10-K 1 asna10-k8042018.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended August 4, 2018
 or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
Commission file number 0-11736

ASCENA RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
30-0641353
(I.R.S. Employer Identification No.)
 
 
933 MacArthur Boulevard, Mahwah, New Jersey
(Address of principal executive offices)
07430
(Zip Code)
(551) 777-6700
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
The Nasdaq Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
 
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.
Large accelerated filer ¨
Accelerated filer ý
Non-accelerated filer ¨
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $0.4 billion as of January 26, 2018, based on the last reported sales price on the Nasdaq Global Select Market on that date. As of September 20, 2018, 196,374,376 shares of voting common shares were outstanding.

Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on December 14, 2018 are incorporated into Part III of this Form 10-K.




ASCENA RETAIL GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED AUGUST 4, 2018
TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
 
 
 
 
Item 1.
 
Business
 
 
Item 1A.
 
Risk Factors
 
 
Item 1B.
 
Unresolved Staff Comments
 
 
Item 2.
 
Properties
 
 
Item 3.
 
Legal Proceedings
 
PART II
 
 
 
 
 
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
Item 6.
 
Selected Financial Data
 
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 8.
 
Financial Statements and Supplementary Data
 
 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
Item 9A.
 
Controls and Procedures
 
 
Item 9B.
 
Other Information
 
PART III
 
 
 
 
 
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
 
Item 11.
 
Executive Compensation
 
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
 
Item 14.
 
Principal Accounting Fees and Services
 
PART IV
 
 
 
 
 
Item 15.
 
Exhibits, Financial Statement Schedules
 
 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K, including the section labeled Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and the risk factors that we have included elsewhere in this report. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our results, level of activity, performance or achievements to be materially different from any future results, level of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. We generally identify these statements by words or phrases such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “may,” “should,” “estimate,” “predict,” “project,” “potential,” “continue,” "remains optimistic," or the negative of such terms or other similar expressions.
 
Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed below under Item 1A. Risk Factors, and other factors discussed in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. We disclaim any intent or obligation to update or revise any forward-looking statements as a result of developments occurring after the period covered by this report.
 
WEBSITE ACCESS TO COMPANY REPORTS
 
We maintain our corporate Internet website at www.ascenaretail.com. The information on our Internet website is not incorporated by reference into this report. We make available, free of charge through publication on our Internet website, a copy of our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, including any amendments to those reports, as filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after they have been so filed or furnished. Information relating to corporate governance at Ascena Retail Group, Inc., including our Code of Ethics for the Chief Executive Officer and Senior Financial Officers, information concerning our directors, committees of the Board of Directors, including committee charters, and SEC filings reporting transactions in Ascena Retail Group, Inc. securities by directors and executive officers, is also available at our website.
 
In this Annual Report on Form 10-K, references to “ascena,” “ourselves,” “we,” “us,” “our” or “Company” or other similar terms refer to Ascena Retail Group, Inc. and its subsidiaries, unless the context indicates otherwise. Fiscal year 2018 ended on August 4, 2018 and reflected a 53-week period (“Fiscal 2018”) as the Company conformed its fiscal period ends to the calendar of the National Retail Federation; fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”); and fiscal year 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016”). All references to “Fiscal 2019” refer to our 52-week period that will end on August 3, 2019.

PART I

Item 1. Business.
 
General

The Company is a leading national specialty retailer of apparel for women and tween girls. The Company's operations consist of its direct channel operations and approximately 4,600 stores in the United States, Canada and Puerto Rico. The Company had annual revenues for Fiscal 2018 of approximately $6.6 billion.

Change for Growth Program

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

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retail landscape, (ii) enhanced its capability to analyze transaction data to support strategic decisions, and (iii) transitioned certain transaction processing functions within the brand services group to an independent third-party managed-service provider. In connection with the Change for Growth program, the Company realized savings of approximately $135 million in Fiscal 2018 and expects to realize approximately $100 to $125 million in incremental cost savings through Fiscal 2020, bringing the total expected cost savings from these activities, when combined with the $65 million cost savings achieved during Fiscal 2017, to approximately $300 to $325 million. Activities associated with the Change for Growth program are currently expected to continue through Fiscal 2019.

Integration of ANN INC.

In Fiscal 2016, the Company acquired 100% of the outstanding common stock of ANN INC. ("ANN"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands, for an aggregate purchase price of approximately $2.1 billion (the "ANN Acquisition"). During Fiscal 2018, integration activities were substantially completed as the Company (i) completed the post-acquisition integration of ANN’s distribution operations, including the closure and sale of the former ANN distribution facility in Louisville, Kentucky and (ii) realized cost reductions from sourcing merchandise through third-party buying agents. As a result of its integration activities, the Company has realized cumulative integration-related cost savings of approximately $205 million through Fiscal 2018 and expects to realize additional synergies of approximately $30 million subsequent to Fiscal 2018 for a total expected realized savings of approximately $235 million.

Brands and Products
 
The Company brands, described in more detail below, are organized into four operating segments as follows: Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion.

Premium Fashion

The Premium Fashion segment consists of the Ann Taylor and LOFT brands.

Ann Taylor includes 304 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 is 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 672 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.

Value Fashion

The Value Fashion segment consists of the maurices and dressbarn brands.

maurices includes 972 specialty retail and outlet stores and direct channel operations, offering up-to-date core and plus-size fashion apparel. maurices stores are concentrated in small markets (approximately 25,000 to 150,000 people), and cater to local market preferences through a core merchandise assortment that is refined to reflect individual store demands. Through its proprietary label, the maurices product line encompasses women’s casual clothing, career wear, dressy apparel, active wear and accessories. maurices retail stores are typically located near large discount and department stores in strip shopping centers and mall locations to capitalize on the traffic those retailers generate, while differentiating itself by offering a wider selection of style, color and current fashion, along with an elevated customer shopping experience.
 
dressbarn includes 730 specialty retail and outlet stores and direct channel operations, offering moderate-to-better quality career, special occasion and casual fashion for working women in a comfortable, easy-to-shop environment staffed by friendly, service oriented associates. dressbarn’s individual store assortments vary depending on local demographics, seasonality and past sales patterns. dressbarn retail stores are located primarily in convenient strip shopping centers in major trading and high-density markets and in surrounding suburban areas.


4



Plus Fashion
 
The Plus Fashion segment consists of the Lane Bryant and Catherines brands.

Lane Bryant includes 749 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.
  
Catherines includes 348 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.

Kids Fashion

The Kids Fashion segment, which consists of the Justice brand, includes 847 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 and bedroom accessories, to meet all of her needs. Justice retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers.
 
The tables below present net sales and operating income (loss) by operating segment for the last three fiscal years:
 
 
Fiscal 2018
 
Fiscal 2017
 
Fiscal 2016
Net sales:
 
(millions)
Premium Fashion 
 
$
2,317.8

 
$
2,322.6

 
$
2,330.9

Value Fashion
 
1,820.5

 
1,950.2

 
2,094.6

Plus Fashion
 
1,340.0

 
1,353.9

 
1,463.6

Kids Fashion
 
1,100.0

 
1,023.1

 
1,106.3

Total net sales
 
$
6,578.3

 
$
6,649.8

 
$
6,995.4

 
 
Fiscal 2018
 
Fiscal 2017
 
Fiscal 2016
Operating income (loss):
 
(millions)
Premium Fashion (a)
 
$
135.2

 
$
140.9

 
$
13.3

Value Fashion
 
(83.2
)
 
12.2

 
92.0

Plus Fashion
 
27.1

 
15.5

 
36.9

Kids Fashion
 
39.1

 
(36.7
)
 
29.0

Unallocated acquisition and integration expenses
 
(5.4
)
 
(39.4
)
 
(77.4
)
Unallocated restructuring and other related charges
 
(78.5
)
 
(81.9
)
 

Unallocated impairment of goodwill
 

 
(596.3
)
 

Unallocated impairment of intangible assets
 

 
(728.1
)
 

Total operating income (loss)
 
$
34.3

 
$
(1,313.8
)
 
$
93.8

_______
(a.) 
The results of the Premium Fashion segment for Fiscal 2016 include approximately $126.9 million of non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value.
 
Over the past five fiscal years, the Company has invested approximately $3.4 billion in acquisitions, capital improvements, supply chain integration and technology infrastructure improvements, which were funded through cash, debt and the issuance of common stock. As a result, net sales increased to approximately $6.6 billion in Fiscal 2018 from $4.8 billion in Fiscal 2014.

5



Omni-channel

The Company continues to invest in initiatives that support its omni-channel strategies. In recent years, the Company has completed the consolidation of all brands into its shared distribution network and the transition of all brands onto its 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. The Company has made significant investments in its supply chain capability, and maintains highly efficient 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
maurices – www.maurices.com
dressbarn – www.dressbarn.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 4, 2018, the Company operated approximately 4,600 stores in the United States, Canada and Puerto Rico. Ann Taylor and LOFT have stores in 41 and 46 states, respectively, as well as the District of Columbia, Canada and Puerto Rico. In addition, LOFT has five international franchise stores. maurices has stores in 45 states and Canada, while dressbarn has stores in 47 states and the District of Columbia. Lane Bryant and Catherines have stores located in 47 and 44 states, respectively. Justice has stores in 48 states and Canada as well as 84 international franchise stores.
 
As of August 4, 2018, the Company's stores had a total of 25.4 million square feet consisting of Ann Taylor with 1.6 million square feet, LOFT with 3.9 million square feet, maurices with 5.0 million square feet, dressbarn with 5.8 million square feet, Lane Bryant with 4.1 million square feet, Catherines with 1.5 million square feet, and Justice with 3.5 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.
 
Store Count by Brand
 
 
Fiscal 2018
 
 
Ann Taylor
 
LOFT
 
maurices
 
dressbarn
 
Lane
Bryant
 
Catherines
 
Justice
 
Total
Beginning of Period
 
322

 
678

 
1,005

 
779

 
764

 
359

 
900

 
4,807

Opened
 
1

 
8

 
14

 

 
2

 
1

 
2

 
28

Closed
 
(19
)
 
(14
)
 
(47
)
 
(49
)
 
(17
)
 
(12
)
 
(55
)
 
(213
)
End of Period
 
304

 
672

 
972

 
730

 
749

 
348

 
847

 
4,622


 
 
Fiscal 2017
 
 
Ann Taylor
 
LOFT
 
maurices
 
dressbarn
 
Lane
Bryant
 
Catherines
 
Justice
 
Total
Beginning of Period
 
340

 
682

 
993

 
809

 
772

 
373

 
937

 
4,906

Opened
 
3

 
15

 
28

 
6

 
8

 
1

 
2

 
63

Closed
 
(21
)
 
(19
)
 
(16
)
 
(36
)
 
(16
)
 
(15
)
 
(39
)
 
(162
)
End of Period
 
322

 
678

 
1,005

 
779

 
764

 
359

 
900

 
4,807


As discussed above, in connection with the Change for Growth program, the Company conducted a strategic review of its store fleet with the goal of improving overall profitability and cash flows of its store portfolio. The Company launched its fleet optimization program in January of 2017, with an annualized savings target of $50 million through rent concessions and / closure

6



of 667 target stores. The Company has recently expanded its target store list to 864 stores, and its total annualized savings target to $60 million. Of the total 864 target stores, 256 have been closed through July 2018. Store actions under the Change for Growth program are expected to continue through Fiscal 2019.

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®, ANN TAYLOR LOFT®, LOU & GREY®, JUSTICE®, LANE BRYANT®, CACIQUE®, MAURICES®, DRESSBARN®, 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 4, 2018, the company operated stores across four brands in Canada (Justice (41), maurices (37), LOFT (9), and Ann Taylor (4)). Additionally, as of August 4, 2018, Justice and LOFT had 84 and 5 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. The Company continues to explore international opportunities for its brands.
 
Sourcing
 
The Company's brands source their products through one of three channels - ascena's internal sourcing group (ascena Global Sourcing ("aGS")), third-party buying agents, or directly from market vendors. Factors affecting the selection of sourcing channels include cost, speed to market, merchandise selection, vendor capacity and fashion trends.

Operating through offices located in South Korea, China, India and Bangladesh, aGS maintains direct relationships with manufacturing partners, enabling desired product quality control and speed to market, along with favorable pricing as compared to market vendors.

Merchandising and Design

The Company continues to focus on building its merchandising and design functions to align with its market positions and support its direct sourcing model. 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 offering, 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.


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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. This is demonstrated through ascena cares, which reflects our culture and the extraordinary philanthropic efforts taking place within our organization. Together, the Company has a shared commitment for making the world a better place for the women and girls it serves, for the communities where it lives and works and for our dedicated associates. The Company is also proud to sponsor the Roslyn S. Jaffe Awards, in which monetary grants are awarded to female social entrepreneurs who are making a meaningful difference for women and children. Whether through collective partnerships or individual brand outreach efforts, ascena supports the women who buy, make and sell our products. More information about our charitable giving, including the non-profit partners it supports, 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.
 
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 our 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.
 
Employees
 
As of August 4, 2018, the Company has approximately 63,000 employees, 47,000 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 adjust the hours they work to coincide with holiday shopping patterns. Additionally, none of its employees are covered by any collective bargaining agreement except for approximately 83 employees of Lane Bryant that are represented by unions. The Company believes that it has good working relations with its employees and unions.
 

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Executive Officers of the Registrant
 
The following table sets forth the name, age and position of our Executive Officers:
Name
 
Age
 
Positions
David Jaffe
 
59
 
Chief Executive Officer and Chairman of the Board
Gary Muto
 
59
 
President and Chief Executive Officer-ascena Brands
Brian Lynch
 
61
 
President and Chief Operating Officer
Robb Giammatteo
 
46
 
Executive Vice President and Chief Financial Officer
John Pershing
 
47
 
Executive Vice President, Chief Human Resources Officer
Dan Lamadrid
 
43
 
Senior Vice President, Finance and Chief Accounting Officer

Mr. David Jaffe serves as a director (since 2001), as our Chief Executive Officer (since 2002) and as Chairman of the Board (since 2016). Previously, he had been President from 2002-2017, and Vice Chairman and Chief Administrative Officer from 2000-2002. Mr. Jaffe joined our Company in 1992 as Vice President, Business Development and became Senior Vice President in 1995, Executive Vice President in 1996 and Vice Chairman in 2000. Mr. Jaffe is the son of Elliot S. Jaffe, our co-founder and Chairman Emeritus and Roslyn S. Jaffe, our co-founder, Company Secretary and Director Emeritus for Life.

Mr. Gary Muto became President and Chief Executive Officer-ascena Brands in 2017. Prior to his most recent appointment, Mr. Muto served as President and Chief Executive Officer of the Company’s Premium Fashion segment since October 2016, and as President and Chief Executive Officer of ANN since October 2015. Additionally, from 2008-2014 Mr. Muto served as President of ANN INC.'s LOFT brand, and then from 2014-2015 as President of ANN Brands. Mr. Muto has over 25 years of fashion and retail experience, having previously held a variety of executive leadership positions with Gap Inc.

Mr. Brian Lynch became President and Chief Operating Officer in 2017.  Prior to his most recent appointment, Mr. Lynch served as Chief Operating Officer of the Company. He joined our organization in 2015 as President and Chief Executive Officer of the Company’s Justice brand.  Prior to joining the Company, from 2008-2012 Mr. Lynch served as President, Corporate Operations at ANN INC., and then from 2012-2014 served as President of ANN INC.'s Ann Taylor brand. Mr. Lynch has over 35 years of fashion and retail experience, having previously held a variety of executive leadership positions with ANN INC., Gap Inc. and The Walt Disney Company.

Mr. Robb Giammatteo became Executive Vice President and Chief Financial Officer in 2015. He joined the Company in 2013 as the Senior Vice President of Financial Planning & Analysis and Investor Relations. Prior to joining the Company, Mr. Giammatteo was the Vice President of Corporate Financial Planning & Analysis at VF Corporation, and before that, the Divisional Chief Financial Officer of VF Outlet. Prior to VF, he spent several years in a variety of financial leadership roles at Limited Brands and General Motors.

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

Mr. Dan Lamadrid was appointed Senior Vice President, Finance and Chief Accounting Officer in August 2017. Mr. Lamadrid has responsibility for all Corporate Financial Planning activities as well as oversight of the Company's financial accounting and reporting operations. Prior to joining the Company, Mr. Lamadrid was a Senior Vice President at Vitamin Shoppe, Inc. where he served as Controller from 2011 and as Chief Accounting Officer from 2012 until 2017. Prior to Vitamin Shoppe, Mr. Lamadrid held various financial leadership roles at Ralph Lauren, Hartz Mountain Corporation and Toys R Us. Mr. Lamadrid began his career in public accounting.


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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 prices of our securities, and the actual outcome of matters as to which forward-looking statements are made in this report. The risk factors generally have been separated into four groups: (1) Macroeconomic and Industry Risks; (2) Operational Risks; (3) Capital Risks; and (4) Legal and Regulatory Risks. Based upon information currently known to us, the Company believes that the following information identifies the most significant risk factors affecting our Company and our securities. However, the risks and uncertainties are not limited to those set forth in the risk factors described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. 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.

Macroeconomic and Industry Risks

General economic conditions and other factors 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 include volatility in national and international financial markets, consumer confidence, fiscal and monetary policies of government, high unemployment, lower wage levels, increased taxation, credit availability, high consumer debt, reductions in net worth, higher fuel, energy and other prices, tax policies and changes in tax laws, increasing interest rates, severe weather conditions, 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.

In addition, there is a risk that consumer sentiment may decline as a result of market disruptions caused by severe or unseasonable weather conditions, natural disasters, public health concerns, terrorist activities, political crises or other major events or the prospect of these events. Such macroeconomic and other factors could have a negative effect on consumer spending in the 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 one of the nation’s largest specialty retailers, we have numerous and varied competitors at the national, regional and local level, primarily consisting of department stores, off-price retailers, other specialty stores, discount stores, mass merchandisers, boutiques, and the Internet, some of whom have advantages over us, including substantially greater financial, marketing or promotional resources. Many retailers, such as department stores, also offer a broader selection of merchandise than we offer, 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 continued 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. Further, unanticipated changes in pricing and other practices of the Company’s competitors, including promotional activity, such as free shipping and pricing pressures, could have a material adverse effect on our business, operational results, financial position and cash flows.

Our stock price may be volatile.

The Company’s stock price has experienced volatility over time and this volatility may continue, in part due to factors such as those discussed in this Item 1A. Stock volatility may adversely affect stockholder confidence, as well as associate morale and retention for those associates who receive equity grants as part of their compensation packages, which could have a material adverse effect on our business, operational results, financial position and cash flows.

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Additionally, future announcements or disclosures concerning us or any of our competitors, our strategic initiatives, our sales and profitability, our financial condition, any quarterly variations in actual or anticipated operating results or comparable sales, any failure to meet analysts’ expectations and sales of large blocks of our stock, among other factors, could cause the market price of our stock to fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks that are unrelated or disproportionate to the operating performance of these companies.

Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of the company’s securities. Such litigation could result in substantial costs, divert our management’s attention and resources and have a material adverse effect on our business, operational results, financial position and cash flows.

Operational Risks

Our business is dependent upon our ability to accurately predict 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. 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.

We may not fully realize the expected cost savings and/or operating efficiencies from the Change for Growth program.

In Fiscal 2017 the Company implemented the Change for Growth program, as described in Item 1. Business. The Change for Growth program is designed to deliver long-term sustainable growth by enhancing our operating effectiveness and efficiency, rightsizing and increasing the quality of our distribution channels, and reducing our operating costs. The Change for Growth program presents significant potential risks that may impair our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise harm our business, including:

higher than anticipated costs in implementing the program;
failure to meet operational targets or customer requirements due to the loss of employees or inadequate transfer of knowledge;
failure to maintain adequate controls and procedures while executing, and subsequent to completing, the Change for Growth program;
diversion of management’s attention and resources from ongoing business activities and/or a decrease in employee morale;
attrition beyond any planned reduction in workforce; and
damage to our reputation and brand image due to our restructuring-related activities, including certain store closures.

The estimated costs and benefits associated with the Change for Growth program may vary materially based on various factors including: timing in execution, outcome of negotiations with landlords, and changes in management’s assumptions and projections. Any delays and unexpected or higher than anticipated costs could result in our not realizing all, or any portion, of the anticipated benefits of the Change for Growth program. If we are not successful in implementing and managing the Change for Growth program, we may not be able to achieve targeted operating enhancements and/or cost reductions within the expected time frame, which could adversely impact our business, operational results, financial position and cash flows, and could also result in the implementation of additional restructuring-related activities, which may be dilutive to our earnings in the short term.

As we transition certain Human Resources and Finance functions to an externally managed service provider, we will become more dependent on the third party performing these functions.

As part of our long-term strategy, we look for opportunities to cost effectively enhance capability of business services. In some cases, this requires that we outsource certain services and/or functions to external third party providers, as more fully described in Note 7 to the accompanying consolidated financial statements. While we believe we conduct appropriate due diligence before entering into agreements with these third parties, the failure of any of these third parties to provide the expected services on a

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timely basis 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.

We may be unable to successfully implement and optimize our omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for our customers.

One of our strategic priorities is to further develop and refine the omni-channel shopping experience for our customers through the integration of our store and direct shopping channels. Our omni-channel initiatives include cross-channel logistics optimization and exploring additional ways to develop an omni-channel shopping experience, including further direct channel integration, use of advance analytics, customer personalization, the assessment and implementation of emerging technologies. These initiatives involve significant investments in information technology systems, operational changes, and employee resources.

In addition, successful implementation of our omni-channel strategy is dependent on our ability to develop our direct channel capabilities in conjunction with optimizing our physical store operations (through our fleet optimization program) and market coverage, while maintaining profitability. The Company’s ability to optimize its store operations and market coverage requires active management of its real estate portfolio in a manner that permits store sizes, layouts, locations and offerings to evolve by brand over time. These efforts may involve the relocation of existing stores, opening or closing of additional stores, efforts which could potentially increase the cost of doing business and the risk that the Company’s business practices could result in liabilities that could have a material effect on our business, operational results, financial position and cash flows.

In addition, our competitors are also investing in omni-channel programs, some of which may be more successful than our own. If the implementation of our customer, direct, and omni-channel initiatives are not successful, or we do not realize our expected return on our investment in these initiatives, we could experience a material adverse effect on our business, operational results, financial position and cash flows.

We may be unable to maintain our brand image, engage new and existing customers or gain market share.

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

Further, the use of social media by the Company and consumers has also increased the risk that the Company’s image and reputation could be negatively impacted. The availability of information, reviews and opinions on social media is immediate, as is its impact. The opportunity for dissemination of information, including inaccurate and inflammatory information and opinion, is nearly infinite. Even if we react quickly and appropriately to negative social media about us or our brands, our reputation and customers’ perception of our brands could be negatively impacted. Damage to the brand image and reputation of the Company in any aspect of its operations could have a material adverse effect on our business, operational results, financial position and cash flows.

Our business depends on effective marketing, advertising and promotional programs.

Customer traffic and demand for our merchandise is influenced by our advertising, marketing and promotional activities, the name recognition and reputation of our brands, and the location 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 that 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.


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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 serve an integral role in the growth and support of our brands. In addition, several of our strategic objectives and initiatives, as more fully described in Note 7, require that we hire and/or develop associates with appropriate experience. If we were to lose the leadership of multiple senior executives or other personnel, our business could be adversely affected. In addition, if significant unexpected turnover occurs at the associate level, the loss of the services of 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 attract, retain and develop a sufficient number of qualified individuals in future periods.

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;
changes to U.S. and foreign trade policies, including the enactment of tariffs, boarder adjustment taxes or increases in duties or quotas applicable to the merchandise we sell that could increase the cost and reduce the supply of products available to us;
impact of natural disasters, extreme weather, public health concerns or other catastrophes on our foreign sourcing offices and vendor manufacturing operations;
increase scrutiny in the U.S. 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 of transportation.

The future performance of our business depends on foreign suppliers and services providers, and may be adversely affected by the factors listed above, all of which are beyond our control. The foregoing may impact our ability to deliver our products and services on a timely basis, increase costs, negate or offset any cost savings anticipated from operating outside the U.S., decrease our efficiency or result in our inability to obtain sufficient quantities of merchandise.

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

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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.

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

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.

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. The Company utilizes primarily one contract carrier to ship merchandise to its stores and direct-to-consumer customers in the U.S., Canada and Puerto Rico. As a result of damage to, or prolonged interruption of, operations at any of these facilities, or with respect to our primary contract carrier, due to a work stoppage, operations significantly below historical efficiency levels, supply chain disruption, inclement weather, natural or man-made disasters, system failures, slowdowns or strikes, acts of terror or other unforeseen events, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores or customers, 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.


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

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 provide. There also can be no assurance that providing such distribution and fulfillment services to third parties would be successful or profitable for us.

Our business could suffer as a result of increases in the price of raw materials, labor, energy, freight and trade relations.

Raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high or low demand for fabrics, labor conditions, 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.

Our business could suffer as a result of disruptions at ports used to import our products.

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

Risks associated with 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 shopping experience that will generate orders and return visits to our sites. 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, warehousing, fulfillment, distribution, purchasing, inventory control, merchandise planning and replenishment, and financial systems. We regularly evaluate and from

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

The reliability and capacity of our information technology systems (including third-party hardware and software systems or services) are critical to our continued operations. Despite our precautionary efforts, our information technology systems, as well as those of our services providers, are vulnerable to damage or interruption from a variety of sources, including natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses, malicious human acts, security breaches and similar disruptive problems, which may require significant investment to fix or replace, and we may suffer loss of critical data and interruptions or delays to our operations.

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

We are subject to cybersecurity risks and other risks associated with data security breaches, credit card fraud and identity theft, which may subject us to increased risk of liability and may cause us to incur increased expenses to mitigate our exposure or to address any such incidents.

During the course of our business, we obtain and transmit confidential customer, employee, vendor and Company information through our information technology systems and infrastructure, 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 the frequent imposition of new and changing 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, litigation and potential liability. Because the techniques used to obtain unauthorized access to our systems are constantly changing and becoming increasingly more sophisticated and often are not recognized until launched against a target, we or our third-party service providers may not be able to anticipate these techniques or implement sufficient preventative measures. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks or intrusions. We, our customers and our third-party services providers face an evolving threat landscape in which cybercriminals, among others, employ a complex array of techniques designed to access PII and other information, including for example, the use of fraudulent or stolen access credentials, malware, ransomware, phishing, denial of service and other types of attacks. These types of cyber-attacks are becoming more prevalent, have occurred in our systems in the past, and may occur in our systems in the future. While we have implemented and intend to continue to implement what we believe to be appropriate cyber practices and cyber security systems and controls, these systems may prove to be inadequate and result in the disruption, failure, misappropriation or corruption of our systems and infrastructure. Actual or anticipated attacks may cause us to incur significant and additional costs, including, but not limited to the costs to deploy additional personnel and protection technologies, training employees, engaging third-party experts and consultants and compliance costs associated with various applicable laws or industry standards regarding use and/or unauthorized disclosure of PII. We may also incur significant remediation costs, including liability for stolen customer, job applicant or employee information, repairing system damage or providing credit monitoring or other benefits to affected customers, job applicants or employees. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data becoming obsolete.

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

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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 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.

We may be unable to successfully integrate acquisitions.

Acquisitions involve numerous risks, including the diversion of our management’s attention from other business concerns, the possibility that current operating and financial systems and controls may be inadequate to deal with our growth and the potential loss of key employees. Achieving the anticipated benefits of previous and future acquisitions, including the ANN Acquisition, may present a number of significant risks and considerations. We may also encounter difficulties in integrating any businesses we may acquire with our existing operations. The success of these transactions depends on our ability to:

successfully merge corporate cultures, operations and financial systems;
realize cost reduction and operational synergies;
retain key employees of acquired companies;
retain existing customers of acquired companies; and
complete the integration in a timely and cost efficient manner.

Impairment to the carrying value of our goodwill or other intangible assets could result in significant non-cash charges.

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 4, 2018, we had approximately $1.2 billion of goodwill and other intangible assets related to the acquisitions of maurices in January 2005, Justice in November 2009, Lane Bryant and Catherines in June 2012 and ANN in August 2015. Current and future economic conditions, as well as the other risks noted in this Item 1A, may adversely impact our brands' ability to attract new customers, retain existing customers, maintain sales volumes and maintain margins. As discussed in our Critical Accounting Policies included elsewhere in this report, these events could materially reduce our brands' profitability and cash flow which could, in turn, lead to a further impairment of our goodwill and other intangible assets. Furthermore, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. As described in Note 6 to the accompanying consolidated financial statements included herein, in the third quarter of Fiscal 2017, we recorded impairment charges of $596.3 million related to goodwill and $728.1 million related to other intangible assets. No impairments related to goodwill and other intangible assets were recorded in Fiscal 2018. Any future impairment could have a material effect on our operational results.

Our efforts to expand internationally may not be successful.

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

The risks associated with expansion into international markets include difficulties in attracting customers due to lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market and the significant costs associated with the start-up and maintenance of foreign operations. Costs may include, but are not limited to, obtaining locations for stores, setting up foreign offices, hiring experienced management and maintaining good relations with associates. We have limited experience operating or franchising in some of these locations and may be unable to open and operate new stores successfully, or we may face operational issues that delay our intended pace of international store growth. Further, entry into new markets may bring us into competition with competitors with established market presence. In addition, in many of these locations, the real estate, employment and labor, transportation and logistics, regulatory, and other varying legal requirements, and other operating requirements differ dramatically from those in the places where we have more experience. Consumer tastes

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

In addition, we have certain licensed franchises in international territories. Franchised stores are independently owned and operated, and franchisees are not our employees. The quality of franchised operations may be diminished by any number of factors beyond our control, such as the ability of these third-parties to meet their projections regarding store openings and sales and their compliance with our standards or requirements or in a manner consistent with applicable law.

Other challenges associated with international expansion may include diverting financial, operational and managerial resources from our existing operations and/or result in increased costs, which could adversely impact our financial condition and results of operations, as well as increased exposure to risks associated with international operations described above in this Item 1A. Failure to successfully implement our international expansion plan consistent with our internal expectations, whether as a result of one or more of the factors listed above or other factors, could adversely affect our ability to achieve the objectives that we have established.

We may be unable to protect our trademarks and other intellectual property rights.

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

We may suffer negative publicity and our business may be harmed if we need to recall any product we sell or if we fail to comply with applicable product safety laws.

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

The cost of compliance with current 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,

18



generally large department stores, and other attractions, which generate consumer traffic in the vicinity of our stores. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of, or continued decline of, anchor stores that drive consumer traffic or changes in customer shopping preferences. There has been a decline in the popularity of strip shopping center or mall shopping among our target customers, and a continuation of such decline in the popularity of strip shopping centers and mall shopping could 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 fewer landlords that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable lease terms with these landlords, this could affect our ability to profitably operate our stores, which in turn could have a material effect on our business, operational results, financial condition and cash flows.

Acts of terrorism, effects of war, public health, man-made and natural disasters, other catastrophes or political unrest could have a material adverse effect on our business.

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

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

Our business could suffer a material adverse effect from extreme or unseasonable weather conditions.

Frequent or unusually heavy snowfall, ice storms, hurricanes, rainstorms or other extreme weather conditions over an extended period could make it difficult for our customers to travel to our stores, and may cause a disruption in the shipment or receipt of our merchandise, which could negatively impact the Company's operational results. The Company's business is also susceptible to unseasonable weather conditions, which could influence customer trends, consumer traffic and shopping habits. 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.

Capital Risks

We incurred significant additional indebtedness in connection with the ANN Acquisition, which could adversely affect us.

We substantially increased our indebtedness in connection with the ANN Acquisition, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and further increasing our interest expense. We also incurred various costs and expenses associated with our financings. The amount of cash flows required to pay interest on our increased indebtedness levels resulting from the ANN Acquisition, and thus the demands on our cash resources, will be greater than the amount of cash flows required to service our indebtedness prior to the transaction. The increased levels of indebtedness could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the acquisition or form our Change for Growth initiatives, or if our financial performance does not meet expectations, our ability to service our indebtedness may be adversely impacted.


19



The indebtedness incurred in connection with the acquisition bears interest at variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our operational results and cash flows.

In addition, our credit ratings affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. In connection with the debt financing, we received ratings from S&P and Moody’s. There can be no assurance that we will maintain particular ratings in the future.

To service our indebtedness, and to fund capital expenditures and other initiatives, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.

Our ability to make cash payments on our indebtedness, as well as our ability to fund planned capital expenditures and operating or strategic initiatives, will depend on our ability to generate significant operating cash flow in the future, which is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that will be beyond our control.

Our business may not generate sufficient cash flow from operations to enable us to pay our indebtedness or fund our other liquidity needs. In any such circumstance, we may need to refinance all or a portion of our indebtedness, on or before maturity, or incur additional debt subject to the restrictions of our borrowing agreements. We may not be able to refinance any indebtedness or incur additional debt on commercially reasonable terms or at all. If we cannot service our indebtedness or incur additional debt, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions and investments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness may restrict our ability to sell assets and our use of the proceeds from such sales.

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

Our amended revolving credit agreement and our term loan contain various covenants that impose restrictions on the Company and certain of its subsidiaries that may affect their ability to operate their businesses.

The amended revolving credit agreement and the term loan contain various affirmative and negative covenants that, subject to certain exceptions, restrict the ability of the Company and certain of its subsidiaries to, among other things, have liens on their property, change the nature of their business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of their assets to any one person. In addition, the agreements that govern the financings contain financial covenants that, under certain circumstances, will require the Company to maintain certain financial ratios. The ability of the Company and its subsidiaries to comply with these provisions may be affected by our operating results as well as events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could cause our lenders thereunder to accelerate the Company’s repayment obligations.

Inability to access the credit or capital markets could adversely affect the Company's business, operational results, financial position or cash flows.

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

In addition, we also have cash and cash equivalents on deposit at overseas financial institutions as well as at FDIC-insured financial institutions that are currently in excess of FDIC-insured limits. As a result, we cannot be assured that we can access the cash and cash equivalents overseas when we are in need of liquidity, or that we will not experience losses with respect to cash on deposit at these financial institutions.

20




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 makes 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 is provisional and subject to further analysis, interpretation and clarification of the Act. In addition, the U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that differs from our interpretations and could result in changes to our estimates. 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. Changes to these estimates during Fiscal 2019 could have a material adverse effect on our business, operational results, financial position and cash flows. Refer to Note 14 to the accompanying consolidated financial statements for further discussion.

The U.S. Supreme Court recently ruled that a state may require online retailers 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. As a result, states may adopt, or begin to enforce, laws requiring us to calculate, collect, and remit taxes on sales in their jurisdictions. In the event we are required to collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect taxes, we could incur significant tax liabilities, including taxes on past sales, penalties and interest, which could negatively affect the Company's business, operational results, financial position and cash flows.

Our business may be affected by other regulatory, administrative and litigation developments.

Laws and regulations at the local, state, federal and international levels frequently change, and the ultimate cost of compliance cannot be reasonably estimated. In addition, we cannot predict the impact that may result from regulatory or administrative changes. Changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and marketing practices, product safety, transportation and logistics, healthcare, tax, accounting, privacy, operations or environmental issues, among others, could have an adverse impact on our business, operational results, financial position and cash flows.

While it is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will at all times comply with all such legal and regulatory requirements. A finding that we or our vendors or agents are out of compliance with applicable laws and regulations could subject us to civil remedies or criminal sanctions, which could have a material adverse effect on our business, 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.

Regulation in the areas of privacy, data protection and information security could increase our costs and affect or limit our business opportunities and how we collect and/or use data.

As privacy, data protection and information security laws, including data localization laws, are interpreted and applied, compliance costs may increase, particularly in the context of providing adequate data protection and adequate data transfer mechanisms. The United States and various other countries in which we operate are increasingly adopting or revising privacy, data protection and

21



information security laws, including data localization laws, that could have significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of customer and/or employee information, and some of our current or future business plans. New legislation or regulation, and the interpretation and application of existing laws and regulations, could increase our costs of compliance, technology and business operations and could reduce revenues from certain business initiatives. Moreover, the application of existing or new laws to existing technology and practices can be uncertain and may lead to additional compliance risk and cost.

In recent years, there has been increasing regulatory enforcement and litigation activity in the area of privacy, data protection and information security in the United States and in various other countries in which we operate. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, ongoing regulatory monitoring customer attrition, which could have a material adverse impact on our business, operational results, financial position and cash flows.

In 2016, the European Union (“EU”) adopted a comprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic Area Privacy Regulation, the General Data Protection Regulation ("GDPR"), which went into effect on May 25, 2018. The GDPR expands the scope of EU data protection law to all foreign companies processing personal data of EU residents and imposes a strict data protection compliance regime with significant monetary penalties. Complying with the GDPR and similar emerging and changing privacy and data protection requirements may cause us to incur substantial costs or require us to change our business practices.

Increases in labor costs related to changes in employment laws or regulations could impact our business, operational results, financial position and cash flows.

Various foreign and domestic labor laws govern our relationship with our employees and affect our operating costs. These include minimum wage requirements, overtime and sick pay, paid time off, work scheduling, healthcare reform and the Patient Protection and Affordable Care Act (“ACA”), unemployment tax rates, workers’ compensation rates, and union organizations. A number of factors could adversely affect our operating costs, including additional government-imposed increases in minimum wages, overtime and sick pay, paid leaves of absence and mandated health benefits, and changing regulations from the National Labor Relations Board or other agencies. Additionally, recent political changes could lead to the repeal of, or changes to, some or all of the ACA. Complying with any new legislation and/or reversing changes implemented under the ACA could be time-intensive and expensive and could have a material adverse impact on our business, operational results, financial position and cash flows.

Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact our business, the price of our common stock and market confidence in our reported financial information.

We must continue to document, test, monitor and enhance our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We cannot be assured that our disclosure controls and procedures and our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act will prove to be adequate in the future. Any failure to maintain the effectiveness of our disclosure controls or our internal control over financial reporting or to comply with the requirements of the Sarbanes-Oxley Act could have a material adverse impact on our business, operational results, financial position and cash flows.

Changes to accounting rules and regulations may adversely affect our operational results, financial position and cash flows.

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

   
Item 1B. Unresolved Staff Comments.
 
None.

22




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.

The table below, covering all open store locations leased by us on August 4, 2018, indicates the number of leases expiring during the period indicated and the number of expiring leases with and without renewal options:
Fiscal Years
 
Leases Expiring
 
Number with
Renewal Options
 
Number without
Renewal Options
2019
 
1,130
 
272
 
858
2020
 
732
 
363
 
369
2021
 
623
 
346
 
277
2022
 
597
 
239
 
358
2023
 
509
 
232
 
277
2024 and thereafter
 
1,031
 
493
 
538
Total
 
4,622
 
1,945
 
2,677
 
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 4, 2018 and excluding locations acquired after August 4, 2018, are approximately $554.4 million for Fiscal 2019. 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 202,000 square foot campus which serves as the corporate office for the dressbarn brand and for ascena located in Mahwah, NJ;
a 200,000 square foot building which serves as the corporate office for the maurices brand and for a portion of the Company's brand services operations, located in Duluth, Minnesota; and
a 168,000 square foot building which serves as the corporate office for the majority of the Company's brand services operations, located in Etna Township, Ohio, adjacent to our distribution center.

The Company acquired leased corporate office facilities of approximately 308,000 square feet in New York City, NY and approximately 42,000 square feet in Milford, CT through the ANN Acquisition. The Company also leases approximately 135,000 square feet in Columbus, Ohio that serves as Lane Bryant’s and Catherines corporate headquarters.

Internationally, the Company owns and leases office space in China, and leases office space in South Korea, India and Bangladesh.

Distribution and Fulfillment Facilities

The Company owns a 903,000 square foot fulfillment center in Greencastle, Indiana, which serves as the Company's primary direct channel fulfillment center, and a 695,000 square foot distribution center in Etna Township, Ohio, which serves as the Company's primary brick-and-mortar store distribution center. The Etna facility also is used to fulfill direct channel orders.

23




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 15 to the accompanying consolidated financial statements.

PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Prices of Common Stock
 
The common stock of Ascena Retail Group, Inc. is quoted on the Nasdaq Global Select Market under the ticker symbol “ASNA.”
 
The table below sets forth the high and low prices as reported on the Nasdaq Global Select Market for the last eight fiscal quarters.
 
 
Fiscal 2018
 
Fiscal 2017
Fiscal
 
High
 
Low
 
High
 
Low
First Quarter
 
$2.67
 
$1.69
 
$9.02
 
$4.75
Second Quarter
 
$2.69
 
$1.85
 
$8.11
 
$4.70
Third Quarter
 
$2.50
 
$1.79
 
$5.41
 
$3.64
Fourth Quarter
 
$4.74
 
$2.01
 
$3.91
 
$1.72
 
Number of Holders of Record
 
As of September 20, 2018, we had approximately 4,296 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.

Performance Graph
 
The following graph illustrates, for the period from July 27, 2013 through August 4, 2018, the cumulative total shareholder return of $100 invested (assuming that all dividends, if any, were reinvested) in (1) our common stock, (2) the S&P Composite-500 Stock Index and (3) the S&P Specialty Apparel Retailers Index.


24



The comparisons in this table are required by the rules of the SEC and, therefore, are not intended to forecast, or be indicative of, possible future performance of our common stock.

performancechartfy20.jpg

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 4, 2018.
Period
 
Total
Number of
Shares
Purchased
 
Average Price
Paid per
Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(a)
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Month # 1 (April 29, 2018 – May 26, 2018)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 2 (May 27, 2018 – June 30, 2018)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 3 (July 1, 2018 – August 4, 2018)
 
 
 
 
$—
 
 
 
 
$181 million
 
 
(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 business and market conditions. Currently, share repurchases in excess of $100 million are subject to certain restrictions under the terms of the Company's borrowing agreements, as more fully described in Note 12 to the accompanying consolidated financial statements. Purchases will be made at prevailing market prices, through open market purchases or in privately negotiated transactions and will be subject to applicable SEC rules.


25




Item 6. Selected Financial Data.
  
The following table sets forth selected historical financial information as of the dates and for the periods indicated.
 
The consolidated statement of operations data for each of the three fiscal years in the period ended August 4, 2018 have been derived from, and should be read in conjunction with, the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated statement of operations data for the fiscal years ended July 25, 2015 and July 26, 2014 have been derived from audited consolidated financial statements not included herein. The historical results are not necessarily indicative of the results to be expected in any future period.

The consolidated balance sheet data as of August 4, 2018 and July 29, 2017 have been derived from, and should be read in conjunction with, the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated balance sheet data as of July 30, 2016, July 25, 2015 and July 26, 2014 have been derived from audited consolidated financial statements not included herein.
 
Fiscal Years Ended(a)
 
August 4,
 2018
 
July 29,
2017
 
July 30,
2016 (b)
 
July 25,
2015 (c)
 
July 26,
2014
 
(millions, except for share data)
Statement of Operations Data:
 
Net sales
$
6,578.3

 
$
6,649.8

 
$
6,995.4

 
$
4,802.9

 
$
4,790.6

Acquisition and integration expenses
(5.4
)
 
(39.4
)
 
(77.4
)
 
(31.7
)
 
(34.0
)
Restructuring and other related charges
(78.5
)
 
(81.9
)
 

 

 

Impairment of goodwill (d)

 
(596.3
)
 

 
(261.7
)
 

Impairment of intangible assets (d)

 
(728.1
)
 

 
(44.7
)
 
(13.0
)
Depreciation and amortization expense
(355.5
)
 
(384.9
)
 
(358.7
)
 
(218.2
)
 
(193.6
)
Operating income (loss)
34.3

 
(1,313.8
)
 
93.8

 
(234.9
)
 
210.8

Net (loss) income from continuing operations
(39.7
)
 
(1,067.3
)
 
(11.9
)
 
(236.8
)
 
138.2

 
 
 
 
 
 
 
 
 
 
Net (loss) income from continuing operations per common share:
 
 
 

 
 

 
 

 
 

Basic
$
(0.20
)
 
$
(5.48
)
 
$
(0.06
)
 
$
(1.46
)
 
$
0.86

Diluted
$
(0.20
)
 
$
(5.48
)
 
$
(0.06
)
 
$
(1.46
)
 
$
0.84

 
 
 
 
 
 
 
 
 
 
Balance sheet data:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
238.9

 
$
325.6

 
$
371.8

 
$
240.6

 
$
156.9

Working capital
219.6

 
185.2

 
226.3

 
232.2

 
291.7

Total assets
3,570.5

 
3,871.5

 
5,506.3

 
2,906.2

 
3,118.6

Total debt
1,328.7

 
1,538.1

 
1,648.5

 
106.5

 
166.8

Total equity
798.5

 
821.0

 
1,863.3

 
1,518.1

 
1,737.7

________
(a) Fiscal 2018 and Fiscal 2016 consisted of 53 weeks, which resulted in incremental revenue of approximately $113.0 million in Fiscal 2018 recognized across all segments and $82 million in Fiscal 2016 reflected at all segments except our Premium Fashion segment. Fiscal 2017, Fiscal 2015 and Fiscal 2014 each consisted of 52 weeks.
(b) Fiscal 2016 included the results of our Premium Fashion segment for the post-acquisition period from August 22, 2015 to July 30, 2016 and reflected a non-cash purchase accounting expense of approximately $126.9 million related to the amortization of the write-up of inventory to fair market value recorded at our Premium Fashion segment.
(c) Includes the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits. Refer to Note 15 to the accompanying consolidated financial statements for additional information.
(d) Fiscal 2017 included non-cash impairments of goodwill and other intangible assets by segment as follows: $428.9 million of goodwill and $566.3 million of other intangible assets at the Premium Fashion segment, $107.2 million of goodwill at the Value Fashion segment and $60.2 million of goodwill and $161.8 million of other intangible assets at the Plus Fashion segment. Fiscal 2015 included non-cash impairment charges of $261.7 million of goodwill and $44.7 million of other intangible assets at the Plus Fashion segment. Fiscal 2014 included a non-cash impairment charge to write off the entire carrying value of the Studio Y trade name at the Value Fashion segment. Refer to Note 6 to the accompanying consolidated financial statements for additional information.

 

26



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 2018 (“Fiscal 2018 10-K”). Fiscal year 2018 ended on August, 4, 2018 and reflected a 53-week period ("Fiscal 2018") as the Company conformed its fiscal period ends to the calendar of the National Retail Federation; Fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”); fiscal year 2016 ended on July 30 2016 and reflected a 53-week period (“Fiscal 2016”). All references to “Fiscal 2019” reflect a 52-week period that will end on August 3, 2019.
 
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 2018.

Results of operations. This section provides an analysis of our operational results for Fiscal 2018, Fiscal 2017 and Fiscal 2016.

Financial condition and liquidity. This section provides an analysis of our cash flows for Fiscal 2018, Fiscal 2017 and Fiscal 2016, as well as a discussion of our financial condition and liquidity as of August 4, 2018. The discussion of our financial condition and liquidity includes (i) our available financial capacity under our revolving credit agreement, (ii) a summary of our capital spending, and (iii) a summary of our contractual and other obligations as of August 4, 2018.

Market risk management. This section discusses how we manage our risk exposures related to interest rates, foreign currency exchange rates and our investments, as well as the underlying market conditions as of August 4, 2018.

Critical accounting policies. This section discusses accounting policies considered to be important to our operational results and financial condition, which require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 3 to our accompanying consolidated financial statements.

Recently issued accounting pronouncements. This section discusses the potential impact to our reported operational results and financial condition of accounting standards that have been recently issued.

OVERVIEW

Our Business

Ascena Retail Group, Inc., a Delaware corporation, is a leading national specialty retailer of apparel for women and tween girls with annual revenue of approximately $6.6 billion for Fiscal 2018. We and our subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
 
Objectives and Initiatives
 
Our performance is subject to macroeconomic conditions and their impact on levels and patterns of consumer spending. Some of the factors that could negatively impact discretionary consumer spending include general economic conditions, high unemployment, lower wage levels, reductions in net worth, higher energy and other prices, increasing interest rates and low consumer confidence.

Retailers, particularly those in the specialty apparel sector, continue to face intense competition and channel disruption as consumer spending habits continue to indicate an increasing preference to purchase digitally as opposed to in traditional brick-and-mortar retail stores. While our comparative sales performance improved in the latter half of Fiscal 2018, competition for consumer spending remains strong and we expect a highly competitive operating environment to continue into Fiscal 2019. In response to this expected operating environment, we continue to scale back overall spending levels where possible, refine our operating model and implement new capabilities to ensure we remain competitive in this rapidly evolving sector. The more significant of these initiatives are described below.

27



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Change for Growth Program
Over the last two fiscal years, we have undergone a substantial transformation program with the objective of supporting sustainable long-term growth and increasing shareholder value (the "Change for Growth" program). In connection with the program, we (i) implemented a number of initiatives to reduce our overhead costs, (ii) conducted a review of our store fleet with the goal of reducing the number of marginally profitable stores through either rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprint and convert sales from these stores into direct channel sales or to nearby store locations, (iii) began to develop new capabilities such as markdown optimization, size pack optimization and localized inventory planning, and (iv) enhanced our capability to analyze transaction data to support strategic decisions. Charges incurred as a result of these actions are described within the section Results of Operations.

We realized approximately $135 million in cost savings in Fiscal 2018, including $105 million in Selling, general and administrative expenses ("SG&A"), $15 million in Buying, distribution and occupancy ("BD&O"), and $15 million in Cost of goods sold, related to Change for Growth program activity. We expect to realize approximately $100 to $125 million in incremental cost savings through Fiscal 2020, bringing the total expected cost savings from these activities, when combined with the $65 million cost savings achieved during Fiscal 2017, to approximately $300 to $325 million. These cost savings are achieved through (i) operating expense reductions in the areas of professional services, travel and facilities management, among others, (ii) refinement of our operating model to eliminate duplicative overhead, and increase utilization of our brand services functions, (iii) creating a platform that reduces product costs and improves information technology efficiencies and (iv) reduced rent expense resulting from store closures or negotiated rent reductions. These cost savings are expected to be realized in our segment operating results generally in proportion to their sales, and serve to offset ongoing inflationary pressure and required reinvestment to support key incremental business initiatives.

We may incur significant additional charges and capital expenditures in future periods as we continue our efforts under the Change for Growth program, which include completing actions already started, more fully define related Change for Growth program initiatives and moving into the execution phases of those associated projects. Since the scope of such efforts are not fully known at this time, the benefits of such initiatives, and any related charges or capital expenditures, are not currently quantifiable. Actions associated with the Change for Growth program are currently expected to continue through Fiscal 2019.

Integration of ANN
During Fiscal 2018, we substantially completed our integration of ANN INC. ("ANN" or the "ANN integration") into our existing operations and realized cost savings of approximately $45 million during Fiscal 2018, with approximately $25 million related to our ongoing Cost of goods sold initiative at our Premium Fashion segment and approximately $20 million in SG&A synergies primarily related to non-merchandise procurement savings. We expect to realize additional synergies related to the integration of approximately $30 million, which are expected to be substantially realized in Fiscal 2019. Once completed, we continue to expect that the total synergies and cost savings related to the ANN integration, including amounts achieved from Fiscal 2016 through Fiscal 2019, will be approximately $235 million.

Distribution and Fulfillment
Over the last few years, (i) our brands' distribution and fulfillment capability was centralized into our brick-and-mortar store distribution facility in Etna, Ohio and our direct channel fulfillment facility in Greencastle, Indiana which has resulted in increased processing efficiencies, and (ii) we entered into a lease agreement for a distribution center in Riverside, California to serve as the receiving and west coast distribution hub for merchandise sourced from Asia. During Fiscal 2018, we completed the expansion of our Riverside facility to include both brick-and-mortar and direct channel distribution, and we introduced direct fulfillment capability at our Etna facility to further increase our capacity in this growing channel. We continue to explore ways to optimize and leverage our integrated distribution network, which may include providing such services to third parties.

Sourcing
Our brands source their products through a variety of sourcing channels including internally through our ascena Global Sourcing ("aGS") subsidiary and externally through third-party buying agents based mainly in Asia. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends. We continue to increase the penetration of internally sourced products and manage our relationships with third-party buying agents.

28



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)



Omni-channel Expansion
We continue to invest in initiatives that support our omni-channel strategies. During Fiscal 2018, we also expanded the functionality of our Riverside, California distribution center and it now supports both our brick-and-mortar and direct channel operations. During Fiscal 2018, we continued to develop technology solutions which will allow our brands to (i) provide customers a seamless omni-channel shopping experience in-store and online, (ii) integrate our marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance our capability to analyze transaction data to support strategic decisions.
Seasonality of Business

Our individual segments are typically affected by seasonal sales trends primarily resulting from the timing of holiday and back-to-school shopping periods. In particular, sales at our Kids Fashion segment tend to be significantly higher during the fall season, which occurs during the first and second quarters of our fiscal year, as this includes the back-to-school period and the December holiday season. Our Plus Fashion segment tends to experience higher sales during the spring season, which include the Easter and Mother's Day holidays. Our Premium Fashion and Value Fashion segments have relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix. 
 
Summary of Financial Performance

Fiscal Period
 
As disclosed in Note 2 to the accompanying consolidated financial statements, we recognized an additional week during Fiscal 2018 as we conformed our fiscal calendar to that of the National Retail Federation.

Performance of the Value Fashion segment
During Fiscal 2018, in connection with the Company's ongoing review of the Value Fashion segment, the Company made certain senior management changes in the segment with a view towards improving its performance. This review resulted in additional clearance markdowns to improve inventory composition as of the end of Fiscal 2018, as well as impairment charges related to certain under-performing retail store assets. The Company plans to continue to pursue initiatives to improve the segment’s performance and to optimize shareholder value.
Impact of Hurricanes

During the first quarter of Fiscal 2018, our business was impacted by three hurricanes that disrupted normal operations at approximately 600 of our retail stores in the south-central and southeast areas of the United States, as well as Puerto Rico. These stores were impacted by the hurricanes, either as a result of damage incurred or declines in customer traffic.  Almost all of the stores damaged in the hurricanes have resumed operations. We have substantially completed our assessment of the damages associated with these events and estimate that our results were negatively impacted by approximately $11 million of sales losses, a portion of which may be recovered through business interruption insurance claims. As of the end of Fiscal 2018, we have received approximately $2 million in recoveries from these insurance claims. Other than the impact of the sales losses, the hurricanes did not have a material impact on our business or results from operations.

Summary and Key Developments

Our Fiscal 2018 operating results were impacted by a decline in store traffic and a more promotional selling environment, along with under-performance at the dressbarn brand which led to non-cash charges to write-down store-related fixed assets and incremental markdowns to sell through excess inventory. These items were partially mitigated by improved operating results in our Plus Fashion and Kids Fashion segments, costs and savings related to our Change for Growth program and costs and synergies from the continued integration of our Premium Fashion segment, which was acquired in Fiscal 2016.


29



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Operating highlights for Fiscal 2018 are as follows: 

Comparable sales decreased by 2%, reflecting declines at our Premium Fashion, Value Fashion and Plus Fashion segments offset in part by an increase at our Kids Fashion segment;
Gross margin rate decreased by 40 basis points to 57.6% primarily reflecting incremental shipping costs of approximately $43 million across the segments as a result of increased mix of direct channel sales, and a 280 basis point decline at our dressbarn brand;
SG&A expenses decreased by 1.5% and included $34.0 million of non-cash charges to write-down store-related fixed assets, primarily at our dressbarn brand;
Operating income increased to $34.3 million compared to an operating loss of $1,313.8 million for the year-ago period, with the improvement primarily due to the impairment of goodwill and other intangible assets in the year-ago period; and
Net loss per diluted share of $0.20 in Fiscal 2018, compared to net loss per diluted share of $5.48 for Fiscal 2017.

Liquidity for Fiscal 2018 primarily reflected:
 
Net cash from operations was $273.9 million, compared to $343.6 million in the year-ago period, primarily due to an increase in prepaid rent of approximately $50 million due to timing of payments;
Net cash used in investing activities for Fiscal 2018 was $134.4 million, consisting primarily of capital expenditures of $186.3 million offset in part by proceeds from the sale of assets, compared to $268.9 million in the year-ago period, consisting primarily of capital expenditures of $258.1 million; and
Net cash used in financing activities for Fiscal 2018 was $226.2 million, consisting primarily of term loan repayments of $225.0 million, compared to $120.9 million in the year-ago period, consisting primarily of term loan repayments of $122.5 million.



30



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


RESULTS OF OPERATIONS
 
Fiscal 2018 Compared to Fiscal 2017
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
August 4,
2018
 
July 29,
2017
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
6,578.3

 
$
6,649.8

 
$
(71.5
)
 
(1.1
)%
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,786.8
)
 
(2,790.2
)
 
3.4

 
0.1
 %
         Cost of goods sold as % of net sales
 
42.4
%
 
42.0
 %
 
 

 
 

Gross margin
 
3,791.5

 
3,859.6

 
(68.1
)
 
(1.8
)%
        Gross margin as % of net sales
 
57.6
%
 
58.0
 %
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(1,281.1
)
 
(1,274.3
)
 
(6.8
)
 
(0.5
)%
        Buying, distribution and occupancy expenses as % of net sales
 
19.5
%
 
19.2
 %
 
 

 
 

    Selling, general and administrative expenses
 
(2,036.7
)
 
(2,068.5
)
 
31.8

 
1.5
 %
        SG&A expenses as % of net sales
 
31.0
%
 
31.1
 %
 
 

 
 

    Acquisition and integration expenses
 
(5.4
)
 
(39.4
)
 
34.0

 
86.3
 %
    Restructuring and other related charges
 
(78.5
)
 
(81.9
)
 
3.4

 
4.2
 %
    Impairment of goodwill
 

 
(596.3
)
 
596.3

 
NM

    Impairment of intangible assets
 

 
(728.1
)
 
728.1

 
NM

    Depreciation and amortization expense
 
(355.5
)
 
(384.9
)
 
29.4

 
7.6
 %
Total other operating expenses
 
(3,757.2
)
 
(5,173.4
)
 
1,416.2

 
27.4
 %
Operating income (loss)
 
34.3

 
(1,313.8
)
 
1,348.1

 
NM

        Operating income (loss) as % of net sales
 
0.5
%
 
(19.8
)%
 
 

 
 

Interest expense
 
(113.0
)
 
(102.2
)
 
(10.8
)
 
(10.6
)%
Interest and other income, net
 
2.2

 
1.8

 
0.4

 
22.2
 %
Loss on extinguishment of debt
 
(5.0
)
 

 
(5.0
)
 
NM

Loss before benefit for income taxes
 
(81.5
)
 
(1,414.2
)
 
1,332.7

 
94.2
 %
Benefit for income taxes
 
41.8

 
346.9

 
(305.1
)
 
(88.0
)%
        Effective tax rate (a)
 
51.3
%
 
24.5
 %
 
 

 
 

Net loss
 
$
(39.7
)
 
$
(1,067.3
)
 
$
1,027.6

 
96.3
 %
 
 
 
 
 
 
 
 
 
Net loss per common share:
 
 

 
 

 
 

 
 

        Basic
 
$
(0.20
)
 
$
(5.48
)
 
$
5.28

 
96.3
 %
        Diluted
 
$
(0.20
)
 
$
(5.48
)
 
$
5.28

 
96.3
 %
_________

(a) Effective tax rate is calculated by dividing the benefit for income taxes by the loss before the benefit for income taxes.
(NM) Not meaningful.

Net sales. Net sales decreased by $71.5 million, or 1.1%, to $6,578.3 million in Fiscal 2018 from $6,649.8 million in the year-ago period. The decline in net sales primarily reflected a 2% decline in comparable sales that mainly resulted from a 6.7% decline in net sales at our Value Fashion segment, as well as product assortment challenges during the first half of Fiscal 2018 experienced by the Premium Fashion segment, which returned to positive comp performance in the second half of Fiscal 2018. Non-comparable sales declined by $73.0 million, or 37.1%, to $123.6 million from $196.6 million, as discussed on a segment basis below. Wholesale, licensing and other revenues increased by $5.2 million, or 2.5%, to $212.8 million from $207.6 million. Net sales for all four segments also included incremental revenues of $113.0 million due to the inclusion of the 53rd week in Fiscal 2018 as previously discussed.

31



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)



Net sales data for our four operating segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
August 4,
2018
 
July 29,
2017
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

Premium Fashion
 
$
2,317.8

 
$
2,322.6

 
$
(4.8
)
 
(0.2
)%
Value Fashion
 
1,820.5

 
1,950.2

 
(129.7
)
 
(6.7
)%
Plus Fashion
 
1,340.0

 
1,353.9

 
(13.9
)
 
(1.0
)%
Kids Fashion
 
1,100.0

 
1,023.1

 
76.9

 
7.5
 %
Total net sales
 
$
6,578.3

 
$
6,649.8

 
$
(71.5
)
 
(1.1
)%
 
 
 
 
 
 
 
 
 
Comparable sales (a)(b)(c)
 
 
 
 

 
 

 
(2
)%
_______
(a) Comparable sales represent combined store comparable sales and direct channel sales. Store comparable sales generally refers to the growth of sales in stores only open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Direct channel sales refer to growth of sales from our direct channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, we report a single, consolidated comparable sales metric, inclusive of store and direct channels.
(b) Incremental revenues of approximately $113.0 million due to the inclusion of the 53rd week in Fiscal 2018 are excluded from the calculation of comparable sales.
(c) 
During Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the Justice pricing litigation, discussed more fully in Note 15 to the accompanying consolidated financial statements, began to be redeemed. Comparable sales related to these transactions includes the transaction value in excess of the voucher value.

Premium Fashion net sales performance in Fiscal 2018 primarily reflected:

a 5% comparable sales decline of $37.3 million at Ann Taylor, and a less than 1% comparable sales decline of $7.3 million at LOFT;
a $4.9 million increase in non-comparable sales primarily reflecting a net positive impact at LOFT, as the impact of 8 store openings more than offset the impact of 14 store closures, which was offset in part by the negative impact of 18 net store closures at Ann Taylor;
a $24.6 million increase due to the inclusion of the 53rd week period; and
a $10.3 million increase in other revenues primarily related to higher gift card breakage and higher credit revenue.

Value Fashion net sales performance in Fiscal 2018 primarily reflected:
 
a 10% comparable sales decline of $86.8 million at dressbarn and a 4% comparable sales decline of $35.2 million at maurices;
a $38.2 million decline in non-comparable sales substantially all at dressbarn reflecting 49 store closures;
a $32.6 million increase due to the inclusion of the 53rd week period; and
a $2.1 million decline in other revenues.

Plus Fashion net sales performance in Fiscal 2018 primarily reflected:
 
a 1% comparable sales decline of $7.9 million at Lane Bryant and a 3% comparable sales decline of $9.6 million at Catherines;
an $11.0 million decline in non-comparable sales at Lane Bryant due to 15 net store closures and a $7.0 million decline in non-comparable sales at Catherines due to 11 net store closures;
a $20.7 million increase due to the inclusion of the 53rd week period; and
a $0.9 million increase in other revenues.


32



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Kids Fashion net sales performance in Fiscal 2018 primarily reflected:
 
a 7% comparable sales increase of $67.4 million at Justice;
a $21.7 million decline in non-comparable sales primarily due to 53 net store closures;
a $35.1 million increase due to the inclusion of the 53rd week period; and
a $3.9 million decline in other revenues primarily due to lower wholesale revenue.
 
Gross margin. Gross margin, in terms of dollars decreased as a result of the decline in comparable sales as well as a decline in gross margin rate. Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, decreased by 40 basis points to 57.6% in Fiscal 2018 from 58.0% in Fiscal 2017. Improved performance at our Plus Fashion and Kids Fashion segments was offset by declines at our Premium Fashion and Value Fashion segments. On a consolidated basis, gross margin reflects higher shipping costs of approximately $43 million across the segments as a result of an increased mix of direct channel sales and higher air freight costs, offset by the realization of approximately $40 million in synergies and cost savings benefits achieved from product sourcing and transportation costs.

Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.

Gross margin rate highlights on a segment basis are as follows:

Premium Fashion gross margin rate performance declined by approximately 60 basis points, reflecting higher shipping costs related to increased direct channel penetration and an increased level of promotional selling resulting from soft product acceptance during the first half of Fiscal 2018, offset in part by the segment's cost of goods sold initiative.
Value Fashion gross margin rate performance declined approximately 150 basis, points caused primarily by a 280 basis point decline at dressbarn. The decline mainly reflects higher markdown requirements to maintain appropriate inventory levels, a higher level of promotional selling, particularly at dressbarn, due to lower than expected customer demand, and higher shipping costs related to the increased direct channel penetration.
Plus Fashion gross margin rate performance improved by approximately 30 basis points, reflecting improved product acceptance and lower levels of promotional selling, offset in part by higher shipping costs related to the increased direct channel penetration.
Kids Fashion gross margin rate performance improved approximately 90 basis points, resulting from improved product acceptance, offset in part by incremental freight expenses necessary to meet higher product demand.

Buying, distribution and occupancy ("BD&O") expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
 
BD&O expenses increased by $6.8 million, or 0.5%, to $1,281.1 million in Fiscal 2018 from $1,274.3 million in Fiscal 2017. Higher buying costs and variable distribution costs related to the increased penetration of our direct channel business were partly offset by lower occupancy expenses related to our fleet optimization program, which provided approximately $15 million of cost savings during Fiscal 2018. BD&O expenses as a percentage of net sales increased by 30 basis points to 19.5% in Fiscal 2018 from 19.2% in Fiscal 2017, primarily due to the de-leveraging effect of lower comparable sales.

Selling, general and administrative (“SG&A”) expenses consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
 
SG&A expenses decreased by $31.8 million, or 1.5%, to $2,036.7 million in Fiscal 2018 from $2,068.5 million in Fiscal 2017. The decrease in SG&A expenses was primarily due to approximately $125 million in synergies and cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings. Also contributing to the decrease were lower store expenses, resulting from the fleet optimization program, and lower performance-based compensation. These items were offset in part by inflationary increases, higher write-downs of store related fixed assets, primarily at the Value Fashion segment, and the impact of the 53rd week in Fiscal 2018 recorded for all of the segments. SG&A expenses as a percentage of net sales decreased

33



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


by 10 basis points to 31.0% in Fiscal 2018 from 31.1% in Fiscal 2017, and reflects the impact of the reduced expenses, offset in part by the de-leveraging effect of lower comparable sales.

Depreciation and amortization expense decreased by $29.4 million, or 7.6%, to $355.5 million in Fiscal 2018 from $384.9 million in Fiscal 2017. The decrease was primarily due to a reduction in store count resulting from our fleet optimization program, offset in part by incremental depreciation from capital investments.

Operating income (loss). Operating income was $34.3 million for Fiscal 2018 compared to an operating loss of $1,313.8 million in Fiscal 2017 and is discussed on a segment basis below.

Operating results for our four operating segments are presented below.
 
 
Fiscal Years Ended
 
 
 
 
 
 
August 4,
2018
 
July 29,
2017
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating income (loss):
 
 

 
 

 
 

 
 

Premium Fashion
 
$
135.2

 
$
140.9

 
$
(5.7
)
 
(4.0
)%
Value Fashion
 
(83.2
)
 
12.2

 
(95.4
)
 
NM

Plus Fashion
 
27.1

 
15.5

 
11.6

 
74.8
 %
Kids Fashion
 
39.1

 
(36.7
)
 
75.8

 
NM

Unallocated acquisition and integration expenses
 
(5.4
)
 
(39.4
)
 
34.0

 
86.3
 %
Unallocated restructuring and other related charges
 
(78.5
)
 
(81.9
)
 
3.4

 
4.2
 %
Unallocated impairment of goodwill
 

 
(596.3
)
 
596.3

 
NM

Unallocated impairment of intangible assets
 

 
(728.1
)
 
728.1

 
NM

Total operating income (loss)
 
$
34.3

 
$
(1,313.8
)
 
$
1,348.1

 
NM

_______
(NM) Not meaningful.
Premium Fashion operating income decreased by $5.7 million primarily due to lower comparable sales and gross margin rate as discussed above, offset in part by a decrease in SG&A expenses. SG&A expense reductions were primarily driven by lower performance-based compensation, and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Value Fashion operating results decreased by $95.4 million primarily due to lower comparable sales and gross margin rate, as discussed above, and an increase in SG&A expenses, which were offset in part by lower BD&O expenses. The lower BD&O expenses primarily reflect lower occupancy expenses associated with our fleet optimization program. The higher SG&A expenses primarily reflect higher non-cash charges to write-down store-related fixed assets as previously discussed, offset in part by a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Plus Fashion operating income increased by $11.6 million primarily due to an increase in the gross margin rate, as discussed above, and a decrease in SG&A expenses, which were offset in part by higher BD&O expenses and a decrease in comparable sales, also discussed above. The higher BD&O expenses primarily reflect the increased penetration of our direct channel business. SG&A expense reductions were primarily driven by a decrease in administrative payroll costs, lower marketing expenses, and other cost savings initiatives, mainly associated with the Change for Growth program.
Kids Fashion operating income increased by $75.8 million primarily due to an increase in comparable sales and gross margin rate, as discussed above, as well as lower SG&A expenses. SG&A expense reductions were primarily driven by lower store expenses associated with our fleet optimization program, lower marketing expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program.

Unallocated acquisition and integration expenses of $5.4 million for Fiscal 2018 primarily reflected costs associated with the post-acquisition integration of ANN's distribution operations, including the closure of the former ANN distribution facility in Louisville, Kentucky, as well as the gain on the related sale of that facility, which occurred in Fiscal 2018. The $39.4 million of unallocated acquisition and integration expenses in Fiscal 2017 represents costs related to the ANN Acquisition consisting of $14.3

34



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


million of severance and retention costs, $8.0 million of settlement charges and professional fees related to the termination of the pension plan acquired in the ANN Acquisition, and $17.1 million of other costs associated with the post-acquisition integration of ANN's operations.

Unallocated restructuring and other related charges reflects costs incurred under the Change for Growth program. Expenses of $78.5 million for Fiscal 2018 included $59.2 million for professional fees incurred in connection with the identification and implementation of transformation initiatives, $5.2 million of severance and other related expenses, and asset impairments of $14.1 million reflecting decisions within the fleet optimization program to close certain under-performing stores as well as a write-down of a building. The $81.9 million of unallocated restructuring and other related charges in Fiscal 2017 represents $33.2 million of severance and other related expenses, $15.3 million for charges related to fleet optimization program and $33.4 million for professional fees incurred in connection with the identification and implementation of transformation initiatives.

Unallocated impairment of goodwill reflects the Fiscal 2017 write-down of the carrying values of the reporting units to their fair values and is included in our operating segments as follows: $428.9 million at our Premium Fashion segment, $107.2 million at our Value Fashion segment and $60.2 million at our Plus Fashion segment. There was no unallocated impairment of goodwill in Fiscal 2018.

Unallocated impairment of intangible assets reflects the Fiscal 2017 write-down of our trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade name and $161.8 million of our Lane Bryant trade name. There was no unallocated impairment of intangible assets in Fiscal 2018.
 
Interest expense increased by $10.8 million to $113.0 million for Fiscal 2018 from $102.2 million in Fiscal 2017, primarily caused by a higher interest rate on our term loan.

Loss on extinguishment of debt. During Fiscal 2018, the company made repayments of $180.0 million which were applied towards future scheduled quarterly payments of the outstanding principal balance of the term loan debt, resulting in a $5.0 million pre-tax loss reflecting the acceleration of deferred financing fees.

Benefit for income taxes represents federal, foreign, state and local income taxes. We recorded a benefit of $41.8 million in Fiscal 2018 on a pre-tax loss of $81.5 million, for an effective tax rate of 51.3%, which reflects the provisional impact of recording the tax effects associated with the 2017 Act discussed in Note 14 to the accompanying consolidated financial statements. This was offset by the impact of recording a valuation allowance on certain state deferred tax assets also discussed in Note 14 to the accompanying consolidated financial statements and accounting for the tax effects of share-based compensation discussed in Note 4 to the accompanying consolidated financial statements. In Fiscal 2017, we recorded a benefit of $346.9 million on a pre-tax loss of $1,414.2 million for a 24.5% effective tax rate. The effective annual tax rate for Fiscal 2017 is lower than the statutory federal and state tax rate primarily as $526.5 million of the impairment of goodwill is non-deductible for income tax purposes and is treated as a permanent difference.
 
Net loss decreased to $39.7 million in Fiscal 2018 from $1,067.3 million in the year-ago period, primarily due to the impairment of goodwill and intangible assets, net of the related income tax benefit, recorded in the year-ago period as discussed above.

Net loss per diluted common share was to $0.20 per share in Fiscal 2018 compared to a loss of $5.48 per share in the year-ago period due to lower net loss discussed above.


35



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Fiscal 2017 Compared to Fiscal 2016
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 29,
2017
 
July 30,
2016
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
6,649.8

 
$
6,995.4

 
$
(345.6
)
 
(4.9
)%
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,790.2
)
 
(3,066.7
)
 
276.5

 
9.0
 %
         Cost of goods sold as % of net sales
 
42.0
 %
 
43.8
 %
 
 

 
 

Gross margin
 
3,859.6

 
3,928.7

 
(69.1
)
 
(1.8
)%
        Gross margin as % of net sales
 
58.0
 %
 
56.2
 %
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(1,274.3
)
 
(1,286.5
)
 
12.2

 
0.9
 %
        Buying, distribution and occupancy expenses as % of net sales
 
19.2
 %
 
18.4
 %
 
 

 
 

    Selling, general and administrative expenses
 
(2,068.5
)
 
(2,112.3
)
 
43.8

 
2.1
 %
        SG&A expenses as % of net sales
 
31.1
 %
 
30.2
 %
 
 

 
 

    Acquisition and integration expenses
 
(39.4
)
 
(77.4
)
 
38.0

 
49.1
 %
    Restructuring and other related charges
 
(81.9
)
 

 
(81.9
)
 
NM

    Impairment of goodwill
 
(596.3
)
 

 
(596.3
)
 
NM

    Impairment of intangible assets
 
(728.1
)
 

 
(728.1
)
 
NM

    Depreciation and amortization expense
 
(384.9
)
 
(358.7
)
 
(26.2
)
 
(7.3
)%
Total other operating expenses
 
(5,173.4
)
 
(3,834.9
)
 
(1,338.5
)
 
(34.9
)%
Operating (loss) income
 
(1,313.8
)
 
93.8

 
(1,407.6
)
 
NM

        Operating (loss) income as % of net sales
 
(19.8
)%
 
1.3
 %
 
 

 
 

Interest expense
 
(102.2
)
 
(103.3
)
 
1.1

 
1.1
 %
Interest and other income, net
 
1.8

 
0.4

 
1.4

 
350.0
 %
Gain on extinguishment of debt
 

 
0.8

 
(0.8
)
 
NM

Loss before benefit for income taxes
 
(1,414.2
)
 
(8.3
)
 
(1,405.9
)
 
NM

Benefit (Provision) for income taxes
 
346.9

 
(3.6
)
 
350.5

 
NM

        Effective tax rate (a)
 
24.5
 %
 
(43.4
)%
 
 

 
 

Net loss
 
$
(1,067.3
)
 
$
(11.9
)
 
$
(1,055.4
)
 
NM

 
 
 
 
 
 
 
 
 
Net loss per common share:
 
 

 
 

 
 

 
 

        Basic
 
$
(5.48
)
 
$
(0.06
)
 
$
(5.42
)
 
NM

        Diluted
 
$
(5.48
)
 
$
(0.06
)
 
$
(5.42
)
 
NM

_________

(a) Effective tax rate is calculated by dividing the benefit (provision) for income taxes by the loss before the benefit (provision) for income taxes.
(NM) Not meaningful.

Net sales. Net sales decreased by $345.6 million, or 4.9%, to $6,649.8 million in Fiscal 2017 from $6,995.4 million in Fiscal 2016. The decline in net sales primarily reflected a 5% decline in comparable sales which was offset in part by three additional weeks of net sales for the Premium Fashion segment in Fiscal 2017 compared to Fiscal 2016 which included only the 49-week post-acquisition period. The comparable sales decline resulted from reduced store traffic. Non-comparable sales decreased by $23.5 million, or 14.0%, to $144.2 million from $167.7 million, as discussed on a segment basis below. Wholesale, licensing and other revenues increased by $8.8 million, or 6.1%, to $152.2 million from $143.4 million. Also contributing to the decline was the 53rd week in Fiscal 2016, which represented an incremental $82 million in net sales in Fiscal 2016.



36



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Net sales data for our four operating segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
July 29,
2017
 
July 30,
2016
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

     Premium Fashion
 
$
2,322.6

 
$
2,330.9

 
$
(8.3
)
 
(0.4
)%
     Value Fashion
 
1,950.2

 
2,094.6

 
(144.4
)
 
(6.9
)%
     Plus Fashion
 
1,353.9

 
1,463.6

 
(109.7
)
 
(7.5
)%
     Kids Fashion
 
1,023.1

 
1,106.3

 
(83.2
)
 
(7.5
)%
Total net sales
 
$
6,649.8

 
$
6,995.4

 
$
(345.6
)
 
(4.9
)%
 
 
 
 
 
 
 
 
 
Comparable sales (a)
 
 
 
 

 
 

 
(5
)%
_______
(a) Comparable sales represent combined store comparable sales and direct channel sales. Store comparable sales generally refers to the growth of sales in stores only open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Direct channel sales refer to growth of sales from our direct channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, we report a single, consolidated comparable sales metric, inclusive of store and direct channels.

Premium Fashion net sales performance in Fiscal 2017 primarily reflected:

a 52-week period compared to the 49-week post-acquisition period in Fiscal 2016;
a 7% comparable sales decline at Ann Taylor and a 4% comparable sales decline at LOFT; and
18 net store closures at Ann Taylor and 4 net store closures at LOFT.

Value Fashion net sales performance in Fiscal 2017 primarily reflected:
 
a 9% comparable sales decline of $88.7 million at maurices and a 5% comparable sales decline of $46.6 million at dressbarn;
a $22.4 million increase in non-comparable sales due to 12 net store openings at maurices, offset in part by a $19.8 million decline in non-comparable sales due to 30 net store closures at dressbarn;
a $34.5 million decline due to the inclusion of the 53rd week in Fiscal 2016; and
a $22.8 million increase in other revenues primarily due to the segment's new private label credit card program.

Plus Fashion net sales performance in Fiscal 2017 primarily reflected:
 
a 7% comparable sales decline of $67.3 million at Lane Bryant and a 4% comparable sales decline of $11.3 million at Catherines;
a $2.3 million decline in non-comparable sales due to 8 net store closures at Lane Bryant and 14 net store closures at Catherines;
a $23.0 million decline due to the inclusion of the 53rd week in Fiscal 2016; and
a $5.8 million decline in other revenues due to lower revenue from product sell-off and gift card breakage.

Kids Fashion net sales performance in Fiscal 2017 primarily reflected:
 
a 3% comparable sales decline of $26.3 million at Justice;
a $23.8 million decline in non-comparable sales caused by 37 net store closures;
a $24.9 million decline due to the inclusion of the 53rd week in Fiscal 2016; and
a $8.2 million decline in other revenues due to lower wholesale and licensing revenue.
 

37



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Gross margin. Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by 180 basis points from 56.2% in Fiscal 2016 to 58.0% in Fiscal 2017. The increase was due to an approximate $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded during Fiscal 2016 in our Premium Fashion segment. Excluding the prior year impact of the inventory amortization, gross margin rate was essentially flat, as improved performance at our Premium Fashion and Plus Fashion segments was offset by declines at our Value Fashion and Kids Fashion segments. On a consolidated basis, gross margin benefited from the realization of approximately $55 million in combined integration synergies and cost savings related to our ongoing supply chain integration and the cost of goods sold initiatives at its Premium Fashion segment.

Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.

Gross margin rate highlights on a segment basis are as follows:

Premium Fashion gross margin rate performance reflected an approximate $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory recorded during Fiscal 2016 discussed above. Excluding the prior year impact of the inventory amortization, gross margin rate performance improved by approximately 220 basis points, reflecting significant improvement at both Ann Taylor and LOFT. Both brands benefited from realization of freight cost synergies related to our ongoing supply chain integration and the segment's cost of goods sold initiative.
Value Fashion gross margin rate performance declined approximately 110 basis points, resulting from a higher level of promotional selling across the segment and increased markdown requirements to maintain appropriate inventory levels on lower than expected customer demand.
Plus Fashion gross margin rate performance improved by approximately 120 basis points, mainly due to more effective inventory management at both Lane Bryant and Catherines.
Kids Fashion gross margin rate performance declined approximately 370 basis points, resulting from a higher level of promotional selling and increased markdown requirements to maintain appropriate inventory levels on lower than expected customer demand.

Buying, distribution and occupancy ("BD&O") expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
 
BD&O expenses decreased by $12.2 million, or 0.9%, to $1,274.3 million in Fiscal 2017 from $1,286.5 million in Fiscal 2016. BD&O expenses for the Premium Fashion segment increased by $14.7 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in Fiscal 2016. For our other segments, BD&O expenses decreased by $26.9 million primarily due to lower occupancy expenses on a reduced store count and lower performance-based compensation. On a consolidated basis, BD&O expenses also included approximately $10 million in transformation initiatives and approximately $10 million of synergies related to the ANN Acquisition associated with the consolidation of the Premium Fashion segment brands into our ecommerce fulfillment center. BD&O expenses as a percentage of net sales increased by 80 basis points to 19.2% in Fiscal 2017 from 18.4% in Fiscal 2016, primarily due to the de-leveraging effect of lower comparable sales.

Selling, general and administrative (“SG&A”) expenses consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
 
SG&A expenses decreased by $43.8 million, or 2.1%, to $2,068.5 million in Fiscal 2017 from $2,112.3 million in Fiscal 2016. SG&A expenses for the Premium Fashion segment increased by $25.2 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in Fiscal 2016. For our other segments, SG&A expenses decreased by $69.0 million primarily due to store closures and the lower sales volume, reduced marketing expenses, lower performance-based compensation and a decrease in administrative payroll costs mainly associated with the Change for Growth program. On a consolidated basis, SG&A expenses also included approximately $85 million in synergies and transformation initiatives, primarily due to the elimination of redundant leadership and non-merchandise procurement savings. SG&A expenses as a percentage of net

38



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


sales increased by 90 basis points to 31.1% in Fiscal 2017 from 30.2% in Fiscal 2016, primarily due to the de-leveraging effect of lower comparable sales.

Depreciation and amortization expense increased by $26.2 million, or 7.3%, to $384.9 million in Fiscal 2017 from $358.7 million in Fiscal 2016. Depreciation and amortization expense for the Premium Fashion segment increased by $6.2 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in Fiscal 2016. For our other segments, depreciation and amortization expense increased by $20.0 million primarily due to our direct channel platform investment which was placed in service in the third quarter of Fiscal 2016 period and investments in our distribution network primarily to integrate the operations of ANN.

Operating (loss) income. Operating loss was $1,313.8 million for Fiscal 2017 compared to operating income of $93.8 million for Fiscal 2016 primarily due to the impairment of goodwill and other intangible assets, as well as the decrease in operating results discussed on a segment basis below. The operating results for Fiscal 2016 reflected an approximately $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded in our Premium Fashion segment.

Operating results for our four operating segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 29,
2017
 
July 30,
2016
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating (loss) income:
 
 

 
 

 
 

 
 

Premium Fashion
 
$
140.9

 
$
13.3

 
$
127.6

 
NM

Value Fashion
 
12.2

 
92.0

 
(79.8
)
 
(86.7
)%
Plus Fashion
 
15.5

 
36.9

 
(21.4
)
 
(58.0
)%
Kids Fashion
 
(36.7
)
 
29.0

 
(65.7
)
 
(226.6
)%
Unallocated acquisition and integration expenses
 
(39.4
)
 
(77.4
)
 
38.0

 
49.1
 %
Unallocated restructuring and other related charges
 
(81.9
)
 

 
(81.9
)
 
NM

Unallocated impairment of goodwill
 
(596.3
)
 

 
(596.3
)
 
NM

Unallocated impairment of intangible assets
 
(728.1
)
 

 
(728.1
)
 
NM

Total operating (loss) income
 
$
(1,313.8
)
 
$
93.8

 
$
(1,407.6
)
 
NM

_______
(NM) Not meaningful.
Premium Fashion operating income increased by $127.6 million as a result of lower non-cash purchase accounting expenses primarily due to approximately $127 million related to the write-up of inventory to fair market value recorded in Fiscal 2016. The operating results for Fiscal 2017 reflected an improvement in gross margin rate, partially offset by lower comparable sales, both discussed above. Operating expenses for Fiscal 2017 reflected lower performance-based compensation, synergies savings associated with the transition into our direct channel fulfillment center, lower occupancy expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program and integration-related activities.
Value Fashion operating income decreased by $79.8 million as a result of the decreases in net sales and gross margin rate, both discussed above, as well as an increase in depreciation expense, offset in part by decreases in operating expenses. Operating expense reductions were driven by lower performance-based compensation, lower store variable expenses resulting from the decrease in sales volume and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Plus Fashion operating income decreased by $21.4 million as a result of the decrease in net sales and an increase in depreciation expense. These items were offset in part by an improvement in gross margin rate and decreased operating expenses. Operating expense reductions were driven by lower occupancy expenses, reduced marketing expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program.

39



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Kids Fashion operating results decreased by $65.7 million as a result of the decreases in net sales and gross margin rate and the additional peak back-to-school week included in Fiscal 2016 as a result of the 53rd week, offset in part by a decrease in operating expenses. The impact of the additional peak back-to-school week in Fiscal 2016 was approximately $10 million. Operating expense reductions were driven by lower occupancy expenses, lower performance-based compensation and a decrease in administrative payroll costs mainly associated with the Change for Growth program.

Unallocated acquisition and integration expenses of $39.4 million for Fiscal 2017 included $14.3 million of severance and retention costs, $8.0 million of settlement charges and professional fees related to the termination of the pension plan acquired in the ANN Acquisition, and $17.1 million of other costs associated with the post-acquisition integration of ANN's operations. The $77.4 million of unallocated acquisition and integration expenses in Fiscal 2016 represents costs related to the ANN Acquisition consisting of $20.8 million of legal, consulting and investment-banking related transaction costs, $37.5 million of severance and retention-related expenses and $17.3 million of integration costs primarily to combine the operations and infrastructure of the ANN business.

Unallocated restructuring and other related charges of $81.9 million for Fiscal 2017 included $33.2 million of severance and other related expenses, $15.3 million for charges related to the fleet optimization program and $33.4 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program. There was no unallocated restructuring and other related charges in Fiscal 2016.

Unallocated impairment of goodwill of $596.3 million for Fiscal 2017 reflects the write-down of the carrying values of the reporting units to their fair values and is included in our operating segments as follows: $428.9 million at our Premium Fashion segment, $107.2 million at our Value Fashion segment and $60.2 million at our Plus Fashion segment. There was no unallocated impairment of goodwill in Fiscal 2016.

Unallocated impairment of intangible assets of $728.1 million for Fiscal 2017 reflects the write down of our trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade name and $161.8 million of our Lane Bryant trade name. There was no unallocated impairment of intangible assets in Fiscal 2016.
 
Interest expense decreased by $1.1 million to $102.2 million for Fiscal 2017. The decrease was primarily the result of the principal redemptions and repayments of the term loan during Fiscal 2017, mostly offset by a higher interest rate and an additional three weeks of interest expense on the term loan for Fiscal 2017 due to the timing of the ANN Acquisition.

Gain on extinguishment of debt. During Fiscal 2016, we repurchased $72.0 million of the outstanding principal balance of the term loan debt at an aggregate cost of $68.4 million through open market transactions, resulting in a $0.8 million pre-tax gain, net of the proportional write-off of unamortized original issuance discount and debt issuance costs of $2.8 million.

Benefit (provision) for income taxes represents federal, foreign, state and local income taxes. The benefit (provision) for income taxes increased by $350.5 million to a benefit of $346.9 million in Fiscal 2017 from a provision of $3.6 million in Fiscal 2016. Our effective tax rate was 24.5% for Fiscal 2017 and negative 43.4% for Fiscal 2016. The effective tax rate computing the benefit on the pre-tax loss for Fiscal 2017 is lower than the statutory federal and state tax rate primarily as $526.5 million of the goodwill impairment charge is non-deductible for income tax purposes and is treated as a permanent difference. The negative effective tax rate for Fiscal 2016 despite a net loss was primarily due to state and local taxes and certain expenses which were non-deductible for income tax purposes.

Net loss increased by $1,055.4 million to $1,067.3 million in Fiscal 2017 from $11.9 million in Fiscal 2016, primarily due to the impairment of goodwill and other intangible assets, as well as lower operating results discussed above.

Net loss per diluted common share increased by $5.42 to $5.48 per share in Fiscal 2017 from $0.06 per share in Fiscal 2016 due to the higher net loss discussed above.





40



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


FINANCIAL CONDITION AND LIQUIDITY
 
Cash Flows
 
Fiscal 2018 Compared to Fiscal 2017
 
The table below summarizes our cash flows for the years presented as follows:
 
 
Fiscal Years Ended
 
 
August 4,
2018
 
July 29,
2017
 
 
(millions)
Net cash provided by operating activities
 
$
273.9

 
$
343.6

Net cash used in investing activities
 
(134.4
)
 
(268.9
)
Net cash used in financing activities
 
(226.2
)
 
(120.9
)
Net decrease in cash and cash equivalents
 
$
(86.7
)
 
$
(46.2
)

Net cash provided by operating activities. Net cash provided by operating activities was $273.9 million for Fiscal 2018, compared with $343.6 million during the year-ago period. Cash provided by operations was lower during Fiscal 2018 primarily due to lower net income before non-cash expenses and higher working capital outflows in Fiscal 2018, primarily related to timing of payments for store rent expense of approximately $50 million.

Net cash used in investing activities. Net cash used in investing activities for Fiscal 2018 was $134.4 million, compared with $268.9 million for the year-ago period. Net cash used in investing activities in Fiscal 2018 consisted primarily of capital expenditures of $186.3 million, offset in part by $52.1 million of proceeds from the sale of assets, which substantially reflects the redemption of cash surrender value on certain company-owned life insurance policies. Net cash used in investing activities in the year-ago period was $268.9 million, consisting primarily of capital expenditures of $258.1 million and the purchase of an intangible asset of $11.6 million.

Net cash used in financing activities. Net cash used in financing activities was $226.2 million during Fiscal 2018, consisting primarily of $225.0 million of principal repayments of our term loan debt. Net cash used in financing activities was $120.9 million during the year-ago period, consisting primarily of principal repayments of our term loan debt.

Fiscal 2017 Compared to Fiscal 2016

The table below summarizes our cash flows for the years presented as follows:
 
 
Fiscal Years Ended
 
 
July 29,
2017
 
July 30,
2016
 
 
(millions)
Net cash provided by operating activities
 
$
343.6

 
$
445.4

Net cash used in investing activities
 
(268.9
)
 
(1,835.7
)
Net cash (used in) provided by financing activities
 
(120.9
)
 
1,521.5

Net (decrease) increase in cash and cash equivalents
 
$
(46.2
)
 
$
131.2


Net cash provided by operating activities. Net cash provided by operating activities was $343.6 million for Fiscal 2017, compared with $445.4 million during Fiscal 2016. Cash provided by operations was lower during Fiscal 2017 as lower net income and unfavorable working capital outflows related to timing of payments and lower incentive compensation accruals were offset in part by cash used for non-recurring payments made during Fiscal 2016, primarily reflecting an escrow payment of approximately $51 million for the Justice pricing litigation settlement and a payment of approximately $44 million to a former Justice executive.

Net cash used in investing activities. Net cash used in investing activities for Fiscal 2017 was $268.9 million, compared with $1,835.7 million for Fiscal 2016. Net cash used in investing activities in Fiscal 2017 consisted primarily of capital expenditures

41



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


of $258.1 million and the purchase of an intangible asset of $11.6 million. Net cash used in investing activities in Fiscal 2016 consisted primarily of $1,494.6 million of cash paid in the ANN Acquisition and cash used for capital expenditures of $366.5 million, partially offset by net proceeds from the sale of investments of $25.4 million.

Net cash (used in) provided by financing activities. Net cash used in financing activities was $120.9 million during Fiscal 2017, consisting primarily of principal repayments of our term loan debt. Net cash provided by financing activities was $1,521.5 million during Fiscal 2016, consisting primarily of $1,764.0 million of borrowing under our new term loan, offset in part by net repayments of debt under our amended revolving credit agreement of $116.0 million, $77.4 million of redemptions and principal repayments of our term loan debt and $42.6 million of payments made for deferred financing costs related to the new borrowing arrangements entered into during the first quarter of Fiscal 2016.

Capital Spending
 
In Fiscal 2018, we had $186.3 million in capital expenditures, which included spending for non-routine capital investments including our omni-channel platform and initiatives identified with the Change for Growth program, as well as routine spending in connection with our digital initiatives, infrastructure, and our retail store network. The most significant non-routine initiatives are described below.

During Fiscal 2018, we continued to invest in initiatives that support our omni-channel capability. We completed the expansion of our Riverside, California facility to include the direct channel, as well as brick-and-mortar distribution. Additionally, during Fiscal 2018, we continued to develop technology solutions which will allow our brands to (i) provide customers a seamless omni-channel shopping experience in-store and online, (ii) integrate our marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance our capability to analyze transaction data to support more effective product and marketing decisions. Also, in connection with the Change for Growth program, we spent approximately $40 million in Fiscal 2018 and expect to spend approximately $30 million in Fiscal 2019 on projects to improve operational efficiency and enhance our customer-facing capabilities.
We expect that total capital spending for Fiscal 2019, including (i) routine spending, (ii) technological spending for the projects discussed above, and (iii) spending required to support the Change for Growth program, will be in the range of $180-$210 million. Our routine and non-routine capital requirements are expected to be funded primarily with available cash and cash equivalents, operating cash flows and, to the extent necessary, borrowings under our Amended Revolving Credit Agreement which is defined and discussed below.

Liquidity
 
Our primary sources of liquidity are the cash flow generated from our operations, remaining availability under our Amended Revolving Credit Agreement after taking into account outstanding borrowings, letters of credit and the collateral limitation, and available cash and cash equivalents. These sources of liquidity are used to fund our ongoing cash requirements, including working capital requirements, retail store expansion, construction and renovation of stores, investment in technological and supply chain infrastructure, acquisitions, debt servicing requirements, stock repurchases, dividends, contingent liabilities (including uncertain tax positions) and other corporate activities. Management believes that our existing sources of liquidity will be sufficient to support our operating needs, capital requirements and any debt service requirements for the foreseeable future.
 
As of August 4, 2018, approximately $44 million, or 18%, of our available cash and cash equivalents was held overseas by our foreign subsidiaries, which represents a significant reduction in our offshore cash balance from Fiscal 2017. The 2017 Act eliminated the deferral of the U.S. tax liability on offshore earnings and profits, and subjected those earnings to tax under the Transition Tax rules that were part of the 2017 Act. The assessment of the Transition Tax meant that our offshore cash and offshore earnings could be repatriated at minimal tax cost. In the fourth quarter of Fiscal 2018, we repatriated approximately $273 million of our foreign cash back to the U.S.  Any remaining offshore cash balances are required to meet the working capital needs of the Company’s offshore businesses or are subject to foreign exchange control regulations. We continue to evaluate various alternatives for our remaining foreign held cash balances and will repatriate any excess cash balances as necessary.
 
As of August 4, 2018, we had $472.9 million of availability under the Amended Revolving Credit Agreement.


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ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


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. 

Amended Revolving Credit Agreement

We believe that our Amended Revolving Credit Agreement is adequately diversified with no undue concentrations in any one financial institution. We were in compliance with all financial covenants contained in the Amended Revolving Credit Agreement as of August 4, 2018. The Amended Revolving Credit Agreement extends the maturity of the Company's revolving credit facility from August 2020 to the earlier of (i) 5 years from the closing date (or February 2023) or (ii) 91