The Ascena Retail Group, continuing to grapple with uneven performance across its portfolio of retail brands catering to different demographics, reported a net loss of $72 million, or 36 cents per diluted share in the second quarter ended Feb. 2 compared with a net loss of $39 million, or 20 cents a share, in the year-ago period.
Operating loss for the second quarter was $52 million compared to an operating loss of $36 million in the year-ago period, as the positive impact of comparable sales growth, lower operating expenses and lower depreciation expense was more than offset by the lower non-comparable sales and lower gross margin rate.
Net sales for the second quarter slipped to $1.69 billion compared with $1.72 billion in the year-ago period, with a 2 percent increase in comparable sales more than offset by lower non-comparable sales. The decrease in non-comparable sales was caused by the unfavorable impact of the 53rd week in the prior fiscal year, and fewer stores as a result of the company’s ongoing fleet optimization program.
While performance improved at Ann Taylor Loft, there were disappointments last quarter at Dressbarn, Justice, Cacique and Lane Bryant. Also, February results were down.
“We delivered our third consecutive quarter of enterprise-level comparable sales growth, with second-quarter comps up 2 percent,” said David Jaffe, chairman and chief executive officer of the $6.6 billion retailer. “While we were pleased with continued traction at the enterprise level, performance was again mixed across our portfolio. Our premium segment (Ann Taylor, Loft and Lou & Grey) continues its momentum, with double-digit comparable sales growth supported by key growth initiatives. Our value segment (Maurices and Dressbarn) while still operating at an unacceptable level of profitability, delivered operating income improvement versus the year-ago period for the first time since the fourth quarter of fiscal 2015.
“Unfortunately, we took a step back at our plus and kids segments this past quarter, and we must deliver more consistent execution to get enterprise financial results back to levels that we consider appropriate.” The plus segment includes Lane Bryant, Catherines and Cacique. Kids includes Justice for tween girls.
Jaffe said the company’s “change for growth” transformation program, which includes cost-cutting and store closings, continues on track. Ascena currently operates 4486 stores and closed 100 stores last quarter. The strategy also involves localized planning and markdown optimization, enterprise marketing tools.
“We expect to realize $300 million in run rate savings by this coming July, and continue to aggressively roll out capability enhancements in our marketing and merchandise planning functions to drive top line and margin rate improvement,” Jaffe said. “The third, and most critical component of our transformation program, is growth from our core. We have made progress here over the past three quarters, but February performance was very challenging, and as a result, we are well off our planned trajectory for top-line growth.”
Jaffe concluded, “While we believe the challenging selling environment is the result of macro headwinds impacting our sector, our third-quarter outlook represents an unacceptable profit shortfall to the expectations we shared at the beginning of our fiscal year. As a result, we are working to accelerate plans that were already in development to take much more fundamental action to address our cost structure.” An additional $150 million in cost savings has been identified. Jaffe cited “a sense of urgency on cost takeout activity.”
For the third quarter, Ascena expects a loss per share of 45 cents to 35 cents; net sales of $1.43 billion to $1.46 billion of a year ago; comparable sales negative 4 to negative 2 percent, and a dip in the gross margin rate to 57 percent from 58 percent.
In a conference call, Gary Muto, president and ceo of Ascena Brands noted strength in the company’s premium segment, with product acceptance particularly with the wear-now products and sweaters, dresses and denim. He said Loft has a “meaningful” growth opportunity in plus sizes.
Ann Taylor got a lift from its new factory web site, and robust sales in tops, dresses and petites.
However, Justice and Lane Bryant were both disappointing this past quarter where there was a lot of clearance activity following an overbought inventory position. Muto said liquidations had a greater impact than expected, but that the company exited the quarter with inventories in good shape.
At Lane Bryant, “the issues are deeper,” Muto said, but he added that the team is addressing marketing positioning. “We must enhance its emotional connections with core customers.…There were significant fashion misses in tops last fall. We took fashion a step too far and overdesigned many of our tops, but Lane Bryant continues to build on strength in dresses and denim.
The performance at Cacique was also down last year, with bras the largest contributor to negative comps. Still, he said Cacique represents “a meaningful long-term growth opportunity.”
Dressbarn is operating at “an unacceptable level of profitability.” Ways to further cut costs and promotional strategies are being examined.