Gary Muto, president and CEO of Ascena Brands

Ascena Retail Group, continuing to exit weak businesses and review the rest of its brand portfolio, on Thursday posted a fourth-quarter net loss of $358 million, compared with a profit of $33.2 million a year ago.

Comparable sales in the quarter ended Aug. 3 were flat, though better than expected, and total sales were $1.45 billion compared to $1.52 billion in the year-ago period.

However, the company said it exceeded its expectations for adjusted operating earnings, which came in at $16 million.

The retailer also said it completed the divestiture of the Maurices chain; that Dressbarn should have all of its stores closed by Dec. 31, and that inventory levels have been normalized and are positioned well for holiday. Ascena said its cash and revolver availability of $725 million at the end of the fiscal year was compliant with all covenants, providing liquidity.

“The company continues to consider options to optimize its balance sheet and liquidity from a position of strength,” said Carrie Teffner, interim executive chairman, during a conference call Thursday. “We have large, iconic brands in our business with significant liquidity. Of the options being considered, to be clear and avoidance of doubt, bankruptcy of Ascena is not one of the options being evaluated.”

Ascena has total debt of $1.37 billion from a term loan which comes due in August 2022. The company’s next quarterly payment on its term loan, amounting to $22.5 million, is due November 2020.

The operating loss in the fourth quarter was $354 million, which primarily reflects non-cash impairments of goodwill and intangible assets recorded in fiscal 2019, as well as restructuring costs.

Gross margin decreased to $789 million, or 54.3 percent of sales, for the fourth quarter, compared to $882 million, or 58.1 percent of sales in the year-ago period. The decline in gross margin rate was primarily due to higher promotional activity to address elevated inventory levels.

While the company expects to have opportunities to improve gross margins, such as through increased full-price selling and cost savings, new tariffs and e-commerce growth will put pressure on the gross margin rate.

In a statement, Teffner commented: “We made pivotal changes in the back half of fiscal 2019 as we exited our value fashion segment to focus on our brands where we see the biggest profitability potential. Our board and executive team continue to actively assess the portfolio as we remain laser-focused on our key objective of returning to sustainable growth, improving operating margins and optimizing our capital structure as we remain committed to enhancing shareholder value.”

The portfolio of brands includes Loft, the strongest-performing division, as well as Ann Taylor, Lane Bryant, Catherines and Justice, as well as Dressbarn and formerly Maurices.

In March, Ascena announced a $300 million deal to sell a majority stake in Maurices Inc. to a subsidiary of British private equity firm OpCapita. Certain members of the Maurices management team invested alongside OpCapita, while Ascena retains an equity interest. Proceeds from the deal are being used to shore up the balance sheet and reinvested in businesses retained by Ascena. Service agreements with the new owner of Maurices are in place.

Gary Muto, chief executive officer, adding commentary on the fourth-quarter outcome, said, “We were pleased to have exceeded our adjusted operating income expectations for the fourth quarter through better-than-expected comparable sales results and lower operating expenses. In addition, we ended the quarter with a strong cash and liquidity position with no borrowings under our credit facility.

“Looking ahead, by shifting our focus to our brands and rightsizing our cost structure, we plan to capitalize on the meaningful and differentiated presence our brands have in the marketplace. We are evolving our merchandising strategy to incorporate greater versatility in our assortment while maintaining flexibility to keep pace with her changing desires in order to deepen loyalty with existing customers, re-engage lapsed customers and attract new customers. In addition, we are taking steps to enhance our cash position over the course of fiscal 2020 through a combination of cost-saving initiatives, rationalization of our capital expenditures and disciplined working capital management.”

Dressbarn has 616 locations remaining and has reached agreements on closures with the majority of its landlords. All of the brand’s stores are expected to be closed by Dec. 31. With its wind-down, Dressbarn’s business has accelerated and is tracking 12 percent comp sale gains, as loyal customers flock to the store for their last chance to buy the goods. The sales increase will help offset costs of the wind-down.

For the year, Ascena had a net loss of $661.4 million and total sales of $5.5 billion. In fiscal 2018, the company reported a loss of $39.7 million and $5.57 billion in sales.

Ascena’s cap-ex budget for this year is down to between $80 million and $100 million, significantly lower from past years.

Regarding tariffs, the company is negotiating with vendors to share the costs, selectively raising prices on some items and is relocating some sourcing from China to alternative locations where the quality won’t be impacted.

Executives said maintaining a high level of cash is the number-one priority, and the goal of achieving $150 million in annual savings through cost-cutting will help. The bulk of the savings are expected to be realized in fiscal 2020. Rightsizing both full price and outlet fleets, optimizing the capital structure and sustainable growth are also priorities.

 

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