Other Intangible Assets

Goodwill and Other Indefinite-lived Intangible Assets Impairment Assessment

Fiscal 2020 Interim Impairment Assessment

The second quarter of Fiscal 2020 marked the continuation of the challenging market environment in which the Company competes. While the Company met its overall expectations for the second quarter, lower than expected comparable sales in the second quarter at the Justice brand, and lower than expected margins at our Ann Taylor brand, along with the expectation that such trends may continue into the second half of Fiscal 2020, led the Company to reduce its level of forecasted earnings for Fiscal 2020 and future periods. Since these brands had little or no excess of fair value over their respective book value at the beginning of Fiscal 2020, the Company concluded that these factors represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the second quarter of Fiscal 2020 (the "Interim Test").

The Company performed its Interim Test of goodwill and indefinite-lived intangible assets using a quantitative approach as of January 4, 2020, which was the last day in the second month of the second fiscal quarter. The Interim Test was determined with the assistance of an independent valuation firm using two valuation approaches, including the income approach (discounted cash flow method ("DCF")) and market approach (guideline public company method). The Company believes that the income approach (Level 3 measurement) is the most reliable indication of value as it captures forecasted revenues and earnings for the reporting units in the projection period that the market approach may not directly incorporate. Under the market approach, the Company estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization, and used the market approach as a comparison of respective fair values. We generally applied a 75% weighting to the income approach and a 25% weighting to the market approach. However, in certain cases where low profit margins made the market approach impracticable, we applied a full weighting to the income approach. Finally, the Company’s publicly traded market capitalization was reconciled to the sum of the fair value of the reporting units.

The projections used in the Interim Test reflect revised assumptions across certain key areas versus prior plans as a result of the recent operating trends discussed above. Based on the results of the impairment assessment, the fair value of our LOFT reporting unit exceeded its carrying value by approximately 14%.

Changes in key assumptions and the resulting reduction in projected future cash flows included in the Interim Test resulted in a decrease in the fair values of our Ann Taylor and Justice reporting units such that their fair values were less than their carrying values. As a result, the Company recognized the following goodwill impairment charges: a loss of $54.9 million at the Ann Taylor reporting unit and $8.5 million at the Justice reporting unit to write down the carrying values of the reporting units to their fair values. In addition, the Company recognized impairment losses to write down the carrying values of its other intangible assets to their fair values as follows: $10.0 million of our Ann Taylor trade name, $35.0 million of our Justice trade name, $1.0 million of our Catherines trade name and $0.9 million of our Justice franchise rights. The fair value of the trade names was determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trade name (Level 3 measurement). These impairment losses have been disclosed separately on the face of the accompanying condensed consolidated statements of operations. The total goodwill impairment charges of $63.4 million were treated as non-deductible for income tax purposes.

The following details the changes in goodwill for each reportable segment:



	Premium Fashion ^(a)			Kids Fashion ^(b)			Total
	(millions)
Balance at August 3, 2019	$	305.0		$	8.5		$	313.5
Impairment losses	(54.9		)	(8.5		)	(63.4		)
Balance at February 1, 2019	$	250.1		$	—		$	250.1

^(a)Net of accumulated impairment losses of $483.8 million and $428.9 million for the Premium Fashion segment as of February 1, 2020 and August 3, 2019, respectively.

^(b)Net of accumulated impairment losses of $169.4 million and $160.9 million for the Kids Fashion segment as of February 1, 2020 and August 3, 2019, respectively.

Other Intangible Assets

As more fully described in Note 3, favorable leases have been reclassified from Other intangible assets, net to Operating lease right-of-use assets within the condensed consolidated balance sheet due to the recent adoption of ASC 842. Other intangible assets, reflecting the change, as well as the impairments discussed above, now consist of the following:



	February 1, 2020							August 3, 2019
Description	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Intangible assets not subject to amortization:	(millions)
Brands and trade names^(a)	$	206.0	$	—		$	206.0	$	252.0	$	—		$	252.0
Franchise rights ^(b)	10.0		—			10.0		10.9		—			10.9
Total intangible assets not subject to amortization	216.0		—			216.0		262.9		—			262.9
Intangible assets subject to amortization:
Proprietary technology	4.8		(4.8		)	—		4.8		(4.8		)	—
Customer relationships	52.0		(49.4		)	2.6		52.0		(46.7		)	5.3
Favorable leases	—		—			—		38.2		(29.8		)	8.4
Trade names	5.3		(5.3		)	—		5.3		(5.3		)	—
Total intangible assets subject to amortization	62.1		(59.5		)	2.6		100.3		(86.6		)	13.7
Total intangible assets	$	278.1	$	(59.5	)	$	218.6	$	363.2	$	(86.6	)	$	276.6

^(a)Net of accumulated trade name impairment losses are as follows: $235.0 million of our Ann Taylor trade name, $416.6 million of our LOFT trade name, $243.5 million of our Lane Bryant trade name, $7.0 million of our Catherines trade name, and $51.6 million of our Justice trade name.

^(b) Net of accumulated franchise right impairment of $0.9 million at our Justice brand.