10-Q 1 asna10q-q2fy19.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended February 2, 2019
 
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
 
30-0641353
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
933 MacArthur Boulevard, Mahwah, New Jersey
 
07430
(Address of principal executive offices)
 
(Zip Code)
 
(551) 777-6700
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark 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 x
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
The Registrant had 197,567,328 shares of common stock outstanding as of March 12, 2019.







INDEX
 
PART I.  FINANCIAL INFORMATION (Unaudited)
 
 
 
 
 
 
 
 
Page
Item 1.
Condensed Financial Statements:
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Loss
 
Condensed Consolidated Statements of Cash Flows
 
Condensed Consolidated Statements of Equity
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 





ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
February 2,
2019
 
August 4,
2018
 
(millions, except per share data)
(unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
214.6

 
$
238.9

Inventories
692.6

 
622.9

Prepaid expenses and other current assets
237.4

 
248.5

Total current assets
1,144.6

 
1,110.3

Property and equipment, net
1,104.6

 
1,205.3

Goodwill
683.0

 
683.0

Other intangible assets, net
509.2

 
516.0

Other assets
54.9

 
55.9

Total assets
$
3,496.3

 
$
3,570.5

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
425.5

 
$
437.6

Accrued expenses and other current liabilities
297.8

 
331.4

Deferred income
168.2

 
121.7

Total current liabilities
891.5

 
890.7

Long-term debt
1,333.6

 
1,328.7

Lease-related liabilities
295.8

 
315.2

Deferred income taxes
24.9

 
29.6

Other non-current liabilities
205.1

 
207.8

Total liabilities
2,750.9

 
2,772.0

 
 
 
 
Commitments and contingencies (Note 14)


 


 
 
 
 
Equity:
 

 
 

Common stock, par value $0.01 per share; 197.6 million and 196.3 million shares issued and outstanding as of February 2, 2019 and August 4, 2018, respectively
2.0

 
2.0

Additional paid-in capital
1,096.8

 
1,088.2

Accumulated deficit
(340.1
)
 
(278.8
)
Accumulated other comprehensive loss
(13.3
)
 
(12.9
)
Total equity
745.4

 
798.5

Total liabilities and equity
$
3,496.3

 
$
3,570.5








See accompanying notes.

3



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions, except per share data)
(unaudited)
Net sales
$
1,692.8

 
$
1,719.0

 
$
3,284.6

 
$
3,308.7

Cost of goods sold
(810.0
)
 
(790.4
)
 
(1,456.2
)
 
(1,415.0
)
Gross margin
882.8

 
928.6

 
1,828.4

 
1,893.7

 
 
 
 
 
 
 
 
Other operating expenses:
 
 
 
 
 

 
 

Buying, distribution and occupancy expenses
(317.6
)
 
(326.1
)
 
(632.3
)
 
(644.2
)
Selling, general and administrative expenses
(519.4
)
 
(526.2
)
 
(1,021.5
)
 
(1,019.0
)
Acquisition and integration expenses

 
(3.3
)
 

 
(5.4
)
Restructuring and other related charges
(14.3
)
 
(18.8
)
 
(22.2
)
 
(41.0
)
Depreciation and amortization expense
(83.3
)
 
(89.8
)
 
(165.3
)
 
(179.8
)
Total other operating expenses
(934.6
)
 
(964.2
)
 
(1,841.3
)
 
(1,889.4
)
Operating (loss) income
(51.8
)
 
(35.6
)
 
(12.9
)
 
4.3

 
 
 
 
 
 
 
 
Interest expense
(26.9
)
 
(27.2
)
 
(52.9
)
 
(53.8
)
Interest income and other income, net
1.2

 
1.6

 
2.0

 
1.8

Loss before benefit (provision) for income taxes
(77.5
)
 
(61.2
)
 
(63.8
)
 
(47.7
)
Benefit (provision) for income taxes
6.0

 
21.9

 
(1.8
)
 
15.0

Net loss
$
(71.5
)
 
$
(39.3
)
 
$
(65.6
)
 
$
(32.7
)
 
 
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 

 
 

Basic
$
(0.36
)
 
$
(0.20
)
 
$
(0.33
)
 
$
(0.17
)
Diluted
$
(0.36
)
 
$
(0.20
)
 
$
(0.33
)
 
$
(0.17
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
197.5

 
196.1

 
197.1

 
195.8

Diluted
197.5

 
196.1

 
197.1

 
195.8


 
















See accompanying notes.

4



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 


 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions)
(unaudited)
Net loss
$
(71.5
)
 
$
(39.3
)
 
$
(65.6
)
 
$
(32.7
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment

 
2.7

 
(0.4
)
 
0.7

Total other comprehensive income (loss)

 
2.7

 
(0.4
)
 
0.7

Total comprehensive loss
$
(71.5
)
 
$
(36.6
)
 
$
(66.0
)
 
$
(32.0
)

 
 






































See accompanying notes.

5



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
(millions)
(unaudited)
Cash flows from operating activities:
 
Net loss
$
(65.6
)
 
$
(32.7
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization expense
165.3

 
179.8

Deferred income tax benefit
(4.8
)
 
(26.7
)
Deferred rent and other occupancy costs
(21.4
)
 
(24.6
)
Stock-based compensation expense
8.3

 
10.8

Impairment of tangible assets
4.5

 
15.1

Non-cash interest expense
4.9

 
6.0

Gain on sale of fixed assets
(0.1
)
 
(2.0
)
Other non-cash income, net
(7.7
)
 
(3.1
)
Changes in operating assets and liabilities:
 

 
 

Inventories
(55.4
)
 
39.0

Accounts payable, accrued liabilities and income tax liabilities
(62.9
)
 
(36.9
)
Deferred income
35.9

 
32.2

Lease-related liabilities
5.3

 
10.4

Other balance sheet changes, net
38.1

 
(11.8
)
Net cash provided by operating activities
44.4

 
155.5

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures
(68.9
)
 
(91.8
)
Proceeds from the sale of assets
0.4

 
9.7

Proceeds from the settlement of corporate-owned life insurance policies

 
37.2

Other investing activities

 
0.3

Net cash used in investing activities
(68.5
)
 
(44.6
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Redemptions and repayments of term loan

 
(22.5
)
Proceeds from revolver borrowings

 
295.5

Repayments of revolver borrowings

 
(295.5
)
Tax payments related to share-based awards
(0.6
)
 
(0.3
)
Proceeds from stock options exercised and employee stock purchases
0.4

 

Net cash used in financing activities
(0.2
)
 
(22.8
)
 
 
 
 
Net (decrease) increase in cash, cash equivalents and restricted cash
(24.3
)
 
88.1

Cash, cash equivalents and restricted cash at beginning of period
240.1

 
326.6

 
 
 
 
Cash, cash equivalents and restricted cash at end of period
$
215.8

 
$
414.7







See accompanying notes.



6



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Equity
Fiscal 2019
 
Shares
 
Amount
 
 
 
 
 
 
(millions)
 
 
(unaudited)
Balance, August 4, 2018
 
196.3

 
$
2.0

 
$
1,088.2

 
$
(278.8
)
 
$
(12.9
)
 
$
798.5

Net income
 

 

 

 
5.9

 

 
5.9

Total other comprehensive loss
 

 

 

 

 
(0.4
)
 
(0.4
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
1.1

 

 
4.8

 
(0.5
)
 

 
4.3

Cumulative effect of change in accounting upon adoption of ASC Topic 606
 

 

 

 
4.9

 

 
4.9

Balance, November 3, 2018
 
197.4

 
2.0

 
1,093.0

 
(268.5
)
 
(13.3
)
 
813.2

Net (loss)
 

 

 

 
(71.5
)
 

 
(71.5
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
0.2

 

 
3.8

 
(0.1
)
 

 
3.7

Balance, February 2, 2019
 
197.6

 
$
2.0

 
$
1,096.8

 
$
(340.1
)
 
$
(13.3
)
 
$
745.4



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Equity
Fiscal 2018
 
Shares
 
Amount
 
 
 
 
 
 
(millions)
 
 
(unaudited)
Balance, July 29, 2017
 
195.1

 
$
2.0

 
$
1,068.2

 
$
(238.8
)
 
$
(10.4
)
 
$
821.0

Net income
 

 

 

 
6.6

 

 
6.6

Total other comprehensive loss
 

 

 

 

 
(2.0
)
 
(2.0
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
0.9

 

 
6.0

 
(0.2
)
 

 
5.8

Balance, October 28, 2017
 
196.0

 
2.0

 
1,074.2

 
(232.4
)
 
(12.4
)
 
831.4

Net (loss)
 

 

 

 
(39.3
)
 

 
(39.3
)
Total other comprehensive income
 

 

 

 

 
2.7

 
2.7

Shares issued and equity grants made pursuant to stock-based compensation plans
 
0.2

 

 
4.8

 
(0.1
)
 

 
4.7

Balance, January 27, 2018
 
196.2

 
$
2.0

 
$
1,079.0

 
$
(271.8
)
 
$
(9.7
)
 
$
799.5












See accompanying notes.



7



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Description of Business
 
ascena retail group, inc., a Delaware corporation (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls. The Company's operations consist of its ecommerce operations and approximately 4,500 stores throughout the United States, Canada and Puerto Rico. The Company had annual revenues for the fiscal year ended August 4, 2018 of approximately $6.6 billion. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.

The Company operates its business in four operating segments: Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion. All of our segments sell fashion merchandise to the women's and girls' apparel market across a wide range of ages, sizes and demographics. Our segments consist of specialty retail, outlet and ecommerce as well as licensed franchises in international territories at our Kids Fashion segment. Our Premium Fashion segment consists of our Ann Taylor and LOFT brands; our Value Fashion segment consists of our maurices and dressbarn brands; our Plus Fashion segment consists of our Lane Bryant and Catherines brands; and our Kids Fashion segment consists of our Justice brand. For a more detailed description of each brand's products and markets in which they serve, see Part I, Item 1 "Business" in our Annual Report on Form 10-K for the fiscal year ended August 4, 2018 (the "Fiscal 2018 10-K").

The Company's brands had the following store counts as of February 2, 2019: maurices 943 stores; Justice 833 stores; Lane Bryant 736 stores; dressbarn 674 stores; LOFT 669 stores; Catherines 335 stores; and Ann Taylor 296 stores.

2. Basis of Presentation

Basis of Consolidation

These unaudited interim consolidated financial statements present all the assets, liabilities, revenues, expenses and cash flows of entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
 
Interim Financial Statements
 
These interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and are unaudited. In the opinion of management, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the condensed consolidated financial condition, results of operations, comprehensive loss, cash flows and equity of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report as permitted by the SEC’s rules and regulations. However, the Company believes that the disclosures herein are adequate to ensure that the information is fairly presented.
 
The condensed consolidated balance sheet data as of August 4, 2018 is derived from the audited consolidated financial statements included in the Company’s Fiscal 2018 10-K, which should be read in conjunction with these interim financial statements. Reference is made to the Fiscal 2018 10-K for a complete set of financial statements.
 
Fiscal Period
 
Fiscal year 2019 will end on August 3, 2019 and will be a 52-week period ("Fiscal 2019"). Fiscal year 2018 ended on August 4, 2018 and was a 53-week period (“Fiscal 2018”). The three and six months ended February 2, 2019 were 13 and 26-week periods, respectively, for all segments.

The Company's Premium Fashion segment, which historically has followed the National Retail Federation calendar, recognized an extra week during the second quarter of Fiscal 2018, consistent with other retail companies already on that calendar. The Company's other segments recognized their extra week in the fourth quarter of Fiscal 2018 due to reporting systems constraints.


8


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


As a result, the three and six months ended January 27, 2018 include the results of the Premium Fashion segment for 14 and 27-weeks, respectively, while the results of the Value Fashion, Plus Fashion, and Kids Fashion segments reflect 13 and 26-weeks, respectively. The Company's Premium Fashion segment recognized Net sales and Operating income from the extra week in the prior year of approximately $25 million and $3 million, respectively.

3. Recently Issued Accounting Standards
 
Recently adopted standards

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," ("ASU 2014-09") which supersedes the revenue recognition requirements in FASB Accounting Standards Codification, "Revenue Recognition (Topic 605)." The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The Company adopted the guidance on a modified retrospective basis in the first quarter of Fiscal 2019. The new guidance primarily impacted the Company's accounting for its customer loyalty and credit card program contracts. Under the new standard, the Company accounts for its customer loyalty programs using a deferred revenue model, which defers revenue at the estimated fair value as the loyalty points are redeemed. Also under the new standard, the Company records financing charges and other income under its credit card programs as variability is resolved. As a result of the changes discussed above, upon adoption of ASU 2014-09 in the first quarter of Fiscal 2019, we recorded a cumulative net after-tax adjustment to opening Accumulated deficit of approximately $5 million. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Other changes related to the adoption of ASU 2014-09 include a change in how expected product sales returns are recorded. While the Company continues to establish a reserve based on historical experience, under ASU 2014-09, the reserve is now recorded on a gross basis, rather than a net basis. As a result of this change, we recorded an offsetting increase of approximately $14 million to Inventories and Accrued expenses and other current liabilities.

The following tables summarize the impact of ASU 2014-09 on our condensed consolidated statement of income and balance sheet for three and six months of Fiscal 2019:

 
 
Three Months Ended February 2, 2019
 
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Net sales
 
$
1,692.8

 
$
1,680.9

 
$
11.9

Cost of goods sold
 
(810.0
)
 
(803.4
)
 
(6.6
)
Gross margin
 
882.8

 
877.5

 
5.3

 
 
 
 
 
 
 
Operating loss
 
(51.8
)
 
(57.1
)
 
5.3

 
 
 
 
 
 
 
Income before benefit for income taxes
 
(77.5
)
 
(82.8
)
 
5.3

Benefit for income taxes
 
6.0

 
7.2

 
(1.2
)
Net loss
 
$
(71.5
)
 
$
(75.6
)
 
$
4.1



9


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
 
Six Months Ended February 2, 2019
 
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Net sales
 
$
3,284.6

 
$
3,287.4

 
$
(2.8
)
Cost of goods sold
 
(1,456.2
)
 
(1,450.3
)
 
(5.9
)
Gross margin
 
1,828.4

 
1,837.1

 
(8.7
)
 
 
 
 
 
 
 
Operating loss
 
(12.9
)
 
(4.2
)
 
(8.7
)
 
 
 
 
 
 
 
Income before provision for income taxes
 
(63.8
)
 
(55.1
)
 
(8.7
)
Provision for income taxes
 
(1.8
)
 
(3.8
)
 
2.0

Net loss
 
$
(65.6
)
 
$
(58.9
)
 
$
(6.7
)

 
 
February 2, 2019
 
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Assets
 
 
 
 
 
 
Inventories
 
$
692.6

 
$
684.2

 
$
8.4

Prepaid expenses and other current assets
 
237.4

 
224.0

 
13.4

Liabilities and Shareholders' Equity
 
 
 
 
 


Accrued expenses and other current liabilities
 
297.8

 
305.6

 
(7.8
)
Deferred income
 
168.2

 
152.4

 
15.8

Accumulated deficit
 
(340.1
)
 
(341.9
)
 
1.8


The following table summarizes the impact of ASU 2014-09 on our condensed consolidated balance sheet as of the date of adoption:
 
 
As Reported August 4, 2018
 
Balances After Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Assets
 
 
 
 
 
 
Inventories
 
$
622.9

 
$
637.2

 
$
14.3

Prepaid expenses and other current assets
 
248.5

 
270.5

 
22.0

Liabilities and Shareholders' Equity
 
 
 
 
 
 
Accrued expenses and other current liabilities
 
331.4

 
347.1

 
15.7

Deferred income
 
121.7

 
137.4

 
15.7

Accumulated deficit
 
(278.8
)
 
(273.9
)
 
4.9


Restricted Cash

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," ("ASU 2016-18"). ASU 2016-18 requires restricted cash be included with cash and cash equivalents when reconciling the total beginning and ending amounts on the statement of cash flows. The standard also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. The Company adopted ASU 2016-18 in the first quarter of Fiscal 2019, using the retrospective method. The other provisions of ASU 2016-18 did not have a material effect on the Company.

10


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



The following table provides a reconciliation of cash, cash equivalents and restricted cash in the condensed consolidated balance sheets that reconcile to the amounts shown on the condensed consolidated statements of cash flows:

 
February 2,
2019
 
August 4,
2018
 
January 27,
2018
 
(millions)
Cash and cash equivalents
$
214.6

 
$
238.9

 
$
413.5

Restricted cash included in:
 
 
 
 
 
   Prepaid expenses and other current assets
1.2

 
1.2

 
1.2

Total cash, cash equivalents and restricted cash
$
215.8

 
$
240.1

 
$
414.7


Recently issued standards

Leases

In February 2016, the FASB issued ASU 2016-02, "Leases." The guidance requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The guidance may be applied retrospectively to each period presented or with the cumulative effect recognized as of the initial date of application. The Company is currently evaluating which transition method it will use to adopt the new guidance. The Company does not expect that the guidance will have a significant impact on its condensed consolidated statements of cash flows and is currently evaluating the guidance and its impact on its other condensed consolidated financial statements, but expects that it will result in a significant increase to its long-term assets and liabilities. The Company is also in the process of testing its lease administration system and is identifying changes to its business processes and controls to support adoption of the new standard in Fiscal 2020.

4. Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, price has been fixed or is determinable and collectability is reasonably assured.
 
Direct channel revenue from sales of products ordered through the Company’s retail internet sites and the corresponding freight revenue are recognized upon delivery and receipt of the shipment by our customers.

Reserves for estimated product returns are recorded based on historical return trends and are adjusted for known events, as applicable. As of February 2, 2019, the liability for estimated returns was $20.1 million and the corresponding balance of the right of return asset for merchandise was $9.8 million.
 
Gift cards, gift certificates and merchandise credits (collectively, “gift cards”) issued by the Company are recorded as a deferred income liability until they are redeemed, at which point revenue is recognized. Gift cards do not have expiration dates, but substantially all gift cards are redeemed within a 12-month period. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Gift card breakage is recognized in Net sales over time based on the historical redemption patterns and historically has not been material. For the thirteen weeks ended February 2, 2019, the opening balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $90.1 million, of which we recognized approximately $19 million as revenue during the period. For the twenty-six weeks ended February 2, 2019, the opening balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $92.7 million, of which we recognized approximately $29 million as revenue during the period. The closing balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $121.9 million, as of February 2, 2019.

The Company offers numerous customer loyalty programs for participating customers based on their level of purchases. For every qualifying purchase, the Company defers a portion of the revenue until the loyalty points are redeemed. The transaction price is allocated between the product and the loyalty points based on the relative stand-alone selling price. Loyalty points accumulate until predetermined thresholds are met at which point the loyalty points can be redeemed as a discount off of a future purchase.

11


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Substantially all loyalty points are redeemed within a 12-month period. For the thirteen weeks ended February 2, 2019, the opening balance of deferred revenue related to outstanding loyalty points was $36.1 million, of which we recognized approximately $20 million as revenue during the period. For the twenty-six weeks ended February 2, 2019, the opening (after adjusting for the impact of adopting ASU 2014-09) balance of deferred revenue related to outstanding loyalty points was $35.4 million, of which we recognized approximately $25 million as revenue during the period. The closing balance of deferred revenue related to outstanding loyalty points was $34.8 million as of February 2, 2019.

Revenue associated with merchandise shipments to other third-party retailers is recognized at the time title passes and risk of loss is transferred to customers, which generally occurs at the date of shipment.
 
In addition to retail-store, direct channel and third-party sales, the Company's segments recognize revenue from (i) licensing arrangements with franchised stores, (ii) royalty payments received under license agreements for the use of their trade name and (iii) credit card agreements as it is earned in accordance with the terms of the underlying agreements.

The Company accounts for sales and other related taxes on a net basis, thereby excluding such taxes from revenue.

The Company’s revenues by major product categories as a percentage of total net sales are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
Apparel
 
79
%
 
79
%
 
82
%
 
82
%
Accessories
 
16
%
 
16
%
 
14
%
 
14
%
Other
 
5
%
 
5
%
 
4
%
 
4
%
    Total net sales
 
100
%
 
100
%
 
100
%
 
100
%

5. Inventories
 
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
 
February 2,
2019
 
August 4,
2018
 
January 27, 2018
 
(millions)
Premium Fashion
$
246.0

 
$
212.2

 
$
192.2

Value Fashion
177.3

 
153.9

 
183.7

Plus Fashion
173.7

 
153.0

 
152.9

Kids Fashion
95.6

 
103.8

 
71.5

    Total inventories
$
692.6

 
$
622.9

 
$
600.3

 

6. Asset Impairments

Long-lived Asset Impairments

The charges below reduced the net carrying value of certain long-lived assets to their estimated fair value, as determined using discounted expected cash flows, which are classified as Level 3 measurements in the fair value measurements hierarchy. These impairment charges arose from the Company's routine assessment of under-performing retail stores and are included as a component of Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for all periods.


12


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Impairment charges related to retail store assets by segment are as follows:
 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions)
 
(millions)
Premium Fashion
$
0.3

 
$

 
$
0.4

 
$

Value Fashion (a)
0.8

 
2.3

 
2.5

 
5.5

Plus Fashion 
1.1

 
1.3

 
1.1

 
3.0

Kids Fashion
0.4

 
0.6

 
0.5

 
1.2

    Total impairment charges
$
2.6

 
$
4.2

 
$
4.5

 
$
9.7

________
(a) The Company incurred additional impairment charges in the three and six months ended January 27, 2018 of $4.3 million and $5.4 million, respectively, in connection with the Change for Growth program which are considered to be outside the Company’s typical quarterly real-estate review, and are included within Restructuring and other related charges, as more fully described in Note 7. No such charges were included in the three and six months ended February 2, 2019.
7. Restructuring and Other Related Charges

In Fiscal 2018 and 2019, the Company continued its activities under the Change for Growth program, which started in Fiscal 2017. Specifically, the Company (i) developed 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 retail landscape, (ii) enhanced our 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. Other activities included the ongoing fleet optimization store program as the Company continues to renegotiate leases and close stores.

Actions associated with the Change for Growth program are currently expected to continue through Fiscal 2019. As the Company continues to execute on the initiatives, we currently expect to incur additional charges in the remainder of Fiscal 2019 of approximately $15 million for professional fees and have identified capital projects of approximately $35 million to be incurred during Fiscal 2019. Of that amount, approximately $20 million was spent in the first six months of Fiscal 2019.

As a result of the Change for Growth program, the Company incurred the following charges, which are included within Restructuring and other related charges, for all periods presented:
 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions)
 
(millions)
Cash restructuring charges:
 
 
 
 
 
 
 
   Severance and benefit costs (a)
$
1.1

 
$
2.7

 
$
0.6

 
$
6.6

   Other related charges (b)
13.2

 
12.9

 
21.6

 
30.1

      Total cash charges
14.3

 
15.6

 
22.2

 
36.7

 
 
 
 
 
 
 
 
Non-cash charges:
 
 
 
 
 
 
 
   Impairment of assets (c)

 
3.2

 

 
4.3

      Total non-cash charges

 
3.2

 

 
4.3

 
 
 
 
 
 
 
 
Total restructuring and other related charges
$
14.3

 
$
18.8

 
$
22.2

 
$
41.0

_______
(a) Severance and benefit costs reflect additional severance accruals associated with previously announced initiatives, as well as adjustments to true up estimates of previously accrued severance-related costs to reflect amounts actually paid.
(b) Other related charges consist of professional fees and other third-party costs incurred in connection with the identification and implementation of transformation initiatives associated with the Change for Growth program.
(c) Includes charges for non-cash asset impairments of $4.3 million and $5.4 million during the three and six months ended January 27, 2018, respectively, which primarily reflect the write-down of the Bensalem building to fair market value. The amounts for both the three and six months ended January 27, 2018 were offset in part by the write-off of $1.1 million of tenant allowances during the second quarter of Fiscal 2018 as program stores were vacated.

13


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



A summary of activity for the six months ended February 2, 2019 in the restructuring-related liabilities associated with the Change for Growth program, which is included within Accrued expenses and other current liabilities, is as follows:
 
Severance and benefit costs
 
Other related charges
 
Total
 
(millions)
Balance at August 4, 2018
$
4.1

 
$
6.0

 
$
10.1

   Additions charged to expense
0.6

 
21.6

 
22.2

   Cash payments
(2.3
)
 
(26.0
)
 
(28.3
)
Balance at February 2, 2019
$
2.4

 
$
1.6

 
$
4.0


8. Debt
Debt consists of the following:
February 2,
2019
 
August 4,
2018
 
(millions)
   Revolving credit facility
$

 
$

         Less: unamortized debt issuance costs (a)
(3.8
)
 
(4.3
)
 
(3.8
)
 
(4.3
)
 


 


   Term loan
1,371.5

 
1,371.5

         Less: unamortized original issue discount (b)
(15.9
)
 
(18.0
)
                   unamortized debt issuance costs (b)
(18.2
)
 
(20.5
)
 
1,337.4

 
1,333.0

Total long-term debt
$
1,333.6

 
$
1,328.7

_______

(a) The unamortized debt issuance costs are amortized on a straight-line basis over the life of the amended revolving credit agreement.
(b) The original issue discount and debt issuance costs for the term loan are amortized over the life of the term loan using the interest method based on an imputed interest rate of approximately 6.3%.

Amended Revolving Credit Agreement
On February 28, 2018, the Company and certain of its domestic subsidiaries entered into an amendment and restatement agreement of its revolving credit agreement dated August 21, 2015, as amended on October 31, 2016, among the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the "Amended Revolving Credit Agreement"). The Amended Revolving Credit Agreement provides aggregate revolving commitments up to $500 million, with an optional increase of up to $200 million.
  
The revolving credit facility may be used for the issuance of letters of credit, to fund working capital requirements and capital expenditures, and for general corporate purposes. The revolving credit facility also includes a $200 million letter of credit sublimit, of which $100 million can be used for standby letters of credit, and a $30 million swingline loan sublimit. The interest rates, pricing and fees under the agreement fluctuate based on the average daily availability, as defined therein. The Amended Revolving Credit Agreement extends the maturity of the Company’s revolving credit facility from August 2020 to the earlier of (i) five years from the closing date (or February 2023) or (ii) 91 days prior to the maturity date of the Term Loan (unless (a) the outstanding principal amount of the Term Loan is $150 million or less and (b) the Company maintains liquidity (which can include (1) availability under the revolving credit facility in excess of the greater of $100 million and 20% of the credit limit and (2) cash held in a controlled account of the administrative agent of the revolving credit facility) in an amount equal to the outstanding principal amount of the remaining Term Loan.  There are no mandatory reductions in aggregate revolving commitments throughout the term of the Amended Revolving Credit Agreement.  However, availability under the revolving credit facility is limited to a percentage of the amount of eligible cash, eligible inventory, and eligible credit card accounts receivable as defined in the Amended Revolving Credit Agreement.

As of February 2, 2019, there were no borrowings under the Amended Revolving Credit Agreement and the Company had $380.7 million of availability under the Amended Revolving Credit Agreement.


14


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Under the Amended Revolving Credit Agreement, the Company is required to maintain a fixed charge coverage ratio, as defined in the Amended Revolving Credit Agreement, of at least 1.00 any time in which the Company is in a covenant period, as defined in the Amended Revolving Credit Agreement (the "Covenant Period"). Such Covenant Period is in effect if Availability is less than the greater of (a) 10% of the Credit Limit (the lesser of total Revolving Commitments and the Borrowing Base) and (b) $37.5 million for three consecutive business days and ends when Availability is greater than these thresholds for thirty consecutive days. The Covenant Period was not in effect as of February 2, 2019.

For a more detailed description of the Company’s Amended Revolving Credit Agreement and restrictions thereunder, refer to Note 12 to the audited consolidated financial statements included in the Fiscal 2018 10-K.

Term Loan

In connection with the August 2015 acquisition of ANN INC., the Company entered into a $1.8 billion variable-rate term loan (the "Term Loan"), which was issued at a 2% discount and provides for an additional term facility of $200 million. The Term Loan matures on August 21, 2022 and requires quarterly repayments of $22.5 million with a remaining balloon payment of approximately $1.2 billion required at maturity. During Fiscal 2018, the Company made repayments of $225.0 million of which $180.0 million was applied to future quarterly scheduled payments such that the Company is not required to make its next quarterly payment of $22.5 million until November of calendar 2020. The Company is also required to make mandatory prepayments in connection with certain prepayment events. As of February 2, 2019, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of 7.00%.

For a more detailed description of the Company’s Term Loan and restrictions thereunder, refer to Note 12 to the audited consolidated financial statements included in the Fiscal 2018 10-K.

Maturities of Debt
The Company's outstanding debt as of February 2, 2019 matures as follows:
Fiscal Year
 
Amount
 
 
(millions)
2019
 
$

2020
 

2021
 
66.5

2022
 
90.0

2023
 
1,215.0

Total maturities
 
$
1,371.5


9. Fair Value Measurements
 
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In evaluating the fair value measurement techniques for recording certain financial assets and liabilities, there is a three-level valuation hierarchy under which financial assets and liabilities are designated. The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs used that are significant to the fair value measurement as of the measurement date as follows:

Level 1
Quoted prices for identical instruments in active markets;

Level 2
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are recently traded (not active); and
Level 3
Instruments with little, if any, market activity are valued using significant unobservable inputs or valuation techniques.

As of February 2, 2019 and August 4, 2018, the Company believes that the carrying values of cash and cash equivalents approximate its estimated fair value based on Level 1 measurements. As the Company’s revolving credit facility is variable rate, the Company believes that there is no significant difference between the estimated fair value and the carrying value as of February 2, 2019 and

15


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


August 4, 2018. The fair value of the Term Loan was determined to be $1.262 billion as of February 2, 2019 and $1.258 billion as of August 4, 2018 based on quoted market prices from recent transactions, which are considered Level 2 inputs within the fair value hierarchy.

The Company’s non-financial instruments, which primarily consist of goodwill, other intangible assets and property and equipment, are not required to be measured at fair values on a recurring basis and are reported at their carrying values. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be recoverable (and at least annually for goodwill and other indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to (and recorded at) fair values. For further discussion of the determination of the fair value of non-financial assets, see Note 6.

10. Income Taxes

Tax Cuts and Jobs Act - Update

In December 2017, the 2017 Tax Cuts and Jobs Act (the "2017 Act") was signed into law. A full description of the 2017 Act and its expected impact on the Company is discussed in Note 14 to the audited consolidated financial statements included in the Fiscal 2018 10-K and should be read in conjunction with the update below.

During the second quarter of Fiscal 2019, adjustments were made to estimates recorded in Fiscal 2018 upon adoption of the 2017 Act. As previously reported, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which is also included in FASB ASU 2018-05 and provided guidance on accounting for the tax effects of the 2017 Act. SAB 118 allows for a measurement period that should not extend beyond one year from the 2017 Act enactment date of December 22, 2017 for companies to complete the accounting under Accounting Standards Codification Topic 740, “Income Taxes” ("ASC 740"). The Company completed its accounting for the impact of the 2017 Act during the second quarter of Fiscal 2019 and increased its Fiscal 2018 estimate of the one-time federal and state transition tax by $2.3 million to $26.9 million and by $0.2 million to $0.9 million, respectively.

The 2017 Act subjects the Company to a new minimum tax on global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries for taxable years beginning after December 31, 2017.  Accordingly, the Company has made an accounting policy election to treat GILTI taxes as a current period expense and has made a reasonable estimate of the impact of GILTI which is included in its Fiscal 2019 effective tax rate discussed below. The Company has considered the potential impact of GILTI on its U.S. federal net operating loss ("NOL") carryforward on the basis of the incremental economic benefit and determined a partial valuation allowance of $5.2 million is required to offset its NOL carryforward because it is not expected to provide incremental tax benefits.

Effective Tax Rate

The Company’s effective tax rate is reflective of the jurisdictions where the Company has operations. The effective tax rates for the second quarter and the first 26 weeks of Fiscal 2019 were 7.7% and (2.8)%, respectively, which were lower than the statutory tax rate primarily due to GILTI, state and local taxes and non-deductible executive compensation.

11. Equity

Common Stock Repurchase Program

In December 2015, the Company’s Board of Directors authorized a $200 million share repurchase program (the “2016 Stock Repurchase Program”). There were no repurchases of common stock by the Company during the three and six months ended February 2, 2019 and the remaining availability was approximately $181.4 million at February 2, 2019.



16


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Net Income per Common Share
 
Basic net income per common share is computed by dividing the net income applicable to common shares after preferred dividend requirements, if any, by the weighted-average number of common shares outstanding during the period. Diluted net income per common share adjusts basic net income per common share for the effects of outstanding stock options, restricted stock units and any other potentially dilutive financial instruments, only in the periods in which such effect is dilutive under the treasury stock method.
 
The weighted-average number of common shares outstanding used to calculate basic net income per common share is reconciled to those shares used in calculating diluted net income per common share as follows:

 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions)
 
(millions)
Basic
197.5

 
196.1

 
197.1

 
195.8

Dilutive effect of stock options and restricted stock units (a)

 

 

 

       Diluted shares
197.5

 
196.1

 
197.1

 
195.8

(a) There was no dilutive effect of stock options and restricted stock units for the three and six months ended February 2, 2019 and January 27, 2018 as the impact of these items was anti-dilutive using the treasury stock method as a result of the net loss incurred during the periods.

Options to purchase shares of common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive, and therefore not included in the computation of diluted net income per common share. Any performance or market-based restricted stock units outstanding are included in the computation of diluted shares only to the extent the underlying performance or market conditions (a) are satisfied prior to the end of the reporting period or (b) would be satisfied if the end of the reporting period was the end of the related contingency period, and the result would be dilutive under the treasury stock method. Anti-dilutive options and/or restricted stock units excluded from the diluted shares calculation was 25.0 million shares for both the three and six months ended February 2, 2019, and 24.3 million shares for both the three and six months ended January 27, 2018.

12. Stock-based Compensation

Omnibus Incentive Plan
 
In November 2018, the Board of Directors approved the amendment of the Company’s 2016 Omnibus Incentive Plan, as amended and restated on December 10, 2015 (the "Omnibus Incentive Plan"). The amended and restated Omnibus Incentive Plan was approved by the Company’s shareholders and became effective on December 14, 2018 to increase the aggregate number of shares that may be issued under the plan by an additional 13.1 million shares to 83.6 million. The 2016 Omnibus Incentive Plan expires in November 2025.
 
As of February 2, 2019, there were approximately 20.1 million shares remaining under the 2016 Omnibus Incentive Plan available for future grants. The Company issues new shares of common stock when stock option awards are exercised and restricted stock units vest. 

Impact on Results
 
A summary of the total compensation expense and associated income tax benefit recognized related to stock-based compensation arrangements is as follows:
 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions)
 
(millions)
Compensation expense
$
3.6

 
$
4.8

 
$
8.3

 
$
10.8

Income tax benefit
$
0.7

 
$
0.9

 
$
1.7

 
$
3.2


17


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Stock Options
 
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the periods presented were as follows:
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
Expected term (years)
5.2

 
5.1

Expected volatility
47.5
%
 
43.7
%
Risk-free interest rate
2.9
%
 
1.9
%
Expected dividend yield
%
 
%
Weighted-average grant date fair value
$
1.78

 
$
0.98

 
A summary of the stock option activity under all plans during the six months ended February 2, 2019 is as follows:
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Terms
 
Aggregate
Intrinsic
Value (a)
 
(thousands)
 
 

 
(years)
 
(millions)
Options outstanding – August 4, 2018
19,307.9

 
$
8.97

 
4.2
 
$
9.3

Granted
4,482.0

 
3.91

 
 
 
 
Exercised
(40.2
)
 
2.37

 
 
 
 
Canceled/Forfeited
(1,921.1
)
 
9.51

 
 
 
 
Options outstanding – February 2, 2019
21,828.6

 
$
7.90

 
4.6
 
$
0.3

 
 
 
 
 
 
 
 
Options vested and expected to vest at February 2, 2019 (b)
21,445.9

 
$
7.98

 
4.5
 
$
0.3

Options exercisable at February 2, 2019
12,905.3

 
$
10.87

 
3.5
 
$

_______
(a) 
The intrinsic value is the amount by which the market price at the end of the period of the underlying share of stock exceeds the exercise price of the stock option.
(b) 
The number of options expected to vest takes into consideration estimated expected forfeitures.

As of February 2, 2019, there was $10.6 million of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 1.4 years. The total intrinsic value of options exercised during the three and six months ended February 2, 2019 was de-minimus and there were no options exercised during the three and six months ended January 27, 2018. The total grant date fair value of options that vested during the six months ended February 2, 2019 and January 27, 2018 was approximately $9.3 million and $11.0 million, respectively. Of these amounts, $0.5 million was vested during the three months ended February 2, 2019 and $0.3 million was vested during the three months ended January 27, 2018.















18


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Restricted Equity Awards
 
A summary of restricted equity awards activity during the six months ended February 2, 2019 is as follows:
 
Service-based
Restricted Equity Awards
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
(thousands)
 
 
Nonvested at August 4, 2018
4,171.3

 
$
4.57

Granted
265.0

 
3.78

Vested
(1,208.7
)
 
6.49

Canceled/Forfeited
(43.0
)
 
10.00

Nonvested at February 2, 2019
3,184.6

 
$
3.72

 
As of February 2, 2019, there was $4.7 million of total unrecognized compensation cost related to the service-based Restricted Equity Awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.3 years.

13. Employee Benefit Plans

Long-Term Incentive Plan

During Fiscal 2016, the Company created a long-term incentive program ("LTIP") for vice presidents and above under the 2016 Omnibus Incentive Plan. The LTIP entitles the holder to either a cash payment, or a stock payment for certain officers at the Company's option, equal to a predetermined target amount earned at the end of a performance period and is subject to (a) the grantee’s continuing employment and (b) the Company’s achievement of certain performance and market-based goals over the performance period. Compensation expense for the LTIP is recognized over the related performance periods based on the expected achievement of the performance goals.

The Company recognized $0.1 million in compensation expense for the six months ended February 2, 2019 and $(10.0) million for the six months ended January 27, 2018, which was recorded within Selling, general and administrative expenses in the condensed consolidated financial statements. The net credits recorded in Fiscal 2018 primarily reflect the Compensation Committee of the Board of Directors' determination in late September 2017 that although certain metrics within the 2017 LTIP were achieved, negative discretion should be applied based upon the overall performance of the Company, thus the LTIP amounts were not distributed.

As of February 2, 2019, there was $32.3 million of expected unrecognized compensation cost related to the LTIP, which is expected to be recognized over a remaining weighted-average vesting period of 2.1 years. As of February 2, 2019, the liability for LTIP Awards was $14.6 million, of which $2.0 million was classified within Accrued expenses and other current liabilities and $12.6 million was classified within Other non-current liabilities in the condensed consolidated balance sheets. No amounts were paid during the six months ended February 2, 2019 and January 27, 2018.

14. Commitments and Contingencies

Legal Matters

Justice Pricing Litigation

The Company is a defendant in class action lawsuits that allege that Justice’s promotional practices violated state comparative pricing and other laws. A description of the lawsuits comprising the Justice pricing litigation is discussed in the Fiscal 2018 10-K and should be read in conjunction with the update below.

On September 24, 2015, a formal settlement agreement was signed with the plaintiffs in the Rougvie case to settle the lawsuit on a class basis for the period of January 1, 2012 through February 28, 2015 for approximately $51 million, including payments in the form of cash and vouchers to members of the class and payment of legal fees and expenses of settlement administration. The

19


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


redemption period for all vouchers distributed to the class members ended in October 2018, and the Company filed a motion at the end of November 2018 seeking reimbursement for a limited portion of the settlement fund attributable to vouchers redeemed by class members that had been self-funded by the Company. That motion was approved by the Court in February 2019.

All of the pricing lawsuits previously stayed have now been formally dismissed. There is some possibility that additional claims will be made based on purchases prior to the class period, or by individual class members who excluded themselves from the settlement, although the Company believes that the liability associated with those claims would not be material.

Other Litigation

The Company is involved in routine litigation arising in the normal course of business. In the opinion of management, such litigation is not expected to have a material adverse effect on the Company’s condensed consolidated financial statements.

15. Segment Information
 
The Company's segment reporting structure reflects an approach designed to optimize the operational coordination and resource allocation of its businesses across multiple functional areas including specialty retail, direct channel and licensing. The Company classifies its businesses into four operating segments: Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion. Each segment is reviewed by the Company's Chief Executive Officer, who functions as the chief operating decision maker (the "CODM"), and is responsible for reviewing the operating activities, financial results, forecasts and business plans of the segment. Accordingly, the Company's CODM evaluates performance and allocates resources at the segment level. The four operating segments are as follows:
Premium Fashion segment – consists primarily of the specialty retail, outlet and direct channel operations of the Ann Taylor and LOFT brands.
Value Fashion segment – consists of the specialty retail, outlet and direct channel operations of the maurices and dressbarn brands.
Plus Fashion segment – consists of the specialty retail, outlet and direct channel operations of the Lane Bryant and Catherines brands.
Kids Fashion segment – consists of the specialty retail, outlet, direct channel and licensing operations of the Justice brand.
The accounting policies of the Company’s operating segments are consistent with those described in the Fiscal 2018 10-K. All intercompany revenues are eliminated in consolidation. Corporate overhead expenses are allocated to the segments based upon specific usage or other reasonable allocation methods. Certain expenses, including acquisition and integration expenses, and restructuring and other related charges, have not been allocated to the segments, which is consistent with the CODM's evaluation of the segments.

20


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Net sales, operating (loss) income and depreciation and amortization expense for each operating segment are as follows:
 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions)
 
(millions)
Net sales (a):
 

 
 

 
 
 
 
Premium Fashion 
$
638.9

 
$
609.6

 
$
1,234.9

 
$
1,164.7

Value Fashion
421.4

 
439.3

 
865.8

 
910.6

Plus Fashion
305.8

 
340.5

 
591.2

 
644.7

Kids Fashion
326.7

 
329.6

 
592.7

 
588.7

Total net sales
$
1,692.8

 
$
1,719.0

 
$
3,284.6

 
$
3,308.7

 
 
 
 
 
 
 
 
Operating (loss) income (a):
 

 
 

 
  

 
 
Premium Fashion
$
13.0

 
$
4.5

 
$
67.6

 
$
43.0

Value Fashion
(32.7
)
 
(38.4
)
 
(38.9
)
 
(27.5
)
Plus Fashion
(19.1
)
 
1.0

 
(31.1
)
 
0.1

Kids Fashion
1.3

 
19.4

 
11.7

 
35.1

Unallocated acquisition and integration expenses

 
(3.3
)
 

 
(5.4
)
Unallocated restructuring and other related charges (b)
(14.3
)
 
(18.8
)
 
(22.2
)
 
(41.0
)
Total operating (loss) income
$
(51.8
)
 
$
(35.6
)
 
$
(12.9
)
 
$
4.3

 
 
 
 
 
 
 
 
Depreciation and amortization expense:
 

 
 

 
  

 
 
Premium Fashion
$
30.7

 
$
31.6

 
$
61.0

 
$
64.5

Value Fashion
23.8

 
26.7

 
46.8

 
53.0

Plus Fashion
14.5

 
15.7

 
28.9

 
31.1

Kids Fashion
14.3

 
15.8

 
28.6

 
31.2

Total depreciation and amortization expense
$
83.3

 
$
89.8

 
$
165.3

 
$
179.8

(a) Prior period amounts have not been restated due to the adoption of ASU 2014-09 and continue to be reported under the accounting standards in effect for those periods. For more information on ASU 2014-09, refer to Note 3.

















21


ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(b) Restructuring and other related charges are as follows:
 
Three Months Ended
 
Six Months Ended
 
February 2,
2019
 
January 27,
2018
 
February 2,
2019
 
January 27,
2018
 
(millions)
 
(millions)
Cash related charges(i):
 

 
 

 
 
 
 
   Severance and benefit costs:
 
 
 
 
 
 
 
 Premium Fashion
$
0.2

 
$
0.3

 
$
0.2

 
$
1.7

 Value Fashion
0.8

 
(0.1
)
 
0.8

 
(1.3
)
 Plus Fashion
0.1

 
0.7

 
0.1

 
5.4

 Kids Fashion
0.1

 

 

 
(0.3
)
      Corporate
(0.1
)
 
1.8

 
(0.5
)
 
1.1

Total severance and benefit costs
1.1

 
2.7

 
0.6

 
6.6

Professional fees and other related charges:
 
 
 
 
 
 
 
Plus Fashion

 
1.0

 
(0.1
)
 
2.2

Corporate
13.2

 
11.9

 
21.7

 
27.9

Total professional fees and other related charges
13.2

 
12.9

 
21.6

 
30.1

Total cash related charges
14.3

 
15.6

 
22.2

 
36.7

 
 
 
 
 
 
 
 
Non-cash charges:
 
 
 
 
 
 
 
   Impairment of assets:
 
 
 
 
 
 
 
Value Fashion

 

 

 
1.1

Plus Fashion

 
3.2

 

 
3.2

Total non-cash charges

 
3.2

 

 
4.3

Total restructuring and other related charges
$
14.3

 
$
18.8


$
22.2

 
$
41.0

(i) The charges incurred under the Company's Change for Growth program are more fully described in Note 7.

16. Additional Financial Information
 
Six Months Ended
Cash Interest and Taxes:  
February 2,
2019
 
January 27,
2018
 
(millions)
Cash paid for interest
$
48.5

 
$
54.6

Cash paid for income taxes
$
3.1

 
$
5.7


Non-cash Transactions
  
Non-cash investing activities include accrued purchases of fixed assets in the amount of $18.0 million as of February 2, 2019 and $15.3 million as of January 27, 2018.


22



Item 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
Certain statements made within this Form 10-Q and in oral statements made from time to time by us or on our behalf may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Forward-looking statements are statements related to future, not past, events, and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," "estimate," "forecast," "target," "preliminary," or "range." The Company does not undertake to publicly update or review its forward-looking statements even if experience or future changes make it clear that our projected results expressed or implied will not be achieved.
 
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended August 4, 2018 (the "Fiscal 2018 10-K"). Other than the update provided in Part II, Item 1A — "Risk Factors" of this Form 10-Q, there are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A — "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW
 
Our Business

ascena retail group, inc., a Delaware corporation (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls, with annual revenue of approximately $6.6 billion for Fiscal 2018. We and our subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.

General Business Conditions and Current Outlook
Our performance is subject to macroeconomic conditions and their impact on levels and patterns of consumer spending. Some of the factors that could negatively impact discretionary consumer spending include general economic conditions, high unemployment, lower wage levels, reductions in net worth, higher energy and other prices, increasing interest rates and low consumer confidence. Retailers, particularly those in the specialty apparel sector, continue to face intense competition and channel disruption as consumer spending habits continue to indicate an increasing preference to purchase digitally as opposed to in traditional brick-and-mortar retail stores.

While we experienced positive consolidated comparative sales performance in the first half of Fiscal 2019, individual brand performance was mixed. In that regard, we saw significantly positive comparable sales performance at our LOFT and Ann Taylor brands, which was offset by mid-single digit declines at Lane Bryant. Our Justice brand experienced slowing store traffic trends as we moved through the second quarter, resulting in aggressive inventory clearance activities and significant margin erosion.

As we entered the third quarter of Fiscal 2019, a broad decline in store traffic across all of the Company's brands negatively impacted February's performance. We are currently operating with reduced forward visibility on sales trends, especially into the fourth quarter of Fiscal 2019, due largely to what we believe are near-term macro-economic factors. Given the level of declines experienced in February, the Company is currently expecting comparative sales in the third quarter of Fiscal 2019 to be in the range of down 4% to down 2%. We continue to reduce overall spending and investment levels where possible, refine our operating model and implement new capabilities to ensure we remain competitive in this rapidly evolving sector.

Change for Growth Program

During the second quarter of Fiscal 2019, activities under the Change for Growth transformation program included (i) operating expense reductions in the areas of professional services, travel and facilities management, among others, (ii) transition of certain transaction process functions to an independent third-party managed-service provider, and (iii) re-negotiation of store leases under the fleet optimization program.


23



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


We realized approximately $50 million in cost savings related to Change for Growth program actions during the six months ended February 2, 2019, primarily reflecting Selling, general and administrative expense ("SG&A") savings. We expect to realize additional cost savings related to these actions of approximately $40 million for the remainder of Fiscal 2019. Subsequent to Fiscal 2019, we expect to realize approximately $10 to $35 million in annual cost savings through Fiscal 2020, bringing the total expected annual cost savings from these actions, when combined with the $200 million cost savings achieved through Fiscal 2018, to a range of $300 to $325 million. These savings are expected to be realized in our segment operating results generally in proportion to their sales.

We may incur significant additional charges and capital expenditures in future periods as we more fully define incremental Change for Growth program initiatives, and move into the execution phases of associated projects. Actions associated with the program are currently expected to continue through Fiscal 2019.


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

Summary of Financial Performance

Fiscal Period
 
The Company's Premium Fashion segment, which historically has followed the National Retail Federation calendar, recognized an extra week during the second quarter of Fiscal 2018, consistent with other retail companies already on that calendar. The Company's other segments recognized their extra week in the fourth quarter of Fiscal 2018 due to reporting systems constraints.

As a result, the three and six month periods ended January 27, 2018 include the results of the Premium Fashion segment for 14 and 27-weeks, respectively, while the results of the Value Fashion, Plus Fashion, and Kids Fashion segments reflect 13 and 26-weeks, respectively. The resulting shift in the financial calendar impacted the comparability of financial results. In that regard, when compared to the second quarter of Fiscal 2018, the second quarter of Fiscal 2019 included one less week of higher volume pre-holiday sales at the beginning of the second quarter and replaced it with a lower volume week at the end of the second quarter, which generally has lower margin sales. The impact of the shift experienced during the first half of Fiscal 2019 is expected to be mostly recovered in the second half of Fiscal 2019.

Second Quarter Summary and Key Developments
Operating highlights for the second quarter are as follows: 
Comparable sales increased by 2%, reflecting increases at our Premium Fashion and Kids Fashion segments, offset in part by a decline at our Plus Fashion segment. Comparable sales at our Value Fashion segment were essentially flat;
Operating loss was $51.8 million compared to $35.6 million in the year-ago period; and
Net loss per diluted share was $0.36, compared to $0.20 in the year-ago period.
Liquidity highlights for the six-month period ended February 2, 2019 are as follows:
Cash provided by operations was $44.4 million in Fiscal 2019 compared to $155.5 million in the year-ago period; and
Capital expenditures were $68.9 million compared to $91.8 million in the year-ago period.


24



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


RESULTS OF OPERATIONS

Three Months Ended February 2, 2019 compared to Three Months Ended January 27, 2018
 
The following table summarizes operating results for certain financial statement line items:
 
Three Months Ended
 
 
 
February 2, 2019
 
January 27,
2018
 
$ Change
 
% Change
 
(millions, except per share data)
 
 
 
 

Net sales
$
1,692.8

 
$
1,719.0

 
$
(26.2
)
 
(1.5
)%
 
 
 
 
 
 
 
 
Cost of goods sold
(810.0
)
 
(790.4
)
 
(19.6
)
 
(2.5
)%
Cost of goods sold as % of net sales
47.8
 %
 
46.0
 %
 
 

 
 

Gross margin
882.8

 
928.6

 
(45.8
)
 
(4.9
)%
Gross margin as % of net sales
52.2
 %
 
54.0
 %
 
 

 
 

Other operating expenses:
 

 
 

 
 

 
 

Buying, distribution and occupancy expenses
(317.6
)
 
(326.1
)
 
8.5

 
2.6
 %
BD&O expenses as % of net sales
18.8
 %
 
19.0
 %
 
 

 
 

Selling, general and administrative expenses
(519.4
)
 
(526.2
)
 
6.8

 
1.3
 %
SG&A expenses as % of net sales
30.7
 %
 
30.6
 %
 
 

 
 

Acquisition and integration expenses

 
(3.3
)
 
3.3

 
NM

Restructuring and other related charges
(14.3
)
 
(18.8
)
 
4.5

 
23.9
 %
Depreciation and amortization expense
(83.3
)
 
(89.8
)
 
6.5

 
7.2
 %
Total other operating expenses
(934.6
)
 
(964.2
)
 
29.6

 
3.1
 %
Operating loss
(51.8
)
 
(35.6
)
 
(16.2
)
 
(45.5
)%
Operating loss as % of net sales
(3.1
)%
 
(2.1
)%
 
 

 
 

Interest expense
(26.9
)
 
(27.2
)
 
0.3

 
1.1
 %
Interest income and other income, net
1.2

 
1.6

 
(0.4
)
 
(25.0
)%
Loss before benefit for income taxes
(77.5
)
 
(61.2
)
 
(16.3
)
 
(26.6
)%
Benefit for income taxes
6.0

 
21.9

 
(15.9
)
 
(72.6
)%
Effective tax rate (a)
7.7
 %
 
35.8
 %
 
 

 
 

Net loss
$
(71.5
)
 
$
(39.3
)
 
$
(32.2
)
 
(81.9
)%
 
 
 
 
 
 
 
 
Net loss per common share:
 

 
 

 
 

 
 

Basic
$
(0.36
)
 
$
(0.20
)
 
$
(0.16
)
 
(80.0
)%
Diluted
$
(0.36
)
 
$
(0.20
)
 
$
(0.16
)
 
(80.0
)%
_______
(a)  
Effective tax rate is calculated by dividing the Benefit for income taxes by the Loss before benefit for income taxes.
(NM) Not meaningful.

Net Sales. Total net sales decreased by $26.2 million, or 1.5%, to $1,692.8 million for the three months ended February 2, 2019. The Net sales decrease was due to the extra week recorded at our Premium Fashion segment in the second quarter of Fiscal 2018, which contributed an incremental $24.6 million, and a non-comparable sales decrease of $57.1 million, reflecting a lower store count resulting from the Company's fleet optimization program, and the impact of a one week calendar shift resulting from the 53rd week recorded at the end of Fiscal 2018. These items were mostly offset by a 2% comparable sales increase and an increase in other revenues of $17.9 million, or 30% to $78.0 million, primarily reflecting higher wholesale revenues, higher shipping revenues and favorable timing related to the adoption of the new revenue recognition accounting standard, which is discussed more fully in Note 3 to the unaudited condensed consolidated financial statements. The changes in Net sales on a segment-by-segment basis are discussed in more detail below.

25



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


Net sales data for our four operating segments is presented below:
 
Three Months Ended
 
 
 
February 2,
2019
 
January 27,
2018
 
$ Change
 
% Change
 
(millions)
 
 
 
 

Net sales:
 

 
 

 
 

 
 

Premium Fashion
$
638.9

 
$
609.6

 
$
29.3

 
4.8
 %
Value Fashion
421.4

 
439.3

 
(17.9
)
 
(4.1
)%
Plus Fashion
305.8

 
340.5

 
(34.7
)
 
(10.2
)%
Kids Fashion
326.7

 
329.6

 
(2.9
)
 
(0.9
)%
Total net sales
$
1,692.8

 
$
1,719.0

 
$
(26.2
)
 
(1.5
)%
 
 
 
 
 
 
 
 
Comparable sales (a)(b)(c)
 

 
 

 
 

 
2
 %
_______
(a) Comparable sales represent combined store comparable sales and direct channel sales. Store comparable sales generally refers to the growth of sales in stores only open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Direct channel sales refer to growth of sales from our direct channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, we report a single, consolidated comparable sales metric, inclusive of store and direct channels.
(b) Incremental revenues of approximately $25 million due to the inclusion of the extra week at the Premium Fashion segment for the second quarter of Fiscal 2018 are excluded from the calculation of comparable sales.
(c) 
During the second quarter of Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the Justice pricing litigation, discussed more fully in Note 14 to the unaudited condensed consolidated financial statements, continued to be redeemed. Comparable sales related to these transactions includes the transaction value in excess of the voucher value.

Premium Fashion net sales performance primarily reflected:

a 10% comparable sales increase of $37.5 million at LOFT and a 10% comparable sales increase of $17.2 million at Ann Taylor during the three months ended February 2, 2019;
a $24.6 million decline due to the inclusion of the 14th week in the year-ago period;
an $11.3 million decline in non-comparable sales, comprised of:
a $7.2 million decline from 10 net LOFT store closures in the last twelve months, and
a $4.1 million decline from 13 net Ann Taylor store closures in the last twelve months; and
a $10.5 million increase in other revenues primarily reflecting higher shipping revenues and favorable timing related to the adoption of the new revenue recognition accounting standard.

Value Fashion net sales performance primarily reflected:
 
comparable sales that were essentially flat with a 1% comparable sales decline of $2.3 million