Quarterly Report (10-q)

Date : 06/12/2019 @ 11:02AM
Source : Edgar (US Regulatory)
Stock : Ascena Retail Group Inc (ASNA)
Quote : 0.4846  -0.0088 (-1.78%) @ 5:00AM
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Quarterly Report (10-q)



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 May 4, 2019
 
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)
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Emerging growth company ¨
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

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. ¨
The Registrant had 197,796,875 shares of common stock outstanding as of June 6, 2019 .







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
 
 
May 4,
2019
 
August 4,
2018
 
(millions, except per share data)
(unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
100.8

 
$
231.0

Inventories
654.0

 
535.1

Prepaid expenses and other current assets
213.7

 
229.4

Assets related to discontinued operations
388.4

 
401.3

Total current assets
1,356.9

 
1,396.8

Property and equipment, net
956.9

 
1,106.8

Goodwill
474.4

 
589.5

Other intangible assets, net
391.9

 
427.0

Other assets
58.7

 
50.4

Total assets
$
3,238.8

 
$
3,570.5

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
366.5

 
$
394.7

Accrued expenses and other current liabilities
315.1

 
304.0

Deferred income
140.9

 
108.4

Liabilities related to discontinued operations
157.8

 
166.2

Total current liabilities
980.3

 
973.3

Long-term debt
1,336.1

 
1,328.7

Lease-related liabilities
239.9

 
260.8

Deferred income taxes
0.4

 
2.6

Other non-current liabilities
172.8

 
206.6

Total liabilities
2,729.5

 
2,772.0

 
 
 
 
Commitments and contingencies (Note 16)


 


 
 
 
 
Equity:
 

 
 

Common stock, par value $0.01 per share; 197.8 million and 196.3 million shares issued and outstanding as of May 4, 2019 and August 4, 2018, respectively
2.0

 
2.0

Additional paid-in capital
1,099.3

 
1,088.2

Accumulated deficit
(578.0
)
 
(278.8
)
Accumulated other comprehensive loss
(14.0
)
 
(12.9
)
Total equity
509.3

 
798.5

Total liabilities and equity
$
3,238.8

 
$
3,570.5







See accompanying notes.

3



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
 
(millions, except per share data)
(unaudited)
Net sales
$
1,265.7

 
$
1,266.7

 
$
4,039.2

 
$
4,046.9

Cost of goods sold
(543.4
)
 
(513.5
)
 
(1,767.1
)
 
(1,696.9
)
Gross margin
722.3

 
753.2

 
2,272.1

 
2,350.0

 
 
 
 
 
 
 
 
Other operating expenses:
 
 
 
 
 

 
 

Buying, distribution and occupancy expenses
(276.3
)
 
(280.0
)
 
(845.1
)
 
(858.1
)
Selling, general and administrative expenses
(476.2
)
 
(426.4
)
 
(1,363.2
)
 
(1,307.6
)
Acquisition and integration expenses

 

 

 
(5.4
)
Restructuring and other related charges
(7.1
)
 
(18.1
)
 
(29.1
)
 
(58.9
)
Impairment of goodwill
(115.1
)
 

 
(115.1
)
 

Impairment of other intangible assets
(25.0
)
 

 
(25.0
)
 

Depreciation and amortization expense
(71.6
)
 
(77.2
)
 
(221.5
)
 
(240.1
)
Total other operating expenses
(971.3
)
 
(801.7
)
 
(2,599.0
)
 
(2,470.1
)
Operating loss
(249.0
)
 
(48.5
)
 
(326.9
)
 
(120.1
)
Interest expense
(27.2
)
 
(28.4
)
 
(80.1
)
 
(82.2
)
Interest income and other income (expense), net
0.1

 
(0.1
)
 
1.9

 
1.3

Loss from continuing operations before benefit for income taxes
(276.1
)
 
(77.0
)
 
(405.1
)
 
(201.0
)
Benefit for income taxes from continuing operations
31.9

 
17.9

 
43.7

 
42.8

Loss from continuing operations
(244.2
)
 
(59.1
)
 
(361.4
)
 
(158.2
)
Income from discontinued operations, net of taxes (a)
6.3

 
18.9

 
57.9

 
85.3

Net loss
$
(237.9
)
 
$
(40.2
)
 
$
(303.5
)
 
$
(72.9
)
 
 
 
 
 
 
 
 
Net (loss) income per common share - basic:
 
 
 
 
 

 
 

Continuing operations
$
(1.24
)
 
$
(0.30
)
 
$
(1.83
)
 
$
(0.81
)
Discontinued operations
0.04

 
0.10

 
0.29

 
0.44

Total net loss per basic common share
$
(1.20
)
 
$
(0.20
)
 
$
(1.54
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Net (loss) income per common share - diluted:
 
 
 
 
 

 
 

Continuing operations
$
(1.24
)
 
$
(0.30
)
 
$
(1.83
)
 
$
(0.81
)
Discontinued operations
0.04

 
0.10

 
0.29

 
0.44

Total net loss per diluted common share
$
(1.20
)
 
$
(0.20
)
 
$
(1.54
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
197.6

 
196.2

 
197.3

 
195.9

Diluted
197.6

 
196.2

 
197.3

 
195.9

 
__________

(a) Income from discontinued operations is presented net of income tax expense of $25.9 million and $6.6 million for the three months ended May 4, 2019 and April 28, 2018, respectively, and $39.6 million and $16.5 million for the nine months ended May 4, 2019 and April 28, 2018, respectively.


See accompanying notes.

4



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


 
Three Months Ended
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
 
(millions)
(unaudited)
Net loss
$
(237.9
)
 
$
(40.2
)
 
$
(303.5
)
 
$
(72.9
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(0.7
)
 
(2.7
)
 
(1.1
)
 
(2.0
)
Total other comprehensive loss
(0.7
)
 
(2.7
)
 
(1.1
)
 
(2.0
)
Total comprehensive loss
$
(238.6
)
 
$
(42.9
)
 
$
(304.6
)
 
$
(74.9
)

 
 








































See accompanying notes.

5



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
(millions)
(unaudited)
Cash flows from operating activities:
 
Net loss
$
(303.5
)
 
$
(72.9
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization expense
243.4

 
264.7

Deferred income tax benefit
(13.7
)
 
(32.9
)
Deferred rent and other occupancy costs
(30.1
)
 
(36.0
)
Stock-based compensation expense
10.5

 
15.2

Impairment of goodwill
115.1

 

Impairment of other intangible assets
25.0

 

Impairment of tangible assets
37.4

 
41.9

Non-cash interest expense
7.4

 
9.0

Gain on sale of fixed assets
(0.3
)
 
(1.7
)
Other non-cash income, net
(4.0
)
 
(5.6
)
Changes in operating assets and liabilities:
 

 
 

Inventories
(118.2
)
 
(28.4
)
Accounts payable, accrued liabilities and income tax liabilities
(81.1
)
 
(34.5
)
Deferred income
33.0

 
23.8

Lease-related liabilities
8.3

 
15.6

Other balance sheet changes, net
42.1

 
(16.0
)
Cash (used in) provided by operating activities
(28.7
)
 
142.2

Cash flows used in investing activities:
 

 
 

Capital expenditures
(103.8
)
 
(132.3
)
Proceeds from the sale of assets
1.0

 
13.8

Proceeds from the settlement of corporate-owned life insurance policies

 
37.5

Cash flows used in investing activities
(102.8
)
 
(81.0
)
Cash flows from financing activities:
 

 
 

Redemptions and repayments of term loan

 
(22.5
)
Proceeds from revolver borrowings
28.1

 
518.0

Repayments of revolver borrowings
(28.1
)
 
(518.0
)
Payment of deferred financing costs

 
(1.0
)
Tax payments related to share-based awards
(0.6
)
 
(0.3
)
Proceeds from stock options exercised and employee stock purchases
0.6

 

Cash flows used in financing activities

 
(23.8
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(131.5
)
 
37.4

Cash, cash equivalents and restricted cash at beginning of period
240.1

 
326.6

Cash, cash equivalents and restricted cash at end of period
$
108.6

 
$
364.0








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 2019
 
Shares
 
Amount
 
 
 
 
 
 
(millions)
 
 
(unaudited)
Balance, August 4, 2018
 
196.3

 
$
2.0

 
$
1,088.2

 
$
(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
 
1.1

 

 
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
 
197.4

 
2.0

 
1,093.0

 
(268.5
)
 
(13.3
)
 
813.2

Net loss
 

 

 

 
(71.5
)
 

 
(71.5
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
0.2

 

 
3.8

 
(0.1
)
 

 
3.7

Balance, February 2, 2019
 
197.6

 
2.0

 
1,096.8

 
(340.1
)
 
(13.3
)
 
745.4

Net loss
 

 

 

 
(237.9
)
 

 
(237.9
)
Total other comprehensive loss
 

 

 

 

 
(0.7
)
 
(0.7
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
0.2

 

 
2.5

 

 

 
2.5

Balance, May 4, 2019
 
197.8

 
$
2.0

 
$
1,099.3

 
$
(578.0
)
 
$
(14.0
)
 
$
509.3



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Equity
Fiscal 2018
 
Shares
 
Amount
 
 
 
 
 
 
(millions)
 
 
(unaudited)
Balance, July 29, 2017
 
195.1

 
$
2.0

 
$
1,068.2

 
$
(238.8
)
 
$
(10.4
)
 
$
821.0

Net income
 

 

 

 
6.6

 

 
6.6

Total other comprehensive loss
 

 

 

 

 
(2.0
)
 
(2.0
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 
0.9

 

 
6.0

 
(0.2
)
 

 
5.8

Balance, October 28, 2017
 
196.0

 
2.0

 
1,074.2

 
(232.4
)
 
(12.4
)
 
831.4

Net loss
 

 

 

 
(39.3
)
 

 
(39.3
)
Total other comprehensive income
 

 

 

 

 
2.7

 
2.7

Shares issued and equity grants made pursuant to stock-based compensation plans
 
0.2

 

 
4.8

 
(0.1
)
 

 
4.7

Balance, January 27, 2018
 
196.2

 
2.0

 
1,079.0

 
(271.8
)
 
(9.7
)
 
799.5

Net loss
 

 

 

 
(40.2
)
 

 
(40.2
)
Total other comprehensive income
 

 

 

 

 
(2.7
)
 
(2.7
)
Shares issued and equity grants made pursuant to stock-based compensation plans
 

 

 
4.4

 

 

 
4.4

Balance, April 28, 2018
 
196.2

 
$
2.0

 
$
1,083.4

 
$
(312.0
)
 
$
(12.4
)
 
$
761.0




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 (“ascena” or the “Company”), is a national specialty retailer of apparel for women and tween girls. As of the end of the third quarter, the Company's continuing operations consist of its ecommerce operations and approximately 3,500 stores throughout the United States, Canada and Puerto Rico. The Company had annual revenues from continuing operations for the fiscal year ended August 4, 2018 of approximately $5.6 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 four operating segments: Premium Fashion , Plus Fashion , Kids Fashion , and Value 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 ecommerce 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; our Kids Fashion segment consists of our Justice brand; and our Value Fashion segment consists of our dressbarn brand. As further discussed in Note 2, subsequent to the end of the third quarter, the Company completed the sale of its maurices brand, which previously was included in the Value Fashion segment and announced plans to wind down its dressbarn brand.

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 4, 2018 (the "Fiscal 2018 10-K"). The Company's brands included in the continuing operations had the following store counts as of May 4, 2019 : Justice 831 stores; Lane Bryant 731 stores; LOFT 670 stores; dressbarn 661 stores; Catherines 332 stores; and Ann Taylor 294 stores. The Company's maurices brand, which is included in discontinued operations, as described in Note 2, had 937 stores as of the end of the third quarter.


2. Basis of Presentation

Basis of Consolidation

These unaudited interim 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.
 
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 loss, 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 4, 2018 is derived from the audited consolidated financial statements included in the Company’s Fiscal 2018 10-K, which should be read in conjunction with these interim financial statements. Reference is made to the Fiscal 2018 10-K for a complete set of financial statements.

Fiscal Period
 
Fiscal year 2019 will end on August 3, 2019 and will be a 52-week period ("Fiscal 2019"). Fiscal year 2018 ended on August 4, 2018 and was a 53-week period (“Fiscal 2018”). The three and nine months ended May 4, 2019 were 13 and 39-week periods, respectively, for all segments.


8


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


The Company's Premium Fashion segment, which historically has followed the National Retail Federation calendar, recognized an extra week during the second quarter of Fiscal 2018, consistent with other retail companies already on that calendar. The Company's other segments recognized their extra week in the fourth quarter of Fiscal 2018 due to reporting systems constraints.
As a result, the three and nine months ended April 28, 2018 include the results of the Premium Fashion segment for 13 and 40-weeks, respectively, while the results of the Plus Fashion , Kids Fashion , and Value Fashion segments reflect 13 and 39-weeks, respectively. The Company's Premium Fashion segment recognized Net sales and Operating income from the extra week in the prior year of approximately $25 million and $3 million , respectively.

Discontinued Operations
 
Subsequent to the end of the third quarter, on May 6, 2019, the Company and Maurices Incorporated, a Delaware corporation (“ maurices ”) and wholly owned subsidiary of ascena, completed its previously-announced Stock Purchase Agreement (the "Purchase Agreement") with Viking Brand Upper Holdings, L.P., a Cayman Islands exempted limited partnership (“Buyer”) and an affiliate of OpCapita LLP ("OpCapita”), providing for, among other things, the sale by ascena of a majority interest in maurices to Buyer (the “Transaction”). Effective upon the closing of the Transaction, ascena received cash proceeds of approximately $210 million and a 49.6% ownership interest in the operations of maurices . Transaction costs of approximately $5 - 10 million are expected to be paid in the fourth quarter of Fiscal 2019. The Company will record the disposition and any related gain or loss on the sale of maurices during the fourth quarter of Fiscal 2019.

As maurices was available for disposal in its present condition as of the end of the third quarter of Fiscal 2019, and with the transaction closing shortly after the end of the Company's fiscal third quarter, the Company's maurices business has been classified as discontinued operations within the condensed consolidated financial statements. As such, assets and liabilities related to discontinued operations have been segregated and separately disclosed in the balance sheets as of May 4, 2019 and August 4, 2018. In addition, operating results for maurices have also been segregated and reported as discontinued operations separately in the condensed consolidated financial statements.

The following table summarizes the results of maurices reclassified as discontinued operations:
 
Three Months Ended
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
 
(millions, unaudited)
Net sales
$
238.3

 
$
236.6

 
$
749.4

 
$
765.1

Depreciation and amortization expense
(6.6
)
 
(7.7
)
 
(21.9
)
 
(24.6
)
Operating income
32.0

 
25.4

 
97.0

 
101.3

Pretax income from discontinued operations
32.2

 
25.5

 
97.5

 
101.8

Income tax expense
(25.9
)
 
(6.6
)
 
(39.6
)
 
(16.5
)
Income from discontinued operations, net of tax
$
6.3

 
$
18.9

 
$
57.9

 
$
85.3








9


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


The major components of assets and liabilities related to discontinued operations are summarized below:
 
May 4,
2019
 
August 4,
2018
 
(millions, unaudited)
Cash and cash equivalents
$
6.6

 
$
7.9

Inventories
101.4

 
87.8

Prepaid expenses and other current assets
20.4

 
19.1

Property and equipment, net
72.5

 
98.5

Goodwill
93.5

 
93.5

Other intangible assets, net
89.0

 
89.0

Other assets
5.0

 
5.5

Total assets related to discontinued operations
$
388.4

 
$
401.3

 
 
 
 
Accounts payable and other current liabilities
$
82.8

 
$
83.6

Lease-related liabilities
48.5

 
54.4

Other liabilities
26.5

 
28.2

Total liabilities related to discontinued operations
$
157.8

 
$
166.2


The major components of cash flows related to discontinued operations are summarized below:
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
(millions, unaudited)
Cash provided by operations of discontinued operations
$
59.2

 
$
97.9

Cash used by investing activities of discontinued operations
(2.7
)
 
(5.4
)

3. Recently Issued Accounting Standards
 
Recently adopted standards

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," ("ASU 2014-09") which supersedes the revenue recognition requirements in FASB Accounting Standards Codification, "Revenue Recognition (Topic 605)." The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The Company adopted the guidance on a modified retrospective basis in the first quarter of Fiscal 2019. The new guidance primarily impacted the Company's accounting for its customer loyalty and credit card program contracts. Under the new standard, the Company accounts for its customer loyalty programs using a deferred revenue model, which defers revenue at the estimated fair value as the loyalty points are redeemed. Also under the new standard, the Company records financing charges and other income under its credit card programs as variability is resolved. As a result of the changes discussed above, upon adoption of ASU 2014-09 in the first quarter of Fiscal 2019, we recorded a cumulative net after-tax adjustment to opening Accumulated deficit of approximately $5 million . The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Other changes related to the adoption of ASU 2014-09 include a change in how expected product sales returns are recorded. While the Company continues to establish a reserve based on historical experience, under ASU 2014-09, the reserve is now recorded on a gross basis, rather than a net basis. As a result of this change, we recorded an offsetting increase of approximately $13 million to Inventories and Accrued expenses and other current liabilities.





10


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


The following tables summarize the impact of ASU 2014-09 on our condensed consolidated statement of operations and balance sheet for the three and nine months of Fiscal 2019:

 
 
Three Months Ended May 4, 2019
 
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Net sales
 
$
1,265.7

 
$
1,276.3

 
$
(10.6
)
Cost of goods sold
 
(543.4
)
 
(552.6
)
 
9.2

Gross margin
 
722.3

 
723.7

 
(1.4
)
 
 
 
 
 
 
 
Operating loss
 
(249.0
)
 
(247.6
)
 
(1.4
)
 
 
 
 
 
 
 
Loss from continuing operations before benefit for income taxes
 
(276.1
)
 
(274.7
)
 
(1.4
)
Benefit for income taxes from continuing operations
 
31.9

 
31.6

 
0.3

Loss from continuing operations
 
(244.2
)
 
(243.1
)
 
(1.1
)
Income from discontinued operations, net of tax
 
6.3

 
7.8

 
(1.5
)
Net loss
 
$
(237.9
)
 
$
(235.3
)
 
$
(2.6
)

 
 
Nine Months Ended May 4, 2019
 
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Net sales
 
$
4,039.2

 
$
4,051.8

 
$
(12.6
)
Cost of goods sold
 
(1,767.1
)
 
(1,769.9
)
 
2.8

Gross margin
 
2,272.1

 
2,281.9

 
(9.8
)
 
 
 
 
 
 
 
Operating loss
 
(326.9
)
 
(317.1
)
 
(9.8
)
 
 
 
 
 
 
 
Loss from continuing operations before benefit for income taxes
 
(405.1
)
 
(395.3
)
 
(9.8
)
Benefit for income taxes from continuing operations
 
43.7

 
41.4

 
2.3

Loss from continuing operations
 
(361.4
)
 
(353.9
)
 
(7.5
)
Income from discontinued operations, net of tax
 
57.9

 
59.7

 
(1.8
)
Net loss
 
$
(303.5
)
 
$
(294.2
)
 
$
(9.3
)


11


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


 
 
May 4, 2019
 
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Assets
 
 
 
 
 
 
Inventories
 
$
654.0

 
$
637.8

 
$
16.2

Prepaid expenses and other current assets
 
213.7

 
202.8

 
10.9

Assets related to discontinued operations
 
388.4

 
386.2

 
2.2

Liabilities and Shareholders' Equity
 
 
 
 
 


Accrued expenses and other current liabilities
 
315.1

 
299.5

 
15.6

Liabilities related to discontinued operations
 
157.8

 
153.0

 
4.8

Deferred income
 
140.9

 
127.6

 
13.3

Accumulated deficit
 
(578.0
)
 
(582.4
)
 
(4.4
)

The following table summarizes the impact of ASU 2014-09 on our condensed consolidated balance sheet as of the date of adoption:
 
 
As Reported August 4, 2018
 
Balances After Adoption of ASU 2014-09
 
Impact of Adoption
 
 
(millions)
Assets
 
 
 
 
 
 
Inventories
 
$
535.1

 
$
548.5

 
$
13.4

Prepaid expenses and other current assets
 
229.4

 
249.3

 
19.9

Assets related to discontinued operations
 
401.3

 
404.3

 
3.0

Liabilities and Shareholders' Equity
 
 
 
 
 
 
Accrued expenses and other current liabilities
 
304.0

 
319.1

 
15.1

Liabilities related to discontinued operations
 
166.2

 
170.0

 
3.8

Deferred income
 
108.4

 
120.9

 
12.5

Accumulated deficit
 
(278.8
)
 
(273.9
)
 
4.9


Restricted Cash

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," ("ASU 2016-18"). ASU 2016-18 requires restricted cash be included with cash and cash equivalents when reconciling the total beginning and ending amounts on the statement of cash flows. The standard also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. The Company adopted ASU 2016-18 in the first quarter of Fiscal 2019, using the retrospective method. The other provisions of ASU 2016-18 did not have a material effect on the Company.

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:
 
May 4,
2019
 
August 4,
2018
 
April 28,
2018
 
July 29,
2017
Cash and cash equivalents
 
$
100.8

 
$
231.0

 
$
344.5

 
$
306.3

Restricted cash included in other current assets
 
1.2

 
1.2

 
1.2

 
1.0

Cash included in discontinued operations
 
6.6

 
7.9

 
18.3

 
19.3

Total cash, cash equivalents and restricted cash
 
$
108.6

 
$
240.1

 
$
364.0

 
$
326.6



12


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


Recently issued standards

Leases

In February 2016, the FASB issued ASU 2016-02, "Leases." 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 with the cumulative effect recognized as of the initial date of application. The Company will adopt this ASU on August 4, 2019 and anticipates using the optional transition method with a cumulative adjustment to accumulated deficit. We are still assessing the implications of applying the practical expedients and the accounting policy elections. While the Company's quantification of the impact of this new standard is still in process, it does not expect that the guidance will have a significant impact on its condensed consolidated statements of cash flows, but does expect that it will result in a significant increase to its long-term assets and liabilities given it has a large number of operating leases. The Company is also in the process of testing its lease administration system and is identifying changes to its business processes and controls to support adoption of the new standard in Fiscal 2020.

4. Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, price has been fixed or is determinable and collectability is reasonably assured.
 
Direct channel revenue from sales of products ordered through the Company’s retail internet sites and the corresponding freight revenue are recognized upon delivery and receipt of the shipment by our customers.

Reserves for estimated product returns are recorded based on historical return trends and are adjusted for known events, as applicable. As of May 4, 2019 , the liability for estimated returns was approximately $42.9 million , of which $3.9 million is included in Liabilities related to discontinued operations. In addition, the corresponding balance of the right of return asset for merchandise was approximately $18.4 million , of which $1.6 million is included in Assets related to discontinued operations.
 
Gift cards, gift certificates and merchandise credits (collectively, “gift cards”) issued by the Company are recorded as a deferred income liability until they are redeemed, at which point revenue is recognized. Gift cards do not have expiration dates, but substantially all gift cards are redeemed within a 12-month period. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Gift card breakage is recognized in Net sales over time based on the historical redemption patterns and historically has not been material. For the three months ended May 4, 2019 , the opening balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $121.9 million , of which $16.6 million was recorded within Liabilities related to discontinued operations. Of these balances, we recognized approximately $30 million as revenue during the period, of which approximately $6 million was recorded within Income from discontinued operations. For the nine months ended May 4, 2019 , the opening balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $92.7 million , of which $10.4 million was recorded within Liabilities related to discontinued operations. Of these balances, we recognized approximately $35 million as revenue during the period, of which approximately $6 million was recorded within Income from discontinued operations. The closing balance of deferred revenue related to gift cards, gift certificates and merchandise credits was $106.1 million as of May 4, 2019 , of which $12.7 million was recorded within Liabilities related to discontinued operations.

The Company offers numerous customer loyalty programs for participating customers based on their level of purchases. For every qualifying purchase, the Company defers a portion of the revenue until the loyalty points are redeemed. The transaction price is allocated between the product and the loyalty points based on the relative stand-alone selling price. Loyalty points accumulate until predetermined thresholds are met at which point the loyalty points can be redeemed as a discount off of a future purchase. Substantially all loyalty points are redeemed within a 12-month period. For the three months ended May 4, 2019 , the opening balance of deferred revenue related to outstanding loyalty points was $34.8 million , of which $5.2 million was recorded within Liabilities related to discontinued operations. Of these balances, we recognized approximately $19 million as revenue during the period, of which approximately $3 million was recorded within Income from discontinued operations. For the nine months ended May 4, 2019 , the opening (after adjusting for the impact of adopting ASU 2014-09) balance of deferred revenue related to outstanding loyalty points was $35.4 million , of which $4.6 million was recorded within Liabilities related to discontinued operations. Of these balances, we recognized approximately $29 million as revenue during the period, of which approximately

13


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


$4 million was recorded within Income from discontinued operations. The closing balance of deferred revenue related to outstanding loyalty points was $37.9 million as of May 4, 2019 , of which $7.3 million was recorded within Liabilities related to discontinued operations.

Revenue associated with merchandise shipments to other third-party retailers is recognized at the time title passes and risk of loss is transferred to customers, which generally occurs at the date of shipment.
 
In addition to retail store, direct channel and third-party sales, the Company's segments recognize revenue from (i) licensing arrangements with franchised stores, (ii) royalty payments received under license agreements for the use of their trade name and (iii) credit card agreements as it is earned in accordance with the terms of the underlying agreements.

The Company accounts for sales and other related taxes on a net basis, thereby excluding such taxes from revenue.

The Company’s revenues by major product categories as a percentage of total net sales are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
Apparel
 
87
%
 
86
%
 
83
%
 
83
%
Accessories
 
11
%
 
12
%
 
13
%
 
14
%
Other
 
2
%
 
2
%
 
4
%
 
3
%
     Total net sales
 
100
%
 
100
%
 
100
%
 
100
%

5. Goodwill and Other Intangible Assets

Goodwill and Other Indefinite-lived Intangible Asset Impairment Assessment
Fiscal 2019 Interim Impairment Assessment

The third quarter of Fiscal 2019 marked the continuation of the challenging market environment in which the Company competes. Continued declines in customer traffic across the Company's brands negatively impacted our February and March performance causing lower comparative sales than expected, along with the expectation that such trends may continue into the fourth quarter. The Company concluded that these factors, as well as the significant decline in the Company's stock price, represented impairment indicators which required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the third quarter of Fiscal 2019 (the "Interim Test").

As a result, the Company performed its Interim Test of goodwill and indefinite-lived intangible assets using a quantitative approach as of April 6, 2019, which was the last day in the second month of the third 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. Therefore, a greater weighting was applied to the income approach than the market approach. The weighing of the fair values by valuation approach (income approach vs. market approach) is generally consistent across all reporting units. For substantially all of the reporting units the income approach was weighted 75% and the market approach 25%. 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, factored in a control premium, and used the market approach as a comparison of respective fair values. The estimated fair value determined under the market approach validated our estimate of fair value determined under the income approach. The only difference to the 75% / 25% weighting was at the Catherines reporting unit where the income approach was weighted 100% as the resulting low profit margins made the market approach impracticable. This approach at Catherines had no impact on the overall conclusion. Further, the Company's maurices reporting unit was valued utilizing the sales price inherent in the Transaction described in Note 2. 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 recent operating performance. In particular, sales growth assumptions were significantly lowered at certain brands to reflect the shortfall in actual results versus those previously projected, reflecting the uncertainty of future comparable sales given the sector's dynamic

14


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


change. Based on the results of the impairment assessment, the fair value of our ANN , Justice and maurices reporting units substantially exceeded their carrying value.

Conversely, the 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 Lane Bryant and Catherines reporting units such that their fair values were less than their carrying values. As a result, the Company recognized impairment losses to write down the carrying values of its trade name intangible assets to their fair values as follows: $23.0 million of our Lane Bryant trade name and $2.0 million of our Catherines trade name. 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). In addition, the Company recognized the following goodwill impairment charges: a loss of $65.8 million at the Lane Bryant reporting unit and $49.3 million at the Catherines reporting unit to write down the carrying values of the reporting units to their fair values. These impairment losses have been disclosed separately on the face of the accompanying condensed consolidated statements of operations.

As a result of these impairment charges, the Company included an income tax benefit of approximately $6 million in the estimated effective tax rate for Fiscal 2019.  The income tax benefit was calculated by applying a statutory rate of approximately 26% to the $25.0 million of impairment of other intangible assets. The $115.1 million impairment of goodwill was treated as non-deductible for income tax purposes and was a significant factor in reducing the Company's effective income tax rate for the three and nine months ended May 4, 2019.

Goodwill

The following schedule details the changes in goodwill for each reportable segment:
 
 
Premium Fashion (a)
 
Plus Fashion (b)
 
Kids Fashion
 
Total (c)
 
 
(millions)
Balance at August 4, 2018
 
$
305.0

 
$
115.1

 
$
169.4

 
$
589.5

Impairment losses
 

 
(115.1
)
 

 
(115.1
)
Balance at May 4, 2019
 
$
305.0

 
$

 
$
169.4

 
$
474.4

_______
(a) Net of accumulated impairment losses of $428.9 million for the ANN reporting unit as of August 4, 2018 and May 4, 2019.
(b) Represents the Plus Fashion segment impairment loss as of May 4, 2019, which $65.8 million and $49.3 million relates to the Lane Bryant and the Catherines reporting units, respectively. The accumulated impairment loss at the Lane Bryant and Catherines reporting units as of May 4, 2019 was $387.7 million and $49.3 million , respectively. The accumulated impairment loss at our Lane Bryant reporting unit as of August 4, 2018 was $321.9 million .
(c) Goodwill at our Value Fashion segment of $93.5 million as of August 4, 2018 and May 4, 2019 has been excluded from the table as it is included within Assets related to discontinued operations in the accompanying condensed consolidated balance sheets. The balances as of both reporting dates is net of accumulated impairment losses of $107.2 million .


15


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


Other Intangible Assets

Other intangible assets consist of the following:
 
May 4, 2019
 
August 4, 2018
Description
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Intangible assets subject to amortization (a) :
(millions)
  Proprietary technology
$
4.8

 
$
(4.8
)
 
$

 
$
4.8

 
$
(4.8
)
 
$

  Customer relationships
52.0

 
(45.0
)
 
7.0

 
52.0

 
(39.7
)
 
12.3

  Favorable leases
38.2

 
(26.1
)
 
12.1

 
38.2

 
(21.3
)
 
16.9

  Trade names
5.3

 
(5.3
)
 

 
5.3

 
(5.3
)
 

      Total intangible assets subject to amortization
100.3

 
(81.2
)
 
19.1

 
100.3

 
(71.1
)
 
29.2

Intangible assets not subject to amortization :
 
 
 

 
 

 
 
 
 

 
 

  Brands and trade names (b) (c)
361.9

 

 
361.9

 
386.9

 

 
386.9

  Franchise rights
10.9

 

 
10.9

 
10.9

 

 
10.9

  Total intangible assets not subject to amortization
372.8

 

 
372.8

 
397.8

 

 
397.8

       Total intangible assets
$
473.1

 
$
(81.2
)
 
$
391.9

 
$
498.1

 
$
(71.1
)
 
$
427.0

________
(a)  There were no finite-lived intangible asset impairment losses recorded for any of the periods presented.
(b) The Company recorded impairment charges related to trade names during the three and nine months ended May 4, 2019 , as discussed by reporting unit above.
(c) The amount of Brands and trade names within Intangible assets not subject to amortization excludes $89 million for each period associated with our maurices brand which is included within Assets related to discontinued operations in the accompanying condensed consolidated balance sheets.

6. 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 discounted expected cash flows, which are classified as Level 3 measurements in the fair value measurements hierarchy. 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.


16


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


Impairment charges related to retail store assets by segment are as follows:
 
Three Months Ended
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
 
(millions)
 
(millions)
Premium Fashion (a)
$

 
$
2.0

 
$
0.4

 
$
2.0

Plus Fashion   (a) (b)
16.3

 
0.4

 
17.4

 
3.4

Kids Fashion
0.4

 
0.4

 
0.9

 
1.6

Value Fashion   (a) (c)
15.6

 
17.1

 
16.1

 
20.0

    Total impairment charges
$
32.3

 
$
19.9

 
$
34.8

 
$
27.0

________
(a) The Company incurred additional impairment charges in the three and nine months ended April 28, 2018 of $5.6 million and $10.4 million , respectively, in connection with the Change for Growth program which are considered to be outside the Company’s typical quarterly real-estate review, and are included within Restructuring and other related charges, as more fully described in Note 7.
(b) During the third quarter of Fiscal 2019, the Company performed its third quarter long-lived asset impairment testing for the Plus Fashion segment using cash flow assumptions consistent with those used in the Interim Test described in Note 5. Those assumptions resulted in lower overall anticipated future cash flows and, as a result, the Company recorded an impairment charge of approximately $16.3 million during the three and nine months ended May 4, 2019 , to write down store-related fixed assets to fair market value.
(c) During the third quarter of Fiscal 2019, certain near-term cash flow assumptions were revised based on revised future expectations regarding the operations of the Company's dressbarn brand. Refer to Note 19 for more information. As a result, the Company recorded an impairment charge of $15.6 million during the three and nine months ended May 4, 2019 to write down store-related fixed assets to fair market value. In addition, during the third quarter of Fiscal 2018, new leadership at the Company's Value Fashion segment, particularly at its dressbarn brand, began a comprehensive review of the dressbarn operations. As a result, when the Company performed its third quarter long-lived asset impairment testing for dressbarn , certain near-term cash flow assumptions for that brand were revised, which resulted in lower overall anticipated future cash flows and the Company recorded an impairment charge of approximately $17.1 million for certain under-performing retail stores.
7. Restructuring and Other Related Charges

In Fiscal 2018 and 2019, the Company continued its activities under the Change for Growth program, which started in Fiscal 2017. Specifically, the Company (i) developed new capabilities such as markdown optimization, size pack optimization and localized inventory planning with the goal of allowing it to better compete in the shifting retail landscape, (ii) enhanced our capability to analyze transaction data to support strategic decisions, and (iii) transitioned certain transaction processing functions within the brand services group to an independent third-party managed-service provider. Other activities included the ongoing fleet optimization store program as the Company continues to renegotiate leases and close stores.

Actions associated with the Change for Growth program are currently expected to continue through Fiscal 2019. As the Company continues to execute on the initiatives, we currently expect to incur additional charges in the fourth quarter of Fiscal 2019 of approximately $5 million for professional fees and have identified capital projects of approximately $35 million to be incurred during Fiscal 2019. Of that amount, approximately $30 million was spent in the first nine months of Fiscal 2019.


17


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


As a result of the Change for Growth program, the Company incurred the following charges, which are included within Restructuring and other related charges, for all periods presented:
 
Three Months Ended
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
 
(millions)
 
(millions)
Cash restructuring charges:
 
 
 
 
 
 
 
   Severance and benefit costs (a)
$

 
$
(0.6
)
 
$
0.4

 
$
6.4

   Other related charges (b)
7.1

 
13.1

 
28.7

 
43.2

      Total cash charges
7.1

 
12.5

 
29.1

 
49.6

 
 
 
 
 
 
 
 
Non-cash charges:
 
 
 
 
 
 
 
    Impairment of assets (c)

 
5.6

 

 
9.3

       Total non-cash charges

 
5.6

 

 
9.3

 
 
 
 
 
 
 
 
Total restructuring and other related charges
$
7.1

 
$
18.1

 
$
29.1

 
$
58.9

_______
(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. During the third quarter of Fiscal 2019, in connection with changes in senior management, the Company recorded severance costs which were offset by reversals of accruals associated with long-term compensation programs. During the third quarter of Fiscal 2018, certain segments recorded adjustments to true up estimates of benefit-related costs to reflect amounts actually paid.
(b) Other related charges consist of professional fees and other third-party costs incurred in connection with the identification and implementation of transformation initiatives associated with the Change for Growth program, as well as third-party costs associated with the relocation of the Catherines brand to Ohio.
(c) Non-cash asset impairments for the three months ended April 28, 2018 reflect decisions within the Company's fleet optimization program to close certain under-performing stores primarily at the Premium Fashion segment. The amount for the nine months ended April 28, 2018 also includes non-cash asset impairments of $4.8 million , which primarily reflect the write down of a Plus Fashion segment building to fair market value and was offset in part by the write-off of $1.1 million of tenant allowances during the second quarter of Fiscal 2018 as program stores were vacated.

A summary of activity for the nine months ended May 4, 2019 in the restructuring-related liabilities associated with the Change for Growth program, 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 4, 2018
$
4.0

 
$
6.0

 
$
10.0

   Additions charged to expense (a)
5.1

 
28.7

 
33.8

   Cash payments
(3.3
)
 
(34.5
)
 
(37.8
)
Balance at May 4, 2019
$
5.8

 
$
0.2

 
$
6.0


(a) Additions charged to expense exclude $(4.7) million of long-term incentive program expense reversals related to the announced changes to its senior leadership team.


18


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


8. Inventories
 
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
 
May 4,
2019
 
August 4,
2018
 
April 28,
2018
 
(millions)
Premium Fashion
$
286.6

 
$
212.2

 
$
218.5

Plus Fashion
181.5

 
153.0

 
176.1

Kids Fashion
91.2

 
103.8

 
72.1

Value Fashion
94.7

 
66.1

 
99.4

    Total inventories
$
654.0

 
$
535.1

 
$
566.1

 


9. Debt
Debt consists of the following:
May 4,
2019
 
August 4,
2018
 
(millions)
   Revolving credit facility
$

 
$

         Less: unamortized debt issuance costs (a)
(3.5
)
 
(4.3
)
 
(3.5
)
 
(4.3
)
 


 


   Term loan
1,371.5

 
1,371.5

         Less: unamortized original issue discount (b)
(14.9
)
 
(18.0
)
                   unamortized debt issuance costs (b)
(17.0
)
 
(20.5
)
 
1,339.6

 
1,333.0

Total long-term debt
$
1,336.1

 
$
1,328.7

_______

(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% .

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, of which $100 million can be used for standby letters of credit, 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 extends the maturity of the Company’s revolving credit facility from August 2020 to 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 May 4, 2019 , there were no borrowings under the Amended Revolving Credit Agreement and the Company had $474.0 million of availability under the Amended Revolving Credit Agreement.

19


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



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 May 4, 2019 .

For a more detailed description of the Company’s Amended Revolving Credit Agreement and restrictions thereunder, refer to Note 12 to the audited consolidated financial statements included in the Fiscal 2018 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 $1.2 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 May 4, 2019 , borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of approximately 6.9% . The Company entered into an interest rate swap agreement in March 2019. Refer to Note 10 for additional information.

For a more detailed description of the Company’s Term Loan and restrictions thereunder, refer to Note 12 to the audited consolidated financial statements included in the Fiscal 2018 10-K.

Maturities of Debt
The Company's outstanding debt as of May 4, 2019 matures as follows:
Fiscal Year
 
Amount
 
 
(millions)
2019
 
$

2020
 

2021
 
66.5

2022
 
90.0

2023
 
1,215.0

Total maturities
 
$
1,371.5


10. Derivative Financial Instruments

As discussed in more detail in Note 9, 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.

As of May 4, 2019 , 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 based on Level 2 measurements. Amounts included in the condensed consolidated balance sheet was de minimus as of May 4, 2019 . The amount of unrealized gains and losses deferred to Accumulated other comprehensive loss and the classification of gains and losses from Accumulated other comprehensive loss into earnings

20


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


related to the Company's derivative instrument during the three and nine months ended May 4, 2019 was de minimus. In addition, there was no material ineffectiveness related to the interest rate swap agreement during the periods presented. Based on current valuations, we estimate a de minimus amount will be reclassified from Accumulated other comprehensive loss into Interest expense during the next twelve months.

11. 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:

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 May 4, 2019 and August 4, 2018, the Company believes that the carrying values of cash and cash equivalents approximate its estimated 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 estimated fair value and the carrying value as of May 4, 2019 and August 4, 2018. The fair value of the Term Loan was determined to be $1.183 billion as of May 4, 2019 and $1.258 billion as of August 4, 2018 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

As more fully described in Note 6, during the nine months of Fiscal 2019, assets of $55.7 million related to 635 under-performing stores were written down to their estimated fair values of $18.3 million , resulting in impairment charges of $37.4 million . During the first nine months of Fiscal 2018, assets of $52.7 million related to 321 under-performing stores and one office building were written down to their estimated fair values of $10.8 million resulting in total impairment charges of $41.9 million .

The Company’s non-financial instruments, which primarily consist of goodwill, other intangible assets and property and equipment, 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 discussion of the determination of the fair value of non-financial assets, see Notes 5 and 6.

12. Income Taxes

Tax Cuts and Jobs Act - Update

In December 2017, the 2017 Tax Cuts and Jobs Act (the "2017 Act") was signed into law. A full description of the 2017 Act and its expected impact on the Company is discussed in Note 14 to the audited consolidated financial statements included in the Fiscal 2018 10-K and should be read in conjunction with the update below.

During the second quarter of Fiscal 2019, adjustments were made to estimates recorded in Fiscal 2018 upon adoption of 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

21


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


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 has made an accounting policy election to treat GILTI taxes as a current period expense and has made a reasonable estimate of the impact of GILTI which is included in its Fiscal 2019 effective tax rate discussed below. The Company has 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 in the second quarter of Fiscal 2019 to offset its NOL carryforward because it is not expected to provide incremental tax benefits. In the third quarter of Fiscal 2019, the Company reduced the partial valuation allowance by $2.0 million .

Other Items

As a result of the Company's recent financial performance, the Company determined it is appropriate to record a partial valuation allowance on its federal deferred tax asset. The discrete tax expense in the third quarter of Fiscal 2019 is $6.4 million .

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 third quarter and the first nine months of Fiscal 2019 were 11.6% and 10.8% , respectively, which were lower than the statutory tax rate primarily due to non-deductible impairments of Goodwill, a partial federal valuation allowance, and GILTI.

13. Equity

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 nine months ended May 4, 2019 and the remaining availability was approximately $181.4 million at May 4, 2019 .

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
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
 
(millions)
 
(millions)
Basic
197.6

 
196.2

 
197.3

 
195.9

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

 

 

 

       Diluted shares
197.6

 
196.2

 
197.3

 
195.9

(a) There was no dilutive effect of stock options and restricted stock units for the three and nine months ended May 4, 2019 and April 28, 2018 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

22


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


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 30.8 million shares for both the three and nine months ended May 4, 2019 , and 24.0 million shares for both the three and nine months ended April 28, 2018 .

14. 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 amended and restated Omnibus Incentive Plan was approved by the Company’s shareholders and became effective on December 14, 2018 to increase the aggregate number of shares that may be issued under the plan by an additional 13.1 million shares to 83.6 million . The 2016 Omnibus Incentive Plan expires in November 2025.
 
As of May 4, 2019 , there were approximately 11.0 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 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
 
May 4,
2019
 
April 28,
2018
 
(millions)
 
(millions)
Compensation expense
$
2.2

 
$
4.4

 
$
10.5

 
$
15.2

Income tax benefit
$
0.5

 
$
0.9

 
$
2.2

 
$
4.1


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:
 
Nine Months Ended
 
May 4,
2019
 
April 28,
2018
Expected term (years)
5.2

 
5.1

Expected volatility
47.5
%
 
43.9
%
Risk-free interest rate
2.9
%
 
2.0
%
Expected dividend yield
%
 
%
Weighted-average grant date fair value
$
1.77

 
$
0.97

 

23


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


A summary of the stock option activity under the service-based plans during the nine months ended May 4, 2019 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 4, 2018
19,307.9

 
$
8.97

 
4.2
 
$
9.3

Granted
4,545.8

 
3.89

 
 
 
 
Exercised
(40.2
)
 
2.37

 
 
 
 
Canceled/Forfeited
(2,139.9
)
 
9.24

 
 
 
 
Options outstanding – May 4, 2019
21,673.6

 
$
7.89

 
4.3
 
$