Moody’s Investor Service decided to drop Ascena’s long-term corporate family rating as well as its probability of default rating down a notch to Ba3, the lowest in a range for the categories that define the company’s financial obligations speculative and subject to substantial credit risk.
While the overall outlook for the company, which operates Lane Bryant, Ann Taylor and Dressbarn, among other stores, remains stable, the downgrade comes after a “recent deterioration” in Ascena revenues and earnings, according to Moody’s.
During the first quarter Ascena saw its net loss widen to $35 million, compared with $23 million a year ago, and sales slip to$1.75 billion from $1.84 billion.
“Given challenging apparel retail conditions results are unlikely to improve meaningfully in the next 12-24 months,” Moody’s added. “Moody’s believes that Ascena’s business transformation initiatives including cost reduction, omnichannel and fleet optimization, can significantly benefit earnings over time. However, in the near-term continued price competition and traffic declines will likely offset these efforts.”
The firm added that Ascena is expected to “withstand modest potential further earnings declines” and continue its prudent history of prioritizing debt payments and maintaining good liquidity.
But Moody’s also downgraded the company’s $1.8 billion senior secured-term loan due 2022 to Ba3, of which roughly $1.6 billion is outstanding.
Ascena could see an upgrade as it returns to earnings growth in the near future, but it could also be downgraded again should revenues and earnings “continue to deteriorate meaningfully” or general financial problems “become more aggressive,” Moody’s said.
Ascena isn’t alone in seeing its credit downgraded by Wall Street analysts, which are wary of retail’s ongoing struggle to keep up with e-commerce growth and the need for downsizing marked by widespread store closures.
Moody’s downgraded Vince after the company delayed financial results and alluded to the possibility of default, Standard & Poor’s took its investment grade rating from Under Armour after the brand showed slowing growth last year, and Fitch hit Target with a negative outlook after its financial results disappointed.
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