UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
Amendment No. 1
(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 August 1, 2020
or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-39300
ASCENA RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 30-0641353 |
(State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | 30-0641353 (I.R.S. Employer Identification No.) |
| |
933 MacArthur Boulevard, | | |
| Mahwah, | New Jersey | | 07430 |
(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 class | Trading Symbol(s) | Name of each exchange on which registered |
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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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨
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 ☐ | ¨
| | Accelerated filer | ☐ |
Non-accelerated filer☒ | ý
| | Smaller reporting company | ý☒
|
| | | 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨
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 $39 million as of February 1, 2020, based on the last reported sales price on the Nasdaq Global Select Market on that date. As of December 8, 2020, 10,090,162 sharesshares of voting common shares were outstanding.
The registrant intends to file on Form 10-K/A an amendment to the Annual Report on Form 10-K, which will be incorporated by reference into Part III of the Annual Report on Form 10-K.
ASCENA RETAIL GROUP, INC.
FORM 10-K10-K/A
FISCAL YEAR ENDED AUGUST 1, 2020
TABLE OF CONTENTS
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| | | | Page |
| Explanatory Note | | | |
| | | | Page |
PART I | | | | |
| Item 1. | | Business | | |
| Part III. | Item 1A. | | Risk Factors | | |
| Item 10. | Item 1B. | Directors, Executive Officers and Corporate Governance | Unresolved Staff Comments | | |
| Item 11. | Item 2. | Executive Compensation | Properties | | |
| Item 12. | Item 3. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | Legal Proceedings | | |
PART IIItem 13. | | Certain Relationships and Related Transactions, and Director Independence | | |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | |
| Item 14. | Item 6. | Principal Accountant Fees and Services | Selected Financial Data | | |
| Part IV. | Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
| Item 15. | Item 7A. | Exhibits | Quantitative and Qualitative Disclosures About Market Risk | | |
| Signatures | 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 | | | | |
PART IV | | | | |
| Item 15. | | Exhibits, Financial Statement Schedules | | |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSExplanatory Note
ThisAscena Retail Group, Inc., which we refer to as “ascena,” the “Company,” “we,” “us,” “our” or other similar terms, and typically these references include our subsidiaries (unless the context indicates otherwise), is filing this Amendment No. 1 (the “Amendment” or “Form 10-K/A”) to its Annual Report on Form 10-K for the fiscal year ended August 1, 2020, filed with the Securities and Exchange Commission (the “SEC”) on December 11, 2020, for the sole purpose of including the section labeled Management’s Discussioninformation required by Items 10 through 14 of Part III of the Form 10-K, as permitted under General Instruction G(3) to Form 10-K. In connection with the filing of this Amendment and Analysispursuant to the rules of the SEC, we are including with this Amendment certain currently dated certifications of the Chief Executive Officer and Chief Financial Condition and ResultsOfficer.
We have not updated or amended the disclosures contained in the original Form 10-K to reflect events that have occurred since the filing of Operations, contains forward-looking statements thatthe original Form 10-K, or modified or updated those disclosures in any way other than as described in Part III of the Form 10-K. Accordingly, this Amendment should be read in conjunction with any other filings made with the consolidated financial statements, notesSEC subsequent to the consolidated financial statementsfiling of the Form 10-K on December 11, 2020.
On July 23, 2020 (the “Commencement Date”), the Company and certain of its domestic subsidiaries (collectively with the Company, the “Debtors”), commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 (“Chapter 11”) of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”). The Debtors are authorized to continue to operate their businesses and manage their properties as debtors in possession pursuant to the Bankruptcy Code and the risk factorsBankruptcy Court. Pursuant to the Federal Rules of Bankruptcy Procedure, the Debtors’ Chapter 11 Cases are being jointly administered for procedural purposes under the caption In re Ascena Retail Group, Inc., et al., Case No. 20-33113. Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at http://cases.primeclerk.com/ascena/.
See Note 2 - Filing Under Chapter 11 of the United States Bankruptcy Code in he Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended August 1, 2020 for further information on the Chapter 11 Cases.
On November 26, 2020, the Company, together with certain of its subsidiaries, entered into an asset purchase agreement (the “Sycamore APA”) with Premium Apparel LLC (the “Purchaser”), an affiliate of Sycamore Partners Management, L.P. Pursuant to the Sycamore APA, the Purchaser will acquire assets relating to the Company’s Ann Taylor, LOFT and Lane Bryant brands pursuant to Section 363 of the Bankruptcy Code for approximately $540.0 million, subject to certain customary purchase price adjustments as set forth in the Sycamore APA (the “Purchase Price”), as well as assume certain related liabilities. Under the Sycamore APA, the Purchaser has committed to offer to employ associates of the Company whose duties are primarily related to the Ann Taylor, LOFT and Lane Bryant brands or the Company’s corporate functions, in each case who meet certain conditions set forth therein. The consummation of the transactions contemplated by the Sycamore APA (the “Sycamore Sale”) is subject to specified closing conditions, including approval of the Bankruptcy Court.
In this Amendment, we refer to our fiscal year 2020 ended on August 1, 2020 and reflected a 52-week period (“Fiscal 2020”) and fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period (“Fiscal 2019”). All references to “Fiscal 2021” refer to our 52-week period that we have included elsewhere inwill end on July 31, 2021.
Forward-Looking Statements
Certain statements made within this report. TheseForm 10-K/A may constitute “forward-looking statements” within the meaning of, and are being made pursuant to, the “safe harbor” provisions, of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Forward-looking statements are statements related to future, not past, events, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “estimate,” “forecast,” “target,” “preliminary,” or “range,” although not all forward-looking statements contain these identifying words. Forward-looking statements are based only on ourthe current expectations, assumptions estimatesof ascena and projections about our businessits views of future events and our industry, and involvefinancial performance. They are subject to known and unknown risks and uncertainties, and other factorsmany of which are outside of the Company’s control that may cause ourthe Company’s actual results level of activity, performance or achievements to be materially different from planned or expected results. Those risks and uncertainties include, but are not limited to, risks associated with the coronavirus (“COVID-19”) pandemic (including any futureresurgence) and actions we have taken in response thereto; risks attendant to the bankruptcy process, including the Company’s ability to obtain approval from the Bankruptcy Court with respect to motions or other requests made to the Bankruptcy Court during the Chapter 11 Cases, including with respect to any proposed debtor-in-possession financing; the ability of the Company to negotiate, develop, confirm and consummate a plan of reorganization; the effects of the Chapter 11 Cases, including increased legal and other professional costs necessary to execute the Company’s reorganization, on the Company’s liquidity (including the availability of
operating capital during the pendency of the Chapter 11 Cases), results level of activity, performanceoperations or achievements expressedbusiness prospects; the length of time that the Company will operate under Chapter 11 protection; risks associated with third-party motions in the Chapter 11 Cases; conditions to which any debtor-in-possession financing is subject and the risk that these conditions may not be satisfied for various reasons, including for reasons outside the Company’s control; more stringent 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 optimistic,” costly payment terms and/or the negativedecision by a significant number of such termsvendors not to sell the Company merchandise on a timely basis or at all; the Company’s ability to attract, motivate and retain key executives and other similar expressions.
Our actual results may differ significantlypersonnel; risks arising from the results discussedCompany’s common stock being delisted from The Nasdaq Stock Market (“Nasdaq”); general economic conditions that adversely impact consumer spending; disruptions at ports used to import the Company’s products; increases in the forward-looking statements. Factors that might cause suchprice of raw materials, labor or energy and transportation costs; the Company’s ability to anticipate and respond to changing fashion trends and customer preferences in a difference include those discussed below under Item 1A. Risk Factors,timely manner; the Company’s ability to maintain its brand image; the impact of cost reduction initiatives; the Company’s ability to successfully achieve its business strategies; and other factors discussedchanges in thisU.S. trade policies and trade restrictions. Please refer to our Annual Report on Form 10-K for the fiscal year ended August 1, 2020 and other reports we filesubsequent filings with the Securities and Exchange Commission. We disclaim any intent or obligationCommission (the “SEC”), for a further discussion of risks and uncertainties. The Company does not undertake to publicly update or revise anyreview its forward-looking statements as a result of developments occurring after the period covered by this report.even if experience or future changes make it clear that our projected results expressed or implied will not be achieved.
Website Information
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”)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.,ascena, 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.Company securities by directors and executive officers, is also available at our website. The website is intended to provide textual references only.
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 2020 ended on August 1, 2020 and reflected a 52-week period (“Fiscal 2020”) and Fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period (“Fiscal 2019”). All references to “Fiscal 2021” refer to our 52-week period that will end on July 31, 2021.
PART IIII.
Item 1. Business.
General
The Company is a national specialty retailer of apparel for women and tween girls. The Company's operations consist of its direct channel operations and approximately 2,500 stores in the United States, Canada and Puerto Rico as of August 1, 2020. The Company had annual revenues for Fiscal 2020 of approximately $3.7 billion.
Recent Developments
In March of Fiscal 2020, the World Health Organization declared the coronavirus disease ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in restrictions and shutdowns implemented by national, state, and local authorities. In response to those shutdowns the Company took a number of steps, some of which included a temporary closure of our retail stores, which had a significant impact on our Net sales and liquidity in the second half of Fiscal 2020. Other steps were taken to mitigate at least a portion of the impact of the temporary store closures, such as temporary associate furloughs and temporary suspension of rent payments. However, given the Company's significant indebtedness, which primarily consisted of its Term Loan, and borrowings under the Amended Revolving Credit Agreement, as well as obligations related to its retail store leases, on July 23, 2020 (the “Petition Date”), the Company and certain of the Company’s direct and indirect subsidiaries commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United
States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”). The filing of the Chapter 11 Cases constitutes an event of default under the Company’s Term Loan and Amended Revolving Credit Agreement, resulting in the automatic and immediate acceleration of the outstanding obligations thereunder.
While operating as a debtor-in-possession pursuant to the Bankruptcy Code, we may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying consolidated financial statements. Further, a Chapter 11 plan of reorganization is likely to materially change the amounts and classifications of assets and liabilities reported in our audited financial statements. The outcome of the Chapter 11 Cases are subject to a high degree of uncertainty and are dependent upon factors that are outside of the Company’s control, including actions of the Bankruptcy Court and the Company’s creditors. There can be no assurance that the Company will confirm and consummate a plan of reorganization with respect to the Chapter 11 Cases. We expect that our equity holders could experience a complete loss on their investment, depending on the outcome of the Chapter 11 Cases. The terms of the restructuring support agreement contemplates that the Company’s common stock will be canceled. We caution that trading in our securities, including our common stock, during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. Trading prices for our common stock may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Chapter 11 Cases. For more detail on the Chapter 11 Cases, see Note 2 to the accompanying consolidated financial statements.
Brands and Products
The Company brands, described in more detail below, are organized into three reportable segments as follows: Premium Fashion, Plus Fashion and KidsFashion.
Premium Fashion
The Premium Fashion segment consists of the Ann Taylor and LOFT brands. See Note 24 to the accompanying consolidated financial statements for more information related to the pending sale of the Premium Fashion segment.
Ann Taylor includes 275 specialty retail and outlet stores and direct 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 features 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 619 specialty retail and outlet stores, direct 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.
Plus Fashion
The Plus Fashion segment consists of the Lane Bryant and Catherines brands.
Lane Bryant includes 637 specialty retail and outlet stores and direct 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 as well as accessories and select footwear. Lane Bryant retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers. See Note 24 to the accompanying consolidated financial statements for more information related to the pending sale of Lane Bryant.
Catherines includes 255 specialty retail stores and direct channel operations, offering a full range of plus sizes (16-34) and (0x-5x) and extended sizes (28-34 and 4x-5x). Catherines offers classic and fashionable apparel and accessories for women at moderate prices that includes casual apparel, wear-to-work apparel, intimate apparel and wide-width footwear. Catherines retail stores are concentrated in suburban and small towns and are primarily located in strip shopping centers. See Note 24 to the accompanying consolidated financial statements for more information related to the sale of the Catherines intellectual property assets.
Kids Fashion
The Kids Fashion segment, which consists of the Justice brand, includes 747 specialty retail and outlet stores, direct 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 a girl wants in her store - a mix of apparel, accessories, footwear, intimates and lifestyle products, such as cosmetics, to meet all of her needs. Justice retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers. See Note 24 to the accompanying consolidated financial statements for more information related to the sale of the Justice intellectual property and other Justice brand assets. This sale, the sale of Catherines intellectual property assets and the pending sale of the Premium Fashion segment and Lane Bryant are referred to as the “363 Sales.”
Discontinued operations
During the second quarter of Fiscal 2020, the Company completed its previously announced wind down of its Dressbarn brand. In addition, 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 operations of maurices, consisting of interests in Viking preferred and common stock. As a result of these actions, the results of both brands, which previously constituted the Value Fashion segment, are now reported in discontinued operations, which concluded the reporting of the Value Fashion segment.
The tables below present Net sales and Operating loss by operating segment for the last two fiscal years:
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| | | Fiscal 2020 | | Fiscal 2019 | | |
| Net sales: | | (millions) |
Premium Fashion | | $ | 1,852.6 | | | $ | 2,415.1 | | | |
| Plus Fashion | | 1,055.9 | | | 1,240.5 | | | |
| Kids Fashion | | 809.6 | | | 1,079.1 | | | |
| Total net sales | | $ | 3,718.1 | | | $ | 4,734.7 | | | |
| | | | | | | | | | | | | | | | |
| | | Fiscal 2020 | | Fiscal 2019 | | |
| Operating (loss) income: | | (millions) |
Premium Fashion | | $ | (280.9) | | | $ | 35.1 | | | |
| Plus Fashion | | (90.1) | | | (101.6) | | | |
| Kids Fashion | | (226.7) | | | (66.8) | | | |
| Unallocated restructuring and other related charges | | (238.3) | | | (94.1) | | | |
| Unallocated impairment of goodwill | | (148.9) | | | (276.0) | | | |
| Unallocated impairment of other intangible assets | | (128.7) | | | (134.9) | | | |
| | | | | | |
| Total operating loss | | $ | (1,113.6) | | | $ | (638.3) | | | |
Omni-channel
To support its omni-channel strategy, the Company's brands are consolidated into one shared distribution network and operate on a shared direct channel platform. The platform allows the brands to (i) provide customers a seamless omni-channel shopping experience in-store and online, (ii) integrate their marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance the capability to analyze transaction data to support strategic decisions. These efforts have increased the Company's e-commerce penetration from 22% in Fiscal 2016 to 47% in Fiscal 2020. Additionally, the Company operates distribution and fulfillment centers in Etna, Ohio, Greencastle, Indiana, and Riverside, California.
The Company's brands sell products online through social media and their direct channel sites:
•Ann Taylor – www.anntaylor.com and factory.anntaylor.com
•LOFT – www.LOFT.com, outlet.loft.com and www.louandgrey.com
•Lane Bryant– www.lanebryant.com
•Catherines– www.catherines.com
•Justice– www.shopjustice.com
Store Locations
The Company's stores are typically open seven days a week and most evenings. As of August 1, 2020, the Company operated approximately 2,500 stores in the United States, Canada and Puerto Rico. Ann Taylor and LOFT have stores in 42 and 48 states, respectively, as well as the District of Columbia, Canada and Puerto Rico. In addition, LOFT has five international franchise stores. Lane Bryant and Catherines have stores located in 47 and 43 states, respectively. Justice has stores in 46 states and Canada as well as 91 international franchise stores.
As of August 1, 2020, the Company's stores had a total of 12.7 million square feet consisting of Ann Taylor with 1.5 million square feet, LOFT with 3.6 million square feet, Lane Bryant with 3.5 million square feet, Catherines with 1.0 million square feet and Justice with 3.1 million square feet. All of the Company's store locations are leased. Some of the 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.
As a result of the Chapter 11 Cases and the 363 Sales, the number of store locations and square footage is expected to significantly decrease during Fiscal 2021.
Store Count by Brand
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| | | Fiscal 2020 |
| | | Ann Taylor | | LOFT | | Lane
Bryant | | Catherines | | Justice | | Dressbarn | | Total |
| Beginning of Period | | 293 | | | 669 | | | 721 | | | 320 | | | 826 | | | 616 | | | 3,445 | |
Stores reduced from Dressbarn wind down | | — | | | — | | | — | | | — | | | — | | | (616) | | | (616) | |
| Opened | | 1 | | | 1 | | | 1 | | | — | | | 2 | | | — | | | 5 | |
| Closed | | (19) | | | (51) | | | (85) | | | (65) | | | (81) | | | — | | | (301) | |
| End of Period | | 275 | | | 619 | | | 637 | | | 255 | | | 747 | | | — | | | 2,533 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal 2019 |
| | | Ann Taylor | | LOFT | | Lane
Bryant | | Catherines | | Justice | | Dressbarn | | maurices | | Total |
| Beginning of Period | | 304 | | | 672 | | | 749 | | | 348 | | | 847 | | | 730 | | | 972 | | | 4,622 | |
Store reduced from sale of maurices | | — | | | — | | | — | | | — | | | — | | | — | | | (972) | | | (972) | |
| Opened | | 1 | | | 6 | | | — | | | — | | | — | | | — | | | — | | | 7 | |
| Closed | | (12) | | | (9) | | | (28) | | | (28) | | | (21) | | | (114) | | | — | | | (212) | |
| End of Period | | 293 | | | 669 | | | 721 | | | 320 | | | 826 | | | 616 | | | — | | | 3,445 | |
In connection with the Company's efforts to right-size its cost structure, the Company continues to review its existing store portfolio which has resulted in rent concessions and closure of stores. The Company continues to renegotiate its store leases where possible and expects such negotiations to continue in connection with the Chapter 11 Cases. As a result of the Chapter 11 Cases, the number of stores is expected to significantly decrease during Fiscal 2021. See Note 2 to the accompanying consolidated financial statements for more information.
Trademarks
The Company has U.S. Trademark Registration Certificates and trademark applications pending for the operating names of the Company's stores and its major private label merchandise brands. The Company believes its trademarks such as ANN TAYLOR®, LOFT®, LOU & GREY®, JUSTICE®, LANE BRYANT®, CACIQUE®, CATHERINES®, and "&®" are essential to the continued success of its business. The Company intends to maintain its trademarks and related registrations and vigorously protect them against infringement.
International Operations
As of August 1, 2020, the Company operated stores across three brands in Canada (Justice (38), LOFT (7), and Ann Taylor (4)). Additionally, as of August 1, 2020, Justice and LOFT had 91 and five international franchise stores, respectively, operated under franchise agreements where we earn licensing revenue. International revenue from company-operated stores and franchised stores accounts for approximately 2% of consolidated annual net sales. As a result of the Chapter 11 Cases, the company closed all of its operated stores in Canada during the first quarter of Fiscal 2021 and expects to exit its international stores and franchises during Fiscal 2021.
Sourcing
Prior to Fiscal 2020, the Company's brands source their products through one of three channels - ascena's internal sourcing group, third-party buying agents, or directly from market vendors. During the first quarter of Fiscal 2020, the Company announced a reorganization of its sourcing operation in connection with its cost reduction initiatives. As a result of the reorganization, the Company closed and ceased regular business operations for the offices in South Korea, China and India effective November 1, 2019.
By the end of second quarter of Fiscal 2020, the Company also completed the transition of production from ascena’s internal sourcing group to an agent or direct vendor model and the internal sourcing group no longer provides sourcing activities for affiliated companies in the United States and Canada. The internal sourcing group continues to provide sourcing activities to certain non-affiliates. The Company continues to source through third-party buying agents or directly from market vendors. Factors affecting the selection of sourcing channels include cost, speed to market, merchandise selection, vendor capacity and fashion trends.
Merchandise Vendors
The Company purchases 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 purchases. The Company believes that it has good working relationships with its suppliers.
Merchandising and Design
The Company continues to focus on building its merchandising and design functions to align with its market position. 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, the Company has made substantial investments to acquire and retain merchandising and design talent allowing it to differentiate its fashion offerings, which it believes is a critical enabler for long-term success.
Office and Distribution Centers
For a detailed discussion of the Company's office and distribution centers, see Part I, Item 2 “Properties” in this Annual Report on Form 10-K, which information is incorporated by reference herein.
Information Technology Systems
The Company continues to make ongoing investments in its information technology systems to support its strategies in omni-channel, merchandise procurement, inventory management and supply 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
The 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, and other means of communication.
Customer Relationship Management
The 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 providing additional discounts and promotional offers. These programs provide opportunities to attract new customers, retain and enhance existing customer relationships, and deliver a more personalized shopping experience through a better understanding of our customers' preferences and shopping behaviors.
Community Service
ascena and its brands have a rich history of giving. Together, the Company has a shared commitment to our associates and the women and girls whom we serve. We support our associates through our ascenaCARES programs, which reflects our culture and the philanthropic efforts taking place within our organization. Through cause-marketing campaigns, our brands are committed to the communities in which we live and work. Whether through collective partnerships or individual brand outreach, we are committed to supporting women and girls to live confidently in their own unique ways. More information about our charitable giving, including the non-profit partners we support, is available at www.ascenaretail.com.
Competition
The retail apparel industry is highly competitive and increasingly fragmented. The 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 direct channel or omni-channel capabilities. Examples of our competitive set include but are not limited to Gap Inc., Amazon, Walmart, Macy’s, JCPenney, Target and TJX Companies. Other competitors may enter the markets we serve. If the Company fails to compete successfully, it could face continued sales declines and may need to offer greater discounts to our customers, which could result in decreased profitability. The Company is working aggressively to differentiate our brands and our assortments to reinforce the value proposition it delivers by focusing on our target customers and by offering up-to-date fashion, unique experiences, superior customer service and shopping convenience across our multiple sales channels.
Employees
As of August 1, 2020, the Company had approximately 35,000 employees, 26,000 of whom worked on a part-time basis. The Company typically adds temporary employees during peak selling periods, which vary throughout the year at each of its brands, and adjusts the hours they work to coincide with holiday shopping patterns. Additionally, none of the Company's employees are covered by any collective bargaining agreement, except for approximately 10 employees of Lane Bryant who are represented by unions. The Company believes that it has good working relations with its employees and unions.
As a result of the Chapter 11 Cases and the 363 Sales, the number of employees is expected to significantly decrease during Fiscal 2021.
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 price 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) Bankruptcy Specific Risks; (2) Macroeconomic and Industry Risks; (3) Operational 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. 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.
Bankruptcy Specific Risks
Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks.
We expect that our equity holders could experience a complete loss on their investment, depending on the outcome of the Chapter 11 Cases. The terms of the restructuring support agreement contemplates that the Company’s common stock will be canceled.We caution that trading in our securities, including our common stock, during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. Trading prices for our common stock may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Chapter 11 Cases. See Note 2 to the accompanying consolidated financial statements for more information on the restructuring support agreement and the Chapter 11 Cases.
We are subject to the risks and uncertainties associated with the Chapter 11 Cases.
On July 23, 2020, the Company and certain of its subsidiaries commenced the Chapter 11 Cases. For the duration of the Chapter 11 Cases, our operations and our ability to develop and execute our strategic business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with bankruptcy. These risks include the following:
•our ability to develop, confirm and consummate a Chapter 11 plan or alternative restructuring transaction;
•the high costs of bankruptcy proceedings and related fees;
•our ability to obtain court approval with respect to motions filed in connection with the Chapter 11 Cases from time to time;
•our ability to maintain our relationships with our landlords, suppliers, vendors, service providers, customers, employees and other third parties;
•our ability to maintain contracts that are critical to our operations;
•the ability of third parties to seek and obtain approval to terminate contracts and other agreements with us;
•the ability of third parties to seek and obtain court approval to terminate or shorten the exclusivity period for us to propose and confirm a Chapter 11 plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 Cases to a Chapter 7 proceeding; and
•the action and decisions of our creditors and other third parties who have interests in the Chapter 11 Cases that may be inconsistent with our strategic business plan.
Delays in our Chapter 11 Cases increase the risks of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.
These risks and uncertainties could affect our business and operations in various ways. For example, negative events associated with the Chapter 11 Cases could adversely affect our relationships with our landlords, suppliers, vendors, service providers, customers, employees, and other third parties, which in turn could adversely affect our operations and financial condition. Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact of events that will occur during the pendency of the Chapter 11 Cases that may be inconsistent with our strategic business plans.
Even if a Chapter 11 plan is consummated, we will continue to face a number of risks, including our ability to reduce expenses, implement any strategic initiatives and generally maintain favorable relationships with, and secure the confidence of, our counterparties. Further, due to the uncertainty around the scope and duration of the COVID-19 pandemic and the related disruption to our business and financial impacts, and because our plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed, or approved by the Bankruptcy Court, we cannot guarantee that the proposed financial restructuring will achieve our stated goals nor can we give any assurance of our ability to continue as a going concern.
Operating under Bankruptcy Court protection for an extended period of time may have an adverse effect on our business.
Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization. An extended period of operations under Bankruptcy Court protection could have a material adverse effect on business, operational results, financial position and cash flows. So long as the Chapter 11 Cases continue, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. In addition, the longer the Chapter 11 Cases continue, the more likely it is that our landlords, suppliers and customers will lose confidence in our ability to reorganize our business successfully and will seek to establish alternative commercial relationships.
Additionally, so long as the Chapter 11 Cases continue, we will be required to incur significant costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases. Although we believe that we will have sufficient liquidity to operate our business during the pendency of the Chapter 11 Cases, there can be no assurance that the cash made
available to us under the DIP Facilities (as defined in Item 7 herein) or otherwise in our restructuring process and revenue generated by our business operations will be sufficient to fund our operations. In the event that revenues and other available cash are not sufficient to meet our liquidity requirements, we may be required to seek additional financing, and there can be no assurance that such additional financing would be available or, if available, offered on terms that are acceptable. If we are unable to obtain such financing on favorable terms or at all, our chances of successfully reorganizing our business may be seriously jeopardized, and the likelihood that we instead will be required to liquidate our assets may be enhanced.
Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to a plan of reorganization. Even once a plan of reorganization is approved and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from bankruptcy.
We may not be able to obtain confirmation of a Chapter 11 plan of reorganization.
To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to a Chapter 11 plan of reorganization, solicit and obtain the requisite acceptances of such plan and fulfill other statutory conditions for confirmation of such plan, which have not occurred to date. The confirmation process is subject to numerous, unanticipated potential delays. If a Chapter 11 plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if anything, holders of claims against us would ultimately receive with respect to their claims.
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources, and in addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout the pendency of the Chapter 11 Cases.
Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) availability under the DIP Facilities and our ability to comply with their terms, conditions and covenants, (ii) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (iii) our ability to maintain adequate cash on hand, (iv) our ability to generate cash flow from operations, (v) our ability to develop, confirm and consummate a Chapter 11 plan or other alternative restructuring transaction, and (vi) the cost, duration and outcome of the Chapter 11 Cases. There is no certainty that we will be able to comply with the covenants of the DIP Facilities or that cash on hand and cash flow from operations will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 Cases until we are able to emerge from the Chapter 11 Cases.
Because of our financial condition, we will have heightened exposure to, and less ability to withstand, the operating risks that are customary in our industry, such as fluctuations in raw material prices and currency exchange rates. Any of these factors could result in the need for substantial additional funding. A number of other factors, including the Chapter 11 Cases, our recent financial results, our substantial indebtedness and the competitive environment we face, adversely affect the availability and terms of funding that might be available to us during bankruptcy. As such, we may not be able to source capital at rates acceptable to us, or at all, to fund our current operations. The inability to obtain necessary additional funding on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations.
As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
During the pendency of the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely to not be indicative of our financial performance after the date of the bankruptcy filing. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial condition and results of operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to July 23, 2020, would be subject to compromise and/or treatment under the plan of reorganization and/or discharged in accordance with the terms of the plan of reorganization. Any claims not ultimately discharged through the plan of reorganization could be asserted against the reorganized entities and may have a material adverse effect on business, operational results, financial position and cash flows on a post-reorganization basis.
The Chapter 11 Cases have and will continue to consume a substantial portion of the time and attention of our management and we may experience increased levels of employee attrition.
While the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focusing on the cases. This diversion of attention may have a material adverse effect on business, operational results, financial position and cash flows, particularly if the Chapter 11 Cases are protracted. Additionally, as a result of the Chapter 11 Cases, we may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incent key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team or material erosion of employee morale could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on business, financial position, cash flows and results of operations.
In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 Cases.
If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan or reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
Macroeconomic and Industry Risks
The COVID-19 pandemic has disrupted and is expected to continue to disrupt our business, which in turn could have a material adverse effect on our business, financial position, cash flow and results of operations for an extended period of time.
The COVID-19 pandemic has had, and continues to have, an unprecedented impact on the U.S. economy as federal, state and local governments react to, and manage, this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the significant impact of the pandemic on the economy, our customers, supply chain partners, associates and stores, and consumer sentiment in general. In response to the pandemic, which has materially adversely affected our near-term revenues, earnings, liquidity and cash flows, and resulting economic uncertainty, and in an effort to preserve capital, we have, among other measures, closed stores and furloughed associates, reduced base salaries, reduced advertising expenses and planned capital expenditures, extended vendor payment terms and withheld rent payments. We have also reduced merchandise inventory orders, which could impact product availability and sales in future periods due to both the operational issues associated with the reduced orders as well as the result of extended payment terms. In May 2020, we began the process of reopening our stores to the public in accordance with local, state and federal health and safety guidelines, and in June 2020, previous reductions in base salaries were restored.
The substantial majority of our retail stores have re-opened to the public, most with restricted operations. However, we are experiencing significantly reduced customer traffic relative to the same period last year, even with respect to our fully re-opened stores. As our stores re-open, new practices or protocols could impact our business and may continue and/or increase our operating costs, such as, for example, occupancy limitations. The Company continues to closely monitor changes in government guidelines, as well as any possible resurgence of the pandemic, and may have to as a result extend closures or restrict operations of our stores, corporate offices and distribution facilities. In addition, in some cases, we have had to close stores that had reopened. The extent to which the COVID-19 pandemic impacts our business, financial position, cash flows and
results of operations will depend on future developments, including, but not limited to, the duration, spread, severity, impact and possible resurgence of the COVID-19 pandemic, the effects of the pandemic on our customers, associates and vendors, and the regulatory response and the impact of stimulus measures adopted by local, state and federal governments, and to what extent normal economic and operating conditions can resume. As such, the impact of the COVID-19 pandemic to our business remain highly uncertain. Additionally, an extended period of remote working by the Company’s corporate employees could strain its technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. The COVID-19 pandemic, by materially reducing our near-term revenues, earnings, liquidity and cash flows, also magnifies many of the other risks to our business, operations, liquidity and financial condition.
Even after the COVID-19 pandemic subsides, we may continue to experience material adverse impacts to our business as a result of an economic recession or depression that has occurred or may occur in the future due to a continued erosion in consumer sentiment or the effect of high unemployment on our customer base. Furthermore, the financial condition of our customers may be adversely impacted, which may result in a decrease in discretionary consumer spending and our store traffic and sales. These events may, in turn, have a material adverse impact on our business, financial position, cash flows and results of operations.
Economic and political conditions and other factors beyond the Company’s control impacting consumer spending may adversely affect our business.
Our performance is subject to macroeconomic conditions that are beyond the Company’s control that could impact 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, unemployment and wage levels, increased taxation, credit availability, high consumer debt, higher fuel costs, energy and other prices, tax policies and changes in tax laws, increasing interest rates, severe or unseasonable weather conditions, natural disasters, public health concerns, including global pandemics, 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 as 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 position and cash flows.
Existing and increased competition and fundamental shifts in the women’s and 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 a large specialty retailer, 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, boutiques, and Internet 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 has 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 direct channel, where online-only businesses or those with robust direct channel capabilities can facilitate competitive entry and comparison shopping in our brands, have increased the difficulty of maintaining and gaining market share. 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, and other practices of the Company’s competitors could have a material adverse effect on our business, operational results, financial position and cash flows.
Extreme weather could have a material adverse impact on our business.
Frequent 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 cause a disruption in the shipment or receipt of our merchandise, and may influence customer trends, consumer traffic and shopping habits, which could negatively impact the Company's operational results. Extreme weather conditions in the areas in which the Company's stores are located could negatively affect the Company's business, operational results, financial position and cash flows.
Acts of terrorism, active shooter situations, political unrest, public health incidents, man-made and natural disasters or other catastrophes could have a material adverse effect on our business.
Acts of terrorism and other catastrophic events remain a significant threat to the global economy. Terrorism and potential military responses, active shooter situations, political unrest, natural disasters, global pandemics, including the COVID-19 pandemic 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, 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.
Disruptions at ports used to import our products could have a material adverse impact on our business.
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.
Increases in the price of raw materials, labor, energy, freight and trade relations could have a material adverse impact on our business.
Raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high or low demand for fabrics, labor conditions, trade wars and higher tariffs, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, economic inflation, market speculation and other 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, substantially increased uncertainty with respect to trade relations, such as the imposition of unilateral tariffs on imported products, could result in trade wars, higher barriers and tariffs, and higher product costs, which could have a material adverse effect on our business, operational results, financial position and cash flows.
Operational Risks
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 adversely affect our business and our image with our customers. Because the lead 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 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 would have an adverse effect on our business, operational results, financial position and cash flows.
Our business is dependent upon our ability to effectively manage our inventory levels.
Inventory is one of the largest assets on our balance sheet and represented approximately 14% of our total assets at August 1, 2020. Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels to meet our customers’ demands without allowing those levels to increase to such an extent that the costs to store and hold the goods unduly impact our financial results. If our buying decisions do not accurately predict customer trends or purchasing actions, we may have to take unanticipated markdowns to dispose of the excess inventory, which also can adversely impact our financial results. We have recorded significant inventory write-downs from time to time in the past and there can be no assurances that we will not record additional inventory charges in the future. We continue to focus on ways to reduce these risks, but we cannot assure that we will be successful in our inventory management. Failing to successfully manage our inventory balances could have a material effect on our business, operational results, financial position and cash flows.
Any divestitures, strategic investments, joint ventures or other transactions could fail to achieve strategic objectives and result in operating difficulties, liabilities and expenses.
We have undertaken, and may undertake in the future, divestitures, strategic investments or other transactions in connection with our comprehensive portfolio review. As part of the Chapter 11 Cases, we have divested the Catherines’ E-Commerce business and Justice’s intellectual property and other assets. We have also entered into an agreement to sell assets relating to the Company’s Ann Taylor, LOFT and Lane Bryant brands. In addition, our Company’s business model may include a certain level of joint venture and/or divestiture activities. We must be able to successfully manage the impacts of these activities, while at the same time deliver 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.
Our financial results could also be impacted in the event of 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 joint ventures, which could also have an impact on goodwill and intangible assets.
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, with our buy-online-pickup-in-store program 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 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.
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.
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. 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 trade credit protection services to our vendors concerning our liquidity and financial position, including discussions regarding pricing, payment terms
and ongoing business arrangements. Vendors may be less willing to conduct business with us on customary trade terms during the pendency of our Chapter 11 Cases and, in some instances could decline to do business with us altogether. Any adverse or prolonged change in our trade credit or access to merchandise for these or other reasons 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 public health concerns, including global pandemics, natural disasters, extreme weather 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%. In September 2019, the U.S. government implemented a 15% tariff on certain additional goods imported from China, and subsequently reduced that tariff rate to 7.5% in February 2020 as a result of the Phase One U.S.-China trade agreement. In October 2020, the U.S. government launched an investigation on Vietnam similar to the investigation on China. Based on the findings and potential actions taken by the administration at that time, certain goods from Vietnam could be subject to additional tariffs. The imposition of such tariffs, or any future tariffs, duties 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. If the current administration or a future administration increases or implements additional tariffs, 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 we are diligent in the execution of operational standards to maintain the level of confidentiality, availability, and integrity of our information technology systems, we realize that there are risks and that no assurances can be made that future disruptions, service outages/failures, or unauthorized access 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, our customers and our third-party service providers face an evolving threat landscape in which cybercriminals, among others, employ a complex array of cyber-attack 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. Additionally, the extended period of remote working by the Company’s corporate employees due to the COVID-19 pandemic could strain our technology resources and introduce heightened cybersecurity risk.Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. 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.
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 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. 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 1, 2020, we had approximately $298.8 million of goodwill and other intangible assets substantially related to the acquisitions of 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. As described in Note 7 to the accompanying consolidated financial statements included herein, in Fiscal 2020, we recorded impairment charges of $148.9 million and $128.7 million, respectively, related to goodwill and other intangible assets. Additionally, in Fiscal 2020, we recognized impairment charges of $399.0 million related to our store fixed assets, our right-of-use assets and other long-lived tangible assets. Incremental charges may result from additional store closures based on the Debtors' review or rejection of other leases and contracts, or due to changes in other factors or circumstances, including deterioration in the macroeconomic environment or in the retail industry, deterioration in our performance or our future projections as a result of the Chapter 11 Cases or otherwise, if actual results are not consistent with our estimates and assumptions used in the impairment analyses, or changes in our plans for one or more indefinite-lived intangible assets. The impairment analyses are particularly sensitive to changes in the projected revenue growth rate and the assumed weighted-average cost of capital or other discount rates. Changes to these key assumptions could result in revisions of management's estimates of the fair value of the indefinite-lived intangible assets, long-lived assets or right-of-use lease assets and could result in impairment charges in the future, which could be material to our results of operations and financial position.
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. 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 in the United States 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, other destination retailers, 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, even before the start of the COVID-19 pandemic, 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.
Legal and Regulatory Risks
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 2018 was 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 17 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 have analyzed each jurisdictions rules where guidance has been issued and are collecting tax accordingly based on the analysis. In the event jurisdictions issue further guidance and we determine we are required to collect taxes where we presently do not do so, or collect more taxes in a jurisdiction in which we currently do collect taxes, it is possible we would incur additional sales tax, penalties and interest. We believe the impact to the Company’s business, operational results, financial position and cash flows would be minimal.
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, operational results, financial position and 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 stockholder 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.
Our business involves the storage and/or transmission of customers’ personal information, shipping preferences and credit card information, as well as confidential information regarding our business, employees and third parties. In addition, as part of our acceptance of customers’ debit and credit cards as forms of payment, we are required to comply with the Payment Card Industry Data Security Standards (“PCI”).
Because we have access to, collect or maintain this information, the protection of this data is critical to our business. The regulatory environment pertaining to information security and privacy continues to evolve, and new laws afford additional rights to control how personal data is used. Once such law is the European Union’s General Data Protection Regulation (“GDPR”). Our failure to comply with the obligations of GDPR could in the future result in significant penalties which could have a material adverse impact on our business, operational results, financial position and cash flows. In addition, the State of California adopted the California Consumer Protection Act of 2018 (“CCPA”), which became effective in 2020 and regulates the collection and use of consumers’ data. Complying with GDPR, CCPA and similar U.S. federal and state laws, and other countries in which we operate could also cause us to incur substantial costs and 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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Retail Store Space
We lease space for all our retail store locations. Terms of our new store leases vary and may have an initial term of up to ten years, although certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied, 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, which provides us the opportunity to aggressively negotiate new lease terms while continuing to shorten our overall portfolio average lease life.
As disclosed above, we had 2,533 open stores as of August 1, 2020. Of that amount, 16 store leases had expired as of August 1, 2020 but remained open. The table below covers all open store locations with unexpired leases as of August 1, 2020 and shows 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 |
| 2021 | | 785 | | 123 | | 662 |
| 2022 | | 578 | | 160 | | 418 |
| 2023 | | 420 | | 159 | | 261 |
| 2024 | | 302 | | 108 | | 194 |
| 2025 | | 196 | | 78 | | 118 |
| 2026 and thereafter | | 235 | | 97 | | 138 |
| Total | | 2,516 | | 725 | | 1,791 |
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 lease payments under operating leases in effect at August 1, 2020 and excluding locations acquired after August 1, 2020, are approximately $351.8 million for Fiscal 2021. 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.
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 280,000 square foot campus which serves as the corporate office for the Justice brand, located in New Albany, Ohio;
•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 a portion of the Company's brand services 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 through the ANN Acquisition. The Company also primarily leases approximately 135,000 square feet in Columbus, Ohio that serves as Lane Bryant’s and Catherines corporate headquarters, although it is currently in the process of vacating that space in connection with the Chapter 11 Cases. The Company leases corporate office facilities of approximately 50,000 square feet in Mahwah, NJ, which were previously owned by the Company.
Internationally, the Company owns office space in China, and leases office space in Bangladesh. We are currently in the process of vacating the Bangladesh space in connection with the Chapter 11 Cases.
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 Etna facility also is used to fulfill direct channel orders.
In 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 and operates as a multichannel distribution facility.
Item 3. Legal Proceedings.
Information regarding legal proceedings is incorporated by reference from Note 18 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.
We expect that our equity holders could experience a complete loss on their investment, depending on the outcome of the Chapter 11 Cases. The terms of the restructuring support agreement contemplates that the Company’s common stock will be canceled.We caution that trading in our securities, including our common stock, during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. Trading prices for our common stock may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Chapter 11 Cases.
Market Prices of Common Stock
Prior to the commencement of the Chapter 11 Cases, the Company's common stock traded on the Nasdaq Global Select Market ("Nasdaq") under the ticker symbol "ASNA". On July 24, 2020, the Company received a letter from the Listing Qualifications Department staff of Nasdaq notifying the Company that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM5101-1, the staff of Nasdaq has determined that trading of the Company’s common stock would be suspended from the Nasdaq at the opening of business on August 4, 2020. The Company did not appeal the Nasdaq's determination and as a result, the Company's common stock began trading on the OTC Pink Marketplace on August 4, 2020.
Number of Holders of Record
As of December 8, 2020, we had approximately 1,047 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. Additionally, payments of dividends are limited by our borrowing arrangements as described in Note 12 to the accompanying consolidated financial statements.
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 August 1, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PeriodItem 10. | | 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 (May 3, 2020 – May 30, 2020) | | | — | | | $— | | | — | | | $181 million | |
Month # 2 (May 31, 2020 – July 4, 2020) | | | — | | | $— | | | — | | | $181 million | |
Month # 3 (July 5, 2020 – August 1, 2020) | | | — | | | $— | | | — | | | $181 million | Directors, Executive Officers and Corporate Governance |
(a) On December 15, 2015, the Company’s Board of Directors announced 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 businessOur current executive officers and market conditions. Currently, share repurchases in excess of $100 milliondirectors, and their ages and positions, are subject to certain restrictions under the terms of the Company's borrowing agreements, as more fully described in Note 12 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 2019 or Fiscal 2020.
Item 6. Selected Financial Data.
Not applicable.
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 2020 (“Fiscal 2020 10-K”). Fiscal year 2020 ended on August 1, 2020 and reflected a 52-week period ("Fiscal 2020"). Fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period ("Fiscal 2019"). All references to “Fiscal 2021” reflect a 52-week period that will end on July 31, 2021.
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 2020.
•Results of operations. This section provides an analysis of our operational results for Fiscal 2020 and Fiscal 2019.
•Financial condition and liquidity. This section provides an analysis of our cash flows for Fiscal 2020 and Fiscal 2019, as well as a discussion of our financial condition and liquidity as of August 1, 2020. The discussion of our financial condition and liquidity includes (i) our available financial capacity and (ii) a summary of our capital spending.
•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 4 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., a Delaware corporation, is a national specialty retailer of apparel for women and tween girls with annual revenue of approximately $3.7 billion for Fiscal 2020. We and our subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
Recent Developments
Voluntary Reorganization Under Chapter 11
On July 23, 2020 (the “Petition Date”), the Company and certain of its subsidiaries (collectively, the “Debtors”) commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (“the Bankruptcy Court”). The Company’s Chapter 11 Cases are being jointly administered under the caption In re: Ascena Retail Group, Inc., et al., Case No. 20-33113. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. Bankruptcy Court filings and other information related to the Chapter 11 Cases are available free of charge online at http://cases.primeclerk.com/ascena/.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
The Debtors have filed the Chapter 11 Cases to implement the terms of a Restructuring Support Agreement, dated July 23, 2020 (together with all exhibits and schedules thereto, the “RSA”), by and among the Company and certain of its subsidiaries (each, a “Company Party” and collectively, the “Company Parties”) and members of an ad hoc group of lenders (the “Consenting Stakeholders”) under the Term Credit Agreement, dated as of August 21, 2015 (as amended, restated, supplemented or otherwise modified from time to time, the “Prepetition Term Credit Agreement”), among the Company, AnnTaylor Retail, Inc., the lenders party thereto and Goldman Sachs Bank USA, as administrative agent. The RSA is supported by Consenting Stakeholders holding approximately 68% of the borrowings under the Prepetition Term Credit Agreement as of the Petition Date.
As part of the Chapter 11 Cases, the Company has divested the Catherines’ E-Commerce business and Justice’s intellectual property and other assets. The Company has also entered into an agreement to sell assets relating to the Company’s Ann Taylor, LOFT and Lane Bryant brands. See Note 24 to the accompanying consolidated financial statements.
For the duration of the Chapter 11 Cases, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Part I, Item 1A — “Risk Factors” of this Annual Report on Form 10-K. As a result of these risks and uncertainties, the amount and composition of the Company’s assets and liabilities could be significantly different following the outcome of the Chapter 11 Cases, and the description of the Company’s operations, properties and liquidity and capital resources included in this Annual Report on Form 10-K may not accurately reflect its operations, properties and liquidity and capital resources following emergence from the Chapter 11 Cases.
For more information regarding the Chapter 11 Cases, see Note 2 to the accompanying consolidated financial statements, and for information regarding our ability to continue as a going concern, see Note 1 to the accompanying consolidated financial statements.
COVID-19 Pandemic
As described elsewhere herein, the coronavirus disease ("COVID-19") has had far-reaching adverse impacts on many aspects of our operation, directly and indirectly, including our employees, consumer behavior, distribution and logistics, our suppliers, and the market overall. The scope and nature of these impacts have been rapidly changing and is expected to continue to be so in the near term. In light of the continued uncertain situation relating to COVID-19, we took a number of precautionary measures in the second half of Fiscal 2020 to manage our resources conservatively by reducing and/or deferring capital expenditures, inventory purchases and operating expenses to mitigate the adverse impact of COVID-19, which is intended to help minimize the risk to our Company, employees, customers, and the communities in which we operate. Such measures include the following:
•The temporary closure of our retail stores;
•The temporary furlough of a substantial portion of our workforce;
•Reductions in pay of ranging amounts for a substantial majority of those employees not placed on temporary furlough;
•Working with our landlords to minimize costs associated with closed retail stores;
•Drawing down $230 million under the Company’s revolving credit facility as a precautionary measure in order to increase its cash position and preserve financial flexibility; and
•Extended vendor payment terms on merchandise and non-merchandise purchases.
In addition to the effects described above, our supply chain has been affected by COVID-19. Certain of the Company’s vendors in Asia were temporarily closed for a portion of the third quarter of Fiscal 2020 as a result of COVID-19, however the vendors had resumed production by the end of the quarter. It is possible that if COVID-19 re-emerges in the countries where we obtain our goods, it could cause our vendors to cease production again. At the current time, we believe that we have sufficient inventory and supplies to support our demand in the near future.
Besides the lower store sales impact, COVID-19 also significantly impacted our margin rates and our long-term growth assumptions, which resulted in long-term asset impairments in the second half of Fiscal 2020, as described more fully in Notes 7 and 10 to the accompanying consolidated financial statements.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
In May 2020, the Company started to reopen its retail stores. As stores began to reopen, the Company also began to bring certain employees back from temporary furlough. Employees necessary to support the phased re-opening of the business were brought back first. In addition, in June 2020, the Company restored all employees who were not on temporary furlough back to their original pay rates.
Although each of the remedial measures discussed above were taken by the Company to protect the business and preserve liquidity, each may also have the potential to have a material adverse impact on our current business, financial condition and results of operations, and may create additional risks for our Company. While we started to reverse at least some of the temporary measures, we cannot predict the specific duration for which other precautionary measures will stay in effect, and we may elect or need to take additional measures, or reinstate previous measures, as the information available to us continues to develop, including with respect to our employees, distribution centers, relationships with our third-party vendors, and our customers.
As the Company reopened its retail stores, it did so in accordance with local government guidelines. As of the time of this filing, substantially all of our retail stores have re-opened to the public with restricted operations. However, the Company continues to closely monitor changes in government guidelines and of the outbreak itself. In certain cases, we have had to close stores that had re-opened. As a result, we continue to believe that COVID-19 will have a significant negative impact on our results of operations, financial position and cash flows through the first half of Fiscal 2021.
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 PlusFashion segment tends to experience higher sales during the Spring season, which include the Easter and Mother's Day holidays. Our Premium Fashion segment has relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix.
Summary of Financial Performance
Discontinued Operations
Dressbarn Wind Down
The Company completed the wind down of its Dressbarn brand during the second quarter of Fiscal 2020. All Dressbarn store locations were closed as of December 31, 2019. As a result, the Company's Dressbarn business has been classified as a component of discontinued operations within the audited consolidated financial statements for all periods presented, and when coupled with the sale of maurices discussed below, we no longer present results of the Value Fashion segment. The operating results of Dressbarn are excluded from the discussion below. In connection with the Dressbarn wind down, we have incurred cumulative costs of approximately $58 million, of which approximately $5 million was incurred during Fiscal 2020 and included in discontinued operations.
Sale of maurices
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 in May 2019, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices, consisting of interests in Viking preferred and common stock. As discussed in Note 3 to the accompanying consolidated financial statements, upon completion of the sale of maurices, the Company has classified
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
maurices as a component of discontinued operations within the audited consolidated financial statements for Fiscal 2019 and is also excluded from the discussion below.
Goodwill and Other Indefinite-lived Intangible Asset Impairment Charges
While overall performance during the second quarter of Fiscal 2020 was in line with management's expectations, lower than expected sales at our Justice brand, and lower than expected margins at our Ann Taylor brand, resulted in a conclusion that these factors represented impairment indicators which required the Company to test our goodwill and indefinite-lived intangible assets for impairment during the second quarter of Fiscal 2020. As a result of the assessment, we recognized goodwill impairment charges of $54.9 million and $8.5 million at the Ann Taylor and Justice reporting units, respectively, to write-down the carrying values of the reporting units to their fair values. In addition, we recorded non-cash impairment charges to write-down the carrying values of our other intangible assets of $46.9 million which substantially consisted of write-downs of our trade name intangible assets to their fair values at Ann Taylor and Justice by $10.0 million and $35.0 million, respectively.
Further, the impact of the retail store closures in response to COVID-19, along with the continued declines in the stock price and the fair value of our Term Loan debt, resulted in a conclusion that another triggering event occurred in the third quarter of Fiscal 2020, thereby requiring us to test our goodwill and intangible assets for impairment (the “April Interim Test”). The April Interim Test reflected revised long-range assumptions that were reflected in contemplation of the Chapter 11 Cases discussed above. Those assumptions included the wind down of the Catherines brand, and a significant reduction in the number of Justice retail stores, an overall reductions in the number of retail stores at the Company's other brands, and a significant reduction in the Company's workforce commensurate with the store reductions. As a result of the revised assumptions, we recognized goodwill impairment charges of $15.0 million and $70.5 million at the Ann Taylor and LOFT reporting units to write-down the carrying value of the reporting units to their fair value. In addition, we recorded non-cash impairment charges totaling $41.3 million to write-down the carrying values of our trade name intangible assets to their fair values as follows: $17.7 million at Ann Taylor, $7.8 million at LOFT, $7.8 million at Justice, $3.0 million at Catherines and $5.0 million of our Justice international franchise rights. These impairment charges are more fully described in Note 7 to the accompanying consolidated financial statements.
Finally, the commencement of the Chapter 11 Cases, discussed above, led the Company to conclude this represented further impairment indicators. As a result, the Company was required to test its goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of Fiscal 2020 (the “Year-End Test"). The cash flow projections underlying the Year-End Test reflected revised assumptions for Fiscal 2021 and Fiscal 2022 based on the current consumer demand, the continuation of the negative impacts of COVID-19 and the potential release of a vaccine during Fiscal 2021 with the expectation that the Company will be back in line with the original long-range projections for Fiscal 2023 and beyond. As of the third quarter of Fiscal 2020, only our LOFT brand had goodwill remaining and was tested for goodwill impairment in the fourth quarter. The Year-End Test indicated the fair value of the LOFT brand exceeded its carrying value and as a result no goodwill impairment charge was required in the fourth quarter. However, the Year-End Test resulted in the Company recognizing impairment charges to write-down the carrying values of its other intangible assets to their fair values as follows: $34.2 million on the LOFT trade name and $1.3 million on the Ann Taylor trade name. In addition, the Company impaired the remaining Justice international franchise rights of $5 million as the Company will no longer be supporting this business strategy.
Tangible Asset Impairment Charges
As a result of the revised projections utilized in the Company’s goodwill and intangible asset impairment testing described above, which reflect significant reductions in near-term cash flows of certain of our retail stores, as well as the planned store reductions discussed above, we recognized impairment charges of $196.8 million to write-down store-related fixed assets and right-of-use assets to their fair values. Impairment charges by segment reflected $115.3 million at the Premium Fashion segment, $25.2 million at the Plus Fashion segment, and $56.3 million at the Kids Fashion segment. In addition, a long-lived Corporate asset impairment charge of $12.9 million was recorded during the second half of Fiscal 2020 which reflects an $8.4 million write-down of the book value of the Company’s campus in Mahwah, NJ to fair market value recorded in the third quarter of Fiscal 2020 in connection with its planned sale and a long-lived asset impairment charge of $4.5 million was recorded in the fourth quarter of Fiscal 2020 relating to the Company's Duluth, MN building to reflect a write-down of the book value to fair market value. These impairment charges are more fully described in Note 10 to the accompanying consolidated financial statements.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Summary and Key Developments
Operating highlights for Fiscal 2020 are as follows:
•Sales decreased by 21.5%, reflecting decreases at all of our operating segments due primarily to the temporary retail store closures;
•Gross margin rate decreased by 530 basis points to 50.6% primarily due to markdown and promotional selling necessary to clear excess inventory that was unable to be sold after the temporary retail store closures;
•Operating loss of $1,113.6 million compared to $638.3 million for the year-ago period, resulting primarily from the lower Net sales and Gross margin decline, higher store-related asset-impairment charges, and higher restructuring and other related charges, which were offset in part by expense reductions, primarily reflecting the furlough of a significant portion of our workforce in response to COVID-19, the impact of our previously-announced cost reduction initiatives, and lower impairment of goodwill and other intangible assets; and
•Net loss from continuing operations per diluted share of $120.68 in Fiscal 2020, compared to $73.87 in Fiscal 2019.
Liquidity for Fiscal 2020 primarily reflected:
•Cash flows provided by operations was $131.6 million, compared to $21.1 million in the year-ago period;
•Cash flows used in investing activities for Fiscal 2020 was $39.5 million, consisting primarily of capital expenditures of $65.1 million, offset in part by $20.6 million received from the sale of our corporate building in Mahwah, New Jersey, compared to net cash provided by investing activities of $67.7 million in the year-ago period; and
•Cash flows provided by financing activities for Fiscal 2020 was $160.3 million, consisting primarily of the $230.0 million borrowed under the revolving credit facility during the third quarter, offset in part by the repurchased $79.5 million of outstanding term loan debt for $49.4 million and the term loan prepayment of $20.4 million compared to net cash provided by financing activities of $0.3 million in the year-ago period.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
RESULTS OF OPERATIONS
Fiscal 2020 Compared to Fiscal 2019
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | August 1,
2020 | | August 3,
2019 | | $ Change | | % Change |
| | | (millions, except per share data) | | |
| Net sales | | $ | 3,718.1 | | | $ | 4,734.7 | | | $ | (1,016.6) | | | (21.5) | % |
| | | | | | | | |
| Cost of goods sold | | (1,836.2) | | | (2,088.0) | | | 251.8 | | | 12.1 | % |
| Cost of goods sold as % of net sales | | 49.4 | % | | 44.1 | % | | | | |
| Gross margin | | 1,881.9 | | | 2,646.7 | | | (764.8) | | | (28.9) | % |
| Gross margin as % of net sales | | 50.6 | % | | 55.9 | % | | | | |
| Other operating expenses: | | | | | | | | |
| Buying, distribution and occupancy expenses | | (825.8) | | | (953.8) | | | 128.0 | | | 13.4 | % |
| Buying, distribution and occupancy expenses as % of net sales | | 22.2 | % | | 20.1 | % | | | | |
| Selling, general and administrative expenses | | (1,421.1) | | | (1,545.8) | | | 124.7 | | | 8.1 | % |
| SG&A expenses as % of net sales | | 38.2 | % | | 32.6 | % | | | | |
| Restructuring and other related charges | | (238.3) | | | (94.1) | | | (144.2) | | | NM |
| Impairment of goodwill | | (148.9) | | | (276.0) | | | 127.1 | | | 46.1 | % |
| Impairment of other intangible assets | | (128.7) | | | (134.9) | | | 6.2 | | | 4.6 | % |
| Depreciation and amortization expense | | (232.7) | | | (280.4) | | | 47.7 | | | 17.0 | % |
| Total other operating expenses | | (2,995.5) | | | (3,285.0) | | | 289.5 | | | 8.8 | % |
| Operating loss | | (1,113.6) | | | (638.3) | | | (475.3) | | | (74.5) | % |
| Operating loss as % of net sales | | (30.0) | % | | (13.5) | % | | | | |
| Interest expense | | (99.4) | | | (107.0) | | | 7.6 | | | 7.1 | % |
| Interest and other (expense) income, net | | (7.6) | | | 3.8 | | | (11.4) | | | NM |
| Gain on extinguishment of debt | | 28.5 | | | — | | | 28.5 | | | NM |
| Reorganization items, net | | (3.4) | | | — | | | (3.4) | | | NM |
| Loss from continuing operations before (provision) benefit for income taxes and income (loss) from equity method investment | | (1,195.5) | | | (741.5) | | | (454.0) | | | (61.2) | % |
| (Provision) benefit for income taxes from continuing operations | | (13.7) | | | 23.9 | | | (37.6) | | | NM |
Effective tax rate (a) | | (1.1) | % | | 3.2 | % | | | | |
| Income (loss) from equity method investment | | 3.1 | | | (11.8) | | | 14.9 | | | NM |
| Loss from continuing operations | | (1,206.1) | | | (729.4) | | | (476.7) | | | (65.4) | % |
| Discontinued operations | | | | | | | | |
Income from discontinued operations, net of taxes (b) | | 64.3 | | | 23.5 | | | 40.8 | | | NM |
Gain on disposal of discontinued operations, net of taxes (c) | | — | | | 44.5 | | | (44.5) | | | (100.0) | % |
| Net loss | | $ | (1,141.8) | | | $ | (661.4) | | | $ | (480.4) | | | (72.6) | % |
| | | | | | | | |
| Net loss per common share - basic: | | | | | | | | |
| Continuing operations | | $ | (120.68) | | | $ | (73.87) | | | $ | (46.81) | | | (63.4) | % |
| Discontinued operations | | 6.43 | | | 6.89 | | | (0.46) | | | (6.6) | % |
| Total net loss per basic common share | | $ | (114.25) | | | $ | (66.98) | | | $ | (47.27) | | | (70.6) | % |
| | | | | | | | |
| Net loss per common share - diluted: | | | | | | | | |
| Continuing operations | | $ | (120.68) | | | $ | (73.87) | | | $ | (46.81) | | | (63.4) | % |
| Discontinued operations | | 6.43 | | | 6.89 | | | (0.46) | | | (6.6) | % |
| Total net loss per diluted common share | | $ | (114.25) | | | $ | (66.98) | | | $ | (47.27) | | | (70.6) | % |
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
________
(a)Effective tax rate is calculated by dividing the (Provision) benefit for income taxes from continuing operations by the Loss from continuing operations before (provision) benefit for income taxes and income (loss) from equity method investment.
(b)Income from discontinued operations is presented net of income tax expense of $0.2 million and $31.2 million for the fiscal years ended August 1, 2020 and August 3, 2019, 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 $1,016.6 million, or 21.5%, to $3,718.1 million. Specifically, the total store and e-commerce revenue decreased by $974.1 million and other revenue decreased by $42.5 million compared to the prior year period. The decrease in Net sales was primarily driven by the temporary closure of our retail stores as a result of COVID-19 during the second half of Fiscal 2020.
Net sales data for our three operating segments is presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | August 1,
2020 | | August 3,
2019 | | $ Change | | % Change |
| | | (millions) | | | | |
| Net sales: | | | | | | | | |
| Premium Fashion | | $ | 1,852.6 | | | $ | 2,415.1 | | | $ | (562.5) | | | (23.3) | % |
| Plus Fashion | | 1,055.9 | | | 1,240.5 | | | (184.6) | | | (14.9) | % |
| Kids Fashion | | 809.6 | | | 1,079.1 | | | (269.5) | | | (25.0) | % |
| Total net sales | | $ | 3,718.1 | | | $ | 4,734.7 | | | $ | (1,016.6) | | | (21.5) | % |
| | | | | | | | |
Comparable sales (a) | | | | | | | | NM |
________
(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 typically report a single, consolidated comparable sales metric, inclusive of store and direct channels. In light of the store closures related to COVID-19, the Company has not disclosed comparable sales as the results are not considered meaningful.
Gross margin. Gross margin, in terms of dollars, was primarily lower as a result of a decline in sales and a decline in rate, which is discussed on a segment basis below. The gross margin rate 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 530 basis points from 55.9% for Fiscal 2019 to 50.6% for Fiscal 2020 resulting from lower margin at all three operating segments. Gross margin rate highlights on a segment basis are as follows:
•Premium Fashiongross margin rate performance declined to 51.5% for Fiscal 2020 from 56.5% for Fiscal 2019 primarily reflecting increased inventory reserves and promotional selling to clear excess inventory that was unable to be sold in the normal course due to the temporary closure of our retail stores as a result of COVID-19 during the second half of Fiscal 2020 and higher shipping costs related to increased direct channel penetration.
•Plus Fashiongross margin rate performance declined to 53.9% for Fiscal 2020 from 57.3% for Fiscal 2019 primarily reflecting inventory markdown reserves and increased promotional selling to clear excess inventory that was unable to be sold in the normal course due to the temporary closure of our retail stores as a result of COVID-19 during the second half of Fiscal 2020 and higher shipping costs related to increased direct channel penetration, offset in part by the improved product acceptance experienced during the first half of Fiscal 2020.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
•Kids Fashiongross marginrate performance declined to 44.3% for Fiscal 2020 from 53.0% for Fiscal 2019 primarily due to significant inventory markdown reserves and increased promotional selling to clear excess inventory that was unable to be sold in the normal course due to the temporary closure of our retail stores as a result of COVID-19 during the second half of Fiscal 2020. The gross margin decline also reflects increased markdowns in the first half of Fiscal 2020 resulting from lower store traffic.
Buying, distribution and occupancy ("BD&O") expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
BD&O expenses decreased by $128.0 million, or 13.4%, to $825.8 million in Fiscal 2020. The reduction in expenses was driven by the furlough in the second half of Fiscal 2020 of a significant portion of our workforce in response to COVID-19, lower occupancy expense and lower-employee related costs, both resulting from the continued impact of our previously announced cost reduction efforts, as well as amounts received under the transition services agreement with maurices as further discussed in Note 11 to the accompanying consolidated financial statements. BD&O expenses as a percentage of net sales increased to 22.2% in Fiscal 2020 from 20.1% 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 decreased by $124.7 million, or 8.1%, to $1,421.1 million in Fiscal 2020. The decrease in SG&A expenses was primarily due to the furlough in the second half of Fiscal 2020 of a significant portion of our workforce in response to COVID-19, the continuation of our previously announced cost reduction initiatives, mainly reflecting lower store related expenses and non-merchandise procurement savings, lower marketing expenses, and amounts received under the transition services agreement with maurices, as further discussed in Note 11 to the accompanying consolidated financial statements. These savings were offset in part by higher store-related impairment charges. SG&A expenses as a percentage of net sales increased to 38.2% in Fiscal 2020 from 32.6% in Fiscal 2019.
Depreciation and amortization expense decreased by $47.7 million, or 17.0%, to $232.7 million in Fiscal 2020. The decrease was across all of our operating segments and was driven by a lower level of store-related fixed-assets, offset in part by incremental depreciation from capital investments placed into service during Fiscal 2019.
Operating loss. Operating loss was $1,113.6 million for Fiscal 2020 compared to $638.3 million in Fiscal 2019 and is discussed on a segment basis below.
Operating results for our three operating segments are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | | |
| | | August 1,
2020 | | August 3,
2019 | | $ Change | | % Change |
| | | (millions) | | | | |
| Operating (loss) income: | | | | | | | | |
| Premium Fashion | | $ | (280.9) | | | $ | 35.1 | | | $ | (316.0) | | | NM |
| Plus Fashion | | (90.1) | | | (101.6) | | | 11.5 | | | 11.3 | % |
| Kids Fashion | | (226.7) | | | (66.8) | | | (159.9) | | | NM |
| Unallocated restructuring and other related charges | | (238.3) | | | (94.1) | | | (144.2) | | | NM |
| Unallocated impairment of goodwill | | (148.9) | | | (276.0) | | | 127.1 | | | 46.1 | % |
| Unallocated impairment of other intangible assets | | (128.7) | | | (134.9) | | | 6.2 | | | 4.6 | % |
| Total operating loss | | $ | (1,113.6) | | | $ | (638.3) | | | $ | (475.3) | | | (74.5) | % |
________
(NM) Not meaningful.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Premium Fashion operating results decreased by $316.0 million primarily driven by a decline in Net sales and a lower gross margin rate, as discussed above, offset in part by lower operating expenses. Operating expense reductions were primarily driven by the furlough in the second half of Fiscal 2020 of a significant portion of our workforce in response to COVID-19, lower expenses as a result of our continued cost reduction efforts, and lower depreciation expense. These expense reductions were offset in part by significantly higher store-related impairment charges.
Plus Fashion operating results improved by $11.5 million primarily due to lower operating expenses, which were mostly offset by declines in Net sales and a lower gross margin rate, as discussed above. Operating expense reductions were primarily driven by the furlough in the second half of Fiscal 2020 of a significant portion of our workforce in response to COVID-19 and lower expenses as a result of our continued cost reduction efforts.
Kids Fashion operating results decreased by $159.9 million primarily due to a decline in Net sales and a lower gross margin rate, as discussed above, offset in part by lower operating expenses. Operating expense reductions were primarily driven by the furlough in the second half of Fiscal 2020 of a significant portion of our workforce in response to COVID-19 and lower expenses as a result of our continued cost reduction efforts. These expense reductions were offset in part by significantly higher store-related impairment charges.
Unallocated restructuring and other related charges of $238.3 million primarily includes charges resulting from announcements and actions taken in connection with the Chapter 11 Cases and included $29.3 million of severance and other related charges, $19.3 million of professional fees, and $189.3 million of non-cash asset impairments primarily related to right-of-use lease assets associated with the stores identified to close as a result of the Chapter 11 Cases. The $94.1 million of unallocated restructuring and other related charges in Fiscal 2019 primarily included $33.1 million for professional fees incurred in connection with the identification and implementation of transformation initiatives, $16.1 million of severance and other related charges, reflecting severance associated with the cost reduction actions taken in the fourth quarter of Fiscal 2019, and $44.9 million of non-cash asset impairments, reflecting the write-down of the Mahwah, NJ corporate headquarters as a result of the Dressbarn 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.
Unallocated impairment of goodwill reflects the Fiscal 2020 write-down of the carrying values of the Ann Taylor, LOFT and Justice reporting units to their fair values as follows: $69.9 million at Ann Taylor, $70.5 million at LOFT, and $8.5 million at Justice. The $276.0 million in Fiscal 2019 reflects the write-down of the carrying values of the Lane Bryant, Catherines and Justice reporting units.
Unallocated impairment of other intangible assets reflects the Fiscal 2020 write-down of the Company's trade name intangible assets to their fair values as follows: $29.0 million of our Ann Taylor trade name, $42.0 million of our LOFT trade name, $42.8 million of our Justice trade name, $4.0 million of our Catherines trade name and $10.9 million of our Justice franchise rights. The $134.9 million in Fiscal 2019 reflects the write-down of the Company's 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, $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.
Interest expense decreased by $7.6 million to $99.4 million for Fiscal 2020, primarily due to a lower average outstanding term loan balance as a result of the second quarter debt repurchases and a lower interest rate on our variable-rate term loan during Fiscal 2020, partially offset by interest on our revolving borrowings drawn down during the third quarter of Fiscal 2020. There were no revolver borrowings outstanding during Fiscal 2019.
Gain on extinguishment of debt. In Fiscal 2020, the Company repurchased $79.5 million of outstanding principal balance of the term loan at an aggregate cost of $49.4 million through the open market transactions, resulting in a $28.5 million pre-tax gain, net of the proportional write-off of unamortized original discount and debt issuance costs of $1.6 million. There was no gain on extinguishment of debt in the year-ago period.
Reorganization items, net of $3.4 million during Fiscal 2020 represent the post-petition costs directly associated with the Chapter 11 Cases. These costs reflect professional fees incurred after the commencement of the Chapter 11 Cases. There were no Reorganization items, net in the year-ago period.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
(Provision) benefit for income taxes from continuing operations represents federal, foreign, state and local income taxes. We recorded a tax provision of $13.7 million in Fiscal 2020 on a pre-tax loss of $1,195.5 million, for an effective tax rate of (1.1)%, which was lower than the statutory tax rate as a result of non-deductible impairments of goodwill and changes in the valuation allowance on U.S. federal and state and foreign deferred tax assets. In Fiscal 2019, we recorded a tax benefit of $23.9 million on a pre-tax loss of $741.5 million for a 3.2% effective tax rate, which was lower than the statutory tax rate primarily due to non-deductible impairments of goodwill, a partial federal valuation allowance, and GILTI.
Loss from continuing operations increased by $476.7 million to $1,206.1 million in Fiscal 2020, primarily due to lower Net sales and Gross margin and higher impairments of our retail store assets, which were offset in part by the costs savings and lower impairments of goodwill and other intangible assets, which are discussed above.
Loss from continuing operations per diluted common share was $120.68 per share in Fiscal 2020 compared to $73.87 per share in the year-ago period, primarily as a result of an increase in the loss from continuing operations, as discussed above.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows
Fiscal 2020 Compared to Fiscal 2019
The table below summarizes our cash flows for the years presented as follows:
| | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | August 1,
2020 | | August 3,
2019 |
| | | (millions) |
| Cash flows provided by operating activities | | $ | 131.6 | | | $ | 21.1 | |
| Cash flows (used in) provided by investing activities | | (39.5) | | | 67.7 | |
| Cash flows provided by financing activities | | 160.3 | | | 0.3 | |
| Net increase in cash and cash equivalents | | $ | 252.4 | | | $ | 89.1 | |
Cash flows provided by operating activities. Net cash provided by operating activities was $131.6 million for Fiscal 2020, compared with cash provided by of $21.1 million during the year-ago period. The increase in cash flows provided by operating activities in Fiscal 2020 primarily reflected reduced inventory purchases and the extension of payment terms to vendors and landlords, offset in part by lower earnings before non-cash expenses as a result of lower sales and margin rates due to COVID-19.
Cash flows (used in) provided by investing activities. Net cash used in investing activities for Fiscal 2020 was $39.5 million, compared with cash provided by investing activities of $67.7 million for the year-ago period. Net cash used in investing activities in Fiscal 2020 consisted primarily of capital expenditures of $65.1 million, offset in part by $20.6 million received from the sale of our corporate building in Mahwah, New Jersey and $5.0 million received from the sale of intellectual property rights associated with the Dressbarn direct channel operations. Net cash provided by investing activities in the year-ago period was $67.7 million, consisted primarily of net proceeds from the sale of maurices of $203.2 million, offset in part by capital expenditures of $136.5 million.
Net cash provided by financing activities. Net cash provided by financing activities was $160.3 million during Fiscal 2020 and reflects proceeds from our revolving credit facility of $230.0 million offset by repurchases of our Term Loan debt of $69.8 million. Net cash provided by financing activities was $0.3 million during the year-ago period.
Capital Spending
With our continued focus on optimizing our capital resource allocation, especially in light of the impact of COVID-19, we significantly reduced our capital spending for Fiscal 2020. In Fiscal 2020, we had $65.1 million in capital expenditures, which included spending for capital investments in connection with our digital initiatives, infrastructure, and our retail store network.
Given the low level of capital spending in Fiscal 2020, the Company expects to increase spending relative to Fiscal 2020 and, as a result, expects capital spending for Fiscal 2021 to be in the range of $75-$100 million. Our capital requirements are expected to be funded primarily with available cash and cash equivalents, operating cash flows and, to the extent necessary, borrowings under the Company’s DIP Facilities, which is discussed below.
Liquidity
Our primary sources of liquidity are the cash flows generated from our operations, proceeds from the sale of assets, available cash and cash equivalents, and prior to the commencement of the Chapter 11 Cases on July 23, 2020, access to our Amended Revolving Credit Agreement and the Term Loan (both of which are defined below). Upon the commencement of the Chapter 11 Cases, the Company may not make borrowings under the Amended Revolving Credit Agreement. As of August 1, 2020, we had cash and cash equivalents of $580.4 million, approximately $32 million, or 6%, which was held overseas by our foreign
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
subsidiaries. Prior to the commencement of the Chapter 11 Cases, these sources of liquidity were used to fund our ongoing cash requirements, such as inventory purchases and other changes in working capital requirements, construction and renovation of stores, investment in technological and supply chain infrastructure, acquisitions, debt service, open market purchases of debt, stock repurchases, contingent liabilities (including uncertain tax positions) and other corporate activities. For a detailed description of the terms and restrictions under our amended and restated revolving credit agreement dated February 27, 2018 (the “Amended Revolving Credit Agreement”), and the $1.8 billion seven-year term loan (the “Term Loan”), see Note 12 to the accompanying consolidated financial statements.
As discussed elsewhere herein, COVID-19 has had a material adverse effect on our revenues, earnings, liquidity, and cash flows, and may continue to have a continued impact for the foreseeable future. As a result of the reduced cash flows, our ability to meet our future debt service obligations has been impacted by COVID-19. The Company projects that it will not have sufficient cash on hand or available liquidity to repay such debt. Accordingly, on July 23, 2020, the Company and certain of its subsidiaries commenced the Chapter 11 Cases. Following the commencement of the Chapter 11 Cases, the Company may not make borrowings under the Amended Revolving Credit Agreement.
Following the commencement of the Chapter 11 Cases, on September 16, 2020, the Company and AnnTaylor Retail, Inc., as borrowers, entered into a Senior Secured Super-Priority Debtor-in-Possession Term Credit Agreement (the “DIP Term Credit Agreement”) with the lenders party thereto and Alter Domus (US) LLC, as administrative agent. The DIP Term Credit Agreement provides for a term loan credit facility (the “DIP Term Facility”) that consists of (i) $150.0 million in new money term loans (the “New Money DIP Loans”) and (ii) $162.3 million of certain prepetition term loan obligations that have been rolled into the DIP Term Facility. The proceeds of the New Money DIP Loans may be used, among other things, to pay certain costs, fees and expenses related to the Chapter 11 Cases and to prepay or repay up to $50.0 million of borrowings under the Amended Revolving Credit Agreement, in all cases, subject to the terms of the DIP Term Credit Agreement.
Also on September 16, 2020, the Company and certain of its subsidiaries, as borrowers, and certain other subsidiaries of the Company, as guarantors, entered into a Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, which provides the Company with a superpriority senior secured debtor-in-possession asset based revolving credit facility of up to $400 million in the aggregate with a $200 million letter of credit sublimit (the “DIP ABL Facility” and together with the DIP Term Facility, the “DIP Facilities”). Pursuant to the DIP ABL Credit Agreement, the commitments and loans of the lenders party to the Amended Revolving Credit Agreement converted into the DIP ABL Facility.
Management currently believes that cash flows from operations at anticipated levels, and our existing sources of liquidity described above, including the New Money DIP Loans, will be sufficient to support our operating needs, costs savings initiatives, capital requirements, and our debt service requirements through the Chapter 11 Cases. However, for the duration of the Chapter 11 Cases, the Company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Part I, Item 1A — “Risk Factors” of this Annual Report on Form 10-K. As a result of these risks and uncertainties, the amount and composition of the Company’s assets and liabilities could be significantly different following the outcome of the Chapter 11 Cases, and the description of the Company’s operations, properties and liquidity and capital resources included in this Annual Report on Form 10-K may not accurately reflect its operations, properties and liquidity and capital resources following emergence from the Chapter 11 Cases.
For more information regarding the Chapter 11 Cases, the RSA and the DIP Facilities, see Note 2 to the accompanying consolidated financial statements, and for more information regarding the items causing substantial doubt about the Company’s ability to continue as a going concern, see Note 1 to the accompanying consolidated financial statements.
Debt
For a detailed description of the terms and restrictions under our amended and restated revolving credit agreement dated February 27, 2018 (the "Amended Revolving Credit Agreement") and the $1.8 billion seven-year term loan (the "Term Loan"), see Note 12 to the accompanying consolidated financial statements.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Amended Revolving Credit Agreement
Prior to the Chapter 11 Cases, under the Amended Revolving Credit Agreement, the maturity of the Company's revolving credit facility was 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 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, as described in more detail in Note 12 to the accompanying consolidated financial statements.
The commencement of the Chapter 11 Cases on July 23, 2020 constituted an event of default under the Amended Revolving Credit Agreement. Refer to Note 2 of the accompanying consolidated financial statements for additional information. The Company's obligations under the Amended Revolving Credit Agreement are secured and classified as Current portion of long-term debt in the accompanying consolidated balance sheet as of August 1, 2020.
Term Loan
In Fiscal 2018, we repaid a total of $225.0 million of Term Loan debt of which $180.0 million was applied to future quarterly scheduled payments such that we are not required to make our next quarterly payment of $22.5 million until November of calendar 2020.
During the second quarter of Fiscal 2020, the Company repurchased $79.5 million aggregate principal amount of its Term Loan debt in open market transactions. In the third quarter of Fiscal 2020, the Company performed an additional repurchase of $42.0 million of principal amount of debt, which has not yet been settled and the underlying debt remains outstanding in order to maintain maximum financial flexibility as a result of COVID-19. For more information, see Note 12 to the accompanying consolidated financial statements.
In July 2020, the Company used the cash proceeds from the sale of its corporate campus in Mahwah, New Jersey to make a prepayment of $20.4 million. On July 23, 2020, the Petition Date, the outstanding Term Loan balance was classified as Liabilities subject to compromise.
Common Stock Repurchase Program
There were no purchases of common stock during Fiscal 2020 and Fiscal 2019 under the repurchase program. For a complete description of our 2016 Stock Repurchase Program, see Note 19 to the accompanying consolidated financial statements.
We may from time to time repurchase shares under the repurchase program depending on our liquidity requirements and prevailing market conditions, subject to any restrictions under our debt agreements, among other factors.
CONTRACTUAL AND OTHER OBLIGATIONS
Off-Balance Sheet Arrangements
Our off-balance sheet commitments, which include outstanding letters of credit, amounted to approximately $99.8 million as of August 1, 2020. 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 our operational results, financial condition and cash flows.
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 our operational results and financial position and requires significant judgment and estimates on the part of management in its application. Our estimates
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
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. We believe that the following list represents the critical accounting policies as contemplated by FRR 60. For a discussion of all of our significant accounting policies, see Notes 4 and 5 to the accompanying consolidated financial statements.
Inventories
Retail Inventory Method
We hold inventory for sale through our retail stores and direct channel sites. Our Plus Fashion and Kids Fashion segments 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.
We continuously review 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. Our historical estimates of these costs and the markdown provisions have not differed materially from actual results.
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 net realizable value, 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.
To assist management in the process of determining goodwill impairment, we review and consider 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.
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). However, for the April 2020 Interim Test and the Year-end Test, we only used the income approach as the market approach was deemed unrepresentative due to the volatility and disruption in the global financial markets caused by COVID-19. The Company believes that the income approach is the most reliable indication of value as it captures forecasted revenues and earnings for the
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
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 assessment is performed at the reporting unit level. The Fiscal 2020 reporting units identified for the purpose of goodwill impairment assessment, after considering the economic aggregation criteria, were Ann Taylor, LOFT, Justice, Lane Bryant, and Catherines. During the second quarter of Fiscal 2020, the Company completed the wind down of the Dressbarn brand.
Fiscal 2020 Second Quarter Interim Impairment Assessment
The second quarter of Fiscal 2020 marked the continuation of the challenging market environment in which the Company competes. While the Company met its overall expectations for the second quarter, lower than expected comparable sales in the second quarter at the Justice brand, and lower than expected margins at our Ann Taylor brand, along with the expectation that such trends may continue into the second half of Fiscal 2020, led the Company to reduce its level of forecasted earnings for Fiscal 2020 and future periods. Since these brands had little or no excess of fair value over its book value at the beginning of Fiscal 2020, the Company concluded that these factors represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the second quarter of Fiscal 2020 (the "January Interim Test").
As a result of lower forecasted revenue assumptions over the projection period, the Company recognized a goodwill impairment charge of $63.4 million as follows: a goodwill impairment charge of $54.9 million at the Ann Taylor reporting unit and $8.5 million at the Justice reporting unit to write-down the carrying values of the reporting units (based on the revised carrying value after deducting the trade name impairments discussed below) to their fair values. In addition, the Company recognized an impairment loss of $46.9 million to write-down the carrying values of its other intangible assets as follows: $10.0 million of our Ann Taylor trade name, $35.0 million of our Justice trade name, $1.0 million of our Catherines trade name, and $0.9 million of our Justice franchise rights. 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).
Significant assumptions underlying the discounted cash flows included: a weighted average cost of capital ("WACC") of 25.5% for Ann Taylor and Justice which was determined from relevant market comparisons and adjusted for specific risks; operating income margin of low 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 WACC rate would increase/decrease the fair value by approximately $5 million at Ann Taylor and Justice. A hypothetical 1% change in the operating income percentages in all periods would increase/decrease the fair value by approximately $20 million at Ann Taylor and approximately $25 million at Justice. Finally, a hypothetical 1% change in the terminal growth rate would increase/decrease the fair value by approximately $2 million at Ann Taylor and Justice. Any changes in fair value resulting from changes in the assumptions discussed above would increase/decrease the impairment charges of the respective 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 Justice goodwill impairment and may have resulted in an increase/decrease in the goodwill impairment charge at Ann Taylor.
Fiscal 2020 Third Quarter Interim Impairment Assessment
The third quarter of Fiscal 2020 reflected a significant decline in the Company’s stock price and the fair value of our Term Loan debt due to the financial market uncertainty from COVID-19 which also resulted in the closure of our retail stores and led to a substantial decrease in our retail store revenue. The Company concluded that these factors represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the third quarter of Fiscal 2020.
As a result of lower forecasted revenue assumptions over the projection period, the Company recognized a goodwill impairment charge of $85.5 million as follows: $15.0 million at the Ann Taylor reporting unit and $70.5 million at the LOFT reporting unit to write down the carrying values of the reporting units (based on the revised carrying value after deducting the trade name impairments discussed below) to their fair values. In addition, the Company recognized impairment losses of $41.3 million to
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
write down the carrying values of its trade name intangible assets as follows: $17.7 million of our Ann Taylor trade name, $7.8 million of our LOFT trade name, $7.8 million of our Justice trade name, $3.0 million of our Catherines trade name and $5.0 million of our Justice franchise rights.
Significant assumptions underlying the discounted cash flows included: a weighted average cost of capital ("WACC") of 22.9% for Ann Taylor and 24.9% for LOFT which was determined from relevant market comparisons and adjusted for specific risks; operating income margin of low 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 WACC rate would increase/decrease the fair value by approximately $5 million at Ann Taylor and approximately $20 million at LOFT. A hypothetical 1% change in the operating income percentages in all periods would increase/decrease the fair value by approximately $30 million at Ann Taylor and approximately $70 million at LOFT. Finally, a hypothetical 1% change in the terminal growth rate would increase/decrease the fair value by approximately $3 million at Ann Taylor and approximately $10 million at LOFT. Any changes in fair value resulting from changes in the assumptions discussed above would increase/decrease the impairment charges of the respective trade name. However, since the Ann Taylor goodwill balances have been written down to zero, changes in the underlying assumptions discussed above would have only decreased the goodwill impairment charge at Ann Taylor and may have resulted in an increase or decrease in the goodwill impairment charge at LOFT.
Fiscal 2020 Year-End Impairment Assessment
On July 23, 2020, the Company and certain of the Company’s direct and indirect subsidiaries filed for Chapter 11 Cases with the United States Bankruptcy Court, discussed further in Note 2 to the accompanying consolidated financial statements, which led the Company to conclude this represented further impairment indicators. As a result, the Company was required to test its goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of Fiscal 2020 (the Year-End Test").
The Year-End Test was determined with the assistance of an independent valuation firm using the same methodologies as the April Interim Test. The cash flow projections underlying the Year-End Test reflected revenue assumptions for Fiscal 2021 and Fiscal 2022 based on the current consumer demand, the continuation of the negative impacts of COVID-19 and the potential release of a vaccine during Fiscal 2021 with the expectation that the Company will be back in line with the original long-range projections for Fiscal 2023 and beyond. The discount rate used for the LOFT brand in the Year-End Test was 25.5% which was a slight increase from 24.9% used in the April Interim Test. The Year-End Test indicated the fair value of the LOFT brand exceeded its carrying value by approximately 11% and as a result no goodwill impairment charge was required in the fourth quarter.
Based on the results of the Year-End Test, the Company recognized impairment charges to write-down the carrying value of its other intangible assets of their fair values as follows: $34.2 million on the LOFT trade name and $1.3 million on the Ann Taylor trade name. In addition, the Company impaired the remaining Justice franchise rights of $5 million as the Company will no longer be supporting this business strategy. Indefinite-lived intangible asset impairment charges have been disclosed separately in the accompanying consolidated statements of operations.
Other
If we continue to experience sustained periods of unexpected declines or shifts in consumer spending, it could adversely impact the long-term assumptions used in our Interim Tests and Year-End Test. Such trends may also have a negative impact on some of the other key assumptions used in impairment tests, including anticipated operating income margin as well as the weighted average cost of capital rate. These assumptions are highly judgmental and subject to change. 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 at the LOFT reporting unit. As an example, the impact of a hypothetical change in both of the significant assumptions is described below. A hypothetical 1% change in WACC rate would increase/decrease the LOFT fair value by approximately $20 million. A hypothetical 1% change in the operating income percentage in all periods would increase/decrease the fair value of LOFT by approximately $55 million. If that were to occur, the fair value of the LOFT reporting unit would be less than its carrying value and result in an impairment of goodwill.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)
Impairment of Long-Lived Assets
Property and equipment, along with other long-lived assets, such as right-of-use 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 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, we 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 2020 and Fiscal 2019, we recorded total non-cash impairment charges within continuing and discontinued operations of $319.3 million and $85.8 million, respectively, to reduce the net carrying value of certain long-lived tangible assets to their estimated fair value. Of these amounts, $109.6 million and $45.4 million in Fiscal 2020 and Fiscal 2019, respectively, are included within Restructuring and other related charges in the consolidated statements of operations. There have been no impairment losses recorded on our finite-lived intangible assets for any of the periods presented. See Notes 8 and 10 to the accompanying consolidated financial statements for a further 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. We 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. We have evaluated all evidence, both positive and negative, with currently available information to determine sources of taxable income that the Company can use in order to recognize its deferred tax assets. This includes taxable income in carryback years if permitted by tax law, future reversals of existing taxable temporary differences (i.e. deferred tax liabilities), tax planning strategies and future taxable income exclusive of taxable temporary differences (i.e. forecasted book income). The Company is in a cumulative loss position and has determined that it does not have sufficient taxable income, therefore, a valuation allowance has been recognized on a portion of our deferred tax asset. 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 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 5 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.
Not applicable.
Item 8. Financial Statements
The Consolidated Financial Statements of Ascena Retail Group, Inc. and subsidiaries are filed together with this 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 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 our 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 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 covered by this Annual Report on Form 10-K.
(c) Changes in Internal Control Over Financial Reporting.
Other than the internal control changes described below, there have been no other changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended August 1, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
As a result of the Chapter 11 Cases filed during the fourth quarter of Fiscal 2020, management implemented controls to ensure compliance with ASC 852, Reorganizations, and its impact on our financial statements and related disclosures. We have also implemented controls related to our payment processes with respect to pre-petition and post-petition payments resulting from the Chapter 11 Cases. The Company has appropriately considered and integrated these changes into our control design and related tests of operating effectiveness of internal controls over financial reporting as of August 1, 2020.
We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic, which began during the third quarter of Fiscal 2020. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
During the first quarter of Fiscal 2020, the Company modified certain existing internal controls and processes and implemented new internal controls and processes in connection with our adoption of the new lease accounting standard.
Item 9B. Other Information.
None.
PART III
The registrant intends to file on Form 10-K/A an amendment to the Annual Report on Form 10-K, which will be incorporated by reference into Part III of the Annual Report on Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The index to the financial statements and financial statement schedules are filed as a part of this report on page F-1 and incorporated by reference herein.
(b) List of Exhibits
The following exhibits are filed as part of this Report and except Exhibits 4.2, 10.13, 21, 23, 31.1, 31.2, 32.1 and 32.2 are all incorporated by reference from the sources shown.
| | | | | | | | |
Exhibit
Number | | Description |
| | Third 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 December 14, 2018. |
| | |
| | Second Amended and Restated By-Laws of Ascena Retail Group, Inc., adopted and effective October 3, 2018, are incorporated by reference to Exhibit 3.1 to the Form 8-K filed on October 9, 2018. |
| | |
| | Certificate of Amendment to the Third 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 December 19, 2019. |
| | |
| | Certificate of Designation of Series A Junior Participating Preferred Stock of Ascena Retail Group, Inc. is incorporated by reference to Exhibit 3.1 to the Form 8-K filed on May 26, 2020. |
| | |
| | Tax Benefits Preservation Plan, dated as of May 26, 2020, between Ascena Retail Group, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent is incorporated by reference to Exhibit 4.1 to the Form 8-K filed on May 26, 2020. |
| | |
| | Description of Securities Registered Under Section 12 of the Exchange Act, filed herewith. |
| | |
| | Interim Order (I) Approving Notification and Hearing Procedures for Certain Transfers of Common Stock, and (II) Granted Relief [Docket No. 80], is incorporated by reference to Exhibit 4.1 to the Form 8-K filed on July 28, 2020. |
| | |
| | Fifth Amendment and Restatement Agreement dated and effective as of 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 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, is incorporated by reference to Exhibit 10.9 to the Form 10-K filed on October 10, 2019. |
| | |
| | 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. |
| | |
| | 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. |
| | |
| | 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.* |
| | |
| | Ascena Retail Group, Inc., 2016 Omnibus Incentive Plan is incorporated by reference to Annex A to the Proxy Statement dated November 3, 2015.* |
| | |
| | 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, is 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 December 14, 2018.* |
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| | 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.* |
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Exhibit
Number | | Description |
| | 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.* |
| | |
| | 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.* |
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| | Employment Letter dated July 25, 2019 with Dan Lamadrid is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on July 25, 2019.* |
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| | Employment Letter dated November 6, 2019 with Justin MacFarlane, filed herewith.* |
| | |
| | Ascena Retail Group, Inc. Executive Severance Plan, amended and restated effective as of May 26, 2020, is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on May 28, 2020.* |
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| | Form of Retention and Clawback Agreement for NEOs is incorporated by reference to Exhibit 10.1 to the Form 8-K filed on June 22, 2020.* |
| | |
| | Form of Acceleration Agreement for NEOs is incorporated by reference to Exhibit 10.2 to the Form 8-K filed on June 22, 2020.* |
| | |
| | Restructuring Support Agreement, dated as of July 23, 2020, by and among Ascena Retail Group, Inc. and the Consenting Stakeholders party thereto is incorporated by reference to Exhibit 10.1 to the Form 8-K/A filed on July 23, 2020. |
| | |
| | Conditional Assignment Agreement, dated as of July 23, 2020, by and among AnnTaylor Loft GP Lux S.à.r.l., AnnTaylor Loft Borrower Lux SCS and Alter Domus (US) LLC is incorporated by reference to Exhibit 10.2 to the Form 8-K/A filed on July 23, 2020. |
| | |
| | Backstop Commitment Letter, dated as of July 23, 2020, by and between Ascena Retail Group, Inc. and the Backstop Commitment Parties thereto is incorporated by reference to Exhibit 10.3 to the Form 8-K/A filed on July 23, 2020. |
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| | Subsidiaries of the Registrant, filed herewith. |
| | |
| | Section 302 Certification of President and Chief Executive Officer, filed herewith. |
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| | Section 302 Certification of Chief Financial Officer, filed herewith. |
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| | Section 906 Certification of President and Chief Executive Officer, filed herewith.** |
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| | Section 906 Certification of Chief Financial Officer, filed herewith.** |
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| | |
101.INS | | Inline XBRL Instance Document |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)† |
_____________
*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.
† Interactive data files pursuant to Rule 405 of Regulation S-T.
(c) Financial 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: December 11, 2020 | | by | /s/ GARY MUTO |
| | | Gary 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.
| | | | | | | | | | | | | | |
SignatureName | | TitleAge | | DatePosition |
| | | | |
/s/ GARY MUTO | | | | |
| Gary Muto | | 61 | | Chief Executive Officer and Director (Principal Executive Officer) | | December 11, 2020 |
| Carrie W. Teffner | | 54 | | Interim Executive Chair of the Board |
/s/ DAN LAMADRID | | | | |
| Dan Lamadrid | | 46 | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | December 11, 2020 |
| Justin MacFarlane | | 48 | | |
/s/ KEVIN TROLARO | | | | |
Kevin Trolaro | | Executive Vice President and Chief AccountingCustomer Officer (Principal Accounting Officer) |
| Gary D. Begeman | | 62 | | Director |
| Kate Buggeln | | 59 | | Director |
| Paul Keglevic | | 66 | | Director |
| Kay Krill | | December 11, 202065 | | Director |
| Stacey Rauch | | 62 | | Director |
/s/ CARRIE W. TEFFNERCarl Rubin | | 61 | | Director |
Carrie W. Teffner | | Interim Executive Chair of the Board and Director | | December 11, 2020 |
| | | | |
/s/ GARY BEGEMAN | | | | |
Gary Begeman | | Director | | December 11, 2020 |
| | | | |
/s/ KATE BUGGELN | | | | |
Kate Buggeln | | Director | | December 11, 2020 |
| | | | |
/s/ PAUL KEGLEVIC | | | | |
Paul Keglevic | | Director | | December 11, 2020 |
| | | | |
/s/ KATHERINE L. KRILL | | | | |
Katherine L. Krill | | Director | | December 11, 2020 |
| | | | |
/s/ STACEY RAUCH | | | | |
Stacey Rauch | | Director | | December 11, 2020 |
| | | | |
/s/ CARL S. RUBIN | | | | |
Carl S. Rubin | | Director | | December 11, 2020 |
| | | | |
/s/ JOHN L. WELBORN, JR. | | | | |
| John L. Welborn, Jr. | | Director43 | | December 11, 2020Director |
| Linda Yaccarino | | 57 | | |
/s/ LINDA YACCARINO | | | | |
Linda Yaccarino | | Director | | December 11, 2020 |
Gary Muto serves as a director and our Chief Executive Officer (since 2019), and served as our President and CEO – ascena brands from August 2017 to May 2019. Mr. Muto joined ANN INC. (ascena retail group, inc.) in 2008 as President of LOFT. In 2013, he assumed responsibility for leading AnnTaylor, LOFT and Lou & Grey brands. During the period 1998 to 2007, Mr. Muto held several leadership roles at Gap, Inc., including President of Banana Republic and President of Gap brands. While at Gap, Inc., Mr. Muto also launched the specialty brand, Forth & Towne. The Company’s Board of Directors (the “Board”) selected Mr. Muto to serve as a director based on his extensive retail background.
ASCENA RETAIL GROUP,
Carrie W. Teffner serves as a director since October 2018 and as our Interim Executive Chair since May 2019. Ms. Teffner served as Executive Vice President Finance and Strategic Projects of Crocs, Inc. (“Crocs”) from August 2018 to April 2019, and served as Executive Vice President and Chief Financial Officer of Crocs from December 2015 to August 2018. Prior to joining Crocs, Ms. Teffner served as Executive Vice President and Chief Financial Officer of PetSmart, Inc. from 2013 to 2015 until it was sold to BC Partners, where she was responsible for finance and information technology. Ms. Teffner also served as Executive Vice President and Chief Financial Officer of Weber Stephen Products LLC from 2011 to 2013. From 2009 to 2011, Ms. Teffner served as Senior Vice President and Chief Financial Officer of The Timberland Company until it was sold to VF Corporation. Ms. Teffner spent the first 21 years of her career with Sara Lee Corporation where she held various domestic and international positions including divisional and segment Chief Financial Officer and Treasurer. Ms. Teffner also serves as a director and Audit Committee Chair for GameStop Corp. since August 2018. Ms. Teffner served as a director and the Audit Committee Chair for Banfield, The Pet Hospital, from 2014 to 2015, and as a director of Crocs for six months during 2015 prior to her appointment as its Executive Vice President and Chief Financial Officer. Ms. Teffner also served as a director of the nonprofit community revitalization organization, Rebuilding Together, from 2013 to 2019. The Board selected Ms. Teffner to serve as a Director based on her extensive strategic, financial and operational expertise and background in financial reporting and internal controls for large, publicly held product and retail companies.
Dan Lamadridis Executive Vice President and Chief Financial Officer of ascena retail group, inc., as of Fiscal 2020. He joined ascena in August 2017 as Senior Vice President, Finance and Chief Accounting Officer and was promoted to his current role in August, 2019. Dan came to ascena from the Vitamin Shoppe, Inc., where he served as Senior Vice President and as its Controller from 2011 and Chief Accounting Officer from 2012 to 2017. Prior to Vitamin Shoppe, he spent several years in a variety of financial leadership roles at Ralph Lauren, Hartz Corporation and Toys R Us. Dan began his career in public accounting. Dan earned a Masters of Business Administration from Iona College and a Bachelor of Science in Accounting from St. John’s University.
Justin MacFarlane serves as ascena’s Executive Vice President and Chief Customer Officer since December 2019.
Prior to joining ascena, Justin was the Chief Strategy, Analytics and Innovation Officer at Macy’s Inc., with responsibility for Macy’s strategic development, consumer and customer research, lease and foods, data analytics, innovation and development of future new business opportunities from February 2016 to March 2019. Justin was previously with ANN INC. as Senior Vice President for Corporate Strategy with responsibility for strategic planning, consumer insights and research, and execution of enterprise strategic initiatives from 2010 to 2016. Justin has served in a number of senior-level roles in leading consulting firms, including leadership roles in the global retail practices of AlixPartners and Kurt Salmon Associates.
(DEBTOR-IN-POSSESSION)
Gary D. Begeman has over 30 years of experience managing the legal support for a broad range of strategic, financing and commercial transactions for public and private companies.Mr. Begeman serves as our director since September 2019, and has served as an independent director on boards of directors of a number of privately owned companies including Nine Point Energy Holdings, Inc., Frontera Holdings, LLC, Intelsat Jackson Holdings, S.A., a Luxembourg société anonyme , SolAero Technologies Corp. Previously, Mr. Begeman served on the boards of directors of Toys “R” Us Property Company II, LLC and Sequa Corporation.He is also Chair and a director of the University of South Dakota Foundation.He was previously Executive Vice President, General Counsel and Secretary of NII Holdings, Inc., a publicly traded wireless telecommunications company operating in Latin America, from November 2006 to October 2015.From August 2003 to September 2006, Mr. Begeman was Senior Vice President and Deputy General Counsel at Sprint Corporation and before that, he was Vice President and Deputy General Counsel at Nextel Communications.Prior to that, Mr. Begeman was General Counsel at XO Communications, Inc., and was a Partner at the Jones Day law firm, focusing on capital formation and mergers and acquisitions. The Board selected Mr. Begeman to serve as a director based on his strong legal background and work with public and private companies.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
Kate Buggeln serves as a director since 2004 and was appointed as our Lead Independent Director on October 4, 2018. Currently, Ms. Buggeln serves as a member of the Board for publicly traded Five Below, Inc. She also is on the Board of Noble Biomaterials, Scoop Holdings (parent company of cabi) and the nonprofit Bpeace. Previously, Ms. Buggeln was a Senior Advisor with Irving Place Capital, L.P., and prior to that position was Senior Vice President of Strategy and Business Development for Coach, Inc., where she created and led strategies to enter new markets and new categories. Ms. Buggeln also spent many years as a retail consultant at LakeWest Group Ltd. and Coopers & Lybrand LLP, where she advised retail companies on business strategy, operations, e-commerce and supply chain. Previously, Ms. Buggeln served as a Director at Vitamin Shoppe, Stuart Weitzman and Timberland Co. The Board selected Ms. Buggeln to serve as a director based on her strong background in strategic planning, marketing and new business development. Committee Membership: Leadership and Corporate Governance Committee and the Compensation and Stock Incentive Committee.
Paul Keglevic serves as a director since September 2019 and has served on several boards of directors and related Committees with experience across multiple industries including retail. Mr. Keglevic currently serves on the boards of directors of Envision Health Care, Evergy, Inc., PetSmart, Inc., Bonanza Creek Energy Inc. and Intelsat Jackson Holdings, S.A., a Luxembourg sociétéanonyme. Previously, Mr. Keglevic served on the board of directors of Stellus Capital. Prior to his retirement in April 2018, Mr. Keglevic served as the Chief Executive Officer (2016 to 2018) and Chief Financial Officer (2008 to 2016) of Energy Future Holdings Corp. Prior to that, Mr. Keglevic was a partner at PricewaterhouseCoopers (���PWC“) and a member of their U.S. Leadership team, and a partner and member of the U.S. Leadership team for Arthur Andersen. The Board selected Mr. Keglevic to serve as a director based on his finance, merger and acquisition, transactional and governance experience.
Kay Krill served as Chief Executive Officer of ANN INC. (“ANN”), which was acquired by the Company on August 21, 2015, from 2005 through October 31, 2015, and was appointed to the Board of the Company. Prior to the acquisition, Ms. Krill served as President of ANN from 2004 through October 31, 2015, in addition to various other senior leadership roles at ANN. Ms. Krill also served as a member of the Board of Directors of ANN from 2004 until acquired by the Company. Prior to joining ANN, Ms. Krill held various management positions at several retailers including The Talbots, Inc. and Hartmarx Corporation. Ms. Krill is also on the Breast Cancer Research Foundation Board of Directors, and previously served on the Boards of the National Retail Federation and St. Luke’s School in New Canaan, CT. The Board selected Ms. Krill to serve as a director based on her experience as the chief executive officer and board member of a publicly held specialty retailer, and her extensive experience in the apparel industry.
Stacey Rauch serves as a director since June of 2017, and as the non-executive Chairman of the board of directors of Fiesta Restaurant Group, Inc. since February 2017, as a director of Fiesta Restaurant Group since 2012, Chair of Fiesta Restaurant Group’s Corporate Governance & Nominating Committee, and as a member of its Compensations Committee. Ms. Rauch is a Director (Senior Partner) Emeritus of McKinsey & Company (“McKinsey”) from which she retired in September 2010. Ms. Rauch was a leader in McKinsey’s Retail and Consumer Goods Practices, served as the head of the North American Retail and Apparel Practice, and acted as the Global Retail Practice Convener. A 24 year veteran of McKinsey, Ms. Rauch led engagements for a wide range of retailers, apparel wholesalers, and consumer goods manufacturers in the US and internationally. Her areas of expertise include strategy, organization, marketing, merchandising, omnichannel management, global expansion, and retail store operations. Ms. Rauch was a co-founder of McKinsey’s New Jersey office, and was the first woman at McKinsey appointed as an industry practice leader. Ms. Rauch also serves as a director of Heidrick & Struggles International, Inc., a global provider of executive search, leadership assessment and development services, where she sits on its Audit and Finance Committee, and as a non-executive director of Land Securities, PLC, the UK’s largest commercial property company, where she sits on its Audit, Nomination and Remuneration Committees. Previously, Ms. Rauch served on the board of directors of CEB, Inc., a leading member-based advisory company, ANN, and Tops Holding Corporation, the parent company of Tops Markets LLC, a US grocery retailer. The Board selected Ms. Rauch to serve as a director based on her extensive background in business strategy, marketing, merchandising and operations in the retail industry. Committee Membership: Chair of the Leadership and Corporate Governance Committee and member of the Audit Committee.
Carl Rubin serves as a director since December 2015, and as Chairman of the Board of The Michaels Companies, Inc. (“Michaels”) from 2015 to April 2019. He joined Michaels in 2013 and was its Chief Executive Officer from 2013 to February 2019. Prior to joining Michaels, from 2010 to 2013, Mr. Rubin was President and Chief Executive Officer of Ulta Salon, Cosmetics & Fragrances, Inc. Mr. Rubin held roles of increasing responsibility at Office Depot, serving as President beginning in 2006. Mr. Rubin spent six years in senior leadership roles, including Partner, at Accenture Consulting where he advised clients and led engagements across retail formats and ecommerce business. Mr. Rubin was a member of the Executive Committee of the Board of Directors of The National Retail Federation from 2007 to 2010.The Board selected Mr. Rubin to serve as a Director based on his extensive managerial and operational knowledge of the retail industry and his experience as a board member of a specialty retailer. Committee Membership: Chair of the Audit Committee and member of the Compensation and Stock Incentive Committee.
John L. Welborn, Jr. serves as a director since May 2018, and as Managing Director for Stadium Capital Management, LLC (“Stadium”), an investment advisory firm that focuses on smaller capitalized publicly traded companies in the U.S., Canada and Western Europe. In his role at Stadium, Mr. Welborn has led or supported Stadium’s due diligence across many different industries, including financial services, retail, software and business services. Mr. Welborn joined Stadium in 2000 as an Associate. Previously, Mr. Welborn served as a director and member of the governance committee for Intermountain Community Bancorp and a director of Panhandle State Bank, Inc., and as a board observer of West Coast Bancorp.The Board selected Mr. Welborn to serve as a director based on his strong background in capital markets and investment experience. Committee Membership: Leadership and Corporate Governance Committee and the Audit Committee.
Linda Yaccarino serves as a director since October 2016; and as Chairman, Advertising and Client Partnerships for NBCUniversal, LLC (“NBCUniversal”) since 2011. In this role Ms. Yaccarino oversees all market strategy and advertising revenue totaling nearly $10 billion, for NBCUniversal's entire portfolio of broadcast, cable and digital assets.Prior to joining NBCUniversal in 2011, she held roles of increasing responsibility from 1996 to 2011 at Turner Broadcast System, Inc. (“Turner”), serving as Executive Vice President and Chief Operating Officer, Turner Entertainment Advertising, Sales and Marketing, and Acquisitions beginning in 2009. The Board selected Ms. Yaccarino to serve as a director based on her extensive digital knowledge, multi-platform consumer engagement and transformation experience. Committee Membership: Chair of Compensation and Stock Incentive Committee and member of the Leadership and Corporate Governance Committee.
Board Composition
The Company’s Board is composed of ten directors, divided into three classes, each with a staggered three-year term of office and each class of directors as nearly equal in number as possible. Each director serves for three-year terms and until his or her successor is elected and qualified.
Board Committees
The Board has the authority to appoint committees to perform certain management and administration functions. Our Board has three standing committees: the Audit Committee, the Compensation and Stock Incentive Committee (the “Compensation Committee”), and the Leadership and Corporate Governance Committee (the “Governance Committee”).
Audit Committee
The members of the Audit Committee are Carl Rubin (Chair), Stacey Rauch, and John L. Welborn, Jr.
It is the responsibility of the Audit Committee to assist the Board in its oversight of our financial accounting and reporting practices. The duties of the Audit Committee include reviewing the quality and integrity of the financial statements, reports and other financial information provided by the Company to the public, the Company’s systems of internal controls regarding financial reporting, the internal audit function, the processes for monitoring enterprise risk, and the Company’s auditing, accounting and financial reporting processes generally. The Audit Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and it has direct access to our independent registered public accounting firm as well as our internal auditors. The Audit Committee has the ability to retain, at our expense, special legal, accounting or other consultants or experts it deems necessary in the performance of its duties. The Audit Committee also prepared the Audit Committee Report for inclusion in the proxy statement. The Board has determined that Mr. Rubin and Mr. Welborn qualify as “audit committee financial experts,” as defined in Item 407(d)(5) of Regulation S-K.
Compensation Committee
The members of the Compensation Committee are Linda Yaccarino (Chair), Carl Rubin, and Kate Buggeln.
The function of the Compensation Committee is to assist the Board by: (i) evaluating and determining all matters relating to the compensation (including base salary, incentive compensation and equity-based awards) of the CEO, Interim Executive Chair of the Board and our other executive officers (including the named executive officers and our former Chairman and CEO until his retirement) and certain other key executives and employees; (ii) administering and functioning as the committee that is authorized to grant stock options, restricted stock and/or restricted stock units and other equity-based and incentive awards to executive officers and such other key executives and employees as the Compensation Committee shall determine under our stock and cash incentive plans, including the Company’s 2016 Omnibus Incentive Plan, as amended (the “Omnibus Incentive Plan”) and as the committee authorized to grant awards under other incentive plans applicable to the executive officers of the Company as in effect from time to time; and (iii) reviewing and reporting to the Board on such other matters as may be appropriately delegated by the Board for the Compensation Committee’s consideration.
The Compensation Committee has sole authority to retain and obtain the advice of compensation consultants, outside legal counsel and other advisers, each referred to herein as an “Adviser,” to assist it with the execution of its duties and responsibilities. The Compensation Committee has the authority to set the compensation and other terms and conditions and oversee the work of the Advisers, to receive appropriate funding from the Company for the payment of compensation to the Advisers and to terminate the services of an Adviser. In selecting Advisers, the Compensation Committee will take into account factors it considers appropriate or as may be required by applicable law or regulation.
Governance Committee
The members of the Governance Committee are Stacey Rauch (Chair), Kate Bugglen, Linda Yaccarino, and John L. Welborn, Jr.
The function of the Governance Committee is to assist the Board by (i) identifying qualified individuals to become Board members, and recommending for selection by the Board the director nominees to stand for election at the next annual meeting of the Company’s stockholders, (ii) recommending the composition of the Board and its committees, (iii) reviewing and recommending changes to the Board, as may be required, with respect to the Company’s Corporate Governance Guidelines and the corporate governance policies and practices of the Company, (iv) leading the Board in its annual review of the Board’s performance, (v) reviewing the succession planning recommendations for certain of the Company’s senior officers, and (vi) advising the Board regarding diversity and inclusion matters.
The responsibilities and duties of the Governance Committee also include advising the Board with respect to the charters, structure and operations of the various committees of the Board and qualifications for membership thereon.
The Governance Committee utilizes a variety of methods for identifying and evaluating director candidates. Candidates may come to the attention of the Governance Committee through current directors, members of management, stockholders or other persons. From time to time, the Governance Committee may also engage a search firm to assist in identifying potential Board candidates. Once the Governance Committee has identified a prospective nominee, the Governance Committee evaluates the prospective nominee against the standards and qualifications set out in the Governance Committee’s charter and the Company’s Corporate Governance Guidelines, including the individual’s potential contributions in providing advice and guidance to the Board and management. The Governance Committee seeks to identify nominees who possess a wide range of experience, skills, areas of expertise, knowledge and business judgment. The Governance Committee evaluates all candidates for director, regardless of the person or firm recommending such candidate. In considering director nominees to stand for election or to fill any vacancy, the Governance Committee and the Board take into account, in addition to such other factors as they deem relevant, such factors as the desirability of selecting directors who are accomplished in their respective fields, with superior credentials and reputation, are believed to have (i) relevant expertise and experience upon the basis of which such person could offer advice and guidance to management and (ii) sufficient time available to devote to the affairs of the Company, are believed to be able to work with the other members of the Board, are believed to be able to represent the long-term interests of the Company’s stockholders as a whole, and are selected with a view to the Board being diverse and representing a range of backgrounds and experience. The Governance Committee and the Board also consider all applicable legal and regulatory requirements, as well as any requirements under the Company’s Third Amended and Restated Certificate of Incorporation, and by-laws that govern the composition of the Board as from time to time in effect.
The Board, with the advice and recommendation of the Governance Committee, determines the total number of directors and selects nominees with a view to maintaining a Board that is strong in its collective knowledge and has a diversity of not only skills and experience, but also diversity in gender, culture and geography. The Board and Governance Committee assess the effectiveness of the Company’s diversity policies by reviewing the nominees for director to determine if such nominees satisfy the Company’s then-current needs.
The Board, the Governance Committee and the Company are committed to diversity and inclusion and recognize the benefits diversity and inclusion can contribute to achieving the Company’s goals. Accordingly, the Governance Committee is responsible for advising the Board regarding diversity and inclusion matters in an effort to promote, foster and nurture a diverse and inclusive workforce, culture and provision of services at the Company.
Board Leadership Structure and Risk Oversight
The Company does not have a formal policy regarding the separation of our Chairman of the Board (“Chairman”) and Chief Executive Officer (“CEO”) positions. Currently, our Board’s leadership structure separates the positions, with Gary Muto serving as CEO and a member of the Board, and Carrie W. Teffner as Interim Executive Chair of the Board. We believe this leadership structure is appropriate as it permits Mr. Muto to focus his attention on managing the Company’s business and its strategic priorities, while Ms. Teffner leads the Board. Additionally, Ms. Buggeln serves as the Company’s Lead Independent Director.
It is management’s responsibility to manage risk, the Company’s risk management program and bring to the Board’s attention risks that are material to the Company. The Board exercises its oversight of the Company’s risks through regular reports to the Board from our CEO, our Interim Executive Chair of the Board and other members of senior management on areas of material risk, actions and strategies to mitigate those risks and the effectiveness of those actions and strategies. The
Board also administers its risk oversight function through its Audit and Compensation Committees. The Audit Committee oversees the management of the Company’s enterprise risk management program, and reviews with our director of compliance and other members of our senior management team the critical risks facing the Company, their relative magnitude and management’s actions to mitigate these risks.
Code of Ethics
The Company’s Code of Ethics for Senior Financial Officers is posted on the “investors” page of the Company’s website at www.ascenaretail.com, accessible through the “Corporate Governance” tab. This code of ethics complies with the requirements of the Sarbanes-Oxley Act of 2002 pertaining to codes of ethics for chief executives and senior financial and accounting officers. If we amend or waive a provision of our Code of Ethics for Senior Financial Officers that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, we will post such information at this location on our website.
| | | | | |
| Item 11. | Page |
| |
Consolidated Financial Statements: | |
Consolidated Balance Sheets | |
Consolidated Statements of Operations | |
Consolidated Statements of Comprehensive Loss | |
Consolidated Statements of Cash Flows | |
Consolidated Statements of Shareholders' (Deficit) Equity | |
Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm | Executive Compensation |
Introduction
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.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | | August 1,
2020 | | August 3,
2019 |
| | | (millions, except share data in thousands and per share data) |
| ASSETS |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 580.4 | | | $ | 323.8 | |
| Inventories | | 338.2 | | | 490.7 | |
| Prepaid expenses and other current assets | | 169.1 | | | 242.3 | |
| Current assets related to discontinued operations | | 3.5 | | | 98.2 | |
| Total current assets | | 1,091.2 | | | 1,155.0 | |
| Property and equipment, net | | 466.3 | | | 835.5 | |
| Operating lease right-of-use assets | | 378.4 | | | 0 | |
| Goodwill | | 164.6 | | | 313.5 | |
| Other intangible assets, net | | 134.2 | | | 276.6 | |
| Equity method investment | | 45.2 | | | 42.1 | |
| Other assets | | 54.2 | | | 65.6 | |
| Non-current assets related to discontinued operations | | 0 | | | 11.5 | |
| Total assets | | $ | 2,334.1 | | | $ | 2,699.8 | |
| LIABILITIES AND EQUITY |
| Current liabilities: | | | | |
| Accounts payable | | $ | 161.0 | | | $ | 316.1 | |
| Accrued expenses and other current liabilities | | 70.1 | | | 273.3 | |
| Deferred income | | 116.9 | | | 114.1 | |
| Current portion of lease liabilities | | 0.6 | | | 0 | |
| Current portion of long-term debt | | 227.9 | | | 0 | |
| Current liabilities related to discontinued operations | | 23.5 | | | 94.7 | |
| Total current liabilities | | 600.0 | | | 798.2 | |
| Long-term debt | | — | | | 1,338.6 | |
| Lease-related liabilities | | 0 | | | 204.6 | |
| | | | |
| Long-term lease liabilities | | 0.8 | | | 0 | |
| Other non-current liabilities | | 42.2 | | | 171.9 | |
| Non-current liabilities related to discontinued operations | | 5.9 | | | 35.5 | |
| Liabilities subject to compromise | | 2,679.4 | | | 0 | |
| Total liabilities | | 3,328.3 | | | 2,548.8 | |
| Commitments and contingencies (Note 18) | | | | |
| | | | |
| Shareholders' (deficit) equity: | | | | |
| Common stock, par value $0.01 per share; 10,087 and 9,925 shares issued and outstanding | | 0.1 | | | 0.1 | |
| Additional paid-in capital | | 1,106.9 | | | 1,102.5 | |
| Accumulated deficit | | (2,089.2) | | | (935.9) | |
| Accumulated other comprehensive loss | | (12.0) | | | (15.7) | |
| Total shareholders'(deficit) equity | | (994.2) | | | 151.0 | |
| Total liabilities and shareholders' (deficit) equity | | $ | 2,334.1 | | | $ | 2,699.8 | |
See accompanying notes.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | |
| | | August 1,
2020 | | August 3,
2019 | | |
| | | (millions, except share data in thousands and per share data) | | |
| Net sales | | $ | 3,718.1 | | | $ | 4,734.7 | | | |
| Cost of goods sold | | (1,836.2) | | | (2,088.0) | | | |
| Gross margin | | 1,881.9 | | | 2,646.7 | | | |
| | | | | | |
| Other operating expenses: | | | | | | |
| Buying, distribution and occupancy expenses | | (825.8) | | | (953.8) | | | |
| Selling, general and administrative expenses | | (1,421.1) | | | (1,545.8) | | | |
| Restructuring and other related charges | | (238.3) | | | (94.1) | | | |
| Impairment of goodwill | | (148.9) | | | (276.0) | | | |
| Impairment of other intangible assets | | (128.7) | | | (134.9) | | | |
| Depreciation and amortization expense | | (232.7) | | | (280.4) | | | |
| Total other operating expenses | | (2,995.5) | | | (3,285.0) | | | |
| Operating loss | | (1,113.6) | | | (638.3) | | | |
| | | | | | |
| Interest expense | | (99.4) | | | (107.0) | | | |
| Interest and other (expense) income, net | | (7.6) | | | 3.8 | | | |
| Gain on extinguishment of debt | | 28.5 | | | 0 | | | |
| Reorganization items, net | | (3.4) | | | 0 | | | |
| Loss from continuing operations before (provision) benefit for income taxes and income (loss) from equity method investment | | (1,195.5) | | | (741.5) | | | |
| (Provision) benefit for income taxes from continuing operations | | (13.7) | | | 23.9 | | | |
| Income (loss) from equity method investment | | 3.1 | | | (11.8) | | | |
| Loss from continuing operations | | (1,206.1) | | | (729.4) | | | |
| Discontinued operations | | | | | | |
Income from discontinued operations, net of taxes (a) | | 64.3 | | | 23.5 | | | |
Gain on disposal of discontinued operations, net of taxes (b) | | 0 | | | 44.5 | | | |
| Net loss | | $ | (1,141.8) | | | $ | (661.4) | | | |
| | | | | | |
| Net loss per common share - basic: | | | | | | |
| Continuing operations | | $ | (120.68) | | | $ | (73.87) | | | |
| Discontinued operations | | 6.43 | | | 6.89 | | | |
| Total net loss per basic common share | | $ | (114.25) | | | $ | (66.98) | | | |
| | | | | | |
| Net loss per common share - diluted: | | | | | | |
| Continuing operations | | $ | (120.68) | | | $ | (73.87) | | | |
| Discontinued operations | | 6.43 | | | 6.89 | | | |
| Total net loss per diluted common share | | $ | (114.25) | | | $ | (66.98) | | | |
| | | | | | |
| Weighted average common shares outstanding: | | | | | | |
| Basic | | 9,994 | | | 9,874 | | | |
| Diluted | | 9,994 | | | 9,874 | | | |
________
(a)Income from discontinued operations is presented net of income tax expense of $0.2 million and $31.2 million for the fiscal years ended August 1, 2020, and August 3, 2019, 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.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | | | | | | | | | | | | |
| | Fiscal Years Ended | | |
| | August 1,
2020 | | August 3,
2019 | | |
| | (millions) | | |
| Net loss | $ | (1,141.8) | | | $ | (661.4) | | | |
Other comprehensive (loss) income, net of tax: | | | | | |
| Reclassification of interest rate hedge deferred loss into earnings | 11.3 | | | 0 | | | |
| Deferred loss related to interest rate hedge | (5.0) | | | (5.0) | | | |
| Foreign currency translation adjustment | (2.6) | | | (0.5) | | | |
| Total other comprehensive (loss) income before reclassification | 3.7 | | | (5.5) | | | |
Reclassification adjustment for realized gain from foreign currency translation upon disposition of maurices | 0 | | | 2.7 | | | |
| Total comprehensive loss | $ | (1,138.1) | | | $ | (664.2) | | | |
See accompanying notes.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | |
| | Fiscal Years Ended | | |
| | August 1,
2020 | | August 3,
2019 | | |
| | (millions) | | |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (1,141.8) | | | $ | (661.4) | | | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization expense | 243.6 | | | 321.1 | | | |
| Deferred income tax provision (benefit) | 12.4 | | | (10.0) | | | |
| Deferred rent and other costs recognized under prior lease accounting standard | 0 | | | (35.7) | | | |
| Stock-based compensation expense | 4.3 | | | 11.5 | | | |
| Impairment of goodwill | 148.9 | | | 276.0 | | | |
| Impairment of other intangible assets | 128.7 | | | 134.9 | | | |
| Impairment tangible assets | 399.0 | | | 103.3 | | | |
| (Income) loss from equity method investment | (3.1) | | | 11.8 | | | |
| Non-cash interest expense | 10.2 | | | 9.9 | | | |
| Gain on extinguishment of debt | (28.5) | | | 0 | | | |
| Gain on sale of property and equipment | 0 | | | (0.3) | | | |
| Gain on sale of other intangible assets | (5.0) | | | 0 | | | |
Gain on sale of maurices | 0 | | | (44.5) | | | |
| Other non-cash income, net | (10.1) | | | (3.1) | | | |
| Changes in operating assets and liabilities: | | | | | |
| Inventories | 209.5 | | | (11.9) | | | |
| Accounts payable, accrued liabilities and income taxes payable | 121.0 | | | (93.1) | | | |
| Deferred income | 6.7 | | | 11.9 | | | |
| Lease-related liabilities | 0 | | | 11.7 | | | |
| Operating lease right-of-use assets and lease liabilities | (19.5) | | | 0 | | | |
| Other balance sheet changes, net | 55.3 | | | (11.0) | | | |
| Cash flows provided by operating activities | 131.6 | | | 21.1 | | | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Capital expenditures | (65.1) | | | (136.5) | | | |
| Proceeds from the sale of assets | 20.6 | | | 1.0 | | | |
| Proceeds from the sale of intangible assets | 5.0 | | | 0 | | | |
Proceeds from the sale of maurices, net | 0 | | | 203.2 | | | |
| Cash flows (used in) provided by investing activities | (39.5) | | | 67.7 | | | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Redemptions and repayments of term loan | (69.8) | | | 0 | | | |
| Proceeds from revolver borrowings | 230.0 | | | 28.1 | | | |
| Repayments of revolver borrowings | 0 | | | (28.1) | | | |
| | | | | |
| Proceeds from stock options exercised and employee stock purchases | 0.1 | | | 0.9 | | | |
| Tax payments related to share-based awards | 0 | | | (0.6) | | | |
| | | | | |
| Cash flows provided by financing activities | 160.3 | | | 0.3 | | | |
| | | | | |
| Net increase in cash, cash equivalents and restricted cash | 252.4 | | | 89.1 | | | |
| Cash, cash equivalents and restricted cash at beginning of year | 329.2 | | | 240.1 | | | |
| | | | | |
| Cash, cash equivalents and restricted cash at end of year | $ | 581.6 | | | $ | 329.2 | | | |
See accompanying notes.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders'
(Deficit) Equity |
| Shares | | Amount | | | | |
| (millions, except share data in thousands) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, August 4, 2018 | 9,817 | | | $ | 0.1 | | | $ | 1,090.1 | | | $ | (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 | 108 | | | — | | | 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 | 9,925 | | 0.1 | | | 1,102.5 | | | (935.9) | | | (15.7) | | | 151.0 | |
| Net loss | — | | | — | | | — | | | (1,141.8) | | | — | | | (1,141.8) | |
| Total other comprehensive income | — | | | — | | | — | | | — | | | 3.7 | | | 3.7 | |
| Shares issued and equity grants made pursuant to stock-based compensation plans | 162 | | | — | | | 4.4 | | | 0 | | | — | | | 4.4 | |
| Cumulative effect of change in accounting upon adoption of ASC Topic 842 | — | | | — | | | — | | | (11.5) | | | — | | | (11.5) | |
| Balance, August 1, 2020 | 10,087 | | $ | 0.1 | | | $ | 1,106.9 | | | $ | (2,089.2) | | | $ | (12.0) | | | $ | (994.2) | |
See accompanying notes.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Ascena Retail Group, Inc., a Delaware corporation, is a national specialty retailer of apparel for women and tween girls. The Company's continuing operations consist of its direct channel operations and approximately 2,500 stores throughout the United States, Canada and Puerto Rico. The Company had annual revenues for the fiscal year ended August 1, 2020 of approximately $3.7 billion. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
The Company operates its business in 3 reportable segments: Premium Fashion, PlusFashion, and Kids 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 direct 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 Plus Fashion segment consists of our Lane Bryant and Catherines brands; our Kids Fashion segment consists of our Justice brand. As further discussed in Note 3, at the beginning of the fourth quarter of Fiscal 2019, the Company announced the wind down of Dressbarn, which was completed in the second quarter of Fiscal 2020 and was formerly included in the Value Fashion segment.
The Company's brands included in the continuing operations had the following store counts as of August 1, 2020: Justice 747 stores; Lane Bryant 637 stores; LOFT 619 stores; Catherines 255 stores; and Ann Taylor 275 stores.
Liquidity
The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. As discussed in Note 12, the Company has significant indebtedness, primarily consisting of its Term Loan, borrowings under the Amended Revolving Credit Agreement (both of which are defined in Note 12), as well as obligations related to its retail store leases. As a result of the Company’s significant indebtedness, and the negative impacts sustained due to the worldwide COVID-19 pandemic, defined and discussed below, on July 23, 2020, the Company and certain of the Company’s direct and indirect subsidiaries commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”). For more information, refer to Note 2. As discussed in Note 2, the filing of the Chapter 11 Cases constitutes an event of default under the Company’s Term Loan and Amended Revolving Credit Agreement, resulting in the automatic and immediate acceleration of the outstanding obligations thereunder. The Company projects that it will not have sufficient cash on hand or available liquidity to repay such debt. These conditions and events raise substantial doubt as to the Company’s ability to continue as a going concern.
While operating as a debtor-in-possession pursuant to the Bankruptcy Code, we may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying consolidated financial statements. Further, a Chapter 11 plan of reorganization is likely to materially change the amounts and classifications of assets and liabilities reported in our Consolidated Balance Sheet as of August 1, 2020. The consolidated financial statements do not reflect any adjustments that might result from the outcome of the Chapter 11 Cases, which are subject to a high degree of uncertainty and are dependent upon factors that are outside of the Company’s control, including actions of the Bankruptcy Court and the Company’s creditors. There can be no assurance that the Company will confirm and consummate a plan of reorganization with respect to the Chapter 11 Cases. Our ability to continue as a going concern is dependent upon,This section describes, among other things, our ability to become profitable, maintain profitability and successfully implement our Chapter 11 plan of reorganization and/or any sale of our assets pursuant to Section 363 of the Bankruptcy Code. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
COVID-19
In MarchFiscal 2020 the World Health Organization declared the coronavirus disease ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. To date, COVID-19 has surfaced in nearly all regions around
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the world and resulted in restrictions and shutdowns implemented by national, state, and local authorities. In response to COVID-19, the Company took a number of steps, some of which included a temporary shutdown of our retail stores and numerous actions in an effort to enhance liquidity and financial flexibility. COVID-19 has had a number of significant impacts on our financial statements, which are discussed in more detail in the Notes to these consolidated financial statements as follows:
•The shutdown of our retail stores resulted in a significant reduction in Net sales in the second half of Fiscal 2020. As a result of the Net sales reduction and lower cash flows, the Company was required to revisit long-term cash flow assumptions and recorded impairments of goodwill, tangible and intangible assets in the third and fourth quarters of Fiscal 2020. Such impairments are further described in Notes 7, 8 and 10;
•Steps to enhance liquidity and financial flexibility included the draw-down of $230 million on our revolving credit facility, which is further discussed in Note 12;
•On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in the United States. The CARES Act is discussed in Note 17;
•Beginning in April 2020, we suspended rent payments under the leasesexecutive compensation for our temporarily closed retail stores. The impact of recent guidance issued by the Financial Accounting Standards Board's ("FASB") is discussed in Note 6; and
•The store closures resulted in unsold seasonal inventory which required the company to record significant inventory reserves, which are discussed in Note 9.
2. Voluntary Reorganization Under Chapter 11
Filing Under Chapter 11 of the United States Bankruptcy Code
Chapter 11 Cases and Effect of Automatic Stay
On July 23, 2020 (the “Petition Date”), the Company and certain of the Company’s direct and indirect subsidiaries (collectively with the Company, the “Debtors”) commenced the Chapter 11 Cases, which are being jointly administered under the caption In re Ascena Retail Group, Inc., et al., Case No. 20-33113. The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Debtors have filed with the Bankruptcy Court motions seeking, and the Bankruptcy Court has entered, a variety of “first day” motions seeking approval from the Bankruptcy Code for various forms of customary relief to allow the Company to meet necessary obligations and fulfill its duties during the restructuring process, including authority to continue payment of employee wages and benefits, honor certain customer and vendor commitments and otherwise manage its day-to-day operations in the ordinary course. In addition, the Debtors have received authority to use cash collateral of the lenders under the Amended Revolving Credit Agreement on an interim basis.
The commencement of the Chapter 11 Cases on the Petition Date constituted an event of default that accelerated the Debtors’ obligations under the Term Loan and Amended Revolving Credit Agreement (the “Debt Instruments”), each of which provide that as a result of the Chapter 11 Cases, the principal then outstanding, together with accrued interest thereon and all fees and other obligations accrued thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Term Loan or the Amended Revolving Credit Agreement are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect thereof are subject to the applicable provisions of the Bankruptcy Code. As a result, the Company’s obligations under the Term loan have been classified as Liabilities subject to compromise in the consolidated balance sheet as of August 1, 2020. The Amended Revolving Credit Agreement is a secured obligation and classified as Current portion of long-term debt in the accompanying consolidated balance sheet as of August 1, 2020.
Restructuring Support Agreement
The Debtors have filed the Chapter 11 Cases to implement the terms of a Restructuring Support Agreement, dated July 23, 2020 (together with all exhibits and schedules thereto, the “RSA”), which was entered into prior to the commencement of the Chapter 11 Cases by the Company and certain of its subsidiaries (each, a “Company Party” and collectively, the “Company Parties”) and members of an ad hoc group of lenders (the “Consenting Stakeholders”) under the Term Loan. The RSA is supported by Consenting Stakeholders holding approximately 68% of the Term Loan as of the Petition Date.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The RSA contemplates a restructuring process, to be implemented through voluntary cases under chapter 11 of the Bankruptcy Code, that is expected to significantly reduce the Debtors’ debt. Specifically, the RSA provided:
•the substantial equitization of the Term Loan;
•a fully backstopped capital injection of $150 million in new money financing pursuant to a backstop commitment letter (together with all exhibits and schedules thereto and as amended on September 9, 2020, the “Backstop Commitment Letter”) on the terms described in more detail below;
•each Consenting Stakeholder will receive (i) its pro rata share (based on such party’s holdings of loans under the First Out Exit Term Facility (as defined in the RSA)) of 44.9% of the equity in reorganized Ascena and (ii) its pro rata share (based on such party’s Backstop Percentage (as defined in the RSA)) of an amount of equity in reorganized Ascena equal to $7.5 million (the “Backstop Equity Premium”), in each case subject to dilution from the Management Incentive Plan (as defined in the RSA);
•all lenders under the Term Loan will receive their pro rata share of 55.1% of the equity in reorganized Ascena less the percentage of such equity distributed as the Backstop Equity Premium, subject to dilution from the Management Incentive Plan, and $88.2 million in new loans under the Last Out Exit Term Facility (as defined in the RSA);
•holders of general unsecured claims will receive their pro rata share of $500,000, provided that holders of general unsecured claims vote as a class to accept the Debtors’ Chapter 11 plan; and
•existing common equity in the Company will be canceled.
In connection with the Company’s entry into the Sycamore APA (as defined and described in Note 24), on November 26, 2020, the Company Parties and the Consenting Stakeholders entered into the Second Amended Restructuring Support Agreement (the “Amended RSA”). In addition to providing for the Consenting Stakeholders’ support of the Sycamore Sale (as defined and described in Note 24), the Amended RSA provides, among other things, that each Consenting Stakeholder and each lender party to the Term Loan will receive its pro rata share (based on its term loan holdings under the Term Loan) of cash pursuant to distributions in accordance with the schedule set forth in Section 6.01(p) of the Amended RSA (instead of equity in reorganized Ascena as previously contemplated in the RSA). The Amended RSA does not contemplate material changes to the treatment of any other stakeholders’ claims, including holders of general unsecured claims, and in particular, the Amended RSA continues to provide that the existing common equity in the Company be canceled.
The Amended RSA may be terminated by the Consenting Stakeholders upon the occurrence of certain events set forth therein, including the Bankruptcy Court not having confirmed the Debtors’ Chapter 11 plan by February 25, 2021 (rather than the date that is 110 days after the Petition Date as was provided in the RSA) and the Plan Effective Date not having occurred by March 11, 2021 (rather than the date that is 130 days after the Petition Date as was provided in the RSA). A Company Party may also terminate the RSA upon the occurrence of certain events set forth therein, including in the event the board of directors, board of managers or such similar governing body of any Company Party determines, after consulting with counsel, (i) that proceeding with any of the transactions described therein would be inconsistent with the exercise of its fiduciary duties or applicable law or (ii) in the exercise of its fiduciary duties, to pursue an Alternative Restructuring Proposal. Capitalized terms used but not otherwise defined in this paragraph have the meanings given to them in the Amended RSA.
As a condition to the Consenting Stakeholders entering into the RSA, AnnTaylor Loft GP Lux S.à r.l. and AnnTaylor Loft Borrower Lux SCS, each of which are wholly owned indirect subsidiaries of the Company (the “LuxCos”), entered into a Conditional Assignment Agreement, dated July 23, 2020 (the “Conditional Assignment Agreement”), with Alter Domus (US) LLC, in its capacity as incremental collateral agent (the “Agent”) on behalf of the Consenting Stakeholders and each of the other secured parties underindividuals whose compensation is set out in the Prepetition Term Credit Agreement. PursuantSummary Compensation Table below (such individuals hereinafter referred to the Conditional Assignment Agreement, upon the occurrence ofas our “named executive officers” or "NEOs"). As we qualify as a “Trigger Event,“smaller reporting company,” the LuxCoswe have agreedelected to irrevocably transfer to the Agent all of their respective personal property and other assets, including intellectual property, and trademark rights, and the Agent has agreed to grant Annco, Inc., an indirect subsidiarytake advantage of the Company, a license to continue to use such trademark rights. A “Trigger Event” under the Conditional Assignment Agreement includes the occurrence of any of the following: (i) any Company Party or either of the LuxCos failing to perform or observe certain provisions set forthscaled executive compensation disclosure requirements in the RSA, the Backstop Commitment Letter, the DIP Term Credit Agreement (as defined below) or the Conditional Assignment Agreement, which, in each case, is both adverse to the interests of the Consenting Stakeholders and remains uncured for ten business days after notice is provided to the Company Parties as set forth therein, (ii) a Consenting Stakeholder Termination Event (as defined in the RSA) and termination of the RSA in accordance with the terms thereof, (iii) an acceleration of the obligations arising under the DIP Term Credit Agreement in accordance with such agreement or (iv) a Change of Control (as defined in the Conditional Assignment Agreement).reporting Fiscal 2020 executive compensation.
Although the Company Parties intend to pursue the restructuring contemplated by the Amended RSA, there can be no assurance that the Company Parties will be successful in completing a restructuring or any other similar transaction on the terms set forth
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
in the Amended RSA or at all. In particular, the transactions contemplated by the Amended RSA are subject to approval by the Bankruptcy Court, among other conditions.
Debtors-in-Possession Financing
On July 23, 2020, prior to commencement of the Chapter 11 Cases and as contemplated by the RSA, the Company entered into the Backstop Commitment Letter with certain of the Company’s creditors and/or their affiliates (the “Backstop Parties”), which was amended and restated on September 9, 2020, pursuant to which the Backstop Parties committed to provide the Company with a superpriority senior secured debtor-in-possession term loan credit facility in an aggregate amount equal to approximately $312.3 million (the “DIP Term Facility”), on the terms and conditions set forth therein, including the approval of the Bankruptcy Court.
In addition, on August 14, 2020, the Company entered into a commitment letter (the “DIP ABL Commitment Letter”) with certain lenders (the “DIP ABL Lenders”) under the Amended Revolving Credit Agreement. Pursuant to the DIP ABL Commitment Letter, and on the terms and conditions set forth therein, including the approval of the Bankruptcy Court, the DIP ABL Lenders committed to provide the Company with a superpriority senior secured debtor-in-possession asset based revolving credit facility in an aggregate amount of up to $400 million (the “DIP ABL Facility” and, together with the DIP Term Facility, the “DIP Facilities”), pursuant to which the commitments and loans of the lenders party to the Amended Revolving Credit Agreement would convert into the DIP ABL Facility.
In connection with the Chapter 11 Cases, the Debtors filed a motion for approval of the DIP Facilities, Docket No. 18, and on September 10, 2020, the Bankruptcy Court approved such motion and entered an order approving the DIP Facilities and use of cash collateral on a final basis, Docket No. 587 (collectively, the “DIP Order”).
DIP Term Credit Agreement
In accordance with the DIP Order, on September 16, 2020, the Company and AnnTaylor Retail, Inc., as borrowers (collectively, the “DIP Term Borrowers”), entered into a Senior Secured Super-Priority Debtor-in-Possession Term Credit Agreement (the “DIP Term Credit Agreement”) with the lenders party thereto (the “DIP Term Lenders”) and Alter Domus (US) LLC, as administrative agent. Capitalized terms used but not otherwise defined in this “DIP Term Credit Agreement” section of this Note 2 have the meanings given to them in the DIP Term Credit Agreement. The DIP Term Borrowers’ obligations under the DIP Credit Agreement are secured by substantially all of the real and personal property of the DIP Term Borrowers and each subsidiary of the Company that are guarantors (collectively, the “DIP Term Loan Parties”), subject to certain exceptions.
The DIP Term Facility, which is governed by the DIP Term Credit Agreement, consistsCompensation Committee of (i) $150.0 million in new money term loans (the “New Money DIP Loans”) and (ii) $162.3 million of certain prepetition term loan obligations that have been rolled into the DIP Term Facility. The proceeds of the New Money DIP Loans may be used, among other things, to pay certain costs, fees and expenses related to the Chapter 11 Cases and to prepay or repay up to $50.0 million of borrowings under the ABL Credit Agreement, in all cases, subject to the terms of the DIP Term Credit Agreement.
The maturity date of the DIP Term Facility is the date that is the earliest of (i) six months after the Effective Date, (ii) the date of the substantial consummation (as defined in section 1101(2) of the Bankruptcy Code) of an Acceptable Plan, (iii) the date the Bankruptcy Court converts any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, (iv) the date the Bankruptcy Court dismisses any of the Chapter 11 Cases, (v) the date on which the DIP Term Loan Parties consummate a sale of all or substantially all of the assets of the DIP Term Loan Parties pursuant to section 363 of the Bankruptcy Code or otherwise, and (vi) such earlier date on which the loans made under the DIP Term Credit Agreement become due and payable by acceleration or otherwise in accordance with the terms of the DIP Term Credit Agreement and the other Loan Documents. The DIP Term Facility is expected to be terminated in connection with the consummation of the Sycamore Sale.
Loans under the DIP Term Facility bear interest at a rate per annum equal to (i) in the case of a base rate loan, the base rate (which is subject to a floor of 2.00%) plus 10.75% or (ii) in the case of a Eurodollar rate loan, the adjusted London interbank offering rate (which is subject to a floor of 1.00%) plus 11.75%. Upon the occurrence and during the continuance of an event of default under the DIP Term Facility, the Company will be subject to a default rate of interest equal to 2.00% above the rate otherwise applicable.
The DIP Term Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the DIP Term Borrowers’ and their restricted subsidiaries’ ability to, among other things, incur
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
additional indebtedness, create liens on assets, make investments, loans, advances or guarantees, engage in mergers, consolidations, sales of assets and acquisitions and pay dividends and distributions, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP Term Credit Agreement also includes representations and warranties, mandatory prepayments, affirmative covenants and events of default customary for financings of this type. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, the appointment of a trustee pursuant to chapter 11 of the Bankruptcy Code, and certain other events related to the impairment of the DIP Term Lenders’ rights or liens granted under the DIP Term Credit Agreement.
DIP ABL Credit Agreement
In accordance with the DIP Order, on September 16, 2020, the Company and certain of its subsidiaries, as borrowers (collectively, the “DIP ABL Borrowing Parties”), and certain other subsidiaries of the Company, as guarantors (together with the DIP ABL Borrowing Parties, the “DIP ABL Loan Parties”), entered into a Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP ABL Credit Agreement”) with the DIP ABL Lenders and JPMorgan Chase Bank, N.A., as administrative agent, which provides the Company with a superpriority senior secured debtor-in-possession asset based revolving credit facility of up to $400 million in the aggregate with a $200 million letter of credit sublimit. Capitalized terms used but not otherwise defined in this “DIP ABL Credit Agreement” section of this Note 2 have the meanings given to them in the DIP ABL Credit Agreement. The obligations under the DIP ABL Credit Agreement are secured by substantially all of the real and personal property of the DIP ABL Loan Parties, subject to certain exceptions.
The proceeds of the DIP ABL Facility may be used to pay certain costs, fees and expenses related to the Chapter 11 Cases, to repay certain prepetition indebtedness and for working capital, among other things, in all cases subject to the terms of the DIP ABL Credit Agreement.
The maturity date of the DIP ABL Facility is the date that is the earliest of (i) six months after the Effective Date, (ii) the date of the substantial consummation (as defined in section 1101(2) of the Bankruptcy Code) of an Acceptable Plan, (iii) the date the Bankruptcy Court converts any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, (iv) the date the Bankruptcy Court dismisses any of the Chapter 11 Cases, (v) the date on which the DIP ABL Loan Parties consummate a sale of all or substantially all of the assets of the DIP ABL Loan Parties pursuant to section 363 of the Bankruptcy Code or otherwise, and (vi) such earlier date on which the loans made under the DIP ABL Credit Agreement become due and payable by acceleration or otherwise in accordance with the terms of the DIP ABL Credit Agreement and the other Loan Documents. The DIP ABL Facility is expected to be determined in connection with the consummation of the Sycamore Sale.
Loans under the DIP ABL Facility bear interest at a rate per annum equal to (i) in the case of a base rate loan, the base rate plus 1.50% or (ii) in the case of a Eurodollar rate loan, the adjusted London interbank offering rate (which is subject to a floor of 0.75%) plus 2.50%. If any principal of or interest on any loan or any fee or other amount payable under the DIP ABL Facility is not paid when due, such overdue amount will be subject to a default rate of interest equal to 2.00% above the rate otherwise applicable.
The DIP ABL Credit Agreement includes customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting the DIP ABL Borrowing Parties’ and their restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans, advances or guarantees, engage in mergers, consolidations, sales of assets and acquisitions and pay dividends and distributions, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type. The DIP ABL Credit Agreement also includes representations and warranties, mandatory prepayments, affirmative covenants and events of default customary for financings of this type. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under chapter 7 of the Bankruptcy Code, the appointment of a trustee pursuant to chapter 11 of the Bankruptcy Code, and certain other events related to the impairment of the DIP ABL Lenders’ rights or liens granted under the DIP ABL Credit Agreement.
Nasdaq Delisting
On July 24, 2020, the Company received a letter from the Listing Qualifications Department staff of Nasdaq notifying the Company that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, at the opening of business on August 4, 2020, trading of the Company’s common stock was suspended from Nasdaq and the Company’s common stock began trading on the OTC Pink Marketplace under the symbol “ASNAQ.” On August 11, 2020,
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Nasdaq filed a Form 25 with the Securities and Exchange Commission (the "SEC") to delist the Company’s common stock from Nasdaq. The deregistration of the common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), became effective 90 days after filing of the Form 25. The common stock remains registered under Section 12(g) of the Exchange Act.
Liabilities Subject to Compromise
Liabilities subject to compromise refers to prepetition obligations which may be affected by the Chapter 11 process. These amounts represent the Company's current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases. Differences between the liabilities the Company has estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust amounts as necessary. Such adjustments may be material.
The components of liabilities subject to compromise are presented below:
| | | | | |
| August 1, 2020 |
Liabilities subject to compromise: | (millions) |
Accounts payable | $ | 417.0 | |
Accrued expenses and other current liabilities | 123.0 | |
Current portion of long-term debt (a)
| 1,252.6 | |
Current portion of lease liabilities | 153.9 | |
Lease-related liabilities | 626.4 | |
Other non-current liabilities | 106.5 | |
Liabilities subject to compromise | $ | 2,679.4 | |
____________
(a) See Note 12 for more details of the prepetition debt reported as Liabilities subject to compromise.
Interest Expense
The Company has ceased recording interest on the Term Loan, which is classified as Liabilities subject to compromise as of the Petition Date. The contractual interest expense on Liabilities subject to compromise not accrued or recorded in the Consolidated Statements of Operations was approximately $2.1 million, representing interest expense from the Petition Date of July 23, 2020 through August 1, 2020.
Reorganization Items, Net
The Company has incurred, and will continue to incur, significant costs associated with the Chapter 11 Cases. The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Company's results. Reorganization items, net of $3.4 million represent the post-petition costs directly associated with the Chapter 11 Cases and for Fiscal 2020 primarily include professional fees which were substantially paid during the year ended August 1, 2020.
Debtors-in-Possession Condensed Combined Financial Statements
Condensed combined financial statements of the debtors-in-possession are set forth below. These condensed combined financial statements exclude the financial statements of certain non-debtor entities.
Transactions and balances of receivables and payables between debtors-in-possession are eliminated in consolidation. However, the debtors-in-possession's condensed combined balance sheet includes receivables from related non-debtor entities and payables to related non-debtor entities.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | |
CONDENSED BALANCE SHEET |
| |
| August 1, 2020 |
| (millions) |
ASSETS |
Current assets: | |
Cash and cash equivalents | $ | 553.5 | |
Inventories | 342.6 | |
Prepaid expenses, and other current assets | 149.4 | |
Current assets related to discontinued operations | 3.5 | |
Total current assets | 1,049.0 | |
Property and equipment, net | 454.1 | |
Operating lease right-of-use assets | 377.0 | |
Goodwill | 164.6 | |
Other intangible assets, net | 20.2 | |
Equity method investment | 45.2 | |
Other assets | 52.2 | |
Investment in non-debtor subsidiaries | 177.3 | |
Total assets | $ | 2,339.6 | |
LIABILITIES AND EQUITY |
Current liabilities: | |
Accounts payable | $ | 126.8 | |
Accrued expenses and other current liabilities | 63.7 | |
Deferred income | 116.9 | |
Current portion of long-term debt | 227.9 | |
Current liabilities related to discontinued operations | 23.5 | |
Total current liabilities | 558.8 | |
| |
| |
Other non-current liabilities | 34.3 | |
Non-current liabilities related to discontinued operations | 5.9 | |
Amounts due to non-debtor subsidiaries | 99.9 | |
Liabilities subject to compromise | 2,679.4 | |
Total liabilities | 3,378.3 | |
Total equity shareholders' (deficit) equity | (1,038.7) | |
Total liabilities and shareholders' (deficit) equity | $ | 2,339.6 | |
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | |
CONDENSED STATEMENT OF OPERATIONS | |
| | |
| Fiscal Year Ended | |
| August 1, 2020 | |
| (millions) | |
Net sales | $ | 3,707.2 | | |
Cost of goods sold | (1,883.0) | | |
Gross margin | 1,824.2 | | |
Other operating expenses: | | |
Buying, distribution and occupancy expenses | (814.3) | | |
Selling, general and administrative expenses | (1,406.6) | | |
Restructuring and other related charges | (234.3) | | |
Impairment of goodwill | (148.9) | | |
Impairment of other intangible assets | (93.2) | | |
Depreciation and amortization expenses | (230.5) | | |
Equity in losses of non-debtor subsidiaries | (28.8) | | |
Total other operating expenses | (2,956.6) | | |
Operating loss | (1,132.4) | | |
| | |
Interest expense | (99.4) | | |
Interest and other income, net | 4.5 | | |
Gain on extinguishment of debt | 28.5 | | |
Reorganization items, net | (3.4) | | |
Loss from continuing operations before provision for income taxes and income from equity method investment | (1,202.2) | | |
Provision for income taxes from continuing operations | (7.0) | | |
Income from equity method investment | 3.1 | | |
Loss from continuing operations | (1,206.1) | | |
Discontinued operations | | |
Income from discontinued operations, net of taxes | 64.3 | | |
Net loss | $ | (1,141.8) | | |
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | |
CONDENSED STATEMENT OF CASH FLOWS |
| |
| Fiscal Year Ended |
| August 1, 2020 |
| (millions) |
Cash flows provided by operating activities | $ | 138.3 | |
Cash flows from investing activities: | |
Capital expenditures | (65.1) | |
Proceeds from sale of assets | 20.6 | |
Proceeds from the sale of intangible assets | 5.0 | |
Cash flows used in investing activities | (39.5) | |
Cash flows from financing activities: | |
Redemptions and repayments of term loan | (69.8) | |
Proceeds from revolver borrowings | 230.0 | |
Proceeds from stock options exercised and employee stock purchases | 0.1 | |
Cash flows provided by financing activities | 160.3 | |
Increase in cash and cash equivalents | 259.1 | |
Cash and cash equivalents, beginning of period | 295.6 | |
Cash and cash equivalents, end of period | $ | 554.7 | |
3. 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 is determined to be the primary beneficiary. All 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 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 realizability of inventory; impairments of long-lived tangible assets and right-of-use assets; and the realizability of deferred tax assets.
Fiscal Year
Fiscal year 2020 ended on August 1, 2020 and reflected a 52-week period (“Fiscal 2020") and fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period (“Fiscal 2019"). All references to “Fiscal 2021” reflect a 52-week period that will end on July 31, 2021.
Common Stock Split
On December 19, 2019, the Company announced that the Board of Directors (the “Board”) has approved a reverse stock splitis responsible for determining our executive compensation programs, including making compensation decisions during Fiscal 2020. The Compensation Committee is comprised of Linda Yaccarino (Chair), Kate Buggeln and Carl Rubin.
For Fiscal 2020, our named executive officers were Gary Muto, our current Chief Executive Officer, Carrie W. Teffner, our current Interim Executive Chair of the Company’s common stock at a ratioBoard, Dan Lamadrid, our current Executive Vice President and Chief Financial Officer, and Justin MacFarlane, our current Executive Vice President and Chief Customer Officer.
Components of 1-for-20. Refer to Note 19 for additional information. As a result, the applicable equity and shares information related to prior periods has been restated to reflect this reverse stock split.Executive Compensation
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Discontinued Operations
Dressbarn Wind Down
In May 2019, the Company announced the wind downThe principal components of its Dressbarn brand, which was completedcompensation in the second quarter of Fiscal 2020. All Dressbarn store locations were closed as of December 31, 2019. Activities during the first and second quarter of Fiscal 2020 include additional employee related accruals,for our named executive officers were base salary, annual performance bonus, stock option awards, and other benefits and perquisites.
Base Salary. The base salaries of our named executive officers are an important element of their total compensation packages, intended to compensate them for their day-to-day responsibilities. Base salaries for the closurenamed executive officers are determined by the Compensation Committee, with each named executive officer’s base salary determined based on his or her position and scope of storesresponsibility. The base salaries for Messrs. Muto and the negotiation of lease terminations. In addition, during the first quarter of Fiscal 2020, the Company sold the direct channel rights to Dressbarn intellectual property to a third-party for approximately $5 million, which was treated as a reduction of the wind down costs. In connection with the Dressbarn wind down, we have incurred cumulative costs of approximately $58 million of which $5 million was incurred duringLamadrid and Ms. Teffner were not changed in Fiscal 2020, and the remainderbase salary for Mr. MacFarlane was incurred in Fiscal 2019. The Dressbarn wind down costs have been included in the results disclosed below.
The following table summarizes the results of Dressbarn reclassified as discontinued operations:
| | | | | | | | | | | | | |
| Fiscal Years Ended | | |
| August 1,
2020 | | August 3,
2019 | | |
| (millions) | | |
| Net sales | $ | 326.6 | | | $ | 758.7 | | | |
| Depreciation and amortization expense | (10.9) | | | (19.5) | | | |
| Operating income (loss) | 63.9 | | | (43.1) | | | |
| Pretax income (loss) from discontinued operations | 64.5 | | | (43.5) | | | |
| Income tax provision | (0.2) | | | (9.4) | | | |
| Income (loss) from discontinued operations, net of tax | $ | 64.3 | | | $ | (52.9) | | | |
The major components of Dressbarn assets and liabilities related to discontinued operations are summarized below:
| | | | | | | | | | | |
| August 1,
2020 | | August 3,
2019 |
| (millions) |
| Cash and cash equivalents | $ | 0 | | | $ | 4.2 | |
| Inventories | 0 | | | 57.0 | |
| Prepaid expenses and other current assets | 3.5 | | | 37.0 | |
| Property and equipment, net | 0 | | | 11.5 | |
| | | |
| | | |
| | | |
| | | |
| Total assets related to discontinued operations | $ | 3.5 | | | $ | 109.7 | |
| | | |
| Accounts payable and other current liabilities | $ | 5.5 | | | $ | 94.7 | |
| | | |
| Lease-related liabilities | 0 | | | 29.6 | |
| Liabilities subject to compromise | 19.9 | | | 0 | |
| Other liabilities | 4.0 | | | 5.9 | |
| Total liabilities related to discontinued operations | $ | 29.4 | | | $ | 130.2 | |
Sale of maurices
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 ("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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. As of August 1, 2020, approximately $5.3 million remains within Deferred income.
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.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the results of maurices classified as discontinued operations:
| | | | | | | | | | |
| Fiscal Year Ended | | |
| | August 3, 2019 (a)
| | |
| | | |
Net sales | | $ | 749.4 | | | |
Depreciation and amortization expense | | (21.2) | | | |
Operating income | | 97.7 | | | |
Pretax income from discontinued operations | | 98.2 | | | |
Income tax expense | | (21.8) | | | |
Income from discontinued operations, net of tax | | $ | 76.4 | | | |
_______
(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 cash flows related to discontinued operations are summarized below:
| | | | | | | | | | | | | |
| Fiscal Years Ended | | |
| August 1,
2020 | | August 3,
2019 | | |
| (millions) | | |
| Cash provided by operating activities of discontinued operations | $ | 52.6 | | | $ | 71.2 | | | |
| Cash provided by (used in) investing activities of discontinued operations | 4.9 | | | (6.4) | | | |
4. Summary of Significant Accounting Policies
Bankruptcy Accounting
The Consolidated Financial Statements have been prepared as if we were a going concern and in accordance with Accounting Standards Codification Topic 852, Reorganizations (“ASC 852”). ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain expenses, realized gains and losses and provisions for losses that are realized or incurred during the Chapter 11 Cases, including adjustments to the carrying value of certain indebtedness are recorded as “Reorganization items” in the Consolidated Statements of Operations. In addition, prepetition obligations that may be impacted by the Chapter 11 Cases have been classified as “Liabilities subject to compromise” on the Consolidated Balance Sheets at August 1, 2020. These liabilities may be settled for less depending on the claim amounts allowed by the Bankruptcy Court.
Revenue Recognition
Effective August 5, 2018, the Company adopted Accounting Standard Update 2014-09, “Revenue from Contracts with Customers,” ("ASU 2014-09").
For retail sales, the performance obligation is the transfer of retail merchandise to the customer at the retail store orestablished at the time of delivery to the customer. Retail store revenue is recognized nethis commencement of estimated returns at the time of sale to consumers. Direct channel revenue from sales of products ordered through the Company’s retail internet sites is recognized upon delivery and receipt of the shipment by our customers. Such revenue 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.employment in December 2019.
Reserves for estimated product returns are recorded based on historical return trends and are adjusted for known events, as applicable. As of August 1, 2020, the liability for estimated returns was approximately $14.0 million and the corresponding balance of the right of return asset for merchandise was approximately $7.9 million. There was no liability for estimated returns related to discontinued operations at the end of Fiscal 2020. As of August 3, 2019, the liability for estimated returns was approximately $19.9 million, of which $2.1 million was included in Liabilities related to discontinued operations, and the corresponding balance of the right of return assets for merchandise was approximately $9.7 million.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The contract liabilities representing unearned revenue for our continuing operations are as follows:
| | | | | | | | | | | |
| August 1, 2020 | | August 3, 2019 |
| (millions) |
| Deferred revenue - gift card liability | $ | 78.4 | | | $ | 79.7 | |
| Deferred revenue - loyalty programs | 21.0 | | | 22.1 | |
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.
The Company recognized revenue of approximately $38 million and $39 million inDuring Fiscal 2020, and Fiscal 2019, respectively, associated with gift card redemptions and gift card breakage. Of these amounts, approximately $6 million and $12 million, respectively, were recorded within Income from discontinued operations.
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, direct channel and third-party sales, the Company's segments recognize revenue from (i) licensing arrangements with franchised stores, (ii) royalty payments received under license agreements for the use of their trade name and (iii) credit card agreements as it is earned in accordance with the terms of the underlying agreements.
The Company offers 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.
The Company recognized revenue of approximately $24 million and $33 million in Fiscal 2020 and Fiscal 2019, respectively, associated with reward redemptions and breakage related to the Company’s loyalty programs. Of these amounts, approximately $5 million and $9 million, respectively, was recorded within Income from discontinued operations.
The Company’s revenues by major product categories as a percentage of total net sales are as follows:
| | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | August 1,
2020 | | August 3,
2019 |
| Apparel | | 83 | % | | 82 | % |
| Accessories | | 12 | % | | 13 | % |
| Other | | 5 | % | | 5 | % |
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 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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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, the Dressbarn wind down, and the Chapter 11 Cases. Professional fees related to the Chapter 11 Cases after July 23, 2020 are included in Reorganization items, net.
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 $57.7 million in Fiscal 2020 and $65.3 million in Fiscal 2019, of which $1.2 million for Fiscal 2020 and $10.7 million for Fiscal 2019 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 $184.6 million for Fiscal 2020 and $265.1 million for Fiscal 2019, of which $6.9 million for Fiscal 2020 and $59.9 million for Fiscal 2019 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 2020 or Fiscal 2019.
Foreign Currency Translation and Transactions
The operating results and financial position of foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. The resulting translation gains or losses are included in the consolidated statements of comprehensive loss, and in the consolidated statements of equity as a component of accumulated other comprehensive loss (“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 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 from foreign currency transactions were $0.4 million in Fiscal 2020 and $0.7 million in Fiscal 2019, of which losses of $0.1 million for Fiscal 2019 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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 service-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.
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 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 August 1, 2020.
Inventories
Retail Inventory Method
We hold inventory for sale through our retail stores and direct channel sites. The Company’s Plus Fashion and Kids Fashion segments 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 theunprecedented impact of market trendsCOVID-19, our named executive officers voluntarily took temporary reductions in their base salaries ranging from 40% for Messrs. Lamadrid and economic conditions. Estimates of markdown requirements may differMacFarlane and 50% for Mr. Muto and Ms. Teffner. These temporary reductions were effective 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.March 29, 2020 through June 20, 2020.
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 net realizable value. Inventory cost is adjusted when the current selling price or future estimated selling price is less than cost.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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, such as right-of-use 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, typically during the fourth quarter of each fiscal year, 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. In the fourth quarter of Fiscal 2019, 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, the announced wind down of the Dressbarn brand, as well as the changes in senior management, including the appointment of a new Chief Operating Decision Maker (“CODM”), all occurred in the same period. After considering the impact of all these changes, the Company concluded that its new management began requesting more discrete operating information related to its Ann Taylor and LOFT businesses, which are 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 testing cannot be at a level higher than the operating segment, the Company determined that Ann Taylor and LOFT met the definition of separate operating segments and therefore goodwill has been separately allocated to these two units.
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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 August 1, 2020 these reserves were $55.1 million and as of August 3, 2019 they were $60.8 million of which $9.6 million and $15.7 million was recorded within Liabilities from discontinued operations as of August 1, 2020 and August 3, 2019, respectively. The Company is subject to various claims and contingencies related to insurance and other matters arising out of the normal course of business. The Company is self-insured for expenses related to its employee medical and dental plans, 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 for medical claims, $500,000 for workers' compensation claims and $150,000 for general liability 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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. Tax valuation allowances are analyzed periodically and adjusted as events occur, or circumstances change, that warrant adjustments to those balances.
In determining the income tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more-likely-than-not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and the Company often obtains assistance from external advisors. To the extent that the Company’s estimates change or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made. If the initial assessment fails to result in the recognition of a tax benefit, the Company regularly monitors its position and subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, (ii) the statute of limitation expires or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency. Uncertain tax positions are classified as current only when the Company expects to pay cash within the next twelve months. Interest and penalties, if any, are recorded within the Benefit (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
Effective August 4, 2019, the Company adopted Accounting Standards Update 2016-02, "Leases" ("ASC 842"). Refer to Notes 5 and 6 for more detailed information about the adoption of ASU 2016-02 and the differences between 2016-02 and the prior guidance.
5. Recently Issued Accounting Standards
Recently adopted standards
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases” (“ASC 842”). The guidance requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The guidance may be applied retrospectively to each period presented or with the cumulative effect recognized as of the initial date of application. The Company adopted this ASU as of August 4, 2019 by applying the modified respective approach, with the cumulative effect recognized at adoption.
As a result of this standard, the Company recognized approximately $875.9 million of right-of-use assets and approximately $1,072.0 million of lease liabilities (current and long-term combined), on its consolidated balance sheet as of August 4, 2019. The right-of-use lease liability for operating leases is based on the net present value of future minimum lease payments. 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 favorable leases, straight-line rent liability, purchased lease rights and landlord allowances and a cumulative effect adjustment that decreased opening Accumulated deficit by approximately $11.5 million for transition impairments related to previously impaired leased locations. As a result, prior periods have not been restated.
The Company determines if an arrangement is a lease at inception and on the lease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.
As the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on a third-party analysis, which is updated periodically. That analysis concluded that the Company’s incremental borrowing rate upon adoption ranged from 24-30%, depending on the term. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company elected 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 lease classification for any expired or existing leases; (iii) to account for a lease and non-lease component as a single component for both its real estate and non-real estate leases; and (iv) to not reassess the initial direct costs for existing leases.
The measurement of lease right-of-use assets and liabilities includes amounts related to:
•Lease payments made prior to the lease commencement date;
•Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded;
•Fixed payments related to lease components, such as rent escalation payments scheduled at the lease commencement date; and
•Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs.
The measurement of lease right-of-use assets and liabilities excludes amounts related to:
•Variable payments related to lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred in the consolidated statements of operations;
•Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the consolidated statements of operations; and
•Leases with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the consolidated statements of operations.
Certain of the Company’s leases include options to extend the lease or to terminate the lease. The Company assesses these leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s lease right-of-use assets and liabilities. Generally, the Company’s options to extend its leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the consolidated statements of operations until a new agreement has been executed.
Amortization and interest expense related to lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded amortization pattern resulting in higher single lease expense in earlier periods. Depending on the nature of the lease, amortization and interest expense is recorded in either Buying, distribution, and occupancy expense or in Selling, general and administrative expense in the consolidated statements of operations.
The Company’s lease right-of-use assets are assessed for indicators of impairment at least quarterly. The results of any such impairments are disclosed in Note 16.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any finance leases, any material sublease arrangements or any material leases where the Company is considered the lessor.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table provides the impact of adoption of ASU 2016-02 on the Company’s consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | |
| | August 3, 2019 (as reported under ASC 840) | | Impact of adoption of ASC 842 | | August 3, 2019 (as reported under ASC 842) |
| | (millions) |
| Assets | | | | | | |
| Prepaid expenses and other current assets | | $ | 242.3 | | | $ | (33.6) | | | $ | 208.7 | |
| Current assets related to discontinued operations | | 98.2 | | | (7.6) | | | 90.6 | |
| Other intangible assets, net | | 276.6 | | | (8.4) | | | 268.2 | |
| Operating lease right-of-use asset | | 0 | | | 744.4 | | | 744.4 | |
| Non-current assets related to discontinued operations | | 11.5 | | | 131.5 | | | 143.0 | |
| | | | | | |
| Liabilities and Shareholders’ Equity | | | | | | |
| Current portion of lease liabilities | | 0 | | | 141.3 | | | 141.3 | |
| Current liabilities related to discontinued operations | | 94.7 | | | 37.8 | | | 132.5 | |
| Lease-related liabilities | | 204.6 | | | (204.6) | | | 0 | |
| Long-term lease liabilities | | 0 | | | 769.1 | | | 769.1 | |
| Non-current liabilities related to discontinued operations | | 35.5 | | | 94.2 | | | 129.7 | |
| Accumulated deficit | | (935.9) | | | (11.5) | | | (947.4) | |
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The new standard simplifies the accounting for income taxes by removing exceptions:
•to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);
•to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;
•to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and
•to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
In addition, the standard does not require that an entity allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, however, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. The standard does require that an entity:
•recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax;
•evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and
•reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company has elected to early adopt ASU 2019-12. By early adopting, ASU 2019-12 becomes effective as of the beginning of Fiscal 2020, however, there is no cumulative effect to be recognized with the early adoption. As a result of the ASU 2019-12 adoption, the Company did not recognize income tax expense on the income from discontinued operations related to Dressbarnbase salaries for the year ended August 1, 2020.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recently issued standards
Intangible Assets
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods. Early adoption is permitted for annual or interim periods. This ASU requires that implementation costs incurred in a hosting arrangement that is a service contract be assessed in accordance with the existing guidance in Subtopic 350-40, “Internal-Use Software.” Accordingly, costs incurred during the preliminary project stage must be expensed as incurred, while costs incurred during the application development stage must be capitalized. Capitalized implementation costs associated with a hosting arrangement that is a service contract must be expensed over the term of the hosting arrangement. Additionally, the new guidance requires that the expense of these capitalized costs be presented in the same line item in the statement of income as the fees associated with the hosting element of the arrangement. While the Company is in the process of determining the impact of the adoption of this guidance on its consolidated financial statements, the Company does not anticipate that the guidance will have a significant impact on its consolidated financial statements upon adoption of the new standard in Fiscal 2021.
6. Leases
The Company has leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.
A summary of the Company’s operating lease costs from continuing operations isour named executive officers were as follows:
| | | | | | | | | | |
| | Fiscal Year Ended | | |
| | August 1,
2020 | | |
| | (millions) | | |
Single lease costs (a)
| | $ | 368.9 | | | |
Variable lease costs (b)
| | 201.4 | | | |
Total lease expenses | | 570.3 | | | |
Less rental income (c)
| | (3.9) | | | |
Total net rental expense (d)
| | $ | 566.4 | | | |
________
(a) Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities.
(b) Includes variable payments related to both lease and non-lease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as month-to-month rent payments while expired store lease contracts are renegotiated.
(c) Substantially reflects rental income received related to Company-owned space in Duluth, MN.
(d) Total occupancy costs included in discontinued operations related to Dressbarn were $31.8 million for the year ended August 1, 2020.
The following table provides a summary of the Company’s operating lease costs from continuing operations for the year ended August 3, 2019, which was accounted for in accordance with Accounting Standards Codification (“ASC”) 840, “Leases” (“ASC 840”).
| | | | | | | | |
| Name | | Salary ($) |
| Gary Muto | | 1,000,000 |
| Carrie W. Teffner | | 1,000,000 |
| Dan Lamadrid | | Fiscal Year Ended600,000 |
| Justin MacFarlane | | August 3,
2019675,000 |
Annual Performance Bonus. The Compensation Committee believes that a substantial percentage of each named executive office's annual compensation should be tied directly to the financial performance of the Company. Our annual cash
incentive compensation ("IC") program is a critical element of each named executive officer’s compensation package, because it is entirely "at-risk” and earned payouts (if any) are solely dependent on Company performance.
Following significant organizational changes with respect to our portfolio of brands and in our executive leadership during Fiscal 2019, the Compensation Committee reviewed the design of our executive compensation programs for Fiscal 2020 with a focus on how the programs can better support our commitments to our customers, vendors and stockholders and made changes to the IC program, as follows:
| | (millions) |
Base rentals | | $ | 395.9 | |
Percentage rentals• | Measured 100% Consolidated Ascena Enterprise results for all NEOs, including our CEO, to strengthen our enterprise foundation and further encourage cross-brand collaboration; |
26.0 | |
Other occupancy costs, primarily CAM• | Changed the performance metric to Adjusted EBITDA, which continues our focus on profitability and real estate taxesalso serves as a measure of cash generation, which is critical to honoring our commitments to customers, vendors and stockholders; and |
| 171.8 | |
Total (a)
• | | $ | 593.7 | Shifted from two seasonal performance cycles to an annual performance cycle to holistically measure our longer-term trending performance over the full year. The annual cycle provides a simplified payout structure while providing the ability to still set goals that account for the seasonality of our business. |
________
(a) Total occupancy costs included in discontinued operationsOur Compensation Committee sets threshold, target and maximum numeric performance goals for each specified performance metric at or near the beginning of each annual performance period, with input from senior management. The Compensation Committee believed, at the time the goals were $191.5 million forset, that these performance targets goals would be difficult to achieve, but could be achieved with significant effort on the year ended August 3, 2019.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The weighted-average remaining lease termpart of its executives, including our named executive officers, and that payment of the Company’s operating leasesmaximum amounts would occur only upon the achievement of results in excess of internal and the weighted-average discount rates used to calculate the Company’s operating lease liabilities are as follows:general market expectations and our long-term strategic objectives.
Fiscal 2020 Performance Goals
| | | | | | | | |
| Bonus Level | | August 1,
2020EBITDA ($ in millions) |
Weighted-average remaining lease term (years)Threshold | | 5.3247.8 |
Weighted-average discount rateTarget | | 25.4%350.0 |
| Maximum | | 402.5 |
We establish each NEO's target IC opportunity for the performance period as a percentage of base salary, based on the NEO's position and level within the organization.Threshold performance achieved pays out at 25%, target performance achieved pays out at 100% and maximum performance achieved pays out at 200%, in each case, of the NEO’s target IC opportunity.Linear interpolation is used to determine pay out amounts for performance achieved between threshold and target and between target and maximum. As reflected in the last column of the table below, based on performance, no bonuses were paid to any of our named executive officers for Fiscal 2020.
Fiscal Year 2020 Bonus Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Threshold Payout Opportunity (as a % of Base Salary) | | Target Payout Opportunity (as a % of Base Salary) | | Maximum Payout Opportunity (as a % of Base Salary) | | Actual Payout % | | Actual Payout $ |
| Gary Muto | | 37% | | 150% | | 300% | | 0% | | $0 |
| | | | | | | |
| Carrie Teffner | | 37% | | 150% | | 300% | | 0% | | $0 |
| | | | | | | |
| Dan Lamadrid | | 18.75% | | 75% | | 150% | | 0% | | $0 |
| | | | | | | |
| Justin MacFarlane | | 18.75% | | 75% | | 150% | | 0% | | $0 |
Long-Term Incentive Compensation. We endeavor to align executive compensation with the achievement of operational and financial results and increases in stockholder value. Our long-term incentive compensation directly links payout opportunities with stock and financial performance. This design is intended to ensure that, in combination with the IC
opportunity described above, a majority of each NEO’s total compensation is “at-risk” based on Company financial and/or stock performance.
Historically, long-term incentive compensation was comprised of long-term cash incentives, restricted stock units and stock options. At the end of Fiscal 2019, the Compensation Committee reviewed the long-term incentive program design in the context of shares available under the 2016 Omnibus Incentive Plan during a period of depressed share price and the 30% discount that had been applied to the NEOs’ long-term incentive grants in Fiscal 2018 and 2019. Given the challenging business environment, the Compensation Committee aimed to (i) simplify long-term incentive compensation; (ii) manage share usage; and (iii) tie value realization for the NEOs more closely to stockholder value creation. As a result, the Compensation Committee approved changes to the long-term incentive compensation program for Fiscal 2020, which eliminated both the long-term cash incentives and the restricted stock units and provided for the grant of long-term incentives in the form of a fixed number of non-qualified stock options that varied by level.
The following tabledecision to grant a fixed number of non-qualified stock options by level was intended to manage shares under our Omnibus Incentive Plan. In a depressed share price environment, it is critical that we control share usage and dilution, as well as avoid granting potential windfall awards to our executives. Further, making the grant entirely in the form of stock options is intended to align our NEOs’ realizable pay opportunities with Company performance, and provides additional upside to our NEOs if we achieve strong stock price performance and deliver value to our stockholders.
Promotion and Appointment Grants for Mr. Lamadrid and Mr. MacFarlane in Fiscal 2020
Mr. Lamadrid. In connection with Mr. Lamadrid’s promotion to Chief Financial Officer on August 4, 2019, in October 2019, Mr. Lamadrid received a maturity analysisone-time long-term incentive grant of performance-based equity (the “Promotion Grant”), delivered in the form of performance-based stock options. Subject to Mr. Lamadrid’s continued employment (except as provided in his offer letter), the performance-based stock options subject to the Promotion Grant will be eligible to vest upon the achievement of the designated closing price per share of the Company’s operating lease liabilities,stock for a 20-consecutive trading day period (the “Closing Price”), in each case, on or prior to the third anniversary of the grant date:
| | | | | |
| |
| • | 25% of the performance-based stock options if the Closing Price equals or exceeds $3.00 per share (the “$3 Hurdle”); |
| |
| • | an additional 25% of the performance-based stock options if the Closing Price equals or exceeds $5.00 per share (the “$5 Hurdle”); and |
| |
| • | the remaining 50% of the performance-based stock options if the Closing Price equals or exceeds $7.00 per share (the “$7 Hurdle” and, together with the $3 Hurdle and $5 Hurdle, the “Hurdles”). |
If a Hurdle is achieved prior to the second anniversary of the grant date of the Promotion Grant, the portion of the performance-based stock options related to the Hurdle that was achieved prior to the second anniversary will vest on the second anniversary, generally subject to Mr. Lamadrid’s continued employment. Any portion of the performance-based stock options related to a Hurdle that is not actually achieved by the third anniversary of the grant date will be forfeited for no consideration.
On December 18, 2019, the Company effected a 1-for-20 reverse stock split of the Company’s Common Stock (the “Reverse Stock Split”), which adjusted the Hurdles under the Promotion Grant from $3, $5 and $7 to $60, $100, and $140, respectively.
Mr. MacFarlane. In connection with Mr. MacFarlane’s appointment as Chief Customer Officer on December 2, 2019, in January 2020, Mr. MacFarlane received a one-time long-term incentive grant of equity (the “Appointment Grant”). The Appointment Grant was delivered in the form of non-qualified stock options that vest ratably over a two-year period.
Equity Awards Under the Company's Omnibus Incentive Plan
The Compensation Committee has a practice of not granting any stock options until at least one business day after the Company has issued its quarterly and/or annual earnings release, as well as the public release of any other pending material non-public information.
If an employee ceases to be an employee of the Company for any reason (other than for Cause, as defined under the Omnibus Incentive Plan) and the employee has achieved the “Total Years Test” (as described in further detail below) as of his or her last day of employment, then all of such employee’s unvested stock options will continue to vest and remain exercisable after the date of termination through the one year anniversary of the vesting date of the last unvested stock option under the applicable stock option award, but not longer than the original term of each stock option.
The “Total Years Test” means 75 years, based on undiscountedthe sum of (i) the total number of years of employment with the Company or an affiliate, plus (ii) the employee’s age, which must be at least age 60. The Company believes that the Total Years Test encourages retention as our executive officers approach retirement age, while also incentivizing our executive officers to drive stockholder value. The Total Years Test does not apply to cash flows, as of August 1, 2020:
| | | | | |
| Fiscal Years | Minimum Operating Lease Payments (a) (b) |
| | (millions) |
| 2021 | $ | 351.8 | |
| 2022 | 287.6 | |
| 2023 | 211.7 | |
| 2024 | 148.0 | |
| 2025 | 101.8 | |
| Thereafter | 360.4 | |
| Total undiscounted operating lease liabilities | 1,461.3 | |
| Less imputed interest | (679.6) | |
| Present value of operating lease liabilities | 781.7 | |
| Less current portion of lease liabilities | (0.6) | |
| Less long-term lease liabilities | (0.8) | |
Total lease liabilities, included in Liabilities subject to compromise (c) | $ | 780.3 | |
________
(a)Net of sublease income, which is not expectedlong-term incentive awards, with the employee required to be employed through the end of the applicable performance period to be eligible to receive a payout.
The Compensation Committee may also make other equity grants from time to time during the year, such as when a new employee is hired (as was the case with Mr. MacFarlane), a current employee is promoted (as was the case with Mr. Lamadrid) or in recognition of special achievement.
Additional Compensation and Benefit Items
Cash Sign-On Bonus for Mr. MacFarlane. Mr. MacFarlane received a one-time cash sign-on bonus in the amount of $250,000 in accordance with his offer letter upon the commencement of his employment with us in December 2019. The sign-on bonus was granted in consideration of certain compensation and benefits Mr. MacFarlane forfeited from his prior employer by accepting his position with the Company. If, prior to the first anniversary of his start date, Mr. MacFarlane resigns or is terminated due to a violation of Company policy or conduct giving rise to immediate discharge, he has to repay the sign-on bonus within 90 days of the cessation of his employment.
Benefits Programs. The NEOs participate in a variety of retirement, health and welfare, and paid time-off benefit arrangements designed to enable us to attract and retain our workforce in a competitive marketplace. Health and welfare and paid time-off benefits helped ensure that we have a productive and focused workforce through reliable and competitive health and other benefits.
On July 23, 2020, the Debtors received authority from the Bankruptcy Court to continue to administer the Company’s benefits programs as provided by the Wages and Benefits Order.
Perquisites. We generally do not offer significant in any period.
(b) Although such amountsperquisites to our NEOs and they represent a relatively small portion of our NEOs’ total compensation. The costs of perquisites for our NEOs 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.
(c) As of August 1, 2020, a substantial amount“All Other Compensation” column of the current portion of operating leases liabilities and the long-term lease liabilities balances were classified to Liabilities subject to compromise, which is further discussed in Note 2.
As of August 1, 2020, the Company had no minimum commitments related to additional operating lease contracts that have not yet commenced.
As reported under the previous accounting standard, the following table provides a summary of total consolidated operating lease commitments, including leasehold financing obligations, under non-cancelable leases as of August 3, 2019:
| | | | | |
| Fiscal Years | Minimum Operating Lease Payments (a) (b) |
| | (millions) |
| 2020 | $ | 462.0 | |
| 2021 | 402.3 | |
| 2022 | 325.4 | |
| 2023 | 242.7 | |
| 2024 | 172.6 | |
| Thereafter | 563.3 | |
| Total future minimum rentals | $ | 2,168.3 | |
________
(a)Net of sublease income, which is 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 includedSummary Compensation Table. Our NEOs participate in the above table.Company’s broad-based health and welfare programs that are available to our full-time employees generally.
Key NEO Compensation Program Changes for Fiscal 2021
Recognizing the volatile and uncertain environment created by COVID-19, the Compensation Committee, in consultation with the Company’s legal and compensation advisors, extensively reviewed the Company’s short- and long-term incentive programs for its entire workforce, including the NEOs, through the spring of 2020 to determine whether such programs appropriately align compensation opportunities with the Company’s current goals and ensure the stability of the Company’s workforce, and on June 17, 2020, following such thorough consultation and review, the Compensation Committee implemented new retention and performance-based arrangements, including for each of the NEOs, as set forth in the Form 8-K filed on June 22, 2020.
Summary Compensation Table
The table below summarizes information concerning compensation for Fiscal 2020 and Fiscal 2019 (which reflects 53 weeks) for our NEOs.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental disclosures related to leases are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Fiscal Year | | Salary ($)(1) | | Bonus ($)(2) | | Stock Awards ($) | | Option Awards ($)(3) | | Non-Equity Incentive Plan Compensation ($)(4) | | All Other Compensation ($)(6) | | Total ($) |
Gary Muto Chief Executive Officer | | 2020 | | 884,615 | | — | | — | | 49,000 | | — | | 54,775 | | 988,390 |
| 2019 | | 1,038,462 | | — | | 998,390 | | 908,820 | | 193,443 | | 60,826 | | 3,199,941 |
Carrie W. Teffner Interim Executive Chair of the Board | | 2020 | | 884,615 | | — | | — | | — | | — | | — | | 884,615 |
| 2019 | | 261,538 | | — | | 363,288 | | 187,500 | | — | | 77,754 | | 890,080 |
Dan Lamadrid EVP and Chief Financial Officer | | 2020 | | 537,885 | | — | | — | | 14,232 | | — | | 6,865 | | 558,982 |
| 2019 | | 429,807 | | 275,000 | | — | | 25,232 | | 98,851 | | 12,584 | | 841,474 |
Justin MacFarlane EVP and Chief Customer Officer | | 2020 | | 366,058 | | 250,000 | | — | | 37,200 | | — | | — | | 653,258 |
| | | | | | | | | | | | | | | |
| | | | | |
| (1) | Amounts shown reflect the temporary base salary reductions in effect from March 29, 2020 through June 20, 2020. |
| (2) | Amount shown reflects the sign-on bonus paid to Mr. MacFarlane in connection with his commencement of employment. |
| (3) | Reflects the aggregate grant date fair value calculation in accordance with FASB ASC Topic 718. Assumptions used in the valuation of equity based awards are discussed in “Stock Based Compensation” in Note 17 to the Consolidated Financial Statements in our Annual Report on Form 10-K for Fiscal 2019. For Mr. Muto, this includes the aggregate grant date fair value ($49,000), calculated in accordance with FASB ASC Topic 718, of stock options granted to Mr. Muto on October 2, 2019 in connection with the Company’s annual equity award cycle. For Mr. Lamadrid, this includes the aggregate grant date fair value ($14,000), calculated in accordance with FASB ASC Topic 718, of stock options granted to Mr. Lamadrid on October 2, 2019 in connection with the Company’s annual equity award cycle, as well as the aggregate grant date fair value ($232), calculated in accordance with ASC Topic 718, of performance-based stock options granted to him in connection with his promotion to Chief Financial Officer on August 4, 2019. For Mr. MacFarlane, this includes the aggregate grant date fair value ($37,200), calculated in accordance with FASB ASC Topic 718, of stock options granted to Mr. MacFarlane on January 31, 2020 in connection with his commencement of employment. |
| |
| The grant date fair value of the Mr. Lamadrid’s performance-based stock option Promotion Grant was derived using a Monte Carlo valuation simulation method, which used the following assumptions: |
| | | | | | | | |
| Grant Date | | Fiscal Year EndedOctober 2, 2019 |
| Remaining Performance Period | | August 1,
20203.00 years |
| Grant Date Closing Price | | (millions)$5.40 |
Cash payments arising from operating lease liabilities (included in cash flows from operating activities)Exercise Price | | $ | 265.6 | 5.25 |
Non-cash operating lease liabilities from obtaining right-of-use assetsContractual Term | | 4.4 7.00 years |
| Compounded Risk-Free Interest Rate (7.00-yr) | | 1.52% |
| Historical Volatility (7.00-yr) | | 62.93% |
| Cost of Equity (Used for Derived Service Period Only) | | 16.91% |
Beginning in April 2020, we suspended rent payments under the leases for our temporarily closed retail stores. We considered FASB’s recent guidance regarding lease modifications as a result of the effects of COVID-19 and have elected to apply the temporary practical expedient to account for negotiated changes to our leases. Despite the suspension of the rent payments, we continued to record accruals for rent payment deferrals and accounted for deferred rental payments as though no changes to the lease contract were made.
7. Goodwill and Other Intangible Assets
Goodwill
The following details the changes in goodwill for each reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Premium Fashion (a) | | Plus Fashion (b) | | Kids Fashion (c) | | Total |
| | | (millions) |
| Balance at August 4, 2018 | | $ | 305.0 | | | $ | 115.1 | | | $ | 169.4 | | | $ | 589.5 | |
| Impairment losses | | 0 | | | (115.1) | | | (160.9) | | | (276.0) | |
| Balance at August 3, 2019 | | 305.0 | | | 0 | | | 8.5 | | | 313.5 | |
| Impairment losses | | (140.4) | | | 0 | | | (8.5) | | | (148.9) | |
| Balance at August 1, 2020 | | $ | 164.6 | | | $ | 0 | | | $ | 0 | | | $ | 164.6 | |
________
(a) Net of accumulated impairment losses of $569.3 million and $428.9 million for the Premium Fashion segment of August 1, 2020 and August 3, 2019, respectively.
(b)Represents the Plus Fashion segment impairment losses as of August 3, 2019, which $65.8 million and $49.3 million relates to Lane Bryant and Catherines reporting units, respectively. The accumulated impairment loss at the Lane Bryant and Catherines reporting units as of August 1, 2020 and August 3, 2019 was $387.7 million and $49.3 million, respectively.
(c) Net of accumulated impairment losses of $169.4 million and $160.9 million for the Kids Fashion segment impairment losses as of August 1, 2020 and August 3, 2019, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Intangible Assets
As more fully described in Note 5, favorable leases have been reclassified from Other intangible assets, net to Operating lease right-of-use assets within the consolidated balance sheet due to the recent adoption of ASC 842. Other intangible assets, reflecting the change, as well as the impairments discussed below, now consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 1, 2020 | | August 3, 2019 |
| Description | Gross
Carrying
Amount | | Accumulated
Amortization | | Net | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
Intangible assets not subject to amortization: | (millions) |
Brands and trade names (a) | $ | 134.2 | | | $ | — | | | $ | 134.2 | | | $ | 252.0 | | | $ | — | | | $ | 252.0 | |
Franchise rights (a) | 0 | | | — | | | 0 | | | 10.9 | | | — | | | 10.9 | |
| Total intangible assets not subject to amortization | 134.2 | | | — | | | 134.2 | | | 262.9 | | | — | | | 262.9 | |
Intangible assets subject to amortization (b): | |
| Proprietary technology | 4.8 | | | (4.8) | | | 0 | | | 4.8 | | | (4.8) | | | 0 | |
| Customer relationships | 52.0 | | | (52.0) | | | 0 | | | 52.0 | | | (46.7) | | | 5.3 | |
| Favorable leases | 0 | | | 0 | | | 0 | | | 38.2 | | | (29.8) | | | 8.4 | |
| Trade names | 5.3 | | | (5.3) | | | 0 | | | 5.3 | | | (5.3) | | | 0 | |
| Total intangible assets subject to amortization | 62.1 | | | (62.1) | | | 0 | | | 100.3 | | | (86.6) | | | 13.7 | |
| Total intangible assets | $ | 196.3 | | | $ | (62.1) | | | $ | 134.2 | | | $ | 363.2 | | | $ | (86.6) | | | $ | 276.6 | |
________
(a) The Company recorded impairment charges related to trade names during Fiscal 2020 and Fiscal 2019, as discussed by reporting unit below.
(b) There were no finite-lived intangible asset impairment losses recorded for any of the periods presented.
Amortization
The Company recognized amortization expense on finite-lived intangible assets, excluding favorable leases discussed below, of $5.3 million in Fiscal 2020 and $7.0 million in Fiscal 2019, 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 Acquisition") 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 was fully amortized during Fiscal 2020.
Prior to the adoption of ASC 842 in Fiscal 2020, favorable leases were 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 $8.5 million in Fiscal 2019.
Goodwill and Other Indefinite-lived Intangible Assets Impairment Assessment
As discussed in Note 4, 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.
Fiscal 2020 Second Quarter Interim Impairment Assessment
The second quarter of Fiscal 2020 marked the continuation of the challenging market environment in which the Company competes. While the Company met its overall expectations for the second quarter, lower than expected comparable sales in the second quarter at the Justice brand, and lower than expected margins at our Ann Taylor brand, along with the expectation that such trends may continue into the second half of Fiscal 2020, led the Company to reduce its level of forecasted earnings for Fiscal 2020 and future periods. Since these brands had little or no excess of fair value over their respective book value at the beginning of Fiscal 2020, the Company concluded that these factors represented impairment indicators which required the
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Company to test its goodwill and indefinite-lived intangible assets for impairment during the second quarter of Fiscal 2020 (the "January Interim Test").
The Company performed its January Interim Test of goodwill and indefinite-lived intangible assets using a quantitative approach as of January 4, 2020, which was the last day in the second month of the second fiscal quarter. The January 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. 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, and used the market approach as a comparison of respective fair values. We generally applied a 75% weighting to the income approach and a 25% weighting to the market approach. However, in certain cases where low profit margins made the market approach impracticable, we applied a full weighting to the income approach. 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 January Interim Test reflect revised assumptions across certain key areas versus prior plans as a result of the recent operating trends discussed above. Based on the results of the impairment assessment, the fair value of our LOFT reporting unit exceeded its carrying value by approximately 14%.
Changes in key assumptions and the resulting reduction in projected future cash flows included in the January Interim Test resulted in a decrease in the fair values of our Ann Taylor and Justice reporting units such that their fair values were less than their carrying values. As a result, the Company recognized the following goodwill impairment charges: a loss of $54.9 million at the Ann Taylor reporting unit and $8.5 million at the Justice reporting unit to write-down the carrying values of the reporting units to their fair values. In addition, the Company recognized impairment losses to write-down the carrying values of its other intangible assets to their fair values as follows: $10.0 million of our Ann Taylor trade name, $35.0 million of our Justice trade name, $1.0 million of our Catherines trade name and $0.9 million of our Justice franchise rights. 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).
Fiscal 2020 Third Quarter Interim Impairment Assessment
The third quarter of Fiscal 2020 reflected a significant decline in the Company’s stock price and the fair value of our Term Loan debt due to the financial market uncertainty from COVID-19 which also resulted in the closure of our retail stores and led to a substantial decrease in our retail store revenue. The Company concluded that these factors represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the third quarter of Fiscal 2020.
As a result, the Company performed its second interim test of goodwill and indefinite-lived intangible assets for Fiscal 2020 (the “April Interim Test”) using a quantitative approach as of May 2, 2020, which was the last day of the third fiscal quarter. The April Interim Test was determined by the Company only using the income approach (discounted cash flow method ("DCF")) as the market approach (guideline public company method) was deemed unrepresentative due to the volatility and disruption in the global financial markets caused by COVID-19. 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. 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 April Interim Test reflect revised assumptions across certain key areas versus the assumptions used in the January Interim Test of Fiscal 2020 discussed below and primarily reflected revised long-range assumptions that were prepared in contemplation of the Chapter 11 Cases discussed earlier. Those assumptions include the wind down of the Catherines brand, a significant reduction in the number of Justice retail stores, an overall reductions in the number of retail stores at the Company’s other brands, and a significant reduction in the Company’s workforce commensurate with the store reductions.
Changes in key assumptions and the resulting reduction in projected future cash flows included in the April Interim Test resulted in a decrease in the fair values of our Ann Taylor and LOFT reporting units such that their fair values were less than their carrying values. As a result, the Company recognized the following goodwill impairment charges: a loss of $15.0 million
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
at the Ann Taylor reporting unit and $70.5 million at the LOFT reporting unit to write-down the carrying values of the reporting units to their fair values. In addition, the Company recognized impairment losses to write-down the carrying values of its other intangible assets to their fair values as follows: $17.7 million of our Ann Taylor trade name, $7.8 million of LOFT trade name, $7.8 million of our Justice trade name, $3.0 million of our Catherines trade name and $5.0 million of our Justice franchise rights. 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).
Fiscal 2020 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 April Interim Test. However, on July 23, 2020, the Company and certain of the Company’s direct and indirect subsidiaries filed for Chapter 11 Cases with the United States Bankruptcy Court, discussed further in Note 2, which led the Company to conclude this represented further impairment indicators. As a result, the Company was required to test its goodwill and indefinite-lived intangible assets for impairment at the end of the fourth quarter of Fiscal 2020 (the Year-End Test").
The Year-End Test was determined with the assistance of an independent valuation firm using the same methodologies as the April Interim Test. The cash flow projections underlying the Year-End Test reflected revised assumptions for Fiscal 2021 and Fiscal 2022 based on the current consumer demand, the continuation of the negative impacts of COVID-19 and the potential release of a vaccine during Fiscal 2021 with the expectation that the Company will be back in line with the original long-range projections for Fiscal 2023 and beyond. As of the third quarter of Fiscal 2020, only our LOFT brand had goodwill remaining and was tested for goodwill impairment in the fourth quarter. The discount rate used for the LOFT brand in the Year-End test is 25.5% which was a slight increase from 24.9% used in the April Interim Test. The Year-End Test indicated the fair value of the LOFT brand exceeded its carrying value by approximately 11% and as a result no goodwill impairment charge was required in the fourth quarter.
Based on the results of the Year-End Test, the Company recognized impairment charges to write-down the carrying values of its other intangible assets to their fair values as follows: $34.2 million on the LOFT trade name and$1.3 million on the Ann Taylor trade name. In addition, the Company impaired the remaining Justice franchise rights of $5.0 million as the Company will no longer be supporting this business strategy. Indefinite-lived intangible asset impairment charges have been disclosed separately in the accompanying consolidated statements of operations.
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
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reporting unit was valued utilizing the sales price inherent in the Transaction described in Note 3. 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 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 12 and 16, 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.
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(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
8. Restructuring and Other Related Charges
In recent years, the Company incurred restructuring-related costs related to its transformation activities and cost-reduction efforts. Some of those efforts focused on advanced data capabilities, particularly in the areas of markdown optimization, inventory planning, and customer analytics, as well as the transition of certain transaction processing functions within the brand services group to an independent third-party managed-service provider. Other activities during that time included the ongoing fleet review whereby the Company continued to renegotiate leases and close stores.
In Fiscal 2020, the primary areas of focus were completion of previously announced activities, continued cost-reduction efforts and, in the wake of the Chapter 11 Cases, the closure of additional stores. The planned store closures resulted in the non-cash impairment and acceleration of the underlying store assets.
As a result of the cost reduction initiatives, the Company incurred the following charges, which are included within Restructuring and other related charges:
| | | | | | | | | | | | | |
| Fiscal Years Ended | | |
| August 1, 2020 | | August 3, 2019 | | |
| Cash restructuring charges: | (millions) | | |
Severance and benefit costs (a) | $ | 29.3 | | | $ | 16.1 | | | |
| | | | | |
Other related charges (b) | 19.7 | | | 33.1 | | | |
| Total cash charges | 49.0 | | | 49.2 | | | |
| | | | | |
| Non-cash charges: | | | | | |
Impairment and acceleration of store assets (c) | 189.3 | | | 44.9 | | | |
Total non-cash charges | 189.3 | | | 44.9 | | | |
| | | | | |
| Total restructuring and other related charges | $ | 238.3 | | | $ | 94.1 | | | |
_______
(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 in Fiscal 2020 consist primarily of professional fees incurred in connection with the Chapter 11 cases prior to July 23, 2020. Charges in Fiscal 2019 consist of professional fees and other third-party costs incurred in connection with the identification and implementation of transformation initiatives.
(c) Non-cash asset impairments in Fiscal 2020 primarily reflect write-offs of assets related to stores that are closing as a result of the Chapter 11 Cases. Charges in Fiscal 2019 reflect the write-down of corporate-owned office buildings in Duluth, MN and Mahwah, NJ to fair market value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of activity for Fiscals 2019 and 2020 in the restructuring-related liabilities, which is included within Accrued expenses and other current liabilities, is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Severance and benefit costs | | | | Other related charges | | Total |
| (millions) |
| Balance at August 4, 2018 | $ | 4.0 | | | | | $ | 6.0 | | | $ | 10.0 | |
Additions charged to expense (a) | 20.8 | | | | | 33.1 | | | 53.9 | |
| Cash payments | (6.0) | | | | | (38.7) | | | (44.7) | |
| Balance at August 3, 2019 | 18.8 | | | | | 0.4 | | | 19.2 | |
| Additions charged to expense | 29.3 | | | | | 19.7 | | | 49.0 | |
| Cash payments | (19.5) | | | | | (19.7) | | | (39.2) | |
| Balance at August 1, 2020 | $ | 28.6 | | | | | $ | 0.4 | | | $ | 29.0 | |
_______
(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.
9. Inventories
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
| | | | | | | | | | | | | | |
| | | August 1,
2020 | | August 3,
2019 |
| | | (millions) |
| Premium Fashion | | $ | 184.6 | | | $ | 226.3 | |
| Plus Fashion | | 98.3 | | | 156.5 | |
| Kids Fashion | | 55.3 | | | 107.9 | |
| Total inventories | | $ | 338.2 | | | $ | 490.7 | |
The significant reduction in inventories from August 3, 2019 to August 1, 2020 primarily reflects a decrease in inventory purchases in response to lower demand resulting from COVID-19. The reduction also reflects an increase of $37.0 million in inventory markdown reserves as of August 1, 2020 mainly at the Plus Fashion and Kids Fashion segments, which follow the retail-method of accounting for inventory. Refer to Note 4 for more information on the Company’s accounting for inventory.
10. Property and Equipment
Property and equipment, net, consist of the following:
| | | | | | | | | | | | | | |
| | | August 1,
2020 | | August 3,
2019 |
| | | (millions) |
| Property and Equipment: | | | | |
| Land | | $ | 13.2 | | | $ | 22.5 | |
| Buildings and improvements | | 144.2 | | | 194.8 | |
| Leasehold improvements | | 540.2 | | | 669.3 | |
| Furniture, fixtures and equipment | | 485.1 | | | 497.0 | |
| Information technology | | 790.4 | | | 793.8 | |
| Construction in progress | | 4.9 | | | 13.6 | |
| | | 1,978.0 | | | 2,191.0 | |
| Less: accumulated depreciation | | (1,511.7) | | | (1,355.5) | |
| Property and equipment, net | | $ | 466.3 | | | $ | 835.5 | |
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Long-Lived Asset Impairments
The charges below reduced the net carrying value of certain long-lived assets to their estimated fair value, as determined using discounted expected cash 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 retail store assets by segment are as follows:
| | | | | | | | | | | | | |
| | Fiscal Years Ended | | |
| August 1,
2020 | | August 3,
2019 | | |
| | (millions) | | |
| Premium Fashion | $ | 115.3 | | | $ | 2.2 | | | |
| Plus Fashion | 25.2 | | | 17.8 | | | |
| Kids Fashion | 56.3 | | | 1.7 | | | |
Total impairment charges (a) | $ | 196.8 | | | $ | 21.7 | | | |
________
(a) The Company incurred additional impairment charges, which are considered to be outside the Company’s typical quarterly real-estate review. These additional charges are included within Restructuring and other related charges and are more fully described in Note 8.
Additionally, a long-lived Corporate asset impairment charges of $12.9 million was recorded during the second half of Fiscal 2020 which reflects an $8.4 million write-down of the book value of the Company’s campus in Mahwah, New Jersey to fair market value in connection with its planned sale, which closed in the fourth quarter of Fiscal 2020, and a $4.5 million write-down of the Duluth, Minnesota office building to its fair market value.
Depreciation
The Company recognized depreciation expense of $227.4 million in Fiscal 2020 and $273.4 million in Fiscal 2019, which is classified within Depreciation and amortization expense in the accompanying consolidated statements of operations.
11. Investment and Variable Interest Entity
As discussed in Note 3, 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.
The Company recorded income from Viking of approximately $3.1 million for the year ended August 1, 2020, which primarily represents results from the operations of maurices. The Company recognized its share of the income 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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 year ended August 1, 2020, the Company recognized fees from these services of approximately $62.3 million, which are primarily recorded as a reduction of Buying, distribution and occupancy expenses and Selling, general and administrative expenses.
As of August 1, 2020, the Company's investment in Viking was recorded at $45.2 million and the Company had a receivable due from maurices of $35.3 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 1, 2020. 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. The private label credit card revenue guarantee is recorded at its estimated fair value as of August 1, 2020 using Level 3 measurements and is not materially different from the amount recorded as of August 3, 2019.
12. Debt
Debt consists of the following:
| | | | | | | | | | | |
| August 1,
2020 | | August 3,
2019 |
| (millions) |
| Revolving credit facility | $ | 230.0 | | | $ | 0 | |
Less: unamortized debt issuance costs (a) | (2.1) | | | (3.2) | |
| 227.9 | | | (3.2) | |
| | | |
| Term loan | 1,271.6 | | | 1,371.5 | |
Less: unamortized original issue discount (b) | (8.9) | | | (13.8) | |
unamortized debt issuance costs (b) | (10.1) | | | (15.9) | |
| 1,252.6 | | | 1,341.8 | |
| Total debt | 1,480.5 | | | 1,338.6 | |
| Less: current portion | (227.9) | | | 0 | |
Less: Liabilities subject to compromise (c) | (1,252.6) | | | — | |
| Total long-term debt | $ | 0 | | | $ | 1,338.6 | |
_______
(a) Prior to the Chapter 11 Cases, the unamortized debt issuance costs were amortized on a straight-line basis over the life of the amended revolving credit agreement.
(b) Prior to the Chapter 11 Cases, the original issue discount and debt issuance costs for the term loan were amortized over the life of the term loan using the interest method based on an imputed interest rate of approximately 6.3%.
(c) See Note 2 for additional information.
Chapter 11 Cases
On July 23, 2020, the Company filed the Chapter 11 Cases, which impact both the Company’s obligations under the Amended Revolving Credit Agreement and Term Loan. Following the commencement of the Chapter 11 Cases, the Company may not make borrowings under the Amended Revolving Credit Agreement. As of August 1, 2020, the Term Loan is classified as Liabilities subject to compromise. Refer to Note 2 for additional information.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amended Revolving Credit Agreement (Prior to Chapter 11 Cases)
On February 27, 2018, the Company and certain of its domestic subsidiaries entered into an amendment and restatement of its revolving credit agreement dated January 3, 2011, as amended and restated as of June 14, 2012, as of March 13, 2013 and as of July 24, 2015, 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 $500 million, with an optional increase of up to $200 million.
The revolving 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 revolving credit facility also includes a $200 million letter of credit sublimit, all of which 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 swingline loan sublimit. The interest rates, pricing and fees under the agreement fluctuate based on the average daily availability, as defined therein. The Amended Revolving Credit Agreement has a maturity of 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 (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.
On March 16, 2020, the Company borrowed approximately $230 million under the Amended Revolving Credit Agreement, which represented at such time the total amount then available. The blended interest rate for the borrowings under the Amended Revolving Credit Agreement is approximately 3.74%, which factors a base rate range of 19 basis points to 30 basis points plus a spread of 150 basis points. The Company took this action as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of the current uncertainty in the global financial markets from COVID-19.
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.
Term Loan (Prior to Chapter 11 Cases)
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 incremental term facility of $200 million. The Company would also be eligible to borrow an unlimited amount, if it were to maintain a minimum senior secured leverage ratio as defined in the Term Loan (the "Senior Secured Leverage Ratio") among other requirements.
The Term Loan matures on August 21, 2022 and its 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. During Fiscal 2018, the Company made repayments totaling $225 million of which $180.0 million was applied to future quarterly scheduled payments such that the Company is not required to make its next quarterly payment of $22.5 million until November of calendar 2020. In July 2020, the Company used the cash proceeds from the sale of its corporate campus in Mahwah, New Jersey to make a prepayment of $20.4 million. The Company is also required to make mandatory prepayments in connection with certain prepayment events, including (i) commencing with the fiscal year ending July 29, 2017 if the Company has excess cash flow, as defined in the Term Loan, for any fiscal year and the Senior Secured Leverage Ratio for such fiscal year exceeds certain predetermined limits and (ii) from Net Proceeds, as defined in the Term Loan, of asset dispositions and certain casualty events that are greater than $25 million in the aggregate in any fiscal year and not reinvested (or committed to be reinvested) within one year, in each case subject to certain conditions and exceptions. No such mandatory
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
prepayments are due for Fiscal 2020. 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) one-month LIBOR plus 100 basis points, plus an applicable margin of 350 basis points. As of July 23, 2020, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of 5.25%. The Company entered into an interest rate swap agreement in March 2019 to mitigate some of the risk associated with the variable rate. Refer to Note 15 for additional information.
During the second quarter of Fiscal 2020, the Company repurchased $79.5 million aggregate principal amount of its Term Loan debt in open market transactions for a total purchase price of $49.4 million. The repurchase was settled in the second quarter of Fiscal 2020 and the Company recorded a gain on extinguishment of debt of $28.5 million, net of transaction costs and a write-off of a portion of deferred financing fees. In the third quarter of Fiscal 2020, the Company performed an additional repurchase of $42.0 million of principal amount of debt for a total purchase price of approximately $28.6 million. However, in order to maintain maximum financial flexibility as a result of COVID-19, this additional repurchase has not yet been settled and the underlying debt remains outstanding.
Restrictions under the Term Loan and the Amended Revolving Credit Agreement (collectively the "Borrowing Agreements") (Prior to Chapter 11 Cases)
Under the Amended Revolving Credit Agreement, the Company is required to maintain a fixed charge coverage ratio, as defined in the Amended Revolving Credit Agreement, of at least 1.00 to 1.00 any time in which the Company is in a covenant period, as defined in the Amended Revolving Credit Agreement (the "Covenant Period"). Such Covenant Period is in effect if Availability is less than the greater of (a) 10% of the Credit Limit (the lesser of total Revolving Commitments and the Borrowing Base) and (b) $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 23, 2020.
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 the greater of 20% of the aggregate revolving commitments. The Company's Term Loan allows us to make restricted payments, including dividends and share repurchases, up to a predetermined dollar amount. The dollar amount limitation is waived upon the satisfaction of certain conditions under the Term Loan, notably that at the time of and immediately after giving effect to such restricted payment, (i) there is no default or event of default, and (ii) the total leverage ratio, as defined in the Term Loan agreement, is below predetermined limits. Dividends are payable when declared by our Board of Directors.
The Company’s obligations under the Borrowing Agreements are guaranteed by certain of its domestic subsidiaries (the “Subsidiary Guarantors”). As collateral under the Borrowing Agreements and the guarantees thereof, the Company and the Subsidiary Guarantors have granted to the administrative agents for the benefit of the lenders a first priority lien on substantially all of their tangible and intangible assets, including, without limitation, certain domestic inventory and certain material real estate.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
| | | | | | | | | | | | | | |
| | | August 1,
2020 | | August 3,
2019 |
| | | (millions) |
| Prepaid expenses | | $ | 66.0 | | | $ | 118.4 | |
Accounts and other receivables (a) | | 101.4 | | | 122.2 | |
| Restricted cash | | 1.2 | | | 1.2 | |
| Other current assets | | 0.5 | | | 0.5 | |
| Total prepaid expenses and other current assets | | $ | 169.1 | | | $ | 242.3 | |
________
(a) Decrease primarily due to the adoption of ASC 842 (see Note 5 for more information) and lower third-party receivables due from maurices for services performed under the agreements described in Note 3.
14. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
| | | | | | | | | | | | | | |
| | | August 1,
2020 | | August 3,
2019 |
| | | (millions) |
| Accrued salary, wages and related expenses | | $ | 49.8 | | | $ | 99.3 | |
| Accrued operating expenses | | 6.4 | | | 126.6 | |
| Sales tax payable | | 9.8 | | | 17.8 | |
| Income taxes payable | | 4.0 | | | 7.1 | |
| Other | | 0.1 | | | 22.5 | |
| Total accrued expenses and other current liabilities | | $ | 70.1 | | | $ | 273.3 | |
Reduction in balances as of August 1, 2020 reflects a reclassification of amounts to Liabilities subject to compromise. Refer to Note 2 for additional information.
15. Derivative Financial Instruments
As discussed in Note 12, the interest rate under the Company's Term Loan is based on a variable rate. Therefore, the Company had 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.
Since the Chapter 11 Cases represent an event of default as defined under the terms of the Company’s interest rate swap agreement discussed in Note 12, the counterparty terminated the swap agreement on July 23, 2020. As a result of the termination, the fair value of $8.7 million, which was recorded as a deferred loss within Accumulated other comprehensive loss, was recognized in the Company’s consolidated statement of operations in the fourth quarter of Fiscal 2020. In addition, a termination payment of $7.3 million was expected to be paid in the first quarter of Fiscal 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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The amount of losses reclassified from Accumulated other comprehensive loss into earnings related to the Company's derivative instrument during the fiscal year ended August 1, 2020 was $11.3 million and was classified within Interest Expense in the consolidated statements of operations.
16. 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(4) | Quoted pricesNo amounts are reported in this column as none of the NEOs received a payout under the annual IC program for identical instruments in active markets;Fiscal 2020. |
Level 2(5) | Quoted pricesAmounts shown for similar instruments in active markets; quoted pricesFiscal 2020 reflect: (i) for identical or similar instruments in markets that are recently traded (not active)Mr. Muto, the Company’s contribution to Mr. Muto’s defined contribution plan account ($11,162), the Company’s contribution to Mr. Muto’s non-qualified deferred compensation plan account ($40,769) and the cost attributable to Mr. Muto’s personal parking service ($2,844); 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. (ii) for Mr. Lamadrid, the Company’s contribution to Mr. Lamadrid’s defined contribution plan account ($6,865). |
Outstanding Equity Awards at End of Financial InstrumentsFiscal 2020
As ofThe following table provides information relating to outstanding equity awards held by the NEOs at August 1, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Option Awards | | Stock Awards |
| Name | | Grant Date | | Number of Securities Underlying Unexercised Options Exercisable
(#) | | Number of Securities Underlying Unexercised Options Unexercisable
(#) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | | Option Exercise Price
($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested
(#) | | Market Value of Shares or Units of Stock That Have Not Vested
($) | | Equity Incentive Plan Awards:
Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
| Gary Muto | | 10/03/2018(1) | | 3,108 | | 3,108 | | | | 78.40 | | 10/03/2025 | | | | | | | | |
| | 05/01/2019(2) | | | | | | 137,500 | | 23.40 | | 05/01/2026 | | | | | | | | |
| | 10/02/2019(3) | | | | 17,500 | | | | 5.20 | | 10/02/2026 | | | | | | | | |
| | 05/01/2019(4) | | | | | | | | | | | | | | | | 97,881 | | 0 |
| Carrie W. Teffner | | 05/01/2019(5) | | | | | | 37,500 | | 23.40 | | 05/01/2026 | | | | | | | | |
| | 05/01/2019(6) | | | | | | | | | | | | | | | | 26,694 | | 0 |
| Dan Lamadrid | | 09/27/2017(7) | | 1,418 | | 1,417 | | | | 47.40 | | 09/27/2024 | | | | | | | | |
| | 10/03/2018(8) | | 354 | | 354 | | | | 78.40 | | 10/03/2025 | | | | | | | | |
| | 10/02/2019(9) | | | | | | 2,500 | | 5.20 | | 10/02/2026 | | | | | | | | |
| | 10/02/2019 (10) | | | | 5,000 | | | | 5.20 | | 10/02/2026 | | | | | | | | |
| Justin MacFarlane | | 01/31/2020(11) | | | | 10,000 | | | | 4.46 | | 01/31/2027 | | | | | | | | |
| | 01/31/2020(11) | | | | 5,000 | | | | 4.46 | | 01/31/2027 | | | | | | | | |
| | | | | |
| (1) | The stock options granted to Mr. Muto on October 3, 2018 vest 50% on the first anniversary (October 3, 2019) and 50% on the second anniversary (October 3, 2020), in each case, of the grant date. |
| (2) | The stock options granted to Mr. Muto on May 1, 2019 vest subject to achievement of designated performance hurdles, as described above, with 25% of the stock options vesting upon achievement of the $3 Hurdle, an additional 25% of the stock options vesting upon achievement of the $5 Hurdle and the final 50% of the stock options vesting upon achievement of the $7 Hurdle. |
| (3) | The stock options granted to Mr. Muto on October 2, 2019 vest 50% on the first anniversary (October 2, 2020) and 50% on the second anniversary (October 2, 2021), in each case, of the grant date. |
| (4) | The RSUs granted to Mr. Muto on May 1, 2019 vest subject to achievement of designated performance hurdles, as described above, with 25% of the RSUs vesting upon achievement of the $3 Hurdle, an additional 25% of the RSUs vesting upon achievement of the $5 Hurdle and the remaining 50% of the RSUs vesting upon achievement of the $7 Hurdle. |
| (5) | The stock options granted to Ms. Teffner on May 1, 2019 vest subject to achievement of designated performance hurdles, as described above, with 25% of the stock options vesting upon achievement of the $3 Hurdle, an additional 25% of the stock options vesting upon achievement of the $5 Hurdle and the remaining 50% of the stock options vesting upon achievement of the $7 Hurdle. |
| (6) | The RSUs granted to Ms. Teffner on May 1, 2019 vest subject to achievement of designated performance hurdles, as described above, with 25% of the RSUs vesting upon achievement of the $3 Hurdle, an additional 25% of the RSUs vesting upon achievement of the $5 Hurdle and the remaining 50% of the RSUs vesting upon achievement of the $7 Hurdle. |
| (7) | The stock options granted to Mr. Lamadrid on September 27, 2017 vest in substantially equal installments on each of the second anniversary (September 27, 2019) and third anniversary (September 27, 2020), in each case, of the grant date. |
| (8) | The stock options granted to Mr. Lamadrid on October 3, 2018 vest in substantially equal installments on each of the first anniversary (October 3, 2019) and second anniversary (October 3, 2020), in each case, of the grant date. |
| (9) | The stock options granted to Mr. Lamadrid on May 1, 2019 vest subject to achievement of designated performance hurdles, as described above, with 25% of the stock options vesting upon achievement of the $3 Hurdle, an additional 25% of the stock options vesting upon achievement of the $5 Hurdle and the final 50% of the stock options vesting upon achievement of the $7 Hurdle. |
| (10) | The stock options granted to Mr. Lamadrid on October 2, 2019 vest 50% on the first anniversary (October 2, 2020) and 50% on the second anniversary (October 2, 2021), in each case, of the grant date. |
| (11) | The stock options granted to Mr. MacFarlane on January 31, 2020 vest 50% on the first anniversary (January 31, 2021) and 50% on the second anniversary (January 31, 2022), in each case, of the grant date. |
Employment Arrangements with our Executive Officers
We have entered into employment letters with all of our currently-employed NEOs. An “employment letter” does not have a term of employment; rather, the employment letter sets forth the minimum compensation and August 3,benefits that the NEO will receive during his or her employment. An NEO with an employment letter is an “employee at-will” (i.e., the Company may terminate such NEO at any time with or without “cause,” as defined in the applicable employment letter, subject to any applicable severance provisions, including the Executive Severance Plan).
The Compensation Committee believes that these employment arrangements are important to our NEOs and to the Company. Each NEO benefits from clarity of the terms of his or her employment. The Compensation Committee periodically reviews the terms of the employment arrangements and amends them as necessary to remain competitive and to carry out its objectives. Details of the terms of the specific employment arrangements are discussed below.
Gary Muto
Effective May 1, 2019, the Company believes that the carrying values of cash, cash equivalents and revolving credit facility approximates its fair value based on Level 1 measurements. The fair value of the Term Loan was determined to be $305.2 million as of August 1, 2020 and $850.3 million as of August 3, 2019 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 8 and Note 10, during Fiscal 2020, store and corporate assets of $217.4 million and operating lease right-of-use assets of $258.2 million related to 1,924 underperforming stores and 2 office building were written-down to their estimated fair values of $49.2 million of store and corporate assets and $107.1 million of right-of-use assets, resulting in impairment charges of $168.2 million in store and corporate assets and $151.1 million in right-of-use assets. None of these amounts related to our discontinued operations in Fiscal 2020. In Fiscal 2019, assets of $145.5 million related to 649 under-performing stores and 2 corporate buildings were written down to their estimated fair values of $60.2 million, resulting in total impairment charges of $85.3 million. Of these amounts, assets of $28.6 million related to 421 under-performing stores were written-down to their estimated fair values of $10.0 million resulting in impairment charges of $18.6 million related to discontinued operations. 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 7.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Income Taxes
Taxes on Income
Domestic and foreign pretax (loss) income from continuing operations is as follows:
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | |
| | | August 1,
2020 | | August 3,
2019 | | |
| | | (millions) | | |
| Domestic | | $ | (1,152.7) | | | $ | (795.0) | | | |
| Foreign | | (42.8) | | | 53.5 | | | |
| Total loss before (provision) benefit for income taxes and income (loss) from equity method investment | | $ | (1,195.5) | | | $ | (741.5) | | | |
The (provision) benefit for current and deferred income taxes is as follows:
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | |
| | | August 1,
2020 | | August 3,
2019 | | |
| Current: | | (millions) | | |
| Federal | | $ | 7.1 | | | $ | 0 | | | |
| State and local | | (1.6) | | | (4.0) | | | |
| Foreign | | (6.7) | | | (8.9) | | | |
| | | (1.2) | | | (12.9) | | | |
| Deferred: | | | | | | |
| Federal | | (8.1) | | | 30.9 | | | |
| State and local | | (2.0) | | | 5.5 | | | |
| Foreign | | (2.4) | | | 0.4 | | | |
| | | (12.5) | | | 36.8 | | | |
| Total (provision) benefit for income taxes | | $ | (13.7) | | | $ | 23.9 | | | |
The Company's net income tax expense in Fiscal 2020 was unfavorably impacted by certain non-routine, discrete items, includingentered into an increase of its valuation allowance for U.S. Federal and state and foreign 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.
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 Tax Cuts and Jobs Act (the "2017 Act"). SAB 118 allows for a measurement period that should not extend beyond one year from the 2017 Act enactment date of December 22, 2017 for companies to complete the accounting under Accounting Standards Codification Topic 740, “Income Taxes” ("ASC 740"). 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 2017 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 effective tax rate.
Tax Benefits Preservation Plan
On May 26, 2020, the Company adopted a Tax Benefits Preservation Plan (the “Plan”) as a measure to protect its existing net operating loss carryforwards and other tax benefits (“Tax Attributes”). Use of any Tax Attributes will be substantially limited if the Company experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code (“Section 382”). For
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
example, the Company’s ability to use its NOLs may become subject to limitation or may be reduced or eliminatedemployment letter with Gary Muto in connection with his appointment as CEO (the “Muto Offer Letter”). The Muto Offer Letter supersedes Mr. Muto’s employment offer letter with the Chapter 11 Cases.Company, dated as of June 1, 2017.
While the Plan is in effect, any person or group that acquires beneficial ownership of 4.9% or more of the Company’s common stock then outstanding without approval from the Board or without meeting certain customary exceptions would be subject to significant dilution in their ownership interest in the Company. Stockholders who currently own 4.9% or more of the Company’s outstanding common stock will not trigger the Plan unless they acquire 0.5% or more additional shares of common stock.
Pursuant to the Plan, one right will be distributedMuto Offer Letter, Mr. Muto receives a base salary at the annualized rate of $1,000,000 and is eligible to participate in the Company’s stockholdersperformance-based incentive compensation program at a target level of record for each share150% of commonhis base salary (with a maximum payout opportunity of 200% of target, or $3,000,000). The Muto Offer Letter also entitles Mr. Muto to participate in all of the Company’s retirement, insurance, and bonus, long-term incentive and other benefit plans, including the Omnibus Incentive Plan.
As set forth in the Muto Offer Letter, Mr. Muto received a one-time long-term incentive award of performance-based equity (the “Muto Promotion Grant”) under the Omnibus Incentive Plan. The Promotion Grant had a grant date value of $3,850,000, with approximately 60% of the value granted in the form of performance-based RSUs and approximately 40% of the value granted in the form of performance-based stock owned atoptions. Subject to Mr. Muto’s continued employment, the close of business on June 5, 2020. Each Right would initially representperformance-based stock options are eligible to vest in accordance with the rightsame vesting terms that apply to purchase fromMr. Lamadrid’s Promotion Grant.
If Mr. Muto’s employment is terminated by the Company one one-thousandthwithout “cause” or Mr. Muto resigns for “good reason” (defined as described below under the heading “Executive Severance Plan”), in each case, prior to a change in control (as defined in the Executive Severance Plan), he will become vested in a pro-rata portion of a share of our Series A Junior Participating Preferred Stock, par value $0.01 (the “Preferred Stock”) at a purchase price of $6.30 per one one-thousandth of a share. The preferredthe performance-based RSUs and performance-based stock will entitleoptions for which the holderapplicable Hurdle was achieved prior to exercise voting rights, receive dividends, participate in distributions andhis termination. If Mr. Muto’s employment with the Company terminates due to have the benefit of all other rights of holders of preferred stock. The Board may redeem the rights in whole, but not in part, for $0.001 per right (subject to adjustment) at any timehis death or disability prior to the closesecond anniversary of business on the tenth business day after the firstgrant date of public announcement that any personthe Promotion Grant, Mr. Muto (or his estate or group has triggeredlegal representative, as applicable) will receive full vesting of the Plan.
The rights will expire on the earliest of (i) the close of business on May 25, 2021, (ii) the time atperformance-based RSUs and performance-based stock options for which the rights are redeemedapplicable Hurdle was actually achieved prior to his termination due to death or exchanged, (iii)disability.
If Mr. Muto incurs a “Post-CIC Termination” (defined as described below under the time at which the Board determines that the Tax Attributes are fully utilized, expired, no longer necessaryheading “Executive Severance Plan”), and on or become limited under Section 382, or (iv) the beginning of the taxable year to which the Board determines no Tax Benefits may be carried forward.
Coronavirus Aid, Relief, and Economic Security Act
The CARES Act provides relief from certain requirements under U.S. GAAP and contains several corporate income tax provisions, including making remaining AMT credits immediately refundable; providing a 5-year carryback of net operating losses (“NOLs”) generated in tax years 2018, 2019, and 2020, and removing the 80% taxable income limitation on utilization of those NOLs if carried back to prior tax years or utilized in tax years beginning before 2021; and temporarily liberalizing the interest deductibility rules under Section 163(j) of the Internal Revenue Code, by raising the adjusted taxable income limitation from 30% to 50% for tax years 2019 and 2020 and giving taxpayers the election of using 2019 adjusted taxable income for purposes of computing 2020 interest deductibility. The CARES Act did not have a material impact to the Company’s financial condition or resultsdate of operation forsuch Post-CIC Termination, the twelve months ended August 1, 2020. The Company has requested a $1.4 million refundable AMT Credit and plans to defer the timing of payroll taxes as permitted by the CARES Act.
Effective Tax Rate
The Company’s effective tax rate is reflective of the jurisdictions where the Company has operations. The effective tax rate for Fiscal 2020$3 Hurdle was (1.1)%. The effective tax rate was impacted primarily by a valuation allowance on the Company’s net Federal and state deferred tax asset ("DTA") and a non-deductible impairment to goodwill.
In Fiscal 2019 based on the Company's financial performance, the Company determined it was 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 3, 2019, the Company had a $122.6 million valuation allowance against the aggregate carrying value of its deferred tax assets. Such valuation allowance provides for the uncertainty thatactually achieved, Mr. Muto will become vested in a portion of the recognized deferred tax assets may not be realizable. The valuation allowance increased by $270.8 million in Fiscal 2020 to $393.4 million as of August 1, 2020.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rateperformance-based RSUs and income taxes provided are as set forth below:
| | | | | | | | | | | | | |
| | Fiscal Years Ended | | |
| August 1,
2020 | | August 3,
2019 | | |
| (millions) | | |
Benefit for income taxes at the U.S. federal statutory rate (a) | $ | 250.5 | | | $ | 158.3 | | | |
| Increase (decrease) due to: | | | | | |
| State and local income taxes, net of federal benefit | 47.9 | | | 18.6 | | | |
| Foreign rate differential | 3.0 | | | 2.8 | | | |
| Tax Cuts and Job Act | 0 | | | 0 | | | |
| Federal valuation allowance | (217.3) | | | (65.3) | | | |
| State valuation allowance | (51.5) | | | (14.5) | | | |
| Share-based compensation | (5.7) | | | (3.1) | | | |
| Goodwill impairment | (31.3) | | | (57.9) | | | |
| Net change relating to uncertain income tax benefits | 2.2 | | | (2.5) | | | |
| GILTI | (3.8) | | | (7.7) | | | |
| Other – net | (7.7) | | | (4.8) | | | |
| Total (provision) benefit for income taxes | $ | (13.7) | | | $ | 23.9 | | | |
_______
(a) The Fiscal 2020 benefit of $250.5 million and the Fiscal 2019 benefit of $158.3 million include the $3.1 million and $(11.8) million Income (loss) from equity method investment respectively at the federal statutory tax rate.
Tax Incentives
In connection with the Company’s relocation of its Dressbarn and corporate offices to New Jersey, as well as the expansion of its distribution centers in Ohio and Indiana, the Company was approved for various state and local tax incentives. In order to receive these incentives, the Company will generally need to meet certain minimum employment or expenditure commitments, as well as comply with periodic reporting requirements. There is currently no future benefit expected as minimum employment commitments may not be met. Approximately $1.7 million was recognized in Fiscal 2020 and $5.9 million in Fiscal 2019.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred Taxes
Significant components of the Company's net deferred tax asset are as follows:
| | | | | | | | | | | | | | |
| | August 1,
2020 | | August 3,
2019 |
Deferred tax assets (a): | | (millions) |
| Inventories | | $ | 22.5 | | | $ | 15.4 | |
| Net operating loss carryforwards and tax credits | | 212.9 | | | 93.8 | |
| Operating lease liabilities | | 201.8 | | | 0 | |
| Section 163(j) capitalized interest | | 29.2 | | | 10.4 | |
| Accrued payroll and benefits | | 33.4 | | | 29.8 | |
| Share-based compensation | | 5.2 | | | 11.0 | |
| Straight-line rent | | 0 | | | 34.2 | |
| Federal benefit of uncertain tax positions | | 14.8 | | | 24.3 | |
| Gift cards and merchandise credits | | 10.3 | | | 9.3 | |
| Investments | | 9.6 | | | 6.8 | |
| Other | | 14.8 | | | 18.7 | |
| Total deferred tax assets | | 554.5 | | | 253.7 | |
| Deferred tax liabilities: | | | | |
| Depreciation | | 33.0 | | | 43.6 | |
| Amortization | | 30.4 | | | 62.8 | |
| Right-of-use assets | | 98.4 | | | 0 | |
| Other | | 5.0 | | | 15.8 | |
| Total deferred tax liabilities | | 166.8 | | | 122.2 | |
| Valuation allowance | | (393.4) | | | (122.6) | |
| Net deferred tax (liability) asset | | $ | (5.7) | | | $ | 8.9 | |
_______
(a) Deferred tax asset of $0.7 million is included within Other assets and $6.4 million of deferred tax liabilities is included within Liabilities subject to compromise as of August 1, 2020. Deferred tax asset of $9.4 million is included within Other assets and $0.5 million of deferred tax liabilities is included in Other non-current liabilities as of August 3, 2019.
Net Operating Loss Carry Forwards
As of August 1, 2020, the Company had U.S. Federal net operating loss carryforwards of $716.6 million and state net operating loss carryforwards of $780.2 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 2019 have a twenty-year carryforward period, with $81.2 million to expire in Fiscal 2036, $64.5 million to expire in Fiscal 2037, $128.8 million to expire in Fiscal 2038 and $442.1 million will carryforward indefinitely. The state net operating losses have carryforward periods with varying expiration dates and amounts as follows: $58.4 million in one to five years, $93.0 million in six to ten years, $111.3 million in eleven to fifteen years, $471.1 million in sixteen to twenty years and $46.4 million will carryforward indefinitely.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
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 related to continuing operations, excluding interest and penalties, is presented below:
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | |
| | August 1,
2020 | | August 3,
2019 | | |
| | | (millions) | | |
| Unrecognized tax benefit beginning balance | | $ | 49.8 | | | $ | 50.4 | | | |
| Additions related to tax positions in prior years | | 1.5 | | | 0.9 | | | |
| Reductions related to prior period tax positions | | (9.8) | | | (0.8) | | | |
| Reductions related to settlements with taxing authorities | | (1.5) | | | (0.1) | | | |
| Reductions related to expiration of statute of limitations | | (2.0) | | | (0.6) | | | |
| Unrecognized tax benefit ending balance | | $ | 38.0 | | | $ | 49.8 | | | |
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits for the Company’s continuing operations is presented below:
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | |
| | August 1,
2020 | | August 3,
2019 | | |
| | | (millions) | | |
| Accrued interest and penalties beginning balance | | $ | 24.5 | | | $ | 21.4 | | | |
| Additions (reductions) charged to expense, net | | (0.3) | | | 3.1 | | | |
| Accrued interest and penalties ending balance | | $ | 24.2 | | | $ | 24.5 | | | |
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 $59.5 million as of August 1, 2020 and $71.5 million as of August 3, 2019.
Future Changes in Unrecognized Tax Benefits
The amount of unrecognized tax benefits relating to the Company's tax positions is subject to changeperformance-based stock options, based on future events including, but not limited to,linear interpolation between 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 $1.0 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 $44.7 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 2014.
18. Commitments and Contingencies
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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 procurement of inventory and the occasional construction of new retail stores. 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 $99.8 million of outstanding letters of credit as of August 1, 2020.
Other Contingencies
On July 29, 2019, the Company received a letter from the Listing Qualifications Department staff of The Nasdaq Stock Market (“Nasdaq”), indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days,20-consecutive trading day period immediately preceding the Company no longer meetsdate of Mr. Muto’s Post-CIC Termination (the “Muto Termination Date Price”) and the requirementHurdles between which the Muto Termination Date Price falls. If Mr. Muto incurs a Pre-CIC Termination (defined as described below under the heading “Executive Severance Plan”), and on or prior to the date that the change in control is consummated, the $3 Hurdle is achieved, the cash payment Mr. Muto is entitled to receive pursuant to the Executive Severance Plan (as in effect on June 1, 2017) will include payment in respect of The Nasdaq Global Select Market to maintain a minimum bid price of $1 per share. Following the approvalportion of the reverseperformance-based RSUs and performance-based stock split byoptions, based on linear interpolation between the Company’s stockholders at the Company’s annual meeting of stockholders, on December 19, 2019, the Company announced that the Board approved a reverse stock splitclosing price of the Company’s common stock for the 20-consecutive trading day period immediately preceding the change in control (the “CIC Closing Date Price”) and the Hurdles between which the CIC Closing Date Price falls.
Mr. Muto is subject to one-year non-competition and two-year non-solicitation restrictions, as well as confidentiality and non-disclosure obligations.
Mr. Muto will continue to be a participant in the Company’s Executive Severance Plan, on the terms described below under the heading “Executive Severance Plan,” as modified by the Muto Offer Letter. For further information regarding Mr. Muto’s employment arrangements and the payments to which he may be entitled thereunder, see below under “Potential Payments Upon Termination or Change in Control - Gary Muto.”
Due to the commencement of the Chapter 11 Cases, the disbursement of severance pay and related benefits to Mr. Muto during the pendency of the Chapter 11 Cases is subject to, among other things, approval by the Bankruptcy Court and the restrictions regarding severance payments imposed by section 503(c) of the Bankruptcy Code.
Carrie W. Teffner
Effective May 1, 2019, the Company entered into an employment letter with Carrie W. Teffner in connection with her appointment as Interim Executive Chair of the Board (the “Teffner Offer Letter”).
Pursuant to the Teffner Offer Letter, Ms. Teffner receives a base salary at the annualized rate of $1,000,000 and is eligible to participate in the Company’s performance-based incentive compensation program at a ratiotarget level of 1-for-20, in order to regain compliance. On January 6, 2020, the150% of her base salary (with a maximum payout opportunity of 200% of target, or $3,000,000), as well as standard Company received written notice from the Listing Qualifications Department staff of Nasdaq stating that because the Company’s shares of common stock had a closing bid price at or above $1 per share for a minimum of ten consecutive business days, the Company’s stock had regained compliance with the minimum bid price requirement for continued listing on The Nasdaq Global Select Market asbenefits.
As set forth in Nasdaq Listing Rule 5450(a)(1)the Teffner Offer Letter, Ms. Teffner received a one-time long-term incentive award of performance-based equity (the “Appointment Grant”) under the Omnibus Incentive Plan. The Appointment Grant had a grant date value of $1,050,000, with approximately 60% of the value granted in the form of performance-based RSUs and approximately 40% of the value granted in the form of performance-based stock options. Subject to Ms. Teffner’s continued employment as Interim Executive Chair of the Board or service as a member of the Board, the performance-based RSUs and performance-based stock options subject to the Appointment Grant are eligible to vest in accordance with the same vesting schedule that applies to Mr. Lamadrid’s Promotion Grant, described above.
If Ms. Teffner’s employment as Interim Executive Chair of the Board ends due to the appointment of a Non-Executive Chair of the Board and Ms. Teffner continues to serve on the Board, the performance-based RSUs and performance-based stock options granted pursuant to the Appointment Grant will remain outstanding and eligible to vest.
If, prior to a change in control, (i) the Company terminates Ms. Teffner’s employment as Interim Executive Chair of the Board without “Cause” (as defined in the Omnibus Incentive Plan) and Ms. Teffner does not continue to serve as a member of the Board or (ii) Ms. Teffner has a “Termination of Directorship” (as defined in the Omnibus Incentive Plan) other than due to her resignation or her removal for “cause” under Delaware law, she will become vested in a pro-rata portion of the performance-based RSUs and performance-based stock options for which the applicable performance Hurdle was achieved prior to her termination.
In the event of Ms. Teffner’s termination as Interim Executive Chair of the Board or as a member of the Board due to her death or “Disability” (as defined in the Omnibus Incentive Plan) prior to the second anniversary of the grant date of the Appointment Grant, Ms. Teffner (or her estate or legal representative, as applicable) will receive full vesting of the performance-based RSUs and performance-based stock options for which the applicable Hurdle was actually achieved prior to her termination due to death or disability.
If, upon a change in control, (i) Ms. Teffner’s employment as Interim Executive Chair of the Board is terminated by the Company without Cause and Ms. Teffner does not continue to serve as a member of the Board or (ii) Ms. Teffner has a Termination of Directorship (other than due to her resignation or her removal for “cause” under Delaware law), in either case while serving on the Board after her employment as Interim Executive Chair of the Board ends due to the appointment of a Non-Executive Chair of the Board (each, a “Change in Control Termination”), and on or prior to the matterdate of such Change in Control Termination, the $3 Hurdle was actually achieved, Ms. Teffner will become vested in a portion of the performance-based RSUs and performance-based stock options based on linear interpolation between the closing price of the Company’s common stock for the 20-consecutive trading day period immediately preceding the Change in Control Termination (the “Teffner Termination Date Price”) and the Hurdles between which the Teffner Termination Date Price falls.
Ms. Teffner is now closed. Refersubject to Note 19non-competition and non-solicitation restrictions, as well as confidentiality and non-disclosure obligations.
Other than with respect to accelerated or continued vesting of the Appointment Grant as described above, Ms. Teffner is not entitled to receive cash severance or any other termination payments or benefits under the Teffner Offer Letter or the Executive Severance Plan.
Dan Lamadrid
Effective August 4, 2019, the Company entered into an employment letter with Dan Lamadrid in connection with his appointment as Executive Vice President and CFO (the “Lamadrid Offer Letter”). The Lamadrid Offer Letter supersedes Mr. Lamadrid’s employment offer letter with the Company, dated August 23, 2017.
Pursuant to the Lamadrid Offer Letter, Mr. Lamadrid receives a base salary at the annualized rate of $600,000 per year and is eligible to participate in the Company’s performance-based incentive compensation program at a target level of 75% of his base salary (with a maximum payout opportunity of 200% of target, or $900,000), as well as standard Company benefits.
If Mr. Lamadrid’s employment is terminated by the Company without “Cause” (as defined in the Lamadrid Offer Letter) prior to a change in control of the Company, he will become vested in a pro-rata portion of the performance-based stock options subject to the Promotion Grant (the “Performance-Based Options”) for additional informationwhich the applicable Hurdle was achieved prior to his termination.
If Mr. Lamadrid’s employment with the Company terminates due to his death or disability prior to the second anniversary of the grant date of the Performance-Based Options, Mr. Lamadrid (or his estate or legal representative, as applicable) will receive full vesting of the Performance-Based Options for which the applicable Hurdle was actually achieved prior to his termination due to death or disability.
If Mr. Lamadrid incurs a Post-CIC Termination, and on or prior to the date of such termination the $3 Hurdle was actually achieved, Mr. Lamadrid will become vested in a portion of the Performance-Based Options based on linear interpolation between the closing price of the Company’s common stock for the 20-consecutive trading day period immediately preceding the date of Mr. Lamadrid’s termination (the “Lamadrid Termination Date Price”) and the Hurdles between which the Lamadrid Termination Date Price falls. If Mr. Lamadrid incurs a Pre-CIC Termination, and on or prior to the date that the change in control is consummated, the $3 Hurdle is achieved, the cash payment Mr. Lamadrid is entitled to receive pursuant to the Executive Severance Plan will include payment in respect of a portion of the Performance-Based Options, based on linear interpolation between the closing price of the Company’s common stock for the 20-consecutive trading day period immediately preceding the change in control (the “CIC Closing Date Price”) and the Hurdles between which the CIC Closing Date Price falls.
Mr. Lamadrid is subject to one-year non-competition and two-year non-solicitation restrictions, as well as confidentiality and non-disclosure obligations.
Mr. Lamadrid will continue to be a participant in the Company’s Executive Severance Plan, on the reverseterms described below under the heading “Executive Severance Plan,” as modified by the Lamadrid Offer Letter.
Due to the commencement of the Chapter 11 Cases, the disbursement of severance pay and related benefits to Mr. Lamadrid during the pendency of the Chapter 11 Cases is subject to, among other things, approval by the Bankruptcy Court and the restrictions regarding severance payments imposed by section 503(c) of the Bankruptcy Code.
Justin MacFarlane
Effective December 2, 2019, the Company entered into an employment letter with Justin MacFarlane in connection with his appointment as Executive Vice President and Chief Customer Officer (the “MacFarlane Offer Letter”)
Pursuant to the MacFarlane Offer Letter, Mr. MacFarlane receives a base salary at the annualized rate of $675,000 and is eligible to participate in the Company’s performance-based incentive compensation program at a target level of 75% of his base salary (with a maximum payout opportunity of 200% of target, or $1,012,500), as well as standard Company benefits. Pursuant to the MacFarlane Offer Letter, Mr. MacFarlane received a one-time cash sign-on bonus in the amount of $250,000.Under the terms of the MacFarlane Offer Letter, Mr. MacFarlane was entitled to receive time-vesting and performance vesting non-qualified stock split.
As a resultreceivedgranted 100% time-vesting non-qualified stock options, that vest ratably over a delisting notice from the Listing Qualifications Department staff of Nasdaqtwo-year period, to Mr. MacFarlane instead.
Mr. MacFarlane is subject to one-year non-competition and on August 4, 2020, trading oftwo-year non-solicitation restrictions, as well as confidentiality and non-disclosure obligations.
Mr. MacFarlane will continue to be a participant in the Company’s common stock was suspended from Nasdaq. Refer to Note 2 for more information.
Legal Proceedings
Chapter 11 Cases
On July 23, 2020,Executive Severance Plan, on the Debtors filed the Chapter 11 Cases seeking reliefterms described below under the Bankruptcy Code. Subjectheading “Executive Severance Plan.”
Due to certain exceptions under the Bankruptcy Code, the filingcommencement of the Chapter 11 Cases, also automatically stayed, pursuantthe disbursement of severance pay and related benefits to Section 362(a)Mr. MacFarlane during the pendency of the Chapter 11 Cases is subject to, among other things, approval by the Bankruptcy Court and the restrictions regarding severance payments imposed by section 503(c) of the Bankruptcy Code,Code.
Executive Severance Plan
We maintain the filing or the continuationExecutive Severance Plan, as amended and restated as of most legal proceedings and other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. See Note 2 for more information about the Chapter 11 Cases.
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. 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
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
as joint lead-plaintiffs (“Lead Plaintiffs”).The Lead Plaintiffs’ filed an amended complaint on November 21, 2019, which shortened the class period. Defendants filed a motion to dismiss the amended complaint on February 7, 2020. The motion has now been fully briefed.
However, the Company filed a Notice of Suggestion of Bankruptcy with the Court on July 27,May 26, 2020, and on July 28, 2020, the Court issued an order staying the proceedings and administratively terminated the motion to dismiss without prejudice. The motion may be re-filed at a later date. Lead Plaintiffs’ counsel has also filed an objection to Ascena’s bankruptcy plan (the “Plan”) in order to tryprovide severance benefits to preservecertain key employees, which for Fiscal 2020, included all of our NEOs (other than Ms. Teffner). The following summary describes the purported class claims against the Company and its officers and directors from any possible release pursuant to the Plan. Given the early statekey provisions of the matter, we are unableExecutive Severance Plan as they would have applied to make a determinationour NEOs (other than Ms. Teffner) at this time as to the likelihoodend of an unfavorable outcome or to estimateFiscal 2020.
The Executive Severance Plan provides participants with the amount or range of any possible loss.
Derivative Actions
As previously reported, 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 alleged 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 plaintiff sought 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. As previously disclosed, on September 19. 2019, Plaintiff voluntarily dismissed the action.
Subsequently, on June 19, 2020 Barkha Shah, 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 (1) breach of fiduciary duty by the management and the Board for 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, the timing of certain impairment charges to the value of ANN’s goodwill, and by approving certain compensation terms in Mr. Jaffe’s May 1, 2019 Transition and Separation Agreement; (2) unjust enrichment against certain present and former directors for compensation received while supposedly concealing material negative information; and (3) contribution and indemnificationfollowing severance benefits in the event Ascena is found liableof a termination of employment by the Company without “cause” (as defined in the Executive Severance Plan and described below), other than a termination that constitutes a termination in connection with a “change in control” (as defined in the Executive Severance Plan):
| | | | | |
| |
| • | 12-month salary continuation; and |
| |
| • | a pro rata portion of his or her annual bonus based on actual results; and |
| |
| • | continued health insurance coverage at the active employee rate for a period up to 12 months. |
In lieu of the benefits described above, if such executive would have been terminated without cause or terminated employment for federal securities law violations.
On July 27, 2020 Ascena filed“good reason” (as defined in the Executive Severance Plan and described below) during (1) the 90 day period prior to a Notice of Suggestion of bankruptcy,change in control (such termination, a “Pre-CIC Termination”), or (2) the period commencing on a Change in Control and ending 24 months later (such termination, a “Post-CIC Termination”), the executive would have been eligible for the following upon the change in control (in the case was subsequently stayed. Defendants believe they have strong defensesof a Pre-CIC Termination), or upon the termination date (in the case of a Post-CIC Termination):
| | | | | |
| |
| • | a lump sum equal to 1.5 times (or 2.0 times in the case of Messrs. Muto, Lamadrid and MacFarlane, pursuant to their respective participation clarification agreements) the sum of his or her annual base salary and the greater of the executive’s a) annual target bonus for the year in which the CIC occurs; or b) average three-year aggregate annual bonus equaling the sum of the two seasonal bonuses paid in each such fiscal year; and |
| |
| • | a pro rata portion of his or her annual bonus based on actual results; and |
| |
| • | continued health insurance coverage at the active employee rate for a period up to 18 months; and |
| |
| • | in the case of a Post-CIC Termination, full vesting of any unvested equity awards (or in the case of a Pre-CIC Termination, a lump sum cash equivalent payment equal to the aggregate fair market value of the unvested equity awards that were forfeited upon the termination). |
Under the Executive Severance Plan, “cause” generally means the occurrence of any of the following: (i) conviction of (including a plea of nolo contendere) to these claims and will respond accordingly. Becausea felony or other crime involving fraud, dishonesty or moral turpitude; (ii) failure to satisfactorily perform duties; (iii) fraud, embezzlement or dishonesty; (iv) gross misconduct or gross negligence in connection with the action is purportedly on behalf of Ascena, any recovery in the action would belong to Ascena.
Other Litigation
The Company is involved in routine litigation arising in the normal course of business. While no assurances can be given as to the ultimate outcome of these matters, in the opinion of management, such litigation is not expected to have a materialCompany’s business that has an adverse effect on the Company’s consolidated financial statements. Additionally, duebusiness; or (v) an intentional or willful act or omission that is detrimental to issues arising from COVID-19, including the temporary closuresCompany’s business or reputation.
Under the Executive Severance Plan, “good reason” generally means the occurrence of our retail stores, weany of the following: (i) any material diminution of responsibilities, duties or authority, (ii) any reduction in base salary and/or benefits, other than a reduction that is uniformly applied to similarly situated employees of not more than 10%, (iii) relocation of the principal place of work outside of a 30-mile radius of the then current work location, or (iv) the failure of a successor to the Company to assume the Executive Severance Plan. With respect to Mr. Muto, under the Muto Offer Letter, “good reason” also includes (A) any material breach of the Muto Offer Letter by the Company or the Company’s failure to pay compensation and benefits in accordance with the Muto Offer Letter, and (B) prior to a change in control, any reduction in base salary and/or benefits, other than a reduction that is uniformly applied to similarly situated employees of not more than 10%.Each NEO has entered into a participation clarification agreement that provides that an NEO will also have among other measures, in order to preserve capital, withheldrent payments on store locations and extended vendor paymentterms for orders placed“good reason” in the ordinary course of business. It is possible that our landlords or other vendors may elect to pursue litigation against the Company related to these payments. If such litigation is pervasive enough, it could result in monetary losses that could be material in the aggregate.
19. Equity
Common Stock Split
On December 19, 2019, the Company announced that the Board has approved a reverse stock splitevent of the Company’s common stock atfailure to provide the NEO with a ratio of 1-for-20. In addition, there was a corresponding reduction in(x) post-emergence short term incentive grant during the number of Company’s authorized shares of common stock30 day period following the approval of the reverse stock split bydate on which the Company’s stockholders atnew board of directors approves a new budget and (y) post-emergence market-based management incentive plan during the 45 day period following the date on which the Company’s annual meetingnew board of stockholders held on December 10, 2019. The reverse stock split became effective atdirectors approves a new long term business plan for the close of business on December 18, 2019. The reverse stock split reduced the number of shares of common stock issued and outstanding fromCompany.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
approximately 199,444,436 to approximately 9,972,221. The authorized number of shares of common stock has been reduced by a corresponding ratio to 18 million.
Capital Stock
The Company’s capital stock consists of one class of common stock and one class of preferred stock. There are 18 million shares of common stock authorized to be issued and 5,000 shares of preferred stock authorized to be issued. There are 0 shares of preferred stock issued or outstanding.
Common Stock Repurchase Program
In December 2015,severance benefits payable under 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 millionSeverance Plan are subject to certain restrictions underto: (1) the terms of the Company's Borrowing Agreements, as more fully described in Note 12. 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.
NaN shares of common stock were repurchased in Fiscal 2020 or Fiscal 2019. Cumulative repurchases under the 2016 Stock Repurchase Program total 0.1 million shares of common stock, which were repurchased at an aggregate cost of $18.6 million and the remaining availability under the 2016 Stock Repurchase Program was approximately $181.4 million at August 1, 2020.
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 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 |
| | August 1, 2020 | | August 3, 2019 | | |
| | | (thousands) |
| Basic | | 9,994.0 | | | 9,874.0 | | | |
Dilutive effect of stock options, restricted stock and restricted stock units (a) | | 0 | | | 0 | | | |
| Diluted shares | | 9,994.0 | | | 9,874.0 | | | |
________
(a)There was no dilutive effect of stock options, restricted stock and restricted stock units for all periods presented 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 onlysix month delay to the extent the underlying performance or market conditions (a) are satisfied prior to the endrequired under Section 409A of the reporting period or (b) would be satisfied ifCode; (2) the endexecutive’s execution and non-revocation of the reporting period was the enda general release of the related contingency period, and the result would be dilutive under the treasury stock method. Potentially dilutive instruments are not includedclaims in the computation of net loss per share for Fiscal 2020 and Fiscal 2019 as the impact of those items would have been anti-dilutive due to the net loss incurred for these periods. For Fiscal 2020 and Fiscal 2019, respectively, 1.0 million and 1.2 million shares of anti-dilutive options and restricted stock units were excluded from the diluted share calculations.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
20. 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 amendment to the 2016 Omnibus Incentive plan was approved by the Company's shareholders and became effective on December 14, 2018 to increase the aggregate number of shares that may be issued under the plan by an additional 0.7 million shares to 4.2 million shares of stock-based awards to eligible employees and directors of the 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 August 1, 2020, there were approximately 1.1 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.
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 |
| | August 1,
2020 | | August 3,
2019 | | |
| | | (millions) |
| Compensation expense | | $ | 4.3 | | | $ | 11.5 | | | |
| Income tax benefit | | $ | 0 | | | $ | 2.4 | | | |
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 two 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.
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.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 |
| | August 1,
2020 | | August 3,
2019 | | |
| Expected term (years) | | 5.2 | | 5.2 | | |
| Expected volatility | | 61.7 | % | | 47.5 | % | | |
| Risk-free interest rate | | 1.5 | % | | 2.9 | % | | |
| Expected dividend yield | | 0 | % | | 0 | % | | |
| Weighted-average grant date fair value | | $ | 2.74 | | | $ | 1.77 | | | |
A summary of the stock option activity under service-based plans during Fiscal 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
Shares | | Weighted-
Average
Exercise Price | | Weighted-
Average Remaining Contractual
Terms | | Aggregate Intrinsic Value (a) |
| | | (thousands) | | | | (years) | | (millions) |
| Options outstanding – August 3, 2019 | | 850.4 | | | $ | 156.00 | | | 4.1 | | $ | 0 | |
| Granted | | 275.9 | | | 5.12 | | | | | |
| Exercised | | 0 | | | 0 | | | | | |
| Canceled/Forfeited | | (443.0) | | | 177.66 | | | | | |
| Options outstanding – August 1, 2020 | | 683.3 | | | $ | 81.05 | | | 4.6 | | $ | 0 | |
Options vested and expected to vest at August 1, 2020 (b) | | 676.6 | | | $ | 81.75 | | | 4.6 | | $ | 0 | |
| Options exercisable at August 1, 2020 | | 374.2 | | | $ | 130.17 | | | 3.4 | | $ | 0 | |
________
(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 August 1, 2020, there was $1.0 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 0.6 years. The total intrinsic value of options exercised during Fiscal 2020 and Fiscal 2019 was de minimis. The total grant date fair value of options that vested during Fiscal 2020 and, Fiscal 2019, was approximately $6.2 million and $9.6 million, respectively.
Market-based Stock Options
Market-based non-qualified stock options (“NQSO Awards”) entitle the holder to receive options to purchase shares of common stockfavor of the Company duringwithin a specified time period; (3) the vesting period. However,executive’s compliance with certain non-competition and non-solicitation restrictive covenants following a termination (other than a Pre-CIC Termination or a Post-CIC Termination); and (4) reduction to avoid any excise tax on “parachute payments” if the executive would benefit from such awardsreduction as compared to paying the excise tax. Any benefits payable under the Executive Severance Plan supersede and are subject toin lieu of any severance benefits and/or payments provided under any other agreements, arrangements or severance plans by and between the grantee’s continuing employmentexecutive and the Company’s achievementCompany.
Nonqualified Deferred Compensation
After satisfying a waiting period, our NEOs are eligible for participation in our Executive Retirement Plan, which is an unfunded, unsecured non-qualified deferred compensation plan. The Executive Retirement Plan allows our executives, including our NEOs, to defer a maximum of certain market-based goals over50% of their base salary and 75% of their bonuses paid or other performance-based cash compensation awarded. Elections to participate in the pre-defined performance period.
The Company granted 0.2 million of NQSO Awards during the third quarter of Fiscal 2019 at an exercise price of $23.40 per share. The weighted-average grant date fair value of the awards was $4.40 per share. 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 basedExecutive Retirement Plan are made by our executives on an expected term of 7 years, a risk-free interest rate of 2.3%, an expected dividend yield of 0 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. The total unrecognized compensation cost at August 1, 2020 was $0.6 million to be recognized over 1.75 years. There were no material grants of NQSOs during Fiscal 2020 and there were no vestings of the NQSOs Awards as of August 1, 2020.
Restricted Equity Awards
The 2010 Stock Plan 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”).
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
The fair values of service-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 service-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 based upon the service and performance-based conditions.
A summary of Service-based Restricted Equity Awards activity during Fiscal 2020 is as follows:
| | | | | | | | | | | |
| | Service-based
Restricted Equity Awards |
| | Number of
Shares | | Weighted-
Average
Grant Date
Fair Value Per
Share |
| | (thousands) | | |
| Nonvested at August 3, 2019 | 67.4 | | | $ | 91.42 | |
| Granted | 0 | | | 0 | |
| Vested | (54.2) | | | 82.58 | |
| Canceled/Forfeited | (7.8) | | | 88.68 | |
| Nonvested at August 1, 2020 | 5.4 | | | $ | 183.84 | |
As of August 1, 2020, there was $0.1 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 0.2 years. The total fair value of the service-based Restricted Equity Awards vested during Fiscal 2020 and Fiscal 2019 was $0.3 million and $5.6 million, respectively. The weighted-average grant-date fair value per share of the service-based Restricted Equity Awards granted during Fiscal 2019 was $75.00, respectively.
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 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 0 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.
The Company granted approximately 0.1 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 $9.35 per share. The total unrecognized compensation at August 1, 2020 was $0.8 million to be recognized over 1.8 years. There were no vestings of the market-based Restricted Equity Awards as of August 1, 2020.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
21. 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 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.
In June 2020, the Company announced that it was accelerating payment under its currently active LTIP plans, for which the pre-established targets have already been met. After the June 2020 payout, expense associated with those portions of the LTIP plans where the pre-established targets were not met reversed in the fourth quarter of Fiscal 2020. As a result of the payout, the Company recorded a reversal of expense of approximately $4.5 million to reflect the differential between the amount accrued as of the end of the third quarter and the amount actually paid in the fourth quarter. Accordingly, there was no liability outstanding as of the end of Fiscal 2020 associated with its LTIP plans.
The Company recognized $(5.9) million and $0.1 million in compensation expense under the LTIP during Fiscal 2020 and Fiscal 2019, respectively, which was recorded within Selling, general and administrative expenses in the accompanying consolidated financial statements.
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 establishedbasis, prior to the beginning of the year in which the compensation is earned.
We make Company contributions to the Executive Retirement Plan in an amount determined by us for each plan year. Effective with the plan year started January 1, 2015, the Company contributes 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 $8.0 million inFor Fiscal 2020, and $15.3 millionNEOs who were eligible to participate in Fiscal 2019. Of these amounts, $0.5 million and $3.1 million were recorded in discontinued operations in Fiscal 2020 and Fiscal 2019, respectively. The decrease in the retirement savings plan expense in Fiscal 2020 compared to the prior year is primarily due to the temporary suspension of the matching contribution in response to COVID-19, the wind down of the Dressbarn brand that was completed in the second quarter of Fiscal 2020 and the sale of maurices in the fourth quarter of Fiscal 2019.
Executive Retirement Plan
The Company sponsors an Executive Retirement Plan (the “ERP Plan”)and Ascena 401(k) Savings Plan received a Company matching contribution of 1% of up to $285,000 of total compensation deferred and Company matching contribution of 5% of compensation over $285,000 deferred through December 31, 2019. The Company will not make any matching contributions for certain officersany NEOs in respect of January through July of Fiscal 2020.
Participants are immediately vested in deferrals of their own compensation. Company matching contributions vest in equal 25% increments after 2 years, 3 years, 4 years and key executives. 5 years of service with the Company. All Company matching contributions held and received by the participant are vested after five years of service with the Company.
The ERP Plan is a non-qualifiedaggregate balance of each participant’s account consists of amounts that have been deferred compensation plan. The purposeby the participant, Company matching contributions and earnings (or losses) thereon. We do not deposit any amounts into any trust or other account for the benefit of plan participants. In accordance with tax requirements, the assets of the ERP Plan is to attract and retain a select group of management and to provide them with an opportunity to defer compensation on a pretax basis above U.S. Internal Revenue Service limitations. ERP Plan balances cannot be rolled over to another qualified plan or IRA upon distribution. Unlike a qualified plan, the Company is not required to pre-fund the benefits payable under the ERP Plan.
ERP Plan participants can contribute up to 50% of base salary and 75% of bonuses, before federal and state taxes are calculated. The Company makes a matching contribution to the ERP Plan in the amount of 100% on the first 1% of base salary and bonus salary deferred up to $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 participants 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 $0.5 million in Fiscal 2020 and $1.0 million in Fiscal 2019 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 ERPExecutive Retirement Plan are subject to market appreciationclaims of our creditors. Account balances are deemed invested in accordance with investment elections designated by the participant. Investment option transfers may be made daily. There are 27 investment options available to plan participants, including fixed income funds, domestic and depreciation,international equity funds, blended funds and pre-allocated lifestyle fund investments. Interest and gains or losses on each deemed investment are credited or debited to each participant’s account daily based on the actual performance of the funds in which resultedthe participant is deemed invested.
Deferred account balances are distributed to the plan participants in expenseaccordance with elections made by the participant at the time the deferral is made, subject to Section 409A of $2.9 millionthe Code. A participant may elect to receive distributions, either in a lump sum or in installments, upon his or her termination of employment with the Company, disability, death, an unforeseeable emergency or a change in control, each of the last two events within the meaning of Section 409A of the Code. A participant may elect to receive distributions while still employed by the Company if he or she elects to have in-service or education distributions, made at a date specified by the participants.
On August 27, 2020, the Debtors received authority from the Bankruptcy Court to continue to administer the Company’s nonqualified deferred compensation plan as provided by the Wages and Benefits Order.
Compensation of Directors
The total compensation of our non-employee directors earned for Fiscal 2020 and $1.0 million in Fiscal 2019. The Company’s obligations under the ERP Plan, including employee compensation deferrals, matching employer contributions and investment returns on account balances, were
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$22.0 million as of August 1, 2020 and $60.5 million as of August 3, 2019. As of August 1, 2020, $2.4 million was classified within Accrued expenses and other current liabilities, $13.8 million was classified within Other non-current liabilities and $5.8 million was classified in Liabilities subject to compromiseis shown in the accompanying consolidated balance sheets. As of August 3, 2019, $31.6 million was classified within Accrued expenses and other current liabilities and $28.9 million was classified within Other non-current liabilities in the accompanying consolidated balance sheets.following table.We do not pay additional compensation to our NEOs for their service on our board.
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 2020 and Fiscal 2019 relating to this plan were de minimis.
22. Segments
The Company's segment reporting structure reflects an approach designed to optimize the operational coordination and resource allocation of its businesses across multiple functional areas including specialty retail, direct channel and licensing. The Company classifies its businesses into 3 reportable operating segments: Premium Fashion, Plus Fashion and Kids Fashion. Each segment is reviewed by 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. In addition, during the second quarter of Fiscal 2020, the Company completed the Dressbarn wind down, which concludes the reporting of the Value Fashion segment. The Company 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 3 reportable segments are as follows:
•Premium Fashion segment – consists primarily of the specialty retail, outlet and direct channel operations of the Ann Taylor and LOFT brands.
•Plus Fashion segment – consists of the specialty retail, outlet and direct channel operations of the Lane Bryant and Catherines brands.
•Kids Fashion segment – consists of the specialty retail, outlet, direct channel and licensing operations of the Justice brand.
The accounting policies of the Company’s reporting segments are consistent with those described in Notes 4 and 5. 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 restructuring and other related charges, have not been allocated to the segments, which is consistent with the CODM's evaluation of the segments.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net sales and operating (loss) income for each operating segment | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) | | Option Awards ($)(2) | | Total ($) |
| Katie J. Bayne | | 90,000 | | — | | 90,000 |
| Gary Begeman | | 167,361 | | — | | 167,361 |
| Kate Buggeln | | 132,500 | | 6,240 | | 138,740 |
David Jaffe(1) | | 45,244 | | 6,240 | | 51,484 |
| Paul Keglevic | | 167,361 | | — | | 167,361 |
| Kay Krill | | 83,764 | | 6,240 | | 90,004 |
| Stacey Rauch | | 110,000 | | 1,200 | | 111,200 |
| Carl Rubin | | 117,500 | | 6,240 | | 123,740 |
| John L. Welborn Jr. | | 105,000 | | 1,200 | | 106,200 |
| Linda Yaccarino | | 110,000 | | 6,240 | | 116,240 |
| | | | | |
| (1) | Mr. Jaffe’s fees reflect his prorated retainer in respect of his resignation from the Board on February 24, 2020. Mr. Jaffe has 16,769 outstanding options from his prior service as an employee as a result of the Total Years Test. |
| (2) | Reflects the aggregate grant date fair value calculation in accordance with FASB ASC Topic 718. Assumptions used in the valuation of equity based awards are discussed in “Stock Based Compensation” in Note 17 to the Consolidated Financial Statements in our Annual Report on Form 10-K for Fiscal 2019. As of the end of Fiscal 2020, each director listed in the table above (other than Ms. Bayne and Messrs. Begeman and Keglevic) held 1,200 non-qualified stock options, which number reflects the Reverse Stock Split. |
For Fiscal 2020, in addition to making the non-qualified stock option grants referenced in the table above, we paid our non-employee directors cash retainers, as follows:
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | August 1,
2020 | | August 3,
2019 | | |
| Net sales: | | (millions) |
Premium Fashion | | $ | 1,852.6 | | | $ | 2,415.1 | | | |
| Plus Fashion | | 1,055.9 | | | 1,240.5 | | | |
| Kids Fashion | | 809.6 | | | 1,079.1 | | | |
| Total net sales | | $ | 3,718.1 | | | $ | 4,734.7 | | | |
| | | | | | |
Operating loss (a): | | | | | | |
Premium Fashion | | $ | (280.9) | | | $ | 35.1 | | | |
| Plus Fashion | | (90.1) | | | (101.6) | | | |
| Kids Fashion | | (226.7) | | | (66.8) | | | |
Unallocated restructuring and other related charges (b) | | (238.3) | | | (94.1) | | | |
Unallocated impairment of goodwill (Note 7) | | (148.9) | | | (276.0) | | | |
Unallocated impairment of other intangible assets (Note 7) | | (128.7) | | | (134.9) | | | |
| Total operating loss | | $ | (1,113.6) | | | $ | (638.3) | | | |
________ | | | | | | | | |
| Name | | Fee ($) |
| Annual Board Member Retainer for Messrs. Begeman and Keglevic | | 250,000 |
| Annual Board Member Cash Retainer to Members (other than Messrs. Begeman and Keglevic) | | 80,000 |
| Annual fees to each committee member (excluding committee chairs): | | |
| Audit Committee | | 15,000 |
| Compensation Committee | | 12,500 |
| Leadership and Corporate Governance Committee | | 10,000 |
| Annual fees to each committee chairs and the lead independent director: | | |
| Audit Committee Chair | | 25,000 |
| Compensation Committee Chair | | 20,000 |
| Leadership and Corporate Governance Committee Chair | | 15,000 |
| Lead Independent Director | | 30,000 |
(a)For Fiscal 2020 and Fiscal 2019, respectively, the maurices and Dressbarn businesses were classified as discontinued operations within the consolidated financial statements. As a result, shared expenses of $18.3 million and $170.1 million, respectively, for the fiscal years ended August 1, 2020 and August 3, 2019, which were previously allocated to maurices and Dressbarn have been reallocated to the remaining operating units.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(b) Restructuring
| | | | | |
| Item 12. | Security Ownership of Certain Beneficial Owners, Directors and Management |
The following table presents information concerning the beneficial ownership of our common stock as of December 8, 2020 (unless otherwise noted) by each of our directors, each of our named executive officers, all of our directors and other related chargescurrent executive officers as a group, and each person who is known by operating segment are as follows:us to beneficially own more than 5% of our common stock.
| | | | | | | | | | | | | |
| Fiscal Years Ended |
| August 1, 2020 | | August 3, 2019 | | |
| (millions) |
Cash related charges(1): | | | | | |
| Severance and benefit costs: | | | | | |
| Premium Fashion | $ | 5.2 | | | $ | 3.3 | | | |
| Plus Fashion | 8.1 | | | 3.5 | | | |
| Kids Fashion | 7.9 | | | 1.8 | | | |
| Corporate | 8.1 | | | 7.5 | | | |
| Total Severance and benefit costs | 29.3 | | | 16.1 | | | |
| | | | | |
| Professional fees and other related charges: | | | | | |
| Plus Fashion | 2.4 | | | 0 | | | |
| Kids Fashion | 1.7 | | | 0 | | | |
| Corporate | 15.6 | | | 33.1 | | | |
| Total Professional fees and other related charges | 19.7 | | | 33.1 | | | |
| | | | | |
| Total Cash related charges | 49.0 | | | 49.2 | | | |
| | | | | |
| Non-cash charges: | | | | | |
| Impairment of assets: | | | | | |
| Premium Fashion | 39.7 | | | 0 | | | |
| Plus Fashion | 43.1 | | | 0 | | | |
| Kids Fashion | 106.5 | | | 0 | | | |
| Corporate | 0 | | | 44.9 | | | |
| Total Non-cash charges | 189.3 | | | 44.9 | | | |
| | | | | |
| Total restructuring and other related charges | $ | 238.3 | | | $ | 94.1 | | | |
________ Unless otherwise indicated, beneficial ownership is direct, the person indicated has sole voting and investment power, and the address of each beneficial owner listed below is c/o Ascena Retail Group, Inc., 933 MacArthur Boulevard, Mahwah, New Jersey 07430.
(1)The charges incurred under | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Name of Beneficial Owner(1) | | | Number of Shares (2) | | | Percentage(3) |
Gary Muto (4) | | | 96,844 | | | * |
| Gary D. Begeman | | | - | | | * |
Kate Buggeln (5) | | | 12,615 | | | * |
| Paul Keglevic | | | - | | | * |
Kay Krill (6) | | | 9,316 | | | * |
Stacey Rauch (7) | | | 5,297 | | | * |
Carl Rubin (8) | | | 5,074 | | | * |
Carrie W. Teffner (9) | | | 1,206 | | | * |
John L. Welborn, Jr. (10) | | | 2,303 | | | * |
Linda Yaccarino (11) | | | 4,299 | | | * |
Dan Lamadrid (12) | | | 6,923 | | | * |
| Justin MacFarlane | | | - | | | * |
All current Directors and Executive Officers as a group (15 persons) (13) | | | 159,298 | | | 1.57% |
| Other Beneficial Owners: | | | | | | |
Stadium Capital Management (14) | | | 961,556.6 | | | 9.53% |
Charles Schwab Investment Management, Inc. (15) | | | 794,766 | | | 7.88% |
Sapience Investments, LLC (16) | | | 728,369 | | | 7.22% |
Dimensional Fund Advisors LP (17) | | | 695,694 | | | 6.89% |
BlackRock, Inc. (18) | | | 640,006 | | | 6.23% |
* Less than 1% of the Company's cost reduction initiatives are more fully described in Note 8.outstanding shares.
Depreciation and amortization expense and capital expenditures for each operating segment are as follows:
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | August 1,
2020 | | August 3,
2019 | | |
Depreciation and amortization expense (a): | | (millions) |
Premium Fashion | | $ | 112.2 | | | $ | 133.9 | | | |
| Plus Fashion | | 60.3 | | | 74.7 | | | |
| Kids Fashion | | 60.2 | | | 71.8 | | | |
| Total depreciation and amortization expense | | $ | 232.7 | | | $ | 280.4 | | | |
| | | | | | |
Capital expenditures (a): | | | | | | |
| Premium Fashion | | $ | 25.4 | | | $ | 28.6 | | | |
| Plus Fashion | | 4.0 | | | 8.5 | | | |
| Kids Fashion | | 9.1 | | | 6.1 | | | |
Corporate (b) | | 26.4 | | | 85.9 | | | |
| Total capital expenditures | | $ | 64.9 | | | $ | 129.1 | | | |
________
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(a) Depreciation and amortization expense and capital expenditures related to the maurices and Dressbarn businesses, historically reported within the Value Fashion segment, were excluded from the tables and is classified as discontinued operations within the consolidated financial statements. Refer to Note 3.
(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. | | | | | | | | |
| (1) | The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power, which includes the power to vote or direct the voting of such security, or power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not deemed outstanding for purposes of computing the percentage of any other person. |
| (2) | Reflects Company’s twenty-for-one reverse stock split effective as of December 18, 2019. |
| (3) | Based upon 10,090,162 shares of common stock outstanding as of December 8, 2020. |
| (4) | Consists of 45,392 shares owned directly by Mr. Muto, which includes 2,371 shares owned jointly by Mr. Muto and his spouse, and 51,452 shares covered by options exercisable within 60 days of December 8, 2020. |
| (5) | Consists of 5,349 shares owned directly by Ms. Buggeln, and 7,266 shares covered by options exercisable within 60 days of December 8, 2020. |
| (6) | Consists of 8,716 shares owned directly by Ms. Krill, and 600 shares covered by options exercisable within 60 days of December 8, 2020. |
| (7) | Consists of 4,697 shares owned directly by Ms. Rauch, and 600 shares covered by options exercisable within 60 days of December 8, 2020. |
| (8) | Consists of 4,474 shares owned directly by Mr. Rubin, and 600 shares covered by options exercisable within 60 days of December 8, 2020. |
| (9) | Consists of 1,206 shares owned directly by Ms. Teffner. |
| | | | | | | | |
| (10) | Consists of 1,703 shares owned directly by Mr. Welborn, and 600 shares covered by options exercisable within 60 days of December 8, 2020. |
| (11) | Consists of 3,699 shares owned directly by Ms. Yaccarino, and 600 shares covered by options exercisable within 60 days of December 8, 2020. |
| (12) | Consists of 880 shares owned directly by Mr. Lamadrid, and 6,043 shares covered by options exercisable within 60 days of December 8, 2020. |
| (1) | Reflects the information above, as well as information regarding our unnamed Executive Officers, and includes 80,234 shares covered by options exercisable by our Directors and Executive Officers within 60 days of December 8, 2020. |
| (14) | Based solely on information set forth in Schedule 13D/A filed with the SEC on May 17, 2018 by Stadium Capital Management, LLC, Stadium Capital Management GP, L.P., Alexander M. Seaver, Bradley R. Kent and Stadium Capital Partners, L.P. (collectively, the “Stadium Reporting Persons”) which indicated that the Stadium Reporting Persons have shared voting and dispositive power over 961,558 shares (after giving effect of the Company’s 20-for-1 reverse stock split). The principal office of the Stadium Reporting Persons is 199 Elm Street, New Canaan, CT 06840-5321. |
| (15) | Based solely on information set forth in Schedule 13G filed with the SEC on February 6, 2020 by Charles Schwab Investment Management Inc. which indicated Charles Schwab Investment Management Inc. has sole and dispositive voting power over 794,766 shares. The principal office of Charles Schwab Investment Management Inc. is 211 Main Street, San Francisco, CA 94105. |
| (16) | Based solely on information set forth in Schedule 13G filed with the SEC on February 14, 2020 by Sapience Investments, LLC which indicated Sapience Investments, LLC has sole and dispositive voting power over 728,369 shares. The principal office of Charles Schwab Investment Management Inc. is 520 Newport Center Drive, Suite 650, Newport Beach, CA 92660. |
| (17) | Based solely on information set forth in Schedule 13G/A filed with the SEC on February 12, 2020 by Dimensional Fund Advisors LP which indicated that Dimensional Fund Advisors LP has sole voting power over 660,557 shares and sole dispositive power over 695,694 shares. The principal office of Dimensional Fund Advisors LP is Building One, 6300 Bee Cave Road, Austin, TX 78746. |
| (18) | Based solely on information set forth in Schedule 13G filed with the SEC on October 4, 2020 by BlackRock, Inc. which indicated that BlackRock, Inc. has sole voting power over 599,798 shares and sole dispositive power over 640,006 shares. The principal office of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055. |
23. Additional Financial Information
| | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| Cash Interest and Taxes: | | August 1,
2020 | | August 3,
2019 | | |
| | (millions) |
| Cash paid for interest | | $ | 85.0 | | | $ | 97.4 | | | |
Cash paid for income taxes (a) | | $ | 9.7 | | | $ | 5.9 | | | |
_______
(a) Includes a net payment of $0.1 million for Fiscal 2020 and a net refund of $0.1 million for Fiscal 2019 related to the maurices and Dressbarn businesses, which are classified in discontinued operations.
Non-cash Transactions
Non-cash investing activities of continuing operations include the accrued purchases of fixed assets in the amount of $9.1 million as of August 1, 2020 and $19.3 million as of August 3, 2019.
Restricted Cash
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:
| | | | | | | | | | | | | | | | |
| Reconciliation of cash, cash equivalents and restricted cash: | | August 1,
2020 | | August 3,
2019 | | |
| Cash and cash equivalents | | $ | 580.4 | | | $ | 323.8 | | | |
| Restricted cash included in other current assets | | 1.2 | | | 1.2 | | | |
| Cash included in discontinued operations | | 0 | | | 4.2 | | | |
| Total cash, cash equivalents and restricted cash | | $ | 581.6 | | | $ | 329.2 | | | |
24. Subsequent Events
Sale of Catherines
In September 2020, following a comprehensive sales process and auction conducted under Section 363 of the U.S. Bankruptcy Code, the Company announced the sale of Catherines’ intellectual property assets for a base sale price of $40.8 million, subject to adjustment. The transaction closed on October 13, 2020. At closing, the parties entered into a 30-day Transition Services Agreement (the “TSA”) in order to provide for a transition of the e-commerce business. Amounts received under the TSA were not material. Subsequent to the sale, the Company returned $1.1 million based on the final inventory amount and other adjustments.
Sale of Justice
In November 2020, the Company announced that, following a comprehensive sale process and a competitive auction conducted under Section 363 of the U.S. Bankruptcy Code, the Company sold the intellectual property of its Justice brand and certain other Justice brand assets for total consideration of approximately $71 million and the assumption of certain liabilities. Justice stores will remain open through the holiday season. A wind down of all Justice locations is expected to conclude by the end of the second quarter of Fiscal 2021. The transaction closed on November 23, 2020.
ASCENA RETAIL GROUP, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Sale of Ann Taylor, LOFT and Lane Bryant
On November 26, 2020, the Company, together with certain of its subsidiaries, entered into an asset purchase agreement (the “Sycamore APA”) with Premium Apparel LLC (the “Purchaser”), an affiliate of Sycamore Partners Management, L.P. Pursuant to the Sycamore APA, the Purchaser will acquire assets relating to the Company’s Ann Taylor, Taylor, LOFT and Lane Bryant brands pursuant to Section 363 of the Bankruptcy Code for approximately $540.0 million, subject to certain customary purchase price adjustments as set forth in the Sycamore APA (the “Purchase Price”), as well as assume certain related liabilities. Under the Sycamore APA, the Purchaser has committed to offer to employ associates of the Company whose duties are primarily related to the Ann Taylor,, LOFT and Lane Bryant brands or the Company’s corporate functions, in each case who meet certain conditions set forth therein. The consummation of the transactions contemplated by the Sycamore APA (the “Sycamore Sale”) is subject to specified closing conditions, including approval of the Bankruptcy Court.
Interest of Management and Others in Certain Transactions; Related Party Transactions
In October 2019, the Board adopted an updated written policy for the review and approval or ratification of any transaction with a related party, which applies to related party transactions after the adoption date of the policy. Under this policy, related parties include our directors and executive officers and beneficial owners who are known to control over five percent of our common stock, as well as the immediate family members of any of the foregoing. The policy generally defines a related party transaction as one or a series of similar transactions, arrangements or relationships in which: (i) the Company was, is or will be a participant; (ii) a related person has a direct or indirect material interest; and (iii) the amount involved exceeds or is expected to exceed $120,000 (determined without regard to the amount of profit or loss involved in the transaction). The policy does not cover arrangements available on the same basis to all employees generally or employment or compensation arrangements for our executive officers or director compensation arrangements.
Under the policy, a related party transaction requires the approval or ratification of the Audit Committee or the Chair of the Audit Committee in those situations in which the legal department, in consultation with the General Counsel, CEO or the CFO, determines that it is not practicable or desirable for us to wait until the next Audit Committee meeting for review. Prior to approving or ratifying any transaction, the Audit Committee or the Chair of the Audit Committee will consider the material facts of the transaction, including the related person’s relationship to us and their interest in the transaction, and will determine whether the transaction is entered into in good faith and on fair and reasonable terms to us. Under the policy, ongoing related party transactions need not be re-approved unless any of the terms of such transaction are modified. No person may participate in the review of a transaction in which such person, or any of his or her immediate family members, may have a direct or indirect material interest.
During Fiscal 2020 and Fiscal 2019, no transactions were reviewed by the Audit Committee since there were no new related party transactions, or any modifications to existing related party transactions.
The Sycamore APA contains certain customary termination rights for the SellersCompany (through its former dressbarn brand) leased two of its store locations in Danbury, Connecticut and the Purchaser. In certain circumstances, including approval by the Bankruptcy CourtNorwalk, Connecticut, from Nordan, LLC, a Connecticut limited liability company and wholly-owned subsidiary of an Alternative Transaction (as definedRosell III, LLC, a Delaware limited liability company, of which various trusts in the Sycamore APA), upon termination,names of the Company will be obligated to pay the Purchasergrandchildren of Elliot S. Jaffe maintain a termination fee100% ownership interest. David Jaffe, a former director, former Chairman and CEO, and Richard Jaffe are trustees of $16.2 millionthose trusts and reimburse the Purchaser for up to $5.4 millionmanagers of expenses incurred inRosell III, LLC. In connection with the Sycamore APA. In addition, if the Sycamore APA is terminated by the Company for certain Purchaser breaches, including because the Purchaser does not complete the Sycamore Sale in breachpreviously announced wind down of the Sycamore APA,Company’s dressbarn brand, the Company will be entitled to receiveleases for Danbury and Norwalk store locations were terminated as of December 31, 2019. During Fiscal 2019 and Fiscal 2020, the total rent and related expenses paid for both locations were $575,994 and $190,750 (through lease termination date of December 31, 2019), respectively.
Director Independence
We are not a termination feelisted issuer whose securities are listed on a national securities exchange or in an inter-dealer quotation system which has requirements that a majority of $54.0 million.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ascena Retail Group, Inc.
Mahwah, New Jersey
Opinionbe independent. However, based on the Financial Statements
We have auditedindependence standards established by Nasdaq, the accompanying consolidated balance sheets of Ascena Retail Group, Inc. and subsidiaries (the "Company") as of August 1, 2020 and August 3, 2019, the related consolidated statements of operations, comprehensive loss, shareholders’ (deficit) equity and cash flows forBoard has determined that each of the following members of the Board are independent: Gary Begeman, Kate Buggeln, Paul Keglevic, Kay Krill, Carl Rubin, Stacey Rauch, John L. Welborn, Jr., and Linda Yaccarino.
In addition, the Board has determined that all members of the Audit Committee are “independent” under the listing standards of The Nasdaq Stock Market applicable to audit committee members and all members of the Compensation Committee are “independent” under the listing standards of The Nasdaq Stock Market applicable to compensation committee members.
| | | | | |
| Item 14. | Principal Accountant Fees and Services |
Fees Paid To Our Independent Registered Public Accounting Firm/Relationship With Our Independent Registered Public Accounting Firm
The following table shows the fees billed by Deloitte & Touche LLP for the past two fiscal years for audit and other related fees:
| | | | | | | | | | | |
| | | | |
| Fiscal 2020
($) |
| Fiscal 2019
($) |
Audit Fees(1) | 3,659,294 | | 3,920,000 |
Audit-Related Fees(2) | 142,176 | | 247,444 |
Tax Fees(3) | 1,743,053 | | 290,110 |
All Other Fees(4) | 888,917 | | 722,222 |
| Total Fees | 6,433,440 | | 5,179,776 |
(1) Fees for audit services billed in the period ended August 1,Fiscal 2020 and 2019 relate to the related notes (collectively referred to asannual audit of the "financial statements"). In our opinion, theCompany’s consolidated financial statements, present fairly, in all material respects, the financial positioninterim reviews of the Companyquarterly consolidated financial statements and auditing the Company’s internal controls over financial reporting, as required by Section 404 of August 1, 2020Sarbanes-Oxley Act of 2002.
(2) Audit-related fees consist principally of services performed in connection with registration statements filed with the SEC, statutory audits, and August 3, 2019,assurance and related services that are reasonably related to the results of its operations and its cash flows for eachperformance of the three fiscal years inaudit or review of the period ended August 1, 2020, in conformity with accounting principles generally accepted inCompany’s consolidated financial statements.
(3) Tax fees include fees for professional services provided related to tax compliance, including federal, state and local taxes, tax planning and advisory services.
(4) All other fees consist of permitted services other than those that meet the United States of America.criteria above and include primarily consulting and advisory services provided by Deloitte Consulting, LLP.
Going ConcernPre-Approval Policies and Procedures
The accompanying financial statements have been prepared assuming thatAudit Committee has established a policy concerning the Company will continue as a going concern. As discussed in Note 1 and Note 2 to the financial statements, the Company filed voluntary petitions for reorganization under Chapter 11 of Title 11pre-approval of the United States Code inaudit and non-audit services to be provided by the United States Bankruptcy Court for the Eastern District of Virginia on July 23, 2020, which raises substantial doubt as to the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 and Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Bankruptcy Proceedings
As discussed in Note 1 and Note 2 to the financial statements, the Company has filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the settlement amounts for allowed claims, or the status and priority thereof; (3) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (4) as to operations, the effect of any changes that may be made in its business.
Change in Accounting Principle
As discussed in Note 5 to the financial statements, effective August 4, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" (“ASC 842”), using the modified retrospective approach.
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 aindependent registered public accounting firm registered withto the Public Company Accounting Oversight Board (PCAOB) and are requiredCompany. The policy requires that all services to be performed by Deloitte & Touche, including audit services, audit-related services and permitted non-audit services, be pre-approved by the Audit Committee. Specific services provided by the independent with respect to the Companyregistered public accounting firm are regularly reviewed in accordance with the U.S. federal securitiespre-approval policy. At subsequent Audit Committee meetings, the Audit Committee receives updates on services being provided by the independent registered public accounting firm, and management may present additional services for approval. The procedures permit limited amounts of services to be pre-approved by the Chair of the Audit Committee pursuant to authority delegated by the Audit Committee. The Chair reports any such pre-approval to the Audit Committee at its next regularly scheduled meeting.
During Fiscal 2020, the Audit Committee pre-approved all of the services provided by the auditors. The Audit Committee considered whether the provision of non-audit services is permitted under applicable laws and regulations and is compatible with maintaining the applicable rules and regulationsindependence of Deloitte & Touche.
PART IV.
| | | | | |
| Item 15. | Exhibits, Financial Statement Schedules |
The Exhibits filed with this Amendment are as follows:
| | | | | | | | |
| Exhibit Number | | Description |
| | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) |
| | |
| | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) |
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and Exchange Commission andAct of 1934, the PCAOB.registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | Ascena Retail Group, Inc. |
| | | |
| December 14, 2020 | | | | By: | | /s/ Gary Muto |
| | | | | | | | Gary Muto, Chief Executive Officer (principal executive officer) |
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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | |
| December 14, 2020 | | | | By: | | /s/ Dan Lamadrid |
| | | | | | | | Dan Lamadrid, Executive Vice President and Chief Financial Officer (principal financial officer) |
/s/ Deloitte & Touche LLP
Parsippany, New Jersey December 11, 2020
We have served as the Company’s auditor since at least 1980, in connection with its initial public offering.