10-K 1 asna10-k8032019.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 3, 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
(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
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
ASNA
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 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 $400 million as of February 2, 2019, based on the last reported sales price on the Nasdaq Global Select Market on that date. As of October 8, 2019, 199,247,000 shares of voting common shares were outstanding.

Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on December 10, 2019 are incorporated by reference into Part III of this Form 10-K.




ASCENA RETAIL GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED AUGUST 3, 2019
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 2019 ended on August 3, 2019 and reflected a 52-week period (“Fiscal 2019”); fiscal year 2018 ended on August 4, 2018 and reflected a 53-week period (“Fiscal 2018”) as the Company conformed its fiscal period ends to the calendar of the National Retail Federation; and fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”). All references to “Fiscal 2020” refer to our 52-week period that will end on August 1, 2020.

PART I

Item 1. Business.
 
General

The Company is a national specialty retailer of apparel for women and tween girls. The Company's operations consist of its direct channel operations and approximately 3,400 stores in the United States, Canada and Puerto Rico as of August 3, 2019. The Company had annual revenues for Fiscal 2019 of approximately $5.5 billion.

Enterprise Transformation

Operational-related transformation

Retailers, especially those in the specialty apparel sector, continue to face intense competition, particularly as consumer spending habits continue to indicate an increasing preference to purchase digitally as opposed to in traditional brick-and-mortar retail stores. This preference has resulted in increased direct channel sales, but has continued to put pressure on our retail store sales. As a result of these fundamental changes, we are continuing our previously announced strategic review of our brands and operations with the goal to enhance shareholder value. We believe that structural and strategic changes are necessary to successfully compete in the changing retail landscape.


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To that end, over the past few years, the Company has undergone an extensive transformation of its business. This transformation began during Fiscal 2017, when the Company 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). Actions completed under this long-term transformation focused on (i) refinements to the Company's operating model to increase the focus on key customer segments, (ii) developing initiatives designed to optimize the flow of product through the Company's distribution channels, including its direct channel and its brick-and-mortar retail locations, including areas related to markdown optimization, size pack optimization and localized inventory planning, (iii) consolidating certain support functions into shared services, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, (iv) transitioning certain transaction processing functions to an independent third-party managed-service provider, and (v) optimizing 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. The Company realized cumulative savings of approximately $290 million from the Change for Growth program through the end of Fiscal 2019, substantially all of which are reflected in the results of our continuing operations, and which have served to offset ongoing inflationary pressure and required reinvestment to support key incremental business initiatives.

The Company will continue to focus on identifying additional cost reduction opportunities to right-size the cost structure. In the third quarter of Fiscal 2019, we announced an incremental cost reduction target and on June 4, 2019, we actioned our initial round of savings towards achieving that target with the goal of realizing the majority of the anticipated savings in Fiscal 2020. We will continue to formulate plans and take actions to achieve the remainder of that target and look for additional opportunities. These opportunities represent a critical component of our enterprise transformation.

Structural-related transformation

On May 6, 2019, the Company and Maurices Incorporated, a Delaware corporation (“maurices”) and wholly owned subsidiary of ascena, completed the transaction contemplated by the previously-announced Stock Purchase Agreement with Viking Brand Upper Holdings, L.P., a Cayman Islands exempted limited partnership (“Viking”) and an affiliate of OpCapita LLP, providing for, among other things, the sale by ascena of maurices to Viking (the “Transaction”). Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices, consisting of interests in Viking preferred and common stock.

On May 20, 2019, the Company announced the wind down of its Dressbarn brand. The wind down is currently expected to be completed in the first half of Fiscal 2020. During Fiscal 2019, the Company recorded severance, professional fees, and non-cash asset impairments and currently expects to incur additional wind down costs during the first half of Fiscal 2020, primarily related to severance, inventory liquidation and closure of Dressbarn retail stores. As a result of these actions, once the wind down of Dressbarn is complete, the Company will have exited its Value Fashion segment.

On May 1, 2019 the Company announced changes to its senior leadership team. These changes included the retirement of the Company's Chief Executive Officer, the departure of the Company's Chief Operating Officer, as well as the appointment of a new Chief Executive Officer and Interim Executive Chair of the Board. On August 4, 2019 the Senior Vice President, Finance and Chief Accounting Officer, was promoted to Executive Vice President and Chief Financial Officer upon the resignation of the former Executive Vice President and Chief Financial Officer. We believe that these changes will continue to support our structure-related transformation activities as the new management team seeks additional ways to optimize our brand portfolio and distribution framework which will allow us to better compete in the changing retail landscape.

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

Premium Fashion

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

Ann Taylor includes 293 specialty retail and outlet stores and direct channel operations. Ann Taylor has been at the forefront of American fashion, leading the way with the idea that style shouldn’t be work, and getting dressed should be about getting ready for really big days and those just as important small moments. Ann Taylor features polished, modern feminine classics with an iconic style point of view for every aspect of her life. Its retail stores are predominantly located in mall locations, lifestyle centers and outlet centers.


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LOFT includes 669 specialty retail and outlet stores, direct channel operations and certain licensed franchises in international territories. LOFT offers modern, feminine and versatile clothing for a wide range of women with one common goal: to help them look and feel confident, wherever the day takes them. From everyday essentials to attainable trends, LOFT consistently serves up head-to-toe outfits and perfect pieces that make getting dressed feel effortless. Its retail stores are predominantly located in mall locations, lifestyle centers and outlet centers.

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

Lane Bryant includes 721 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 320 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 826 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.
 
Value Fashion

The Value Fashion segment consists of our Dressbarn brand. As discussed in Note 2 to the accompanying consolidated financial statements included herein, the Company completed the sale of its maurices brand on May 6, 2019, which previously was included in the Value Fashion segment and announced plans to wind down its Dressbarn brand in the first half of Fiscal 2020. Dressbarn operates 616 specialty retail and outlet stores and direct channel operations, offering moderate-to-better quality career, special occasion and casual fashion for working women in a comfortable, easy-to-shop environment. Dressbarn retail stores are located primarily in strip shopping centers in major trading and high-density markets and in surrounding suburban areas.

The tables below present net sales and operating loss by operating segment for the last three fiscal years:
 
 
Fiscal 2019
 
Fiscal 2018
 
Fiscal 2017
Net sales:
 
(millions)
Premium Fashion 
 
$
2,415.1

 
$
2,317.8

 
$
2,322.6

Plus Fashion
 
1,240.5

 
1,340.0

 
1,353.9

Kids Fashion
 
1,079.1

 
1,100.0

 
1,023.1

Value Fashion
 
758.7

 
808.6

 
917.7

Total net sales
 
$
5,493.4

 
$
5,566.4

 
$
5,617.3


5



 
 
Fiscal 2019
 
Fiscal 2018
 
Fiscal 2017
Operating loss:
 
(millions)
Premium Fashion 
 
$
72.7

 
$
102.3

 
$
129.6

Plus Fashion
 
(71.4
)
 
0.6

 
(12.7
)
Kids Fashion
 
(42.4
)
 
18.7

 
(60.5
)
Value Fashion
 
(101.7
)
 
(128.5
)
 
(56.0
)
Unallocated restructuring and other related charges
 
(127.7
)
 
(76.6
)
 
(78.1
)
Unallocated impairment of goodwill
 
(276.0
)
 

 
(489.1
)
Unallocated impairment of other intangible assets
 
(134.9
)
 

 
(728.1
)
Unallocated acquisition and integration expenses
 

 
(5.4
)
 
(39.4
)
Total operating loss
 
$
(681.4
)
 
$
(88.9
)
 
$
(1,334.3
)
 
Omni-channel

The Company continues to invest in initiatives that support 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. These efforts have increased the Company's e-commerce penetration from 19% in Fiscal 2016 to 31% in Fiscal 2019. Additionally, 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
Lane Bryant – www.lanebryant.com
Catherines – www.catherines.com
Justice – www.shopjustice.com
Dressbarn – www.dressbarn.com

Store Locations

The Company's stores are typically open seven days a week and most evenings. As of August 3, 2019, the Company operated approximately 3,400 stores in the United States, Canada and Puerto Rico. Ann Taylor and LOFT have stores in 41 and 46 states, respectively, as well as the District of Columbia, Canada and Puerto Rico. In addition, LOFT has five international franchise stores. Lane Bryant and Catherines have stores located in 47 and 44 states, respectively. Justice has stores in 47 states and Canada as well as 80 international franchise stores. Dressbarn has stores in 46 states.
 
As of August 3, 2019, the Company's stores had a total of 19.1 million square feet consisting of Ann Taylor with 1.6 million square feet, LOFT with 3.8 million square feet, Lane Bryant with 4.0 million square feet, Catherines with 1.3 million square feet, Justice with 3.5 million square feet, and Dressbarn with 4.9 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.
 

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Store Count by Brand
 
 
Fiscal 2019
 
 
Ann Taylor
 
LOFT
 
Lane
Bryant
 
Catherines
 
Justice
 
Dressbarn
 
maurices
 
Total
Beginning of Period
 
304

 
672

 
749

 
348

 
847

 
730

 
972

 
4,622

Stores reduced from sale of maurices
 

 

 

 

 

 

 
(972
)
 
(972
)
Opened
 
1

 
6

 

 

 

 

 

 
7

Closed
 
(12
)
 
(9
)
 
(28
)
 
(28
)
 
(21
)
 
(114
)
 

 
(212
)
End of Period
 
293

 
669

 
721

 
320

 
826

 
616

 

 
3,445


 
 
Fiscal 2018
 
 
Ann Taylor
 
LOFT
 
Lane
Bryant
 
Catherines
 
Justice
 
Dressbarn
 
maurices
 
Total
Beginning of Period
 
322

 
678

 
764

 
359

 
900

 
779

 
1,005

 
4,807

Opened
 
1

 
8

 
2

 
1

 
2

 

 
14

 
28

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

 
672

 
749

 
348

 
847

 
730

 
972

 
4,622


In connection with the Company's efforts to right-size the cost structure, the Company conducted a strategic review of its store fleet with the goal of improving overall profitability and cash flows of its store 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 of stores. In Fiscal 2018, the Company expanded its total annualized savings target to $60 million. As of the end of Fiscal 2019, the program has generated total annualized savings to our continuing operations in excess of the $60 million target. The Company will continue to seek opportunities to optimize its store portfolio and achieve rent reductions whenever possible.

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®, 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 3, 2019, the Company operated stores across three brands in Canada (Justice (41), LOFT (9), and Ann Taylor (4)). Additionally, as of August 3, 2019, Justice and LOFT had 80 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.
 
Sourcing
 
The Company's brands source their products through one of three channels - ascena's internal sourcing group, third-party buying agents, or directly from market vendors. 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, the Company maintains direct relationships with manufacturing partners, enabling desired product quality control and speed to market, along with favorable pricing as compared to market vendors.

Merchandise Vendors
 
The Company purchases its merchandise from many domestic and foreign suppliers. It has no long-term purchase commitments or arrangements with any of its suppliers, and believes that it is not dependent on any one supplier as no third-party supplier accounts for more than 10% of our merchandise purchases. The Company believes that it has good working relationships with its suppliers.


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Merchandising and Design

The Company continues to focus on building its merchandising and design functions to align with its market position. The merchandising and design teams determine inventory needs for the upcoming season in response to fast changing fashion trends and customer preferences. Over the last few years, the Company has made substantial investments to acquire and retain merchandising and design talent allowing it to differentiate its fashion offerings, which it believes is a critical enabler for long-term success.

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

Information Technology Systems
 
The Company continues to make ongoing investments in its information technology systems to support its strategies in omni-channel, merchandise procurement, inventory management and supply chain. Our information technology systems make the design, marketing, importing and distribution of our products more efficient by providing common platforms for, among other things, order processing, product and design information, and financial information.

Advertising and Marketing

The Company uses a combination of broad-based and targeted marketing and advertising strategies to effectively define, evolve, and promote our brands. These strategies are designed to deliver a personalized and relevant shopping experience for our customers and include customer research, advertising and promotional events, window and in-store marketing materials, direct mail marketing, Internet and social media marketing, lifestyle magazines, and other means of communication.

Customer Relationship Management

The Company continues to focus on building our customer relationships and promoting customer loyalty through various programs including brand-specific loyalty and credit card programs. Customers shopping at our brands who are enrolled in our loyalty programs earn reward points that are redeemable toward future purchases. Our brands also offer credit card programs to eligible customers providing additional discounts and promotional offers. During Fiscal 2019, the Company launched new loyalty programs at its Premium Fashion and Plus Fashion segments. This follows the rollout of a new loyalty program at the Kids Fashion segment in Fiscal 2018. These programs provide opportunities to attract new customers, retain and enhance existing customer relationships, and deliver a more personalized shopping experience through a better understanding of our customers' preferences and shopping behaviors.
Community Service

ascena and its brands have a rich history of giving. Together, the Company has a shared commitment to our associates and the women and girls whom we serve. We support our associates through our ascenaCARES programs, which reflects our culture and the philanthropic efforts taking place within our organization. The Company is proud to sponsor programs that provide leadership development, training, and mentoring along with monetary grants awarded to female social entrepreneurs. Through cause-marketing campaigns, our brands are committed to the communities in which we live and work. Whether through collective partnerships or individual brand outreach, we are committed to supporting women and girls to live confidently in their own unique ways. More information about our charitable giving, including the non-profit partners we support, is available at www.ascenaretail.com.
 
Competition

The retail apparel industry is highly competitive and increasingly fragmented. The Company competes with numerous retailers, including department stores, off-price retailers, specialty stores and Internet-based retailers, on pricing, styles and fulfillment capability. Our business is vulnerable to demand and pricing shifts, channel shifts and changes in customer preferences. Some of our competitors operate at a lower cost structure, and are able to offer better pricing; others have more sophisticated direct channel or omni-channel capabilities. Examples of our competitive set include but are not limited to Gap Inc., Amazon, Walmart, Macy’s, JCPenney, Target and TJX Companies. Other competitors may enter the markets we serve. If the Company fails to compete successfully, it could face continued sales declines and may need to offer greater discounts to our customers, which could result in decreased profitability. The Company is working aggressively to differentiate our brands and our assortments to reinforce the

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value proposition it delivers by focusing on our target customers and by offering up-to-date fashion, unique experiences, superior customer service and shopping convenience across our multiple sales channels.
 
Employees
 
As of August 3, 2019, the Company had approximately 53,000 employees, 40,000 of whom worked on a part-time basis. The Company typically adds temporary employees during peak selling periods, which vary throughout the year at each of its brands, and adjusts the hours they work to coincide with holiday shopping patterns. Additionally, none of the Company's employees are covered by any collective bargaining agreement, except for approximately 85 employees of Lane Bryant who are represented by unions. The Company believes that it has good working relations with its employees and unions.
 
Information About Our Executive Officers
 
The following table sets forth the name, age and position of our Executive Officers:
Name
 
Age
 
Positions
Carrie Teffner
 
52
 
Interim Executive Chair of the Board
Gary Muto
 
60
 
Chief Executive Officer
Dan Lamadrid
 
44
 
Executive Vice President and Chief Financial Officer
Wendy Hufford
 
58
 
Senior Vice President, General Counsel and Secretary

Ms. Carrie Teffner has been a member of the Company's Board of Directors since 2018 and became Interim Executive Chair of the Board in May, 2019. Prior to that, Ms. Teffner served as Executive Vice President Finance and Strategic Projects at Crocs, Inc. (“Crocs”) until April 2019, and served as Executive Vice President and Chief Financial Officer of Crocs from December 2015 to August 2018. Prior to joining Crocs, Ms. Teffner served as Executive Vice President and Chief Financial Officer at PetSmart, Inc. ("PetSmart") from 2013 to 2015 until it was sold to BC Partners, where she was responsible for finance and information technology. Prior to PetSmart, Ms. Teffner held a number of leadership roles at Weber Stephen Products LLC, The Timberland Company and Sara Lee Corporation.

Mr. Gary Muto became Chief Executive Officer in May 2019. Prior to that, Mr. Muto served as President and Chief Executive Officer-ascena Brands from August 2017 until May 2019, served as President and Chief Executive Officer of the Company’s Premium Fashion segment from October 2016 to August 2017, and served as President and Chief Executive Officer of ANN INC. ("ANN") from October 2015 to October 2016. Additionally, from 2008 to 2014 Mr. Muto served as President of ANN's LOFT brand, and then from 2014 to 2015, as President of ANN Brands. Mr. Muto has over 25 years of fashion and retail experience, having previously held a variety of executive leadership positions with Gap Inc.

Mr. Dan Lamadrid became Executive Vice President and Chief Financial Officer in August 2019. Mr. Lamadrid joined our organization in 2017 as Senior Vice President, Finance and Chief Accounting Officer. Mr. Lamadrid has responsibility for all Corporate Financial Planning activities as well as oversight of the Company's financial accounting and reporting operations. Prior to joining the Company, Mr. Lamadrid was a Senior Vice President at Vitamin Shoppe, Inc. where he served as Controller from 2011 to 2012 and as Chief Accounting Officer from 2012 until 2017. Prior to Vitamin Shoppe, Mr. Lamadrid held various financial leadership roles at Ralph Lauren, Hartz Mountain Corporation and Toys R Us. Mr. Lamadrid began his career in public accounting.

Ms. Wendy Hufford joined the Company in October 2018 and serves as Senior Vice President, General Counsel and Secretary. Ms. Hufford has responsibility for all legal, compliance, legal risk and government affairs matters affecting the Company.  Prior to joining ascena, Ms. Hufford was the Chief Operating Officer, Legal Department & Vice President, US Litigation, Risk Management & Human Resources at Boehringer Ingelheim USA from 2015 to 2018. Ms. Hufford was previously Vice President, Deputy General Counsel and Assistant Secretary at ITT Corporation from 2010 to 2014 and Executive Vice President and Chief Litigation Counsel at Cardinal Health from 2006 to 2009. She also held in-house roles at GE Consumer Finance and Credit Suisse First Boston. Early in her career, she was in private practice at Davis Polk & Wardwell in New York and she served as a law clerk for the Honorable Robert J. Ward on the U.S. District Court of the Southern District Court of New York. 




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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 price of our securities, and the actual outcome of matters as to which forward-looking statements are made in this report. The risk factors generally have been separated into four groups: (1) 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 beyond the Company’s control impacting consumer spending may adversely affect our business.

Our performance is subject to macroeconomic conditions that are beyond the Company’s control that could impact consumer discretionary spending. Some of the factors negatively impacting consumer spending and consumer sentiment include volatility in national and international financial markets, recession, inflation, deflation, consumer confidence, fiscal and monetary policies of government, unemployment and wage levels, increased taxation, credit availability, high consumer debt, higher fuel, energy and other prices, tax policies and changes in tax laws, increasing interest rates, severe or unseasonable weather conditions, natural disasters, public health concerns, civil disturbances, the threat of or actual terrorist attacks, military conflicts, the domestic or international political environment, and general uncertainty regarding the overall future economic environment as well as the prospects of these factors and events. Such macroeconomic and other factors could have a negative effect on consumer spending in the U.S., which in turn could have a material effect on our business, operational results, financial position and cash flows.

Existing and increased competition and fundamental shifts in the women’s and girls’ retail apparel industry may reduce our net revenues, operational results and market share.

The women’s and girls’ retail apparel industry is highly competitive. Although the Company is 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 Internet retailers, some of whom have advantages over us, including substantially greater financial, marketing or promotional resources. Many retailers, such as department stores, also offer a broader selection of merchandise than we offer, continue to be promotional by reducing their selling prices, and in some cases are expanding into markets in which we have a significant presence.

In addition, the growth and prominence of fast-fashion and value-fashion retailers and expansion of off-price retailers have fundamentally shifted customers’ expectations of affordable pricing of well-known brands and has resulted in the continuation of increased promotional pressure. The rise of these retailers as well as the shift in shopping preferences away from brick-and-mortar stores to the direct channel, where online-only businesses or those with robust direct channel capabilities can facilitate competitive entry and comparison shopping in our brands, have increased the difficulty of maintaining and gaining market share. The Company’s execution of its own omni-channel strategy to adapt to these changes, in relation to its competitors’ actions as well as to its customers’ adoption of new technology, presents a specific risk.

These competitive factors, including unanticipated changes in pricing, promotional activity such as free shipping and pricing pressures, and other practices of the Company’s competitors could have a material adverse effect on our business, operational results, financial position and cash flows.

Disruptions at ports used to import our products could have a material adverse impact on our business.

We currently ship the vast majority of our products by ocean. If a disruption occurs in the operation of ports through which our products are imported, we and our vendors may have to ship some or all of our products from Asia or other regions by air freight or to alternate shipping destinations in the United States. Shipping by air is significantly more expensive than shipping by ocean and our profitability could be reduced. Similarly, shipping to alternate destinations in the United States could lead to increased

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lead times and costs for our products. A disruption at ports (domestic or abroad) through which our products are imported could have a material adverse effect on our business, operational results, financial position and cash flows.

Increases in the price of raw materials, labor, energy, freight and trade relations could have a material adverse impact on our business.

Raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high or low demand for fabrics, labor conditions, trade wars and higher tariffs, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, economic inflation, market speculation and other factors. Increases in the demand for and price of cotton, wool and other raw materials used in the production of fabric and accessories, as well as increases in labor and energy costs or shortages of skilled labor, could result in increases for the costs of our products as well as their distribution to our distribution centers, retail locations and to our customers. The Company is also susceptible to fluctuations in the cost of transportation. Additionally, substantially increased uncertainty with respect to trade relations, such as the imposition of unilateral tariffs on imported products, could result in trade wars, higher barriers and tariffs, and higher product costs, which could have a material adverse effect on our business, operational results, financial position and cash flows.

Extreme weather could have a material adverse impact on our business.

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

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

Acts of terrorism and other catastrophic events remain a significant threat to the global economy. Terrorism and potential military responses, active shooter situations, political unrest, natural disasters, 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.

Operational Risks

Risks associated with our ongoing portfolio review and business transformation could adversely affect our financial results.

The Company’s previously announced comprehensive portfolio review has resulted in the Company’s recent sale of the maurices brand, and the announcement of the wind down of the Dressbarn brand. As a result of these, and similar efforts, we may incur unexpected costs, reductions in available liquidity, diversion of management’s attention and resources from our business, stock price volatility, difficulty in negotiating, maintaining, or consummating business or strategic relationships or transactions, difficulty in recruiting, hiring, motivating, and retaining talented and skilled personnel, and disruptions in operations, supplier relationships and employee relations, which in turn could have a material adverse effect on our business, operational results, financial position and cash flows. 





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There are risks associated with the wind down of our Dressbarn brand.
On May 20, 2019, we reported that our Dressbarn brand announced plans to commence a wind down of Dressbarn’s operations. In connection with the Dressbarn brand wind down, retail store locations will continue to be closed in a phased approach; the e-commerce site, however, will remain active until the wind down is complete.
In connection with the Dressbarn brand wind down, we have incurred charges of approximately $50 million for the year ended August 3, 2019 primarily related to actions including employee-related costs (including estimates for severance), professional fees, and non-cash asset impairment charges, including costs associated with the write-down of Dressbarn's corporate office space. We expect to incur additional costs until the wind down is complete, which may include additional severance, inventory liquidation, non-cash asset impairments and contract assignment and termination costs, primarily with respect to store operating leases. The amount of actual restructuring and transition charges and impairment charges may materially exceed our estimates, when determined, due to various factors, many of which are outside of our control, including, without limitation, the actual outcomes of discussions and negotiations (a number of which are currently ongoing) with the counterparties to the contracts we intend to terminate or modify. In addition, because of uncertainties with respect to our wind down plan (including those described above), we may not be able to complete the wind down of Dressbarn in the timeframe, on the terms or in the manner we expect, and the costs incurred in connection with such wind down activities may exceed our estimates. If the actual restructuring charges or impairment charges exceed our estimates, when determined, this could adversely impact the Company’s business, operational results, financial position and cash flows.
Furthermore, because of the wind down of the Dressbarn brand and because of other factors that ordinarily influence consumer acceptance of our other brands’ products (many of which are outside of our control), we may not be able to sell our Dressbarn brand Fall 2019 products at prices that will generate a profit. If we incur losses relating to the sales of such products, this could adversely impact the Company’s business, operational results, financial position and cash flows.
In addition, the announced wind down involves numerous risks, including but not limited to:
the inability of the Dressbarn brand to retain qualified personnel necessary for the wind down during the wind down period; 
potential disruption of the operations of the rest of our brands and businesses and diversion of management’s attention from such businesses and operations; 
exposure to unknown, contingent or other liabilities, including litigation arising in connection with the Dressbarn brand wind down;
negative impact on our business relationships, including but not limited to potential relationships with our customers, suppliers, vendors, lessors, licensees and employees; and
unintended negative consequences from changes to our business profile.
If any of these or other factors impair our ability to successfully implement the wind down, we may not be able to realize other business opportunities as we may be required to spend additional time and incur additional expense relating to the wind down that otherwise would be used on the development and expansion of our other businesses, which could adversely impact the Company’s business, operational results, financial position and cash flows.
Any divestitures, strategic investments, acquisitions, joint ventures or other transactions could fail to achieve strategic objectives and result in operating difficulties, liabilities and expenses.

We have undertaken, and may undertake in the future, divestitures, strategic investments or other transactions in connection with our comprehensive portfolio review, which has resulted in the Company’s recent sale of the maurices brand and the announcement of the wind down of the Dressbarn brand. In addition, as a company of portfolio consumer brands, our business model may include a certain level of acquisition, joint venture and/or divestiture activities. We must be able to successfully manage the impacts of these activities, while at the same time delivering against our business objectives.

Specifically, with respect to divestitures, our financial results could be adversely impacted by the dilutive impacts from the loss of earnings and corporate overhead contribution/allocation associated with divested brands. We may experience difficulty separating out portions of the entire business, incur potential loss of revenue or experience negative impact on margins, or we may not achieve the desired strategic and financial benefits from these transactions. Such transactions may also delay achievement of our strategic objectives, cause us to incur additional expenses, potentially disrupt customer or employee relationships, and expose us to unanticipated or ongoing obligations and liabilities, including any indemnification obligations, and divert management’s and our employees’ time and attention. Further, during the pendency of a divestiture, we may be subject to risks related to a decline in the business, loss of employees, customers, or suppliers and the risk that the transaction may not close, any of which would have a material adverse effect on the business to be divested and the Company. If a divestiture is not completed for any reason, we may not be able to find another buyer on the same terms, and we may have incurred significant costs without the corresponding benefit.


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In May 2019, we completed the sale of our maurices brand to Viking Brand Upper Holdings, L.P. (“Viking”), an affiliate of OpCapita LLP, for approximately $210 million in cash and approximately 49.6% of the outstanding equity interests in Viking, which is now the owner of maurices. In connection with the closing of the sale of Maurices Incorporated, we entered into a managed services agreement pursuant to which we will continue to support maurices on our shared business services platform, including support for IT, supply chain, sourcing and certain back office functions pursuant to the managed services and/or transitional services agreements. In the course of performing our obligations under these agreements, we will allocate certain of our resources, including without limitation, assets, facilities, equipment and the time and attention of management and employees, for the benefit of maurices and not us, which may negatively impact our business, results of operations and financial condition.
Additionally, we now hold a minority investment in the maurices’ owner. Minority investments inherently involve a lesser degree of control over business operations, thereby potentially increasing the financial, legal, operational and compliance risks associated with the investments. Management or other investors in these entities may have business goals and interests that are not aligned with ours or may exercise their rights in a manner for which we do not approve. These circumstances could lead to delayed decisions or disputes and litigation, all of which could have a material adverse impact on our reputation, business, results of operations and financial condition. Refer to Note 9 to the accompanying consolidated financial statements for more information on our investment,

Our financial results could also be impacted in the event of acquisition or joint venture activities if changes in the cash flows or other market-based assumptions cause the value of acquired assets to decline below book value, or we are not able to deliver the expected cost and growth synergies associated with such acquisitions and joint ventures, which could also have an impact on goodwill and intangible assets.

Our business is dependent upon our ability to anticipate and respond to changing fashion trends and customer preferences in a timely manner.

Specialty fashion apparel trends and customer preferences tend to change rapidly, particularly for women and tween girls, and our business is dependent upon our ability to effectively manage our inventory. Our success depends largely on our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner. Accordingly, our failure to anticipate, identify and react to changing fashion trends or styles could adversely affect consumer acceptance of our merchandise, which in turn could 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 reductions and/or operating efficiencies from the cost reduction initiatives.

The Company has undertaken various cost reduction initiatives to right-size its cost structure. The actions implemented through these initiatives present significant potential risks that may impair our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise harm our business, including:

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

The estimated costs and benefits associated with the Company's cost reduction initiatives may vary materially based on various factors including: timing in execution, outcome of negotiations with landlords, and changes in management’s assumptions and projections. Any delays and unexpected or higher than anticipated costs could result in our not realizing all, or any portion, of the anticipated benefits of the cost reduction initiatives. As part of our cost-savings initiatives, we have reduced our headcount. These reductions, as well as employee attrition, could result in the potential loss of specific knowledge relating to our Company, operations and industry that could be difficult to replace. Also, we now operate with fewer employees, who have assumed additional duties and responsibilities. These workforce changes may negatively impact communication, morale, management cohesiveness

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and decision-making, which could have an adverse impact on our business, operational results, financial position and cash flows. If we are not successful in implementing and managing the cost reduction initiatives while continuing to invest in our business growth, we may not be able to achieve targeted operating enhancements and/or cost reductions within the expected time frame or at all, which could adversely impact our business, operational results, financial position and cash flows, and could also result in the implementation of additional restructuring-related activities, which may be dilutive to our earnings in the short-term and present incremental risks as discussed above.

Our stock price may continue to be volatile.

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

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

Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. In June and July 2019, two purported securities law class actions were filed against the Company and certain of our officers and directors alleging certain violations of federal securities laws based on, among other things, purported materially false and misleading statements and omissions allegedly made by the Company. See the information under Note 16 to the accompanying consolidated financial statements for more information. We deny the allegations in the lawsuit and intend to defend ourselves vigorously. However, no assurance can be given that the results of these matters will be favorable to us. In addition, we may be the target of securities-related litigation in the future, both related and unrelated to the existing class action lawsuit. Such litigation could result in substantial costs, divert our management’s attention and resources and have a material adverse effect on our business, operational results, financial position and cash flows. See below under “Our business may be affected by other regulatory, administrative and litigation developments” for additional risks associated with litigation against the Company.

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

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

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

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

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

Our success is largely dependent on our ability to maintain, enhance and protect our brand image and reputation and our customers’ connections with our brands. Maintaining, promoting and growing our brands will depend largely on the success of our design,

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merchandising and marketing efforts and our ability to provide a consistent, high-quality customer experience. In addition, our success depends, in part, on our ability to keep existing customers, while engaging and attracting new customers to shop our brands. Our business and results of operations could be adversely affected if we fail to achieve these objectives for any of our brands. Failure to achieve consistent, positive performance at several of our brands simultaneously could have an adverse effect on our sales and profitability.

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

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

Customer traffic and demand for our merchandise is influenced by our advertising, marketing and promotional activities, the name recognition and reputation of our brands, and the location of and service offered in our stores, in addition to many initiatives focused on direct channel and mobile applications, including social media. Although we use marketing, advertising and promotional programs to attract customers through various media, including social media, database marketing and print, if our competitors increase their spending on marketing, advertising and promotional programs, if our marketing, advertising and promotional expenses increase, if our programs become less effective than those of our competitors, or if we do not adequately leverage technology and data analytic capabilities needed to generate concise and effective competitive insight, our business, operational results, financial position and cash flows could be adversely impacted.

We depend on key personnel in order to support our existing business and future initiatives and may not be able to retain or replace these employees, recruit additional qualified personnel or effectively manage succession.

In Fiscal 2019, the Company experienced a number of significant leadership changes, including appointing a new Chief Executive Officer, a new Interim Executive Chair of the Board and a new Chief Financial Officer and the departures of our President and Chief Operating Officer and Chief Human Resources Officer. Our success may be adversely impacted if we are not able to attract, retain and develop talent and future leaders, including our senior executives and associates. Our senior executive team closely supervises all major aspects of our business including the design, development, and procurement of merchandise; operation of our information technology platforms, supply chain, and store network; development and retention of critical talent; and financial planning, reporting and compliance. Our senior executive team has substantial experience and expertise in our retail business, and serves an integral role in the growth and support of our brands. In addition, several of our strategic objectives and initiatives require that we hire and/or develop associates with appropriate experience. If we were to lose the leadership of additional senior executives or other personnel, our business could be adversely affected. In addition, if significant unexpected turnover occurs at the associate level, the loss of the services of these individuals, or any resulting negative perceptions of our business, could damage our reputation and our business. Competition for such qualified talent is intense, and we cannot be sure we will be able to find suitable successors promptly, or at all, or to successfully integrate any successors, or that we will be able to attract, retain and develop a sufficient number of qualified individuals in future periods.

We are dependent on our vendors and factors for credit to acquire merchandise, and any disruption in our supply of merchandise would materially impact us.

Our business is dependent upon our ability to purchase merchandise at competitive terms through relationships with our vendors and their factors, as applicable, and we depend on our vendors to provide financing on our purchases of merchandise. Any significant change in vendor and factor financing or support could limit our ability to acquire desired merchandise at competitive prices or payment terms. In addition, any insolvency of our vendors or their inability to access liquidity could lead to their failure to deliver merchandise. Certain vendors finance their operations and reduce the risk associated with collecting accounts receivable by selling or “factoring” the receivables or by purchasing credit insurance or other forms of protection from loss, and the ability of vendors to do so is subject to the perceived credit quality of their customers. Our vendors’ ability to factor receivables or obtain credit protection in the future because of our perceived financial position and creditworthiness could be limited, which could reduce the availability of merchandise and increase the cost to us of the merchandise. Additionally, if we experience declining operating performance or liquidity challenges, vendors and their factors may seek protection against non-payment, such as accelerated payment terms, letters of credit and tighter limits on credit.

We have ongoing discussions with the vendor community and factors/third parties that offer various credit protection services to our vendors concerning our liquidity and financial position, including discussions regarding pricing, payment terms and ongoing

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business arrangements. As of the date of this report, we have not experienced any significant disruption in our access to merchandise or our operations due to issues with our vendors. However, there can be no assurances that there will not be a disruption in the future, and such circumstances could have a material adverse effect on our business, financial condition and results of operations.

We rely on foreign sources of production and other international service providers.

Our international operations subject us to additional risks which could have an adverse effect on our results of operations and may impair our ability to operate effectively. We purchase nearly all of our merchandise from foreign sources, both directly in foreign markets and indirectly through domestic vendors with foreign sources. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult for goods sourced outside the United States.

Additionally, through outsourcing arrangements, we have engaged in efforts to reduce our costs by utilizing lower-cost labor outside the U.S. in countries which may be subject to higher degrees of political and/or social instability than the U.S. and may lack the infrastructure to withstand events that may disrupt their business. Such disruptions could impact our ability to deliver our products and services on a timely basis, if at all, and to a lesser extent could decrease efficiency and increase our costs.

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

financial or political instability or terrorist acts in any of the countries in which we operate, outsource services or acquire our merchandise, or through which our merchandise passes;
new and additional U.S. government initiatives may be proposed or implemented that may have an impact on the trading status of certain countries and may include retaliatory duties, tariffs or other trade sanctions that, if enacted, could increase the cost of products purchased from suppliers in such countries or restrict the importation of products from such countries;
fluctuations in the value of the U.S. Dollar against foreign currencies or higher inflation rates in these countries, or restrictions on the transfer of funds to and from foreign countries;
inability of our manufacturers to comply with local laws, including labor laws, health and safety laws or labor practices;
increased security and regulatory requirements and inspections applicable to imported goods;
enactment of tariffs, border adjustment taxes or increases in duties or quotas applicable to the merchandise we sell that could increase the cost and reduce the supply of products available to us;
impact of natural disasters, extreme weather, public health concerns or other catastrophes on our foreign sourcing offices and vendor manufacturing operations;
increased scrutiny in the U.S. of utilizing labor based in foreign countries;
delays in shipping due to port security or congestion issues, labor disputes or shortages, local business practices, vendor compliance with applicable import regulations or weather conditions;
violations under the U.S. Foreign Corrupt Practices Act (the “FCPA”) or similar laws or regulations by us, our subsidiaries or our local agents;
the adoption of new legislation or regulations in the U.S. or foreign countries that make it more difficult, more costly or impossible to continue our foreign activities;
violation of applicable laws or regulations; and
increased costs and/or capacities of transportation.

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

We require our vendors, manufacturers and other service providers to operate in compliance with applicable laws and regulations, including the FCPA and other anti-corruption laws, and our internal requirements. Our vendor code of conduct, guidelines and other compliance programs promote ethical business practices, and we monitor compliance with them; however, we do not control these vendors or manufacturers, their labor practices or business practices, the health and safety conditions of their facilities, or their sources of raw materials, and from time to time these vendors, manufactures or other service providers may not be in compliance with these standards or applicable laws. Significant or continuing noncompliance with such standards and laws by one or more vendors, manufacturers or other service providers could have a negative impact on our reputation and our business, and could subject us to liability in the form of substantial financial penalties, sanctions or otherwise.


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

Changes in U.S. trade policies, including the imposition of tariffs and a potential resulting trade war, could have a material adverse impact on our business.

We source the majority of our merchandise from foreign countries, including Vietnam, Indonesia, China, India, Guatemala, Sri Lanka and Bangladesh, making the price and availability of our merchandise susceptible to international trade risks and other international conditions. In September 2018, the U.S. government implemented a 10% tariff on certain goods imported from China. In May 2019, these tariffs were increased to 25% and in October 2019, these tariffs are scheduled to be increased to 30%. In addition, the U.S. government has implemented tariffs on other goods from China. The imposition of such tariffs, or any future tariffs, duties, border adjustment taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other trade restrictions by other countries. The tariffs may in the future cause us to further increase prices to our customers which we believe may reduce demand for our products. Any such price increase may not be sufficient to fully offset the impact of the tariffs and result in lowering our margin on products sold. In addition, the current U.S. administration has indicated that it may withdraw the U.S. from the North American Free Trade Agreement (“NAFTA”) in order to encourage the U.S. Congress to vote on the ratification of the United States-Mexico-Canada Agreement (“USMCA”) which was signed in 2018 and which is intended to be the successor to NAFTA. If the current administration increases or implements additional tariffs, withdraws from NAFTA, the ratification and implementation of the USMCA is not completed promptly and effectively, or if additional tariffs or trade restrictions are implemented by the U.S. or other countries, the resulting trade barriers could have a significant adverse impact on our business. We are not able to predict future trade policy of the U.S. or of any foreign countries in which we operate or purchase goods, or the terms of any renegotiated trade agreements, or their impact on our business. The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a “trade war,” or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact demand for our products, our costs, our customers, our suppliers and the world and U.S. economies, which in turn could have a material adverse effect on our business, operational results, financial position and cash flows.

Our business could suffer as a result of a third-party manufacturer’s inability to produce goods for us on time and to our specifications.

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

We rely upon independent third-party transportation providers for substantially all of our merchandise shipments.

We currently rely primarily on one independent third-party transportation provider for substantially all of our merchandise shipments, including shipments to our stores and to the customer directly in the U.S., Canada and Puerto Rico through our direct channel. Our use of third-party delivery services for shipments is subject to risks, including increased fuel prices, which would increase our shipping costs, and employee strikes and inclement weather, which may impact a shipper’s ability to provide delivery services that adequately meet our shipping needs. If we change shipping companies, we could face logistical difficulties that could adversely impact deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from the independent third-party transportation providers we currently use, which could have a material adverse impact on our business, operational results, financial position and cash flows.
 
Our business could suffer a material adverse effect if our distribution or fulfillment centers were shut down, disrupted or fail to operate efficiently.

We operate three distribution and fulfillment centers to manage the receipt, storage, sorting, packing and distribution of our merchandise to the appropriate stores or to the customer directly through our direct channel. We depend in large part on the orderly

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operation of our receiving and distribution process, which depends, in turn, on adherence to shipping schedules, proper functioning of our information technology and inventory control systems and overall effective management of our distribution and fulfillment centers. As a result of damage to, or prolonged interruption of, operations at any of these facilities, or with respect to our third-party transportation provider, due to a work stoppage, operations significantly below historical efficiency levels, supply chain disruption, inclement weather, natural or man-made disasters, system failures, slowdowns or strikes, acts of terror or other unforeseen events, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores or customers, which in turn could have a material adverse effect on our business, operational results, financial position and cash flows. Refer to Item 2. Properties, for a listing of the distribution and fulfillment centers that we rely on.

Although we maintain business interruption and property insurance for these facilities, there can be no assurance that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us, if our distribution or fulfillment centers are shut down or interrupted for any unplanned reason.

We also continue to explore ways to further optimize and leverage our integrated distribution network, which may include providing distribution and fulfillment services to third-party retailers. Any disruption of our distribution and fulfillment capabilities would also impact any third-party services we may provide in the future. There also can be no assurance that providing such distribution and fulfillment services to third parties would be successful or profitable for us.

Risks associated with direct channel sales.

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

system failures, including but not limited to, inadequate system capacity, human error, change in programming, website downtimes, system upgrades or migrations, Internet service or power outages;
cyber incidents, including but not limited to, security breaches and computer viruses;
reliance on third-party computer hardware/software fulfillment and delivery providers;
unfavorable federal or state regulations or laws;
violations of federal, state or other applicable laws, including those related to online privacy;
disruptions in telecommunication systems, power outages or other technical failures;
ability to anticipate and implement innovations in technology and logistics;
credit card fraud;
constantly evolving technology;
liability for online content;
challenges associated with recreating the in-store experience for our customers through our direct channels; and
natural or man-made disasters or adverse weather conditions.

Our failure to maintain efficient and uninterrupted order-taking and fulfillment operations or our failure to successfully address and respond to any one or more of these risks could damage the reputation of our brands and have a material adverse effect on our business, operational results, financial position and cash flows.

Our business could suffer if our information technology systems fail to operate effectively, are disrupted or are compromised.

Our success depends, in part, on the secure and uninterrupted performance of our existing information technology systems in operating, supporting and monitoring all major aspects of our business, including sales (including stores and direct channel services), warehousing, fulfillment, distribution, purchasing, inventory control, merchandise planning and replenishment, and financial systems. We regularly evaluate and from time to time make investments to upgrade, enhance or replace these systems, including those that relate to point-of-sale, direct channel, merchandising, planning, sourcing, logistics, inventory management and support systems, which are utilized by our human resources, finance and other groups on a Company-wide basis, as well as leverage new technologies to support our growth strategies. We are aware of inherent risks associated with operating, replacing and modifying these systems, including inaccurate system information and system disruptions. We believe we are taking appropriate action to mitigate the risks through testing, training, staging implementation and in-sourcing certain processes, as well as securing appropriate commercial contracts with third-party vendors supplying such replacement and redundancy technologies; however, there is a risk that information technology system disruptions and inaccurate system information, if not anticipated and/or appropriately mitigated, could have a material adverse effect on our business, operational results, financial position and cash flows.

The reliability and capacity of our information technology systems (including third-party hardware and software systems or services) are critical to our continued operations. Despite our precautionary efforts, our information technology systems, as well

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as those of our services providers, are vulnerable to damage or interruption from a variety of sources, including natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses, malicious human acts, security breaches and similar disruptive problems, which may require significant investment to fix or replace, and we may suffer loss of critical data and interruptions or delays to our operations.

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

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

During the course of our business, we obtain and transmit confidential customer, employee, vendor and Company information through our information technology systems, and we are subject to numerous laws, rules and regulations in the United States (both federal and state) and foreign jurisdictions to protect both individual identifiable information as well as personal health information. The protection of customer, employee, vendor and Company data is critical to our business. The regulatory environment surrounding information security and privacy is demanding, with frequent changes in requirements and heightened public awareness and scrutiny.

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

In addition, data and security breaches can also occur as a result of non-technical issues, including breaches by us or by our third-party service providers that result in the unauthorized release of personal or confidential information, employee error or malfeasance, faulty password management or other irregularities that may result in a defeat of our or our third-party providers’ security measures. We are also exposed to risks and costs associated with customer payment methods, including credit card fraud and identify theft, which may cause us to incur unexpected expenses and loss of revenues.

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

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

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

As part of our long-term strategy, we look for opportunities to cost-effectively enhance the capability of our business services. In some cases, this requires that we outsource certain services and/or functions to external third-party providers, as more fully described in Note 6 to the accompanying consolidated financial statements. While we believe we conduct appropriate due diligence before entering into agreements with these third parties, the failure of any of these third parties to provide the expected services on a timely basis, at the level of quality expected, or at the prices/savings expected could disrupt or harm our business. Any significant interruption in the operations of these service providers, over which we have no control, could also have an adverse effect on our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely or cost-effective basis on terms favorable to us.

Any further impairment to the carrying value of our goodwill or other intangible assets could result in significant non-cash charges and could have a material adverse effect on our operational results.

Under generally accepted accounting principles, identifiable intangible assets with an indefinite useful life, including goodwill, are not amortized, but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. As of August 3, 2019, we had approximately $590 million of goodwill and other intangible assets related to the acquisitions of Justice in November 2009, Lane Bryant and Catherines in June 2012 and ANN in August 2015. Current and future economic conditions, as well as the other risks noted in this Item 1A, may adversely impact our brands' ability to attract new customers, retain existing customers, maintain sales volumes and maintain margins. As discussed in our Critical Accounting Policies included elsewhere in this report, these events could materially reduce our brands' profitability and cash flows which could, in turn, lead to a further impairment of our goodwill and other intangible assets. Furthermore, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. Additionally, declines in our stock price, or the fair value of our term loan debt, could also be deemed to be triggering events, which would require an evaluation of goodwill and intangible assets. As described in Note 5 to the accompanying consolidated financial statements included herein, in Fiscal 2019 and Fiscal 2017, we recorded impairment charges of $276.0 million and $596.3 million, respectively, related to goodwill and $134.9 million and $728.1 million, respectively, related to other intangible assets. No impairments related to goodwill and other intangible assets were recorded in Fiscal 2018. There can be no assurance that we will not experience further impairment charges with respect to goodwill or other intangible assets in future periods. Any future impairment could have a material adverse effect on our operational results.

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

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

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

The products our brands sell are regulated by many different governmental bodies, including but not limited to the Consumer Product Safety Commission and the Food and Drug Administration in the U.S., Health Canada in Canada, and similar state, provincial and foreign regulatory authorities. Although our practice is to test (or have our suppliers test) the products sold in our brands’ stores and on our brands’ websites for compliance with applicable mandatory and industry standards, selected products still could present safety problems of which our brands are not aware. This could lead one or more of our brands to recall selected

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products, either voluntarily or at the direction of a governmental authority, and may lead to a lack of consumer acceptance or loss of consumer trust. Product safety concerns, non-compliance with standards, recalls, defects or errors could result in the rejection of our products by customers, significant damage to our reputation, lost sales, product liability litigation and increased costs, any or all of which could harm our business and have a material adverse effect on our financial position, operational results and cash flows.

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

We depend on strip shopping center and mall traffic and our ability to identify suitable store locations.

Our ability to effectively obtain store locations depends on the availability of real estate that meets our criteria for consumer traffic, square footage, co-tenancies, lease economics, demographics, and other factors. Many of our stores are located in strip shopping centers, shopping malls and other retail centers that, historically, have benefited from their proximity to “anchor” retail tenants, generally large department stores, and other attractions, which generate consumer traffic in the vicinity of our stores. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of, or continued decline of, anchor stores that drive consumer traffic or changes in customer shopping preferences. There has been a decline in the popularity of strip shopping center or mall shopping among our target customers, and a continuation of such decline could have a material adverse effect on customer traffic and our operational results. In order to leverage customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable consumer locations, however competition for such suitable store locations is intense.

In addition, continued consolidation in the commercial retail real estate market could affect our ability to seek to downsize, consolidate, reposition, relocate, or close some of our stores. Several large landlords dominate ownership of prime retail real estate and should significant consolidation continue, a large portion of our store base could be concentrated with one or a few landlords that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable lease terms with these landlords, this could affect our ability to profitably operate our stores, which in turn could have a material adverse effect on our business, operational results, financial condition and cash flows.

Capital Risks

We have incurred significant indebtedness with significant payment obligations in connection with the ANN INC. acquisition, which could adversely affect us.

We substantially increased our indebtedness in connection with the acquisition of ANN (the "ANN Acquisition") as described in Note 10 to the accompanying consolidated financial statements, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and further increasing our interest expense. We also incurred various costs and expenses associated with our financings. The amount of cash flows required to pay interest on our indebtedness, and thus the demands on our cash resources, may 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 reductions from the acquisition or from our cost reduction initiatives, or if our financial and operating performance does not meet expectations, our ability to service our indebtedness may be adversely impacted.

Our indebtedness bears interest at variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our operational results and cash flows. In March 2019, we entered into an interest rate swap designed to mitigate some of the risk associated with our variable rate debt. Refer to Item 7 "Interest Rate Risk Management" for more information.

In addition, our credit ratings affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. In connection with the debt financing, we received ratings from S&P and Moody’s. There can be no assurance that we will maintain particular ratings, or that we will not be subject to further downgrades, in the future.


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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.

We currently have substantial indebtedness. 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 flows in the future, which is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, as well as the successful execution of our transformational initiatives.

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

If we are unable to generate sufficient cash flows 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, incur debt, have liens on their property, change the nature of their business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of their assets to any one person and also, under certain conditions, restrict our ability to pay dividends, repurchase common shares and make other restricted payments as defined in our borrowing agreements. In addition, the amended revolving credit agreement contains a financial covenant that, under certain circumstances, will require the Company to maintain compliance with certain financial ratios. The ability of the Company and its subsidiaries to comply with these provisions may be affected by our operating results as well as events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, would give our lenders thereunder the ability to accelerate the Company’s repayment obligations and exercise other remedies.

A further downgrade in our credit rating could negatively impact our cost of and ability to access capital and could increase interest expense.

We receive credit ratings from the major credit rating agencies in the United States, which periodically review our capital structure and the quality and stability of our earnings. Our credit ratings may be impacted by certain factors, including debt levels, planned asset purchases or sales, near-term and long-term growth opportunities, liquidity, asset quality, cost structure, and product mix. In Fiscal 2019, the credit rating on certain of our outstanding debt instruments was downgraded and further downgrades may occur in the future. A deterioration in our capital structure or the quality and stability of our earnings could result in a further downgrade of our credit rating. Negative ratings actions could constrain the capital available to us or our industry, could limit our ability to access capital required to fund our operations at rates and on terms we determine to be attractive, or at all, and could likely cause our interest rates to increase. If our ability to access capital becomes constrained, it could negatively impact the Company's business, operational results, financial position and cash flows. Additionally, further changes to our credit rating could affect our future interest costs.

We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.

As of August 3, 2019 we had outstanding approximately $1,371.5 million of variable debt that is indexed to the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR rates by the end of 2021. It is unclear whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021, or whether any alternative reference rate will attain market acceptance as a

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replacement for LIBOR. It is not possible to predict the further effect of the rules of the FCA, any changes in the methods by which LIBOR is determined or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or elsewhere. Any such developments may cause LIBOR to perform differently than in the past, or cease to exist. In addition, any other legal or regulatory changes made by the FCA, the European Commission or any other successor governance or oversight body, or future changes adopted by such body, in the method by which LIBOR is determined or the change from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination, and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. dollar LIBOR rate is unavailable after 2021, the interest rates on our debt which are indexed to LIBOR will be determined using an alternative method, which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S. dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the discontinuation or unavailability of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences could have a material adverse effect on our financing costs.

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

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

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

Legal and Regulatory Risks

Our inability to comply with the continued listing requirements of the Nasdaq Global Select Stock Market could result in our common stock being delisted, which would adversely affect the market price and liquidity of our securities and could have other material adverse effects.

On July 29, 2019, we received a letter from the Listing Qualifications staff of Nasdaq (the “Notification Letter”), indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days, the Company no longer meets the requirement of the Nasdaq Global Select Market to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5450(a)(1).

The Notification Letter does not impact our listing on The Nasdaq Global Select Market at this time. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until January 27, 2020, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to transfer to the Nasdaq Capital Market and seek an additional compliance period of 180 calendar days if we (i) meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and (ii) provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, including by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that we will not be eligible for the additional compliance period and our common stock will be subject to delisting. We would then be entitled to appeal the determination to a Nasdaq Listing Qualification Panel and request a hearing. We are considering our available options to regain compliance, including whether to effect a reverse stock split. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other Nasdaq listing requirements. If we do not regain compliance with Nasdaq continuing listing requirements, our common stock will be delisted from the Nasdaq Global Select Market (or Nasdaq Capital Market, if applicable) and it could be more difficult to buy or sell our securities and to obtain accurate quotations, and the price of our common stock

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could suffer a material decline. In addition, a delisting would impair our ability to raise capital through the public markets, could deter broker-dealers from making a market in or otherwise seeking or generating interest in our securities and might deter certain institutions and persons from investing in our securities at all, any of which could have a significant negative impact on our business, operational results, financial position and cash flows.

Fluctuations in our tax obligations and effective tax rate may result in volatility in our results of operations.

We are subject to income taxes in many U.S. and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes (“VAT”) in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations. Fluctuations in duties could also have a material impact on our financial condition, results of operations or cash flows. In some international markets, we are required to hold and submit VAT to the appropriate local tax authorities. Failure to correctly calculate or submit the appropriate amounts could subject us to substantial fines and penalties that could have an adverse effect on our financial condition, results of operations or cash flows. In addition, tax law may be enacted in the future, domestically or abroad, that impacts our current or future tax structure and effective tax rate. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law. The Act made broad and significantly complex changes to the U.S. corporate income tax system. Given the complexities associated with the Act, the estimated financial impact for Fiscal 2018 was provisional and subject to further analysis, interpretation and clarification. In addition, the U.S. Treasury Department, the Internal Revenue Service and other standard-setting bodies could interpret or issue guidance in the future on how provisions of the Act will be applied or otherwise administered that differs from our interpretations and could result in changes to our assessment. SEC Staff Accounting Bulletin No. 118 (“SAB 118”) requires that the Company finalize its estimate of the impact of the Act by December 22, 2018. In the second quarter of Fiscal 2019, we finalized our assessment of the impact of the Act taking into account the published guidance and recorded the additional cost in the quarter. Refer to Note 15 to the accompanying consolidated financial statements for further discussion.

In June 2018, the U.S. Supreme Court ruled that states and local jurisdictions may require remote vendors to collect and remit sales tax on goods sold to buyers in the state, even if the seller has no physical presence in the state. A number of states have already begun, or have prepared to begin, requiring sales and use tax collection by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements vary from state to state. We are in the process of determining how and when our collection practices will need to change in certain jurisdictions. In the event we are required to collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect taxes, we could incur significant tax liabilities, including taxes on past sales, penalties and interest, which could negatively affect the Company's business, operational results, financial position and cash flows.

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

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

While it is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will at all times comply with all such legal and regulatory requirements. A finding that we or our vendors or agents are out of compliance with applicable laws and regulations could subject us to civil remedies or criminal sanctions, which could have a material adverse effect on our business, operational results, financial position and cash flows. In addition, even the claim of a violation of applicable laws or regulations could negatively affect our reputation.

We are also involved from time to time in litigation, claims and assessments arising primarily in the ordinary course of business. Litigation matters may include, among other things, employment, commercial, intellectual property, advertising or stockholder claims, and any adverse decision in any such litigation or disputes could adversely impact our business, operational results, financial position and cash flows. Resolution of these matters can be prolonged and costly, and the ultimate resolutions are uncertain due to the inherent uncertainty in such proceedings. Moreover, our potential liabilities are subject to change over time due to new

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developments, changes in settlement strategy or the impact of evidentiary requirements. While we maintain insurance for certain risks, it is not possible to obtain insurance to protect against all our operational risks and liabilities. Accordingly, in certain instances, we may become subject to or be required to pay damage awards or settlements that could have a material adverse effect on our results of operations, financial position, and cash flows. Certain of these proceedings could also have a negative impact on the Company's reputation or relations with its employees, customers or other third parties.

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

As privacy, data protection and information security laws, including data localization laws, are interpreted and applied, compliance costs may increase, particularly in the context of providing adequate data protection and adequate data transfer mechanisms and addressing consumer rights to access and delete data. The United States, other countries in which we operate, and various states and other local jurisdictions are increasingly adopting or revising privacy, data protection and information security laws that could have significant impact on our current and planned data and information security-related practices, our collection, use, sharing, retention and safeguarding of customer and/or employee information, and some of our current or future business plans. New legislation or regulation, and the interpretation and application of existing laws and regulations, could increase our costs of compliance, technology and business operations, and could reduce revenues from certain business initiatives. Moreover, the application of existing or new laws to existing technology and practices can be uncertain and may lead to additional compliance risk and cost.

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

In 2016, the European Union (“EU”) adopted a comprehensive overhaul of its data protection regime from the current national legislative approach to a single European Economic Area Privacy Regulation, the General Data Protection Regulation ("GDPR"), which went into effect on May 25, 2018. The GDPR generally expands the scope of EU data protection law to foreign companies processing personal data of EU residents and imposes a strict data protection compliance regime, including new security breach notice obligations, with significant monetary penalties. There remain significant questions about the precise scope and application of the GDPR and the proposed EU ePrivacy Regulation that may affect our online marketing practices. Development, implementation, modification, and maintenance of compliance protocols for the GDPR and similar emerging and changing privacy and data protection requirements may cause us to incur substantial costs and may require us to change our business practices, which could have a material adverse impact on our business, operational results, financial position and cash flows.

In 2018, the state of California enacted the California Consumer Privacy Act (the “CCPA”), which provides significant rights to California consumers and greatly increases legally-mandated compliance obligations on companies, including providing consumers with access, deletion and opt-out rights. Complying with the CCPA and similar emerging and changing regulation by other states or the federal government may cause us to incur substantial costs and may require us to change our business practices, which could have a material adverse impact on our business, operational results, financial position and cash flows.

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

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

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


25



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. Refer to Note 4 to the accompanying consolidated financial statements and “Critical Accounting Policies” included herein which discuss accounting policies considered to be important to our operational results and financial condition. These and other future changes to accounting rules or regulations could have an adverse impact on our business, operational results, financial position and cash flows.
  
Item 1B. Unresolved Staff Comments.
 
None.

Item 2. Properties.
 
Retail Store Space

We lease space for all our retail 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 3, 2019, indicates the number of leases expiring during the period indicated and the number of expiring leases with and without renewal options:
Fiscal Years
 
Leases Expiring
 
Number with
Renewal Options
 
Number without
Renewal Options
2020
 
861
 
106
 
755
2021
 
684
 
274
 
410
2022
 
581
 
193
 
388
2023
 
455
 
192
 
263
2024
 
334
 
128
 
206
2025 and thereafter
 
530
 
228
 
302
Total
 
3,445
 
1,121
 
2,324
 
Our store leases generally provide for a base rent per square foot per annum. Certain leases have formulas requiring the payment of additional rent as a percentage of sales, generally when sales reach specified levels. Our aggregate minimum lease payments under operating leases in effect at August 3, 2019 and excluding locations acquired after August 3, 2019, are approximately $462.0 million for Fiscal 2020. In addition, we are typically responsible under our store leases for our pro rata share of maintenance expenses and common area charges in strip shopping centers, lifestyle centers, outlet centers and enclosed malls.
 
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.


26



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 in Duluth, Minnesota, the majority of which is subject to a lease to maurices which, as discussed earlier, was sold in May 2019. The building also serves as the corporate office for a portion of the Company's brand services operations; and
a 168,000 square foot building which serves as the corporate office for the majority of the Company's brand services operations, located in Etna Township, Ohio, adjacent to our distribution center.

The Company acquired leased corporate office facilities of approximately 308,000 square feet in New York City, NY 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.

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 16 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 2019
 
Fiscal 2018
Fiscal
 
High
 
Low
 
High
 
Low
First Quarter
 
$5.29
 
$3.46
 
$2.67
 
$1.69
Second Quarter
 
$4.55
 
$2.25
 
$2.69
 
$1.85
Third Quarter
 
$2.73
 
$0.97
 
$2.50
 
$1.79
Fourth Quarter
 
$1.50
 
$0.31
 
$4.74
 
$2.01
 
Number of Holders of Record
 
As of October 8, 2019, we had approximately 4,297 holders of record of our common stock.

27



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 10 to the accompanying consolidated financial statements.

Performance Graph
 
The following graph illustrates, for the period from July 27, 2014 through August 3, 2019, the cumulative total shareholder return of $100 invested (assuming that all dividends, if any, were reinvested) in (1) our common stock, (2) the S&P Composite-500 Stock Index and (3) the S&P Specialty Apparel Retailers Index.

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

grapha03.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 3, 2019.
Period
 
Total
Number of
Shares
Purchased
 
Average Price
Paid per
Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(a)
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Month # 1 (May 5, 2019 – June 1, 2019)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 2 (June 2, 2019 – July 6, 2019)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 3 (July 7, 2019 – August 3, 2019)
 
 
 
 
$—
 
 
 
 
$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 10 to the accompanying consolidated financial statements. Purchases, if any, will be made at prevailing market prices, through open market purchases or in privately negotiated transactions and will be subject to applicable SEC rules. No shares were repurchased under the 2016 Stock Repurchase Program in Fiscal 2017, Fiscal 2018 or Fiscal 2019.

28



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 3, 2019 has been derived from, and should be read in conjunction with, the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated statement of operations data for the fiscal years ended July 30, 2016 and July 25, 2015 has been derived from consolidated financial statements which have been recast to present maurices as a discontinued operation. 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 3, 2019 and August 4, 2018 has been derived from, and should be read in conjunction with, the audited consolidated financial statements and other financial information presented elsewhere herein. The consolidated balance sheet data as of July 29, 2017, July 30, 2016 and July 25, 2015 has been derived from consolidated financial statements which have been recast to present maurices as a discontinued operation.
 
Fiscal Years Ended(a)
 
August 3,
 2019 (c)
 
August 4,
2018
 
July 29,
2017 (c)
 
July 30,
2016 (b)
 
July 25,
2015 (c)
 
(millions, except for share data)
Statement of Operations Data:
 
Net sales
$
5,493.4

 
$
5,566.4

 
$
5,617.3

 
$
5,894.1

 
$
3,742.3

Restructuring and other related charges
(127.7
)
 
(76.6
)
 
(78.1
)
 

 

Impairment of goodwill
(276.0
)
 

 
(489.1
)
 

 
(261.7
)
Impairment of other intangible assets
(134.9
)
 

 
(728.1
)
 

 
(44.7
)
Acquisition and integration expenses

 
(5.4
)
 
(39.4
)
 
(77.4
)
 
(32.8
)
Depreciation and amortization expense
(299.9
)
 
(323.5
)
 
(350.8
)
 
(323.8
)
 
(184.7
)
Operating loss
(681.4
)
 
(88.9
)
 
(1,334.3
)
 
(80.9
)
 
(411.2
)
Loss from continuing operations
(782.3
)
 
(143.0
)
 
(1,068.0
)
 
(120.2
)
 
(346.0
)
 
 
 
 
 
 
 
 
 
 
Net loss per common share - continuing operations:
 
 
 

 
 

 
 

 
 

Basic
$
(3.96
)
 
$
(0.73
)
 
$
(5.48
)
 
$
(0.63
)
 
$
(2.13
)
Diluted
$
(3.96
)
 
$
(0.73
)
 
$
(5.48
)
 
$
(0.63
)
 
$
(2.13
)
 
 
 
 
 
 
 
 
 
 
Balance sheet data (d):
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
328.0

 
$
231.0

 
$
306.3

 
$
363.4

 
$
230.1

Working capital
356.8

 
188.4

 
150.5

 
194.2

 
212.6

Total assets
2,699.8

 
3,169.2

 
3,427.6

 
4,931.4

 
2,343.3

Total debt
1,338.6

 
1,328.7

 
1,538.1

 
1,648.5

 
106.5

Total equity
151.0

 
798.5

 
821.0

 
1,863.3

 
1,518.1

________
(a) Fiscal 2018 and Fiscal 2016 consisted of 53 weeks, which resulted in incremental revenue of approximately $94.8 million in Fiscal 2018 recognized across all segments and $64.4 million in Fiscal 2016 reflected at all segments except our Premium Fashion segment. Fiscal 2019, Fiscal 2017 and Fiscal 2015 each consisted of 52 weeks.
(b) Fiscal 2016 included the results of our Premium Fashion segment for the post-acquisition period from August 22, 2015 to July 30, 2016 and reflected a non-cash purchase accounting expense of approximately $126.9 million related to the amortization of the write-up of inventory to fair market value recorded at our Premium Fashion segment.
(c) Fiscal 2019 included non-cash impairments of goodwill and other intangible assets by segment as follows: $75.3 million of intangible assets at the Premium Fashion segment, $115.1 million of goodwill and $43.0 million of other intangible assets at the Plus Fashion segment, and $160.9 million of goodwill and $16.6 million of other intangible assets at the Kids Fashion segment. Fiscal 2017 included non-cash impairments of goodwill and other intangible assets by segment as follows: $428.9 million of goodwill and $566.3 million of other intangible assets at the Premium Fashion segment and $60.2 million of goodwill and $161.8 million of other intangible assets at the Plus Fashion segment. A Fiscal 2017 goodwill impairment at our Value Fashion segment of $107.2 million has been excluded from the table as it is included within income from discontinued operations in the accompanying consolidated statements of income. Fiscal 2015 included non-cash impairment charges of $261.7 million of goodwill and $44.7 million of other intangible assets at the Plus Fashion segment. Refer to Note 5 to the accompanying consolidated financial statements for additional information.
(d) Excludes balances related to discontinued operations.
 

29



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 2019 (“Fiscal 2019 10-K”). Fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period ("Fiscal 2019"). Fiscal year 2018 ended on August 4, 2018 ("Fiscal 2018") and reflected a 53-week period as the Company conformed its fiscal period ends to the calendar of the National Retail Federation; Fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”). All references to “Fiscal 2020” reflect a 52-week period that will end on August 1, 2020.
 
INTRODUCTION
 
MD&A is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our operational results, financial condition, liquidity and changes in financial condition. MD&A is organized as follows:
 
Overview. This section includes recent developments, our objectives and risks, and a summary of our financial performance for Fiscal 2019.

Results of operations. This section provides an analysis of our operational results for Fiscal 2019, Fiscal 2018 and Fiscal 2017.

Financial condition and liquidity. This section provides an analysis of our cash flows for Fiscal 2019, Fiscal 2018 and Fiscal 2017, as well as a discussion of our financial condition and liquidity as of August 3, 2019. The discussion of our financial condition and liquidity includes (i) our available financial capacity under our revolving credit agreement, (ii) a summary of our capital spending, and (iii) a summary of our contractual and other obligations as of August 3, 2019.

Market risk management. This section discusses how we manage our risk exposures related to interest rates, foreign currency exchange rates and our investments, as well as the underlying market conditions as of August 3, 2019.

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

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

OVERVIEW

Our Business

Ascena Retail Group, Inc., a Delaware corporation, is a national specialty retailer of apparel for women and tween girls with annual revenue of approximately $5.5 billion for Fiscal 2019. 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
 
Retailers, especially those in the specialty apparel sector, continue to face intense competition, particularly as consumer spending habits continue to indicate an increasing preference to purchase digitally as opposed to in traditional brick-and-mortar retail stores. This preference has resulted in increased direct channel sales, but has continued to put pressure on our retail store sales. As a result of these fundamental changes, we are continuing our previously announced strategic review of our brands and operations with the goal to enhance shareholder value. We believe that such structural and strategic changes are necessary to successfully compete in the changing retail landscape.

To that end, over the past few years, the Company has undergone an extensive transformation of its business. The more significant of these initiatives are described below.



30



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


Structural-related transformation
On May 6, 2019, the Company and Maurices Incorporated, a Delaware corporation (“maurices”) and wholly owned subsidiary of ascena, completed the transaction contemplated by the previously-announced Stock Purchase Agreement with Viking Brand Upper Holdings, L.P., a Cayman Islands exempted limited partnership (“Viking”) and an affiliate of OpCapita LLP, providing for, among other things, the sale by ascena of maurices to Viking (the “Transaction”). Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices, consisting of interests in Viking preferred and common stock.

In addition, on May 20, 2019, the Company announced its plan to wind down its Dressbarn brand. The wind down is currently expected to be completed in the first half of Fiscal 2020. As a result of these actions, once the wind down of Dressbarn is complete, the Company will have exited its Value Fashion segment.

On May 1, 2019 the Company announced changes to its senior leadership team. These changes included the retirement of the Company's Chief Executive Officer, the departure of the Company's Chief Operating Officer, as well as the appointment of a new Chief Executive Officer and Interim Executive Chair of the Board. On August 4, 2019 the Senior Vice President, Finance and Chief Accounting Officer, was promoted to Executive Vice President and Chief Financial Officer upon the resignation of the former Executive Vice President and Chief Financial Officer. We believe that these changes will continue to support our structure-related transformation activities as the new management team seeks additional ways to optimize our brand portfolio and extensive distribution framework which will allow us to better compete in the changing retail landscape.

Operational-related transformation
During 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). Actions completed under this long-term transformation focused on (i) refinements to the Company's operating model to increase the focus on key customer segments, (ii) developing initiatives designed to optimize the flow of product through the Company's distribution channels, including its direct channel and its brick-and-mortar retail locations, including areas related to markdown optimization, size pack optimization and localized inventory planning, (iii) consolidating certain support functions into its brand services group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, (iv) transitioning certain transaction processing functions within the brand services group to an independent third-party managed-service provider, and (v) optimizing 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. Cost reductions achieved from the program have served to offset ongoing inflationary pressure and required reinvestment to support key incremental business initiatives. The Company realized cumulative annualized cost reductions of approximately $290 million from the Change for Growth program through the end of Fiscal 2019, substantially all of which are reflected in the results of our continuing operations. The Company currently expects that total annualized cost reductions from the program benefiting our continuing operations will exceed the original program target of $300 million.

The Company will continue to focus on identifying additional cost reduction opportunities to right-size the cost structure. As a result, in the third quarter of Fiscal 2019, we announced an incremental cost reduction target and on June 4, 2019, we actioned our initial round of savings towards achieving that target with the goal of realizing the majority of the anticipated savings in Fiscal 2020. We will continue to formulate plans and take actions to achieve the remainder of that target and look for additional opportunities. These opportunities represent a critical component of our enterprise transformation.

Omni-channel Expansion
We continue to invest in initiatives that support our omni-channel strategies. Over the last couple of years, we have 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. Additionally, in Fiscal 2018, we expanded the functionality of our Riverside, California distribution center and it supports both our brick-and-mortar and direct channel operations.



31



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


Distribution and Fulfillment
Over the last few years, (i) our brands' distribution and fulfillment capabilities were centralized into our brick-and-mortar store distribution facility in Etna, Ohio and our direct channel fulfillment facility in Greencastle, Indiana which has resulted in increased processing efficiencies, and (ii) we entered into a lease agreement for a distribution center in Riverside, California to serve as the receiving and west coast distribution hub for merchandise sourced from Asia. In Fiscal 2018, we completed the expansion of our Riverside facility to include both brick-and-mortar and direct channel distribution, 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 our internal sourcing group and externally through third-party buying agents based mainly in Asia. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends. We continue to manage our relationships with vendors through our internal channel and with third-party buying agents to meet the needs of our brands.

Integration of ANN
In Fiscal 2018, we substantially completed our integration of ANN INC. ("ANN integration") into our existing operations. Total synergies and cost reductions related to the ANN integration, including amounts achieved from Fiscal 2016 through Fiscal 2019, were approximately $235 million, substantially all of which are reflected in the results of our continuing operations.
Seasonality of Business

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

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

Discontinued Operations
 
On May 6, 2019, the Company completed its sale of maurices. Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices. As the sale of maurices represented a major strategic shift, the Company's maurices business has been classified as a component of discontinued operations within the consolidated financial statements for all periods presented. Thus, the foregoing discussion of our results excludes maurices, which has been removed from the Value Fashion segment below, as discussed in Note 2 to the consolidated financial statements. In addition, shared expenses of $78 million, $96 million and $81 million for the fiscal years ended August 3, 2019, August 4, 2018 and July 29, 2017, respectively, which were previously allocated to maurices, have been reallocated to the remaining operating units.

Dressbarn Wind Down

As noted above, the Company has begun a wind down of its Dressbarn brand. The wind down is currently expected to be completed in the first half of Fiscal 2020. During Fiscal 2019, the Company recorded approximately $50 million of costs, primarily reflecting $26 million of severance costs as well as a non-cash impairment charge of approximately $20 million to write-down Dressbarn's

32



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


headquarters building to its fair market value. We also expect to record other closing costs during the first half of Fiscal 2020, primarily related to severance, inventory liquidation and closure of Dressbarn retail stores. Costs associated with the wind down, which could have a material impact on our results of operations and cash flows in the first half of Fiscal 2020, are expected to be paid from cash flows from operations, available cash, and to any extent required, availability from our revolving credit facility.

Goodwill and Other Indefinite-lived Intangible Asset Impairment Charges

The continued negative sales performance at our Plus Fashion segment, coupled with a significant decline in the Company's stock price, resulted in a conclusion that a triggering event had occurred in the third quarter of Fiscal 2019, thereby requiring us to test our goodwill and intangible assets for impairment. As a result of the assessment, we recorded non-cash impairment charges to write-down the carrying values of our Lane Bryant and Catherines trade name intangible assets to their fair values by $23.0 million and $2.0 million, respectively. In addition, we recognized goodwill impairment charges of $65.8 million and $49.3 million at the Lane Bryant and Catherines reporting units, respectively, to write-down the carrying values of the reporting units to their fair values. These impairment charges are more fully described in Note 5 to the accompanying consolidated financial statements.

Further, continued declines in the stock price and the fair value of the Company's Term Loan debt resulted in a conclusion that another triggering event occurred in the fourth quarter of Fiscal 2019, thereby requiring us to test our goodwill and intangible assets for impairment. As a result of the assessment, we recorded non-cash impairment losses to write-down the carrying values of our trade name intangible assets to their fair values as follows: $15.0 million of our Ann Taylor trade name, $60.3 million of our LOFT trade name, $14.0 million of our Lane Bryant trade name, $4.0 million of our Catherines trade name and $16.6 million of our Justice trade name. In addition, the Company recognized a goodwill impairment charge of $160.9 million at the Justice reporting unit to write-down the carrying value of the reporting unit to its fair value.

Inventory Update

We experienced increases in inventory levels at our Premium Fashion, Plus Fashion and Kids Fashion segments, reflecting a decline in trends at those segments compared to when inventory was bought. While our inventory balance at the end of Fiscal 2019 only increased by 2% over that of Fiscal 2018, the efforts throughout Fiscal 2019 to reduce the excess inventory levels had a negative impact on our gross margin as discussed below. Those efforts included closer monitoring of brand inventory levels and purchases in relation to underlying sales trends.

Summary and Key Developments

Operating highlights for Fiscal 2019 are as follows: 

Comparable sales increased by 2%, reflecting increases at our Premium Fashion, Kids Fashion and Value Fashion segments offset in part by a decrease at our Plus Fashion segment;
Gross margin rate decreased by 240 basis points to 55.7% primarily as a result of higher markdown requirements needed to address elevated inventory levels, along with competitive pricing pressures;
Operating loss of $681.4 million compared to $88.9 million for the year-ago period, resulting primarily from the impairment of goodwill and other intangible assets and the decline in both net sales and gross margin; and
Loss from continuing operations per diluted share of $3.96 in Fiscal 2019, compared to $0.73 in Fiscal 2018.

Liquidity for Fiscal 2019 primarily reflected:
 
Cash flows provided by operations was $21.1 million, compared to $273.9 million in the year-ago period;
Cash flows provided by investing activities for Fiscal 2019 was $67.7 million, consisting primarily of net proceeds from the sale of maurices of $203.2 million, offset in part by capital expenditures of $136.5 million, compared to net cash used in investing activities of $134.2 million in the year-ago period; and
Cash flows provided by financing activities for Fiscal 2019 was $0.3 million, compared to net cash used in financing activities of $226.2 million in the year-ago period, consisting primarily of term loan repayments of $225.0 million.

33



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


RESULTS OF OPERATIONS
 
Fiscal 2019 Compared to Fiscal 2018
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
August 3,
2019
 
August 4,
2018
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
5,493.4

 
$
5,566.4

 
$
(73.0
)
 
(1.3
)%
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,432.1
)
 
(2,334.1
)
 
(98.0
)
 
(4.2
)%
         Cost of goods sold as % of net sales
 
44.3
 %
 
41.9
 %
 
 

 
 

Gross margin
 
3,061.3

 
3,232.3

 
(171.0
)
 
(5.3
)%
        Gross margin as % of net sales
 
55.7
 %
 
58.1
 %
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(1,120.5
)
 
(1,149.5
)
 
29.0

 
2.5
 %
        Buying, distribution and occupancy expenses as % of net sales
 
20.4
 %
 
20.7
 %
 
 

 
 

    Selling, general and administrative expenses
 
(1,783.7
)
 
(1,766.2
)
 
(17.5
)
 
(1.0
)%
        SG&A expenses as % of net sales
 
32.5
 %
 
31.7
 %
 
 

 
 

    Restructuring and other related charges
 
(127.7
)
 
(76.6
)
 
(51.1
)
 
(66.7
)%
    Impairment of goodwill
 
(276.0
)
 

 
(276.0
)
 
NM

    Impairment of other intangible assets
 
(134.9
)
 

 
(134.9
)
 
NM

    Acquisition and integration expenses
 

 
(5.4
)
 
5.4

 
100.0
 %
    Depreciation and amortization expense
 
(299.9
)
 
(323.5
)
 
23.6

 
7.3
 %
Total other operating expenses
 
(3,742.7
)
 
(3,321.2
)
 
(421.5
)
 
(12.7
)%
Operating loss
 
(681.4
)
 
(88.9
)
 
(592.5
)
 
NM

        Operating loss as % of net sales
 
(12.4
)%
 
(1.6
)%
 
 

 
 

Interest expense
 
(107.0
)
 
(113.0
)
 
6.0

 
5.3
 %
Interest and other income, net
 
3.4

 
1.6

 
1.8

 
NM

Loss on extinguishment of debt
 

 
(5.0
)
 
5.0

 
100.0
 %
Loss from continuing operations before benefit for income taxes and loss from equity method investment
 
(785.0
)
 
(205.3
)
 
(579.7
)
 
NM

Benefit for income taxes from continuing operations
 
14.5

 
62.3

 
(47.8
)
 
(76.7
)%
        Effective tax rate (a)
 
1.8
 %
 
30.3
 %
 
 

 
 

Loss from equity method investment
 
(11.8
)
 

 
(11.8
)
 
NM

Loss from continuing operations
 
(782.3
)
 
(143.0
)
 
(639.3
)
 
NM

Discontinued operations
 
 
 
 
 
 
 
 
Income from discontinued operations, net of taxes (b)
 
76.4

 
103.3

 
(26.9
)
 
(26.0
)%
Gain on disposal of discontinued operations, net of taxes (c)
 
44.5

 

 
44.5

 
NM

Net loss
 
$
(661.4
)
 
$
(39.7
)
 
$
(621.7
)
 
NM

 
 
 
 
 
 
 
 
 
Net (loss) income per common share - basic:
 
 

 
 

 
 

 
 

Continuing operations
 
$
(3.96
)
 
$
(0.73
)
 
$
(3.23
)
 
NM

Discontinued operations
 
0.61

 
0.53

 
0.08

 
NM

Total net loss per basic common share
 
$
(3.35
)
 
$
(0.20
)
 
$
(3.15
)
 
NM

 
 
 
 
 
 
 
 
 
Net (loss) income per common share - diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(3.96
)
 
$
(0.73
)
 
$
(3.23
)
 
NM

Discontinued operations
 
0.61

 
0.53

 
0.08

 
NM

Total net loss per diluted common share
 
$
(3.35
)
 
$
(0.20
)
 
$
(3.15
)
 
NM


34



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


_________

(a) Effective tax rate is calculated by dividing the Benefit for income taxes from continuing operations by the Loss from continuing operations before the benefit for income taxes.
(b) Income from discontinued operations is presented net of income tax expense of $21.8 million and $20.5 million for the fiscal years ended August 3, 2019 and August 4, 2018, respectively.
(c) Gain on sale of discontinued operations is presented net of income tax benefit of $4.0 million for the fiscal year ended August 3, 2019.
(NM) Not meaningful.

Net sales. Total net sales decreased by $73.0 million, or 1.3%, to $5,493.4 million. The Net sales decrease was attributable to the additional week for all four segments in Fiscal 2018, which contributed an incremental $94.8 million, and a decrease in non-comparable sales of $109.5 million, or 73.2%, to $40.0 million, reflecting a lower store count resulting from the Company's fleet optimization program. These items were partly offset by a 2% increase in comparable sales, as well as an increase in other revenues of $33.6 million, or 17.5%, to $225.3 million, primarily reflecting higher wholesale and shipping revenues.

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

 
 
August 3,
2019
 
August 4,
2018
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

Premium Fashion
 
$
2,415.1

 
$
2,317.8

 
$
97.3

 
4.2
 %
Plus Fashion
 
1,240.5

 
1,340.0

 
(99.5
)
 
(7.4
)%
Kids Fashion
 
1,079.1

 
1,100.0

 
(20.9
)
 
(1.9
)%
Value Fashion
 
758.7

 
808.6

 
(49.9
)
 
(6.2
)%
Total net sales
 
$
5,493.4

 
$
5,566.4

 
$
(73.0
)
 
(1.3
)%
 
 
 
 
 
 
 
 
 
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 $94.8 million due to the inclusion of the additional week in Fiscal 2018 are excluded from the calculation of comparable sales.
(c) 
During the first quarter of Fiscal 2019 and the first nine months of Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the Justice pricing litigation continued to be redeemed through October 2018. Comparable sales related to these transactions includes the transaction value in excess of the voucher value.

Premium Fashion net sales performance in Fiscal 2019 primarily reflected:

a 5% comparable sales increase of $36.6 million at Ann Taylor, and a 6% comparable sales increase of $92.9 million at LOFT;
a $15.7 million decline in non-comparable sales, comprised of:
a $13.2 million decline from 11 net Ann Taylor store closures, and
a $2.5 million decline from 3 net LOFT store closures;
a $24.6 million decline due to the inclusion of the additional week in the year-ago period; and
an $8.1 million increase in other revenues primarily reflecting higher shipping revenues.


35



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


Plus Fashion net sales performance in Fiscal 2019 primarily reflected:
 
a 4% comparable sales decline of $37.3 million at Lane Bryant and a 6% comparable sales decline of $14.5 million at Catherines;
a $28.1 million decline in non-comparable sales, primarily comprised of:
a $20.2 million decline from 28 Lane Bryant store closures, and
a $7.9 million decline from 28 Catherines store closures;
a $20.7 million decline due to the inclusion of the additional week in the year-ago period; and
a $1.1 million increase in other revenues.

Kids Fashion net sales performance in Fiscal 2019 primarily reflected:
 
a 1% comparable sales increase of $12.5 million;
a $22.8 million decline in non-comparable sales primarily due to 21 Justice store closures;
a $35.1 million decline due to the inclusion of the additional week in the year-ago period; and
a $24.5 million increase in other revenues primarily due to higher wholesale revenue.

Value Fashion net sales performance in Fiscal 2019 primarily reflected:
 
a 1% comparable sales increase of $7.5 million;
a $42.9 million decline in non-comparable sales primarily due to 114 store closures;
a $14.4 million decline due to the inclusion of the additional week in the year-ago period; and
a $0.1 million decline in other revenues.
 
Gross margin. Gross margin, in terms of dollars, was primarily lower as a result of a decline in rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales. Gross margin rate is dependent upon a variety of factors, including brand sales mix, product mix, channel mix, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.

Gross margin rate decreased by 240 basis points to 55.7% in Fiscal 2019 resulting from lower margin at our Kids Fashion, Plus Fashion, and Premium Fashion segments, which were partially offset by increased margins at our Value Fashion segment. On a consolidated basis, the gross margin rate reduction reflects higher shipping costs of approximately $30 million across the segments as a result of an increased mix of direct channel sales, and increased promotional selling and markdown requirements. Gross margin rate highlights on a segment basis are as follows:

Premium Fashion gross margin rate performance declined by approximately 200 basis points, primarily reflecting increased promotional selling to address elevated inventory levels along with higher shipping costs related to increased direct channel penetration.
Plus Fashion gross margin rate performance declined by approximately 190 basis points, reflecting declines of 160 basis points and 280 basis points at Lane Bryant and Catherines, respectively, primarily reflecting higher levels of promotional selling and markdown requirements to clear under-performing inventory receipts, and higher shipping costs related to increased direct channel penetration.
Kids Fashion gross margin rate performance declined approximately 580 basis points as a result of significant promotional selling and markdown requirements to address elevated inventory levels and clear under-performing assortment categories, higher shipping costs related to increased direct channel penetration and a higher mix of lower margin wholesale revenue.
Value Fashion gross margin rate performance increased approximately 50 basis points primarily reflecting lower levels of promotional selling and markdowns versus the year-ago period. Markdowns in the year-ago period reflected significant charges for certain slow-turning product categories.

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.
 

36



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


BD&O expenses decreased by $29.0 million, or 2.5%, to $1,120.5 million in Fiscal 2019. The reduction in expenses was driven by lower occupancy expenses resulting primarily from our fleet optimization program, which provided approximately $25 million of cost reductions during Fiscal 2019, and was partially offset by higher variable distribution costs related to the increased penetration of our direct channel business. BD&O expenses as a percentage of net sales decreased by 30 basis points to 20.4% in Fiscal 2019.

Selling, general and administrative (“SG&A”) expenses consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
 
SG&A expenses increased by $17.5 million, or 1.0%, to $1,783.7 million in Fiscal 2019. The increase in SG&A expenses was primarily due to inflationary increases, higher marketing expenses, higher write-offs of store related fixed assets at the Plus Fashion segment, and the write-off of corporate-held fixed assets. These increases were offset in part by approximately $55 million in cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings, and the impact of the additional week recorded during Fiscal 2018 for all of the segments. SG&A expenses as a percentage of net sales increased by 80 basis points to 32.5% in Fiscal 2019.

Depreciation and amortization expense decreased by $23.6 million, or 7.3%, to $299.9 million in Fiscal 2019. The decrease was across all of our segments and was driven by a lower level of store-related fixed-assets, offset in part by incremental depreciation from capital investments.

Operating loss. Operating loss was $681.4 million for Fiscal 2019 compared to $88.9 million in Fiscal 2018 and is discussed on a segment basis below.

Operating results for our four operating segments are presented below.
 
 
Fiscal Years Ended
 
 
 
 
 
 
August 3,
2019
 
August 4,
2018
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating loss:
 
 

 
 

 
 

 
 

Premium Fashion
 
$
72.7

 
$
102.3

 
$
(29.6
)
 
(28.9
)%
Plus Fashion
 
(71.4
)
 
0.6

 
(72.0
)
 
NM

Kids Fashion
 
(42.4
)
 
18.7

 
(61.1
)
 
NM

Value Fashion
 
(101.7
)
 
(128.5
)
 
26.8

 
(20.9
)%
Unallocated restructuring and other related charges
 
(127.7
)
 
(76.6
)
 
(51.1
)
 
(66.7
)%
Unallocated impairment of goodwill
 
(276.0
)
 

 
(276.0
)
 
NM

Unallocated impairment of other intangible assets
 
(134.9
)
 

 
(134.9
)
 
NM

Unallocated acquisition and integration expenses
 

 
(5.4
)
 
5.4

 
100.0
 %
Total operating loss
 
$
(681.4
)
 
$
(88.9
)
 
$
(592.5
)
 
NM

_______
(NM) Not meaningful.
Premium Fashion operating income decreased by $29.6 million primarily due to a decline in gross margin rate and higher variable distribution costs, employee-related costs and marketing expenses, partially offset by an increase in comparable sales and lower store expenses associated with our fleet optimization program.
Plus Fashion operating results decreased by $72.0 million primarily due to a decline in comparable sales and gross margin rate, and higher write-downs of store-related fixed assets, offset in part by lower occupancy and store expenses associated with our fleet optimization program.
Kids Fashion operating results decreased by $61.1 million primarily due to a significantly lower gross margin rate, partially offset by an increase in comparable sales and lower operating expenses. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program.


37



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


Value Fashion operating results improved by $26.8 million primarily due to an increase in comparable sales and in gross margin rate and a decrease in operating expenses, as discussed above. Operating expense reductions were primarily driven by lower occupancy and store expenses associated with our fleet optimization program.
Unallocated restructuring and other related charges reflects costs incurred under the transformational programs discussed earlier. Expenses of $127.7 million for Fiscal 2019 primarily included $38.6 million for professional fees, reflecting costs incurred in connection with the identification and implementation of transformation initiatives under the Change for Growth program and the Dressbarn wind down, $43.0 million related to severance and other related charges, reflecting severance associated with the cost reduction actions taken in the fourth quarter of Fiscal 2019 as well as severance related to the Dressbarn wind down, and $45.4 million of non-cash asset impairments, reflecting the write-down of the Dressbarn corporate headquarters as a result of the wind down and the write-down of a corporate-owned office building in Duluth, MN to fair market value as a result of the sale of maurices. The $76.6 million of unallocated restructuring and other related charges in Fiscal 2018 reflect $59.2 million for professional fees incurred in connection with the identification and implementation of transformation initiatives, $5.7 million of severance and other related expenses and asset impairments of $11.7 million reflecting decisions within the fleet optimization program to close under-performing stores as well as the write-down of a building.

Unallocated impairment of goodwill reflects the Fiscal 2019 write-down of the carrying values of the Lane Bryant, Catherines and Justice reporting units to their fair values as follows: $65.8 million at Lane Bryant, $49.3 million at Catherines, and $160.9 million at Justice. There was no impairment of goodwill recorded in Fiscal 2018.

Unallocated impairment of other intangible assets reflects the Fiscal 2019 write-down of the Company's trade name intangible assets to their fair values as follows: $15.0 million at Ann Taylor, $60.3 million at LOFT, $37.0 million of our Lane Bryant trade name, $6.0 million of our Catherines trade name and $16.6 million of our Justice trade name. There was no impairment of other intangible assets recorded in Fiscal 2018.

Unallocated acquisition and integration expenses of $5.4 million for Fiscal 2018 primarily reflected costs associated with the post-acquisition integration of ANN's distribution operations, including the closure of the former ANN distribution facility in Louisville, Kentucky, as well as the gain on the related sale of that facility, which occurred in Fiscal 2018. There were no such expenses during Fiscal 2019.
Interest expense decreased by $6.0 million to $107.0 million for Fiscal 2019, primarily caused by a lower average outstanding term loan balance as a result of repayments in the third and fourth quarters of Fiscal 2018, mostly offset by a higher interest rate on our variable rate term loan.

Loss on extinguishment of debt. In Fiscal 2018, the Company made repayments of $180.0 million which were applied towards future scheduled quarterly payments of the outstanding principal balance of the term loan debt, resulting in a $5.0 million pre-tax loss reflecting the acceleration of deferred financing fees. There was no such extinguishment in Fiscal 2019.

Benefit for income taxes from continuing operations represents federal, foreign, state and local income taxes. We recorded a benefit of $14.5 million in Fiscal 2019 on a pre-tax loss of $785.0 million, for an effective tax rate of 1.8%, which was lower than the statutory tax rate primarily due to non-deductible impairments of goodwill, a partial federal valuation allowance, and GILTI. In Fiscal 2018, we recorded a benefit of $62.3 million on a pre-tax loss of $205.3 million for a 30.3% effective tax rate, which reflects the provisional impact of recording the tax effects associated with the 2017 Act. This was offset by the impact of recording a valuation allowance on certain state deferred tax assets. Refer to Note 15 to the accompanying consolidated financial statements.
 
Loss from continuing operations increased by $639.3 million to $782.3 million in Fiscal 2019, primarily due to the impairment of goodwill and intangible assets, as well as lower operating results, both discussed above.

Loss from continuing operations per diluted common share was $3.96 per share in Fiscal 2019 compared to $0.73 per share in the year-ago period, primarily a result of an increase in the loss from continuing operations, as discussed above.


38



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


Fiscal 2018 Compared to Fiscal 2017
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
August 4,
2018
 
July 29,
2017
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
5,566.4

 
$
5,617.3

 
$
(50.9
)
 
(0.9
)%
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,334.1
)
 
(2,333.4
)
 
(0.7
)
 
 %
         Cost of goods sold as % of net sales
 
41.9
 %
 
41.5
 %
 
 

 
 

Gross margin
 
3,232.3

 
3,283.9

 
(51.6
)
 
(1.6
)%
        Gross margin as % of net sales
 
58.1
 %
 
58.5
 %
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(1,149.5
)
 
(1,138.5
)
 
(11.0
)
 
(1.0
)%
        Buying, distribution and occupancy expenses as % of net sales
 
20.7
 %
 
20.3
 %
 
 

 
 

    Selling, general and administrative expenses
 
(1,766.2
)
 
(1,794.2
)
 
28.0

 
1.6
 %
        SG&A expenses as % of net sales
 
31.7
 %
 
31.9
 %
 
 

 
 

    Restructuring and other related charges
 
(76.6
)
 
(78.1
)
 
1.5

 
1.9
 %
    Impairment of goodwill
 

 
(489.1
)
 
489.1

 
100.0
 %
    Impairment of other intangible assets
 

 
(728.1
)
 
728.1

 
100.0
 %
    Acquisition and integration expenses
 
(5.4
)
 
(39.4
)
 
34.0

 
86.3
 %
    Depreciation and amortization expense
 
(323.5
)
 
(350.8
)
 
27.3

 
7.8
 %
Total other operating expenses
 
(3,321.2
)
 
(4,618.2
)
 
1,297.0

 
28.1
 %
Operating loss
 
(88.9
)
 
(1,334.3
)
 
1,245.4

 
93.3
 %
        Operating loss as % of net sales
 
(1.6
)%
 
(23.8
)%
 
 

 
 
Interest expense
 
(113.0
)
 
(102.2
)
 
(10.8
)
 
NM

Interest and other income, net
 
1.6

 
1.0

 
0.6

 
NM

Loss on extinguishment of debt
 
(5.0
)
 

 
(5.0
)
 
NM

Loss from continuing operations before benefit for income taxes
 
(205.3
)
 
(1,435.5
)
 
1,230.2

 
85.7
 %
Benefit for income taxes from continuing operations
 
62.3

 
367.5

 
(305.2
)
 
83.0
 %
        Effective tax rate (a)
 
30.3
 %
 
25.6
 %
 
 

 
 

Loss from continuing operations
 
(143.0
)
 
(1,068.0
)
 
925.0

 
86.6
 %
Income (loss) from discontinued operations, net of tax (b)
 
103.3

 
0.7

 
102.6

 
NM

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

 
96.3
 %
 
 
 
 
 
 
 
 
 
Net (loss) income per common share - basic:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
(0.73
)
 
$
(5.48
)
 
$
4.75

 
86.7
 %
        Discontinued operations
 
0.53

 

 
0.53

 
NM

Total net loss per basic common share
 
$
(0.20
)
 
$
(5.48
)
 
$
5.28

 
96.4
 %
 
 
 
 
 
 
 
 
 
Net (loss) income per common share - diluted:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
(0.73
)
 
$
(5.48
)
 
$
4.75

 
86.7
 %
        Discontinued operations
 
0.53

 

 
0.53

 
NM

Total net loss per diluted common share
 
$
(0.20
)
 
$
(5.48
)
 
$
5.28

 
96.4
 %
_________

(a) Effective tax rate is calculated by dividing the Benefit for income taxes from continuing operations by the Loss from continuing operations before the benefit for income taxes.
(b) Income from discontinued operations is presented net of income tax expense of $20.5 million and $20.6 million for the fiscal years ended August 4, 2018 and July 29, 2017, respectively.
(NM) Not meaningful.


39



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


Net sales. Net sales decreased by $50.9 million, or 0.9%, to $5,566.4 million in Fiscal 2018. The decline in net sales primarily reflected a 2% decline in comparable sales that mainly resulted from an 11.9% decline in net sales at our Value Fashion segment, as well as product assortment challenges during the first half of Fiscal 2018 experienced by the Premium Fashion segment, which returned to positive comparable sales performance in the second half of Fiscal 2018. Non-comparable sales declined by $70.5 million, or 47.0%, to $79.6 million, as discussed on a segment basis below. Other revenues increased by $6.3 million, or 3.4%, to $191.7 million. Net sales for all four segments also included incremental revenues of $94.8 million due to the inclusion of the additional week in Fiscal 2018 as previously discussed.

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

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

Net sales:
 
 

 
 

 
 

 
 

     Premium Fashion
 
$
2,317.8

 
$
2,322.6

 
$
(4.8
)
 
(0.2
)%
     Plus Fashion
 
1,340.0

 
1,353.9

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

 
1,023.1

 
76.9

 
7.5
 %
     Value Fashion
 
808.6

 
917.7

 
(109.1
)
 
(11.9
)%
Total net sales
 
$
5,566.4

 
$
5,617.3

 
$
(50.9
)
 
(0.9
)%
 
 
 
 
 
 
 
 
 
Comparable sales (a)(b)(c)
 
 
 
 

 
 

 
(2
)%
_______
(a) Comparable sales represent combined store comparable sales and direct channel sales. Store comparable sales generally refers to the growth of sales in stores only open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Direct channel sales refer to growth of sales from our direct channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, we report a single, consolidated comparable sales metric, inclusive of store and direct channels.
(b) Incremental revenues of $94.8 million due to the inclusion of the additional week in Fiscal 2018 are excluded from the calculation of comparable sales.
(b) During Fiscal 2018, vouchers distributed in the first quarter of Fiscal 2018 in connection with the Justice pricing litigation began to be redeemed. Comparable sales related to these transactions includes the transaction value in excess of the voucher value.

Premium 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 additional week period; and
a $10.3 million increase in other revenues primarily related to higher gift card breakage and higher credit revenue.

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 additional week period; and
a $0.9 million increase in other revenues.




40



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;
a $21.7 million decline in non-comparable sales primarily due to 53 net store closures;
a $35.1 million increase due to the inclusion of the additional week period; and
a $3.9 million decline in other revenues primarily due to lower wholesale revenue.
 
Value Fashion net sales performance in Fiscal 2018 primarily reflected:
 
a 10% comparable sales decline of $86.8 million;
a $35.7 million decline in non-comparable sales due to 49 store closures;
a $14.4 million increase due to the inclusion of the additional week period; and
a $1.0 million decline in other revenues.

Gross margin. 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 58.1% in Fiscal 2018. Improved performance at our Plus Fashion and Kid 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 $40 million across the segments as a result of an increased mix of direct channel sales and higher air freight costs, offset by the realization of approximately $35 million in synergies and cost reduction 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.
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.
Value Fashion gross margin rate performance declined approximately 280 basis points, resulting from higher markdown requirements to maintain appropriate inventory levels, a higher level of promotional selling due to lower than expected customer demand, and higher shipping costs related to the increased direct channel penetration.

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 $11.0 million, or 1.0%, to $1,149.5 million in Fiscal 2018. 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 reductions during Fiscal 2018. BD&O expenses as a percentage of net sales increased 40 basis points to 20.7% in Fiscal 2018, 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.
 

41



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


SG&A expenses decreased by $28.0 million, or 1.6%, to $1,766.2 million in Fiscal 2018. The decrease in SG&A expenses was primarily due to $110 million in synergies and cost reduction initiatives, mainly reflecting headcount and non-merchandise procurement savings. Also contributing to the decrease were lower store expenses, resulting from the fleet optimization program, and lower performance-based compensation. These items were offset in part by inflationary increases, higher write-downs of store related fixed assets, primarily at the Value Fashion segment, and the impact of the additional week in Fiscal 2018 recorded for all segments. SG&A expenses as a percentage of net sales decreased by 20 basis points to 31.7% in Fiscal 2018, and reflects the impact of the redu