10-Q 1 asna10q-q2fy20.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended February 1, 2020
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 0-11736
 
ASCENA RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
30-0641353
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
933 MacArthur Boulevard, Mahwah, New Jersey
 
07430
(Address of principal executive offices)
 
(Zip Code)
 
(551) 777-6700
(Registrant’s telephone number, including area code)

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
 
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, a 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 ý
The Registrant had 9,986,423 shares of common stock outstanding as of March 5, 2020.







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






ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS 
 
February 1,
2020
 
August 3,
2019
 
(millions, except share data in thousands and per share data)
(unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
373.7

 
$
323.8

Inventories
488.2

 
490.7

Prepaid expenses and other current assets
181.9

 
242.3

Current assets related to discontinued operations
9.5

 
98.2

Total current assets
1,053.3

 
1,155.0

Property and equipment, net
743.9

 
835.5

Operating lease right-of-use assets
680.2

 

Goodwill
250.1

 
313.5

Other intangible assets, net
218.6

 
276.6

Equity method investment
65.4

 
42.1

Other assets
58.1

 
65.6

Non-current assets related to discontinued operations

 
11.5

Total assets
$
3,069.6

 
$
2,699.8

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
305.0

 
$
316.1

Accrued expenses and other current liabilities
251.4

 
273.3

Deferred income
129.2

 
114.1

Current portion of lease liabilities
161.8

 

Current portion of long-term debt
21.5

 

Current liabilities related to discontinued operations
49.9

 
94.7

Total current liabilities
918.8

 
798.2

Long-term debt
1,244.3

 
1,338.6

Lease-related liabilities

 
204.6

Deferred income taxes
4.5

 
0.5

Long-term lease liabilities
679.9

 

Other non-current liabilities
139.7

 
171.4

Non-current liabilities related to discontinued operations
5.8

 
35.5

Total liabilities
2,993.0

 
2,548.8

 
 
 
 
Commitments and contingencies (Note 18)


 


 
 
 
 
Equity:
 

 
 

Common stock, par value $0.01 per share; 9,986 and 9,925 shares issued and outstanding as of February 1, 2020 and August 3, 2019, respectively
0.1

 
0.1

Additional paid-in capital
1,105.0

 
1,102.5

Accumulated deficit
(1,013.1
)
 
(935.9
)
Accumulated other comprehensive loss
(15.4
)
 
(15.7
)
Total equity
76.6

 
151.0

Total liabilities and equity
$
3,069.6

 
$
2,699.8

See accompanying notes.

3



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions, except share data in thousands and per share data)
(unaudited)
Net sales
$
1,216.9

 
$
1,271.4

 
$
2,336.5

 
$
2,418.8

Cost of goods sold
(581.7
)
 
(611.6
)
 
(1,037.2
)
 
(1,067.0
)
Gross margin
635.2

 
659.8

 
1,299.3

 
1,351.8

 
 
 
 
 
 
 
 
Other operating expenses:
 
 
 
 
 

 
 

Buying, distribution and occupancy expenses
(219.8
)
 
(245.0
)
 
(444.4
)
 
(480.2
)
Selling, general and administrative expenses
(381.5
)
 
(393.8
)
 
(735.5
)
 
(770.8
)
Restructuring and other related charges
0.5

 
(13.5
)
 
(3.3
)
 
(21.4
)
Impairment of goodwill
(63.4
)
 

 
(63.4
)
 

Impairment of other intangible assets
(46.9
)
 

 
(46.9
)
 

Depreciation and amortization expense
(64.4
)
 
(71.4
)
 
(131.6
)
 
(142.0
)
Total other operating expenses
(775.5
)
 
(723.7
)
 
(1,425.1
)
 
(1,414.4
)
Operating loss
(140.3
)
 
(63.9
)
 
(125.8
)
 
(62.6
)
Interest expense
(25.3
)
 
(26.9
)
 
(51.7
)
 
(52.9
)
Interest income and other income, net
1.8

 
1.2

 
3.3

 
1.8

Gain on extinguishment of debt
28.5

 

 
28.5

 

Loss from continuing operations before (provision) benefit for income taxes and income from equity method investment
(135.3
)
 
(89.6
)
 
(145.7
)
 
(113.7
)
(Provision) benefit for income taxes from continuing operations
(0.9
)
 
8.6

 
(3.5
)
 
9.4

Income from equity method investment
4.3

 

 
23.3

 

Loss from continuing operations
(131.9
)
 
(81.0
)
 
(125.9
)
 
(104.3
)
Income from discontinued operations, net of taxes (a)
34.5

 
9.5

 
60.2

 
38.7

Net loss
$
(97.4
)
 
$
(71.5
)
 
$
(65.7
)
 
$
(65.6
)
 
 
 
 
 
 
 
 
Net (loss) income per common share - basic:
 
 
 
 
 

 
 

Continuing operations
$
(13.22
)
 
$
(8.20
)
 
$
(12.64
)
 
$
(10.58
)
Discontinued operations
3.46

 
0.96

 
6.04

 
3.92

Total net loss per basic common share
$
(9.76
)
 
$
(7.24
)
 
$
(6.60
)
 
$
(6.66
)
 
 
 
 
 
 
 
 
Net (loss) income per common share - diluted:
 
 
 
 
 

 
 

Continuing operations
$
(13.22
)
 
$
(8.20
)
 
$
(12.64
)
 
$
(10.58
)
Discontinued operations
3.46

 
0.96

 
6.04

 
3.92

Total net loss per diluted common share
$
(9.76
)
 
$
(7.24
)
 
$
(6.60
)
 
$
(6.66
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
9,975

 
9,874

 
9,957

 
9,856

Diluted
9,975

 
9,874

 
9,957

 
9,856

 
__________

(a) Income from discontinued operations is presented net of income tax expense of $2.6 million and $11.2 million for the three and six months ended February 2, 2019, respectively.


See accompanying notes.

4



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


 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions)
(unaudited)
Net loss
$
(97.4
)
 
$
(71.5
)
 
$
(65.7
)
 
$
(65.6
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
0.4

 

 
0.6

 
(0.4
)
Reclassification of interest rate hedge deferred loss into earnings
0.6

 

 
0.9

 

Deferred loss related to interest rate hedge
(0.9
)
 

 
(1.2
)
 

Total other comprehensive income (loss), net of tax
0.1

 

 
0.3

 
(0.4
)
Total comprehensive loss
$
(97.3
)
 
$
(71.5
)
 
$
(65.4
)
 
$
(66.0
)

 
 





































See accompanying notes.

5



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
(millions)
(unaudited)
Cash flows from operating activities:
 
Net loss
$
(65.7
)
 
$
(65.6
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization expense
142.5

 
165.3

Deferred income tax benefit
10.2

 
(4.8
)
Deferred rent and other costs recognized under prior lease accounting standard

 
(21.4
)
Stock-based compensation expense
2.4

 
8.3

Impairment of goodwill
63.4

 

Impairment of other intangible assets
46.9

 

Impairment of tangible assets
1.8

 
4.5

Income from equity method investment
(23.3
)
 

Non-cash interest expense
5.1

 
4.9

Gain on extinguishment of debt
(28.5
)
 

Gain on sale of fixed assets

 
(0.1
)
Gain on sale of intangible assets
(5.0
)
 

Other non-cash income, net
(8.5
)
 
(7.7
)
Changes in operating assets and liabilities:
 

 
 

Inventories
59.5

 
(55.4
)
Accounts payable, accrued liabilities and income tax liabilities
(84.8
)
 
(62.9
)
Deferred income
15.9

 
35.9

Lease-related liabilities

 
5.3

Operating lease right-of-use assets and lease liabilities
(34.3
)
 

Other balance sheet changes, net
38.4

 
38.1

Cash flows provided by operating activities
136.0

 
44.4

Cash flows from investing activities:
 

 
 

Capital expenditures
(46.0
)
 
(68.9
)
Proceeds from the sale of assets

 
0.4

Proceeds from the sale of intangible assets
5.0

 

Cash flows used in investing activities
(41.0
)
 
(68.5
)
Cash flows from financing activities:
 

 
 

Redemptions of term loan debt
(49.4
)
 

Tax payments related to share-based awards

 
(0.6
)
Proceeds from stock options exercised and employee stock purchases
0.1

 
0.4

Cash flows used in financing activities
(49.3
)
 
(0.2
)
Net increase (decrease) in cash, cash equivalents and restricted cash
45.7

 
(24.3
)
Cash, cash equivalents and restricted cash at beginning of period
329.2

 
240.1

Cash, cash equivalents and restricted cash at end of period
$
374.9

 
$
215.8








See accompanying notes.

6



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Equity
Fiscal 2020
 
Shares
 
Amount
 
 
 
 
 
 
(millions, except share data in thousands)
 
 
(unaudited)
Balance, August 3, 2019
 
9,925

 
$
0.1

 
$
1,102.5

 
$
(935.9
)
 
$
(15.7
)
 
$
151.0

Net income
 

 

 

 
31.7

 

 
31.7

Total other comprehensive income
 

 

 

 

 
0.2

 
0.2

Shares issued and equity grants made pursuant to stock-based compensation plans
 
47

 

 
1.6

 

 

 
1.6

Cumulative effect of change in accounting upon adoption of ASC Topic 842
 

 

 

 
(11.5
)
 

 
(11.5
)
Balance, November 2, 2019
 
9,972

 
0.1

 
1,104.1

 
(915.7
)
 
(15.5
)
 
173.0

Net loss
 

 

 

 
(97.4
)
 

 
(97.4
)
Total other comprehensive income
 

 

 

 

 
0.1

 
0.1

Shares issued and equity grants made pursuant to stock-based compensation plans
 
14

 

 
0.9

 

 

 
0.9

Balance, February 1, 2020
 
9,986

 
$
0.1

 
$
1,105.0

 
$
(1,013.1
)
 
$
(15.4
)
 
$
76.6



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Equity
Fiscal 2019
 
Shares
 
Amount
 
 
 
 
 
 
(millions, except share data in thousands)
 
 
(unaudited)
Balance, August 4, 2018
 
9,817

 
$
0.1

 
$
1,090.1

 
$
(278.8
)
 
$
(12.9
)
 
$
798.5

Net income
 

 

 

 
5.9

 

 
5.9

Total other comprehensive loss
 

 

 

 

 
(0.4
)
 
(0.4
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
54

 

 
4.8

 
(0.5
)
 

 
4.3

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

 

 

 
4.9

 

 
4.9

Balance, November 3, 2018
 
9,871

 
0.1

 
1,094.9

 
(268.5
)
 
(13.3
)
 
813.2

Net loss
 

 

 

 
(71.5
)
 

 
(71.5
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
7

 

 
3.8

 
(0.1
)
 

 
3.7

Balance, February 2, 2019
 
9,878

 
$
0.1

 
$
1,098.7

 
$
(340.1
)
 
$
(13.3
)
 
$
745.4














See accompanying notes.

7



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business
 
Ascena Retail Group, Inc., a Delaware corporation, is a national specialty retailer of apparel for women and tween girls. The Company’s continuing operations consist of its direct channel operations and approximately 2,800 stores throughout the United States, Canada and Puerto Rico. The Company had annual revenues from continuing operations for the fiscal year ended August 3, 2019 of approximately $4.7 billion. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.

The Company operates its business in three reportable segments: Premium Fashion, Plus Fashion and Kids Fashion. All of our segments sell fashion merchandise to the women’s and girls’ apparel market across a wide range of ages, sizes and demographics. Our segments consist of specialty retail, outlet and direct channel as well as licensed franchises in international territories at our Kids Fashion segment. Our Premium Fashion segment consists of our Ann Taylor and LOFT brands; our Plus Fashion segment consists of our Lane Bryant and Catherines brands and our Kids Fashion segment consists of our Justice brand. As further discussed in Note 2, during the second quarter of the fiscal year ending August 1, 2020 (“Fiscal 2020”), the previously-announced wind down of Dressbarn was completed and in Fiscal 2019, the Company completed the sale of its maurices brand, both of which were formerly included in the Value Fashion segment.

For a more detailed description of each brand’s products and markets in which they serve, see Part I, Item 1 “Business” in our Annual Report on Form 10-K for the fiscal year ended August 3, 2019 (the “Fiscal 2019 10-K”). The Company’s brands had the following store counts as of February 1, 2020:
Justice
 
Lane Bryant
 
LOFT
 
Catherines
 
Ann Taylor
 
Total
820
 
688
 
666
 
299
 
291
 
2,764

2. Basis of Presentation

Basis of Consolidation

These unaudited interim condensed consolidated financial statements present all the assets, liabilities, revenues, expenses and cash flows of entities in which the Company has a controlling financial interest and is determined to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

Fiscal Period
 
Fiscal 2020 will end on August 1, 2020 and will be a 52-week period. Fiscal year 2019 ended on August 3, 2019 and was a 52-week period (“Fiscal 2019”). The three and six months ended February 1, 2020 and February 2, 2019 were 13 and 26-week periods, respectively.
 
Interim Financial Statements
 
These interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and are unaudited. In the opinion of management, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the condensed consolidated financial condition, results of operations, comprehensive income, cash flows and equity of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report as permitted by the SEC’s rules and regulations. However, the Company believes that the disclosures herein are adequate to ensure that the information is fairly presented.
 
The condensed consolidated balance sheet data as of August 3, 2019 is derived from the audited consolidated financial statements included in the Company’s Fiscal 2019 10-K, which should be read in conjunction with these interim financial statements. Reference is made to the Fiscal 2019 10-K for a complete set of financial statements.

8


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


Common Stock Split

On December 19, 2019, the Company announced that the Board of Directors has approved a reverse stock split of the Company’s common stock at a ratio of 1-for-20. Refer to Note 15 for additional information. As a result, the applicable equity and shares information related to prior periods has been restated to reflect this reverse stock split.

Discontinued Operations

Dressbarn Wind Down

In May 2019, the Company announced the wind down of its Dressbarn brand, which was completed in the second quarter of Fiscal 2020. All Dressbarn store locations were closed as of December 31, 2019. Activities during the first and second quarter of Fiscal 2020 include additional employee related accruals, the closure of stores and the negotiation of lease terminations. In addition, during the first quarter of Fiscal 2020, the Company sold the ecommerce rights to Dressbarn intellectual property to a third-party for approximately $5 million, which was treated as a reduction of the wind down costs. In connection with the Dressbarn wind down, we have incurred cumulative costs of approximately $62 million of which approximately $9 million was incurred during the six months ending February 1, 2020 and have been included in the results disclosed below.

The following table summarizes the results of Dressbarn reclassified as discontinued operations:
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions, unaudited)
Net sales
$
149.1

 
$
163.6

 
$
326.6

 
$
354.7

Depreciation and amortization expense
(3.7
)
 
(4.8
)
 
(10.9
)
 
(8.8
)
Operating income (loss)
34.5

 
(16.0
)
 
60.2

 
(16.1
)
Pretax income (loss) from discontinued operations
34.5

 
(16.0
)
 
60.2

 
(16.1
)
Income tax benefit

 
2.9

 

 
2.5

Income (loss) from discontinued operations, net of tax
$
34.5

 
$
(13.1
)
 
$
60.2

 
$
(13.6
)

The major components of Dressbarn assets and liabilities related to discontinued operations are summarized below:
 
February 1,
2020
 
August 3,
2019
 
(millions, unaudited)
Cash and cash equivalents
$

 
$
4.2

Inventories

 
57.0

Prepaid expenses and other current assets
9.5

 
37.0

Property and equipment, net

 
11.5

Total assets related to discontinued operations
$
9.5

 
$
109.7

 
 
 
 
Accounts payable and other current liabilities
$
49.9

 
$
94.7

Lease-related liabilities
0.3

 
29.6

Other liabilities
5.5

 
5.9

Total liabilities related to discontinued operations
$
55.7

 
$
130.2


Sale of maurices

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

9


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


the operations of maurices through its investment in Viking, consisting of interests in Viking preferred and common stock. Reference is made to Note 10 for more information about the Company’s investment in Viking.

As the sale of maurices represented a major strategic shift, as well as the Company's determination that it did not have a significant continuing involvement in the business, the Company's maurices business was classified as a discontinued operations within the condensed consolidated financial statements.

The following table summarizes the results of maurices reclassified as discontinued operations:
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions, unaudited)
Net sales
$

 
$
257.8

 
$

 
$
511.1

Depreciation and amortization expense

 
(7.1
)
 

 
(14.5
)
Operating income

 
28.1

 

 
65.8

Pretax income from discontinued operations

 
28.1

 

 
66.0

Income tax expense

 
(5.5
)
 

 
(13.7
)
Income from discontinued operations, net of tax
$

 
$
22.6

 
$

 
$
52.3


Cash Flow Information Related to Discontinued Operations

The major components of cash flows related to discontinued operations are summarized below:
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
(millions, unaudited)
Cash provided by operations of discontinued operations
$
68.9

 
$
64.3

Cash provided by (used by) investing activities of discontinued operations
4.9

 
(3.2
)

Condensed Consolidated Statements of Cash Flows Reconciliation

A reconciliation of cash, cash equivalents and restricted cash in the condensed consolidated balance sheets to the amounts shown on the condensed consolidated statements of cash flows is shown below:
Reconciliation of cash, cash equivalents and restricted cash:
 
February 1,
2020
 
August 3,
2019
 
February 2,
2019
 
August 4,
2018
Cash and cash equivalents
 
$
373.7

 
$
323.8

 
$
210.2

 
$
230.2

Restricted cash included in other current assets
 
1.2

 
1.2

 
1.2

 
1.2

Cash included in discontinued operations
 

 
4.2

 
4.4

 
8.7

Total cash, cash equivalents and restricted cash
 
$
374.9

 
$
329.2

 
$
215.8

 
$
240.1


3. Recently Issued Accounting Standards
 
Recently adopted standards

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases” (“ASC 842”). The guidance requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The guidance may be applied retrospectively to each period presented or

10


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


with the cumulative effect recognized as of the initial date of application. The Company adopted this ASU as of the beginning of Fiscal 2020 with the cumulative effect recognized at adoption.

As a result of this standard, the Company has recognized approximately $680.2 million of right-of-use assets and approximately $841.7 million of lease liabilities (current and long-term combined) on its consolidated balance sheet as of February 1, 2020. The right-of-use lease liability for operating leases is based on the net present value of future minimum lease payments. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as favorable leases, straight line rent liability, purchased lease rights and landlord allowances and a cumulative effect adjustment that decreased opening Accumulated deficit by approximately $11.5 million for transition impairments related to previously impaired leased locations. As a result, prior periods have not been restated.

The Company determines if an arrangement is a lease at inception and on the lease commencement date, the Company recognizes an asset for the right to use a leased asset and a liability based on the present value of remaining lease payments over the lease term.

As the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on a third-party analysis, which is updated periodically. That analysis concluded that the Company’s incremental borrowing rate upon adoption ranged from 24-30%, depending on the term. For leases existing before the adoption of the new lease accounting standard, the Company used its incremental borrowing rate as of the date of adoption, determined using the remaining lease term as of the date of adoption. For leases commencing on or after the adoption of the new lease accounting standard, the incremental borrowing rate is determined using the remaining lease term as of the lease commencement date.

The Company elected the package of practical expedients included in this guidance, which allows us (i) to not reassess whether any expired or existing contracts contain leases; (ii) to not reassess the lease classification for any expired or existing leases; (iii) to account for a lease and non-lease component as a single component for both its real estate and non-real estate leases; and (iv) to not reassess the initial direct costs for existing leases.

The measurement of lease right-of-use assets and liabilities includes amounts related to:
Lease payments made prior to the lease commencement date;
Incentives from landlords received by the Company for signing a lease, including construction allowances or deferred lease credits paid to the Company by landlords towards construction and tenant improvement costs, which are presented as a reduction to the right-of-use asset recorded;
Fixed payments related to lease components, such as rent escalation payments scheduled at the lease commencement date; and
Fixed payments related to nonlease components, such as taxes, insurance, and maintenance costs.

The measurement of lease right-of-use assets and liabilities excludes amounts related to:
Variable payments related to lease components, such as contingent rent payments made by the Company based on performance, the expense of which is recognized in the period incurred on the Condensed Consolidated Statements of Operations;
Variable payments related to nonlease components, such as taxes, insurance, and maintenance costs, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations; and
Leases with an initial term of 12 months or less, the expense of which is recognized in the period incurred in the Condensed Consolidated Statements of Operations.

Certain of the Company’s leases include options to extend the lease or to terminate the lease. The Company assesses these leases and, depending on the facts and circumstances, may or may not include these options in the measurement of the Company’s lease right-of-use assets and liabilities. Generally, the Company’s options to extend its leases are at the Company’s sole discretion and at the time of lease commencement are not reasonably certain of being exercised. There may be instances in which a lease is being renewed on a month-to-month basis and, in these instances, the Company will recognize lease expense in the period incurred in the Condensed Consolidated Statements of Operations until a new agreement has been executed.

Amortization and interest expense related to lease right-of-use assets and liabilities are generally calculated on a straight-line basis over the lease term. Amortization and interest expense related to previously impaired lease right-of-use assets are calculated on a front-loaded amortization pattern resulting in higher single lease expense in earlier periods. Depending on the nature of the lease,

11


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


amortization and interest expense is recorded in either Buying, distribution, and occupancy expense or in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations.

The Company’s lease right-of-use assets are assessed for indicators of impairment at least quarterly. The results of any such impairments are disclosed in Note 7.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any finance leases, any material sublease arrangements or any material leases where the Company is considered the lessor.

The following table provides the impact of adoption of ASU 2016-02 on the Company’s condensed consolidated balance sheet:
 
 
August 3, 2019 (as reported under ASC 840)
 
Impact of adoption of ASC 842
 
August 3, 2019 (as reported under ASC 842)
 
 
(millions)
Assets
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
242.3

 
$
(33.6
)
 
$
208.7

Other intangible assets, net
 
276.6

 
(8.4
)
 
268.2

Current assets related to discontinued operations
 
98.2

 
(7.6
)
 
90.6

Operating lease right-of-use asset
 

 
744.4

 
744.4

Non-current assets related to discontinued operations
 
11.5

 
131.5

 
143.0

 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
Current portion of lease liabilities
 

 
141.3

 
141.3

Current liabilities related to discontinued operations
 
94.7

 
37.8

 
132.5

Lease-related liabilities
 
204.6

 
(204.6
)
 

Long-term lease liabilities
 

 
769.1

 
769.1

Non-current liabilities related to discontinued operations
 
35.5

 
94.2

 
129.7

Accumulated deficit
 
(935.9
)
 
(11.5
)
 
(947.4
)

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The new standard simplifies the accounting for income taxes by removing exceptions:
to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);
to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;
to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and
to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

In addition, the standard does not require that an entity allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, however, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. The standard does require that an entity:
recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax;
evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; and

12


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


reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. The Company has elected to early adopt ASU 2019-12. By early adopting, ASU 2019-12 becomes effective as of the beginning of Fiscal 2020, however, there is no cumulative effect to be recognized with the early adoption.  As a result of the ASU 2019-12 adoption, the Company did not recognize income tax expense on the income from discontinued operations related to Dressbarn for the three and six months ended February 1, 2020.

Recently issued standards

Intangible Assets

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods. Early adoption is permitted for annual or interim periods. This ASU requires that implementation costs incurred in a hosting arrangement that is a service contract be assessed in accordance with the existing guidance in Subtopic 350-40, “Internal-Use Software.” Accordingly, costs incurred during the preliminary project stage must be expensed as incurred, while costs incurred during the application development stage must be capitalized. Capitalized implementation costs associated with a hosting arrangement that is a service contract must be expensed over the term of the hosting arrangement. Additionally, the new guidance requires that the expense of these capitalized costs be presented in the same line item in the statement of income as the fees associated with the hosting element of the arrangement. While the Company is in the process of determining the impact of the adoption of this guidance on its consolidated financial statements, the Company does not anticipate that the guidance will have a significant impact on its consolidated financial statements upon adoption of the new standard in Fiscal 2021.

4. Leases

The Company has leases related to its Company-operated retail stores as well as for certain of its distribution centers, office space, information technology and equipment.

A summary of the Company’s operating lease costs from continuing operations is as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
February 1,
2020
 
February 1,
2020
 
 
(millions)
Single lease costs (a)
 
$
94.7

 
$
189.9

Variable lease costs (b)
 
51.6

 
104.6

Total lease expenses
 
146.3

 
294.5

Less rental income (c)
 
(1.1
)
 
(2.1
)
Total net rental expense (d)
 
$
145.2

 
$
292.4

________
(a) 
Includes amortization and interest expense associated with operating lease right-of-use assets and liabilities.
(b) 
Includes variable payments related to both lease and nonlease components, such as contingent rent payments made by the Company based on performance, and payments related to taxes, insurance, and maintenance costs, as well as month-to-month rent payments while expired store lease contracts are renegotiated.
(c) Substantially reflects rental income received related to Company-owned space in Duluth, MN.
(d) Total occupancy costs included in discontinued operations related to Dressbarn were $5.8 million and $32.3 million for the three and six months ended February 1, 2020.

The following table provides a summary of the Company’s operating lease costs from continuing operations for the three and six months ended February 2, 2019, which was accounted for in accordance with Accounting Standards Codification (“ASC”) 840, “Leases” (“ASC 840”). Prior periods have not been adjusted for the adoption of ASU 2016-02.


13


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


 
 
Three Months Ended
 
Six Months Ended
 
 
February 2,
2019
 
February 2,
2019
 
 
(millions)
Base rentals
 
$
99.1

 
$
197.3

Percentage rentals
 
6.8

 
14.6

Other occupancy costs, primarily CAM and real estate taxes
 
41.8

 
82.9

Total (a)
 
$
147.7

 
$
294.8

________
(a) 
Total occupancy costs included in discontinued operations related to Dressbarn and maurices were $53.6 million and $110.6 million for the three and six months ended February 2, 2019.

The weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rates used to calculate the Company’s operating lease liabilities are as follows:
 
 
February 1,
2020
Weighted-average remaining lease term (years)
 
5.7
Weighted-average discount rate
 
26.1%

The following table provides a maturity analysis of the Company’s operating lease liabilities, based on undiscounted cash flows, as of February 1, 2020:
Fiscal Years
Minimum Operating
Lease Payments (a) (b)
 
(millions)
2020 (excluding the six months ended February 1, 2020)
$
158.9

2021
350.4

2022
287.6

2023
214.2

2024
151.6

Thereafter
529.0

Total undiscounted operating lease liabilities
1,691.7

Less imputed interest
(850.0
)
Present value of operating lease liabilities
841.7

Less current portion of lease liabilities
(161.8
)
Total long-term lease liabilities
$
679.9

             
(a) Net of sublease income, which is not expected to be significant in any period.
(b) Although such amounts are generally non-cancelable, certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. All future minimum rentals under such leases have been included in the above table.

As of February 1, 2020, the Company had minimum commitments related to additional operating lease contracts that have not yet commenced, primarily for its Company-operated retail stores, of approximately $18.7 million.


14


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


As reported under the previous accounting standard, the following table provides a summary of total consolidated operating lease commitments, including leasehold financing obligations, under non-cancelable leases as of August 3, 2019:
Fiscal Years
Minimum Operating
Lease Payments (a) (b)
 
(millions)
2020
$
462.0

2021
402.3

2022
325.4

2023
242.7

2024
172.6

Thereafter
563.3

Total future minimum rentals
$
2,168.3

             
(a) Net of sublease income, which is not expected to be significant in any period.
(b) Although such amounts are generally non-cancelable, certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. All future minimum rentals under such leases have been included in the above table.

Supplemental disclosures related to leases are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
February 1,
2020
 
February 1,
2020
 
 
(millions)
Cash payments arising from operating lease liabilities (included in cash flows from operating activities)
 
$
100.7

 
$
202.7

Non-cash operating lease liabilities from obtaining right-of-use assets
 
0.3

 
1.4


5. Revenue Recognition

Contract liabilities

The contract liabilities representing unearned revenue for our continuing operations are as follows:
 
 
February 1, 2020
 
August 3, 2019
 
February 2, 2019
 
August 4, 2018 (a)
 
 
(millions)
Deferred revenue - gift card liability
 
$
92.0

 
$
79.7

 
$
92.7

 
$
72.4

Deferred revenue - loyalty programs
 
24.5

 
22.1

 
25.3

 
26.3

________
(a)    After adjusting for the impact of adopting ASU 2014-09.

For the three and six months ended February 1, 2020, the Company recognized revenue of approximately $20 million and $32 million, respectively, associated with gift card redemptions and gift card breakage. Of these amounts, approximately $5 million and $6 million, respectively, were recorded within Income from discontinued operations. For the three and six months ended February 2, 2019, the company recognized revenue of approximately $19 million and $29 million, respectively, associated with gift card redemptions and gift card breakage. Of these amounts, approximately $5 million and $9 million, respectively, were recorded within Income from discontinued operations.

For the three and six months ended February 1, 2020, the Company recognized revenue of approximately $10 million and $22 million, respectively, associated with reward redemptions and breakage related to the Company’s loyalty programs. Of these amounts, approximately $0 million and $5 million, respectively, were recorded within Income from discontinued operations. For the three and six months ended February 2, 2019, the Company recognized revenue of approximately $20 million and $25 million,

15


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


respectively, associated with reward redemptions and breakage related to the Company’s loyalty programs. Of these amounts, approximately $7 million and $8 million, respectively, were recorded within Income from discontinued operations.

The Company’s revenues by major product categories as a percentage of total net sales are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
Apparel
 
80
%
 
77
%
 
82
%
 
81
%
Accessories
 
15
%
 
17
%
 
13
%
 
14
%
Other
 
5
%
 
6
%
 
5
%
 
5
%
    Total net sales
 
100
%
 
100
%
 
100
%
 
100
%

6. Goodwill and 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.


16


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


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.

7. Asset Impairments

Long-lived Asset Impairments

The charges below reduced the net carrying value of certain long-lived assets to their estimated fair value, as determined using a combination of a third-party analysis (Level 2 measurement) and discounted expected cash flows (Level 3 measurement). These impairment charges arose from the Company’s routine assessment of under-performing retail stores and are included as a component of Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for all periods. Beginning with the adoption of ASC 842 in Fiscal 2020, impairment charges could include write-downs of the right-of-use assets and/or write-downs of store-related fixed assets. Impairment charges for the three and six months ended February 1, 2020 substantially reflect write-downs of only store-related fixed assets.


17


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


Impairment charges included in continuing operations related to retail store fixed assets by segment are as follows:
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions)
 
(millions)
Premium Fashion
$

 
$
0.3

 
$
0.2

 
$
0.4

Plus Fashion
0.3

 
1.1

 
0.5

 
1.1

Kids Fashion
0.8

 
0.4

 
1.1

 
0.5

    Total impairment charges
$
1.1

 
$
1.8

 
$
1.8

 
$
2.0


8. Restructuring and Other Related Charges

In connection with its cost reduction initiatives, during the first quarter of Fiscal 2020, the Company announced a reorganization of its sourcing operation. Restructuring and other related charges for Fiscal 2020 primarily reflect costs associated with the sourcing reorganization. Future costs related to this reorganization are not expected to be material.

Charges related to the Dressbarn wind down are included in discontinued operations. Activity for the three and six months ended February 2, 2019 reflects actions under the Change for Growth program.
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions)
 
(millions)
Cash restructuring charges:
 
 
 
 
 
 
 
   Severance and benefit costs (a)
$
(0.9
)
 
$
0.3

 
$
2.9

 
$
(0.2
)
   Other related charges (b)
0.4

 
13.2

 
0.4

 
21.6

Total restructuring and other related charges
$
(0.5
)
 
$
13.5

 
$
3.3

 
$
21.4

_______
(a) Severance and benefit costs reflect additional severance accruals associated with previously announced initiatives, as well as adjustments to true up estimates of previously accrued severance-related costs to reflect amounts actually paid.
(b) Other related charges in Fiscal 2019 consist of professional fees and other third-party costs incurred in connection with the Change for Growth program.

A summary of activity for the six months ended February 1, 2020 in the restructuring-related liabilities, which is included within Accrued expenses and other current liabilities, is as follows:
 
Severance and benefit costs
 
Other related charges
 
Total
 
(millions)
Balance at August 3, 2019
$
11.4

 
$
1.0

 
$
12.4

   Additions charged to expense
2.9

 
0.4

 
3.3

   Cash payments
(9.5
)
 
(0.4
)
 
(9.9
)
Balance at February 1, 2020
$
4.8

 
$
1.0

 
$
5.8


9. Inventories
 
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
 
February 1,
2020
 
August 3,
2019
 
February 2,
2019
 
(millions)
Premium Fashion
$
229.2

 
$
226.3

 
$
246.0

Plus Fashion
162.8

 
156.5

 
173.7

Kids Fashion
96.2

 
107.9

 
95.6

    Total inventories
$
488.2

 
$
490.7

 
$
515.3

 

18


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



10. Investment and Variable Interest Entity

As discussed in Note 2, in the fourth quarter of Fiscal 2019, the Company completed the Transaction which provided for, among other things, the sale by ascena of maurices to Viking. Effective upon the closing of the Transaction, ascena received cash proceeds and a 49.6% ownership interest in the operations of maurices through its investment in Viking, consisting of interests in Viking preferred and common stock. Viking's operations substantially consist of its investment in maurices. At the end of Fiscal 2019, the Company’s investment in Viking was recorded at $42.1 million. The Company is accounting for its investment under the equity method of accounting.

Viking, primarily through its investment in maurices, reported income of approximately $4.3 million and $23.3 million for the three and six months ended February 1, 2020, which primarily represents results from the operations of maurices. The results of maurices includes the preliminary impact of adjusting its assets and liabilities to fair value under the acquisition method of accounting for business combinations, which will be finalized during Fiscal 2020. The Company recognized its share of the income in the accompanying condensed consolidated statement of operations which was determined by using the hypothetical liquidation at book value ("HLBV"). HLBV is a balance sheet approach whereby a calculation is prepared at each balance sheet date to determine the amount that the Company would receive if the underlying equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to its investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is the Company's share of the earnings or losses from the equity investment for that period.

In connection with the sale of maurices, the Company agreed to provide transition services to maurices for varying periods of time depending on the service. Service periods ranged from 3-36 months and include services such as legal, tax, logistics, sourcing and other back office functions. For the three and six months ended February 1, 2020, recognized fees from these services are approximately $16.1 million and $32.9 million, respectively, which are primarily recorded as a reduction of Buying, distribution and occupancy expenses and Selling, general and administrative expenses.

As of February 1, 2020, the Company's investment in Viking was recorded at $65.4 million and the Company had a receivable due from maurices of $41.8 million, primarily for in-transit inventory purchased on their behalf. Of the receivable balance, $12 million is classified in non-current assets. There were no amounts due to maurices as of February 1, 2020. The Company's investment balance, plus the receivable and the private label credit card revenue guarantee, which is disclosed in Note 2 to the audited consolidated financial statements included in the Fiscal 2019 10-K, represent our maximum exposure to any potential loss. The private label credit card revenue guarantee is recorded at its estimated fair value as of February 1, 2020 using Level 3 measurements and is not materially different from the amount recorded as of August 3, 2019.

11. Debt
Debt consists of the following:
February 1,
2020
 
August 3,
2019
 
(millions)
   Revolving credit facility
$

 
$

         Less: unamortized debt issuance costs (a)
(2.6
)
 
(3.2
)
 
(2.6
)
 
(3.2
)
 


 


   Term loan
1,292.0

 
1,371.5

         Less: unamortized original issue discount (b)
(11.0
)
 
(13.8
)
                   unamortized debt issuance costs (b)
(12.6
)
 
(15.9
)
 
1,268.4

 
1,341.8

    Less: current portion
(21.5
)
 

Total long-term debt
$
1,244.3

 
$
1,338.6

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


19


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


Amended Revolving Credit Agreement
On February 28, 2018, the Company and certain of its domestic subsidiaries entered into an amendment and restatement agreement of its revolving credit agreement dated August 21, 2015, as amended on October 31, 2016, among the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the “Amended Revolving Credit Agreement”). The Amended Revolving Credit Agreement provides aggregate revolving commitments up to $500 million, with an optional increase of up to $200 million.
  
The revolving credit facility may be used for the issuance of letters of credit, to fund working capital requirements and capital expenditures, and for general corporate purposes. The revolving credit facility also includes a $200 million letter of credit sublimit, all of which can be used for standby letters of credit pursuant to an amendment to the revolving credit facility dated September 20, 2019, and a $30 million swingline loan sublimit. The interest rates, pricing and fees under the agreement fluctuate based on the average daily availability, as defined therein. The Amended Revolving Credit Agreement has a maturity date of the earlier of (i) five years from the closing date (or February 2023) or (ii) 91 days prior to the maturity date of the Term Loan (unless (a) the outstanding principal amount of the Term Loan is $150 million or less and (b) the Company maintains liquidity (which can include (1) availability under the revolving credit facility in excess of the greater of $100 million and 20% of the credit limit and (2) cash held in a controlled account of the administrative agent of the revolving credit facility), in an amount equal to the outstanding principal amount of the remaining Term Loan.  There are no mandatory reductions in aggregate revolving commitments throughout the term of the Amended Revolving Credit Agreement.  However, availability under the revolving credit facility is limited to a percentage of the amount of eligible cash, eligible inventory, and eligible credit card accounts receivable as defined in the Amended Revolving Credit Agreement.

As of February 1, 2020, there were no borrowings under the Amended Revolving Credit Agreement and the Company had $247.2 million of availability under the Amended Revolving Credit Agreement.

Under the Amended Revolving Credit Agreement, the Company is required to maintain a fixed charge coverage ratio, as defined in the Amended Revolving Credit Agreement, of at least 1.00 any time in which the Company is in a covenant period, as defined in the Amended Revolving Credit Agreement (the “Covenant Period”). Such Covenant Period is in effect if Availability is less than the greater of (a) 10% of the Credit Limit (the lesser of total Revolving Commitments and the Borrowing Base) and (b) $37.5 million for three consecutive business days and ends when Availability is greater than these thresholds for thirty consecutive days. The Covenant Period was not in effect as of February 1, 2020.

For a more detailed description of the Company’s Amended Revolving Credit Agreement and restrictions thereunder, refer to Note 10 to the audited consolidated financial statements included in the Fiscal 2019 10-K.

Term Loan

In connection with the August 2015 acquisition of ANN INC., the Company entered into a $1.8 billion variable-rate term loan (the “Term Loan”), which was issued at a 2% discount and provides for an additional term facility of $200 million. The Term Loan matures on August 21, 2022 and requires quarterly repayments of $22.5 million with a remaining balloon payment of approximately $1.1 billion required at maturity. During Fiscal 2018, the Company made repayments of $225.0 million of which $180.0 million was applied to future quarterly scheduled payments such that the Company is not required to make its next quarterly payment of $22.5 million until November of calendar 2020. The Company is also required to make mandatory prepayments in connection with certain prepayment events. As of February 1, 2020, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of approximately 6.5%. The Company entered into an interest rate swap agreement in March 2019 to mitigate some of the risk associated with the variable rate. Refer to Note 12 for additional information.

During the second quarter of Fiscal 2020, the Company repurchased $79.5 million aggregate principal amount of its Term Loan debt in open market transactions for a total purchase price of $49.4 million. The repurchase was settled in the second quarter of Fiscal 2020 and the Company recorded a gain on extinguishment of debt of $28.5 million, net of transaction costs and a write-off of a portion of deferred financing fees. Subsequent to the second quarter of Fiscal 2020, the Company completed an additional repurchase of $42.0 million of principal amount of debt for a total purchase price of approximately $28.6 million. This additional repurchase will be settled in March 2020. As a result of this repurchase, the Company expects to record an additional gain of approximately $13 million in the third quarter of Fiscal 2020.

For a more detailed description of the Company’s Term Loan and restrictions thereunder, refer to Note 10 to the audited consolidated financial statements included in the Fiscal 2019 10-K.

20


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



Maturities of Debt
The Company’s outstanding debt as of February 1, 2020 matures as follows:
Fiscal Year
 
Amount
 
 
(millions)
2020
 
$

2021
 
66.5

2022
 
90.0

2023
 
1,135.5

Total maturities
 
$
1,292.0


12. Derivative Financial Instruments

As discussed in more detail in Note 11, the interest rate under the Company’s Term Loan is based on a variable rate. Therefore, the Company has exposure to increases in the underlying interest rate. In order to protect against our interest rate exposure, we entered into an interest rate swap agreement in March 2019. We do not hold any derivative financial instruments for speculative or trading purposes.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in the line item Accumulated other comprehensive loss on the Company’s Condensed Consolidated Balance Sheets and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in Accumulated other comprehensive loss related to the Company’s derivative contracts will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. 

As of February 1, 2020, the Company had the following outstanding interest rate derivative that was designated as a cash flow hedge of interest rate risk:
Interest Rate Derivative
 
Number of Instruments
 
Notional Agreement Principal Amount
 
Interest Rate
 
Maturity Date
Interest rate swap
 
One
 
$600.0 Million
 
6.85%
 
March 31, 2021

The interest rate swap was recorded at its estimated fair value of $6.1 million and $6.3 million as of February 1, 2020 and August 3, 2019, respectively, based on Level 2 measurements. Amounts included in the Condensed Consolidated Balance Sheet as of February 1, 2020 include $5.1 million in Accrued expenses and other current liabilities and $1.0 million in Other non-current liabilities. Amounts included in the Condensed Consolidated Balance Sheet as of August 3, 2019 include $3.1 million in Accrued expenses and other current liabilities and $3.2 million in Other non-current liabilities. The amount of unrealized losses deferred to Accumulated other comprehensive loss before the effect of taxes was $6.1 million as of February 1, 2020 and $6.3 million as of August 3, 2019.

The amount of losses reclassified from Accumulated other comprehensive loss into earnings related to the Company’s derivative instrument during the three and six months ended February 1, 2020 was $0.6 million and $0.9 million respectively, and was classified within Interest expense in the Condensed Consolidated Statements of Operations. Based on current valuations, we estimate $5.3 million will be reclassified from Accumulated other comprehensive loss into Interest expense during the next twelve months. There was no material ineffectiveness related to the interest rate swap agreement during the periods presented.

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


21


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


Level 1
Quoted prices for identical instruments in active markets;
Level 2
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are recently traded (not active); and
Level 3
Instruments with little, if any, market activity are valued using significant unobservable inputs or valuation techniques.

Fair Value Measurements of Financial Instruments

As of February 1, 2020 and August 3, 2019, the Company believes that the carrying values of cash and cash equivalents approximate its fair value based on Level 1 measurements. As the Company’s revolving credit facility is variable rate, the Company believes that there is no significant difference between the fair value and the carrying value as of February 1, 2020 and August 3, 2019. The fair value of the Term Loan was determined to be $852.7 million as of February 1, 2020 and $850.3 million as of August 3, 2019 based on quoted market prices from recent transactions, which are considered Level 2 inputs within the fair value hierarchy.

Fair Value Measurements of Long-lived Assets Measured on a non-Recurring Basis

The Company’s non-financial instruments, which primarily consist of goodwill, other intangible assets, property and equipment and lease-related right-of-use assets, are not required to be measured at fair values on a recurring basis and are reported at their carrying values. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be recoverable (and at least annually for goodwill and other indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to (and recorded at) fair values. For further information about the fair value of non-financial assets, see Notes 6 and 7.

14. Income Taxes

Tax Cuts and Jobs Act

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

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

Effective Tax Rate

The Company’s effective tax rate is reflective of the jurisdictions where the Company has operations. The effective tax rates for the second quarter and the first six months of Fiscal 2020 were (0.7)% and (2.4)%, respectively, which were lower than the statutory tax rate as a result of non-deductible impairments of goodwill and changes in the valuation allowance on U.S. federal and state deferred tax assets.


22


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


15. Equity

Common Stock Split

On December 19, 2019, the Company announced that the Board of Directors has approved a reverse stock split of the Company’s common stock at a ratio of 1-for-20. In addition, there was a corresponding reduction in the number of Company’s authorized shares of common stock following the approval of the reverse stock split by the Company’s stockholders at the Company’s annual meeting of stockholders held on December 10, 2019. The reverse stock split became effective at the close of business on December 18, 2019. The reverse stock split reduced the number of shares of common stock issued and outstanding from approximately 199,444,436 to approximately 9,972,221. The authorized number of shares of common stock has been reduced by a corresponding ratio to 18 million.

Common Stock Repurchase Program

In December 2015, the Company’s Board of Directors authorized a $200 million share repurchase program (the “2016 Stock Repurchase Program”). There were no repurchases of common stock by the Company during the three and six months ended February 1, 2020 and the remaining availability was approximately $181.4 million at February 1, 2020.

Net Income per Common Share
 
Basic net income per common share is computed by dividing the net income applicable to common shares after preferred dividend requirements, if any, by the weighted-average number of common shares outstanding during the period. Diluted net income per common share adjusts basic net income per common share for the effects of outstanding stock options, restricted stock units and any other potentially dilutive financial instruments, only in the periods in which such effect is dilutive under the treasury stock method.
 
The weighted-average number of common shares outstanding used to calculate basic net income per common share is reconciled to those shares used in calculating diluted net income per common share as follows:
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(thousands)
 
(thousands)
Basic
9,975

 
9,874

 
9,957

 
9,856

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

 

 

 

       Diluted shares
9,975

 
9,874

 
9,957

 
9,856

(a) There was no dilutive effect of stock options and restricted stock units for the three and six months ended February 1, 2020 and February 2, 2019 as the impact of these items was anti-dilutive using the treasury stock method as a result of the net loss incurred during the periods.

Options to purchase shares of common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive, and therefore not included in the computation of diluted net income per common share. Any performance or market-based restricted stock units outstanding are included in the computation of diluted shares only to the extent the underlying performance or market conditions (a) are satisfied prior to the end of the reporting period or (b) would be satisfied if the end of the reporting period was the end of the related contingency period, and the result would be dilutive under the treasury stock method. Anti-dilutive options and/or restricted stock units excluded from the diluted shares calculation were 1.1 million shares for both the three and six months ended February 1, 2020 and 1.3 million shares for both the three and six months ended February 2, 2019.

16. Stock-based Compensation

Omnibus Incentive Plan
 
In November 2018, the Board of Directors approved the amendment of the Company’s 2016 Omnibus Incentive Plan, as amended and restated on December 10, 2015 (the “Omnibus Incentive Plan”). The amendment to the 2016 Omnibus Incentive Plan was approved by the Company’s shareholders and became effective on December 14, 2018 to increase the aggregate number of shares

23


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


that may be issued under the plan by an additional 0.7 million shares to 4.2 million. The 2016 Omnibus Incentive Plan provides for the granting of service-based and performance-based stock awards as well as performance-based cash incentive awards. The 2016 Omnibus Incentive Plan expires in November 2025.
 
As of February 1, 2020, there were approximately 1.1 million shares remaining under the 2016 Omnibus Incentive Plan available for future grants. The Company issues new shares of common stock when stock option awards are exercised and restricted stock units vest. 

Impact on Results
 
A summary of the total compensation expense and associated income tax benefit recognized related to stock-based compensation arrangements on a consolidated basis is as follows:
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions)
 
(millions)
Compensation expense
$
0.8

 
$
3.6

 
$
2.4

 
$
8.3

Income tax benefit
$

 
$
0.7

 
$

 
$
1.7


Service-based Stock Options
 
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the periods presented were as follows:
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
Expected term (years)
5.2

 
5.2

Expected volatility
61.6
%
 
47.5
%
Risk-free interest rate
1.6
%
 
2.9
%
Expected dividend yield
%
 
%
Weighted-average grant date fair value
$
2.75

 
$
35.65

 
A summary of the stock option activity under the service-based plans during the six months ended February 1, 2020 is as follows:
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Terms
 
Aggregate
Intrinsic
Value (a)
 
(thousands)
 
 

 
(years)
 
(millions)
Options outstanding – August 3, 2019
850.4

 
$
156.00

 
4.1
 
$

Granted
274.6

 
5.13

 
 
 
 
Exercised

 

 
 
 
 
Canceled/Forfeited
(378.3
)
 
185.56

 
 
 
 
Options outstanding – February 1, 2020
746.7

 
$
85.54

 
4.9
 
$

 
 
 
 
 
 
 
 
Options vested and expected to vest at February 1, 2020 (b)
707.4

 
$
89.98

 
4.9
 
$

Options exercisable at February 1, 2020
402.3

 
$
139.70

 
3.8
 
$

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


24


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


As of February 1, 2020, there was $2.3 million of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 0.9 years. There were no options exercised during the three and six months ended February 1, 2020 and the total intrinsic value of options exercised during the three and six months ended February 2, 2019 was de minimus. The total grant date fair value of options that vested during the six months ended February 1, 2020 and February 2, 2019 was approximately $5.0 million and $9.3 million, respectively.

Market-based Stock Options

Market-based non-qualified stock options (“NQSO Awards”) entitle the holder to receive options to purchase shares of common stock of the Company during the vesting period. However, such awards are subject to the grantee’s continuing employment and the Company’s achievement of certain market-based goals over the pre-defined performance period.

The NQSOs Awards’ fair value is determined using a Monte-Carlo simulation model on the grant date. A Monte-Carlo simulation model estimates the fair value of the market-based awards granted in the three months ended February 1, 2019 based on an expected term of 7.0 years, a risk-free interest rate of 1.5%, an expected dividend yield of zero and an expected volatility measure of 62.9% for the Company. Compensation expense for NQSOs Awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.

As of February 1, 2020, there were a total of 0.2 million NQSO Awards outstanding with an average exercise price of $23.15 per share. The total unrecognized compensation at February 1, 2020 was $0.7 million to be recognized over 2.3 years. There were no vestings of the NQSOs Awards as of February 1, 2020.

Service-based Restricted Equity Awards
 
A summary of restricted equity awards activity during the six months ended February 1, 2020 is as follows:
 
Service-based
Restricted Equity Awards
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
(thousands)
 
 
Nonvested at August 3, 2019
67.4

 
$
91.42

Granted

 

Vested
(28.0
)
 
113.32

Canceled/Forfeited
(7.5
)
 
89.03

Nonvested at February 1, 2020
31.9

 
$
72.78

 
As of February 1, 2020, there was $0.5 million of total unrecognized compensation cost related to the service-based Restricted Equity Awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.5 years.

Market-based Restricted Equity Awards

Market-based Restricted Equity Awards entitle the holder to receive shares of common stock of the Company during the vesting period. However, such awards are subject to the grantee’s continuing employment and the Company’s achievement of certain market-based goals over the pre-defined performance period. The market-based Restricted Equity Awards fair value is determined using a Monte-Carlo simulation model on the grant date. Compensation expense for market-based Restricted Equity Awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.

The Company issued no grants of market-based Restricted Equity Awards during the second quarter of Fiscal 2020. As of February 1, 2020, there were a total of 0.1 million Restricted Equity Awards outstanding which had a weighted average grant date fair value of $9.35 per share. The total unrecognized compensation at February 1, 2020 was $1.0 million to be recognized over 2.3 years. There were no vestings of the market-based Restricted Equity Awards as of February 1, 2020.


25


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


17. Employee Benefit Plans

Long-Term Incentive Plan

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

The Company recognized $(0.8) million in compensation expense for the six months ended February 1, 2020 and $0.3 million for the six months ended February 2, 2019, which was recorded within Selling, general and administrative expenses in the condensed consolidated financial statements. Amounts included in discontinued operations were not material in either period.

As of February 1, 2020, there was $9.0 million of expected unrecognized compensation cost related to the LTIP, which is expected to be recognized over a remaining weighted-average vesting period of 1.3 years. As of February 1, 2020, the liability for LTIP Awards was $9.9 million of which $4.7 million was classified within Accrued expenses and other current liabilities and $5.2 million was classified within Other non-current liabilities in the condensed consolidated balance sheets. No amounts were paid during the six months ended February 1, 2020 and February 2, 2019.

18. Commitments and Contingencies

Legal Proceedings

Federal Securities Class Action

On June 7, 2019, plaintiff James Newman commenced a federal securities class action in the United States District Court for the District of New Jersey, naming Ascena Retail Group, Inc. and certain of ascena’s current and former officers and directors as defendants. The Newman complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 related to the Company’s goodwill impairment accounting and statements regarding the success of the 2015 purchase of ANN and the overall performance and expected growth of the ANN brands. Plaintiff seeks damages on behalf of a proposed class of purchasers of ascena securities between September 16, 2015 and June 8, 2017 (the proposed “Class Period”).

On July 2, 2019, a second lawsuit was filed by Michaella Corporation. The Michaella complaint is substantially similar to the Newman complaint. Both the Michaella complaint and the Newman complaint name the same defendants, allege the same proposed class period, and challenge the same categories of public statements under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.

On August 6, 2019, two potential lead plaintiffs (Joel Patterson and Michaella Corporation) filed motions for appointment as lead plaintiff in the Newman and Michaella actions, and to consolidate both actions. On August 23, 2019, the Court consolidated the two actions as In re Ascena Retail Group, Inc. Sec. Litig. and appointed Patterson and Michaella Corporation as joint lead-plaintiffs (“Lead Plaintiffs”). The Lead Plaintiffs’ filed an amended complaint on November 21, 2019, which shortened the class period. Defendants filed a motion to dismiss the amended complaint on February 7, 2020.

Defendants believe they have strong defenses to these claims. The range of loss, if any, is not reasonably estimable at this time.

Other Litigation

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


26


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


Other Contingencies

On July 29, 2019, the Company 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. Following the approval of the reverse stock split by the Company’s stockholders at the Company’s annual meeting of stockholders, on December 19, 2019, the Company announced that the Board of Directors approved a reverse stock split of the Company’s common stock at a ratio of 1-for-20, in order to regain compliance. On January 6, 2020, the Company received written notice from the Listing Qualifications department staff of The Nasdaq Market LLC stating that because the Company’s shares of common stock had a closing bid price at or above $1 per share for a minimum of ten consecutive business days, the Company’s stock had regained compliance with the minimum bid price requirement for continued listing on The Nasdaq Global Select Market as set forth in Nasdaq Listing Rule 5450(a)(1), and the matter is now closed. Refer to Note 15 for additional information on the reverse stock split.

19. Segment Information
 
The Company’s segment reporting structure reflects an approach designed to optimize the operational coordination and resource allocation of its businesses across multiple functional areas including specialty retail, direct channel and licensing. The Company classifies its businesses into three reportable operating segments: Premium Fashion, Plus Fashion and Kids Fashion. Each segment is reviewed by the Company’s Chief Executive Officer, who functions as the chief operating decision maker (the “CODM”), and is responsible for reviewing the operating activities, financial results, forecasts and business plans of the segment. Accordingly, the Company’s CODM evaluates performance and allocates resources at the segment level. During the third quarter of Fiscal 2019, the Company made revisions to its reportable segments upon the divesting of its maurices business. As a result, the Company removed the maurices business from the Value Fashion segment and reallocated all corporate overhead to the remaining operating segments. In addition, during the second quarter of Fiscal 2020, the company completed the Dressbarn wind down, which concludes the reporting of the Value Fashion segment. The Company reallocated all corporate overhead to the remaining operating segments. The financial information presented below reflects such changes for all periods presented, including the prior year financial information.

The three reportable operating segments are as follows:
Premium Fashion segment – consists primarily of the specialty retail, outlet and direct channel operations of the Ann Taylor and LOFT brands.
Plus Fashion segment – consists of the specialty retail, outlet and direct channel operations of the Lane Bryant and Catherines brands.
Kids Fashion segment – consists of the specialty retail, outlet, direct channel and licensing operations of the Justice brand.

The accounting policies of the Company’s reportable operating segments are consistent with those described in the Fiscal 2019 10-K. Corporate overhead expenses are allocated to the segments based upon specific usage or other reasonable allocation methods. Certain expenses, including acquisition and integration expenses, and restructuring and other related charges, have not been allocated to the segments, which is consistent with the CODM’s evaluation of the segments.


27


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


Net sales, operating loss and depreciation and amortization expense for each reportable operating segment are as follows:
 
Three Months Ended
 
Six Months Ended
 
February 1,
2020
 
February 2,
2019
 
February 1,
2020
 
February 2,
2019
 
(millions)
 
(millions)
Net sales:
 

 
 

 
 
 
 
Premium Fashion 
$
624.1

 
$
638.9

 
$
1,209.1

 
$
1,234.9

Plus Fashion
318.6

 
305.8

 
598.4

 
591.2

Kids Fashion
274.2

 
326.7

 
529.0

 
592.7

Total net sales
$
1,216.9

 
$
1,271.4

 
$
2,336.5

 
$
2,418.8

 
 
 
 
 
 
 
 
Operating income (loss) (a):
 

 
 

 
  

 
 
Premium Fashion
$
8.9

 
$
(5.1
)
 
$
39.0

 
$
32.0

Plus Fashion
(9.7
)
 
(34.0
)
 
(15.6
)
 
(60.3
)
Kids Fashion
(29.7
)
 
(11.3
)