expenses andincreased penetration of our direct channel business. SG&A expense reductions were primarily driven by a decrease in administrative payroll costs, mainlylower marketing expenses, and other cost reductions associated with the Change for Growth program and integration-related activities.program.
ValueKids Fashion operating income decreasedincreased by $79.8$79.2 million as a result of the decreasesan increase in netcomparable sales and gross margin rate, bothas discussed above, as well as an increase in depreciation expense, offset in part by decreases in operatinglower SG&A expenses. OperatingSG&A expense reductions were primarily driven by lower performance-based compensation,store expenses associated with our fleet optimization program, lower store variablemarketing expenses resulting from the decrease in sales volume and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
PlusValue Fashion operating incomeresults decreased by $21.4$72.5 million as a result of the decrease in netlower comparable sales and gross margin rate, as discussed above, and an increase in depreciation expense. These itemsSG&A expenses, which were offset in part by an improvementlower BD&O expenses. The higher SG&A expenses primarily reflect higher non-cash charges to write-down store-related fixed assets as previously discussed, offset in gross margin rate and decreased operating expenses. Operating expense reductions were drivenpart by lower occupancy expenses, reduced marketing expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program. The lower BD&O expenses primarily reflect lower occupancy expenses associated with our fleet optimization program.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Kids FashionUnallocated restructuring and other related charges operating results decreased by $65.7 million as a result of the decreases in net sales and gross margin rate and the additional peak back-to-school week included in the year-ago period as a result of the 53rd week, offset in part by a decrease in operating expenses. The impact of the additional peak back-to-school week in the year-ago period was approximately $10 million. Operating expense reductions were driven by lower occupancy expenses, lower performance-based compensation and a decrease in administrative payrollreflect costs mainly associated withincurred under the Change for Growth program. Expenses of $76.6 million for Fiscal 2018 included $59.2 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives, $5.7 million of severance and other related expenses, and asset impairments of $11.7 million reflecting the closure of certain under-performing stores as well as the write-down of a building. The $78.1 million of unallocated restructuring and other related charges in Fiscal 2017 primarily reflect $30.8 million of severance and other related expenses, $12.7 million for charges related to the fleet optimization program and $33.4 million for professional fees incurred in connection with the identification and implementation of transformation initiatives.
Unallocated Acquisitionimpairment of goodwill reflects the Fiscal 2017 write-down of the carrying values of the reporting units to their fair values and Integration Expensesis included in our operating segments as follows: $428.9 million at our Premium Fashion segment and $60.2 million at our Plus Fashion segment. There was no unallocated impairment of goodwill in Fiscal 2018.
Unallocated impairment of other intangible assets reflects the Fiscal 2017 write-down of our trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade nameand $161.8 million of our Lane Bryant trade name. There was no unallocated impairment of other intangible assets in Fiscal 2018.
Unallocated acquisition and integration expenses of $39.4$5.4 million for Fiscal 2018 primarily reflected costs associated with the post-acquisition integration of ANN's distribution operations, including the closure of the former ANN distribution facility in Louisville, Kentucky, as well as the gain on the related sale of that facility, which occurred in Fiscal 2018. The $39.4 million of unallocated acquisition and integration expenses in Fiscal 2017 includedrepresents costs related to the ANN Acquisition consisting of $14.3 million of severance and retention costs, $8.0 million of settlement charges and professional fees related to the termination of the pension plan acquired in the ANN Acquisition, and $17.1 million of other costs associated with the post-acquisition integration of ANNANN's 's operations. The $77.4 million in the year-ago period represents costs related to the ANN Acquisition consisting of $20.8 million of legal, consulting and investment-banking related transaction costs, $37.5 million of severance and retention-related expenses and $17.3 million of integration costs primarily to combine the operations and infrastructure of the ANN business into the Company's.
Unallocated Restructuring and Other Related ChargesInterest expense of $81.9increased by $10.8 million to $113.0 million for Fiscal 2017 included $33.2 million of severance and other related expenses, $15.3 million for charges related2018, primarily due to the previously disclosed Fleet Optimization and $33.4 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program.
Unallocated impairment of goodwill reflects the write down of the carrying values of the reporting units to their fair values. The impairment charges by operating segment are as follows: $428.9 million at our Premium Fashion segment, $107.2 million at our Value Fashion segmentand $60.2 million at our Plus Fashion segment.
Unallocated impairment of intangible assets reflects the write down of the Company's trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade nameand $161.8 million of our Lane Bryant trade name.
Interest Expense decreased by $1.1 million to $102.2 million for Fiscal 2017. The decrease was primarily the result of the principal redemptions and repayments of the term loan during Fiscal 2017, mostly offset by a higher interest rate and an additional three weeks of interest expense on theour term loan for Fiscal 2017 due to the timing of the ANN Acquisition.loan.
GainLoss on extinguishment of debt. During Fiscal 2018, the year-ago period, the Company repurchased $72.0company made repayments of $180.0 million which were applied towards future scheduled quarterly payments of the outstanding principal balance of the Term Loan at an aggregate cost of $68.4 million through open market transactions,term loan debt, resulting in a $0.8$5.0 million pre-tax gain, netloss reflecting the acceleration of the proportional write-off of unamortized original issuance discount and debt issuance costs of $2.8 million.deferred financing fees.
Benefit (provision) for Income Taxesincome taxes from continuing operations represents federal, foreign, state and local income taxes. The benefit (provision) for income taxes increased by $350.5 million toWe recorded a benefit of $346.9$62.3 million in Fiscal 2017 from2018 on a provisionpre-tax loss of $3.6$205.3 million, in the year-ago period. Ourfor an effective tax rate of 30.3%, which reflects the provisional impact of recording the tax effects associated with the 2017 Act. This was 24.5%offset by the impact of recording a valuation allowance on certain state deferred tax assets and accounting for the tax effects of share-based compensation. In Fiscal 2017, and negative 43.4%we recorded a benefit of $367.5 million on a pre-tax loss of $1,435.5 million for the year-ago period.a 25.6% effective tax rate. The effective annual tax rate computing the benefit on the pre-tax loss for Fiscal 2017 is lower than the statutory federal and state tax rate primarily as $526.5because $489.1 million of the goodwill impairment chargeof goodwill is non-deductible for income tax purposes and is treated as a permanent difference. The negative effective tax rate forRefer to Note 15 to the year-ago period despite a net loss was primarily due to state and local taxes and certain expenses which were non-deductible for income tax purposes.accompanying consolidated financial statements.
Net Loss from continuing operations increaseddecreased by $1.055 billion$925.0 million to $1.067 billion$143.0 million in Fiscal 2017 from $11.9 million in the year-ago period,2018, primarily due to the impairment of goodwill and other intangible assets, net of the related income tax benefit, recorded in the year-ago period as well as lower operating results discussed above.
Net Loss from continuing operations per Diluted Common Sharediluted common share increased by $5.42was $0.73 per share in Fiscal 2018 compared to $5.48 per share in Fiscal 2017 from $0.06 per share in Fiscal 2016the year-ago period due to the higherlower net loss discussed above.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Fiscal 2016 Compared to Fiscal 2015
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
|
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | July 30,
2016 | | July 25,
2015 | | $ Change | | % Change |
| | | (millions, except per share data) | | |
| Net sales | | $ | 6,995.4 |
| | $ | 4,802.9 |
| | $ | 2,192.5 |
| | 45.6 | % |
| | | | | | | | | |
| Cost of goods sold | | (3,066.7 | ) | | (2,133.7 | ) | | (933.0 | ) | | (43.7 | )% |
| Cost of goods sold as % of net sales | | 43.8 | % | | 44.4 | % | | |
| | |
|
| Gross margin | | 3,928.7 |
| | 2,669.2 |
| | 1,259.5 |
| | 47.2 | % |
| Gross margin as % of net sales | | 56.2 | % | | 55.6 | % | | |
| | |
|
| Other operating expenses: | | |
| | |
| | |
| | |
|
| Buying, distribution and occupancy expenses | | (1,286.5 | ) | | (856.9 | ) | | (429.6 | ) | | (50.1 | )% |
| �� Buying, distribution and occupancy expenses as % of net sales | | 18.4 | % | | 17.8 | % | | |
| | |
|
| Selling, general and administrative expenses | | (2,112.3 | ) | | (1,490.9 | ) | | (621.4 | ) | | (41.7 | )% |
| SG&A expenses as % of net sales | | 30.2 | % | | 31.0 | % | | |
| | |
|
| Acquisition and integration expenses | | (77.4 | ) | | (31.7 | ) | | (45.7 | ) | | (144.2 | )% |
| Impairment of goodwill | | — |
| | (261.7 | ) | | 261.7 |
| | NM |
|
| Impairment of intangible assets | | — |
| | (44.7 | ) | | 44.7 |
| | NM |
|
| Depreciation and amortization expense | | (358.7 | ) | | (218.2 | ) | | (140.5 | ) | | (64.4 | )% |
| Total other operating expenses | | (3,834.9 | ) | | (2,904.1 | ) | | (930.8 | ) | | (32.1 | )% |
| Operating income (loss) | | 93.8 |
| | (234.9 | ) | | 328.7 |
| | NM |
|
| Operating income (loss) as % of net sales | | 1.3 | % | | (4.9 | )% | | |
| | |
|
| Interest expense | | (103.3 | ) | | (6.0 | ) | | (97.3 | ) | | NM |
|
| Interest and other income, net | | 0.4 |
| | 0.3 |
| | 0.1 |
| | 33.3 | % |
| Gain on extinguishment of debt | | 0.8 |
| | — |
| | 0.8 |
| | NM |
|
| Loss before (provision) benefit for income taxes | | (8.3 | ) | | (240.6 | ) | | 232.3 |
| | (96.6 | )% |
| (Provision) Benefit for income taxes | | (3.6 | ) | | 3.8 |
| | (7.4 | ) | | NM |
|
Effective tax rate (a) | | (43.4 | )% | | 1.6 | % | | |
| | |
|
| Net loss | | $ | (11.9 | ) | | $ | (236.8 | ) | | $ | 224.9 |
| | (95.0 | )% |
| | | | | | | | | |
| Net loss per common share: | | |
| | |
| | |
| | |
|
| Basic | | $ | (0.06 | ) | | $ | (1.46 | ) | | $ | 1.40 |
| | (95.9 | )% |
| Diluted | | $ | (0.06 | ) | | $ | (1.46 | ) | | $ | 1.40 |
| | (95.9 | )% |
_________
(a) Effective tax rate is calculated by dividing the (provision) benefit for income taxes by the loss before the (provision) benefit for income taxes.
(NM) Not meaningful.
Net Sales. Net sales increased by $2.193 billion, or 45.6%, to $6.995 billion in Fiscal 2016 from $4.803 billion in Fiscal 2015. The increase was primarily due to the acquisition of ANN, which represented our Premium Fashion segment. For our other operating segments, comparable sales decreased by $214.0 million, or 5%, to $4.233 billion in Fiscal 2016 from $4.447 billion in Fiscal 2015 mainly as a result of anticipated sales declines at our Kids Fashion segment principally related to its less promotional selling model. Non-comparable sales decreased by $0.2 million, or essentially flat, to $206.0 million from $206.2 million. Wholesale, licensing and other revenues decreased by $6.6 million, or 4%, to $143.4 million from $150.0 million. Net sales excluding our Premium Fashion segment also reflected incremental revenues of approximately $82 million due to the inclusion of the 53rd week in Fiscal 2016.
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.
|
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
|
| | | July 30,
2016 | | July 25,
2015 | | $ Change | | % Change |
| | | (millions) | | | | |
|
| Net sales: | | |
| | |
| | |
| | |
|
| Premium Fashion | | $ | 2,330.9 |
| | $ | — |
| | $ | 2,330.9 |
| | NM |
|
| Value Fashion | | 2,094.6 |
| | 2,084.2 |
| | 10.4 |
| | 0.5 | % |
| Plus Fashion | | 1,463.6 |
| | 1,441.9 |
| | 21.7 |
| | 1.5 | % |
| Kids Fashion | | 1,106.3 |
| | 1,276.8 |
| | (170.5 | ) | | (13.4 | )% |
| Total net sales | | $ | 6,995.4 |
| | $ | 4,802.9 |
| | $ | 2,192.5 |
| | 45.6 | % |
| | | | | | | | | |
Comparable sales (a) | | | | |
| | |
| | (5 | )% |
_______
(a) Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales refer to growth of sales from the Company's ecommerce channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, the Company reports a single, consolidated comparable sales metric, inclusive of store and ecommerce channels.
(NM) Not meaningful.
Premium Fashionnet sales of $2.331 billion represented ANN's net sales for the post-acquisition period from August 22, 2015 to July 30, 2016.
Value Fashion net sales performance primarily reflected:
a decrease of $16.2 million, or 2%, in comparable sales at maurices and a decrease of $45.5 million, or 5%, in comparable sales at dressbarn during Fiscal 2016;
an increase of $36.0 million in non-comparable sales due to 42 net store openings at maurices in Fiscal 2016, offset in part by a decrease of $0.9 million in non-comparable sales due to the timing of 15 net store closures at dressbarn in Fiscal 2016;
| |
• | incremental revenue of $34.5 million due to the inclusion of the 53rd week in Fiscal 2016; and
|
a $2.5 million increase in other revenues.
Plus Fashionnet sales performance primarily reflected:
an increase of $12.7 million, or 1%, in comparable sales at Lane Bryant and a decrease of $14.2 million, or 4%, in comparable sales at Catherines during Fiscal 2016;
a decrease of $2.7 million in non-comparable sales primarily due to the timing of 7 net store openings at Lane Bryant in Fiscal 2016 and a decrease of $3.8 million in non-comparable sales due to 4 net store closures at Catherines in Fiscal 2016;
| |
• | incremental revenue of $23.0 million due to the inclusion of the 53rd week in Fiscal 2016; and
|
a $6.7 million increase in other revenues.
Kids Fashionnet sales performance primarily reflected:
a decrease of $150.8 million, or 13%, in comparable sales during Fiscal 2016 mainly as a result of an anticipated decrease in customer transactions, which was caused by the less promotional selling model;
a $28.8 million decrease in non-comparable stores sales, caused by 41 net store closures during Fiscal 2016;
| |
• | incremental revenues of $24.9 million due to the inclusion of the 53rd week in Fiscal 2016; and
|
a $15.8 million decrease in wholesale, licensing operations and other revenues.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Gross Margin, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by 60 basis points to 56.2% in Fiscal 2016 from 55.6% in Fiscal 2015. Gross margin was negatively impacted in Fiscal 2016 by approximately $130 million of non-cash purchase accounting expenses, primarily related to the amortization of the purchase accounting write-up of inventory to fair market value recorded in our Premium Fashion segment. The gross margin rate for our other operating segments increased by 290 basis points from 55.6% to 58.5% primarily due to the less promotional selling model at our Kids Fashion segment.
Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from year to year.
Gross margin rate highlights of our other operating segments are as follows:
Value Fashion gross margin rate performance improved mainly due to higher mark-on resulting from an increased internally-sourced product mix.
Plus Fashiongross margin rate performance improved slightly as a result of reduced promotional selling and tighter inventory management.
Kids Fashiongross marginrate performance improved by approximately 980 basis points as a result of an increased mix of full-ticket selling and tighter inventory management. The gross margin performance reflected a significant reduction in promotional activity, supported by execution of the new strategy, which was based on a hybrid of everyday low price merchandise, along with full ticket fashion merchandise, supported by focused, category-level promotions.
Buying, Distribution and Occupancy ("BD&O") Expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
BD&O expenses increased by $429.6 million, or 50.1%, to $1,286.5 million in Fiscal 2016 from $856.9 million in Fiscal 2015. BD&O expenses as a percentage of net sales increased by 60 basis points to 18.4% in Fiscal 2016 from 17.8% in Fiscal 2015. The increase in BD&O expenses was primarily attributable to the addition of $423.4 million related to the Premium Fashion segment. The increase of $6.2 million from our other operating segments was primarily due to increases in buying-related costs resulting from the expansion of merchandising and design functions, offset in part by synergy savings resulting from the supply chain integration of our ecommerce distribution facilities into one distribution center in Greencastle, Indiana that was completed in the third quarter of Fiscal 2015.
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 $621.4 million, or 41.7%, to $2.112 billion in Fiscal 2016 from $1.491 billion in Fiscal 2015. SG&A expenses as a percentage of net sales decreased by 80 basis points to 30.2% in Fiscal 2016 from 31.0% in Fiscal 2015. The increase in SG&A expenses was due to the addition of $634.1 million related to the Premium Fashion segment. The decrease of $12.7 million from our other operating segments was primarily due to the establishment of a legal reserve in Fiscal 2015 of approximately $51 million in connection with the Justice pricing lawsuits and lower store-related expenses mainly at the Kids Fashion segment, offset in part by incremental marketing investments mainly at the Plus Fashion and Value Fashion segmentsas well as general administrative increases.
Depreciation and Amortization Expense increased by $140.5 million, or 64.4%, to $358.7 million in Fiscal 2016 from $218.2 million in Fiscal 2015, with $128.0 million related to the Premium Fashion segment. The remaining increase of $12.5 million from other operating segments primarily resulted from higher depreciation of Company-owned information technology assets placed into service during Fiscal 2015 offset in part by accelerated depreciation of $5.9 million for the store assets due to the closure of Brothers, which was completed in Fiscal 2015.
Operating Income (Loss). Operating results increased by $328.7 million, to an operating income of $93.8 million in Fiscal 2016 from an operating loss of $234.9 million in Fiscal 2015 primarily due to $306.4 million of impairment losses recognized during
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Fiscal 2015 at the Plus Fashion segment to write down Lane Bryant's goodwill and trade name to their respective fair values and the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits recognized during Fiscal 2015, offset in part by a $45.7 million increase in Acquisition and integration expenses in Fiscal 2016. The operating results also reflected operating income of $13.3 million for the PremiumFashion segment, which included non-cash purchase accounting expenses of approximately $165 million.
Operating results for our four operating segments is presented below.
|
| | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | July 30,
2016 | | July 25,
2015 | | $ Change | | % Change |
| | | (millions) | | | | |
| Operating income (loss): | | |
| | |
| | |
| | |
|
| Premium Fashion | | $ | 13.3 |
| | $ | — |
| | $ | 13.3 |
| | NM |
|
| Value Fashion | | 92.0 |
| | 136.6 |
| | (44.6 | ) | | (32.7 | )% |
| Plus Fashion | | 36.9 |
| | 29.4 |
| | 7.5 |
| | 25.5 | % |
| Kids Fashion | | 29.0 |
| | (62.8 | ) | | 91.8 |
| | (146.2 | )% |
| Unallocated acquisition and integration expenses | | (77.4 | ) | | (31.7 | ) | | (45.7 | ) | | 144.2 | % |
| Unallocated impairment of goodwill | | — |
| | (261.7 | ) | | 261.7 |
| | NM |
|
| Unallocated impairment of intangible assets | | — |
| | (44.7 | ) | | 44.7 |
| | NM |
|
| Total operating income (loss) | | $ | 93.8 |
| | $ | (234.9 | ) | | $ | 328.7 |
| | NM |
|
_______
(NM) Not meaningful.
Premium Fashion operating income of $13.3 million was for the post-acquisition period from August 22, 2015 to July 30, 2016. The operating results for Fiscal 2016 were impacted by non-cash purchase accounting expenses of approximately $165 million.
Value Fashion operating income decreased by $44.6 million as increases in sales and improved gross margin rate were more than offset by increases in BD&O, SG&A and depreciation expenses. BD&O and SG&A expenses were higher due to general administrative increases, strategic investments expected to drive future growth, including new stores and incremental marketing investments, and higher store asset impairment charges resulting from lower-than-expected operating performance of certain retail locations. Depreciation expense increased mainly due to higher allocated depreciation of Company-owned information technology assets placed into service during Fiscal 2015.
Plus Fashion operating income increased by $7.5 million as an increase in sales and gross margin rate was offset in part by an increase in SG&A expenses. The increase in SG&A expenses was primarily due to higher marketing expenses associated with incremental marketing campaigns during Fiscal 2016, offset in part by the elimination of duplicative corporate overhead as the Company completed its migration to common information technology platforms in the first quarter of Fiscal 2016.
Kids Fashion operating results increased by $91.8 million as the decrease in sales was more than offset by the significant improvement in gross profit margin rate and lower operating expenses. BD&O and SG&A expenses decreased as a result of store closures related to ongoing market optimization and lower variable expenses associated with the decrease in sales volume. SG&A expenses also decreased due to the establishment of a legal reserve in Fiscal 2015 of approximately $51 million in connection with the Justice pricing lawsuits. Depreciation expense increased primarily as a result of higher allocated depreciation of Company-owned information technology assets placed into service during Fiscal 2015.
Unallocated Acquisition and Integration Expenses of $77.4 million for Fiscal 2016 primarily represents costs related to the ANN Acquisition consisting of $20.8 million of legal, consulting and investment banking-related transaction costs, $17.3 million of integration costs to combine the operations and infrastructures of the ANN business into the Company's and $37.5 million of severance and retention-related expenses. The $31.7 million for Fiscal 2015 related primarily to the Company's supply chain and technology integration, which was substantially completed by the end of Fiscal 2015.
Impairment of Goodwill represents the impairment loss recognized during Fiscal 2015 to write down the carrying value of Lane Bryant's goodwill to its implied fair value, as more fully described in Note 6 to the accompanying consolidated financial statements.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Impairment of Intangible Assets represents the impairment loss recognized to write down the carrying value of the Lane Bryant trade name to its implied fair value during Fiscal 2015, as more fully described in Note 6 to the accompanying consolidated financial statements.
Interest Expense increased by $97.3 million to $103.3 million for Fiscal 2016 as a result of the $1.8 billion seven-year, variable-rate term loan obtained to finance the ANN Acquisition on August 21, 2015. Interest expense included the non-cash amortization of $11.3 million related to the original issue discount and debt issuance costs.
Gain on extinguishment of debt. During Fiscal 2016, the Company repurchased $72.0 million of the outstanding principal balance of the Term Loan at an aggregate cost of $68.4 million through open market transactions, resulting in a $0.8 million pre-tax gain, net of the proportional write-off of unamortized original discount and debt issuance costs of $2.8 million.
(Provision) Benefit for Income Taxes represents federal, foreign, state and local income taxes. The provision for income taxes was $3.6 million for Fiscal 2016, compared to a benefit of $3.8 million for Fiscal 2015. In Fiscal 2016, we had a pretax loss of $8.3 million, compared to a pretax loss of $240.6 million for Fiscal 2015. Our effective tax rate was negative 43.4% for Fiscal 2016. The Company recorded a tax provision in Fiscal 2016 despite the net loss for the period primarily due to state and local taxes and certain expenses which are non-deductible for income tax purposes. The 1.6% effective tax rate for Fiscal 2015 is lower than the Company's Federal statutory rate as a result of the goodwill impairment loss recorded in the Plus Fashion segment which was treated as a permanent non-deductible item, offset in part by an approximate $13 million tax benefit related to the retirement agreement for the former President and CEO of Justice whereby previously non-deductible permanent items for income tax purposes in previous fiscal years, became fully deductible in Fiscal 2015.
Net Loss decreased by $224.9 million, or 95.0%, to $11.9 million in Fiscal 2016 from $236.8 million in Fiscal 2015, primarily due to a higher level of operating results as previously discussed, offset in part by an increase in acquisition and integration expenses and interest expense for Fiscal 2016.
Net Loss per Diluted Common Share decreased by $1.40, or 95.9%, to $0.06 per share in Fiscal 2016 from $1.46 per share in Fiscal 2015 primarily as a result of the decrease in net loss, as previously discussed.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
Fiscal 20172019 Compared to Fiscal 20162018
The table below summarizes our cash flows for the years presented as follows:
|
| | | | | | | | |
| | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 |
| | | (millions) |
| Net cash provided by operating activities | | $ | 343.6 |
| | $ | 445.4 |
|
| Net cash used in investing activities | | (268.9 | ) | | (1,835.7 | ) |
| Net cash (used in) provided by financing activities | | (120.9 | ) | | 1,521.5 |
|
| Net (decrease) increase in cash and cash equivalents | | $ | (46.2 | ) | | $ | 131.2 |
|
|
| | | | | | | | |
| | | Fiscal Years Ended |
| | | August 3,
2019 | | August 4,
2018 |
| | | (millions) |
| Cash flows provided by operating activities | | $ | 21.1 |
| | $ | 273.9 |
|
| Cash flows provided by (used in) investing activities | | 67.7 |
| | (134.2 | ) |
| Cash flows provided by (used in) financing activities | | 0.3 |
| | (226.2 | ) |
| Net increase (decrease) in cash and cash equivalents | | $ | 89.1 |
| | $ | (86.5 | ) |
Net cashCash flows provided by operating activities. Net cash provided by operating activities was $343.6$21.1 million for Fiscal 2017,2019, compared with $445.4$273.9 million during the year-ago period. Cash provided byflows from operations was lower during Fiscal 2017 as lower2019 primarily due to higher net incomeloss before non-cash expenses and unfavorablehigher working capital outflows, primarily related to timing of payments for inventory and lower incentive compensation accruals wereother operating expenses, offset in part by cash used for non-recurring payments made during the year-ago period, primarily reflecting an escrow paymentfavorable timing of approximately $51 million for the Justice pricing litigation settlement and a payment of approximately $44 million to a former Justice executive.store rent expense payments.
Net cash used inCash flows provided by (used in) investing activities. Net cash provided by investing activities for Fiscal 2019 was $67.7 million, compared with cash used in investing activities for Fiscal 2017 was $268.9of $134.2 million compared with $1.836 billion for the year-ago period. Net cash used inprovided by investing activities in Fiscal 20172019 consisted primarily of net proceeds from the sale of maurices of $203.2 million, offset in part by capital expenditures of $258.1 million and the purchase of an intangible asset of $11.6$136.5 million. Net cash used in investing activities in the year-ago period was $1.836 billion,$134.2 million, consisting primarily of $1.495 billion of cash paid in the ANN Acquisition and cash used for capital expenditures of $366.5$186.3 million, partially offset in part by net$52.1 million of proceeds from the sale of investmentsassets, which substantially reflects the redemption of $25.4 million.the cash surrender value on certain company-owned life insurance policies.
Net cash provided by (used in) financing activities. Net cash provided by financing activities. was $0.3 million during Fiscal 2019. Net cash used in financing activities was $120.9$226.2 million during Fiscal 2017,the year-ago period, consisting primarily of principal repayments of our term loan. Net cash provided by financing activities was $1.522 billion during the year-ago period, consisting primarily of $1.8 billion of borrowing under our new term loan offset in part by net repayments of debt under our amended revolving credit agreement of $116.0 million, $77.4 million of redemptions and principal repayments of our term loan debt and $42.6 million of payments made for deferred financing costs related to the new borrowing arrangements entered into during the first quarter of the year-ago period.debt.
Fiscal 20162018 Compared to Fiscal 20152017
The table below summarizes our cash flows for the years presented as follows:
|
| | | | | | | | |
| | | Fiscal Years Ended |
| | | July 30,
2016 | | July 25,
2015 |
| | | (millions) |
| Net cash provided by operating activities | | $ | 445.4 |
| | $ | 431.3 |
|
| Net cash used in investing activities | | (1,835.7 | ) | | (298.1 | ) |
| Net cash provided (used in) financing activities | | 1,521.5 |
| | (49.5 | ) |
| Net increase in cash and cash equivalents | | $ | 131.2 |
| | $ | 83.7 |
|
|
| | | | | | | | |
| | | Fiscal Years Ended |
| | | August 4,
2018 | | July 29,
2017 |
| | | (millions) |
| Cash flows provided by operating activities | | $ | 273.9 |
| | $ | 343.6 |
|
| Cash flows used in investing activities | | (134.2 | ) | | (269.7 | ) |
| Cash flows used in financing activities | | (226.2 | ) | | (120.9 | ) |
| Net decrease in cash and cash equivalents | | $ | (86.5 | ) | | $ | (47.0 | ) |
Net Cash Providedflows provided by Operating Activities.operating activities. Net cash provided by operating activities was $445.4$273.9 million for Fiscal 2016,2018, compared with $431.3$343.6 million during Fiscal 2015.2017. Cash provided by operations increasedwas lower during Fiscal 2016 as higher2018 primarily due to lower net income before non-cash expenses such as depreciation and amortization expense, goodwill and intangible asset impairment charges andhigher working capital outflows, primarily related to timing of payments for store rent expense.
Cash flows used in investing activities. Net cash used in investing activities for Fiscal 2018 was $134.2 million, compared with $269.7 million for Fiscal 2017. Net cash used in investing activities in Fiscal 2018 consisted primarily of capital expenditures of $186.3 million, offset in part by $52.1 million of proceeds from the amortizationsale of assets, which substantially reflects the acquisition-related inventory write-up was mostly offset by an approximately $44 million payment made to aredemption of
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
former Justice executive, an approximately $51 million escrow payment for the proposed Justice pricing litigation settlement and the payment of approximately $95 million of employee-related obligations assumed in the ANN Acquisition.
Net Cash Used in Investing Activities. Net cash used in investing activities for Fiscal 2016 was $1.836 billion, compared with $298.1 million for Fiscal 2015.surrender value on certain company-owned life insurance policies. Net cash used in investing activities in Fiscal 2016 consisted2017 was $269.7 million, consisting primarily of $1.495 billion of cash paid in the ANN Acquisition, net of cash acquired, and $366.5 million of capital expenditures offsetof $258.1 million and the purchase of an intangible asset of $11.6 million.
Cash flows used in part by $25.4 million of net proceeds from the sale of investments.financing activities. Net cash used in investingfinancing activities inwas $226.2 million during Fiscal 2015 was $298.1 million,2018, consisting primarily of cash used for capital expenditures of $312.5 million, partially offset by proceeds from the sale of assets of $8.9 million and net proceeds from the sale of investments of $5.5 million.
Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $1.522 billion during Fiscal 2016, consisting primarily of $1.8 billion of borrowing under our new term loan, offset in part by net repayments of debt under our amended revolving credit agreement of $116.0 million, $77.4$225.0 million of redemptions and principal repayments of our term loan debt and $42.6 million of payments made for deferred financing costs related to the new borrowing arrangements entered into during the first quarter of Fiscal 2016.debt. Net cash used in financing activities forwas $120.9 million during Fiscal 2015 was $49.5 million,2017, consisting primarily of $56.0 million ofprincipal repayments of debt (net of borrowings) and proceeds relating to our stock-based compensation plans.term loan debt.
Capital Spending
In Fiscal 2017,2019, we had $258.1$136.5 million in capital expenditures, which included bothspending for capital investments primarily including initiatives identified with the Change for Growth program as well as routine spending in connection with ongoing investments inour digital initiatives, infrastructure, and our retail store network, construction and renovation of our existing portfolio of retail stores as well as spending for non-routine capital investments in our technology and supply chain infrastructure.network. The most significant non-routine initiatives are described below.
During Fiscal 2017,2019, we continued to invest in initiatives that support our omni-channel strategies. We completed the transition of all brands onto our new ecommerce platform with our dressbarn, Lane Bryantcapability as well as initiatives aimed at improving product availability and Catherines brands added to the platform. Additionally, the Company's new distribution center in Riverside, California commenced west coast brick-and-mortar distribution this past spring. The Company's distribution centers in Etna, Ohio and Riverside, California, and its fulfillment center in Greencastle, Indiana, are expectedefficiency to enhance its fulfillmentour capability to analyze transaction data to support more effective product and distribution efficiency. Also,marketing decisions. Lastly, in connection with the Change for Growth program, we incurredspent approximately $5$35 million in Fiscal 2017 and expect to incur approximately $40 million in Fiscal 20182019 on projects to improve operational efficiency and enhance our customer-facing capabilities.
AsFor Fiscal 2020, we expect a resultsignificant reduction in the level of capital spending reflecting the Fleet Optimization review in connection withend of the Change for Growth program we expectand fewer new store openings during Fiscal 2018. Thus,openings. As a result of those changes, we expect that total capital spending forin Fiscal 2018, including (i) routine spending, (ii) technological spending for the projects discussed above, and (iii) spending required to support the Change for Growth program,2020 will be in the range of $190-$80-$220100 million. 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’sCompany's Amended Revolving Credit Agreement which is defined and discussed below.
Liquidity
Our primary sources of liquidity are the cash flowflows generated from our operations, remaining availability under our Amended Revolving Credit Agreement after taking into account outstanding borrowings, letters of credit and(inclusive of the collateral limitation,limitation), proceeds from the sale of assets, such as the disposition of maurices, and available cash and cash equivalents and other available financing options. equivalents. As of August 3, 2019, we had $396.5 million of availability under the Amended Revolving Credit Agreement.
These sources of liquidity are used to fund our ongoing cash requirements, includingsuch as inventory purchases and other changes in working capital requirements, retail store expansion, construction and renovation of stores, any future dividend requirements, investment in technologytechnological and supply chain infrastructure, acquisitions, debt servicing requirements,service, stock repurchases, contingent liabilities (including uncertain tax positions) and other corporate activities.
In addition to the ongoing cash requirements, those sources of liquidity will also be used to fund the announced wind down of our Dressbarn operations which is expected to result in the payment of severance related benefits, as well as other closing costs, primarily related to the closing of our retail stores. Such payments could be significant and have a material effect on our cash flows from operations. Further, as the Company identifies additional cost reduction opportunities, costs associated with those actions may have a material impact on our cash flows from operations. Lastly, it will also fund the payments to former members of management under the Company's deferred compensation program, as well as severance payments to employees impacted by the job eliminations in the fourth quarter of Fiscal 2019. Management believes that cash flows from operations at anticipated levels and our existing sources of liquidity described above will be sufficient to support our operating needs, costs associated with our transformation initiatives, capital requirements and anyour debt service requirements for at least the foreseeable future.next twelve months.
As of July 29, 2017, approximately $224 million, or 69%, of our availableAugust 3, 2019, we had cash and cash equivalents of $328.0 million, approximately $33 million, or 10%, which was held overseas by our foreign subsidiaries. For the CompanyWe continue to have access to thoseevaluate various alternatives for our remaining foreign held cash balances and will repatriate any excess cash equivalents in the U.S, we would incur a current U.S. tax liability of between 15% to 20% on a substantial portion of the cash repatriated. A U.S. tax liability has been previously provided for in the provision for income taxes for the portion that is not permanently reinvestedbalances as discussed in Note 14, and is currentlynecessary.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
classified within Deferred income taxes on the accompanying consolidated balance sheets. We continue to assess options for the use of our overseas cash and cash equivalents.
As of July 29, 2017, we had no borrowings outstanding under the Amended Revolving Credit Agreement. After taking into account the $31.1 million in outstanding letters of credit, the Company had $500.4 million of availability under the Amended Revolving Credit Agreement.
Debt
For a detailed description of the terms and restrictions under theour amended and restated revolving credit agreement ("Amendeddated February 27, 2018 (the "Amended Revolving Credit Agreement") and the $1.8 billion seven-year term loan (the "Term Loan"), see Note 1210 to the accompanying consolidated financial statements.
Amended Revolving Credit Agreement
We believe that our Amended Revolving Credit Agreement is adequately diversified with no undue concentrations in any one financial institution. Upon the closing of the Amended Revolving Credit Agreement, thereWe were seven financial institutions participating in the Amended Revolving Credit Facility, with no one participant maintaining a maximum commitment percentage in excess of 25%. Management has no reason at this time to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the Amended Revolving Credit Agreement in the event of our election to draw funds in the foreseeable future. The Company was in compliance with all financial covenants contained in the Amended Revolving Credit Agreement as of July 29, 2017.August 3, 2019. The Amended Revolving Credit Agreement extends the maturity of the Company's revolving credit facility from August 2020 to the earlier of (i) 5 years from the closing date (or February 2023) or (ii) 91 days prior to the maturity date of the Term Loan (unless (a) the outstanding principal amount of the Term Loans is $150 million or less and (b) the Company believesmaintains liquidity, as defined in the Amended Revolving Credit Agreement (which can include (1) availability under the revolving credit facility in excess of the greater of $100 million and 20% of the credit limit and (2) cash held in a controlled account of the administrative agent of the revolving credit facility) in an amount equal to the outstanding principal amount of the remaining Term Loan, as described in more detail in Note 10 to the accompanying consolidated financial statements. We believe the remaining availability under our Amended Revolving Credit Agreement, as amended on September 20, 2019 and described in Note 22 to the accompanying consolidated financial statements, after taking into account outstanding borrowings, letters of credit (inclusive of the collateral limitation), together with cash flows generated from our operations at anticipated levels, proceeds from the sale of assets, such as the disposition of maurices, and available cash and cash equivalents will provide sufficient liquidity to continue to support the Company’sour operating needs, costs associated with our transformational initiatives and capital requirements for at least the foreseeable future.next twelve months.
Term Loan
ForIn Fiscal 2017, the Company2018, we repaid a total of $122.5$225.0 million of Term Loan debt of which $180.0 million was applied to future quarterly scheduled payments such that the Company iswe are not required to make itsour next quarterly payment of $22.5 million until May 2018.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.
The Company is required to make principal payments of $44 million in Fiscal 2018. Additionally, the Company expectswe expect to incur cash interest expense of approximately $90$93 million on the Term Loan in Fiscal 20182020 based on the outstanding balance and interest rates in effect as of July 29, 2017.August 3, 2019. Such interest and principal payments are expected to be funded with our cash flows from operations.operations and available cash and cash equivalents.
Common Stock Repurchase Program
There were no purchases of common stock by the Company during Fiscal 2019, Fiscal 2018 or Fiscal 2017 under itsthe repurchase program. For a complete description of the Company'sour 2016 Stock Repurchase Program, see Note 1617 to the accompanying consolidated financial statements.
We may from time to time continue to repurchase additional shares under the repurchase program depending on our liquidity requirements and prevailing market conditions, and our liquidity requirements, subject to any restrictions under our debt agreements, among other factors.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
CONTRACTUAL AND OTHER OBLIGATIONS
Firm Commitments
The following table summarizes certain of the Company'sour aggregate contractual obligations as of July 29, 2017,August 3, 2019, and the estimated timing and effect that such obligations are expected to have on the Company'sour liquidity and cash flows in future periods. The Company expectsWe expect to fund the firm commitments with operating cash flowflows generated in the normal course of business, available cash and if necessary,cash equivalents and, availability under itsthe Amended Revolving Credit Agreement.Agreement, as required.
| | | | | Payments Due by Period | | Payments Due by Period |
| Contractual Obligations | | Fiscal 2018 | | Fiscal 2019- 2020 | | Fiscal 2021- 2022 | | Fiscal 2023 and Thereafter | | Total | | Fiscal 2020 | | Fiscal 2021- 2022 | | Fiscal 2023- 2024 | | Fiscal 2025 and Thereafter | | Total |
| | | (millions) | | (millions) |
| Long-term debt | | $ | 44.0 |
| | $ | 157.5 |
| | $ | 180.0 |
| | $ | 1,215.0 |
| | $ | 1,596.5 |
| | $ | — |
| | $ | 156.5 |
| | $ | 1,215.0 |
| | $ | — |
| | $ | 1,371.5 |
|
| Interest payments on long-term debt | | 89.6 |
| | 166.6 |
| | 146.4 |
| | 5.3 |
| | 407.9 |
| | 93.2 |
| | 175.9 |
| | 6.4 |
| | — |
| | 275.5 |
|
| Operating leases | | 585.1 |
| | 941.6 |
| | 672.3 |
| | 608.1 |
| | 2,807.1 |
| | 462.0 |
| | 727.7 |
| | 415.3 |
| | 563.3 |
| | 2,168.3 |
|
| Inventory purchase commitments | | 761.1 |
| | 1.0 |
| | — |
| | — |
| | 762.1 |
| | 635.8 |
| | — |
| | — |
| | — |
| | 635.8 |
|
| Other commitments | | 32.0 |
| | 52.3 |
| | 19.7 |
| | — |
| | 104.0 |
| | 44.7 |
| | 24.9 |
| | 5.8 |
| | 1.1 |
| | 76.5 |
|
| Total | | $ | 1,511.8 |
| | $ | 1,319.0 |
| | $ | 1,018.4 |
| | $ | 1,828.4 |
| | $ | 5,677.6 |
| | $ | 1,235.7 |
| | $ | 1,085.0 |
| | $ | 1,642.5 |
| | $ | 564.4 |
| | $ | 4,527.6 |
|
The following is a description of the Company'sour material, firmly committed contractual obligations as of July 29, 2017:August 3, 2019:
Long-term debt represents contractual payments of outstanding borrowings under our borrowing agreements as of July 29, 2017.August 3, 2019.
Interest payments on long-term debt represent interest payments related to our borrowing agreements. Interest payments on our Term Loan were calculated based on the interest rates in effect as of July 29, 2017August 3, 2019 and the estimated outstanding balance, giving effect to the contractual repayments in future periods. Interest payments on our Amended Revolving Credit Agreement, if any, were calculated based on the outstanding balance and the interest rates in effect as of July 29, 2017,August 3, 2019, as if the borrowings remain outstanding until mandatory repayment is required at expiration in August 2020.February 2023.
Operating lease obligations represent the estimated minimum lease rental payments for the Company'sour real estate and operating equipment in various locations around the world and do not include incremental rentals based on a percentage of sales. Although such amounts are generally non-cancelable, certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. All future minimum rentals under these cancelable leases have been included in the above table. In addition to such amounts, the Company iswe are normally required to pay taxes, insurance and occupancy costs relating to itsthe leased real estate properties, which are not included in the table above.
Inventory purchase commitments represent the Company'sour agreements to purchase fixed or minimum quantities of goods at determinable prices. While a portion of these commitments may be canceled at the Company'sour option up to 30 days prior to the vendor’s scheduled shipment date, such commitments are generally not canceled and are included in the table above.
Other commitments primarily represent contractual payments primarily related to information technology services. While these commitments may be canceled at the Company'sour option for a termination fee, such commitments are generally not canceled and are included in the table above.
Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of $61.1$72.8 million as of July 29, 2017.August 3, 2019. This liability for unrecognized tax benefits has been excluded from the above table because the Companywe cannot make a reliable estimate of the period in which the liability will be settled, if ever.
The above table also excludes the following: (i) non-debt related amounts included in current liabilities in the consolidated balance sheet as of August 3, 2019, as these items will be paid within one year; and (ii) non-current liabilities that have no cash outflows
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
The above table also excludes the following: (i) non-debt related amounts included in current liabilities in the consolidated balance sheet as of July 29, 2017, as these items will be paid within one year; and (ii) non-current liabilities that have no cash outflows associated with them (e.g., deferred revenue) or the cash outflows associated with them are uncertain or do not represent a "purchase obligation" as the term is used herein (e.g., deferred taxes and other miscellaneous items).
The CompanyWe also hashave certain contractual arrangements that would require itus to make payments if certain circumstances occur. See Notes 1516 and 1819 to the accompanying consolidated financial statements for a description of the Company'sour contingent commitments not included in the above table, including obligations under employment agreements.
Off-Balance Sheet Arrangements
The Company'sOur off-balance sheet firm commitments, which include outstanding letters of credit, amounted to approximately $31.1$43.5 million as of July 29, 2017. The Company doesAugust 3, 2019. We do not maintain any other off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect on itsour operational results, financial condition and cash flows.
MARKET RISK MANAGEMENT
The Company isWe are exposed to a variety of market-based risks, representing our potential exposure to losses arising from adverse changes in market rates and prices. These market risks include, but are not limited to, changes in foreign currency exchange rates relating to our Canadian operations, changes in interest rates, and changes in both the value and liquidity of our cash and cash equivalents. Consequently, in the normal course of business, we employ a number of established policies and procedures to manage such risks, including considering, at times, the use of derivative financial instruments to hedge such risks. In order to protect against our interest rate exposure, we entered into an interest rate swap agreement in March 2019. However, as a matter of policy, we do not enter into derivative financial instruments for speculative or trading purposes. As of the end of Fiscal 2017, the Company did not have any outstanding derivative financial instruments.
Foreign Currency Risk Management
We currently do not have any significant risks related to the fluctuation of foreign currency exchange rates. Purchases of inventory for resale in our retail stores and ecommercedirect channel operations normally are transacted in U.S. dollars. In addition, our 100% owned international retail operations represent approximately 2% of our consolidated revenues for Fiscal 2017. In the future, if our international operations continue to expand, we may consider the use of forward foreign currency exchange contracts to manage any significant risks to changes in foreign currency exchange rates.2019.
Interest Rate Risk Management
As of July 29, 2017, our CompanyAugust 3, 2019, we had $1.597 billion$1,371.5 million in variable-rate debt outstanding under our borrowing agreements. Accordingly,To protect against future increases in interest rates, on March 22, 2019, we entered into an interest rate swap contract, which was designated as a cash flow hedge. This interest rate swap became effective on March 29, 2019. It has a notional principal amount of $600.0 million, a swap rate of 2.35%, and matures on March 31, 2021. We remain subject to changes in interest rates.rates for the remaining portion of our variable-rate debt not covered by the interest rate swap contract. For each 0.125% increase or decrease in interest rates, the Company’sour interest expense would increase or decrease by approximately $2.0$1.0 million, and net income would decrease or increase, respectively, by approximately $1.2$0.7 million. See Note 1210 to ourthe accompanying consolidated financial statements for a summary of the terms and conditions of our borrowing agreements.agreements and Note 13 for a summary of the terms of our interest rate swap.
Investment Risk Management
As of July 29, 2017, our CompanyAugust 3, 2019, we had cash and cash equivalents of $325.6$328.0 million. We maintain cash deposits and cash equivalents with well-known and stable financial institutions; however, there were significant amounts of cash and cash equivalents on deposit at overseas financial institutions as well as FDIC-insured financial institutions that were in excess of FDIC-insured limits at the end of Fiscal 2017. 2019. This represents a concentration of credit risk. While there have been no losses recorded on deposits of cash and cash equivalents to date, we cannotthere can be assuredno assurance that we will not experience losses on our deposits in the future.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
CRITICAL ACCOUNTING POLICIES
The SEC's Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggests companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to the Company'sour operational results and financial position and requires significant judgment and estimates on the part of management in its application. The Company'sOur estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. Actual results may differ from these estimates under different assumptions or conditions. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. The Company believesWe believe that the following list represents itsthe critical accounting policies as contemplated by FRR 60. For a discussion of all of the Company'sour significant accounting policies, see Notes 3 and 4 to the accompanying consolidated financial statements.
Inventories
Retail Inventory Method
We hold inventory for sale through our retail stores and ecommercedirect channel sites. All of the Company'sour segments, other than Premium Fashion discussed below, use the retail inventory method of accounting, under which inventory is stated at the lower of cost, on a First In, First Out (“FIFO”) basis, or market. Under the retail inventory method, the valuation of inventory at cost and the resulting gross margin are calculated by applying a calculated cost to retailcost-to-retail ratio to the retail value of inventory. Inherent in the retail method are certain significant management judgments and estimates including, among others, initial merchandise markup, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins.
The CompanyWe continuously reviews itsreview inventory levels to identify slow-moving merchandise and markdowns necessary to clear slow-moving merchandise, which reduces the cost of inventories to its estimated net realizable value. Consideration is given to a number of quantitative and qualitative factors, including current pricing levels and the anticipated need for subsequent markdowns, aging of inventories, historical sales trends, and the impact of market trends and economic conditions. Estimates of markdown requirements may differ from actual results due to changes in quantity, quality and mix of products in inventory, as well as changes in consumer preferences, market and economic conditions. The Company’sOur historical estimates of these costs and itsthe markdown provisions have not differed materially from actual results.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Weighted-average Cost Method
The Premium Fashion segment uses the weighted-average cost method to value inventory, under which inventory is valued at the lower of average cost or market, at the individual item level. Inventory cost is adjusted when the current selling price or future estimated selling price is less than cost.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Impairment of Goodwill and Other Intangible Assets
Goodwill and certain other intangible assets deemed to have indefinite useful lives are not amortized. Rather, goodwill and such indefinite-lived intangible assets are assessed for impairment at least annually, or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable.
As described in Note 4 to the accompanying consolidated financial statements, the Company elected to early adopt Accounting Standards Update ("ASU") 2017-04 in Fiscal 2017, which removes Step 2 of the goodwill impairment test requiring a hypothetical purchase price allocation. Under the new guidance, the Company evaluates assets for potential impairment, and then determines goodwill impairment by comparing the reporting unit's fair value to its carrying value. A goodwill impairment loss is recognized
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit.
To assist management in the process of determining goodwill impairment, the Company reviewswe review and considersconsider an appraisal from an independent valuation firm. Estimates of fair value are determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projected future cash flows and the timing of those cash flows, discount rates reflecting the risks inherent in future cash flows, perpetual growth rates and determination of appropriate market comparables. Estimating the fair value is judgmental in nature, which could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
The fair values of the reporting units are determined using a combination of the income approach (the discounted cash flows method) and the market approach (guideline public company method and guideline transaction method). The Company believesWe believe that the income approach is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate. Therefore, a greater weighting was applied to the income approach than the market approach. Historically, the Company assigned 75% to the income approach, 15% to the guideline public company method and 10% to the guideline transaction method for all reporting units. Due to the lack of recent comparable transactions, guideline transaction method was not used in determining the reporting unit fair values in Fiscal 2017. As a result, 85% was assigned to the income approach and 15% was assigned to the market approach in the interim test described below.
The assessment is performed at the reporting unit level. TheThrough the third quarter of Fiscal 2019, the reporting units identified for the purpose of goodwill impairment assessment, for all periods presented areafter considering the economic aggregation criteria, were ANN, Justice, Lane Bryant, maurices, dressbarnDressbarn and Catherines. During the fourth quarter, the Company determined that several discrete events had occurred which changed the manner in which the business was expected to be managed going forward. The sale of maurices, eachthe announced wind down of the Dressbarn brand, as well as changes in senior management, including the appointment of a new Chief Operating Decision Maker (“CODM”), all occurred in the fourth quarter of Fiscal 2019. After considering the impact of all these changes, the Company concluded that its new management was beginning to request more discrete operating information related to its Ann Taylor and LOFT businesses, which representsare components of the lowestPremium Fashion segment. Therefore, since new management, which included the Company's chief operating decision maker, was beginning to look at the components separately, and beginning to make decisions and allocate resources on that basis, the Company concluded that these components meet the definition of separate operating segments. Given that the determination of a reporting unit for purposes of goodwill impairment testing cannot be at a level where discrete financial information is availablehigher than the operating segment, the Company determined that Ann Taylor and is regularly reviewed by segment managers.LOFT now meet the definition of separate operating segments and therefore goodwill has been separately allocated to these two units and tested for impairment as part of the fourth quarter impairment test.
Fiscal 20172019 Interim Impairment Assessment
The third quarter of Fiscal 20172019 marked the continuation of the challenging market environment in which the Company competes. LowerContinued declines in customer traffic across the Company's brands negatively impacted our February and March performance causing lower comparative sales than expected, comparable sales for the third quarter, along with a reduced comparable sales outlook forthe expectation that such trends may continue into the fourth quarter led the Company to significantly reduce its level of forecasted earnings.quarter. The Company concluded that these factors, as well as the significant decline in the Company's stock price, represented impairment indicators which required the Company to test its goodwill and indefinite livedindefinite-lived intangible assets for impairment during the third quarter of Fiscal 20172019 (the "Interim Test").
As a result of a significantly lower forecasted revenue assumptions over the projection period, partially offset by the impact of estimated cost reductions resulting from the Change for Growth Program (refer to the Overview section of this MD&A for a detailed discussion), the Company recognized an impairment loss of $728.1$25.0 million to write downwrite-down the carrying values of its trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade name,and $161.8$23.0 million of our Lane Bryant trade name and $2.0 million of our Catherines trade name. The fair value of the trade names was determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trade name (Level 3 measurement). In addition, the Company recognized a goodwill impairment charge of $596.3$115.1 million as follows: a goodwill impairment charge of $428.9 million at the ANN reporting unit, $107.2 million at the maurices reporting and $60.2$65.8 million at the Lane Bryant reporting unit and $49.3 million at the Catherines reporting unit to write downwrite-down the carrying values of the reporting units (based on the revised carrying value after deducting the trade name impairments discussed above) to their fair values. The results of the Interim Test were also used to support our annual impairment test on the first day of the fourth quarter of Fiscal 2017.
Significant assumptions underlying the discounted cash flows included: a weighted average cost of capital ("WACC") of 11.0% to 15.0% for Lane Bryant and 14.0% for Catherines which was determined from relevant market comparisons and adjusted for specific risks; operating income margin of mid-to-high single digitslow single-digits and a terminal growth rate of 2%. Changes in these assumptions could have a significant impact on the valuation model. As an example, the impact of a hypothetical change in each of the significant assumptions is described below. In quantifying the impact, we changed only the specific assumption and held all other assumptions constant. A hypothetical 1% change in the WACC rate would increase/decrease the fair value by approximately $60 million at ANN, $30 million at maurices and $15$2 million at Lane Bryant and have no effect at Catherines. A hypothetical 1% change in the operating income margin percentages in all periods would increase/decrease the fair value by approximately $120 million at ANN, $60 million at maurices and $45$50 million at Lane Bryant and approximately $15 million at Catherines. Finally, a hypothetical 1% change in the terminal growth rate would increase/decrease the fair value by approximately $40 million at ANN,$20 million at maurices and $10$1 million at Lane Bryant and have no effect at Catherines. Any changes in fair value resulting from changes in the assumptions discussed above would increase/decrease the impairment charges of the respective goodwill and trade name. However, since the goodwill balances have been written down to zero, changes in the underlying assumptions discussed above would have had no impact on the Catherines goodwill impairment and may have resulted in a decrease in the goodwill impairment charge at Lane Bryant.
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Fiscal 2019 Year-End Impairment Assessment
The Company performed its regular annual assessment at the beginning of the fourth quarter and did not note any impairment of goodwill or intangible assets as it had just completed the Interim Test. However, during the fourth quarter of Fiscal 2019, the Company's stock price again declined significantly, dropping from the price used in the Interim Test of $1.20 to a value of $0.33 at the end of Fiscal 2019. This decline, coupled with a decline in the fair value of the Company's Term Loan, as defined herein, led the Company to conclude that the items represented further impairment indicators which again required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of Fiscal 2019 (the "Year-End Test").
The Year-End Test was determined with the assistance of an independent valuation firm using the same methodologies as the Interim Test. While the actual cash flows achieved in the fourth quarter of Fiscal 2019 differed from the projected Fiscal 2019 cash flows used in the Interim Test, the Company concluded that the primary difference arose from differences in gross margin rate, which resulted from the excess inventory positions previously noted herein. As a result, the Company concluded that the changes did not impact the cash flow estimates used for the future years, therefore the cash flow projections underlying the Year-End Test were substantially the same as those used in the Interim Test. The primary driver of the change in value was the change in the discount rate assumption. In the Interim Test, the discount rate ranged from 14%-15%. However, because of further declines in the Company's stock price and the fair value of the Company's debt, the discount rates used in the Year-End Test ranged from 27% for ANN and 29% for the other units. Other key assumptions included operating income margin ranging from low single-digits to low double-digits and a terminal growth rate of 2%.
Additionally, ifas a result of identifying that Ann Taylor and LOFT were additional reporting units, we performed an initial test on those units utilizing a similar approach as that used for the ANN test described above. The discount rates used were 27% for LOFT and 28% for Ann Taylor.
While the fair value of the LOFT reporting unit significantly exceeded its carrying value in the Year-End test, the fair value of the Ann Taylor reporting unit exceeded its carrying value by approximately 10%. Additionally, as a result of the significantly higher discount rate compared to the Interim Test, the Company recognized impairment losses to write-down the carrying values of its trade name intangible assets to their fair values as follows: $15.0 million of our Ann Taylor trade name, $60.3 million of our LOFT trade name, $14.0 million of our Lane Bryant trade name, $4.0 million of our Catherines trade name and $16.6 million of our Justice trade name. In addition, the Company recognized a goodwill impairment charge of $160.9 million at the Justice reporting unit to write-down the carrying values of the reporting units to their fair values.
Other
If we continue to experience sustained periods of unexpected declines or shifts in consumer spending, or fail to realize the anticipated benefits of the cost savings associated from the Change for Growth Program,reduction initiatives, it could adversely impact the long-term assumptions used in our Interim Test and Year-End Test. Such trends may also have a negative impact on some of the other key assumptions used in the Interim Test and Year-End Test, including anticipated gross margin and operating income margin as well as the WACCweighted average cost of capital rate. These assumptions are highly judgmental and subject to change. In addition, further declines in the Company's stock price, or the fair value of its Term Loan debt, could cause declines in the weighted average cost of capital rate. Such changes, if material, may require us to incur additional impairment charges for goodwill and/or other indefinite-lived intangible assets in future periods, including our otherat the Ann Taylor reporting units that exceeded or substantially exceeded their respective carrying values. In that regard, ourunit. As an example, the impact of a hypothetical 1% reduction in the operating income percentage in all periods would decrease the fair value of Justice reporting unit currently only exceeded its carrying value by 8%. Theapproximately $35 million and the fair value of our Catherines Ann Taylor by approximately $25 million. If that were to occur, the fair value of the Ann Taylorreporting unit substantially exceededwould be less than its carrying value and was not at riskwould result in an impairment of impairment as of our Interim Test.goodwill.
Impairment of Long-Lived Assets
Property and equipment, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. In evaluating long-lived assets, including finite-lived intangible assets, for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
and its fair value, considering external market participant assumptions. Assets to be disposed of, and for which there is a committed plan of disposal, are reported at the lower of carrying value or fair value less costs to sell.
In determining future cash flows, the Company takeswe take various factors into account, including changes in merchandising strategy, the emphasis on retail store cost controls, the effects of macroeconomic trends such as consumer spending, and the impacts of more experienced retail store managers and increased local advertising. Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations.
During Fiscal 2017,2019, Fiscal 20162018 and Fiscal 2015, the Company2017, we recorded total non-cash impairment charges within continuing and discontinued operations of $21.6$85.8 million, $13.3$49.2 million and $10.8$35.6 million, respectively, to reduce the net carrying value of certain long-lived tangible assets to their estimated fair value. Additionally, the Company incurred incremental store impairment charges of $14.0Of these amounts, $46.5 million, $12.8 million and $12.7 million in Fiscal 2019, Fiscal 2018 and Fiscal 2017, in connection with the Fleet Optimization review, whichrespectively, are included within Restructuring and other related charges.charges in the consolidated statements of operations. There have been no impairment losses recorded on the Company’sour finite-lived intangible assets for any of the periods presented. See Note 9Notes 6 and 8 to the accompanying consolidated financial statements for a further discussion.discussion of impairments of long-lived assets.
Income Taxes
Income taxes are provided using the asset and liability method. Under this method, income taxes (i.e., deferred tax assets and liabilities, current taxes payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the current year, and include the results of any differences between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating loss, capital loss and general business credit carry forwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The Company accountsWe account for the financial effect of changes in tax laws or rates in the period of enactment.
Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. This determination requires significant judgment by management. Tax valuation allowances are analyzed quarterly and adjusted as events occur, or circumstances change, that warrant adjustments to those balances. If we continue to experience sustained periods of unexpected declines in consumer spending, or fail to realizeWe have evaluated the anticipated cost savings associated from the Changeavailable positive and negative evidence and have concluded that, for Growth Program, it could adversely impact our assessment of the realization of deferred tax assets. Such changes, if material, may require us to write-off all or a portion of our deferred tax assetsasset, it is more likely than not that it will not be realized in future periods.the foreseeable future. A valuation allowance is a non-cash charge, which does not eliminate the deferred tax asset but instead reduces the benefit we expect to realize from it in the future.
We also establish a reserve for uncertain tax positions. If we consider that a tax position is more-likely-than-not of being sustained upon audit, based solely on the technical merits of the position, we recognize the tax benefit. We measure the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and we often obtain assistance from external advisors. We regularly monitor our position and subsequently recognize the tax benefit if (i) there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
merits of the position to more-likely-than-not, (ii) the statute of limitation expires or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency.
As previously mentioned, in the fourth quarter of Fiscal 2019, the Company sold its maurices subsidiary. Effective upon the closing of the Transaction, the Company received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices through its investment in Viking, consisting of interests in Viking preferred and common stock. The determination of our estimated tax gain on sale required significant analysis of historic information to determine its tax basis. We utilized historic information and certain judgments, which we believe were reasonable, in order to estimate the tax impact arising from the sale of maurices.
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 Fiscal 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
ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
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. See Note 15 to the accompanying consolidated financial statements for further discussion.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 4 to the accompanying consolidated financial statements for a description of certain recently issued or proposed accounting standards which may impact our financial statements in future reporting periods.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
For a discussion of our exposure to, and management of our market risks, see “Market Risk Management” in Item 7 included elsewhere in this Annual Report on Form 10-K.10-K and incorporated by reference herein.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of Ascena Retail Group, Inc. and subsidiaries are filed together with this report: See “Exhibits, Financial Statement Schedules,” Item 15.report, as indexed on page F-1 of this Annual Report on Form 10-K and incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the fiscal year end covered by this Annual Report on Form 10-K.
(b) Management’s Assessment of Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of the Company's assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of our financial statements would be prevented or detected. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject
to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with theour policies and procedures may decline.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of the end of the fiscal year covered by this report based on the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013). Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective at the reasonable assurance level as of the end of the fiscal year end covered by this Annual Report on Form 10-K.
Deloitte & Touche LLP, the Company's independent registered public accounting firm, has issued an attestation report on the Company's internal control over financial reporting. The report is included elsewhere herein.in this Annual Report on Form 10-K.
(c) Changes in Internal Control Over Financial Reporting.
There has been no change in the Company’s internal control over financial reporting during the fiscal quarter ended July 29, 2017August 3, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC within 120 days after the end of our last fiscal year. We have adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers. The Code of Ethics for the Chief Executive Officer and Senior Financial Officers is posted on our website, www.ascenaretail.com, thenand can be found by clicking on “For Investors,” then under the Investors Relations pull-down menu, click on "Corporate Governance," then clickclicking the link for the “Code of Ethics for Senior Financial Officers.” We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics by posting such information on our website.website, www.ascenaretail.com. We undertake to provide to any person a copy of this Code of Ethics upon request to our Secretary at our principal executive offices, 933 MacArthur Boulevard, Mahwah, NJ 07430.
Item 11. Executive Compensation.
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC within 120 days after the end of our last fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes our equity compensation plans as of July 29, 2017 regarding compensation plans under which the Company’sCompany's equity securities are authorized for issuance:issuance as of August 3, 2019:
| | | | | (a) | | (b) | | (c) | | (a) | | (b) | | (c) |
| Plan Category | | Number of Securities to be Issued upon Exercise of Outstanding Options | | Weighted-Average Exercise Price of Outstanding Options | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column(a)) | | Number of Securities to be Issued upon Exercise of Outstanding Options and Vesting of Restricted Stock Units | | Weighted-Average Exercise Price of Outstanding Options and the Grant Date Fair Value for Restricted Stock Units | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)(1)) |
| Equity compensation plans approved by security holders | | 16,413,717 |
| | $ | 11.42 |
| | 17,449,970 |
| | 24,365,498 |
| | $ | 5.92 |
| | 18,764,734 |
|
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | 16,413,717 |
| | $ | 11.42 |
| | 17,449,970 |
| | 24,365,498 |
| | $ | 5.92 |
| | 18,764,734 |
|
_______
(a)(1) In November 2015, the Board of Directors approved the amendment and restatement of the Company’s 2010 Stock Incentive Plan, as amended in December 2012 (the "2010 Stock Incentive Plan"). The amended and restated 2010 Stock Incentive Plan (the “2016 Omnibus Incentive Plan”) which was approved by the Company’s shareholders and became effective on December 10, 2015. In November 2018, the Board of Directors approved the amendment of the Company's 2016 Omnibus Incentive Plan to increase the shares available for grant thereunder, which was approved by the Company's shareholders and became effective on December 14, 2018. All of the securities remaining available for future issuance set forth in column (c) may be in the form of options, restricted stock, restricted stock units, performance awards or other stock-based awards under the Company’s 2016 Omnibus Incentive Plan.
Other Information with respect to security ownership of certain beneficial owners and management is incorporated by reference from our definitive Proxy Statement to be filed with the SEC within 120 days after the end of our fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC within 120 days after the end of our fiscal year.
Item 14. Principal Accounting Fees and Services.
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC within 120 days after the end of our fiscal year.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)1., 2. Financial Statements The index to the financial statements and Financial Statement Schedules, see indexfinancial statement schedules are filed as a part of this report on page F-1.F-1 and incorporated by reference herein.
ITEM 15. (b) LIST OF EXHIBITSList of Exhibits
The following exhibits are filed as part of this Report and except Exhibits 10.15, 21, 23, 31.1, 31.2, 32.1 and 32.2 are all incorporated by reference from the sources shown.
|
| | |
Exhibit Number | | Description |
| | Second AmendedStock Purchase Agreement, dated March 24, 2019, by and Restated Certificate of Incorporation ofamong Ascena Retail Group, Inc., Maurices Incorporated and Viking Brand Upper Holdings, L.P., is incorporated by reference to Annex IIExhibit 2.1 to the Proxy Statement dated November 18, 2010.Form 8-K filed on March 27, 2019. |
| | | |
| | Certificate of Amendment of SecondThird Amended and Restated Certificate of Incorporation of Ascena Retail Group, Inc. is incorporated by reference to Exhibit 3.1 to the Form 8-K filed on January 3, 2011.December 14, 2018. |
| | | |
| | Second Amended and Restated By-Laws of Ascena Retail Group, Inc., as amendedadopted and restated,effective October 3, 2018, are incorporated by reference to Exhibit 3.1 to the Form 8-K filed on March 6, 2015.October 9, 2018. |
| | | |
| | Amendment to Amended and Restated By-LawsDescription of Ascena Retail Group, Inc., adopted November 2, 2015, is incorporated by reference to Exhibit 3.1 toSecurities Registered Under Section 12 of the Form 8-KExchange Act, filed on November 3, 2015.herewith. |
| | | |
| | Ascena Retail Group, Inc., 2016 Omnibus Incentive Plan is incorporated by reference to Annex A to the Proxy Statement dated November 3, 2015.* |
| | | |
| | Amended and Restated Executive 162(m) Bonus Plan, effective as of December 12, 2013, is incorporated by reference to Annex A to the Proxy Statement dated November 5, 2013.* |
| | |
10.3 | | Employment Agreement dated May 2, 2002 with Elliot S. Jaffe is incorporated by reference to Exhibit 10(u)(u)10(tt) to the Form 10-K filed for the fiscal year ended July 27, 2002, filed on October 15, 2002.* |
| | | |
10.4 | | Amendment dated July 10, 2006 to Employment Agreement dated May 2, 2002 with Elliot S. Jaffe is incorporated by reference to Exhibit 99.1 to the Form 8-K filed on July 13, 2006.* |
| | | |
| | Employment Agreement dated March 5, 2014 with David Jaffe is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on March 6, 2014.* |
| | |
| | Employment Letter dated January 23, 2015 with John Pershing is incorporated by reference to Exhibit 10.6 to the Form 10-K filed for the fiscal year ended July 25, 2015, filed on September 16, 2015.* |
| | | |
| | Employment Letter dated July 20, 2015 with Robb Giammatteo is incorporated by reference to Exhibit 10.7 to the Form 10-K filed for the fiscal year ended July 25, 2015, filed on September 16, 2015.* |
| | | |
10.8 | | Supplemental Retirement Benefit Agreement dated August 29, 2006 with Mrs. Roslyn Jaffe is incorporated by reference to Exhibit 99.1 to the Form 8-K filed on August 30, 2006.* |
| | | |
| | Amendment and Restatement of the Company's Executive Severance Plan effective as of December 9, 2015, is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on December 11, 2015.* |
| | |
| | Form of Indemnification Agreement, adopted January 1, 2011, for Members of the Board of Directors and certain executive officers is incorporated by reference to Exhibit 10.24 to the Form 10-K filed for the fiscal year ended July 30, 2011, filed on September 28, 2011.* |
| | | |
| | Fifth Amendment and Restatement Agreement dated as of July 24, 2015 and effective as of August 21, 2015,February 27, 2018, among the Company, the Borrowing Subsidiaries party thereto, the Loan Parties party thereto, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, together with the exhibits and schedules thereto, is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on August 27, 2015.March 5, 2018. |
| | | |
| | First Amendment, dated September 20, 2019, to the Fifth Amended and Restated Credit Agreement, dated and effective as of February 27, 2018, among the Company, the Loan Parties thereto, the Lenders party thereto, the Issuing Banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Swingline Lender, filed herewith. |
| | |
| | Term Credit Agreement dated as of August 21, 2015 among the Company, AnnTaylor Retail, Inc., the Lenders party thereto and Goldman Sachs Bank USA, as Administrative Agent, is incorporated by reference to Exhibit 10.2 to the Form 8-K filed on August 27, 2015. |
| | | |
| | Amendment and Restatement of the Company’s Executive Severance Plan effective March 2, 2016, is incorporated by reference to Exhibit 10.2 to the Form 10-Q for the fiscal quarter ended April 29, 2017.* |
| | |
| | Employment Letter dated December 4, 2015 with Duane D. Holloway is incorporated by reference to Exhibit 10.14 to the Form 10-K filed for the fiscal year ended July 30, 2016.* |
|
| | |
Exhibit
Number
| | Description |
| | |
| | Amendment No. 1 to the Company’s Executive Severance Plan effective December 7, 2016, is incorporated by reference to Exhibit 10.3 to the Form 10-Q for the fiscal quarter ended April 29, 2017.* |
| | |
| | Employment Letter dated October 4, 2016 with Brian Lynch is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on October 7, 2016.* |
| | |
| | Ascena Retail Group, Inc. Transformation Bonus Program Terms and Conditions under the Ascena Retail Group, Inc. 2016 Omnibus Incentive Plan (as Amended and Restated effective December 10, 2015) effective as of March 30,is incorporated by reference to Exhibit 10.17 to the Form 10-K for the fiscal year ended July 29, 2017, filed herewith as Exhibit 10.17.on September 25, 2017.* |
| | | |
| | Form of Award Agreement pursuant to the Ascena Retail Group, Inc. Transformation Bonus Program under the 2016 Omnibus Incentive Plan (as Amended and Restated effective December 10, 2015) effective as of March 30, 2017, is incorporated by reference to Exhibit 10.18 to the Form 10-K for the fiscal year ended July 29, 2017, filed herewith as on September 25, 2017.* |
|
| | |
Exhibit 10.18.* Number | | Description |
| | | |
| | Amended and Restated Credit Card Program Agreement dated April 28, 2017, by and between Ascena Retail Group, Inc. and Capital One, National Association, is incorporated by reference to Exhibit 10.1 to the Form 10-Q for the fiscal quarter ended April 29, 2017, filed on June 8, 2017. |
| | | |
| | Amendment and Restatement of the Company'sAscena Retail Group, Inc. Executive Severance Plan, Amended and Restated effective as of June 8, 2017, is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on June 8, 2017.* |
| | | |
| | Employment Letter dated July 29, 2017 with David Jaffe is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on August 1, 2017.* |
| | | |
| | Employment Letter dated June 12,August 24, 2018 with Wendy Hufford, filed herewith.* |
| | |
| | Amendment Number One to the Ascena Retail Group, Inc., 2016 Omnibus Incentive Plan (Amended and Restated effective December 10, 2015) approved and effective as of September 27, 2017, with Brian Lynchis incorporated by reference to Exhibit 10.1 to the Form 8-K filed on December 14, 2018.* |
| | |
| | Amendment Number Two to the Ascena Retail Group, Inc., 2016 Omnibus Incentive Plan (Amended and Restated effective December 10, 2015), as amended, approved and effective as of December 14, 2018, is incorporated by reference to Exhibit 10.2 to the Form 8-K filed on AugustDecember 14, 2018.* |
| | |
| | Amended and Restated Employment Letter dated April 5, 2019 with Brian Lynch is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on April 8, 2019.* |
| | |
| | Transition and Separation Agreement and General Release dated May 1, 2017.2019 with David Jaffe is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on May 1, 2019.* |
| | |
| | Employment Letter dated May 1, 2019 with Gary Muto is incorporated by reference to Exhibit 10.2 to the Form 8-K filed on May 1, 2019.* |
| | |
| | Employment Letter dated May 1, 2019 with Carrie Teffner is incorporated by reference to Exhibit 10.3 to the Form 8-K filed on May 1, 2019.* |
| | | |
| | Employment LetterRetention Agreement dated JuneMay 1, 20172019 with Gary MutoRobb Giammatteo is incorporated by reference to Exhibit 10.310.4 to the Form 8-K filed on AugustMay 1, 2017.2019.* |
| | | |
| | Retention Agreement dated May 1, 2019 with Dan Lamadrid is incorporated by reference to Exhibit 10.6 to the Form 10-Q for the fiscal quarter ended May 4, 2019, filed on June 12, 2019.* |
| | |
| | Employment Letter dated August 23, 2017July 25, 2019 with DanielDan Lamadrid is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on August 28, 2017.* |
| | |
14 | | Code of Ethics for the Chief Executive Officer and Senior Financial Officers is incorporated by reference to Exhibit 14 to the Form 10-K filed for the fiscal year ended July 26, 2003.25, 2019.* |
| | | |
| | Subsidiaries of the Registrant, filed herewith. |
| | | |
| | Consent of Independent Registered Public Accounting Firm, filed herewith. |
| | | |
| | Section 302 Certification of President and Chief Executive Officer, filed herewith. |
| | | |
| | Section 302 Certification of Chief Financial Officer, filed herewith. |
| | | |
| | Section 906 Certification of President and Chief Executive Officer, filed herewith.** |
| | | |
| | Section 906 Certification of Chief Financial Officer, filed herewith.** |
|
| | |
| 101.INS | | XBRL Instance Document |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document†Document |
*Each of these exhibits constitutes a management contract, compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15 (b) of this report.
**This certification accompanies each report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
ITEM 15. (c) FINANCIAL STATEMENT SCHEDULESFinancial Statement Schedules
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | | Ascena Retail Group, Inc. |
| | | |
Date: September 25, 2017October 10, 2019 | | by | /s/ DAVID JAFFEGARY MUTO |
| | | | David JaffeGary Muto |
| | | | Chief Executive Officer |
| | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ DAVID JAFFEGARY MUTO | | | | |
David JaffeGary Muto | | Chief Executive Officer Chairman of the Board of Directors and Director (Principal Executive Officer) | | September 25, 2017October 10, 2019 |
| | | | | |
/s/ ROBB GIAMMATTEODAN LAMADRID | | | | |
Robb GiammatteoDan Lamadrid | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | September 25, 2017October 10, 2019 |
| | | | | |
/s/ KEVIN TROLAROCARRIE W. TEFFNER | | | | |
Kevin TrolaroCarrie W. Teffner | | Vice President, Financial Reporting (Interim Principal Accounting Officer)Interim Executive Chair of the Board and Director | | September 25, 2017October 10, 2019 |
| | | | | |
| /s/ KATIE J. BAYNE | | | | |
| Katie J. Bayne | | Director | | September 25, 2017October 10, 2019 |
| | | | | |
| /s/ KATE BUGGELN | | | | |
| Kate Buggeln | | Director | | September 25, 2017October 10, 2019 |
| | | | | |
/s/ STEVEN L. KIRSHENBAUMDAVID JAFFE | | | | |
Steven L. KirshenbaumDavid Jaffe | | Director | | September 25, 2017October 10, 2019 |
| | | | | |
| /s/ KATHERINE L. KRILL | | | | |
| Katherine L. Krill | | Director | | September 25, 2017 |
| | | | |
/s/ MARC LASRY | | | | |
Marc Lasry | | Director | | September 25, 2017 |
| | | | |
/s/ RANDY L. PEARCE | | | | |
Randy L. Pearce | | Director | | September 25, 2017October 10, 2019 |
| | | | | |
| /s/ STACEY RAUCH | | | | |
| Stacey Rauch | | Director | | September 25, 2017October 10, 2019 |
| | | | | |
| /s/ CARL S. RUBIN | | | | |
| Carl S. Rubin | | Director | | September 25, 2017October 10, 2019 |
| | | | |
| /s/ JOHN L. WELBORN, JR. | | | | |
| John L. Welborn, Jr. | | Director | | October 10, 2019 |
| | | | | |
| /s/ LINDA YACCARINO | | | | |
| Linda Yaccarino | | Director | | September 25, 2017October 10, 2019 |
ASCENA RETAIL GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
|
| |
| | Page |
| | |
| Consolidated Financial Statements: | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Operations | |
| Consolidated Statements of Comprehensive Loss | |
| Consolidated Statements of Cash Flows | |
| Consolidated Statements of Equity | |
| Notes to Consolidated Financial Statements | |
| Reports of Independent Registered Public Accounting Firm | |
| Supplementary Information: | |
| Quarterly Financial Information (Unaudited) | |
Selected Financial Information | |
All schedules are omitted because either they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
ASCENA RETAIL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | July 29,
2017 | | July 30,
2016 | | August 3,
2019 | | August 4,
2018 |
| | | (millions, except per share data) | | (millions, except per share data) |
ASSETS | | Current assets: | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 325.6 |
| | $ | 371.8 |
| | $ | 328.0 |
| | $ | 231.0 |
|
| Inventories | | 639.3 |
| | 649.3 |
| | 547.7 |
| | 535.1 |
|
| Prepaid expenses and other current assets | | 157.4 |
| | 218.9 |
| | 279.3 |
| | 229.4 |
|
| Assets related to discontinued operations | | | — |
| | 401.3 |
|
| Total current assets | | 1,122.3 |
| | 1,240.0 |
| | 1,155.0 |
| | 1,396.8 |
|
| Property and equipment, net | | 1,437.6 |
| | 1,630.1 |
| | 847.0 |
| | 1,106.8 |
|
| Goodwill | | 683.0 |
| | 1,279.3 |
| | 313.5 |
| | 589.5 |
|
| Other intangible assets, net | | 532.4 |
| | 1,268.7 |
| | 276.6 |
| | 427.0 |
|
| Equity method investment | | | 42.1 |
| | — |
|
| Other assets | | 96.2 |
| | 88.2 |
| | 65.6 |
| | 50.4 |
|
| Total assets | | $ | 3,871.5 |
| | $ | 5,506.3 |
| | $ | 2,699.8 |
| | $ | 3,570.5 |
|
| | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | |
| Current liabilities: | | |
| | |
| | |
| | |
|
| Accounts payable | | $ | 411.6 |
| | $ | 429.4 |
| | $ | 336.0 |
| | $ | 394.7 |
|
| Accrued expenses and other current liabilities | | 352.9 |
| | 413.7 |
| | 333.9 |
| | 304.0 |
|
| Deferred income | | 121.5 |
| | 110.0 |
| | 128.3 |
| | 108.4 |
|
| Income taxes payable | | 7.1 |
| | 6.6 |
| |
| Current portion of long-term debt | | 44.0 |
| | 54.0 |
| |
| Liabilities related to discontinued operations | | | — |
| | 166.2 |
|
| Total current liabilities | | 937.1 |
| | 1,013.7 |
| | 798.2 |
| | 973.3 |
|
| Long-term debt | | 1,494.1 |
| | 1,594.5 |
| | 1,338.6 |
| | 1,328.7 |
|
| Lease-related liabilities | | 348.3 |
| | 387.1 |
| | 234.2 |
| | 260.8 |
|
| Deferred income taxes | | 79.3 |
| | 442.2 |
| | 0.6 |
| | 2.6 |
|
| Other non-current liabilities | | 191.7 |
| | 205.5 |
| | 177.2 |
| | 206.6 |
|
| Total liabilities | | 3,050.5 |
| | 3,643.0 |
| | 2,548.8 |
| | 2,772.0 |
|
| | | | | | | | | |
| Commitments and contingencies (Note 15) | |
|
| |
|
| |
| Commitments and contingencies (Note 16) | | |
|
| |
|
|
| | | | | | | | | |
| Equity: | | | | | | | | |
| Common stock, par value $0.01 per share; 195.1 and 194.2 million shares issued and outstanding | | 2.0 |
| | 1.9 |
| |
| Common stock, par value $0.01 per share; 198.5 and 196.3 million shares issued and outstanding | | | 2.0 |
| | 2.0 |
|
| Additional paid-in capital | | 1,068.2 |
| | 1,050.3 |
| | 1,100.6 |
| | 1,088.2 |
|
| Retained (deficit) earnings | | (238.8 | ) | | 828.8 |
| |
| Accumulated deficit | | | (935.9 | ) | | (278.8 | ) |
| Accumulated other comprehensive loss | | (10.4 | ) | | (17.7 | ) | | (15.7 | ) | | (12.9 | ) |
| Total equity | | 821.0 |
| | 1,863.3 |
| | 151.0 |
| | 798.5 |
|
| Total liabilities and equity | | $ | 3,871.5 |
| | $ | 5,506.3 |
| | $ | 2,699.8 |
| | $ | 3,570.5 |
|
See accompanying notes.
ASCENA RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | | (millions, except per share data) | | (millions, except per share data) |
| Net sales | | $ | 6,649.8 |
| | $ | 6,995.4 |
| | $ | 4,802.9 |
| | $ | 5,493.4 |
| | $ | 5,566.4 |
| | $ | 5,617.3 |
|
| Cost of goods sold | | (2,790.2 | ) | | (3,066.7 | ) | | (2,133.7 | ) | | (2,432.1 | ) | | (2,334.1 | ) | | (2,333.4 | ) |
| Gross margin | | 3,859.6 |
| | 3,928.7 |
| | 2,669.2 |
| | 3,061.3 |
| | 3,232.3 |
| | 3,283.9 |
|
| | | | | | | | | | | | | |
| Other operating expenses: | | |
| | |
| | |
| | |
| | |
| | |
|
| Buying, distribution and occupancy expenses | | (1,274.3 | ) | | (1,286.5 | ) | | (856.9 | ) | | (1,120.5 | ) | | (1,149.5 | ) | | (1,138.5 | ) |
| Selling, general and administrative expenses | | (2,068.5 | ) | | (2,112.3 | ) | | (1,490.9 | ) | | (1,783.7 | ) | | (1,766.2 | ) | | (1,794.2 | ) |
| Acquisition and integration expenses | | (39.4 | ) | | (77.4 | ) | | (31.7 | ) | |
| Restructuring and other related charges | | (81.9 | ) | | — |
| | — |
| | (127.7 | ) | | (76.6 | ) | | (78.1 | ) |
| Impairment of goodwill | | (596.3 | ) | | — |
| | (261.7 | ) | | (276.0 | ) | | — |
| | (489.1 | ) |
| Impairment of intangible assets | | (728.1 | ) | | — |
| | (44.7 | ) | |
| Impairment of other intangible assets | | | (134.9 | ) | | — |
| | (728.1 | ) |
| Acquisition and integration expenses | | | — |
| | (5.4 | ) | | (39.4 | ) |
| Depreciation and amortization expense | | (384.9 | ) | | (358.7 | ) | | (218.2 | ) | | (299.9 | ) | | (323.5 | ) | | (350.8 | ) |
| Total other operating expenses | | (5,173.4 | ) | | (3,834.9 | ) | | (2,904.1 | ) | | (3,742.7 | ) | | (3,321.2 | ) | | (4,618.2 | ) |
| Operating (loss) income | | (1,313.8 | ) | | 93.8 |
| | (234.9 | ) | |
| Operating loss | | | (681.4 | ) | | (88.9 | ) | | (1,334.3 | ) |
| | |
|
| | | | | |
|
| | | | |
| Interest expense | | (102.2 | ) | | (103.3 | ) | | (6.0 | ) | | (107.0 | ) | | (113.0 | ) | | (102.2 | ) |
| Interest income and other income, net | | 1.8 |
| | 0.4 |
| | 0.3 |
| |
| Gain on extinguishment of debt | | — |
| | 0.8 |
| | — |
| |
| Loss before benefit (provision) for income taxes | | (1,414.2 | ) | | (8.3 | ) | | (240.6 | ) | |
| Benefit (provision) for income taxes | | 346.9 |
| | (3.6 | ) | | 3.8 |
| |
| Interest and other income, net | | | 3.4 |
| | 1.6 |
| | 1.0 |
|
| Loss on extinguishment of debt | | | — |
| | (5.0 | ) | | — |
|
| Loss from continuing operations before benefit for income taxes and loss from equity method investment | | | (785.0 | ) | | (205.3 | ) | | (1,435.5 | ) |
| Benefit for income taxes from continuing operations | | | 14.5 |
| | 62.3 |
| | 367.5 |
|
| Loss from equity method investment | | | (11.8 | ) | | — |
| | — |
|
| Loss from continuing operations | | | (782.3 | ) | | (143.0 | ) | | (1,068.0 | ) |
| Discontinued operations | | | | | | | |
Income from discontinued operations, net of taxes (a) | | | 76.4 |
| | 103.3 |
| | 0.7 |
|
Gain on disposal of discontinued operations, net of taxes (b) | | | 44.5 |
| | — |
| | — |
|
| Net loss | | $ | (1,067.3 | ) | | $ | (11.9 | ) | | $ | (236.8 | ) | | $ | (661.4 | ) | | $ | (39.7 | ) | | $ | (1,067.3 | ) |
| | | | | | | | | | | | | |
| Net loss per common share: | | |
| | |
| | |
| |
| Basic | | $ | (5.48 | ) | | $ | (0.06 | ) | | $ | (1.46 | ) | |
| Diluted | | $ | (5.48 | ) | | $ | (0.06 | ) | | $ | (1.46 | ) | |
| Net loss per common share - basic: | | | |
| | |
| | |
|
| Continuing operations | | | $ | (3.96 | ) | | $ | (0.73 | ) | | $ | (5.48 | ) |
| Discontinued operations | | | 0.61 |
| | 0.53 |
| | — |
|
| Total net loss per basic common share | | | $ | (3.35 | ) | | $ | (0.20 | ) | | $ | (5.48 | ) |
| | | | | | | | |
| Net loss per common share - diluted: | | | |
| | |
| | |
|
| Continuing operations | | | $ | (3.96 | ) | | $ | (0.73 | ) | | $ | (5.48 | ) |
| Discontinued operations | | | 0.61 |
| | 0.53 |
| | — |
|
| Total net loss per diluted common share | | | $ | (3.35 | ) | | $ | (0.20 | ) | | $ | (5.48 | ) |
| | | | | | | | | | | | | |
| Weighted average common shares outstanding: | | |
| | |
| | |
| | |
| | |
| | |
|
| Basic | | 194.8 |
| | 192.2 |
| | 162.6 |
| | 197.5 |
| | 196.0 |
| | 194.8 |
|
| Diluted | | 194.8 |
| | 192.2 |
| | 162.6 |
| | 197.5 |
| | 196.0 |
| | 194.8 |
|
___________
(a) Income from discontinued operations is presented net of income tax expense of $21.8 million, $20.5 million, and $20.6 million for the fiscal years ended August 3, 2019, August 4, 2018 and July 29, 2017, respectively.
(b) Gain on sale of discontinued operations is presented net of income tax benefit of $4.0 million for the fiscal year ended August 3, 2019.
See accompanying notes.
ASCENA RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| | (millions) |
| Net loss | $ | (1,067.3 | ) | | $ | (11.9 | ) | | $ | (236.8 | ) |
Other comprehensive income (loss), net of tax: | |
| | |
| | |
|
| Net actuarial loss on a defined benefit pension plan, net of income tax benefit of $0.4 million and $2.5 million, respectively | (0.7 | ) | | (3.8 | ) | | — |
|
| Foreign currency translation adjustment | 3.5 |
| | (1.3 | ) | | (10.4 | ) |
| Total other comprehensive income (loss) before reclassification | 2.8 |
| | (5.1 | ) | | (10.4 | ) |
Reclassification of settlement charges for ANN's pension plan, net of income tax benefit of $2.9 million | 4.5 |
| | — |
| | — |
|
| Total comprehensive loss | $ | (1,060.0 | ) | | $ | (17.0 | ) | | $ | (247.2 | ) |
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | (millions) |
| Net loss | $ | (661.4 | ) | | $ | (39.7 | ) | | $ | (1,067.3 | ) |
Other comprehensive (loss) income, net of tax: | |
| | |
| | |
|
| Net actuarial loss on a defined benefit pension plan, net of income tax benefit of $0.4 million | — |
| | — |
| | (0.7 | ) |
| Deferred loss related to interest rate hedge, net of income tax benefit of $1.3 million. | (5.0 | ) | | — |
| | — |
|
| Foreign currency translation adjustment | (0.5 | ) | | (2.5 | ) | | 3.5 |
|
| Total other comprehensive (loss) income before reclassification | (5.5 | ) | | (2.5 | ) | | 2.8 |
|
Reclassification of settlement charges for ANN's pension plan, net of income tax benefit of $2.9 million | — |
| | — |
| | 4.5 |
|
Reclassification adjustment for realized gain from foreign currency translation upon disposition of maurices | 2.7 |
| | — |
| | — |
|
| Total comprehensive loss | $ | (664.2 | ) | | $ | (42.2 | ) | | $ | (1,060.0 | ) |
See accompanying notes.
ASCENA RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Fiscal Years Ended | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | (millions) | (millions) |
| Cash flows from operating activities: | |
| | |
| | |
| |
| | |
| | |
|
| Net loss | $ | (1,067.3 | ) | | $ | (11.9 | ) | | $ | (236.8 | ) | $ | (661.4 | ) | | $ | (39.7 | ) | | $ | (1,067.3 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | |
| | |
| |
| | |
| | |
|
| Depreciation and amortization expense | 384.9 |
| | 358.7 |
| | 218.2 |
| 321.1 |
| | 355.5 |
| | 384.9 |
|
| Deferred income tax benefit | (371.3 | ) | | (26.8 | ) | | (6.6 | ) | (10.0 | ) | | (47.1 | ) | | (371.3 | ) |
| Deferred rent and other occupancy costs | (62.7 | ) | | (74.4 | ) | | (39.1 | ) | (35.7 | ) | | (47.1 | ) | | (62.7 | ) |
| Gain on extinguishment of debt | — |
| | (0.8 | ) | | — |
| |
| Gain on sale of assets | — |
| | — |
| | (1.6 | ) | |
| Amortization of acquisition-related inventory write-up | — |
| | 126.9 |
| | — |
| |
| Non-cash stock-based compensation expense | 24.5 |
| | 26.2 |
| | 18.2 |
| |
| Non-cash impairment of tangible assets | 35.6 |
| | 13.3 |
| | 10.8 |
| |
| Non-cash impairment of goodwill | 596.3 |
| | — |
| | 261.7 |
| |
| Non-cash impairment of intangible assets | 728.1 |
| | — |
| | 44.7 |
| |
| Non-cash interest expense, net | 12.1 |
| | 11.3 |
| | 0.9 |
| |
| Other non-cash expense (income), net | 10.9 |
| | (0.9 | ) | | (2.4 | ) | |
| Excess tax benefits from stock-based compensation | — |
| | (1.5 | ) | | — |
| |
| Loss on extinguishment of debt | | — |
| | 5.0 |
| | — |
|
| Gain on sale of fixed assets | | (0.3 | ) | | (1.6 | ) | | — |
|
Gain on sale of maurices | | (44.5 | ) | | — |
| | — |
|
| Loss from equity method investment | | 11.8 |
| | — |
| | — |
|
| Stock-based compensation expense | | 11.5 |
| | 19.8 |
| | 24.5 |
|
| Impairment of goodwill | | 276.0 |
| | — |
| | 596.3 |
|
| Impairment of other intangible assets | | 134.9 |
| | — |
| | 728.1 |
|
| Impairment and write-down of tangible assets | | 103.3 |
| | 49.2 |
| | 35.6 |
|
| Non-cash interest expense | | 9.9 |
| | 11.9 |
| | 12.1 |
|
| Other non-cash (income) expense, net | | (3.1 | ) | | 0.2 |
| | 10.9 |
|
| Changes in operating assets and liabilities: | |
| | |
| | |
| |
| | |
| | |
|
| Inventories | 10.0 |
| | 111.4 |
| | 63.9 |
| (11.9 | ) | | 16.4 |
| | 10.0 |
|
| Accounts payable, accrued liabilities and income taxes payable | (26.0 | ) | | (133.6 | ) | | 54.2 |
| (93.1 | ) | | (11.2 | ) | | (26.0 | ) |
| Deferred income | 15.6 |
| | 7.8 |
| | 7.7 |
| 11.9 |
| | 13.0 |
| | 15.6 |
|
| Lease-related liabilities | 31.4 |
| | 52.5 |
| | 32.6 |
| 11.7 |
| | 20.9 |
| | 31.4 |
|
| Other balance sheet changes, net | 21.5 |
| | (12.8 | ) | | 4.9 |
| (11.0 | ) | | (71.3 | ) | | 21.5 |
|
| Net cash provided by operating activities | 343.6 |
| | 445.4 |
| | 431.3 |
| |
| Cash flows provided by operating activities | | 21.1 |
| | 273.9 |
| | 343.6 |
|
| | | | | | | | | | | |
| Cash flows from investing activities: | |
| | |
| | |
| |
| | |
| | |
|
| Cash paid for the acquisition of ANN INC., net of cash acquired (Note 5) | — |
| | (1,494.6 | ) | | — |
| |
| Capital expenditures | (258.1 | ) | | (366.5 | ) | | (312.5 | ) | (136.5 | ) | | (186.3 | ) | | (258.1 | ) |
| Acquisition of intangible assets | (11.6 | ) | | — |
| | — |
| — |
| | — |
| | (11.6 | ) |
| Proceeds from the sale of assets | — |
| | — |
| | 8.9 |
| 1.0 |
| | 14.6 |
| | — |
|
| Purchases of investments | — |
| | (1.1 | ) | | (22.3 | ) | |
| Proceeds from sales and maturities of investments | 0.8 |
| | 26.5 |
| | 27.8 |
| |
| Net cash used in investing activities | (268.9 | ) | | (1,835.7 | ) | | (298.1 | ) | |
Proceeds from the sale of maurices, net | | 203.2 |
| | — |
| | — |
|
| Proceeds from the settlement of corporate-owned life insurance policies | | — |
| | 37.5 |
| | — |
|
| Cash flows provided by (used in) investing activities | | 67.7 |
| | (134.2 | ) | | (269.7 | ) |
| | | | | | | | | | | |
| Cash flows from financing activities: | |
| | |
| | |
| |
| | |
| | |
|
| Proceeds from revolver borrowings | 1,221.9 |
| | 1,510.5 |
| | 832.3 |
| 28.1 |
| | 553.5 |
| | 1,221.9 |
|
| Repayments of revolver borrowings | (1,221.9 | ) | | (1,626.5 | ) | | (888.3 | ) | (28.1 | ) | | (553.5 | ) | | (1,221.9 | ) |
| Proceeds from term loan, net of original issue discount | — |
| | 1,764.0 |
| | — |
| |
| Redemptions and repayments of term loan | (122.5 | ) | | (77.4 | ) | | — |
| — |
| | (225.0 | ) | | (122.5 | ) |
| Payment of deferred financing costs | — |
| | (42.6 | ) | | (2.2 | ) | — |
| | (1.3 | ) | | — |
|
| Purchases and retirements of common stock | — |
| | (18.6 | ) | | — |
| |
| Proceeds from stock options exercised and employee stock purchases | 1.6 |
| | 10.6 |
| | 8.7 |
| 0.9 |
| | 0.4 |
| | 1.6 |
|
| Excess tax benefits from stock-based compensation | — |
| | 1.5 |
| | �� |
| |
| Net cash (used in) provided by financing activities | (120.9 | ) | | 1,521.5 |
| | (49.5 | ) | |
| Tax payments related to share-based awards | | (0.6 | ) | | (0.3 | ) | | — |
|
| Cash flows provided by (used in) financing activities | | 0.3 |
| | (226.2 | ) | | (120.9 | ) |
| | | | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | (46.2 | ) | | 131.2 |
| | 83.7 |
| |
| Cash and cash equivalents at beginning of year | 371.8 |
| | 240.6 |
| | 156.9 |
| |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 89.1 |
| | (86.5 | ) | | (47.0 | ) |
| Cash, cash equivalents and restricted cash at beginning of year | | 240.1 |
| | 326.6 |
| | 373.6 |
|
| | | | | | | | | | | |
| Cash and cash equivalents at end of year | $ | 325.6 |
| | $ | 371.8 |
| | $ | 240.6 |
| |
| Cash, cash equivalents and restricted cash at end of year | | $ | 329.2 |
| | $ | 240.1 |
| | $ | 326.6 |
|
See accompanying notes.
ASCENA RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained (Deficit) Earnings | | Accumulated Other Comprehensive Loss | | Total Equity |
| | Shares | | Amount | | | | |
| | (millions) |
| Balance, July 26, 2014 | 161.8 |
| | $ | 1.6 |
| | $ | 642.2 |
| | $ | 1,096.1 |
| | $ | (2.2 | ) | | $ | 1,737.7 |
|
| Net loss | — |
| | — |
| | — |
| | (236.8 | ) | | — |
| | (236.8 | ) |
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (10.4 | ) | | (10.4 | ) |
| Shares issued and equity grants made pursuant to stock-based compensation plans | 1.4 |
| | — |
| | 27.6 |
| | — |
| | — |
| | 27.6 |
|
| Balance, July 25, 2015 | 163.2 |
| | 1.6 |
| | 669.8 |
| | 859.3 |
| | (12.6 | ) | | 1,518.1 |
|
| Net loss | — |
| | — |
| | — |
| | (11.9 | ) | | — |
| | (11.9 | ) |
| Common stock issued in connection with the acquisition of ANN INC. (Note 5) | 31.2 |
| | 0.3 |
| | 344.6 |
| | — |
| | — |
| | 344.9 |
|
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (5.1 | ) | | (5.1 | ) |
| Shares issued and equity grants made pursuant to stock-based compensation plans | 1.9 |
| | — |
| | 35.9 |
| | — |
| | — |
| | 35.9 |
|
| Purchases and retirements of common stock | (2.1 | ) | | — |
| | — |
| | (18.6 | ) | | | | (18.6 | ) |
| Balance, July 30, 2016 | 194.2 |
| | 1.9 |
| | 1,050.3 |
| | 828.8 |
| | (17.7 | ) | | 1,863.3 |
|
| Net loss | — |
| | — |
| | — |
| | (1,067.3 | ) | | — |
| | (1,067.3 | ) |
| Total other comprehensive income | — |
| | — |
| | — |
| | — |
| | 7.3 |
| | 7.3 |
|
| Shares issued and equity grants made pursuant to stock-based compensation plans | 0.9 |
| | 0.1 |
| | 17.9 |
| | — |
| | — |
| | 18.0 |
|
| Other | — |
| | — |
| | — |
| | (0.3 | ) | | — |
| | (0.3 | ) |
| Balance, July 29, 2017 | 195.1 |
| | $ | 2.0 |
| | $ | 1,068.2 |
| | $ | (238.8 | ) | | $ | (10.4 | ) | | $ | 821.0 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Equity |
| | Shares | | Amount | | | | |
| | (millions) |
| Balance, July 30, 2016 | 194.2 |
| | $ | 1.9 |
| | $ | 1,050.3 |
| | $ | 828.8 |
| | $ | (17.7 | ) | | $ | 1,863.3 |
|
| Net loss | — |
| | — |
| | — |
| | (1,067.3 | ) | | — |
| | (1,067.3 | ) |
| Total other comprehensive income | — |
| | — |
| | — |
| | — |
| | 7.3 |
| | 7.3 |
|
| Shares issued and equity grants made pursuant to stock-based compensation plans | 0.9 |
| | 0.1 |
| | 17.9 |
| | — |
| | — |
| | 18.0 |
|
| Other | — |
| | — |
| | — |
| | (0.3 | ) | | — |
| | (0.3 | ) |
| Balance, July 29, 2017 | 195.1 |
| | 2.0 |
| | 1,068.2 |
| | (238.8 | ) | | (10.4 | ) | | 821.0 |
|
| Net loss | — |
| | — |
| | — |
| | (39.7 | ) | | — |
| | (39.7 | ) |
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2.5 | ) | | (2.5 | ) |
| Shares issued and equity grants made pursuant to stock-based compensation plans | 1.2 |
| | — |
| | 20.0 |
| | — |
| | — |
| | 20.0 |
|
| Other | — |
| | — |
| | — |
| | (0.3 | ) | | — |
| | (0.3 | ) |
| Balance, August 4, 2018 | 196.3 |
| | 2.0 |
| | 1,088.2 |
| | (278.8 | ) | | (12.9 | ) | | 798.5 |
|
| Net loss | — |
| | — |
| | — |
| | (661.4 | ) | | — |
| | (661.4 | ) |
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (2.8 | ) | | (2.8 | ) |
| Shares issued and equity grants made pursuant to stock-based compensation plans | 2.2 |
| | — |
| | 12.4 |
| | (0.6 | ) | | — |
| | 11.8 |
|
| Cumulative effect of change in accounting upon adoption of ASC Topic 606 | — |
| | — |
| | — |
| | 4.9 |
| | — |
| | 4.9 |
|
| Balance, August 3, 2019 | 198.5 |
| | $ | 2.0 |
| | $ | 1,100.6 |
| | $ | (935.9 | ) | | $ | (15.7 | ) | | $ | 151.0 |
|
See accompanying notes.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
ascena retail group, inc.Ascena Retail Group, Inc., a Delaware corporation, (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls. On August 21, 2015, the Company acquired ANN INC. ("ANN"), a retailerThe Company's continuing operations consist of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands (the "ANN Acquisition"). The Company operates, through its 100% owned subsidiaries, ecommercedirect channel operations and approximately 4,8003,400 stores inthroughout the United States, Canada and Puerto Rico. The Company had annual revenues for the fiscal year ended August 3, 2019 of approximately $6.6 billion for Fiscal 2017.$5.5 billion. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
In connection with the Change for Growth program, as more fully describedThe Company operates its business in Note 7, effective October 2016, the Company reorganized into four operatingreportable segments: Premium Fashion, Value Fashion, Plus Fashion,Kids Fashion and KidsValue Fashion. All of our segments sell fashion merchandise to the women's and girls' apparel market across a wide range of ages, sizes and demographics. Our segments consist of specialty retail, outlet and ecommercedirect channel as well as licensed franchises in international territories at our Kids Fashion segment. Our Premium Fashion segment consists of our Ann Taylor and LOFT brands; our Value Fashion segment consists of our maurices and dressbarn brands; our Plus Fashion segment consists of our Lane Bryant and Catherines brands; and our Kids Fashion segment consists of our Justice brand; and our Value Fashion segment consists of our Dressbarn brand. As further discussed in Note 2, at the beginning of the fourth quarter, the Company completed the sale of its maurices brand, which previously was included in the Value Fashion segment and announced plans to wind down its Dressbarnbrand.
The Company's brands included in the continuing operations had the following store counts as of July 29, 2017: Ann Taylor 322 stores; LOFT 678 stores;August 3, 2019: Justice 900826 stores; Lane Bryant 764721 stores; mauricesLOFT 1,005669 stores; dressbarnDressbarn 779616 stores; Catherines 320 stores; and CatherinesAnn Taylor 359293 stores.
2. Basis of Presentation
Basis of Consolidation
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and present the financial position, operational results, comprehensive loss and cash flows of entities in which the Company has a controlling financial interest and its 100% owned subsidiaries.is determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto.accompanying notes. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include: evaluation of goodwill and other intangible assets for impairment; the determination of the fair values of assets acquired and liabilities assumed in a business combination; the realizability of inventory; impairments of long-lived tangible assets; and the realizability of deferred tax assets.
Fiscal Year
Fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period (“Fiscal 2019"); fiscal year 2018 ended on August 4, 2018 and reflected a 53-week period (“Fiscal 2018") as the Company conformed its fiscal periods to the National Retail Federation calendar; and fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017"); fiscal year 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016"); and fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015”2017”). The results of ANN, or our Premium Fashion segment, for the post-acquisition period from August 22, 2015 to July 30, 2016, have been included in the Company's consolidated statements of operations for Fiscal 2016. All references to “Fiscal 2018” refer to our 53-week2020” reflect a 52-week period that will end on August 4, 2018 when the Company conforms its fiscal periods to1, 2020.
The Company's Premium Fashion segment, which historically has followed the National Retail Federation calendar, (the "NRF Calendar").recognized an additional week during the second quarter of Fiscal 2018, consistent with other retail companies already on that calendar. The Company's Plus Fashion, Kids Fashion and Value Fashion segments recognized an additional week in the fourth quarter of Fiscal 2018 due to reporting systems constraints.
Discontinued Operations
In the fourth quarter of Fiscal 2019, on May 6, 2019, the Company and Maurices Incorporated, a Delaware corporation (“maurices”) and wholly owned subsidiary of ascena, completed the transaction contemplated by the previously-announced Stock Purchase
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Agreement with Viking Brand Upper Holdings, L.P., a Cayman Islands exempted limited partnership (“Viking”) and an affiliate of OpCapita LLP ("OpCapita”), providing for, among other things, the sale by ascena of maurices to Viking (the “Transaction”). Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices through its investment in Viking, consisting of interests in Viking preferred and common stock.
As the sale of maurices represented a major strategic shift, as well as the Company's determination that it did not have a significant continuing involvement in the business, the Company's maurices business has been classified as discontinued operations within the consolidated financial statements. As such, assets and liabilities related to discontinued operations have been segregated and separately disclosed in the consolidated financial statements for all periods presented.
In connection with the sale of maurices, the Company agreed to provide transition services to maurices for varying periods of time depending on the service. Service periods range from 3-36 months and include services such as legal, tax, logistics, sourcing and other back office functions. Per the agreement, such services are to be provided at the Company's estimated costs to provide the services. As such, in connection with the accounting for the sale, the Company recorded the services at fair value assuming a normalized profit margin. The resulting balance of $10 million was included within Deferred income as of August 3, 2019 and will be recognized over the 3-36 months service period.
In addition, the Company has guaranteed that maurices will receive annual revenues from its private label credit card arrangements in line with those received historically. The guarantee period ranges from June 2019 through May 2023. The Company believes that the income generated by these arrangements will be substantially in line with the amount contemplated by the guarantee and has provided for any projected shortfall as a component of the gain on the sale of maurices.
The sale was recorded in the fourth quarter of Fiscal 2019 and resulted in a gain of $44.5 million, net of tax, which was recorded as a component of discontinued operations in the accompanying consolidated statement of operations and was calculated as follows:
|
| | | | | | | | | | |
| | | | | August 3,
2019 |
| | | | | (millions) |
| Consideration received: | | | | |
| | Cash | | $ | 209.8 |
| | |
| | Investment in Viking | | 53.9 |
| | |
| | | | | | | 263.7 |
|
| | | | | | | |
| Less: | | | | |
| | Net assets of maurices | | | | (201.1 | ) |
| | Deferred income of transition services contracts | | | | (10.0 | ) |
| | Transaction costs | | | | (6.7 | ) |
| | Other related costs | | | | (5.4 | ) |
| | Gain on disposition of maurices before taxes | | | | 40.5 |
|
| | Income tax benefit from the sale of maurices (a) | | | | 4.0 |
|
| | Gain on disposition of maurices after taxes | | | | $ | 44.5 |
|
| | | | | | | |
_______
(a) The Company's tax basis in maurices exceeded that of its book basis. As a result, the Company recorded a tax benefit of $4.0 million on the sale in the fourth quarter of Fiscal 2019.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the results of maurices classified as discontinued operations:
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | August 3, 2019 (a) | | August 4,
2018 | | July 29,
2017 |
| | (millions) |
| Net sales | $ | 749.4 |
| | $ | 1,011.9 |
| | $ | 1,032.5 |
|
| Depreciation and amortization expense | (21.2 | ) | | (32.0 | ) | | (34.1 | ) |
| Operating income | 97.7 |
| | 123.2 |
| | 20.5 |
|
| Pretax income from discontinued operations | 98.2 |
| | 123.8 |
| | 21.3 |
|
| Income tax expense | (21.8 | ) | | (20.5 | ) | | (20.6 | ) |
| Income from discontinued operations, net of tax | $ | 76.4 |
| | $ | 103.3 |
| | $ | 0.7 |
|
_______
(a) Results for the fiscal year ended August 3, 2019 represent results for the period prior to the sale closing on May 6, 2019 and do not reflect the Gain on the disposition of $44.5 million, which is also included under the discontinued operations line in the Company's consolidated statements of operations.
The major components of assets and liabilities related to discontinued operations are summarized below: |
| | | | | | | |
| | August 3,
2019 | | August 4,
2018 |
| | (millions) |
| Cash and cash equivalents | $ | — |
| | $ | 7.9 |
|
| Inventories | — |
| | 87.8 |
|
| Prepaid expenses and other current assets | — |
| | 19.1 |
|
| Property and equipment, net | — |
| | 98.5 |
|
| Goodwill | — |
| | 93.5 |
|
| Other intangible assets, net | — |
| | 89.0 |
|
| Other assets | — |
| | 5.5 |
|
| Total assets related to discontinued operations | $ | — |
| | $ | 401.3 |
|
| | | | |
| Accounts payable and other current liabilities | $ | — |
| | $ | 83.6 |
|
| Lease-related liabilities | — |
| | 54.4 |
|
| Other liabilities | — |
| | 28.2 |
|
| Total liabilities related to discontinued operations | $ | — |
| | $ | 166.2 |
|
The major components of cash flows related to discontinued operations are summarized below:
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | (millions) |
| Cash provided by operating activities of discontinued operations | $ | 77.0 |
| | $ | 119.6 |
| | $ | 128.1 |
|
| Cash used in investing activities of discontinued operations | (2.7 | ) | | (5.9 | ) | | (18.2 | ) |
3. Summary of Significant Accounting Policies
Revenue Recognition
Effective August 5, 2018, the Company adopted Accounting Standard Update 2014-09, “Revenue from Contracts with Customers,” ("ASU 2014-09") which supersedes most preexisting revenue recognition guidance. Refer to Note 4 for more detailed information about the adoption of ASU 2014-09 and the differences between ASU 2014-09 and the prior guidance.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, price has been fixed or is determinable and collectability is reasonably assured.
Retail store revenue is recognized net of estimated returns at the time of sale to consumers. EcommerceDirect channel revenue from sales of products ordered through the Company’s retail Internetinternet sites and revenue from direct-mail orders areis recognized upon delivery and receipt of the shipment by our customers. Such revenue also is reduced by an estimate of returns. The Company accounts for sales and other related taxes on a net basis, thereby excluding such taxes from revenue.
Reserves for estimated product returns are recorded based on historical return trends and are adjusted for known events, as applicable. ReservesAs of August 3, 2019, the liability for estimated returns was approximately $19.9 million and the corresponding balance of the right of return asset for merchandise was approximately $9.7 million. As of August 4, 2018, the reserve for product returns were $18.1was $19.9 million, and $17.3of which $1.0 million as of July 29, 2017 and July 30, 2016, respectively.was included in the Liabilities related to discontinued operations.
Gift cards, gift certificates and merchandise credits (collectively, “gift cards”) issued by the Company are recorded as a deferred income liability until they are redeemed, at which point revenue is recognized. Gift cards do not have expiration dates. A substantial majority of all gift cards are redeemed within a 12-month period with the highest redemption period occurring in the same quarter the card was issued. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Gift card breakage is recognized in Net sales over time based on the historical redemption patterns and historically has not been material. For the fiscal year ended August 3, 2019, the opening balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $92.7 million, of which $10.4 million was recorded within Liabilities related to discontinued operations. Of these balances, we recognized approximately $39 million as revenue during Fiscal 2019, of which approximately $6 million was recorded within Income from discontinued operations. The closing balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $85.9 million as of August 3, 2019.
Revenue associated with merchandise shipments to other third-party retailers is recognized at the time title passes and risk of loss is transferred to customers, which generally occurs at the date of shipment.
In addition to retail-store, ecommercedirect channel and third partythird-party sales, the Company's segments recognize revenue from (i) licensing arrangements with franchised stores, (ii) royalty payments received under license agreements for the use of their trade name and (iii) credit card agreements as it is earned in accordance with the terms of the underlying agreements.
The Company accountsoffers numerous customer loyalty programs for participating customers based on their level of purchases. For every qualifying purchase, the Company defers a portion of the revenue until the loyalty points are redeemed. The transaction price is allocated between the product and the loyalty points based on the relative stand-alone selling price. Loyalty points accumulate until predetermined thresholds are met at which point the loyalty points can be redeemed as a discount off of a future purchase. Substantially all loyalty points are redeemed within a 12-month period. For the fiscal year ended August 3, 2019, the opening (after adjusting for the impact of adopting ASU 2014-09) balance of deferred revenue related to outstanding loyalty points was $35.4 million, of which $4.6 million was recorded within Liabilities related to discontinued operations. Of these balances, we recognized approximately $33 million as revenue during Fiscal 2019, of which approximately $4 million was recorded within Income from discontinued operations. The closing balance of deferred revenue related to outstanding loyalty points was $26.9 million as of August 3, 2019.
The Company’s revenues by major product categories as a percentage of total net sales and other related taxes on a net basis, thereby excluding such taxes from revenue.are as follows:
|
| | | | | | |
| | | Fiscal Years Ended |
| | | August 3,
2019 | | August 4,
2018 |
| Apparel | | 83 | % | | 83 | % |
| Accessories | | 12 | % | | 13 | % |
| Other | | 5 | % | | 4 | % |
Total net sales | | 100 | % | | 100 | % |
Cost of Goods Sold
Cost of goods sold (“COGS”) consists of all costs of merchandise (net of purchase discounts and vendor allowances), merchandise acquisition costs (primarily commissions and import fees) and freight to our distribution centers and stores. These costs are
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
determined to be directly or indirectly incurred in bringing an article to its existing condition and location. Additionally, the direct costs associated with shipping goods to customers and adjustments to the carrying value of inventory related to realizability and shrinkage are recorded as components of COGS.
Our COGS and Gross margin may not be comparable to those of other entities. Some entities, like us, exclude costs related to their distribution network, buying function, store occupancy costs and depreciation and amortization expenses from COGS and include them in other operating expenses, whereas other entities include these costs in their COGS.
Buying, Distribution and Occupancy Expenses
Buying, distribution and occupancy expenses ("BD&O expenses") consist of store occupancy and utility costs, fulfillment expense (as defined below) and all costs associated with the buying and distribution functions (excluding depreciation).
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A expenses”) consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Acquisition and Integration Expenses
Acquisition and integration expenses consist primarily of transaction expenses representing legal, consulting and investment banking-related costs that are direct, incremental costs incurred prior to the closing of an acquisition, costs to integrate the operations of acquired businesses into the Company's existing infrastructure and severance and retention-related expenses from integrating acquired businesses.
Restructuring and Other Related Charges
Restructuring and other related charges consist of severance and benefit costs, long-lived asset impairment charges and professional fees incurred in connection with identification and implementation of the cost reduction initiatives, primarily associated with the Change for Growth program, and the Dressbarn wind down, as more fully described in Note 7.6.
Shipping and Fulfillment
Shipping and fulfillment fees billed to customers are recorded as revenue. The direct costs associated with shipping goods to customers are recorded as a component of COGS. Costs associated with preparing the merchandise for shipping, such as picking, packing, warehousing and order charges ("fulfillment expense") are recorded as a component of BD&O expenses. Fulfillment expense was approximately $65.3 million in Fiscal 2019, $53.4 million in Fiscal 2018 and $41.0 million in Fiscal 2017, $50.5of which $6.9 million infor Fiscal 20162019, $7.2 million for Fiscal 2018 and $37.8$5.4 million infor Fiscal 2015.2017 was recorded within Income from discontinued operations.
Marketing and Advertising Costs
Marketing and advertising costs are included in SG&A expenses. Marketing and advertising costs are expensed when the advertisement is first exhibited. Marketing and advertising expenses were $265.1 million for Fiscal 2019, $265.1 million for Fiscal 2018 and $269.1 million for Fiscal 2017, $270.6of which $30.8 million for Fiscal 2016 and $176.72019, $39.4 million for Fiscal 2015.2018 and $34.4 million for Fiscal 2017 was recorded within Income from discontinued operations. Deferred marketing and advertising costs, which principally relate to advertisements that have not yet been exhibited or services that have not yet been received, were not material at the end of either Fiscal 20172019, Fiscal 2018 or Fiscal 2016.2017.
Foreign Currency Translation and Transactions
The operating results and financial position of foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. The resulting translation gains or losses are
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
included in the consolidated statements of comprehensive loss, and in the consolidated statements of equity as a component of accumulated other comprehensive loss (“AOCI”AOCL”). Gains and losses on the translation of intercompany loans made to foreign subsidiaries that are of a long-term investment nature also are included within AOCI.AOCL.
The Company recognizes gains and losses on transactions that are denominated in a currency other than the respective entity's functional currency. Foreign currency transaction gains and losses also result from intercompany loans made to foreign subsidiaries that are not of a long-term investment nature and include amounts realized on the settlement of certain intercompany loans with foreign subsidiaries. Net losses (gains) losses from foreign currency transactions were $0.7 million in Fiscal 2019, $1.1 million in Fiscal 2018 and $(0.4) million in Fiscal 2017, $1.5of which losses of $0.1 million infor Fiscal 20162019, $0.2 million for Fiscal 2018 and $0.9$0.1 million infor Fiscal 2015.2017 were recorded within Income from discontinued operations. Such amounts are recognized in earnings and included within Interest income and other income, net in the accompanying consolidated statements of operations.
Stock-Based Compensation
The Company expenses stock-based compensation to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures. The Company uses the Black-Scholes valuation method to determine the grant date fair value of its option-basedservice-based option compensation and a Monte Carlo simulation model to determine the grant date fair value of its market and performance-based option compensation. Shares of restricted stock and restricted stock units are issuable with service-based, market-based or performance-based conditions (collectively, “Restricted Equity Awards”). Compensation expense for Restricted Equity Awards is recognized over the vesting period based on the grant-date fair values of the awards that are expected to vest based upon the service, market and performance-based conditions.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-Term Incentive Plans
The Company maintains a long-term cash incentive program ("LTIP") which entitles the holder to a cash payment equal to a target amount earned at the end of a performance period and is subject to (a) the grantee’s continuing employment and (b) the Company’s achievement of certain performance goals over a one two or three-year performance period. Compensation expense for the LTIP is recognized over the related performance periods based on the expected achievement of the performance goals.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less and receivables from financial institutions related to credit card purchases due to the high-credit quality and short time frame for settlement of the outstanding amounts.
Concentration of Credit Risk
The Company maintains cash deposits and cash equivalents with well-known and stable financial institutions; however, there were significant amounts of cash and cash equivalents on deposit at overseas financial institutions as well as at financial institutions that were in excess of FDIC-insured limits at July 29, 2017.August 3, 2019.
Inventories
Retail Inventory Method
We hold inventory for sale through our retail stores and ecommercedirect channel sites. All of the Company's segments, other than our Premium Fashion segment discussed below, use the retail inventory method of accounting, under which inventory is stated at the lower of cost, on a First In, First Out (“FIFO”) basis, or market. Under the retail inventory method, the valuation of inventory at cost and the resulting gross margin are calculated by applying a calculated cost to retail ratio to the retail value of inventory. Inherent in the retail method are certain significant management judgments and estimates including, among others, initial merchandise markup, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins.
The Company continuously reviews its inventory levels to identify slow-moving merchandise and markdowns necessary to clear slow-moving merchandise, which reduces the cost of inventories to its estimated net realizable value. Consideration is given to a number of quantitative and qualitative factors, including current pricing levels and the anticipated need for subsequent markdowns, aging of inventories, historical sales trends, and the impact of market trends and economic conditions. Estimates of markdown
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
requirements may differ from actual results due to changes in quantity, quality and mix of products in inventory, as well as changes in consumer preferences, market and economic conditions. The Company’s historical estimates of these costs and its markdown provisions have not differed materially from actual results.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Weighted-average Cost Method
Our Premium Fashion segment uses the weighted-average cost method to value inventory, under which inventory is valued at the lower of average cost or market, at the individual item level.market. Inventory cost is adjusted when the current selling price or future estimated selling price is less than cost.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property and Equipment, Net
Property and equipment, net, is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:
|
| |
| Buildings and improvements | 5-40 years |
| Distribution center equipment and machinery | 3-20 years |
| Leasehold improvements | Shorter of the useful life or expected term of the lease |
| Furniture, fixtures, and equipment | 2-10 years |
| Information technology | 2-10 years |
Certain costs associated with computer software developed or obtained for internal use are capitalized, including internal costs. The Company capitalizes certain costs for employees that are directly associated with internal use computer software projects once specific criteria are met. Costs are expensed for preliminary stage activities, training, maintenance and all other post-implementation stage activities as they are incurred.
Property and equipment, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. In evaluating long-lived assets for recoverability, including finite-lived intangible assets as described below, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. Assets to be disposed of and for which there is a committed plan of disposal are reported at the lower of carrying value or fair value less costs to sell.
Goodwill and Other Intangible Assets, Net
At acquisition, the Company estimates and records the fair value of purchased intangible assets, which primarily consist of certain trade names, customer relationships, favorable leases, proprietary software and franchise rights. The fair value of these intangible assets is estimated based on management's assessment, considering independent third-party appraisals, when necessary. The excess of the purchase consideration over the fair value of net assets acquired is recorded as goodwill.
Goodwill and certain other intangible assets deemed to have indefinite useful lives, including trade names and certain franchise rights, are not amortized but assessed for impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. Such assessment is performed using a quantitative approach at the reporting unit level. TheThrough the third quarter of Fiscal 2019, the reporting units identified for the purpose of the goodwill impairment assessment, for all periods presented areafter considering the economic aggregation criteria, were ANN, Justice, Lane Bryant, maurices, dressbarnDressbarn and Catherines, each of which represents the lowest level where discrete financial information is available and is regularly reviewed by segment managers.
. During Fiscal 2016 and Fiscal 2015, the annual impairment assessment was performed as of the first day of the fourth quarter, each fiscal year. Goodwill impairmentthe Company determined that several discrete events had occurred which changed the manner in which the business was determined using a two-step process. The first step of the goodwill impairment test was to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill. If the fair value of a reporting unit exceeded its carrying amount, goodwill of the reporting unit was considered notexpected to be impaired and performancemanaged going forward. The sale of maurices, the second stepannounced wind down of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeded its fair value, the second step of the goodwill impairment test was performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit was then allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value was the purchase price paid to acquire the reporting unit.
During the third quarter of Fiscal 2017, as more fully described in Note 6, as of result of lower than expected sales and profitability trends, the Company significantly reduced its level of forecasted earnings for Fiscal 2017 and future periods. The Company concluded that these factors, as well as the decline in the Company's stock price, represented impairment indicators which required
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the Company to test its goodwill and indefinite-lived intangible assets for impairment (the "Interim Test"). The Interim Test was performedDressbarn brand, as well as the changes in senior management, including the appointment of the last day of the third quarter of Fiscal 2017 and was also used to support our annual impairment test on the first day ofa new Chief Operating Decision Maker (“CODM”), all occurred in the fourth quarter of Fiscal 2017. The2019. After considering the impact of all these changes, the Company electedconcluded that its new management was beginning to early adopt Accounting Standards Update ("ASU") 2017-04, “Simplifying the Test for Goodwill Impairment”,request more discrete operating information related to its Ann Taylor and LOFT businesses, which removes Step 2are components of the Premium Fashion segment. Therefore, since new management, which included the Company's chief operating decision maker, was beginning to look at the components separately, and beginning to make decisions and allocate resources on that basis, the Company concluded that these components meet the definition of separate operating segments. Given that the determination of a reporting unit for purposes of goodwill impairment test requiringtesting cannot be at a hypothetical purchase price allocation. Underlevel higher than the new guidance,operating segment, the Company evaluates assetsdetermined that Ann Taylor and LOFT now meet the definition of separate operating segments and therefore goodwill has been separately allocated to these two units and tested for potential impairment and then determines goodwillas part of the fourth quarter impairment by comparing the reporting unit's fair value to its carrying value. test.
A goodwill impairment loss is recognized in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit.
The impairment test for other indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. The fair value of indefinite-lived intangible assets is primarily determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trade name. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the excess. In addition, in evaluating finite-lived intangible assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value.
Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets (as discussed above), are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. Refer to the Company's accounting policy for long-lived asset impairment as described earlier under the caption "Property and Equipment, Net."
Investments
Accounting Standards Codification (“ASC”) 810—Consolidation (“ASC 810”) requires the consolidation of all entities for which a Company has a controlling voting interest and all variable interest entities (“VIEs”) for which a Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. For those entities that are not considered VIEs, or are considered VIEs but the Company is not the primary beneficiary, the Company uses either the equity method or the cost method of accounting, depending on a variety of factors as set forth in ASC 323—Investments (“ASC 323”), to account for those investments which are not required to be consolidated under U.S. GAAP.
Insurance Reserves
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation, general liability and employee healthcare benefits. Liabilities associated with these risks are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Such liabilities are capped through the use of stop-loss contracts with insurance companies. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. As of July 29, 2017 and July 30, 2016,August 3, 2019 these reserves were $73.1$60.8 million and $70.4as of August 4, 2018 they were $69.2 million respectively.of which $3.4 million was recorded within Liabilities from discontinued operations. The Company is subject to various claims and contingencies related to insurance and other matters arising out of the normal course of business. The Company is self-insured for expenses related to its employee medical and dental plans, and its workers’ compensation plan and its general liability plan, up to certain thresholds. Claims filed, as well as claims incurred but not reported, are accrued based on management’s estimates, using information received from plan administrators, historical analysis and other relevant data. The Company’s stop-loss insurance coverage limit for individual claims under these policies is $750,000.$750,000 for medical claims, $500,000 for workers' compensation claims and $150,000 for general liability
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
claims. The Company believes its accruals for claims and contingencies are adequate based on information currently available. However, it is possible that actual results could differ significantly from the recorded accruals for claims and contingencies.
Income Taxes
Income taxes are provided using the asset and liability method. Under this method, income taxes (i.e., deferred tax assets and liabilities, current taxes payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the current year, and include the results of any differences between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating loss, capital loss and general business credit carry forwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The Company accounts for the financial effect of changes in tax laws or rates in the period of enactment.
Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. Tax valuation allowances are analyzed periodically and adjusted as events occur, or circumstances change, that warrant adjustments to those balances.
In determining the income tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more-likely-than-not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and the Company often obtains assistance from external advisors. To the extent that the Company’s estimates change or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made. If the initial assessment fails to result in the recognition of a tax benefit, the Company regularly monitors its position and subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, (ii) the statute of limitation expires or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency. Uncertain tax positions are classified as current only when the Company expects to pay cash within the next twelve months. Interest and penalties, if any, are recorded within the benefitBenefit (provision) for income taxes in the Company’s accompanying consolidated statements of operations and are classified on the accompanying consolidated balance sheets with the related liability for uncertain tax positions.
Leases
The Company leases certain facilities and equipment, including its retail stores. Most of theThe Company's leases contain renewal options, rent escalation clauses and/or landlord incentives. Rent expense for non-cancelable operating leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date. The effective lease commencement date represents the date on which the Company takes possession of, or controls the physical use of, the leased property. The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred rent liability and is classified on the consolidated balance sheets within Lease-related liabilities.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
4. Recently Issued Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company elected to early adopt this guidance for its Fiscal 2017 interim goodwill assessment conducted during the third quarter of Fiscal 2017. See Note 6 for a discussion of the Company's goodwill and other indefinite-lived intangible assets and a discussion of the results of the interim assessment, including related impairment charges.Recently adopted standards
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The guidance simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and the classification in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods therein, with early adoption permitted. Currently, the accounting for income taxes requires excess tax benefits and shortfalls to be recorded within equity as an adjustment to paid-in-capital whereas the new standard requires it to be recorded within the provision for income taxes in the consolidated statements of operations in the period they are realized. The impact of this change will depend on changes in the Company's stock price and the timing of the exercise of stock options and the vesting of restricted stock units, so the full effect of the standard is not able to be quantified. However, the recognition of these changes within the consolidated statements of operations will likely result in increased volatility of our provision for income taxes and earnings. In addition, the guidance will change the classification of excess tax benefits and shortfalls from a financing activity to an operating activity within the Company's consolidated statements of cash flows. The Company will apply this change on a prospective basis. The other amendments of the standard are not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." The guidance requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. Adoption of the standard requires a modified retrospective approach where the guidance is applied to the earliest comparative period presented. The Company is currently
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
evaluating the guidance and its impact on the Company's consolidated financial statements, but expects that it will result in a significant increase to its long-term assets and liabilities. The Company is also in the process of identifying changes to its business processes, systems and controls to support adoption of the new standard in fiscal 2020.Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," ("ASU 2014-09") which supersedes the revenue recognition requirements in FASB Accounting Standards Codification, "Revenue Recognition (Topic 605)." The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The guidance, which was deferred in July 2015, is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. The guidance may be applied retrospectively to each period presented or with the cumulative effect recognized as of the initial date of application. The Company is currently in the process of evaluating the impact that adopting ASU 2014-09 will have on its consolidated financial statements and notes thereto. Based on these efforts, the Company currently anticipates that the performance obligations underlying its core revenue streams (its retail store and ecommerce businesses) and related timing of revenue recognition thereof, will remain substantially unchanged. The Company is in the process of evaluating the impact of the new standard on ancillary sources of revenue, such as its loyalty and credit card programs, which represented approximately 2% of total net sales in Fiscal 2017. The Company has not yet determined whetheradopted the guidance will be adopted using the full retrospective restatement of all prior periods presented, or using theon a modified retrospective basis with a cumulative adjustment to opening retained earnings in the year of initial adoption. Finally, we are also analyzing the impact of the new standard on our current accounting policies and internal controls. Upon completion of these assessments, the Company will evaluate the impact of adopting the new standard on the Company's consolidated financial statements.
5. Acquisition of ANN INC.
On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN for an aggregate purchase price of approximately $2.1 billion. The purchase price consisted of approximately $1.75 billion in cash and the issuance of 31.2 million shares of the Company's common stock valued at approximately $345 million, based on the Company's stock price on the date of the acquisition. The cash portion of the purchase price was funded with borrowings under a $1.8 billion seven-year, variable-rate term loan described in Note 12. The acquisition is intended to diversify our portfolio of brands that serve the needs of women of different ages, sizes and demographics.
The Company expensed $20.8 million of transaction costs during Fiscal 2016 which are included within Acquisition and integration expenses in the Company’s accompanying consolidated statements of operations. In addition, the Company expensed $126.9 million during Fiscal 2016 related to the amortization of the write-up of ANN's inventory to its fair value which is included within Cost of goods sold in the consolidated statements of operations.
The Company accounted for the ANN Acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire such assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, which consists largely of the synergies and economies of scale expected from integrating ANN's operations. The Company allocated $225.7 million of the goodwill related to the ANN Acquisition to the Company's other reporting units where the anticipated benefits of the acquisition are expected to be achieved, as more fully described in Note 6. Goodwill is non-deductible for income tax purposes.
The allocation of the purchase price to the assets acquired and liabilities assumed, including the amount allocated to goodwill, was subject to change within the measurement period (up to one year from the acquisition date) as additional information that existed at the date of the acquisition related to the values of assets acquired and liabilities assumed was obtained. During Fiscal 2016, the Company recorded certain immaterial measurement-period adjustments. There were no measurement-period adjustments recorded during Fiscal 2017 and the purchase price allocation was finalized during the first quarter of Fiscal 2017.2019. The new guidance primarily impacted the Company's accounting for its customer loyalty and credit card program contracts. Under the new standard, the Company accounts for its customer loyalty programs using a deferred revenue model, which defers revenue at the estimated fair value as the loyalty points are redeemed. Also under the new standard, the Company records financing charges and other income under its credit card programs as variability is resolved. As a result of the changes discussed above, upon adoption of ASU 2014-09 in the first quarter of Fiscal 2019, we recorded a cumulative net after-tax adjustment to opening Accumulated deficit of approximately $5 million. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Other changes related to the adoption of ASU 2014-09 include a change in how expected product sales returns are recorded. While the Company continues to establish a reserve based on historical experience, under ASU 2014-09, the reserve is now recorded on a gross basis, rather than a net basis. As a result of this change, we recorded an offsetting increase of approximately $13 million to Inventories and Accrued expenses and other current liabilities.
The following tables summarize the impact of ASU 2014-09 on our consolidated statement of operations and balance sheet:
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended August 3, 2019 |
| | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Impact of Adoption |
| | | (millions) |
| Net sales | | $ | 5,493.4 |
| | $ | 5,490.4 |
| | $ | 3.0 |
|
| Cost of goods sold | | (2,432.1 | ) | | (2,426.6 | ) | | (5.5 | ) |
| Gross margin | | 3,061.3 |
| | 3,063.8 |
| | (2.5 | ) |
| | | | | | | |
| Operating loss | | (681.4 | ) | | (678.9 | ) | | (2.5 | ) |
| | | | | | | |
| Loss from continuing operations before benefit for income taxes | | (785.0 | ) | | (782.5 | ) | | (2.5 | ) |
| | | | | | | |
| Benefit for income taxes from continuing operations | | 14.5 |
| | 13.9 |
| | 0.6 |
|
| | | | | | | |
| Loss from continuing operations | | (782.3 | ) | | (780.4 | ) | | (1.9 | ) |
| Income from discontinued operations, net of taxes | | 76.4 |
| | 78.2 |
| | (1.8 | ) |
| Gain on disposal of discontinued operations, net of taxes | | 44.5 |
| | 44.5 |
| | — |
|
| Net loss | | $ | (661.4 | ) | | $ | (657.7 | ) | | $ | (3.7 | ) |
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | August 3, 2019 |
| | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Impact of Adoption |
| | | (millions) |
| Assets | | | | | | |
| Inventories | | $ | 547.7 |
| | $ | 539.8 |
| | $ | 7.9 |
|
| Prepaid expenses and other current assets | | 279.3 |
| | 264.0 |
| | 15.3 |
|
| Liabilities and Equity | | | | | | |
| Accrued expenses and other current liabilities | | 333.9 |
| | 324.9 |
| | 9.0 |
|
| Deferred income | | 128.3 |
| | 117.9 |
| | 10.4 |
|
| Accumulated deficit | | (935.9 | ) | | (934.7 | ) | | 1.2 |
|
The following table summarizes the final allocationimpact of fair valuesASU 2014-09 on our consolidated balance sheet as of the identifiable assets acquireddate of adoption:
|
| | | | | | | | | | | | |
| | | As Reported August 4, 2018 | | Balances After Adoption of ASU 2014-09 | | Impact of Adoption |
| | | (millions) |
| Assets | | | | | | |
| Inventories | | $ | 535.1 |
| | $ | 548.5 |
| | $ | 13.4 |
|
| Prepaid expenses and other current assets | | 229.4 |
| | 249.3 |
| | 19.9 |
|
| Assets related to discontinued operations | | 401.3 |
| | 404.3 |
| | 3.0 |
|
| Liabilities and Equity | | | | | | |
| Accrued expenses and other current liabilities | | 304.0 |
| | 319.1 |
| | 15.1 |
|
| Liabilities related to discontinued operations | | 166.2 |
| | 170.0 |
| | 3.8 |
|
| Deferred income | | 108.4 |
| | 120.9 |
| | 12.5 |
|
| Accumulated deficit | | (278.8 | ) | | (273.9 | ) | | 4.9 |
|
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," ("ASU 2016-18"). ASU 2016-18 requires restricted cash be included with cash and liabilities assumedcash equivalents when reconciling the total beginning and ending amounts on the statement of cash flows. The standard also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. The Company adopted ASU 2016-18 in the ANN Acquisition.first quarter of Fiscal 2019, using the retrospective method. The other provisions of ASU 2016-18 did not have a material effect on the Company.
A reconciliation of cash, cash equivalents and restricted cash in the consolidated balance sheets to the amounts shown on the consolidated statements of cash flows is shown below:
|
| | | |
| | Final Purchase Price Allocation |
| | (millions) |
| Cash and cash equivalents | $ | 257.6 |
|
| Inventories | 398.3 |
|
| Prepaid expenses and other current assets | 118.5 |
|
| Property and equipment | 453.3 |
|
Goodwill (a) | 959.6 |
|
| Other intangible assets (Note 6): | |
Trade names (a) | 815.0 |
|
| Customer relationships | 51.5 |
|
| Favorable leases | 38.4 |
|
| Other assets | 3.5 |
|
| Total assets acquired | 3,095.7 |
|
| | |
| Accounts payable | 155.6 |
|
| Accrued expenses and other current liabilities | 209.0 |
|
| Deferred income | 46.0 |
|
| Lease-related liabilities | 175.0 |
|
| Deferred income taxes | 374.1 |
|
| Other non-current liabilities | 38.8 |
|
| Total liabilities assumed | 998.5 |
|
| | |
| Total net assets acquired | $ | 2,097.2 |
|
_______
(a) Refer to Note 6 for a discussion of impairment charges recorded during Fiscal 2017. |
| | | | | | | | | | | | |
| Reconciliation of cash, cash equivalents and restricted cash: | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| Cash and cash equivalents | | $ | 328.0 |
| | $ | 231.0 |
| | $ | 306.3 |
|
| Restricted cash included in other current assets | | 1.2 |
| | 1.2 |
| | 1.0 |
|
| Cash included in discontinued operations | | — |
| | 7.9 |
| | 19.3 |
|
| Total cash, cash equivalents and restricted cash | | $ | 329.2 |
| | $ | 240.1 |
| | $ | 326.6 |
|
The values assigned to the Ann Taylor and LOFT trade names were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The Ann Taylor and LOFT trade names are deemed to have indefinite lives and are not amortized but subject to an impairment assessment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired.
The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized over five years based on the pattern of revenue expected to be generated from the use of the asset.
The values of favorable and unfavorable leasehold interests are determined by comparing the present value of the contract rent over the remaining lease term with that of the market rent, taking into account the type, size and location of the property. Favorable leasehold interests are included within Other intangible assets and unfavorable leasehold interests are included within Lease-related liabilities in the table above. ANN's historical lease-related liabilities of similar amounts were eliminated through purchase accounting.
The fair value of ANN's inventory as of the acquisition date was determined by using the estimated selling price, adjusted for the estimated costs of disposal and a reasonable profit margin.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recently issued standards
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes lease accounting as contained within ASC 840. The resultscore principle of ANNASU 2016-02 is that a lessee should recognize on the balance sheet the lease assets and lease liabilities that arise from all lease arrangements with terms greater than 12 months. Recognition of these lease assets and lease liabilities represents a change from previous GAAP, which did not require lease assets and lease liabilities to be recognized for operating leases. Qualitative disclosures along with specific quantitative disclosures will be required to provide enough information to supplement the post-acquisition period fromamounts recorded in the financial statements so that users can understand the nature of the Company’s leasing activities.
The provisions of ASU 2016-02 are effective for Fiscal 2020, which begins on August 22, 20154, 2019, including interim periods within that fiscal year. The Company plans to July 30, 2016elect the package of practical expedients included in this guidance, which allows us (i) to not reassess whether any expired or existing contracts contain leases; (ii) to not reassess the Company’s accompanying consolidated statementlease classification for any expired or existing leases; (iii) to account for a lease and non-lease component as a single component for certain classes of operationsassets; and (iv) to not reassess the initial direct costs for Fiscal 2016 consistexisting leases. In addition, the Company does not plan to recognize short-term leases on its Consolidated Balance Sheets and will recognize the expense for those lease payments in the Consolidated Statements of the following:
|
| | | |
| | For the period from August 22, 2015 to July 30, 2016 |
| | (millions) |
| Net sales | $ | 2,330.9 |
|
| Net loss | $ | (40.3 | ) |
In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements,” as an update to the previously-issued guidance. This update added a modified retrospective approach under which the cumulative effect of initially applying the standard will be recognized as an adjustment to its opening Fiscal 2020 retained earnings, with no restatement of prior year amounts. The following pro forma information hasCompany plans to elect this transition option.
Upon adoption on August 4, 2019, we will recognize right-of-use assets and lease liabilities that have not previously been prepared as ifrecorded. The lease liability for operating leases is based on the ANN Acquisition andnet present value of future minimum lease payments using the issuance of stock and debt to finance the acquisition had occurredCompany's incremental borrowing rate as of the beginningdate of Fiscal 2015:
|
| | | | | | | |
| | Fiscal Years Ended |
| | July 30,
2016 | | July 25,
2015 |
| | (millions, except per share data) (unaudited) |
| Pro forma net sales | $ | 7,119.1 |
| | $ | 7,332.6 |
|
| Pro forma net income (loss) | $ | 70.3 |
| | $ | (254.0 | ) |
| Pro forma net income (loss) per common share: | | | |
| Basic | $ | 0.36 |
| | $ | (1.31 | ) |
| Diluted | $ | 0.36 |
| | $ | (1.31 | ) |
adoption of ASU 2016-02. The Fiscal 2016 pro forma amounts reflect the historical operational results for ascena as well as those of ANN for the three-week stub period preceding the closeCompany has received a preliminary analysis of the transaction on August 21, 2015.rates to be used upon adoption and is reviewing the analysis. The pro forma amounts also reflectpreliminary analysis indicates that the effectCompany's incremental borrowing rate is in the range of pro forma adjustments of $82.2 million, net of taxes. The adjustments primarily reflect transaction costs and25-30%, which is similar to the amortization ofyield underlying the fair value adjustmentof the Company's Term Loan debt, as disclosed in Note 14. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as deferred rent. Deferred and prepaid rent will not be presented separately after the adoption of the new lease standard.
The Company expects that this standard will have a material impact on our Consolidated Balance Sheet and related disclosures, however, the adoption of this standard is not expected to inventory, which are currently included inhave a material impact on the reported resultsConsolidated Statement of Income and are excluded fromConsolidated Statement of Cash Flows. It is also not expected to have any impact on the Fiscal 2016 pro forma amounts dueCompany’s covenant compliance under its current debt agreements. The Company continues to their non-recurring nature.
The Fiscal 2015 pro forma amounts reflect the historical operational results for ascenaenhance accounting systems and ANNupdate business processes and the effect of pro forma adjustments of $(87.1) million, net of taxes. These adjustments primarily reflect charges for incremental interest expensecontrols related to the term loannew guidance for leases and incremental depreciationwe are finalizing the impact of the standard to our accounting policies, processes, disclosures, and amortization expense relatedinternal control over financial reporting. Collectively, these activities are expected to enable the write-up of ANN’s tangibleCompany to meet the new accounting and intangible assets to fair market value that were not reflecteddisclosure requirements upon adoption in the historical results.
The pro forma weighted-average number of common shares outstanding for each period assumes that 31.2 million shares of ascena common stock issued in connection with the acquisition had been issued as of the beginningfirst quarter of Fiscal 2015. The pro forma weighted-average number of diluted shares outstanding for Fiscal 2016 includes potentially dilutive shares of 1.2 million, which are excluded from the reported amount due to the net loss reported for the year.
The pro forma financial information is not indicative of the operational results that would have been obtained had the transactions actually occurred as of that date, nor is it necessarily indicative of the Company’s future operational results.
2020.
ASCENA RETAIL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6.5. Goodwill and Other Intangible Assets
Goodwill
The following details the changes in goodwill for each reportable segment:
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Premium Fashion (a) | | Value Fashion (b) | | Plus Fashion (c) | | Kids Fashion | | Total |
| | | (millions) |
| Balance at July 25, 2015 | | $ | — |
| | $ | 130.7 |
| | $ | 85.4 |
| | $ | 103.6 |
| | $ | 319.7 |
|
| Acquisition-related activity (Note 5) | | 733.9 |
| | 70.0 |
| | 89.9 |
| | 65.8 |
| | 959.6 |
|
| Balance at July 30, 2016 | | 733.9 |
| | 200.7 |
| | 175.3 |
| | 169.4 |
| | 1,279.3 |
|
| Impairment losses | | (428.9 | ) | | (107.2 | ) | | (60.2 | ) | | — |
| | (596.3 | ) |
| Balance at July 29, 2017 | | $ | 305.0 |
| | $ | 93.5 |
| | $ | 115.1 |
| | $ | 169.4 |
| | $ | 683.0 |
|
|
| | | | | | | | | | | | | | | | |
| | | Premium Fashion (a) | | Plus Fashion (b) | | Kids Fashion (c) | | Total (d) |
| | | (millions) |
| Balance at July 29, 2017 | | $ | 305.0 |
| | $ | 115.1 |
| | $ | 169.4 |
| | $ | 589.5 |
|
| Impairment losses | | — |
| | — |
| | — |
| | — |
|
| Balance at August 4, 2018 | | 305.0 |
| | 115.1 |
| | 169.4 |
| | 589.5 |
|
| Impairment losses | | — |
| | (115.1 | ) | | (160.9 | ) | | (276.0 | ) |
| Balance at August 3, 2019 | | $ | 305.0 |
| | $ | — |
| | $ | 8.5 |
| | $ | 313.5 |
|
(a)The impairment loss for Fiscal 2017 also represents theNet of accumulated impairment loss atlosses of $428.9 million for the ANN reporting unit as of July 29, 2017.August 3, 2019 and August 4, 2018.
(b) The impairment loss for Fiscal 2017 also represents the accumulated impairment loss atRepresents the mauricesPlus Fashion reporting unitsegment impairment losses as of July 29, 2017.
(c)August 3, 2019The impairment loss for Fiscal 2017 represents impairment charges at the, which $65.8 million and $49.3 million relates to Lane Bryant and Catherinesreporting unit.units, respectively. The accumulated impairment loss at the Lane Bryant and Catherines reporting unitunits as of August 3, 2019 was $321.9$387.7 million and $49.3 million, respectively. The accumulated impairment loss at the Lane Bryant and Catherines reporting units as of August 4, 2018 was $321.9 million and $0, respectively.
(c) Represents the Kids Fashion segment impairment losses as of August 3, 2019, which also represents the accumulated impairment loss as of August 3, 2019.
(d) Goodwill at our Value Fashion segment of $93.5 million as of July 29, 2017 and $261.7 millionAugust 4, 2018 has been excluded from the table as it is included within Assets related to discontinued operations in the accompanying consolidated balance sheets. The balance as of July 30, 2016.that date is net of accumulated impairment losses of $107.2 million.
As described in Note 5, the Company recorded goodwill of $959.6 million for the OtANN Acquisition. During the fourth quarter of Fiscal 2016, the Company assigned $225.7 million of goodwill from its ANN reporting unit to the Company's other reporting units as the analysis of the expected synergies was completed. The allocation of goodwill was based on specific identification or other reasonable allocation methodologies for expected cost savings related to procurement, fulfillment, distribution and brand services. The amount of goodwill assigned to a reporting unit represents the difference between the fair value of that reporting unit before and after the acquisition using a with-and-without analysis that measures the fair values of the expected synergies under the income approach.
Otherher Intangible Assets
Other intangible assets consist of the following:
| | | | July 29, 2017 | | July 30, 2016 | August 3, 2019 | | August 4, 2018 |
| Description | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Intangible assets subject to amortization (a): | (millions) | (millions) |
| Proprietary technology | $ | 5.3 |
| | $ | (5.3 | ) | | $ | — |
| | $ | 5.3 |
| | $ | (5.3 | ) | | $ | — |
| $ | 4.8 |
| | $ | (4.8 | ) | | $ | — |
| | $ | 4.8 |
| | $ | (4.8 | ) | | $ | — |
|
| Customer relationships | 54.2 |
| | (32.4 | ) | | 21.8 |
| | 54.2 |
| | (19.9 | ) | | 34.3 |
| 52.0 |
| | (46.7 | ) | | 5.3 |
| | 52.0 |
| | (39.7 | ) | | 12.3 |
|
| Favorable leases | 38.2 |
| | (14.4 | ) | | 23.8 |
| | 38.2 |
| | (7.1 | ) | | 31.1 |
| 38.2 |
| | (29.8 | ) | | 8.4 |
| | 38.2 |
| | (21.3 | ) | | 16.9 |
|
| Trade names | 5.3 |
| | (5.3 | ) | | — |
| | 5.3 |
| | (5.3 | ) | | — |
| 5.3 |
| | (5.3 | ) | | — |
| | 5.3 |
| | (5.3 | ) | | — |
|
| Total intangible assets subject to amortization | 103.0 |
| | (57.4 | ) | | 45.6 |
| | 103.0 |
| | (37.6 | ) | | 65.4 |
| 100.3 |
| | (86.6 | ) | | 13.7 |
| | 100.3 |
| | (71.1 | ) | | 29.2 |
|
Intangible assets not subject to amortization: | | | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
|
Brands and trade names (b) | 475.9 |
| | — |
| | 475.9 |
| | 1,192.4 |
| | — |
| | 1,192.4 |
| |
Brands and trade names (b) (c) | | 252.0 |
| | — |
| | 252.0 |
| | 386.9 |
| | — |
| | 386.9 |
|
| Franchise rights | 10.9 |
| | — |
| | 10.9 |
| | 10.9 |
| | — |
| | 10.9 |
| 10.9 |
| | — |
| | 10.9 |
| | 10.9 |
| | — |
| | 10.9 |
|
| Total intangible assets not subject to amortization | 486.8 |
| | — |
| | 486.8 |
| | 1,203.3 |
| | — |
| | 1,203.3 |
| 262.9 |
| | — |
| | 262.9 |
| | 397.8 |
| | — |
| | 397.8 |
|
| Total intangible assets | $ | 589.8 |
| | $ | (57.4 | ) | | $ | 532.4 |
| | $ | 1,306.3 |
| | $ | (37.6 | ) | | $ | 1,268.7 |
| $ | 363.2 |
| | $ | (86.6 | ) | | $ | 276.6 |
| | $ | 498.1 |
| | $ | (71.1 | ) | | $ | 427.0 |
|
________
(a) There were no finite-lived intangible asset impairment losses recorded for any of the periods presented.
(b) The Company recorded impairment charges related to trade names during Fiscal 2017,2019, as discussed by reporting unit below.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(c) Brands and trade names within Intangible assets not subject to amortization excludes $89 million for each period associated with our maurices brand which is included within Assets related to discontinued operations in the accompanying consolidated balance sheets.
Amortization
The Company recognized amortization expense on finite-lived intangible assets, excluding favorable leases discussed below, of $7.0 million in Fiscal 2019, $9.5 million in Fiscal 2018 and $12.5 million in Fiscal 2017, $17.2 million in Fiscal 2016 and $2.4 million in Fiscal 2015, which is classified within Depreciation and amortization expense in the accompanying consolidated statements of operations. The Company amortizes customer relationships recognized as part of the acquisition of ANN INC. (the "ANN AcquisitionAcquisition") over five years based on the pattern of revenue expected to be generated from the use of the asset. In that regard, the remaining balance as of August 3, 2019 of $5.3 million will be amortized during Fiscal 2020.
The expected amortization of customer relationships is as follows:
ASCENA RETAIL GROUP, INC. |
| | | |
| | Expected Amortization |
| | (millions) |
| 2018 | $ | 9.4 |
|
| 2019 | 7.0 |
|
| 2020 | 5.4 |
|
| Total | $ | 21.8 |
|
Favorable leases are amortized into either Buying, distribution and occupancy expenses or Selling, general and administrative expenses over a weighted-average lease term of approximately four years. The Company recognized amortization expense on favorable leases of $7.3$8.5 million in Fiscal 20172019, $6.9 million in Fiscal 2018 and $7.3 million in Fiscal 2016.2017. The expected amortization for each of the next five fiscal years is as follows: Fiscal 2018: $6.82020: $5.0 million; fiscal 2019: $6.3Fiscal 2021: $1.8 million; fiscal 2020: $5.8Fiscal 2022: $1.0 million; fiscal 2021: $2.4Fiscal 2023: $0.5 million; and fiscal 2022Fiscal 2024 and thereafter: $2.5$0.1 million.
Goodwill and Other Indefinite-lived Intangible Assets Impairment Assessment
As discussed in Note 3, the Company typically performs its annual impairment assessment of goodwill and indefinite-lived intangible assets during the fourth quarter of each fiscal year unless a triggering event has occurred in a previous quarter. The impairment test for other indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the excess. Based on the results of the Company’s annual impairment testing of goodwill and indefinite-lived intangible assets for Fiscal 2018, no impairment charges were deemed necessary.
Fiscal 2019 Interim Impairment Assessment
The third quarter of Fiscal 2019 marked the continuation of the challenging market environment in which the Company competes. Continued declines in customer traffic across the Company's brands negatively impacted our February and March performance causing lower comparative sales than expected, along with the expectation that such trends may continue into the fourth quarter. The Company concluded that these factors, as well as the significant decline in the Company's stock price, represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the third quarter of Fiscal 2019 (the "Interim Test").
As a result, the Company performed its Interim Test of goodwill and indefinite-lived intangible assets using a quantitative approach as of April 6, 2019, which was the last day in the second month of the third fiscal quarter. The Interim Test was determined with the assistance of an independent valuation firm using two valuation approaches, including the income approach (discounted cash flow method ("DCF")) and market approach (guideline public company method). The Company believes that the income approach (Level 3 measurement) is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate. Therefore, a greater weighting was applied to the income approach than the market approach. The weighing of the fair values by valuation approach (income approach vs. market approach) is generally consistent across all reporting units. For substantially all of the reporting units the income approach was weighted 75% and the market approach 25%. Under the market approach, the Company estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization, factored in a control premium, and used the market approach as a comparison of respective fair values. The estimated fair value determined under the market approach validated our estimate of fair value determined under the income approach. The only difference to the 75% / 25% weighting was at the Catherines reporting unit where the income approach was weighted 100% as the resulting low profit margins made the market approach impracticable. This approach at Catherines had no impact on the overall conclusion. Further, the Company's maurices reporting unit was valued utilizing the sales price inherent in the Transaction described in Note 2. Finally, the Company’s publicly traded market capitalization was reconciled to the sum of the fair value of the reporting units.
The projections used in the Interim Test reflect revised assumptions across certain key areas versus prior plans as a result of recent operating performance. In particular, sales growth assumptions were significantly lowered at certain brands to reflect the shortfall in actual results versus those previously projected, reflecting the uncertainty of future comparable sales given the sector's dynamic change. Based on the results of the impairment assessment, the fair value of our ANN, Justice and maurices reporting units significantly exceeded their carrying value.
Conversely, the changes in key assumptions and the resulting reduction in projected future cash flows included in the Interim Test resulted in a decrease in the fair values of our Lane Bryant and Catherines reporting units such that their fair values were less than their carrying values. As a result, the Company recognized impairment losses to write down the carrying values of its trade name intangible assets to their fair values as follows: $23.0 million of our Lane Bryant trade name and $2.0 million of our Catherines trade name. The fair value of the trade names was determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trade name (Level 3 measurement). In addition, the Company recognized the following goodwill impairment charges: a loss of $65.8 million at the Lane Bryant reporting unit and $49.3 million at the Catherines reporting unit to write down the carrying values of the reporting
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
units to their fair values. These impairment losses have been disclosed separately on the face of the accompanying consolidated statements of operations.
Fiscal 2019 Fourth Quarter Assessment
The Company performed its regular annual assessment at the beginning of the fourth quarter and did not note any impairment of goodwill or intangible assets as it had just completed the Interim Test. However, during the fourth quarter of Fiscal 2019, the Company's stock price again declined significantly, dropping from the price used in the Interim Test of $1.20 to a value of $0.33 at the end of Fiscal 2019. This decline, coupled with a decline in the fair value of the Company's Term Loan, as defined herein, and discussed in Notes 10 and 14, led the Company to conclude that the items represented further impairment indicators which again required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of Fiscal 2019 (the "Year-End Test").
The Year-End Test was determined with the assistance of an independent valuation firm using the same methodologies as the Interim Test. While the actual cash flows achieved in the fourth quarter of Fiscal 2019 differed from the projected Fiscal 2019 cash flows used in the Interim Test, the Company concluded that the primary difference arose from differences in gross margin rate, which resulted from the higher inventory levels experienced during Fiscal 2019. As a result, the Company concluded that the changes did not substantially impact the cash flow estimates used for the future years, therefore the cash flow projections underlying the Year-End Test were substantially the same as those used in the Interim Test. The primary driver of the change in value was the change in the discount rate assumption. In the Interim Test, the discount rate ranged from 14%-15%. Because of declines in the Company's stock price and the fair value of the Company's Term Loan, the discount rate used in the Year-End Test ranged from 27%-29%.
Primarily as a result of the significantly higher discount rate assumption in the Year-End Test, the fair value of the Justice reporting unit, which significantly exceeded its carrying value as of the Interim Test, was less than its carrying value in the Year-End Test. Based on the results of the impairment assessment, the fair value of ANN, which significantly exceeded its carrying value in the Interim Test, still significantly exceeded its carrying value in the Year-End Test, however by a lower amount.
Additionally, as a result of the previously described change in operating segments during the fourth quarter which led to Ann Taylor and LOFT being identified as separate reporting units not subject to further aggregation, we performed an initial test on those units utilizing a similar approach as that used for the ANN test described above. The discount rates used were 27% for LOFT and 28% for Ann Taylor.
Based on the conclusions of the Year-End Test, the Company recognized impairment losses to write-down the carrying values of its trade name intangible assets to their fair values as follows: $15.0 million of our Ann Taylor trade name, $60.3 million of our LOFT trade name, $14.0 million of our Lane Bryant trade name, $4.0 million of our Catherines trade name and $16.6 million of our Justice trade name. In addition, the Company recognized a goodwill impairment charge of $160.9 million at the Justice reporting unit to write-down the carrying values of the reporting units to their fair values. These impairment losses have been disclosed separately in the accompanying consolidated statements of operations.
As a result of the impairment charges recorded in both the Interim Test and the Year-End Test, the Company included an income tax benefit of approximately $33 million in the estimated effective tax rate for Fiscal 2019. The income tax benefit was calculated by applying a blended statutory rate of approximately 25% to the $134.9 million of impairment of other intangible assets. The total goodwill impairment charges of $276.0 million under the two tests were treated as non-deductible for income tax purposes and were a significant factor in reducing the Company's effective income tax rate for the fiscal year ended August 3, 2019.
Fiscal 2017 Interim Impairment Assessment
The third quarter of Fiscal 2017 marked the continuation of the challenging market environment in which the Company competes. Lower than expected comparable sales for the third quarter, along with a reduced comparable sales outlook for the fourth quarter led the Company to significantly reduce its level of forecasted earnings for Fiscal 2017 and future periods. The Company concluded that these factors, as well as the decline in the Company's stock price, represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the third quarter of Fiscal 2017.2017 (the "2017 Interim Test").
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As a result, the Company performed anthe 2017 Interim Test of goodwill and indefinite-lived intangible assets using a quantitative approach on the last day of its third fiscal quarter. The 2017 Interim Test was determined with the assistance of an independent valuation firm using two valuation approaches, including the income approach (the discounted cash flow method) and the market approach (guideline public company method). The Company believes that the income approach (Level 3 measurement) is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate. Therefore, a greater weighting was applied to the income approach than the market approach. The weighing of the fair values by valuation approach (income approach vs. market approach) was consistent across all reporting units. For all reporting units, the income approach was weighted 85% and the market approach 15%. Under the market approach, the Company estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization, factored in a control premium, and used the market approach as a comparison of respective fair values. The estimated fair value determined under the market approach validated its estimate of fair value determined under the income approach. Finally, the Company’s publicly traded market capitalization was reconciled to the sum of the fair value of the reporting units, taking into account subsequent changes in the Company's stock price reflecting information known as of, but made public subsequent to, the date of the 2017 Interim Test.
The projections used in the 2017 Interim Test reflect lower assumptions across certain key areas as a result of lower-than-expected performance and a sustained challenging retail environment. In particular, sales growth assumptions were significantly lowered to reflect the shortfall in actual results versus those previously projected, reflecting the uncertainty of future comparable sales given the sector's dynamic change. The lower sales outlook resulted in a significant reduction in fair market value comparisonscompared to the prior valuation performed in Fiscal 2016. Based on the results of the impairment assessment, the fair value of its Catherines
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
reporting unit substantiallysignificantly exceeded its carrying value and was not at risk of impairment, while its Justice reporting unit only exceeded its carrying value by 8%.
The changes in key assumptions and the resulting reduction in the long-term growth rates and profitability included in the 2017 Interim Test resulted in a decrease in the fair values of trade names and goodwill at its ANN, maurices and Lane Bryant reporting units such that their fair values were less than their carrying values. As a result, the Company recognized impairment losses to write downwrite-down the carrying values of its trade name intangible assets to their fair values as follows: $210.0 million of its Ann Taylor trade name, $356.3 million of its LOFT trade name and $161.8 million of its Lane Bryant trade name. The fair value of the trade names was determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trade name (Level 3 measurement). In addition, the Company recognized the following goodwill impairment charges: a loss of $428.9 million at the ANN reporting unit, $107.2 million at the maurices reporting unit and $60.2 million at the Lane Bryant reporting unit and $107.2 million at the maurices reporting unit, which is included in discontinued operations, to write downwrite-down the carrying values of the reporting units to their fair values. These impairment losses have been disclosed separately on the face of the accompanying consolidated statements of operations.
Fiscal 2015 Lane Bryant Impairment
During the fourth quarter of Fiscal 2015, due to lower-than-expected performance since the acquisition, management lowered certain key assumptions in its long-term projections used in the Fiscal 2015 valuation. As a result, Lane Bryant recorded an impairment loss of $261.7 million to write down the carrying value of its goodwill to its implied fair value, as if the reporting unit had been acquired in a business combination. In addition, Lane Bryant recorded an impairment loss of $44.7 million to write down the carrying value of its trade name to its fair value, which was determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trade name (Level 3 measurement). Such impairment losses have been included within Impairment of goodwill and Impairment of intangible assets, respectively, in the accompanying consolidated statements of operations.
7.6. Restructuring and Other Related Charges
In October 2016,Fiscal 2017, the Company initiatedannounced 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). The Change for Growth program is expected toIn Fiscal 2017, the Company (i) refine the Company'srefined its operating model to increase itsthe focus on key customer segments, (ii) reducedeveloped initiatives which will optimize the time to bringflow of product to market, (iii) reduce working capital requirements and (iv) enhancethrough the Company's ability to serve customers on any purchasing platform, while better leveraging the Company's brand services platform. The Company's new operating model is designed to focus on enhancing customer-facing capabilities while eliminating organizational overlap.
During the first quarter of Fiscal 2017, as part of refining the operating model, the Company eliminated a number of executive positionsdistribution channels, including direct channel and made organizational changes resulting in the creation of the Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion operating segments. The Company's new operating model is designed to allow its operating segments to focus on enhancing customer-facing capabilities while reducing duplicative overhead.
During the second quarter of Fiscal 2017, the Company announced further consolidation ofbrick-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. In the fourth quarter of Fiscal 2017, in an effort to further streamline its brand services functionsProtection, and enhance its customer-facing capabilities, the Company(iv) began transitioning certain transaction processing functions in Human Resources and Finance within its brand services group to an independent third-party managed service provider.
During the third quarter of Fiscal 2017, the Company conducted a review of its store fleet with the goal of reducing the number of marginally profitableunder-performing stores through either rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprintportfolio and convert sales from these stores into ecommercedirect channel sales or to nearby store locations ("Fleet Optimization"). Aslocations.
In Fiscal 2018 and 2019, in addition to continuing a resultnumber of the Fleet Optimization,activities started in Fiscal 2017, the Company recognized charges for early-termination payments(i) developed new capabilities such as markdown optimization, size pack optimization and non-cash asset impairmentslocalized inventory planning with the goal of allowing it to write downbetter compete in the underlying assets of those storesshifting retail landscape, (ii) enhanced our capability to fair value based on the discounted cash flows which are includedanalyze transaction data to support strategic decisions, and (iii) transitioned certain transaction processing functions within the table below.brand services group to an independent third-party managed-service provider.
AsOther activities during Fiscal 2018 and 2019 included the ongoing fleet optimization store program as the Company continues to execute onrenegotiate leases and close stores. Such activities included the initiatives identified underplanned closure of under-performing stores and the Change for Growth program, we currently expectcompletion of the previously announced relocation of the Catherines brand to incur additional chargesColumbus, Ohio, which resulted in Fiscal 2018a write-down of approximately $35-$50 million. In addition, we have identified capital projects of approximately $40 million, which are expected to be incurred during Fiscal 2018. The Company may incur significant additionaltheir former
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
headquarters building in Bensalem, Pennsylvania to fair market value during Fiscal 2018. The building was sold in the third quarter of Fiscal 2018. These previously mentioned charges were recorded within Restructuring and capital expenditures in future periods as it more fully defines incremental Change for Growth program initiatives, and moves into the execution phases of those projects.other related charges. Actions associated with the Change for Growth program are currently expectedwere completed in Fiscal 2019.
In addition to continue through fiscal 2019.the Change for Growth program, the Company announced an additional organizational restructuring in the fourth quarter of Fiscal 2019, which included job eliminations, as it continues its cost reduction initiatives.
As a result of the Change for Growth program,cost reduction initiatives, the Company incurred the following charges, which are included within Restructuring and other related charges:
| | | | | | Fiscal Years Ended |
| | Fiscal Year Ended July 29, 2017 | August 3, 2019 | | August 4, 2018 | | July 29, 2017 |
| Cash restructuring charges: | (millions) | (millions) |
| Severance and benefit costs | $ | 33.2 |
| |
Severance and benefit costs (a) | | $ | 43.0 |
| | $ | 5.7 |
| | $ | 30.8 |
|
| Lease termination and store closure costs | 1.3 |
| 0.7 |
| | — |
| | 1.2 |
|
Other related charges (a) | 33.4 |
| |
Other related charges (b) | | 38.6 |
| | 59.2 |
| | 33.4 |
|
| Total cash charges | 67.9 |
| 82.3 |
| | 64.9 |
| | 65.4 |
|
| | | | | | | |
| Non-cash charges: | | | | | | |
Impairment of store assets | 14.0 |
| |
Impairment of store assets (c) | | 45.4 |
| | 11.7 |
| | 12.7 |
|
Total non-cash charges | 14.0 |
| 45.4 |
| | 11.7 |
| | 12.7 |
|
| | | | | | | |
| Total restructuring and other related charges | $ | 81.9 |
| $ | 127.7 |
| | $ | 76.6 |
| | $ | 78.1 |
|
_______
(a)Severance and benefit costs reflect severance accruals as well as adjustments to true up estimates of previously accrued severance-related costs to reflect amounts actually paid.
(b) Other related charges consist of professional fees and other third-party costs incurred in connection with the identification and implementation of transformation initiatives associated with the Change for Growth program.program, professional fees in connection with the Dressbarn wind down, and third-party costs associated with the relocation of the Catherines brand to Ohio in Fiscal 2018.
(c) Non-cash asset impairments primarily reflect the write-down of the Dressbarn corporate headquarters to fair market value as a result of the wind down and the write-down of a corporate-owned office building in Duluth, MN to fair market value as a result of the sale of maurices, decisions within the Company's fleet optimization program to close certain under-performing stores, primarily at the Premium Fashion segment, and write-downs associated with a Plus Fashion segment building to fair market value. The amount for Fiscal 2018 includes asset impairments of $12.8 million and was offset by the write-off of $1.1 million of tenant allowances.
A summary of activity for FiscalFiscals 2017, 2018 and 2019 in the restructuring-related liabilities, associated with the Change for Growth program, which is included within Accrued expenses and other current liabilities, is as follows:
| | | | Severance and benefit costs | | Lease termination and store closure costs
| | Other related charges | | Total | Severance and benefit costs | | Lease termination and store closure costs | | Other related charges | | Total |
| | (millions) | (millions) |
| Balance at July 30, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Additions charged to expense | 33.2 |
| | 1.3 |
| | 33.4 |
| | 67.9 |
| 30.8 |
| | 1.2 |
| | 33.4 |
| | 65.4 |
|
| Cash payments | (15.9 | ) | | (1.3 | ) | | (28.3 | ) | | (45.5 | ) | (15.2 | ) | | (1.2 | ) | | (28.3 | ) | | (44.7 | ) |
| Balance at July 29, 2017 | $ | 17.3 |
| | $ | — |
| | $ | 5.1 |
| | $ | 22.4 |
| 15.6 |
| | — |
| | 5.1 |
| | 20.7 |
|
| Additions charged to expense | | 5.7 |
| | — |
| | 59.2 |
| | 64.9 |
|
| Cash payments | | (17.3 | ) | | — |
| | (58.3 | ) | | (75.6 | ) |
| Balance at August 4, 2018 | | 4.0 |
| | — |
| | 6.0 |
| | 10.0 |
|
Additions charged to expense (a) | | 47.7 |
| | 0.7 |
| | 38.6 |
| | 87.0 |
|
| Cash payments | | (7.0 | ) | | (0.7 | ) | | (39.8 | ) | | (47.5 | ) |
| Balance at August 3, 2019 | | $ | 44.7 |
| | $ | — |
| | $ | 4.8 |
| | $ | 49.5 |
|
_______
(a) Additions charged to expense for Fiscal 2019 exclude $(4.7) million of long-term incentive program expense reversals related to the announced changes to the Company's senior leadership team.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8.7. Inventories
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
|
| | | | | | | | |
| | | July 29,
2017 | | July 30,
2016 |
| | | (millions) |
| Premium Fashion | | $ | 208.2 |
| | $ | 198.6 |
|
| Value Fashion | | 180.6 |
| | 188.8 |
|
| Plus Fashion | | 161.9 |
| | 154.4 |
|
| Kids Fashion | | 88.6 |
| | 107.5 |
|
| Total inventories | | $ | 639.3 |
| | $ | 649.3 |
|
|
| | | | | | | | |
| | | August 3,
2019 | | August 4,
2018 |
| | | (millions) |
| Premium Fashion | | $ | 226.3 |
| | $ | 212.2 |
|
| Plus Fashion | | 156.5 |
| | 153.0 |
|
| Kids Fashion | | 107.9 |
| | 103.8 |
|
| Value Fashion | | 57.0 |
| | 66.1 |
|
| Total inventories | | $ | 547.7 |
| | $ | 535.1 |
|
ASCENA RETAIL GROUP, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9.8. Property and Equipment
Property and equipment, net, consist of the following:
| | | | | July 29,
2017 | | July 30,
2016 | | August 3,
2019 | | August 4,
2018 |
| | | (millions) | | (millions) |
| Property and Equipment: | | |
| | |
| | |
| | |
|
| Land | | $ | 31.1 |
| | $ | 32.0 |
| | $ | 22.5 |
| | $ | 27.3 |
|
| Buildings and improvements | | 257.6 |
| | 250.8 |
| | 194.9 |
| | 236.8 |
|
| Leasehold improvements | | 950.7 |
| | 948.7 |
| | 748.6 |
| | 791.4 |
|
| Furniture, fixtures and equipment | | 791.4 |
| | 718.2 |
| | 637.3 |
| | 644.1 |
|
| Information technology | | 708.0 |
| | 572.1 |
| | 868.6 |
| | 792.3 |
|
| Construction in progress | | 54.3 |
| | 155.1 |
| | 13.5 |
| | 29.2 |
|
| | | 2,793.1 |
| | 2,676.9 |
| | 2,485.4 |
| | 2,521.1 |
|
| Less: accumulated depreciation | | (1,355.5 | ) | | (1,046.8 | ) | | (1,638.4 | ) | | (1,414.3 | ) |
| Property and equipment, net | | $ | 1,437.6 |
| | $ | 1,630.1 |
| | $ | 847.0 |
| | $ | 1,106.8 |
|
Long-Lived Asset Impairments
The charges below reduced the net carrying value of certain long-lived assets to their estimated fair value, which wasas determined based onusing discounted expected cash flows.flows, which are classified as Level 3 measurements in the fair value measurements hierarchy. These impairment charges arose from the Company's routine assessment of under-performing retail stores and are included as a component of Selling, general and administrative expenses in the accompanying consolidated statements of operations for all periods.
Impairment charges related to long-lived tangibleretail store assets by segment are as follows:
| | | | Fiscal Years Ended | Fiscal Years Ended |
| | July 29, 2017 (a) | | July 30,
2016 | | July 25,
2015 | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | (millions) | (millions) |
| Premium Fashion | $ | 0.7 |
| | $ | — |
| | $ | — |
| $ | 2.2 |
| | $ | 2.3 |
| | $ | 0.7 |
|
| Value Fashion | 11.1 |
| | 8.1 |
| | 3.8 |
| |
| Plus Fashion | 6.3 |
| | 2.8 |
| | 0.6 |
| 17.8 |
| | 5.1 |
| | 6.3 |
|
| Kids Fashion | 3.5 |
| | 2.4 |
| | 6.4 |
| 1.7 |
| | 1.8 |
| | 3.5 |
|
| Value Fashion | | 16.1 |
| | 20.3 |
| | 7.4 |
|
Total impairment charges | $ | 21.6 |
| | $ | 13.3 |
| | $ | 10.8 |
| $ | 37.8 |
| | $ | 29.5 |
| | $ | 17.9 |
|
________
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(a) The Company incurred additional store impairment charges, of $14.0 million in connection with the Fleet Optimization review, which are considered to be outside the Company’s typical quarterly real-estate review andreview. These additional charges are included within Restructuring and other related charges for Fiscal 2017, asand are more fully described in Note 7.6.
Depreciation
The Company recognized depreciation expense of $372.4$292.9 million in Fiscal 2017, $341.52019, $314.0 million in Fiscal 20162018 and $215.8$338.3 million in Fiscal 2015,2017, which is classified within Depreciation and amortization expense in the accompanying consolidated statements of operations.
9. Investment and Variable Interest Entity
As discussed in Note 2, on May 6, 2019, the Company and OpCapita completed the Transaction which provided for, among other things, the sale by ascena of maurices to Viking. Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices through its investment in Viking, consisting of interests in Viking preferred and common stock. Viking's operations substantially consist of its investment in maurices.
At inception, the Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and OpCapita, that Viking is a VIE and not subject to consolidation, as the Company is not the primary beneficiary of Viking because the Company does not have the power to direct the activities that most significantly impact Viking’s economic performance. As a result, the Company has recorded its initial investment in Viking of $53.9 million, based on a third-party valuation that utilized a binomial lattice model, and will account for its investment under the equity method of accounting.
As part of the Transaction, the Company has guaranteed that maurices will receive annual revenues from its private label credit card arrangements in line with those received historically over the period ranging from June 2019 through May 2023. The Company believes that the income generated by these arrangements will be substantially in line with the amount contemplated by the guarantee and has provided for the projected shortfall as a component of the gain on the sale of maurices.
Viking, primarily through its investment in maurices, reported a loss of approximately $12 million in the fourth quarter of Fiscal 2019, which represents results from the operations of maurices for the post acquisition period in Fiscal 2019. The results of maurices includes the preliminary impact of adjusting its assets and liabilities to fair value under the acquisition method of accounting for business combinations, which will be finalized during Fiscal 2020. Accordingly, the Company recognized its share of the loss in the accompanying consolidated statement of operations which was determined by using the hypothetical liquidation at book value ("HLBV"). HLBV is a balance sheet approach whereby a calculation is prepared at each balance sheet date to determine the amount that the Company would receive if the underlying equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to its investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is the Company's share of the earnings or losses from the equity investment for that period.
As of August 3, 2019, the Company's investment in Viking was recorded at $42.1 million and the Company had a receivable due from maurices of $59.8 million, primarily for in-transit inventory purchased on their behalf. Of the receivable balance, $12 million is classified in non-current assets. There were no amounts due to maurices as of August 3, 2019. The Company's investment balance, plus the receivable and the private label credit card revenue guarantee, both previously discussed, represent our maximum exposures to any potential loss.
In connection with the sale of maurices, the Company agreed to provide transition services to maurices for varying periods of time depending on the service. Service periods range from 3-36 months and include services such as legal, tax, logistics, sourcing and other back office functions. For the three months ended August 3, 2019, the Company recognized fees from these services of approximately $13.9 million.
10. Debt
Debt consists of the following:
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
| | | | | | | | |
| | | July 29,
2017 | | July 30,
2016 |
| | | (millions) |
| Prepaid expenses | | $ | 73.6 |
| | $ | 132.1 |
|
| Accounts and other receivables | | 82.3 |
| | 84.7 |
|
| Short-term investments | | 1.0 |
| | 1.8 |
|
| Other current assets | | 0.5 |
| | 0.3 |
|
| Total prepaid expenses and other current assets | | $ | 157.4 |
| | $ | 218.9 |
|
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
| | | | | | | | |
| | | July 29,
2017 | | July 30,
2016 |
| | | (millions) |
| Accrued salary, wages and related expenses | | $ | 147.4 |
| | $ | 183.8 |
|
| Accrued operating expenses | | 151.4 |
| | 161.6 |
|
| Sales tax payable | | 20.6 |
| | 34.1 |
|
| Other | | 33.5 |
| | 34.2 |
|
| Total accrued expenses and other current liabilities | | $ | 352.9 |
| | $ | 413.7 |
|
12. Debt
Debt consists of the following:
| | | | July 29,
2017 | | July 30,
2016 | August 3,
2019 | | August 4,
2018 |
| | (millions) | (millions) |
| Revolving credit facility | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
Less: unamortized debt issuance costs (a) | (4.4 | ) | | (5.8 | ) | (3.2 | ) | | (4.3 | ) |
| | (4.4 | ) | | (5.8 | ) | (3.2 | ) | | (4.3 | ) |
| | | | | | | |
| Term loan | 1,596.5 |
| | 1,719.0 |
| 1,371.5 |
| | 1,371.5 |
|
Less: unamortized original issue discount (b) | (25.2 | ) | | (30.1 | ) | (13.8 | ) | | (18.0 | ) |
unamortized debt issuance costs (b) | (28.8 | ) | | (34.6 | ) | (15.9 | ) | | (20.5 | ) |
| | 1,542.5 |
| | 1,654.3 |
| 1,341.8 |
| | 1,333.0 |
|
| | | | | | | |
| Less: current portion | (44.0 | ) | | (54.0 | ) | — |
| | — |
|
| Total long-term debt | $ | 1,494.1 |
| | $ | 1,594.5 |
| $ | 1,338.6 |
| | $ | 1,328.7 |
|
_______
(a) The unamortized debt issuance costs in connection with the Amended Revolving Credit Agreement, as defined below, are amortized on a straight-line basis over the life of the Amended Revolving Credit Agreement.amended revolving credit agreement.
(b) The original issue discount and debt issuance costs for the term loan are amortized over the life of the term loan using the interest method based on an imputed interest rate of approximately 6.3%.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amended Revolving Credit Agreement
In connection with the ANN Acquisition,On February 28, 2018, the Company amendedand certain of its domestic subsidiaries entered into an amendment and restatement of its revolving credit facility inagreement dated August 21, 2015, as amended October 31, 2016, among the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the "Amended Revolving Credit Agreement"). The Amended Revolving Credit Agreement provides aggregate revolving commitments up to $600$500 million, with an optional increase of up to $200 million and expires in August 2020. There are no mandatory reductions in aggregate revolving commitments throughout the term of the Amended Revolving Credit Agreement. However, borrowing availability under the Amended Revolving Credit Agreement (the "Availability") is limited by the amount of eligible cash, inventory and receivables as defined in the Amended Revolving Credit Agreement.million.
The Amended Revolving Credit Agreementrevolving credit facility may be used for the issuance of letters of credit, to fund working capital requirements and capital expenditures, and for general corporate purposes. The Amended Revolving Credit Agreementrevolving credit facility also includes a $350$200 million letter of credit sub-limit,sublimit, all of which $100 million can be used for standby letters of credit pursuant to an amendment to the revolving credit facility dated September 20, 2019, and a $30 million swingswingline loan sub-limit.sublimit. Refer to Note 22 for more details on the amendment. The interest rates, pricing and fees under the agreement fluctuate based on the average daily availability, as defined therein. The Amended Revolving Credit Agreement extends the maturity of the Company’s revolving credit facility from August 2020 to the earlier of (i) five years from the closing date (or February 2023) or (ii) 91 days prior to the maturity date of the Term Loan (unless (a) the outstanding principal amount of the Term Loan is $150 million or less and (b) the Company maintains liquidity, as defined in the Amended Revolving Credit Agreement (which can include (1) availability under the revolving credit facility in excess of the greater of $100 million and 20% of the credit limit and (2) cash held in a controlled account of the administrative agent of the revolving credit facility), in an amount equal to the outstanding principal amount of the remaining Term Loan. There are no mandatory reductions in aggregate revolving commitments throughout the term of the Amended Revolving Credit Agreement. However, availability under the revolving credit facility is limited to a percentage of the amount of eligible cash, eligible inventory and eligible credit card accounts receivable as defined in the Amended Revolving Credit Agreement.
Throughout the term of the Amended Revolving Credit Agreement, the Company can elect to borrow either Alternative Base Rate Borrowings ("ABR Borrowings") or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using the LIBOR for such Interest Period plus an applicable margin ranging from 125 basis points to 150 basis points based on the Company’s average availability during the previous fiscal quarter. ABR Borrowings bear interest at a variable rate determined using a base rate equal to the greatest of (i) prime rate, (ii) federal funds rate plus 50 basis points or (iii) one-month LIBOR plus 100 basis points; plus an applicable margin ranging from 25 basis points to 50 basis points based on the average availability during the previous fiscal quarter.
Under the terms of the Amended Revolving Credit Agreement, the unutilized commitment fee ranges from 20 basis points to 25 basis points per annum based on the Company's average utilization during the previous fiscal quarter.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of July 29, 2017, we hadAugust 3, 2019, there were no borrowings outstanding under the Amended Revolving Credit Agreement. After taking into account the $31.1$43.5 million in outstanding letters of credit, the Company had $500.4$396.5 million of availability under the Amended Revolving Credit Agreement.
Term Loan
In connection with the ANN Acquisition, the Company entered into a $1.8 billion variable-rate term loan (the "Term Loan"), which was issued at a 2% discount and provides for an additionala term facility of $200 million. The Company iswould also be eligible to borrow an unlimited amount, as long as the Company maintainsif it were to maintain a minimum senior secured leverage ratio as defined in the Term Loan (the "Senior Secured Leverage Ratio") among other factors.requirements.
The Term Loan matures on August 21, 2022 and requiresits terms require quarterly repayments of $4.5 million during the first half of Fiscal 2017 and $22.5 million thereafter, with a remaining balloon payment of approximately $1.2 billion required at maturity. TheDuring Fiscal 2018, the Company made repayments totaling $122.5$225 million during Fiscal 2017 and $22.5of which $180.0 million at the beginning of Fiscal 2018, which werewas applied to the future quarterly scheduled payments such that the Company is not required to make its next quarterly payment of $22.5 million until August 2018.November of calendar 2020. The Company is also required to make mandatory prepayments in connection with certain prepayment events, including (i) commencing with the fiscal year ending July 29, 2017 if the Company has excess cash flow,flows, as defined in the Term Loan, for any fiscal year and the Senior Secured Leverage Ratio for such fiscal year exceeds certain predetermined limits and (ii) from Net Proceeds, as defined in the Term Loan, of asset dispositions and certain casualty events that are greater than $25 million in the aggregate in any fiscal year and not reinvested (or committed to be reinvested) within one year, in each case subject to certain conditions and exceptions. No such mandatory prepayments are due for Fiscal 2017.2019. The Company has the right to prepay the Term Loan in any amount and at any time with no prepayment penalties.
At the time of initial borrowings and renewal periods throughout the term of the Term Loan, the Company may elect to borrow either ABR Borrowings or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using LIBOR (subject to a 75 basis points floor) plus an applicable margin of 450 basis points. ABR Borrowings bear interest at a variable rate determined using a base rate (subject to a 175 basis points floor) equal to the greatest of (i) prime rate, (ii) federal funds rate plus 50 basis points or (iii) LIBOR plus 100 basis points, plus an applicable margin of 350 basis points. As of July 29, 2017,August 3, 2019, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of 5.625%6.79%. The Company entered into an interest rate swap agreement in March 2019 to mitigate some of the risk associated the variable rate. Refer to Note 13 for additional information.
DuringIn connection with the Fiscal 2016,2018 principal prepayments of $180.0 million referred to above, the Company repurchased $72.0recorded a $5.0 million ofloss on the outstanding principal balance of the Term Loan at an aggregate cost of $68.4 million through open market transactions, resulting in $0.8 million in pre-tax gains, net of the proportional write-off
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of unamortized original discount and debt issuance costs of $2.8 million. Such net gain has been recorded as Gain onearly extinguishment of debt in the consolidated statements of operations.debt.
Restrictions under the Term Loan and the Amended Revolving Credit Agreement (collectively the "Borrowing Agreements")
Under the Amended Revolving Credit Agreement, the Company is required to maintain a fixed charge coverage ratio, as defined in the Amended Revolving Credit Agreement, of at least 1.00 any time in which the Company is in a covenant period, as defined in the Amended Revolving Credit Agreement (the "Covenant Period"). Such Covenant Period is in effect if Availability is less than the greater of (a) 10% of the Credit Limit (the lesser of total Revolving Commitments and the Borrowing Base) and (b) $45$37.5 million for three consecutive business days and ends when Availability is greater than these thresholds for 30 consecutive days. The Covenant Period was not in effect as of July 29, 2017.August 3, 2019.
The Borrowing Agreements contain customary negative covenants, subject to negotiated exceptions, on (i) liens and guarantees, (ii) investments, (iii) indebtedness, (iv) significant corporate changes including mergers and acquisitions, (v) dispositions and (vi) restricted payments, cash dividends, stock repurchases and certain other restrictive agreements. The Borrowing Agreements also contain customary events of default, such as payment defaults, cross-defaults to certain material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation of the Company’s business, in each case subject to customary grace periods.
The Company's Amended Revolving Credit Agreement allows us to make restricted payments, including dividends and share repurchases, subject to the Company satisfying certain conditions set forth in the Company's Amended Revolving Credit Agreement, notably that at the time of and immediately after giving effect to the restricted payment, (i) there is no default or event of default, and (ii) Availability is not less than 20% of the aggregate revolving commitments. The Company's Term Loan allows us to make restricted payments, including dividends and share repurchases, up to a predetermined dollar amount. The dollar amount limitation is waived upon the satisfaction of certain conditions under the Term Loan, notably that at the time of and immediately after giving
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
effect to such restricted payment, (i) there is no default or event of default, and (ii) the total leverage ratio, as defined in the Term Loan agreement, is below predetermined limits. Dividends are payable when declared by itsour Board of Directors.
The Company’s obligations under the Borrowing Agreements are guaranteed by certain of its domestic subsidiaries (the “Subsidiary Guarantors”). As collateral under the Borrowing Agreements and the guarantees thereof, the Company and the Subsidiary Guarantors have granted to the administrative agents for the benefit of the lenders a first priority lien on substantially all of their tangible and intangible assets, including, without limitation, certain domestic inventory and certain material real estate.
Maturities of Debt
The Company's debt matures as follows:
| | | Fiscal Year | | Amount | | Amount |
| | | (millions) | | (millions) |
| 2018 | | $ | 44.0 |
| |
| 2019 | | 90.0 |
| |
| 2020 | | 67.5 |
| | $ | — |
|
| 2021 | | 90.0 |
| | 66.5 |
|
| 2022 | | 90.0 |
| | 90.0 |
|
| Thereafter | | 1,215.0 |
| |
| 2023 | | | 1,215.0 |
|
| Total maturities | | $ | 1,596.5 |
| | $ | 1,371.5 |
|
11. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
| | | | | | | | |
| | | August 3,
2019 | | August 4,
2018 |
| | | (millions) |
| Prepaid expenses | | $ | 131.6 |
| | $ | 134.2 |
|
Accounts and other receivables (a) | | 131.1 |
| | 93.5 |
|
| Restricted cash | | 1.2 |
| | 1.2 |
|
| Other current assets | | 15.4 |
| | 0.5 |
|
| Total prepaid expenses and other current assets | | $ | 279.3 |
| | $ | 229.4 |
|
________
(a) Increase primarily reflects the third-party receivables due from maurices for services performed under the agreements described in Note 2.
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
| | | | | | | | |
| | | August 3,
2019 | | August 4,
2018 |
| | | (millions) |
| Accrued salary, wages and related expenses | | $ | 114.1 |
| | $ | 119.0 |
|
| Accrued operating expenses | | 169.3 |
| | 134.5 |
|
| Sales tax payable | | 19.0 |
| | 24.0 |
|
| Income taxes payable | | 6.8 |
| | 5.4 |
|
| Other | | 24.7 |
| | 21.1 |
|
| Total accrued expenses and other current liabilities | | $ | 333.9 |
| | $ | 304.0 |
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Derivative Financial Instruments
As discussed in Note 10, the interest rate under the Company's Term Loan is based on a variable rate. Therefore, the Company has exposure to increases in the underlying interest rate. In order to protect against our interest rate exposure, we entered into an interest rate swap agreement in March 2019. We do not hold any derivative financial instruments for speculative or trading purposes.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in the line item Accumulated other comprehensive loss on the Company’s Consolidated Balance Sheets and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in Accumulated other comprehensive loss related to the Company’s derivative contracts will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
As of August 3, 2019, the Company had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk:
|
| | | | | | | | |
| Interest Rate Derivative | | Number of Instruments | | Notional Agreement Principal Amount | | Interest Rate | | Maturity Date |
| Interest rate swap | | One | | $600.0 Million | | 6.85% | | March 31, 2021 |
The interest rate swap was recorded at its estimated fair value of $6.3 million as of August 3, 2019 based on Level 2 measurements. Amounts included in the consolidated balance sheet as of August 3, 2019 include $3.1 million in Accrued expenses and other current liabilities and $3.2 million in Other non-current liabilities. The amount of unrealized losses deferred to Accumulated other comprehensive loss before the effect of taxes was $6.3 million as of August 3, 2019. The amount of classification of gains and losses from Accumulated other comprehensive loss into earnings related to the Company's derivative instrument during the fiscal year ended August 3, 2019 was de minimis. Based on current valuations, we estimate $3.3 million will be reclassified from Accumulated other comprehensive loss into Interest expense during the next twelve months. There was no material ineffectiveness related to the interest rate swap agreement during the fiscal year ended August 3, 2019.
14. Fair Value Measurements
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In evaluating the fair value measurement techniques for recording certain financial assets and liabilities, there is a three-level valuation hierarchy under which financial assets and liabilities are designated. The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs used that are significant to the fair value measurement as of the measurement date as follows:
|
| |
| Level 1 | Quoted prices for identical instruments in active markets;
|
| Level 2 | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are recently traded (not active); model-derived valuations whose inputs are observable or whose significant value drivers are observable; and |
| Level 3 | Instruments with little, if any, market activity are valued using significant unobservable inputs or valuation techniques. |
Fair Value Measurements of Financial Instruments
As of July 29, 2017August 3, 2019 and July 30, 2016,August 4, 2018, the Company believes that the carrying valuevalues of cash and cash equivalents approximates its fair value based on Level 1 measurements. The fair value of the Term Loan was determined to be $1.345$850.3 million as of August 3, 2019 and $1.258 billion as of July 29, 2017 and $1.683 billion as of July 30, 2016August 4, 2018 based on quoted market prices from recent transactions, which are considered Level 2 inputs within the fair value hierarchy.
Fair Value Measurements of Long-lived Assets Measured on a non-Recurring Basis
As more fully described in Note 76 and Note 9,8, during Fiscal 2019, assets of $145.5 million related to 649 under-performing stores and two corporate buildings were written down to their estimated fair values of $60.2 million, resulting in total impairment charges
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of $85.3 million. In Fiscal 2018, store-related assets of $65.0 million related to (i) 327 under-performing stores and (ii) 105 stores and one office building under the fleet optimization review were written down to their estimated fair values of $15.8 million, resulting in total impairment charges of $49.2 million. In Fiscal 2017, store-related assets of $38.4 million related to approximately 120 under-performing stores and approximately 130 stores under the Fleet Optimizationfleet optimization review were written down to their estimated fair values of $2.8 million, resulting in total impairment charges of $35.6 million. Key assumptions used to determine fair values were future cash flows including, among other things, expected future operating performance, changes in economic conditions as well as other market information obtained from brokers. Significant inputs related to valuing the store-related assets are classified as Level 3 in the fair value measurement hierarchy.
For further discussion of the determination of fair values of goodwill and other intangible assets, see Note 6.5.
14.15. Income Taxes
Taxes on Income
Domestic and foreign pretax (loss) incomeloss from continuing operations is as follows:
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3, 2019 | | August 4,
2018 | | July 29,
2017 |
| | | (millions) | | (millions) |
| Domestic | | $ | (1,451.0 | ) | | $ | (56.0 | ) | | $ | (303.1 | ) | | $ | (838.5 | ) | | $ | (239.6 | ) | | $ | (1,471.8 | ) |
| Foreign | | 36.8 |
| | 47.7 |
| | 62.5 |
| | 53.5 |
| | 34.3 |
| | 36.3 |
|
| Total loss before (benefit) provision for income taxes | | $ | (1,414.2 | ) | | $ | (8.3 | ) | | $ | (240.6 | ) | |
| Total loss before benefit for income taxes and loss from equity method investment | | | $ | (785.0 | ) | | $ | (205.3 | ) | | $ | (1,435.5 | ) |
The benefit for current and deferred income taxes is as follows:
|
| | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| Current: | | (millions) |
| Federal | | $ | — |
| | $ | (2.2 | ) | | $ | (8.1 | ) |
| State and local | | (4.0 | ) | | (1.1 | ) | | (11.7 | ) |
| Foreign | | (8.9 | ) | | (5.7 | ) | | (5.2 | ) |
| | | (12.9 | ) | | (9.0 | ) | | (25.0 | ) |
| Deferred: | | |
| | |
| | |
|
| Federal | | 21.5 |
| | 93.9 |
| | 328.2 |
|
| State and local | | 5.5 |
| | (22.4 | ) | | 66.0 |
|
| Foreign | | 0.4 |
| | (0.2 | ) | | (1.7 | ) |
| | | 27.4 |
| | 71.3 |
| | 392.5 |
|
| Total benefit for income taxes | | $ | 14.5 |
| | $ | 62.3 |
| | $ | 367.5 |
|
The Company's net income tax benefit in Fiscal 2019 was unfavorably impacted by certain non-routine, discrete items, including an increase of its valuation allowance for U.S. Federal and state jurisdictions. The Company has evaluated the available positive and negative evidence and has concluded that, for some of its deferred tax assets, it is more likely than not that it will not be realized in the foreseeable future. A valuation allowance is a non-cash charge, which does not eliminate the deferred tax asset but instead reduces the benefit expected to be realized from it in the future.
In December 2017, the 2017 Tax Cuts and Jobs Act (the "2017 Act") was signed into law. A full description of the 2017 Act and its expected impact on the Company is discussed in Note 14 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended August 4, 2018 and should be read in conjunction with the update below.
The SEC staff issued Staff Accounting Bulletin Number 118 ("SAB 118"), which is also included in FASB ASU 2018-05, and provided guidance on accounting for the tax effects of the 2017 Act. SAB 118 allows for a measurement period that should not
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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"). The Company completed its accounting for the impact of the 2017 Act during the second quarter of Fiscal 2019 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.
The (benefit) provision2017 Act subjects the Company to a new minimum tax on global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries for taxable years beginning after December 31, 2017. Accordingly, the Company has made an accounting policy election to treat GILTI taxes as a current period expense and has made a reasonable estimate of the impact of GILTI which is included in its Fiscal 2019 effective tax rate discussed below.
Effective Tax Rate
The Company’s effective tax rate is reflective of the jurisdictions where the Company has operations. As shown below, the effective tax rate for Fiscal 2019 was 1.8%. The effective tax rate was impacted primarily by a valuation allowance on the Company’s net Federal deferred income taxestax asset ("DTA") and a non-deductible impairment to goodwill.
As a result of the Company’s recent financial performance, the Company has determined it is appropriate to record a valuation allowance on its net Federal and state DTAs. This tax expense during Fiscal 2019 was $99.2 million.
As of August 4, 2018, the Company had a $53.3 million valuation allowance against the aggregate carrying value of its deferred tax assets. Such valuation allowance provides for the uncertainty that a portion of the recognized deferred tax assets may not be realizable. The valuation allowance increased by $99.2 million in Fiscal 2019 to $152.5 million as follows:
|
| | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| Current: | | (millions) |
| Federal | | $ | 6.9 |
| | $ | 7.7 |
| | $ | (20.8 | ) |
| State and local | | 12.6 |
| | 10.2 |
| | 8.8 |
|
| Foreign | | 4.9 |
| | 12.5 |
| | 14.8 |
|
| | | 24.4 |
| | 30.4 |
| | 2.8 |
|
| Deferred: | | |
| | |
| | |
|
| Federal | | (308.3 | ) | | (21.7 | ) | | 0.9 |
|
| State and local | | (64.8 | ) | | (3.2 | ) | | (6.5 | ) |
| Foreign | | 1.8 |
| | (1.9 | ) | | (1.0 | ) |
| | | (371.3 | ) | | (26.8 | ) | | (6.6 | ) |
| Total (benefit) provision for income taxes | | $ | (346.9 | ) | | $ | 3.6 |
| | $ | (3.8 | ) |
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rate of 35% and income taxes provided are as set forth below: | | | | Fiscal Years Ended | Fiscal Years Ended |
| | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | (millions) | (millions) |
Benefit for income taxes at the U.S. federal statutory rate | $ | (495.0 | ) | | $ | (2.9 | ) | | $ | (84.3 | ) | $ | 167.4 |
| | $ | 54.9 |
| | $ | 501.3 |
|
| Increase (decrease) due to: | | | | | | | | | | |
| State and local income taxes, net of federal benefit | (39.7 | ) | | 2.4 |
| | 4.1 |
| 18.6 |
| | 0.8 |
| | 41.2 |
|
| Tax benefit related to deferred compensation | — |
| | — |
| | (13.7 | ) | |
| Foreign rate differential | | 2.8 |
| | 1.9 |
| | — |
|
| Tax Cuts and Job Act | | — |
| | 36.9 |
| | — |
|
| Federal valuation allowance | | (84.7 | ) | | — |
| | — |
|
| State valuation allowance | | (14.5 | ) | | (21.8 | ) | | — |
|
| Share-based compensation | | (3.5 | ) | | (4.6 | ) | | — |
|
| Goodwill impairment | 184.3 |
| | — |
| | 91.6 |
| (57.9 | ) | | — |
| | (171.2 | ) |
| Net change relating to uncertain income tax benefits | 3.2 |
| | 3.3 |
| | (0.7 | ) | (2.5 | ) | | 0.7 |
| | (3.2 | ) |
| Indefinitely reinvested foreign earnings | — |
| | 0.1 |
| | 1.7 |
| |
| GILTI | | (7.7 | ) | | — |
| | — |
|
| Other – net | 0.3 |
| | 0.7 |
| | (2.5 | ) | (3.5 | ) | | (6.5 | ) | | (0.6 | ) |
| Total (benefit) provision for income taxes | $ | (346.9 | ) | | $ | 3.6 |
| | $ | (3.8 | ) | |
| Total benefit for income taxes | | $ | 14.5 |
| | $ | 62.3 |
| | $ | 367.5 |
|
_______
As more fully described in Note 6, the Company recorded goodwill impairment charges of $596.3 million during(a) The U.S. federal statutory rate for Fiscal 2017 was 35%. The 2017 Act reduced the statutory rate from 35% to 21% effective January 1, 2018, and under Section 15 of which $69.8the Internal Revenue Code resulted in a blended statutory rate of 27% for Fiscal 2018. The statutory rate for Fiscal 2019 was 21%. The Fiscal 2019 benefit of $167.4 million for maurices (usingincludes the pro rata method) was$11.8 million Loss from equity method investment at the federal statutory tax deductible and the remaining $526.5 million was non-deductible for income tax purposes and treated as a permanent item.rate.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tax Incentives
In connection with the Company’s relocation of its dressbarnDressbarn and corporate offices to New Jersey, as well as the expansion of its distribution centers in Ohio and Indiana, the Company was approved for various state and local tax incentives. In order to receive these incentives, the Company will generally need to meet certain minimum employment or expenditure commitments, as well as comply with periodic reporting requirements. These incentives, estimated to total approximately $43.2$23.5 million, are expected to be recognized over a 10-15 year period. Approximately $6.1$5.9 million was recognized in Fiscal 2017, $2.92019, $4.3 million in Fiscal 20162018 and $2.0$6.1 million in Fiscal 2015.2017.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred Taxes
Significant components of the Company's net deferred tax liabilitiesasset are as follows: | | | | | July 29,
2017 | | July 30,
2016 | | August 3,
2019 | | August 4,
2018 |
Deferred tax assets (a): | | (millions) | | (millions) |
| Inventories | | $ | 35.6 |
| | $ | 31.4 |
| | $ | 18.0 |
| | $ | 21.5 |
|
| Net operating loss carryforwards and tax credits | | 66.6 |
| | 38.3 |
| | 98.6 |
| | 65.2 |
|
| Accrued payroll and benefits | | 83.1 |
| | 91.5 |
| | 40.1 |
| | 41.5 |
|
| Share-based compensation | | 25.0 |
| | 24.8 |
| | 12.3 |
| | 15.5 |
|
| Straight-line rent | | 62.2 |
| | 57.3 |
| | 37.8 |
| | 40.5 |
|
| Federal benefit of uncertain tax positions | | 20.6 |
| | 19.4 |
| | 24.6 |
| | 23.6 |
|
| Gift cards and merchandise credits | | 16.8 |
| | 14.3 |
| | 10.1 |
| | 8.9 |
|
| Investments | | | 6.8 |
| | — |
|
| Other | | 23.2 |
| | 23.1 |
| | 19.7 |
| | 12.1 |
|
| Total deferred tax assets | | 333.1 |
| | 300.1 |
| | 268.0 |
| | 228.8 |
|
| Deferred tax liabilities: | | | | | | | | |
| Depreciation | | 125.0 |
| | 148.9 |
| | 26.5 |
| | 55.1 |
|
| Amortization | | 197.7 |
| | 512.8 |
| | 62.8 |
| | 97.6 |
|
| Foreign unremitted earnings | | 47.1 |
| | 40.1 |
| | — |
| | 0.4 |
|
| Other | | 21.7 |
| | 22.7 |
| | 17.3 |
| | 22.4 |
|
| Total deferred tax liabilities | | 391.5 |
| | 724.5 |
| | 106.6 |
| | 175.5 |
|
| Valuation allowance | | (16.9 | ) | | (12.9 | ) | | (152.5 | ) | | (53.3 | ) |
| Net deferred tax liabilities | | $ | (75.3 | ) | | $ | (437.3 | ) | |
| Net deferred tax asset | | | $ | 8.9 |
| | $ | — |
|
_______
(a) Deferred tax assetsasset of $4.0$9.5 million as of July 29, 2017August 3, 2019 and $4.9$2.6 million as of July 30, 2016August 4, 2018 are included within Other assets.
As of July 29, 2017, we have not provided deferred U.S. income taxes on approximately $37.6 million of undistributed earnings from non-U.S. subsidiaries, as these earnings are indefinitely reinvested. If the Company elects to distribute these foreign earnings in the future, they could be subject to additional income taxes. Determination of the amount of any unrecognized deferred income tax liability is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Net Operating Loss Carry Forwards
As of July 29, 2017,August 3, 2019, the Company had U.S. Federal net operating loss carryforwards of $79.3$264.6 million and state net operating loss carryforwards of $278.3$594.5 million that are available to offset future U.S. Federal and state taxable income. The U.S. Federal net operating losses generated prior to Fiscal 2018 have a twenty-year carryforward period, with $52.2$49.0 million to expire in fiscalFiscal 2036 and $27.1$32.5 million to expire in fiscalFiscal 2037. Due to the 2017 Act, the U.S. Federal net operating losses generated in Fiscal 2018 and forward have an unlimited carryforward, therefore, $183.1 million will carryforward indefinitely. The state net operating losses have carryforward periods of five to twenty years, with varying expiration dates and amounts as follows: $25.3$33.9 million in one to five years, $16.0$51.9 million in six to ten years, $43.3$115.7 million in eleven to fifteen years, and $193.7$355.7 million in sixteen to twenty years.years and $37.3 million will carryforward indefinitely.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Uncertain Income Tax Benefits
Reconciliation of Liabilities
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is presented below:
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | | (millions) | | (millions) |
| Unrecognized tax benefit beginning balance | | $ | 43.2 |
| | $ | 34.1 |
| | $ | 29.9 |
| | $ | 50.9 |
| | $ | 45.3 |
| | $ | 43.2 |
|
Additions related to the ANN Acquisition | | — |
| | 9.6 |
| | — |
| |
| Additions related to current period tax positions | | 2.0 |
| | 2.2 |
| | 1.6 |
| | — |
| | — |
| | 2.0 |
|
| Additions related to tax positions in prior years | | 1.9 |
| | 1.0 |
| | 6.7 |
| | 0.9 |
| | 9.8 |
| | 1.9 |
|
| Reductions related to prior period tax positions | | (0.2 | ) | | (3.0 | ) | | (3.2 | ) | | (0.8 | ) | | (0.5 | ) | | (0.2 | ) |
| Reductions related to settlements with taxing authorities | | (0.1 | ) | | — |
| | (0.3 | ) | | (0.1 | ) | | (1.3 | ) | | (0.1 | ) |
| Reductions related to expiration of statute of limitations | | (1.5 | ) | | (0.7 | ) | | (0.6 | ) | | (0.6 | ) | | (2.4 | ) | | (1.5 | ) |
| Unrecognized tax benefit ending balance | | $ | 45.3 |
| | $ | 43.2 |
| | $ | 34.1 |
| | $ | 50.3 |
| | $ | 50.9 |
| | $ | 45.3 |
|
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits is presented below:
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | | (millions) | | (millions) |
| Accrued interest and penalties beginning balance | | $ | 17.2 |
| | $ | 11.5 |
| | $ | 13.8 |
| | $ | 22.1 |
| | $ | 19.4 |
| | $ | 17.2 |
|
Additions related to the ANN Acquisition | | — |
| | 4.3 |
| | — |
| |
| Additions (reductions) charged to expense, net | | 2.2 |
| | 1.4 |
| | (2.3 | ) | | 3.1 |
| | 2.7 |
| | 2.2 |
|
| Accrued interest and penalties ending balance | | $ | 19.4 |
| | $ | 17.2 |
| | $ | 11.5 |
| | $ | 25.2 |
| | $ | 22.1 |
| | $ | 19.4 |
|
The Company’s liability for unrecognized tax benefits (including accrued interest and penalties), which is primarily included in Other non-current liabilities in the accompanying consolidated balance sheets, was $61.1$72.8 million as of July 29, 2017August 3, 2019 and $56.8$69.4 million as of July 30, 2016.August 4, 2018.
Future Changes in Unrecognized Tax Benefits
The amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company anticipates that the balance of the liability for unrecognized tax benefits will decrease by approximately $2.5$1.9 million during the next twelve months. However, changes in the occurrence, expected outcomes and timing of those events could cause the Company’s current estimate to change materially in the future. The Company’s portion of gross unrecognized tax benefits that would affect its effective tax rate, including interest and penalties, is $40.7$48.4 million.
The Company files tax returns in the U.S. federal and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to Fiscal 2010.2013.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15.16. Commitments and Contingencies
Lease Commitments
The Company leases all of its retail stores. Certain leases provide for additional rents based on percentages of net sales, charges for real estate taxes, insurance and other occupancy costs. Store leases generally have an initial term of approximately ten years, although certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. Leases may also have one or more five-year options to extend the lease or have provisions for rent escalations during the initial term.
The Company’s operating lease obligations represent future minimum lease payments under non-cancelable operating leases as of July 29, 2017.August 3, 2019. The minimum lease payments do not include common area maintenance ("CAM") charges or real estate taxes, which are also required contractual obligations under the operating leases. In the majority of the Company’s operating leases, CAM charges are not fixed and can fluctuate from year to year.
| | | A summary of occupancy costs follows: | | Fiscal Years Ended | |
| A summary of occupancy costs for continuing operations are as follows: | | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | | (millions) | | (millions) |
| Base rentals | | $ | 611.1 |
| | $ | 608.1 |
| | $ | 404.4 |
| | $ | 492.1 |
| | $ | 509.7 |
| | $ | 539.3 |
|
| Percentage rentals | | 27.4 |
| | 33.7 |
| | 20.5 |
| | 23.3 |
| | 32.1 |
| | 26.2 |
|
| Other occupancy costs, primarily CAM and real estate taxes | | 225.0 |
| | 210.5 |
| | 143.6 |
| | 203.0 |
| | 205.7 |
| | 198.8 |
|
Total | | $ | 863.5 |
| | $ | 852.3 |
| | $ | 568.5 |
| | $ | 718.4 |
| | $ | 747.5 |
| | $ | 764.3 |
|
(a) Total occupancy costs included in discontinued operations were $66.8 million for Fiscal 2019, $94.9 million for Fiscal 2018 and $99.2 million for Fiscal 2017.
The following is a schedule of future minimum rentals under non-cancelable operating leases as of July 29, 2017:August 3, 2019:
| | | Fiscal Years | Minimum Operating Lease Payments (a) (b) | Minimum Operating Lease Payments (a) (b) |
| | (millions) | (millions) |
| 2018 | $ | 585.1 |
| |
| 2019 | 502.4 |
| |
| 2020 | 439.2 |
| $ | 462.0 |
|
| 2021 | 370.2 |
| 402.3 |
|
| 2022 | 302.1 |
| 325.4 |
|
| 2023 | | 242.7 |
|
| 2024 | | 172.6 |
|
| Thereafter | 608.1 |
| 563.3 |
|
| Total future minimum rentals | $ | 2,807.1 |
| $ | 2,168.3 |
|
(a) Net of sublease income, which wasis not expected to be significant in any period.
(b) Although such amounts are generally non-cancelable, certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. All future minimum rentals under such leases have been included in the above table.
Employment Agreements
The Company has employment agreements with certain executives in the normal course of business which provide for compensation and certain other benefits. These agreements also provide for severance payments under certain circumstances.
Other Commitments
The Company enters into various cancelable and non-cancelable commitments during the year. Typically, those commitments are for less than a year in duration and are principally focused on the construction of new retail stores and the procurement of inventory.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company normally does not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. Preliminary commitments with the Company’s private-label merchandise vendors typically are made five to seven months in advance of planned receipt date. A portion of these merchandise purchase commitments are cancelable up to 30 days prior to the vendor’s scheduled shipment date.
In addition, the Company had $43.5 million of outstanding letters of credit as of August 3, 2019.
Other Contingencies
On July 29, 2019, the Company received a letter from the Listing Qualifications staff of Nasdaq (the “Notification Letter”), indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer meets the requirement of the Nasdaq Global Select Market to maintain a minimum bid price of $1 per share. The Notification Letter does not impact the Company’s listing on The Nasdaq Global Select Market at this time. The Company has been provided a period of 180 calendar days, or until January 27, 2020, in which to regain compliance. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible to transfer to the Nasdaq Capital Market and seek an additional compliance period of 180 calendar days if the Company (i) meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and (ii) provides written notice to Nasdaq of the Company’s intent to cure the deficiency during this second compliance period. The Company is considering actions that it may take in order to regain compliance, including whether to effect a reverse stock split.
Legal Proceedings
Federal Securities Class Action
On June 7, 2019, plaintiff James Newman commenced a federal securities class action in the United States District Court for the District of New Jersey, naming Ascena Retail Group, Inc. and certain of Ascena’s current and former officers and directors as defendants. The Newman complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 related to the Company’s goodwill impairment accounting and statements regarding the success of the 2015 purchase of ANN and the overall performance and expected growth of the ANN brands. Plaintiff seeks damages on behalf of a proposed class of purchasers of Ascena securities between September 16, 2015 and June 8, 2017 (the proposed “Class Period”).
On July 2, 2019, a second lawsuit was filed by Michaella Corporation. The Michaella complaint is substantially similar to the Newman complaint. Both the Michaella complaint and the Newman complaint name the same defendants, allege the same proposed class period, and challenge the same categories of public statements under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.
On August 6, 2019, two potential lead plaintiffs (Joel Patterson and Michaella Corporation) filed motions for appointment as lead plaintiff in the Newman and Michaella actions, and to consolidate both actions. James Newman did not move for appointment as lead plaintiffs. On August 23, 2019, the Court consolidated the two actions as In re Ascena Retail Group, Inc. Sec. Litig. and appointed Patterson and Michaella Corporation as joint lead-plaintiffs.
Defendants believe they have strong defenses to these claims and will respond accordingly. The range of loss, if any, is not reasonably estimable at this time.
Derivative Action
On August 19, 2019, William Cunningham, an Ascena Retail Group, Inc. shareholder, filed a derivative action, purportedly on behalf of Ascena, in federal court in Delaware against certain of Ascena’s current and former officers and directors. The complaint alleges that the management and the board breached their fiduciary duties by failing to exercise proper oversight of Ascena, including by failing to disclose issues regarding the acquisition of ANN, the true condition of the ANN brands purchased in the acquisition, and the timing of certain impairment charges to the value of ANN’s goodwill. The plaintiffs seek damages on behalf of Ascena for the alleged breaches of fiduciary duty, reforms to the corporate governance and internal procedure to ensure compliance with governance obligations and applicable law, as well as an award to plaintiff of attorneys’ fees and costs incurred in pursuing this action.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition, the Company has $31.1 millionDefendants believe they have strong defenses to these claims and will respond accordingly. The range of outstanding letters of credit as of July 29, 2017.
Legal Proceedings
Justice Pricing Lawsuits
The Company is a defendant in a number of class action lawsuits that allege, among other claims, that Justice’s promotional practices violated state comparative pricing laws in connection with advertisements promoting a 40% discount.
Mehigan v. Ascena Retail Group, Inc. and Tween Brands, Inc.
On February 12, 2015, Melinda Mehigan and Fonda Kubiak, both consumers, filed a purported class action proceeding (the “Mehigan case”) against Ascena Retail Group, Inc. and Tween Brands, Inc. (doing business as “Justice”) in the United States District Court for the Eastern District of Pennsylvania, on behalf of themselves and all similarly situated consumers who, in the case of Ms. Mehigan in the State of New Jersey, and in the case of Ms. Kubiak in the State of New York, made purchases at Justice from 2009 to 2015 (the “Alleged Class Period”). The lawsuit alleges that Justice violated state comparative pricing laws in connection with advertisements promoting a 40% discount. The plaintiffs further allege false advertising, violation of state consumer protection statutes, breach of contract, breach of express warranty and unfair benefit to Justice. The plaintiffs sought to stop Justice’s allegedly unlawful practice and obtain damages, for Justice’s customers in the named states. They also sought interest and legal fees.
On February 17, 2015, the complaint in the Mehigan case was amended to add five more named individual plaintiffs and to add the same allegations against Justice in the States of California, Florida, Illinois and Texas.
On April 8, 2015, the complaint in the Mehigan case was amended again to assert allegations on behalf of a purposed nationwide class. As amended, the case covered Justice customers in 47 states. The excluded states were Hawaii, Alaska and Ohio. During the Alleged Class Period, Justice did not operateif any, stores in Hawaii or Alaska. A similar class action lawsuit making substantially the same allegations as the Mehigan case was settled in December 2014 in Ohio.
Cowhey v. Tween Brands, Inc.
On February 17, 2015, Carol Cowhey, a consumer, filed a purported class action proceeding (the “Cowhey case”) against Ascena Retail Group, Inc. and Tween Brands, Inc. (doing business as “Justice”) in the Court of Common Pleas in Philadelphia, Pennsylvania on behalf of herself and all other similarly situated consumers who in the State of Pennsylvania made purchases at Justice during the Alleged Class Period. The allegations in the Cowhey case were substantially the same as those in the Mehigan case. The relief sought in the Cowhey case focused on remedies available under Pennsylvania law, which the plaintiff claimed included treble damages. On March 19, 2015, Justice removed the Cowhey case to federal court in the United States District Court for the Eastern District of Pennsylvania.
Consolidation of Mehigan and Cowhey Cases (Rougvie)
On April 8, 2015, the United States District Court for the Eastern District of Pennsylvania consolidated the Cowhey case and the Mehigan case. They were consolidated for all pre-trial purposes in the federal court in the Eastern District of Pennsylvania.
On June 2, 2015, the court held a Rule 16 Conference and issued a Scheduling Order and Settlement Conference Order. The Scheduling Order sets a fact and expert discovery deadline of December 4, 2015, with trial scheduled for early 2016. In light of the settlement described below, however, the consolidated cases were dismissed with prejudice on July 29, 2016.
Traynor-Lufkin v. Tween Brands, Inc.
On March 6, 2015, Katie Traynor-Lufkin and three other named plaintiffs, all consumers, filed a purported nationwide class action (the “Traynor-Lufkin case”) against Tween Brands, Inc. (doing business as “Justice”) in the Court of Common Pleas in Cuyahoga County, Ohio. The Traynor-Lufkin case purported to include a class of Justice customers in 47 states. As with the Mehigan case, the Traynor-Lufkin case excludes Hawaii, Alaska and Ohio. During the Alleged Class Period, Justice did not operate any stores
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
in Hawaii or Alaska. In December 2014, Justice settled a similar class action lawsuit in the State of Ohio. The allegations and damages sought in the Traynor-Lufkin case were substantially the same as those in the Mehigan case.
Removal of Traynor-Lufkin Case and Motion to Transfer
On April 7, 2015, Justice removed the Traynor-Lufkin case to the United States District Court for the Northern District of Ohio. On April 13, 2015, Justice filed a motion under 28 U.S.C. § 1404(a) to transfer the Traynor-Lufkin case to the United States District Court for the Eastern District of Pennsylvania. In seeking the transfer, Justice argued that there were already two consolidated actions pending in the Eastern District of Pennsylvania and that a forum in Ohio is not appropriate because no Ohio consumers are involved in the case. The Eastern District of Pennsylvania was advised that the Traynor-Lufkin case was related to Rougvie, and the case was reassigned on May 27, 2015.
Consolidation of Traynor-Lufkin and Rougvie case
On June 18, 2015, the United States District Court for the Eastern District of Pennsylvania consolidated the Cowhey case and the Mehigan case (collectively referred to as Rougvie) and the Traynor-Lufkin matters. The Scheduling and Settlement Conference Orders issued in the Rougvie matter were applicable to all parties in the Traynor-Lufkin and Rougvie cases, including the Company and all of the named plaintiffs in the consolidated actions.
Metoyer v. Tween Brands, Inc.
On May 29, 2015, Theresa Metoyer, a consumer, filed a purported class action (the "Metoyer Case") against Tween Brands, Inc. in the United States District Court for the Central Division of California, Eastern Division, on behalf of herself and all other similarly situated consumers who made purchases from Justice stores located in California during the four years preceding the filing of the lawsuit. The allegations in the Metoyer case were substantially the same as those in the other Justice pricing lawsuits described above. The relief sought by the plaintiff was substantially the same as that sought in the other lawsuits.
On November 14, 2015, the Court granted the Company’s motion to stay the Metoyer case in light of the broader settlement described below. In the first quarter of Fiscal 2017, however, the plaintiff's counsel requested that the Court lift the stay to allow the plaintiff to pursue individual and potential class claims not subject to the broader settlement, and the Court ultimately granted that request. After the plaintiff filed an amended complaint, the Company agreed to a settlement with the plaintiff, and the Metoyer Case was dismissed with prejudice on January 18, 2017.
Gallagher v. Tween Brands, Inc.
On June 4, 2015, Robert Gallagher, a consumer, filed a lawsuit against Tween Brands, Inc. in the United States District Court for the Eastern District of Missouri, Eastern Division. This lawsuit includes putative national and Missouri classes. The plaintiff seeks monetary damages and reasonable costs and attorneys' fees. On August 27, 2015, the Company filed its Answer to the Complaint. On October 15, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
Kallay v. Tween Brands, Inc.
On June 5, 2015, Andrea Kallay, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the Southern District of Ohio, Eastern Division. This lawsuit includes putative national and Wisconsin classes. The plaintiff seeks monetary damages and reasonable costs and attorneys' fees. On August 28, 2015, the Company filed its Answer to the Complaint. On October 29, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
Joiner v. Tween Brands, Inc.
On June 1, 2015, Rebecca Joiner, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the District of Maryland. This lawsuit includes putative national and Maryland classes. The plaintiff seeks monetary damages and reasonable costs and attorney’s fees. On August 28, 2015, the Company filed its Answer to the Complaint. On December 1, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Loor v. Tween Brands, Inc.
On June 11, 2015, Yanetsy Loor, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the Middle District of Florida. This lawsuit includes putative national and Florida classes. The plaintiff sought monetary damages and reasonable costs and attorney’s fees. On August 21, 2015, the Company filed its Answer to the Complaint. On December 1, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below. Upon request by the Court, the parties submitted a joint status report on August 9, 2017 indicating that the broader settlement discussed below was final and non-appealable. As a result, the Court issued an order dismissing this case with prejudice on August 10, 2017.
Legendre v. Tween Brands, Inc.
On June 17, 2015, David Legendre, a consumer, filed a purported class action against Tween Brands, Inc. in the United States District Court for the District of New Jersey. This lawsuit includes putative national and New Jersey classes. The plaintiff seeks monetary damages and reasonable costs and attorney’s fees. On August 28, 2015, the Company filed its Answer to the Complaint. On December 11, 2015, the Court granted the Company’s motion to stay this case in light of the broader settlement described below.
In re Tween Brands, Inc., Marketing & Sales Practices Litigation. MDL No. 2646
On June 1, 2015, Andrea Kallay, the plaintiff in Kallay v. Tween Brands, Inc., filed a Motion to Transfer to the United State District Court for the Southern District of Ohio and for creation of a Multidistrict Litigation (“MDL”) proceeding styled In re: Tween Brands, Inc., Marketing and Sales Practices Litigation, MDL 2646. Responses to the Motion to Transfer were submitted on June 23, 2015. The majority of the plaintiffs in the above listed cases filed response motions in support of transfer and consolidation to the Southern District of Ohio. The Rougvie plaintiffs filed a response motion opposing transfer to the Southern District of Ohio and arguing for transfer to the Eastern District of Pennsylvania. Justice filed a Response in Opposition, supporting transfer and consolidation but arguing that the proper venue for the MDL is the Eastern District of Pennsylvania. The Judicial Panel on Multidistrict Litigation held a hearing on July 30, 2015 on the Motion to Transfer and subsequently denied the Motion to Transfer in an Order issued on August 7, 2015.
Settlement Agreed to at July 2, 2015 Mediation and Final Approval
In July 2015, an agreement in principle was reached with the plaintiffs in the Rougvie case to settle the lawsuit on a class basis for the period of January 1, 2012 through February 28, 2015 for approximately $51 million, including payments to members of the class and payment of legal fees and expenses of settlement administration. The parties executed a formal Settlement Agreement dated September 24, 2015.
The Company paid approximately $51 million representing the agreed settlement amount into an escrow account on November 16, 2015. Formal notice of settlement was sent to the class members on December 1, 2015. The final approval hearing was held on May 20, 2016.
On July 29, 2016, the Court granted the parties’ joint motion for final approval of settlement and dismissed the case with prejudice. In reaching this conclusion, the Court rejected all of the objections to the settlement that had been raised, but did reduce the amount of attorneys’ fees to be paid to plaintiffs’ counsel out of the settlement amount. The Court's deduction of attorney's fees to be paid to plaintiff's counsel will have no impact on the agreed upon settlement amount of approximately $51 million.
The Court’s decision granting final approval was appealed to the United States Court of Appeals for the Third Circuit. After a court-ordered mediation session on March 24, 2017, the appeals were withdrawn and dismissed with prejudice. The class settlement is now final and non-appealable. Distributions to class members pursuant to the settlement are expected to take place before the deadline of October 27, 2017. To the extent some of the pricing lawsuits discussed above are still stayed, it is likely that they will be formally dismissed within the coming months. If the matters described herein do not occur and the pricing lawsuits are not finally resolved on a class basis for approximately $51 million in accordance with the settlement, the ultimate resolution of these matters may or may not result in an additional material loss which cannot be reasonably estimatedestimable at this time.
Potential claims related to purchases made in 2010 and 2011 have been raised, including in the Metoyer case discussed above, although no additional lawsuits have been filed. The Company believes it has strong defenses to any such claims and is prepared
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to defend any such claims. If the plaintiffs in the other Justice cases do not agree to dismissal, the Company will move to dismiss those cases in light of the binding release of all class members affected by the settlement. There is some possibility that individual class members who excluded themselves from the settlement may seek to pursue their own or additional claims, although the Company believes that the liability associated with those cases would not be material.
Steven Linares v. ANN INC.
On December 29, 2015, plaintiff, Steven Linares, a former sales associate, filed a class action complaint on behalf of all sales leads, sales associates and stock associates working in California from December 29, 2011 through the present, in Los Angeles County Superior Court. The plaintiff alleges on behalf of the class that ANN did not properly provide overtime pay, minimum wage pay, meal and rest breaks, and waiting time pay, among other claims under the California Business and Professions Code and California Labor Code.
At mediation, the parties agreed to settle all claims in the suit for a total of $3.5 million to settle both the pending claims and other wage-and-hour claims that could have been brought as part of the lawsuit (including claims for penalties under the Private Attorneys’ General Act). The Company believes that such amount reflects a liability that is both probable and reasonably estimable, thus a reserve for approximately $3.5 million was established in the first quarter of Fiscal 2017. The parties executed a formal Joint Stipulation for Class Action Settlement and Release, dated February 6, 2017. The Joint Stipulation for Class Action Settlement and Release was preliminarily approved by the Court on April 25, 2017. On August 22, 2017, the Court granted the unopposed motion for final approval of Joint Stipulation for Class Action Settlement and Release. Within thirty days of the Court’s final approval, provided that there are no objections or appeals of the settlement by the class members, the settlement funds shall be deposited with the appointed settlement administrator. Distributions to class members pursuant to the Joint Stipulation for Class Action Settlement and Release are expected to take place within approximately sixty days following the entry of the Court’s final approval of the Joint Stipulation for Class Action Settlement and Release.
Other litigation
The Company is involved in routine litigation arising in the normal course of its business. In the opinion of management, such litigation is not expected to have a material adverse effect on the Company's consolidated financial statements.
16.17. Equity
Capital Stock
The Company’s capital stock consists of one class of common stock and one class of preferred stock. There are 360 million shares of common stock authorized to be issued and 100,000 shares of preferred stock authorized to be issued. There are no shares of preferred stock issued or outstanding.
Common Stock Repurchase Program
In December 2015, the Company’s Board of Directors authorized a $200 million share repurchase program (the “2016 Stock Repurchase Program”). Under the 2016 Stock Repurchase Program, purchases of shares of common stock may be made at the Company’s discretion from time to time, subject to overall business, liquidity, and market conditions. Currently, share repurchases in excess of $100 million are subject to certain restrictions under the terms of the Company's Borrowing Agreements, as more fully described in Note 12.10. Repurchased shares are retired and treated as authorized but unissued. The excess of repurchase price over the par value of common stock for the repurchased shares is charged entirely to retained earnings.
No shares of common stock were repurchased in Fiscal 2019, Fiscal 2018 or Fiscal 2017. Cumulative repurchases under the 2016 Stock Repurchase Program total 2.1 million shares of common stock, all of which were repurchased at an aggregate cost of $18.6 million in Fiscal 2016. No shares of common stock were repurchased in Fiscal 2017 and Fiscal 2015. Thethe remaining availability under the 2016 Stock Repurchase Program was approximately $181.4 million at July 29, 2017.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
August 3, 2019.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss applicable to common shares after preferred dividend requirements, if any, by the weighted-average number of common shares outstanding during the period. Diluted net income per common share adjusts basic net income per common share for the effects of outstanding stock options, restricted stock restricted stock units and any other potentially dilutive financial instruments, only in the periods in which such effect is dilutive under the treasury stock method.
The weighted-average number of common shares outstanding used to calculate basic net loss per common share is reconciled to those shares used in calculating diluted net loss per common share as follows:
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29, 2017 | | July 30, 2016 | | July 25, 2015 | | August 3, 2019 | | August 4, 2018 | | July 29, 2017 |
| | | (millions) | | (millions) |
| Basic | | 194.8 |
| | 192.2 |
| | 162.6 |
| | 197.5 |
| | 196.0 |
| | 194.8 |
|
Dilutive effect of stock options, restricted stock and restricted stock units (a) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Diluted shares | | 194.8 |
| | 192.2 |
| | 162.6 |
| | 197.5 |
| | 196.0 |
| | 194.8 |
|
(a) There was no dilutive effect of stock options, restricted stock and restricted stock units for all periods representedpresented as the impact of these items was anti-dilutive because of the Company's net loss incurred during these periods.
Options to purchase shares of common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive, and therefore not included in the computation of diluted net loss per common share. In addition, the Company has outstanding restricted stock units that are issuable only upon the achievement of certain service conditions. Any performance or market-based restricted stock units outstanding are included in the computation of diluted shares
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
only to the extent the underlying performance or market conditions (a) are satisfied prior to the end of the reporting period or (b) would be satisfied if the end of the reporting period was the end of the related contingency period, and the result would be dilutive under the treasury stock method. Potentially dilutive instruments are not included in the computation of net loss per share for Fiscal 2017,2019, Fiscal 20162018 and Fiscal 20152017 as the impact of those items would have been anti-dilutive due to the net loss incurred for these periods. For Fiscal 2017,2019, Fiscal 20162018 and Fiscal 2015,2017, respectively, 19.524.4 million, 17.124.1 million and 15.819.5 million shares of anti-dilutive options and restricted stock units were excluded from the diluted share calculations.
Dividends
The Company has never declared or paid cash dividends on its common stock. However, payment of dividends is within the discretion of, and are payable only when declared by, the Company’s Board of Directors. Additionally, payments of dividends are limited by the Company's liquidity and borrowing arrangements as described in Note 12.10.
17.18. Stock-Based Compensation
Omnibus Incentive Plan
In November 2018, the Board of Directors approved the amendment of the Company's 2016 Omnibus Incentive Plan, as amended and restated on December 10, 2015 (the "2016 Omnibus Incentive Plan"). The Company is authorizedamendment to issue upthe 2016 Omnibus Incentive plan was approved by the Company's shareholders and became effective on December 14, 2018 to 70.5increase the aggregate number of shares that may be issued under the plan by an additional 13.1 million shares to 83.6 million shares of stock-based awards to eligible employees and directors of the Company under its amended and restated 2010 Stock Incentive Plan (the “2016 Omnibus Incentive Plan”).Company. The 2016 Omnibus Incentive Plan provides for the granting of service-based and performance-based stock awards as well as performance-based cash incentive awards. The 2016 Omnibus Incentive Plan expires in November 2025.
As of July 29, 2017,August 3, 2019, there were approximately 17.418.8 million shares remaining under the 2016 Omnibus Incentive Plan available for future grants. The Company issues new shares of common stock when stock option awards are exercised and restricted stock units vest.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impact on Results
A summary of the total compensation expense and associated income tax benefit recognized related to stock-based compensation arrangements on a consolidated basis is as follows:
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| | | (millions) | | (millions) |
| Compensation expense | | $ | 24.5 |
| | $ | 26.2 |
| | $ | 18.2 |
| | $ | 11.5 |
| | $ | 19.8 |
| | $ | 24.5 |
|
| Income tax benefit | | $ | 9.3 |
| | $ | 10.1 |
| | $ | 6.8 |
| | $ | 2.4 |
| | $ | 5.3 |
| | $ | 9.3 |
|
Stock Options
Stock option awards outstanding under the Company’s current plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period of three, four ortwo to five years and expire at either seven or ten years after the grant date. The Company recognizes compensation expense ratably over the vesting period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:
Expected Term — The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants.
Expected Volatility — The expected volatility factor is based on the historical volatility of the Company's common stock for a period equal to the expected term of the stock option.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Risk-free Interest Rate — The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock option.
Expected Dividend Yield — The expected dividend yield is based on the Company's historical practice of not paying dividends on its common stock.
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the fiscal years presented were as follows:
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4, 2018 | | July 29,
2017 |
| Expected term (years) | | 3.0 |
| | 3.1 |
| | 3.9 |
| | 5.2 |
| | 5.1 |
| | 5.1 |
|
| Expected volatility | | 37.6 | % | | 35.4 | % | | 38.8 | % | | 47.5 | % | | 43.9 | % | | 37.6 | % |
| Risk-free interest rate | | 1.3 | % | | 1.5 | % | | 1.8 | % | | 2.9 | % | | 2.0 | % | | 1.3 | % |
| Expected dividend yield | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
| Weighted-average grant date fair value | | $ | 1.87 |
| | $ | 4.14 |
| | $ | 4.97 |
| | $ | 1.77 |
| | $ | 0.98 |
| | $ | 1.87 |
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the stock option activity under allservice-based plans during Fiscal 20172019 is as follows:
|
| | | | | | | | | | | | | |
| | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Terms | | Aggregate Intrinsic Value (a) |
| | | (thousands) | | |
| | (years) | | (millions) |
| Options outstanding – July 30, 2016 | | 14,813.4 |
| | $ | 14.33 |
| | 4.8 | | $ | 0.9 |
|
| Granted | | 6,409.2 |
| | 5.33 |
| | | | |
|
| Exercised | | (13.6 | ) | | 8.03 |
| | | | |
|
| Canceled/Forfeited | | (4,795.3 | ) | | 12.29 |
| | | | |
|
| Options outstanding – July 29, 2017 | | 16,413.7 |
| | $ | 11.42 |
| | 4.5 | | $ | 0.2 |
|
Options vested and expected to vest at July 29, 2017 (b) | | 16,093.0 |
| | $ | 11.52 |
| | 4.5 | | $ | 0.1 |
|
| Options exercisable at July 29, 2017 | | 8,332.1 |
| | $ | 14.29 |
| | 3.5 | | $ | — |
|
|
| | | | | | | | | | | | | |
| | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Terms | | Aggregate Intrinsic Value (a) |
| | | (thousands) | | |
| | (years) | | (millions) |
| Options outstanding – August 4, 2018 | | 19,307.9 |
| | $ | 8.97 |
| | 4.2 | | $ | 9.3 |
|
| Granted | | 4,545.8 |
| | 3.89 |
| | | | |
|
| Exercised | | (40.2 | ) | | 2.37 |
| | | | |
|
| Canceled/Forfeited | | (6,788.1 | ) | | 8.54 |
| | | | |
|
| Options outstanding – August 3, 2019 | | 17,025.4 |
| | $ | 7.80 |
| | 4.1 | | $ | — |
|
Options vested and expected to vest at August 3, 2019 (b) | | 16,879.7 |
| | $ | 7.83 |
| | 4.1 | | $ | — |
|
| Options exercisable at August 3, 2019 | | 10,311.9 |
| | $ | 10.53 |
| | 3.1 | | $ | — |
|
______
| |
(a) | The intrinsic value is the amount by which the market price at the end of the period of the underlying share of stock exceeds the exercise price of the stock option. |
| |
(b) | The number of options expected to vest takes into consideration estimated expected forfeitures. |
As of July 29, 2017,August 3, 2019, there was $14.4$4.7 million of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 1.71.1 years. The total intrinsic value of options exercised during Fiscal 2019 and Fiscal 2017 was de minimis. The total intrinsic value ofThere were no options exercised during Fiscal 2016 and Fiscal 2015 was approximately $7.3 million and $5.0 million, respectively.2018. The total grant date fair value of options that vested during Fiscal 2017,2019, Fiscal 20162018 and Fiscal 2015,2017, was approximately $9.6 million, $11.2 million and $13.4 million, $13.7respectively.
Market-based Stock Options
Market-based non-qualified stock options (“NQSO Awards”) entitle the holder to receive options to purchase shares of common stock of the Company during the vesting period. However, such awards are subject to the grantee’s continuing employment and the Company’s achievement of certain market-based goals over the pre-defined performance period.
The NQSO Awards' fair value is determined using a Monte-Carlo simulation model on the grant date. A Monte-Carlo simulation model estimates the fair value of the market-based award based on an expected term of 7 years, a risk-free interest rate of 2.3%, an expected dividend yield of zero and an expected volatility measure of 56.4% for the Company. Compensation expense for NQSOs Awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company granted 3.5 million and $14.2of NQSO Awards during the third quarter of Fiscal 2019 at an exercise price of $1.17 per share. The weighted-average grant date fair value of the awards was $0.22 per share. The total unrecognized compensation cost at August 3, 2019 was $0.8 million respectively.to be recognized over 2.8 years. There were no vestings of the NQSOs Awards as of August 3, 2019.
Restricted Equity Awards
The 2010 Stock Plan also allowed for the issuance of shares of restricted stock and restricted stock units (“RSUs”) with service-based, market-based and performance-based conditions (collectively, “Restricted Equity Awards”). In the first quarter of Fiscal 2016, the Compensation Committee of the Board of Directors (the "Compensation Committee") approved the cancellation of the Company's performance-based and market-based Restricted Equity Awards. As a result, the previously unrecognized expense related to the market-based Restricted Equity Awards was expensed in the first quarter of Fiscal 2016. In addition, the previously accrued expense related to the performance-based Restricted Equity Awards was derecognized during the first quarter of Fiscal 2016. Such amounts were de minimis and have been included within Selling, general and administrative expenses in the accompanying consolidated financial statements.
Under the 2016 Omnibus Incentive Plan, shares of Restricted Equity Awards are issuable with service-based, market-based or performance-based conditions. Any shares of Restricted Equity Awards issued are counted against the shares available for future grant limit as 2.3 shares for every one Restricted Equity Award granted. In general, if options are canceled for any reason or expire, the shares covered by such options again become available for grant. If a share of restricted stock or a RSU is forfeited for any reason, 2.3 shares become available for grant.
Service-based Restricted Equity Awards entitle the holder to receive unrestricted shares of common stock of the Company at the end of a vesting period, subject to the grantee’s continuing employment. Service-based Restricted Equity Awards generally vest over a three or four year period of time.
Performance-based Restricted Equity Awards also entitle the holder to receive shares of common stock of the Company at the end of a vesting period. However, such awards are subject to (a) the grantee’s continuing employment and (b) the Company’s achievement of certain performance goals over a pre-defined performance period. Performance-based Restricted Equity Awards generally vest at the completion of the performance period.
The fair values of both service-based and performance-based Restricted Equity Awards are based on the fair value of the Company’s unrestricted common stock at the date of grant. Compensation expense for both service-based and performance-based Restricted Equity Awards is recognized over the vesting period based on the grant-date fair values of the awards that are expected to vest
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
based upon the service and performance-based conditions. As of July 29, 2017, there are no restricted stock or RSUs with performance-based conditions issued under the 2016 Omnibus Incentive Plan.
A summary of Service-based Restricted Equity Awards activity during Fiscal 20172019 is as follows:
| | | | Service-based Restricted Equity Awards | Service-based Restricted Equity Awards |
| | Number of Shares | | Weighted- Average Grant Date Fair Value Per Share | Number of Shares | | Weighted- Average Grant Date Fair Value Per Share |
| | (thousands) | | | (thousands) | | |
| Nonvested at July 30, 2016 | 2,258.8 |
| | $ | 13.62 |
| |
| Nonvested at August 4, 2018 | | 4,171.3 |
| | $ | 4.57 |
|
| Granted | 2,504.4 |
| | 5.28 |
| 269.9 |
| | 3.75 |
|
| Vested | (681.2 | ) | | 13.01 |
| (1,825.8 | ) | | 5.22 |
|
| Canceled/Forfeited | (972.0 | ) | | 10.37 |
| (1,266.9 | ) | | 3.49 |
|
| Nonvested at July 29, 2017 | 3,110.0 |
| | $ | 8.05 |
| |
| Nonvested at August 3, 2019 | | 1,348.5 |
| | $ | 4.57 |
|
As of July 29, 2017,August 3, 2019, there was $10.6$1.5 million of total unrecognized compensation cost related to the service-based Restricted Equity Awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.10.8 years. The total fair value of the service-based Restricted Equity Awards vested during Fiscal 2017,2019, Fiscal 20162018 and Fiscal 20152017 was $3.9$5.6 million, $4.9$2.8 million and $7.1$3.9 million, respectively. The weighted-average grant-date fair value per share of the service-based Restricted Equity Awards granted during Fiscal 2017,2019, Fiscal 20162018 and Fiscal 20152017 was $3.75, $2.45 and $5.28, $12.72respectively.
Market-based Restricted Equity Awards
Market-based Restricted Equity Awards entitle the holder to receive shares of common stock of the Company during the vesting period. However, such awards are subject to the grantee’s continuing employment and $13.96, respectively.the Company’s achievement of certain market-based goals over the pre-defined performance period.
The market-based Restricted Equity Awards fair value is determined using a Monte-Carlo simulation model on the grant date. A Monte-Carlo simulation model estimates the fair value of the market-based award based on an expected term of 3 years, a risk-free interest rate of 2.3%, an expected dividend yield of zero and an expected volatility measure of 74.2% for the Company. Compensation expense for market-based Restricted Equity Awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company granted approximately 2.5 million of market-based Restricted Equity Awards during the third quarter ended May 4, 2019. The weighted-average grant day fair value of the awards was $0.47 per share. The total unrecognized compensation at August 3, 2019 was $1.2 million to be recognized over 2.7 years. There were no vestings of the market-based Restricted Equity Awards as of August 3, 2019.
18.19. Employee Benefit Plans
Long-Term Incentive Plans
During Fiscal 2016, the Company created a long-term incentive program ("LTIP") for vice presidents and above under the 2016 Omnibus Incentive Plan. The LTIP entitles the holder to either a cash payment, or a stock payment for certain officers at the Company's option, equal to a predetermined target amount earned at the end of a performance period and is subject to (a) the grantee’s continuing employment and (b) the Company’s achievement of certain performance goals over a one two or three-year performance period. Compensation expense for the LTIP is recognized over the related performance periods based on the expected achievement of the performance goals.
The Company recognized $14.1$0.1 million, $(7.2) million and $20.1$13.6 million in compensation expense under the LTIP during Fiscal 20172019, Fiscal 2018 and Fiscal 2016,2017, respectively, which was recorded within Selling, general and administrative expenses in the accompanying consolidated financial statements. The net credits recorded in Fiscal 2018 primarily reflect (1) the Compensation Committee's determination in late September 2017 that although certain metrics within the 2017 LTIP were achieved, negative discretion should be applied based upon the overall performance of the Company, thus the LTIP amounts were not distributed and (2) the Company's determination in Fiscal 2018 that certain performance targets for the 2018 LTIP year would not be achieved.
As of July 29, 2017,August 3, 2019, there was $16.7$19.1 million of expected unrecognized compensation cost related to the LTIP, which is expected to be recognized over a remaining weighted-average vesting period of 1.61.8 years. As of July 29, 2017,August 3, 2019, the liability for LTIP Awards was $23.2$10.7 million, of which $8.9 million was classified within Accrued expenses and other current liabilities and $14.3 million wasall classified within Other non-current liabilities in the accompanying consolidated balance sheets. In addition, the Company paid $10.4 million to settle such liabilities during Fiscal 2017. No amounts were paid during Fiscal 2016.2019 or Fiscal 2018 and $10.4 million was paid during Fiscal 2017.
Retirement Savings Plan (401(k))
The Company currently sponsors a defined contribution retirement savings plan (the "401(k)" plan). This plan covers substantially all eligible U.S. employees. Participating employees may contribute a percentage of their annual compensation, subject to certain limitations under the U.S Internal Revenue Code. The Company's contribution is made in accordance with a matching formula established prior to the beginning of each plan year. Effective with the plan year startingstarted January 1, 2015, the Company will contributecontributes a matching amount based on eligible salary contributed by an employee equal to 100% of the first 3% contributed and 50% of the next 2% contributed. Under the terms of the plan, such matching contributions are immediately vested. The Company incurred expenses relating to its contributions to and administration of its 401(k) plan of $15.3 million in Fiscal 2019, $15.8 million in Fiscal 2018 and $17.1 million in Fiscal 2017, $18.0 million in Fiscal 2016 and $8.8 million in Fiscal 2015.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2017.
Defined Benefit Plan
In connection withDuring Fiscal 2017, the Company completed its plan to terminate a defined benefit plan assumed in the ANN Acquisition the Company assumed ANN's pension plan which was frozen and for which the accumulated benefit obligation exceeded the plan's assets by approximately $12 million as of July 30, 2016. In Fiscal 2016, the Company made a decision to terminate the plan whereby under the terms of liquidation, someeligible participants elected to receive lump-sum payments while others elected to remain in the plan. During the first quarter of Fiscal 2017, lump sum payments were madedistributions. Subsequent to its participants, andthose distributions, also during the second quarter of Fiscal 2017, the remaining obligation was transferred to a third-party and settled through a non-participating annuity contract. As of the end of the second quarter of Fiscal 2017,contract whereby the trust was fully liquidated. DuringAs a result, during Fiscal 2017, the accumulated actuarial loss of $7.4 million (net of an income tax benefit of $2.9 million) was reclassified from Accumulated other comprehensive loss to Acquisition and integration expenses. In addition, the Company recorded total settlement charges and professional fees of $8.0 million within Acquisition and integration expenses during Fiscal 2017.
Executive Retirement Plan
The Company sponsors an Executive Retirement Plan (the “ERP Plan”) for certain officers and key executives. The ERP Plan is a non-qualified deferred compensation plan. The purpose of the ERP Plan is to attract and retain a select group of management and to provide them with an opportunity to defer compensation on a pretax basis above U.S. Internal Revenue Service
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
limitations. ERP Plan balances cannot be rolled over to another qualified plan or IRA upon distribution. Unlike a qualified plan, the Company is not required to pre-fund the benefits payable under the ERP Plan.
ERP Plan participants can contribute up to 50% of base salary and 75% of bonuses, before federal and state taxes are calculated. The Company makes a matching contribution to the ERP Plan in the amount of 100% on the first 1% of base salary and bonus salary deferred up to $270,000. The Company makes an additional matching contribution to the ERP Plan in the amount of 100% on the first 5% of base salary and bonus salary deferred in excess of $270,000. Plan Employeesparticipants vest immediately in their voluntary deferrals and are incrementally vested in their employer matching contributions over a five year vesting period after which they are 100% vested. The Company incurred expenses related to its matching contributions of approximately $1.0 million in Fiscal 2019, $1.0 million in Fiscal 2018 and $0.9 million in Fiscal 2017 $1.9 million in Fiscal 2016 and $2.1 million in Fiscal 2015 relating to the ERP Plan. In addition, as the ERP Plan is unfunded by the Company, the Company is also required to pay an investment return to participating employees on all account balances in the ERP Plan based on 27 reference investment fund elections offered to participating employees. As a result, the Company’s obligations under the ERP Plan are subject to market appreciation and depreciation, which resulted in expense of $1.0 million in Fiscal 2019, $6.7 million in Fiscal 2018 and $8.6 million in Fiscal 2017, $1.4 million in Fiscal 2016 and $3.3 million in Fiscal 2015.2017. The Company’s obligations under the ERP Plan, including employee compensation deferrals, matching employer contributions and investment returns on account balances, were $71.1$60.5 million as of July 29, 2017August 3, 2019 and $75.4$71.6 million as of July 30, 2016.August 4, 2018. As of July 29, 2017, $8.1August 3, 2019, $31.6 million was classified within Accrued expenses and other current liabilities and $63.0$28.9 million was classified within Other non-current liabilities in the accompanying consolidated balance sheets. As of July 30, 2016, $4.5August 4, 2018, $4.2 million was classified within Accrued expenses and other current liabilities and $70.9$67.4 million was classified within Other non-current liabilities in the accompanying consolidated balance sheets. The increase in the current portion of the liability as of August 3, 2019 reflects amounts due to former senior executives who left the Company during in the second half of Fiscal 2019. The amounts are expected to be paid during Fiscal 2020.
Employee Stock Purchase Plan
The Company also sponsors an Employee Stock Purchase Plan, which allows employees to purchase shares of the Company’s common stock during each quarterly offering period at a 15% discount through payroll deductions. Expenses incurred during Fiscal 2017, Fiscal 2016 and Fiscal 2015 relating to this plan were de minimis. During the fourth quarter of Fiscal 2017 the plan reached the maximum number of authorized shares to be issued and waspurchases under the plan were automatically terminated. On December 7, 2017, stockholders approved an amended and restated Employee Stock Purchase Plan effective as of January 1, 2018. The principal purpose of adopting this amended and restated plan was to approve a 4,000,000 share increase to the number of shares of common stock available for issuance under the plan. Purchases under the amended and restated plan began in the third quarter of Fiscal 2018. Expenses incurred during Fiscal 2019, Fiscal 2018 and Fiscal 2017 relating to this plan were de minimis.
19.20. Segments
Historically,The Company's segment reporting structure reflects an approach designed to optimize the operational coordination and resource allocation of its businesses across multiple functional areas including specialty retail, direct channel and licensing. The Company organizedclassifies its businesses into sixfour reportable segments following a brand-focused approach: ANN, Justice, Lane Bryant, maurices, dressbarn and Catherines. In connection with the Change for Growth program, the Company shifted from a brand-based focus to a customer-based focus in order to reduce organizational overlap and maximize operational efficiencies. In connection therewith, effective the first quarter of Fiscal 2017, the Company reorganized its businesses into four operating segments: Premium Fashion, Value Fashion, Plus Fashion, Kids Fashion and KidsValue Fashion. Each segment is ledreviewed by a segment manager who is directly accountable for that segment's financial performance and maintains regular contact with the Company's Chief Executive Officer, who functions as the chief operating decision maker (the "CODM"), and is responsible for reviewing the operating activities, financial results, forecasts and business plans of the segment. Accordingly, the Company's CODM evaluates performance and allocates resources at the segment level. During the third quarter of Fiscal 2019, the Company made revisions to its reportable segments upon the divesting of its maurices business. As a result, the Company removed the maurices business from the Value Fashion segment and reallocated all corporate overhead to the remaining operating segments. The financial information presented below reflects such changes for all periods presented, including the prior year financial information.
The four operatingreportable segments are as follows:
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Premium Fashion segment – consists primarily of the specialty retail, outlet and ecommercedirect channel operations of the Ann Taylor and LOFT brands.
Value Fashion segment – consists of the specialty retail, outlet and ecommerce operations of the maurices and dressbarn brands.
Plus Fashion segment – consists of the specialty retail, outlet and ecommercedirect channel operations of the Lane Bryant and Catherines brands.
Kids Fashion segment – consists of the specialty retail, outlet, ecommercedirect channel and licensing operations of the Justice brand.
Value Fashion segment – consists of the specialty retail, outlet and direct channel operations of the Dressbarn brand.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The accounting policies of the Company’s reporting segments are consistent with those described in Notes 3 and 4. All intercompany revenues are eliminated in consolidation. Corporate overhead expenses are allocated to the segments based upon specific usage or other reasonable allocation methods. Certain expenses, including acquisition and integration expenses, and restructuring and other related charges, and impairment charges of goodwill and other intangible assets have not been allocated to the segments, which is consistent with the CODM's evaluation of the segments.
Due to changes in the Company's operating segments discussed above, segment information for Fiscal 2016 and Fiscal 2015 has been recast to conform to the current period's presentation. These changes related entirely to combining the previously reported brand-based segment information into the new customer-based operating model and had no impact on total net sales, total operating income or total depreciation and amortization expense.
Net sales and operating (loss) income for each operating segment are as follows: | | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29,
2017 |
| Net sales: | | (millions) | |
Net sales (a) (b): | | | (millions) |
Premium Fashion (a) | | $ | 2,322.6 |
| | $ | 2,330.9 |
| | $ | — |
| | $ | 2,415.1 |
| | $ | 2,317.8 |
| | $ | 2,322.6 |
|
| Value Fashion | | 1,950.2 |
| | 2,094.6 |
| | 2,084.2 |
| |
| Plus Fashion | | 1,353.9 |
| | 1,463.6 |
| | 1,441.9 |
| | 1,240.5 |
| | 1,340.0 |
| | 1,353.9 |
|
| Kids Fashion | | 1,023.1 |
| | 1,106.3 |
| | 1,276.8 |
| | 1,079.1 |
| | 1,100.0 |
| | 1,023.1 |
|
| Value Fashion | | | 758.7 |
| | 808.6 |
| | 917.7 |
|
| Total net sales | | $ | 6,649.8 |
| | $ | 6,995.4 |
| | $ | 4,802.9 |
| | $ | 5,493.4 |
| | $ | 5,566.4 |
| | $ | 5,617.3 |
|
| | | | | | | | | | | | | |
| Operating (loss) income: | | |
| | |
| | |
| |
Premium Fashion (a) (b) | | 140.9 |
| | 13.3 |
| | — |
| |
| Value Fashion | | 12.2 |
| | 92.0 |
| | 136.6 |
| |
Operating loss (a) (b): | | | |
| | |
| | |
|
Premium Fashion | | | $ | 72.7 |
| | $ | 102.3 |
| | $ | 129.6 |
|
| Plus Fashion | | 15.5 |
| | 36.9 |
| | 29.4 |
| | (71.4 | ) | | 0.6 |
| | (12.7 | ) |
| Kids Fashion | | (36.7 | ) | | 29.0 |
| | (62.8 | ) | | (42.4 | ) | | 18.7 |
| | (60.5 | ) |
| Value Fashion | | | (101.7 | ) | | (128.5 | ) | | (56.0 | ) |
Unallocated restructuring and other related charges (c) | | | (127.7 | ) | | (76.6 | ) | | (78.1 | ) |
Unallocated impairment of goodwill (Note 5) | | | (276.0 | ) | | — |
| | (489.1 | ) |
Unallocated impairment of other intangible assets (Note 5) | | | (134.9 | ) | | — |
| | (728.1 | ) |
| Unallocated acquisition and integration expenses | | (39.4 | ) | | (77.4 | ) | | (31.7 | ) | | — |
| | (5.4 | ) | | (39.4 | ) |
Unallocated restructuring and other related charges (c) | | (81.9 | ) | | — |
| | — |
| |
Unallocated impairment of goodwill (Note 6) | | (596.3 | ) | | — |
| | (261.7 | ) | |
Unallocated impairment of intangible assets (Note 6) | | (728.1 | ) | | — |
| | (44.7 | ) | |
| Total operating (loss) income | | $ | (1,313.8 | ) | | $ | 93.8 |
| | $ | (234.9 | ) | |
| Total operating loss | | | $ | (681.4 | ) | | $ | (88.9 | ) | | $ | (1,334.3 | ) |
_______
| |
(a)
| The results of the Premium Fashion segment for the post-acquisition period from August 22, 2015 to July 30, 2016 are included within the Company's consolidated results of operations for Fiscal 2016.
|
| |
(b)
| The results of the Premium Fashion segmentfor Fiscal 2016 include approximately $126.9 million of non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value.
|
(a)Prior period amounts have not been restated due to the adoption of ASU 2014-09 and continue to be reported under the accounting standards in effect for those periods. For more information on ASU 2014-09, refer to Note 4.
(b) For Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively, the maurices business was excluded from the Value Fashion segment and has been classified as discontinued operations within the consolidated financial statements. As a result, shared expenses of $78 million, $96 million and $81 million, respectively, for the fiscal years ended August 3, 2019, August 4, 2018 and July 29, 2017, which were previously allocated to maurices have been reallocated to the remaining operating units for all periods presented.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(c) Restructuring and other related charges by operating segment are as follows:
| | | | Fiscal Year Ended July 29, 2017 | Fiscal Years Ended |
| | (millions) | August 3, 2019 | | August 4, 2018 | | July 29, 2017 |
| Cash related charges: | |
| |
| Restructuring charges: | | |
| | | (millions) |
Cash related charges(1): | | |
| | | | |
|
| Severance and benefit costs: | | | | | | |
| Premium Fashion | $ | 3.0 |
| $ | 3.3 |
| | $ | 1.3 |
| | $ | 3.0 |
|
| Value Fashion | 8.2 |
| |
| Plus Fashion | 10.6 |
| 3.5 |
| | 3.2 |
| | 9.4 |
|
| Kids Fashion | 2.4 |
| 1.8 |
| | 0.2 |
| | 2.4 |
|
| Value Fashion | | 26.9 |
| | (0.8 | ) | | 5.7 |
|
| Corporate | 10.3 |
| 7.5 |
| | 1.8 |
| | 10.3 |
|
| Other related charges | 33.4 |
| |
| Total Severance and benefit costs | | 43.0 |
| | 5.7 |
| | 30.8 |
|
| | | | | | | |
| Professional fees and other related charges: | | | | | | |
| Plus Fashion | | — |
| | 2.2 |
| | 1.2 |
|
| Value Fashion | | 6.1 |
| | — |
| | — |
|
| Corporate | | 33.2 |
| | 57.0 |
| | 33.4 |
|
| Total Professional fees and other related charges | | 39.3 |
| | 59.2 |
| | 34.6 |
|
| | | | | | | |
| Total Cash related charges | | 82.3 |
| | 64.9 |
| | 65.4 |
|
| | 67.9 |
| | | | | |
| Non-cash charges: | | | | | | |
| Impairment of store assets: | | |
| Impairment of assets: | | | | | | |
| Premium Fashion | 3.2 |
| — |
| | 6.5 |
| | 3.2 |
|
| Value Fashion | 4.4 |
| |
| Plus Fashion | 4.8 |
| — |
| | 4.4 |
| | 4.8 |
|
| Kids Fashion | 1.6 |
| — |
| | 0.2 |
| | 1.6 |
|
| | 14.0 |
| |
| Value Fashion | | 0.5 |
| | 0.6 |
| | 3.1 |
|
| Corporate | | 44.9 |
| | — |
| | — |
|
| Total Non-cash charges | | 45.4 |
| | 11.7 |
| | 12.7 |
|
| | | | | | | |
| Total restructuring and other related charges | $ | 81.9 |
| $ | 127.7 |
| | $ | 76.6 |
| | $ | 78.1 |
|
(1)The charges incurred under the Company's cost reduction initiatives are more fully described in Note 6.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation and amortization expense and capital expenditures for each operating segment are as follows:
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29, 2017 |
| Depreciation and amortization expense: | | (millions) | |
Depreciation and amortization expense (a): | | | (millions) |
Premium Fashion (a) | | $ | 134.2 |
| | $ | 128.0 |
| | $ | — |
| | $ | 125.3 |
| | $ | 134.4 |
| | $ | 135.3 |
|
| Value Fashion | | 111.2 |
| | 106.5 |
| | 94.0 |
| |
| Plus Fashion | | 68.4 |
| | 52.1 |
| | 54.0 |
| | 65.9 |
| | 69.4 |
| | 76.6 |
|
| Kids Fashion | | 71.1 |
| | 72.1 |
| | 70.2 |
| | 64.2 |
| | 66.4 |
| | 78.8 |
|
| Value Fashion | | | 44.5 |
| | 53.3 |
| | 60.1 |
|
| Total depreciation and amortization expense | | $ | 384.9 |
| | $ | 358.7 |
| | $ | 218.2 |
| | $ | 299.9 |
| | $ | 323.5 |
| | $ | 350.8 |
|
| | | | | | | | | | | | | |
Capital expenditures (b): | | |
| | |
| | |
| |
Capital expenditures (a): | | | |
| | |
| | |
|
Premium Fashion (a) | | $ | 64.2 |
| | $ | 57.0 |
| | $ | — |
| | $ | 28.6 |
| | $ | 40.7 |
| | $ | 64.2 |
|
| Value Fashion | | 35.6 |
| | 90.6 |
| | 103.9 |
| |
| Plus Fashion | | 21.2 |
| | 40.9 |
| | 54.1 |
| | 8.5 |
| | 8.8 |
| | 21.2 |
|
| Kids Fashion | | 17.9 |
| | 19.8 |
| | 51.5 |
| | 6.1 |
| | 6.1 |
| | 17.9 |
|
| Value Fashion | | | 3.1 |
| | 5.7 |
| | 13.5 |
|
Corporate (c)(b) | | 119.2 |
| | 158.2 |
| | 103.0 |
| | 85.9 |
| | 118.3 |
| | 119.2 |
|
| Total capital expenditures | | $ | 258.1 |
| | $ | 366.5 |
| | $ | 312.5 |
| | $ | 132.2 |
| | $ | 179.6 |
| | $ | 236.0 |
|
(a)The results of Depreciation and amortization expense and capital expenditures related to the Premiummaurices business, historically reported within the Value Fashion segment, forhas been excluded from the post-acquisition period from August 22, 2015 to July 30, 2016 are includedtables and is now classified as discontinued operations within the Company's consolidated results of operations for Fiscal 2016.financial statements. Refer to Note 2.
(b) Excludes ending accrued capital expenditures of $26.6 million in Fiscal 2017, $61.9 million in Fiscal 2016 and $50.8 million in Fiscal 2015.
(c)(b) Includes capital expenditures for technology and supply chain infrastructure.
The Company’s executive team does not regularly review asset information by operating segment and, as a result, we do not report asset information by operating segment. In addition, the Company’s operations are largely concentrated in the United States and Canada. Accordingly, net sales and long-lived assets by geographic location are not meaningful at this time.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s revenues by major product categories as a percentage of total net sales are as follows:
|
| | | | | | | | | |
| | | Fiscal Years Ended |
| | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 |
| | | (millions) |
| Apparel | | 85 | % | | 87 | % | | 84 | % |
| Accessories and other | | 15 | % | | 13 | % | | 16 | % |
Total net sales | | 100 | % | | 100 | % | | 100 | % |
20.21. Additional Financial Information
| | | | | Fiscal Years Ended | | Fiscal Years Ended |
| Cash Interest and Taxes: | | July 29,
2017 | | July 30,
2016 | | July 25,
2015 | | August 3,
2019 | | August 4,
2018 | | July 29, 2017 |
| | | (millions) | | (millions) |
| Cash paid for interest | | $ | 90.8 |
| | $ | 76.3 |
| | $ | 4.6 |
| | $ | 97.4 |
| | $ | 112.9 |
| | $ | 90.8 |
|
| Cash paid (received) for income taxes | | $ | 3.5 |
| | $ | (9.2 | ) | | $ | (5.9 | ) | |
Cash paid for income taxes (a) | | | $ | 5.9 |
| | $ | 5.1 |
| | $ | 3.5 |
|
_______
(a) Includes a net refund of $0.2 million for Fiscal 2019 and net payments of $0.5 million and $0.8 million for Fiscal 2018 and 2017, respectively, related to the maurices business, which is classified in discontinued operations.
Non-cash Transactions
During Fiscal 2016, in connection with the ANN Acquisition, as more fully described in Note 5, the Company issued 31.2 million shares of common stock valued at approximately $345 million, based on the Company's stock price on the date of the acquisition. Non-cash investing activities of continuing operations include the accrued purchases of fixed assets in the amount of $26.6$19.3 million as of August 3, 2019, $20.6 million as of August 4, 2018 and $24.7 million as of July 29, 2017, $61.9 million as of July 30, 2016 and $50.8 million as of July 25, 2015.2017.
21.22. Subsequent EventEvents
During the first quarter of Fiscal 2018, the south-central and southeast areas of the United States, as well as Puerto Rico, were impacted by three hurricanes that disrupted normal operations at approximately 600 of the Company’s retail stores. While almost all of these stores have resumed operations, many of these stores continue to be impacted by the hurricanes, either as a result of damage incurred, or they are experiencing declines in customer traffic. The Company is in the process of assessing the damage to store assets and inventory. As of the date of this filing,On September 20, 2019, the Company has not completedand certain of its assessmentdomestic subsidiaries entered into an amendment to our Amended Revolving Credit Agreement among the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The amendment expands the limit on the letter of credit sublimit available for standby letters of credit from $100 million to $200 million, which offers the full economic impact of the hurricanes, including losses associated with the damaged stores and the impact of lost sales in the affected regions. Company greater financing flexibility to meet its working capital needs.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ascena Retail Group, Inc.
Mahwah, New Jersey
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ascena Retail Group, Inc. and subsidiaries (the “Company”"Company") as of July 29, 2017August 3, 2019 and July 30, 2016, andAugust 4, 2018, the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three fiscal years in the period ended July 29, 2017. TheseAugust 3, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Company as of August 3, 2019 and August 4, 2018, and the results of its operations and its cash flows for each of the three fiscal years in the period ended August 3, 2019, in conformity with accounting principles generally accepted in the United States of America.
We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of August 3, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 10, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ascena Retail Group, Inc. and subsidiaries as of July 29, 2017 and July 30, 2016, and the results of their operations and their cash flows for each of the three fiscal years in the period ended July 29, 2017, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of testing goodwill for impairment for its fiscal 2017 interim impairment test as of April 29, 2017 due to the adoption of Accounting Standards Update 2017-04, “Simplifying the Test for Goodwill Impairment” which removes Step 2 of the goodwill impairment test and requires that any impairment charge be calculated based on the excess of a reporting unit’s carrying amount over its fair value.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of July 29, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 25, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
September 25, 2017October 10, 2019
We have served as the Company’s auditor since at least 1980, in connection with its initial public offering.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ascena Retail Group, Inc.
Mahwah, New Jersey
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Ascena Retail Group, Inc.Inc, and subsidiaries (the “Company”) as of July 29, 2017,August 3, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 3, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the fiscal year ended August 3, 2019, of the Company and our report dated October 10, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for designing, implementing, and maintaining effective internal control over financial reporting and for its assessment aboutof the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America.PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 29, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the fiscal year ended July 29, 2017 of the Company and our report dated September 25, 2017 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change in method of testing goodwill for impairment due to the adoption of Accounting Standards Update 2017-04, “Simplifying the Test for Goodwill Impairment”.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
September 25, 2017October 10, 2019
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the quarterly financial information of the Company:
| | | Fiscal Year Ended July 29, 2017 | | Fourth Quarter (a)(b) | | Third Quarter (a)(b)(c) | | Second Quarter (a)(b) | | First Quarter (a)(b) | |
| Fiscal Year Ended August 3, 2019 | | | Fourth Quarter (a)(b)(c) | | Third Quarter (a)(b)(c) | | Second Quarter (a)(b) | | First Quarter (a)(b) |
| | | (millions, except per share data) | | (millions, except per share data) |
| Net sales | | $ | 1,658.1 |
| | $ | 1,565.1 |
| | $ | 1,748.2 |
| | $ | 1,678.4 |
| | $ | 1,454.2 |
| | $ | 1,265.7 |
| | $ | 1,435.0 |
| | $ | 1,338.5 |
|
| Gross margin | | 951.4 |
| | 948.4 |
| | 945.8 |
| | 1,014.0 |
| | 789.2 |
| | 722.3 |
| | 748.7 |
| | 801.1 |
|
| Net loss from continuing operations | | | (420.2 | ) | | (244.2 | ) | | (94.1 | ) | | (23.8 | ) |
| Net loss from continuing operations per common share: | | | | | | | | | |
| Basic | | | $ | (2.12 | ) | | $ | (1.24 | ) | | $ | (0.48 | ) | | $ | (0.12 | ) |
| Diluted | | | $ | (2.12 | ) | | $ | (1.24 | ) | | $ | (0.48 | ) | | $ | (0.12 | ) |
| | | | | | | | | | |
| Net (loss) income | | (15.8 | ) | | (1,030.7 | ) | | (35.2 | ) | | 14.4 |
| | (358.0 | ) | | (237.9 | ) | | (71.5 | ) | | 5.9 |
|
| Net (loss) income per common share: | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.08 | ) | | $ | (5.29 | ) | | $ | (0.18 | ) | | $ | 0.07 |
| | $ | (1.81 | ) | | $ | (1.20 | ) | | $ | (0.36 | ) | | 0.03 |
|
| Diluted | | $ | (0.08 | ) | | $ | (5.29 | ) | | $ | (0.18 | ) | | $ | 0.07 |
| | $ | (1.81 | ) | | $ | (1.20 | ) | | $ | (0.36 | ) | | 0.03 |
|
| | | Fiscal Year Ended July 30, 2016 | | Fourth Quarter (a)(d) | | Third Quarter (a)(e) | | Second Quarter (a)(e)(f) | | First Quarter (a)(e)(f) | |
| Fiscal Year Ended August 4, 2018 | | | Fourth Quarter (a)(b)(d) | | Third Quarter (a)(b) | | Second Quarter (a)(b)(d) | | First Quarter (a)(b) |
| | | (millions, except per share data) | | (millions, except per share data) |
| Net sales | | $ | 1,812.3 |
| | $ | 1,669.3 |
| | $ | 1,841.8 |
| | $ | 1,672.0 |
| | $ | 1,519.5 |
| | $ | 1,266.7 |
| | $ | 1,456.4 |
| | $ | 1,323.8 |
|
| Gross margin | | 1,041.3 |
| | 1,016.7 |
| | 968.0 |
| | 902.7 |
| | 882.3 |
| | 753.2 |
| | 790.6 |
| | 806.2 |
|
| Net income (loss) from continuing operations | | | 15.8 |
| | (59.4 | ) | | (75.2 | ) | | (24.2 | ) |
| Net income (loss) from continuing operations per common share: | | | | | | | | | |
| Basic | | | $ | 0.08 |
| | $ | (0.30 | ) | | $ | (0.38 | ) | | $ | (0.12 | ) |
| Diluted | | | $ | 0.08 |
| | $ | (0.30 | ) | | $ | (0.38 | ) | | $ | (0.12 | ) |
| | | | | | | | | | |
| Net income (loss) | | 13.8 |
| | 15.0 |
| | (22.6 | ) | | (18.1 | ) | | 33.2 |
| | (40.2 | ) | | (39.3 | ) | | 6.6 |
|
| Net income (loss) per common share: | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.07 |
| | $ | 0.08 |
| | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | 0.17 |
| | $ | (0.20 | ) | | $ | (0.20 | ) | | $ | 0.03 |
|
| Diluted | | $ | 0.07 |
| | $ | 0.08 |
| | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | 0.17 |
| | $ | (0.20 | ) | | $ | (0.20 | ) | | $ | 0.03 |
|
________
(a)For all periods presented, the maurices business has been classified as discontinued operations within the consolidated financial statements and has been excluded from the results of continuing operations shown herein.
(b)Fiscal 20172019 continuing operations includes AcquisitionRestructuring and integrationother related expenses of $12.0$7.9 million, $15.8$14.1 million, $3.8$7.1 million and $7.8$98.6 million in the first, second, third and fourth quarters, respectively. Fiscal 20162018 continuing operations includes AcquisitionRestructuring and integrationother related expenses of $42.5$22.0 million, $16.0$18.9 million, $8.4$18.0 million and $10.5$17.7 million in the first, second, third and fourth quarters, respectively.
(b) Fiscal 2017 includes Restructuring and other related expenses of $11.9 million, $20.2 million, $15.9 million and $33.9 million in the first, second, third and fourth quarters, respectively.
(c) In the third quarterand fourth quarters of Fiscal 2017,2019, the Company recorded non-cash impairment charges of $1,324.4$140.1 million and $270.8 million, respectively, related to goodwill and other intangible assets. Refer to Note 65 to the consolidated financial statements for additional information.
(d) The fourth quarter of Fiscal 2016 reflected a 14-week period for all the segments except the Premium Fashion segment. The fourth quarter of Fiscal 2016 for our Premium Fashion segment reflected a 13-week period as they followed the National Retail Federation calendar and, as a result, was on the same fiscal calendar as the Company's other segments at the end of Fiscal 2016. The inclusion of the 14th week in the fourth quarter of Fiscal 2016 resulted in incremental revenues of approximately $82 million at our segments other than the Premium Fashion segment.
| |
(e)
| The first quarter of Fiscal 2016 includes the post-acquisition results of our Premium Fashion segment,which was acquired on August 21, 2015. Our Premium Fashion segment's first, second and third quarters of Fiscal 2016 ended October 31, 2015, January 30, 2016 and April 30, 2016, respectively, whereas the first, second and third quarters of Fiscal 2016 for the Company's other segments ended October 24, 2015, January 23, 2016 and April 23, 2016, respectively. The effect of the one-week reporting period difference is not material. All segments of the Company are on the same fiscal calendar at the end of Fiscal 2016.
|
(f) The first and second quarter of Fiscal 2016 include a non-cash purchase accounting expense of approximately $104 million and $23 million, respectively, related to the amortization of the write-up of inventory to fair market value recorded at our Premium Fashion segment.
SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial information as of the dates and for the periods indicated.
The consolidated statement of operations data for each of the three fiscal years in the period ended July 29, 2017 have been derived from, and should be read in conjunction with, the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated statement of operations data for the fiscal years ended July 26, 2014 and July 27, 2013 have been derived from audited consolidated financial statements not included herein. The historical results are not necessarily indicative of the results to be expected in any future period.
The consolidated balance sheet data as of July 29, 2017 and July 30, 2016 have been derived from, and should be read in conjunction with, the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated balance sheet data as of July 25, 2015, July 26, 2014 and July 27, 2013 have been derived from audited consolidated financial statements not included herein.
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended(a) |
| | July 29, 2017 | | July 30, 2016 (b) | | July 25, 2015 (c) | | July 26, 2014 | | July 27, 2013 |
| | (millions, except for share data) |
| Statement of Operations Data: | |
| Net sales | $ | 6,649.8 |
| | $ | 6,995.4 |
| | $ | 4,802.9 |
| | $ | 4,790.6 |
| | $ | 4,714.9 |
|
| Acquisition and integration expenses | (39.4 | ) | | (77.4 | ) | | (31.7 | ) | | (34.0 | ) | | (34.6 | ) |
| Restructuring and other related charges | (81.9 | ) | | — |
| | — |
| | — |
| | — |
|
Impairment of goodwill (d) | (596.3 | ) | | — |
| | (261.7 | ) | | — |
| | — |
|
Impairment of intangible assets (d) | (728.1 | ) | | — |
| | (44.7 | ) | | (13.0 | ) | | — |
|
| Depreciation and amortization expense | (384.9 | ) | | (358.7 | ) | | (218.2 | ) | | (193.6 | ) | | (176.0 | ) |
| Operating (loss) income | (1,313.8 | ) | | 93.8 |
| | (234.9 | ) | | 210.8 |
| | 265.3 |
|
| Net (loss) income from continuing operations | (1,067.3 | ) | | (11.9 | ) | | (236.8 | ) | | 138.2 |
| | 155.2 |
|
| | | | | | | | | | |
| Net (loss) income from continuing operations per common share: | | | |
| | |
| | |
| | |
|
| Basic | $ | (5.48 | ) | | $ | (0.06 | ) | | $ | (1.46 | ) | | $ | 0.86 |
| | $ | 0.99 |
|
| Diluted | $ | (5.48 | ) | | $ | (0.06 | ) | | $ | (1.46 | ) | | $ | 0.84 |
| | $ | 0.95 |
|
| | | | | | | | | | |
| Balance sheet data: | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | $ | 325.6 |
| | $ | 371.8 |
| | $ | 240.6 |
| | $ | 156.9 |
| | $ | 186.4 |
|
| Working capital | 185.2 |
| | 226.3 |
| | 232.2 |
| | 291.7 |
| | 306.3 |
|
| Total assets | 3,871.5 |
| | 5,506.3 |
| | 2,906.2 |
| | 3,118.6 |
| | 2,865.2 |
|
| Total debt | 1,538.1 |
| | 1,648.5 |
| | 106.5 |
| | 166.8 |
| | 129.1 |
|
| Total equity | $ | 821.0 |
| | $ | 1,863.3 |
| | $ | 1,518.1 |
| | $ | 1,737.7 |
| | $ | 1,556.4 |
|
________
(a) Except for Fiscal 2016, all fiscal years presented consisted of 52 weeks. Fiscal 2016 consisted of 53 weeks, which resulted in incremental revenue of approximately $82 million excluding our Premium Fashion segment.
(b) Fiscal 2016 included the results of our Premium Fashion for the post-acquisition period from August 22, 2015 to July 30, 2016 and reflected of a non-cash purchase accounting expense of approximately $126.9 million related to the amortization of the write-up of inventory to fair market value recorded at our Premium Fashion segment.
(c) Includes the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits. Refer to Note 15 in the consolidatedaccompanying financial statements for additional information.
(d) Fiscal 2017 included non-cash impairments2018 continuing operations includes incremental revenues from the 53rd week of goodwill and other intangible assets by segment as follows: $428.9$24.6 million of goodwill and $566.3 million of other intangible assets at the Premium Fashion segment $107.2in the second quarter and $70.2 million of goodwill at the Value Fashion segment and $60.2 million of goodwill and $161.8 million of other intangible assets at the Plus Fashion, Kids Fashion segment. Fiscal 2015 included non-cash impairment charges of $261.7 million related toand Lane BryantValue Fashion 's goodwill and $44.7 million related to Lane Bryant's trade name. Fiscal 2014 included a non-cash impairment charge to write off the entire carrying value of the Studio Y trade name at maurices. Refer to Note 6segments in the consolidated financial statements for additional information.fourth quarter.
