NOTES TO 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 3,400 stores throughout the United States, Canada and Puerto Rico. The Company had annual revenues for the fiscal year ended August 3, 2019 of approximately $5.5 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 reportable 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 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; 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, at the beginning of the fourth 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.
The Company's brands included in the continuing operations had the following store counts as of August 3, 2019: Justice 826 stores; Lane Bryant 721 stores; LOFT 669 stores; Dressbarn 616 stores; Catherines 320 stores; and Ann Taylor 293 stores.
2. Basis of Presentation
Basis of Consolidation
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and present the financial position, operational results, comprehensive loss 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the consolidated financial statements include: evaluation of goodwill and other intangible assets for impairment; the realizability of inventory; impairments of long-lived tangible assets; and the realizability of deferred tax assets.
Fiscal Year
Fiscal year 2019 ended on August 3, 2019 and reflected a 52-week period (“Fiscal 2019"); fiscal year 2018 ended on August 4, 2018 and reflected a 53-week period (“Fiscal 2018") as the Company conformed its fiscal periods to the National Retail Federation calendar; and fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”). All references to “Fiscal 2020” reflect a 52-week period that will end on August 1, 2020.
The Company's Premium Fashion segment, which historically has followed the National Retail Federation calendar, recognized an additional week during the second quarter of Fiscal 2018, consistent with other retail companies already on that calendar. The Company's Plus Fashion, Kids Fashion and Value Fashion segments recognized an additional week in the fourth quarter of Fiscal 2018 due to reporting systems constraints.
Discontinued Operations
In the fourth quarter of Fiscal 2019, on May 6, 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
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 the operations of maurices through its investment in Viking, consisting of interests in Viking preferred and common stock.
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 has been classified as discontinued operations within the consolidated financial statements. As such, assets and liabilities related to discontinued operations have been segregated and separately disclosed in the consolidated financial statements for all periods presented.
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 range from 3-36 months and include services such as legal, tax, logistics, sourcing and other back office functions. Per the agreement, such services are to be provided at the Company's estimated costs to provide the services. As such, in connection with the accounting for the sale, the Company recorded the services at fair value assuming a normalized profit margin. The resulting balance of $10 million was included within Deferred income as of August 3, 2019 and will be recognized over the 3-36 months service period.
In addition, the Company has guaranteed that maurices will receive annual revenues from its private label credit card arrangements in line with those received historically. The guarantee period ranges from June 2019 through May 2023. The Company believes that the income generated by these arrangements will be substantially in line with the amount contemplated by the guarantee and has provided for any projected shortfall as a component of the gain on the sale of maurices.
The sale was recorded in the fourth quarter of Fiscal 2019 and resulted in a gain of $44.5 million, net of tax, which was recorded as a component of discontinued operations in the accompanying consolidated statement of operations and was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
|
|
|
|
(millions)
|
|
Consideration received:
|
|
|
|
|
|
|
Cash
|
|
$
|
209.8
|
|
|
|
|
|
Investment in Viking
|
|
53.9
|
|
|
|
|
|
|
|
|
|
|
263.7
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
Net assets of maurices
|
|
|
|
(201.1
|
)
|
|
|
Deferred income of transition services contracts
|
|
|
|
(10.0
|
)
|
|
|
Transaction costs
|
|
|
|
(6.7
|
)
|
|
|
Other related costs
|
|
|
|
(5.4
|
)
|
|
|
Gain on disposition of maurices before taxes
|
|
|
|
40.5
|
|
|
|
Income tax benefit from the sale of maurices (a)
|
|
|
|
4.0
|
|
|
|
Gain on disposition of maurices after taxes
|
|
|
|
$
|
44.5
|
|
|
|
|
|
|
|
|
|
_______
(a) The Company's tax basis in maurices exceeded that of its book basis. As a result, the Company recorded a tax benefit of $4.0 million on the sale in the fourth quarter of Fiscal 2019.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the results of maurices classified as discontinued operations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
August 3, 2019 (a)
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
(millions)
|
|
Net sales
|
$
|
749.4
|
|
|
$
|
1,011.9
|
|
|
$
|
1,032.5
|
|
|
Depreciation and amortization expense
|
(21.2
|
)
|
|
(32.0
|
)
|
|
(34.1
|
)
|
|
Operating income
|
97.7
|
|
|
123.2
|
|
|
20.5
|
|
|
Pretax income from discontinued operations
|
98.2
|
|
|
123.8
|
|
|
21.3
|
|
|
Income tax expense
|
(21.8
|
)
|
|
(20.5
|
)
|
|
(20.6
|
)
|
|
Income from discontinued operations, net of tax
|
$
|
76.4
|
|
|
$
|
103.3
|
|
|
$
|
0.7
|
|
_______
(a) Results for the fiscal year ended August 3, 2019 represent results for the period prior to the sale closing on May 6, 2019 and do not reflect the Gain on the disposition of $44.5 million, which is also included under the discontinued operations line in the Company's consolidated statements of operations.
The major components of assets and liabilities related to discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
|
(millions)
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
7.9
|
|
|
Inventories
|
—
|
|
|
87.8
|
|
|
Prepaid expenses and other current assets
|
—
|
|
|
19.1
|
|
|
Property and equipment, net
|
—
|
|
|
98.5
|
|
|
Goodwill
|
—
|
|
|
93.5
|
|
|
Other intangible assets, net
|
—
|
|
|
89.0
|
|
|
Other assets
|
—
|
|
|
5.5
|
|
|
Total assets related to discontinued operations
|
$
|
—
|
|
|
$
|
401.3
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
$
|
—
|
|
|
$
|
83.6
|
|
|
Lease-related liabilities
|
—
|
|
|
54.4
|
|
|
Other liabilities
|
—
|
|
|
28.2
|
|
|
Total liabilities related to discontinued operations
|
$
|
—
|
|
|
$
|
166.2
|
|
The major components of cash flows related to discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
(millions)
|
|
Cash provided by operating activities of discontinued operations
|
$
|
77.0
|
|
|
$
|
119.6
|
|
|
$
|
128.1
|
|
|
Cash used in investing activities of discontinued operations
|
(2.7
|
)
|
|
(5.9
|
)
|
|
(18.2
|
)
|
3. Summary of Significant Accounting Policies
Revenue Recognition
Effective August 5, 2018, the Company adopted Accounting Standard Update 2014-09, “Revenue from Contracts with Customers,” ("ASU 2014-09") which supersedes most preexisting revenue recognition guidance. Refer to Note 4 for more detailed information about the adoption of ASU 2014-09 and the differences between ASU 2014-09 and the prior guidance.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. Retail store revenue is recognized net of estimated returns at the time of sale to consumers. Direct channel revenue from sales of products ordered through the Company’s retail internet sites is recognized upon delivery and receipt of the shipment by our customers. Such revenue is reduced by an estimate of returns. The Company accounts for sales and other related taxes on a net basis, thereby excluding such taxes from revenue.
Reserves for estimated product returns are recorded based on historical return trends and are adjusted for known events, as applicable. As of August 3, 2019, the liability for estimated returns was approximately $19.9 million and the corresponding balance of the right of return asset for merchandise was approximately $9.7 million. As of August 4, 2018, the reserve for product returns was $19.9 million, of which $1.0 million was included in the Liabilities 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. A substantial majority of all gift cards are redeemed within a 12-month period with the highest redemption period occurring in the same quarter the card was issued. 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 fiscal year ended August 3, 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 $39 million as revenue during Fiscal 2019, 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 $85.9 million as of August 3, 2019.
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 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 fiscal year ended August 3, 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 $33 million as revenue during Fiscal 2019, of which approximately $4 million was recorded within Income from discontinued operations. The closing balance of deferred revenue related to outstanding loyalty points was $26.9 million as of August 3, 2019.
The Company’s revenues by major product categories as a percentage of total net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
Apparel
|
|
83
|
%
|
|
83
|
%
|
|
Accessories
|
|
12
|
%
|
|
13
|
%
|
|
Other
|
|
5
|
%
|
|
4
|
%
|
|
Total net sales
|
|
100
|
%
|
|
100
|
%
|
Cost of Goods Sold
Cost of goods sold (“COGS”) consists of all costs of merchandise (net of purchase discounts and vendor allowances), merchandise acquisition costs (primarily commissions and import fees) and freight to our distribution centers and stores. These costs are
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
determined to be directly or indirectly incurred in bringing an article to its existing condition and location. Additionally, the direct costs associated with shipping goods to customers and adjustments to the carrying value of inventory related to realizability and shrinkage are recorded as components of COGS.
Our COGS and Gross margin may not be comparable to those of other entities. Some entities, like us, exclude costs related to their distribution network, buying function, store occupancy costs and depreciation and amortization expenses from COGS and include them in other operating expenses, whereas other entities include these costs in their COGS.
Buying, Distribution and Occupancy Expenses
Buying, distribution and occupancy expenses ("BD&O expenses") consist of store occupancy and utility costs, fulfillment expense (as defined below) and all costs associated with the buying and distribution functions (excluding depreciation).
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A expenses”) consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
Acquisition and Integration Expenses
Acquisition and integration expenses consist primarily of transaction expenses representing legal, consulting and investment banking-related costs that are direct, incremental costs incurred prior to the closing of an acquisition, costs to integrate the operations of acquired businesses into the Company's existing infrastructure and severance and retention-related expenses from integrating acquired businesses.
Restructuring and Other Related Charges
Restructuring and other related charges consist of severance and benefit costs, long-lived asset impairment charges and professional fees incurred in connection with identification and implementation of the cost reduction initiatives, primarily associated with the Change for Growth program, and the Dressbarn wind down, as more fully described in Note 6.
Shipping and Fulfillment
Shipping and fulfillment fees billed to customers are recorded as revenue. The direct costs associated with shipping goods to customers are recorded as a component of COGS. Costs associated with preparing the merchandise for shipping, such as picking, packing, warehousing and order charges ("fulfillment expense") are recorded as a component of BD&O expenses. Fulfillment expense was approximately $65.3 million in Fiscal 2019, $53.4 million in Fiscal 2018 and $41.0 million in Fiscal 2017, of which $6.9 million for Fiscal 2019, $7.2 million for Fiscal 2018 and $5.4 million for Fiscal 2017 was recorded within Income from discontinued operations.
Marketing and Advertising Costs
Marketing and advertising costs are included in SG&A expenses. Marketing and advertising costs are expensed when the advertisement is first exhibited. Marketing and advertising expenses were $265.1 million for Fiscal 2019, $265.1 million for Fiscal 2018 and $269.1 million for Fiscal 2017, of which $30.8 million for Fiscal 2019, $39.4 million for Fiscal 2018 and $34.4 million for Fiscal 2017 was recorded within Income from discontinued operations. Deferred marketing and advertising costs, which principally relate to advertisements that have not yet been exhibited or services that have not yet been received, were not material at the end of either Fiscal 2019, Fiscal 2018 or Fiscal 2017.
Foreign Currency Translation and Transactions
The operating results and financial position of foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. The resulting translation gains or losses are
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
included in the consolidated statements of comprehensive loss, and in the consolidated statements of equity as a component of accumulated other comprehensive loss (“AOCL”). Gains and losses on the translation of intercompany loans made to foreign subsidiaries that are of a long-term investment nature also are included within AOCL.
The Company recognizes gains and losses on transactions that are denominated in a currency other than the respective entity's functional currency. Foreign currency transaction gains and losses also result from intercompany loans made to foreign subsidiaries that are not of a long-term investment nature and include amounts realized on the settlement of certain intercompany loans with foreign subsidiaries. Net losses (gains) from foreign currency transactions were $0.7 million in Fiscal 2019, $1.1 million in Fiscal 2018 and $(0.4) million in Fiscal 2017, of which losses of $0.1 million for Fiscal 2019, $0.2 million for Fiscal 2018 and $0.1 million for Fiscal 2017 were recorded within Income from discontinued operations. Such amounts are recognized in earnings and included within Interest income and other income, net in the accompanying consolidated statements of operations.
Stock-Based Compensation
The Company expenses stock-based compensation to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for estimated forfeitures. The Company uses the Black-Scholes valuation method to determine the grant date fair value of its service-based option compensation and a Monte Carlo simulation model to determine the grant date fair value of its market and performance-based option compensation. Shares of restricted stock and restricted stock units are issuable with service-based, market-based or performance-based conditions (collectively, “Restricted Equity Awards”). Compensation expense for Restricted Equity Awards is recognized over the vesting period based on the grant-date fair values of the awards that are expected to vest based upon the service, market and performance-based conditions.
Long-Term Incentive Plans
The Company maintains a long-term cash incentive program ("LTIP\") which entitles the holder to a cash payment equal to a 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.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of 90 days or less and receivables from financial institutions related to credit card purchases due to the high-credit quality and short time frame for settlement of the outstanding amounts.
Concentration of Credit Risk
The Company maintains cash deposits and cash equivalents with well-known and stable financial institutions; however, there were significant amounts of cash and cash equivalents on deposit at overseas financial institutions as well as at financial institutions that were in excess of FDIC-insured limits at August 3, 2019.
Inventories
Retail Inventory Method
We hold inventory for sale through our retail stores and direct channel sites. All of the Company's segments, other than our Premium Fashion segment discussed below, use the retail inventory method of accounting, under which inventory is stated at the lower of cost, on a First In, First Out (“FIFO”) basis, or market. Under the retail inventory method, the valuation of inventory at cost and the resulting gross margin are calculated by applying a calculated cost to retail ratio to the retail value of inventory. Inherent in the retail method are certain significant management judgments and estimates including, among others, initial merchandise markup, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins.
The Company continuously reviews its inventory levels to identify slow-moving merchandise and markdowns necessary to clear slow-moving merchandise, which reduces the cost of inventories to its estimated net realizable value. Consideration is given to a number of quantitative and qualitative factors, including current pricing levels and the anticipated need for subsequent markdowns, aging of inventories, historical sales trends, and the impact of market trends and economic conditions. Estimates of markdown
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
requirements may differ from actual results due to changes in quantity, quality and mix of products in inventory, as well as changes in consumer preferences, market and economic conditions. The Company’s historical estimates of these costs and its markdown provisions have not differed materially from actual results.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Weighted-average Cost Method
Our Premium Fashion segment uses the weighted-average cost method to value inventory, under which inventory is valued at the lower of average cost or market. Inventory cost is adjusted when the current selling price or future estimated selling price is less than cost.
Reserves for inventory shrinkage, representing the risk of physical loss of inventory, are estimated based on historical experience and are adjusted based upon physical inventory counts.
Property and Equipment, Net
Property and equipment, net, is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:
|
|
|
|
|
|
Buildings and improvements
|
5-40 years
|
|
Distribution center equipment and machinery
|
3-20 years
|
|
Leasehold improvements
|
Shorter of the useful life or expected term of the lease
|
|
Furniture, fixtures, and equipment
|
2-10 years
|
|
Information technology
|
2-10 years
|
Certain costs associated with computer software developed or obtained for internal use are capitalized, including internal costs. The Company capitalizes certain costs for employees that are directly associated with internal use computer software projects once specific criteria are met. Costs are expensed for preliminary stage activities, training, maintenance and all other post-implementation stage activities as they are incurred.
Property and equipment, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. In evaluating long-lived assets for recoverability, including finite-lived intangible assets as described below, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions. Assets to be disposed of and for which there is a committed plan of disposal are reported at the lower of carrying value or fair value less costs to sell.
Goodwill and Other Intangible Assets, Net
At acquisition, the Company estimates and records the fair value of purchased intangible assets, which primarily consist of certain trade names, customer relationships, favorable leases, proprietary software and franchise rights. The fair value of these intangible assets is estimated based on management's assessment, considering independent third-party appraisals, when necessary. The excess of the purchase consideration over the fair value of net assets acquired is recorded as goodwill.
Goodwill and certain other intangible assets deemed to have indefinite useful lives, including trade names and certain franchise rights, are not amortized but assessed for impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. Such assessment is performed using a quantitative approach at the reporting unit level. Through the third quarter of Fiscal 2019, the reporting units identified for the purpose of goodwill impairment assessment, after considering the economic aggregation criteria, were ANN, Justice, Lane Bryant, Dressbarn and Catherines. During the fourth quarter, the Company determined that several discrete events had occurred which changed the manner in which the business was expected to be managed going forward. The sale of maurices, the announced wind down of
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the Dressbarn brand, as well as the changes in senior management, including the appointment of a new Chief Operating Decision Maker (“CODM”), all occurred in the fourth quarter of Fiscal 2019. After considering the impact of all these changes, the Company concluded that its new management was beginning to request more discrete operating information related to its Ann Taylor and LOFT businesses, which are components of the Premium Fashion segment. Therefore, since new management, which included the Company's chief operating decision maker, was beginning to look at the components separately, and beginning to make decisions and allocate resources on that basis, the Company concluded that these components meet the definition of separate operating segments. Given that the determination of a reporting unit for purposes of goodwill impairment testing cannot be at a level higher than the operating segment, the Company determined that Ann Taylor and LOFT now meet the definition of separate operating segments and therefore goodwill has been separately allocated to these two units and tested for impairment as part of the fourth quarter impairment test.
A goodwill impairment loss is recognized in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit.
The impairment test for other indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. The fair value of indefinite-lived intangible assets is primarily 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. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the excess. In addition, in evaluating finite-lived intangible assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value.
Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets (as discussed above), are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. Refer to the Company's accounting policy for long-lived asset impairment as described earlier under the caption "Property and Equipment, Net."
Investments
Accounting Standards Codification (“ASC”) 810—Consolidation (“ASC 810”) requires the consolidation of all entities for which a Company has a controlling voting interest and all variable interest entities (“VIEs”) for which a Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights. For those entities that are not considered VIEs, or are considered VIEs but the Company is not the primary beneficiary, the Company uses either the equity method or the cost method of accounting, depending on a variety of factors as set forth in ASC 323—Investments (“ASC 323”), to account for those investments which are not required to be consolidated under U.S. GAAP.
Insurance Reserves
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for workers’ compensation, general liability and employee healthcare benefits. Liabilities associated with these risks are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Such liabilities are capped through the use of stop-loss contracts with insurance companies. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. As of August 3, 2019 these reserves were $60.8 million and as of August 4, 2018 they were $69.2 million of which $3.4 million was recorded within Liabilities from discontinued operations. The Company is subject to various claims and contingencies related to insurance and other matters arising out of the normal course of business. The Company is self-insured for expenses related to its employee medical and dental plans, its workers’ compensation plan and its general liability plan, up to certain thresholds. Claims filed, as well as claims incurred but not reported, are accrued based on management’s estimates, using information received from plan administrators, historical analysis and other relevant data. The Company’s stop-loss insurance coverage limit for individual claims under these policies is $750,000 for medical claims, $500,000 for workers' compensation claims and $150,000 for general liability
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
claims. The Company believes its accruals for claims and contingencies are adequate based on information currently available. However, it is possible that actual results could differ significantly from the recorded accruals for claims and contingencies.
Income Taxes
Income taxes are provided using the asset and liability method. Under this method, income taxes (i.e., deferred tax assets and liabilities, current taxes payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the current year, and include the results of any differences between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating loss, capital loss and general business credit carry forwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. The Company accounts for the financial effect of changes in tax laws or rates in the period of enactment.
Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. Tax valuation allowances are analyzed periodically and adjusted as events occur, or circumstances change, that warrant adjustments to those balances.
In determining the income tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions. If the Company considers that a tax position is more-likely-than-not of being sustained upon audit, based solely on the technical merits of the position, it recognizes the tax benefit. The Company measures the tax benefit by determining the largest amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. These assessments can be complex and the Company often obtains assistance from external advisors. To the extent that the Company’s estimates change or the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determinations are made. If the initial assessment fails to result in the recognition of a tax benefit, the Company regularly monitors its position and subsequently recognizes the tax benefit if (i) there are changes in tax law or analogous case law that sufficiently raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, (ii) the statute of limitation expires or (iii) there is a completion of an audit resulting in a settlement of that tax year with the appropriate agency. Uncertain tax positions are classified as current only when the Company expects to pay cash within the next twelve months. Interest and penalties, if any, are recorded within the Benefit (provision) for income taxes in the Company’s accompanying consolidated statements of operations and are classified on the accompanying consolidated balance sheets with the related liability for uncertain tax positions.
Leases
The Company leases certain facilities and equipment, including its retail stores. The Company's leases contain renewal options, rent escalation clauses and/or landlord incentives. Rent expense for non-cancelable operating leases with scheduled rent increases and/or landlord incentives is recognized on a straight-line basis over the lease term, beginning with the effective lease commencement date. The effective lease commencement date represents the date on which the Company takes possession of, or controls the physical use of, the leased property. The excess of straight-line rent expense over scheduled payment amounts and landlord incentives is recorded as a deferred rent liability and is classified on the consolidated balance sheets within Lease-related liabilities.
Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
4. 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
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
The following tables summarize the impact of ASU 2014-09 on our consolidated statement of operations and balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended August 3, 2019
|
|
|
|
As Reported
|
|
Balances Without Adoption of ASU 2014-09
|
|
Impact of Adoption
|
|
|
|
(millions)
|
|
Net sales
|
|
$
|
5,493.4
|
|
|
$
|
5,490.4
|
|
|
$
|
3.0
|
|
|
Cost of goods sold
|
|
(2,432.1
|
)
|
|
(2,426.6
|
)
|
|
(5.5
|
)
|
|
Gross margin
|
|
3,061.3
|
|
|
3,063.8
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(681.4
|
)
|
|
(678.9
|
)
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before benefit for income taxes
|
|
(785.0
|
)
|
|
(782.5
|
)
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes from continuing operations
|
|
14.5
|
|
|
13.9
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(782.3
|
)
|
|
(780.4
|
)
|
|
(1.9
|
)
|
|
Income from discontinued operations, net of taxes
|
|
76.4
|
|
|
78.2
|
|
|
(1.8
|
)
|
|
Gain on disposal of discontinued operations, net of taxes
|
|
44.5
|
|
|
44.5
|
|
|
—
|
|
|
Net loss
|
|
$
|
(661.4
|
)
|
|
$
|
(657.7
|
)
|
|
$
|
(3.7
|
)
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
|
|
As Reported
|
|
Balances Without Adoption of ASU 2014-09
|
|
Impact of Adoption
|
|
|
|
(millions)
|
|
Assets
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
547.7
|
|
|
$
|
539.8
|
|
|
$
|
7.9
|
|
|
Prepaid expenses and other current assets
|
|
279.3
|
|
|
264.0
|
|
|
15.3
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
333.9
|
|
|
324.9
|
|
|
9.0
|
|
|
Deferred income
|
|
128.3
|
|
|
117.9
|
|
|
10.4
|
|
|
Accumulated deficit
|
|
(935.9
|
)
|
|
(934.7
|
)
|
|
1.2
|
|
The following table summarizes the impact of ASU 2014-09 on our 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 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 consolidated balance sheets to the amounts shown on the consolidated statements of cash flows is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash:
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
Cash and cash equivalents
|
|
$
|
328.0
|
|
|
$
|
231.0
|
|
|
$
|
306.3
|
|
|
Restricted cash included in other current assets
|
|
1.2
|
|
|
1.2
|
|
|
1.0
|
|
|
Cash included in discontinued operations
|
|
—
|
|
|
7.9
|
|
|
19.3
|
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
329.2
|
|
|
$
|
240.1
|
|
|
$
|
326.6
|
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Recently issued standards
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes lease accounting as contained within ASC 840. The core principle of ASU 2016-02 is that a lessee should recognize on the balance sheet the lease assets and lease liabilities that arise from all lease arrangements with terms greater than 12 months. Recognition of these lease assets and lease liabilities represents a change from previous GAAP, which did not require lease assets and lease liabilities to be recognized for operating leases. Qualitative disclosures along with specific quantitative disclosures will be required to provide enough information to supplement the amounts recorded in the financial statements so that users can understand the nature of the Company’s leasing activities.
The provisions of ASU 2016-02 are effective for Fiscal 2020, which begins on August 4, 2019, including interim periods within that fiscal year. The Company plans to elect 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 certain classes of assets; and (iv) to not reassess the initial direct costs for existing leases. In addition, the Company does not plan to recognize short-term leases on its Consolidated Balance Sheets and will recognize the expense for those lease payments in the Consolidated Statements of Operations.
In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements,” as an update to the previously-issued guidance. This update added a modified retrospective approach under which the cumulative effect of initially applying the standard will be recognized as an adjustment to its opening Fiscal 2020 retained earnings, with no restatement of prior year amounts. The Company plans to elect this transition option.
Upon adoption on August 4, 2019, we will recognize right-of-use assets and lease liabilities that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments using the Company's incremental borrowing rate as of the date of adoption of ASU 2016-02. The Company has received a preliminary analysis of the rates to be used upon adoption and is reviewing the analysis. The preliminary analysis indicates that the Company's incremental borrowing rate is in the range of 25-30%, which is similar to the yield underlying the fair value of the Company's Term Loan debt, as disclosed in Note 14. 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 deferred rent. Deferred and prepaid rent will not be presented separately after the adoption of the new lease standard.
The Company expects that this standard will have a material impact on our Consolidated Balance Sheet and related disclosures, however, the adoption of this standard is not expected to have a material impact on the Consolidated Statement of Income and Consolidated Statement of Cash Flows. It is also not expected to have any impact on the Company’s covenant compliance under its current debt agreements. The Company continues to enhance accounting systems and update business processes and controls related to the new guidance for leases and we are finalizing the impact of the standard to our accounting policies, processes, disclosures, and internal control over financial reporting. Collectively, these activities are expected to enable the Company to meet the new accounting and disclosure requirements upon adoption in the first quarter of Fiscal 2020.
5. Goodwill and Other Intangible Assets
Goodwill
The following details the changes in goodwill for each reportable segment:
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion (a)
|
|
Plus Fashion (b)
|
|
Kids Fashion (c)
|
|
Total (d)
|
|
|
|
(millions)
|
|
Balance at July 29, 2017
|
|
$
|
305.0
|
|
|
$
|
115.1
|
|
|
$
|
169.4
|
|
|
$
|
589.5
|
|
|
Impairment losses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance at August 4, 2018
|
|
305.0
|
|
|
115.1
|
|
|
169.4
|
|
|
589.5
|
|
|
Impairment losses
|
|
—
|
|
|
(115.1
|
)
|
|
(160.9
|
)
|
|
(276.0
|
)
|
|
Balance at August 3, 2019
|
|
$
|
305.0
|
|
|
$
|
—
|
|
|
$
|
8.5
|
|
|
$
|
313.5
|
|
(a) Net of accumulated impairment losses of $428.9 million for the ANN reporting unit as of August 3, 2019 and August 4, 2018.
(b) Represents the Plus Fashion segment impairment losses as of August 3, 2019, which $65.8 million and $49.3 million relates to Lane Bryant and Catherines reporting units, respectively. The accumulated impairment loss at the Lane Bryant and Catherines reporting units as of August 3, 2019 was $387.7 million and $49.3 million, respectively. The accumulated impairment loss at the Lane Bryant and Catherines reporting units as of August 4, 2018 was $321.9 million and $0, respectively.
(c) Represents the Kids Fashion segment impairment losses as of August 3, 2019, which also represents the accumulated impairment loss as of August 3, 2019.
(d) Goodwill at our Value Fashion segment of $93.5 million as of August 4, 2018 has been excluded from the table as it is included within Assets related to discontinued operations in the accompanying consolidated balance sheets. The balance as of that date is net of accumulated impairment losses of $107.2 million.
Other Intangible Assets
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 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
|
|
|
(46.7
|
)
|
|
5.3
|
|
|
52.0
|
|
|
(39.7
|
)
|
|
12.3
|
|
|
Favorable leases
|
38.2
|
|
|
(29.8
|
)
|
|
8.4
|
|
|
38.2
|
|
|
(21.3
|
)
|
|
16.9
|
|
|
Trade names
|
5.3
|
|
|
(5.3
|
)
|
|
—
|
|
|
5.3
|
|
|
(5.3
|
)
|
|
—
|
|
|
Total intangible assets subject to amortization
|
100.3
|
|
|
(86.6
|
)
|
|
13.7
|
|
|
100.3
|
|
|
(71.1
|
)
|
|
29.2
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brands and trade names (b) (c)
|
252.0
|
|
|
—
|
|
|
252.0
|
|
|
386.9
|
|
|
—
|
|
|
386.9
|
|
|
Franchise rights
|
10.9
|
|
|
—
|
|
|
10.9
|
|
|
10.9
|
|
|
—
|
|
|
10.9
|
|
|
Total intangible assets not subject to amortization
|
262.9
|
|
|
—
|
|
|
262.9
|
|
|
397.8
|
|
|
—
|
|
|
397.8
|
|
|
Total intangible assets
|
$
|
363.2
|
|
|
$
|
(86.6
|
)
|
|
$
|
276.6
|
|
|
$
|
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 Fiscal 2019, as discussed by reporting unit below.
(c) 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 consolidated balance sheets.
Amortization
The Company recognized amortization expense on finite-lived intangible assets, excluding favorable leases discussed below, of $7.0 million in Fiscal 2019, $9.5 million in Fiscal 2018 and $12.5 million in Fiscal 2017, which is classified within Depreciation and amortization expense in the accompanying consolidated statements of operations. The Company amortizes customer relationships recognized as part of the acquisition of ANN INC. (the "ANN Acquisition") over five years based on the pattern of revenue expected to be generated from the use of the asset. In that regard, the remaining balance as of August 3, 2019 of $5.3 million will be amortized during Fiscal 2020.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Favorable leases are amortized into either Buying, distribution and occupancy expenses or Selling, general and administrative expenses over a weighted-average lease term of approximately four years. The Company recognized amortization expense on favorable leases of $8.5 million in Fiscal 2019, $6.9 million in Fiscal 2018 and $7.3 million in Fiscal 2017. The expected amortization for each of the next five fiscal years is as follows: Fiscal 2020: $5.0 million; Fiscal 2021: $1.8 million; Fiscal 2022: $1.0 million; Fiscal 2023: $0.5 million; and Fiscal 2024 and thereafter: $0.1 million.
Goodwill and Other Indefinite-lived Intangible Assets Impairment Assessment
As discussed in Note 3, the Company typically performs its annual impairment assessment of goodwill and indefinite-lived intangible assets during the fourth quarter of each fiscal year unless a triggering event has occurred in a previous quarter. The impairment test for other indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the excess. Based on the results of the Company’s annual impairment testing of goodwill and indefinite-lived intangible assets for Fiscal 2018, no impairment charges were deemed necessary.
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 change. Based on the results of the impairment assessment, the fair value of our ANN, Justice and maurices reporting units significantly 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
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
units to their fair values. These impairment losses have been disclosed separately on the face of the accompanying consolidated statements of operations.
Fiscal 2019 Fourth Quarter Assessment
The Company performed its regular annual assessment at the beginning of the fourth quarter and did not note any impairment of goodwill or intangible assets as it had just completed the Interim Test. However, during the fourth quarter of Fiscal 2019, the Company's stock price again declined significantly, dropping from the price used in the Interim Test of $1.20 to a value of $0.33 at the end of Fiscal 2019. This decline, coupled with a decline in the fair value of the Company's Term Loan, as defined herein, and discussed in Notes 10 and 14, led the Company to conclude that the items represented further impairment indicators which again required the Company to test its goodwill and indefinite-lived intangible assets for impairment during the fourth quarter of Fiscal 2019 (the "Year-End Test").
The Year-End Test was determined with the assistance of an independent valuation firm using the same methodologies as the Interim Test. While the actual cash flows achieved in the fourth quarter of Fiscal 2019 differed from the projected Fiscal 2019 cash flows used in the Interim Test, the Company concluded that the primary difference arose from differences in gross margin rate, which resulted from the higher inventory levels experienced during Fiscal 2019. As a result, the Company concluded that the changes did not substantially impact the cash flow estimates used for the future years, therefore the cash flow projections underlying the Year-End Test were substantially the same as those used in the Interim Test. The primary driver of the change in value was the change in the discount rate assumption. In the Interim Test, the discount rate ranged from 14%-15%. Because of declines in the Company's stock price and the fair value of the Company's Term Loan, the discount rate used in the Year-End Test ranged from 27%-29%.
Primarily as a result of the significantly higher discount rate assumption in the Year-End Test, the fair value of the Justice reporting unit, which significantly exceeded its carrying value as of the Interim Test, was less than its carrying value in the Year-End Test. Based on the results of the impairment assessment, the fair value of ANN, which significantly exceeded its carrying value in the Interim Test, still significantly exceeded its carrying value in the Year-End Test, however by a lower amount.
Additionally, as a result of the previously described change in operating segments during the fourth quarter which led to Ann Taylor and LOFT being identified as separate reporting units not subject to further aggregation, we performed an initial test on those units utilizing a similar approach as that used for the ANN test described above. The discount rates used were 27% for LOFT and 28% for Ann Taylor.
Based on the conclusions of the Year-End Test, the Company recognized impairment losses to write-down the carrying values of its trade name intangible assets to their fair values as follows: $15.0 million of our Ann Taylor trade name, $60.3 million of our LOFT trade name, $14.0 million of our Lane Bryant trade name, $4.0 million of our Catherines trade name and $16.6 million of our Justice trade name. In addition, the Company recognized a goodwill impairment charge of $160.9 million at the Justice reporting unit to write-down the carrying values of the reporting units to their fair values. These impairment losses have been disclosed separately in the accompanying consolidated statements of operations.
As a result of the impairment charges recorded in both the Interim Test and the Year-End Test, the Company included an income tax benefit of approximately $33 million in the estimated effective tax rate for Fiscal 2019. The income tax benefit was calculated by applying a blended statutory rate of approximately 25% to the $134.9 million of impairment of other intangible assets. The total goodwill impairment charges of $276.0 million under the two tests were treated as non-deductible for income tax purposes and were a significant factor in reducing the Company's effective income tax rate for the fiscal year ended August 3, 2019.
Fiscal 2017 Interim Impairment Assessment
The third quarter of Fiscal 2017 marked the continuation of the challenging market environment in which the Company competes. Lower than expected comparable sales for the third quarter, along with a reduced comparable sales outlook for the fourth quarter led the Company to significantly reduce its level of forecasted earnings for Fiscal 2017 and future periods. The Company concluded that these factors, as well as the 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 2017 (the "2017 Interim Test").
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As a result, the Company performed the 2017 Interim Test using a quantitative approach on the last day of its third fiscal quarter. The 2017 Interim Test was determined with the assistance of an independent valuation firm using two valuation approaches, including the income approach (the discounted cash flow method) and the 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) was consistent across all reporting units. For all reporting units, the income approach was weighted 85% and the market approach 15%. 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 its estimate of fair value determined under the income approach. Finally, the Company’s publicly traded market capitalization was reconciled to the sum of the fair value of the reporting units, taking into account subsequent changes in the Company's stock price reflecting information known as of, but made public subsequent to, the date of the 2017 Interim Test.
The projections used in the 2017 Interim Test reflect lower assumptions across certain key areas as a result of lower-than-expected performance and a sustained challenging retail environment. In particular, sales growth assumptions were significantly lowered to reflect the shortfall in actual results versus those previously projected, reflecting the uncertainty of future comparable sales given the sector's dynamic change. The lower sales outlook resulted in a significant reduction in fair market value compared to the prior valuation performed in Fiscal 2016. Based on the results of the impairment assessment, the fair value of its Catherines reporting unit significantly exceeded its carrying value and was not at risk of impairment, while its Justice reporting unit only exceeded its carrying value by 8%.
The changes in key assumptions and the resulting reduction in the long-term growth rates and profitability included in the 2017 Interim Test resulted in a decrease in the fair values of trade names and goodwill at its ANN, maurices and Lane Bryant 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: $210.0 million of its Ann Taylor trade name, $356.3 million of its LOFT trade name and $161.8 million of its Lane Bryant 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 $428.9 million at the ANN reporting unit, $60.2 million at the Lane Bryant reporting unit and $107.2 million at the maurices reporting unit, which is included in discontinued operations, 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 consolidated statements of operations.
6. Restructuring and Other Related Charges
In Fiscal 2017, the Company announced that it was beginning a multi-year transformation plan with the objective of supporting sustainable long-term growth and increasing shareholder value (the "Change for Growth" program). In Fiscal 2017, the Company (i) refined its operating model to increase the focus on key customer segments, (ii) developed initiatives which will optimize the flow of product through the Company's distribution channels, including direct channel and its brick-and-mortar retail locations, (iii) consolidated certain support functions into its brand services group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, and (iv) began a review of its store fleet with the goal of reducing the number of under-performing stores through either rent reductions or store closures, in an effort to increase the overall profitability of the remaining store portfolio and convert sales from these stores into direct channel sales or to nearby store locations.
In Fiscal 2018 and 2019, in addition to continuing a number of the activities started in Fiscal 2017, 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 during Fiscal 2018 and 2019 included the ongoing fleet optimization store program as the Company continues to renegotiate leases and close stores. Such activities included the planned closure of under-performing stores and the completion of the previously announced relocation of the Catherines brand to Columbus, Ohio, which resulted in a write-down of their former
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
headquarters building in Bensalem, Pennsylvania to fair market value during Fiscal 2018. The building was sold in the third quarter of Fiscal 2018. These previously mentioned charges were recorded within Restructuring and other related charges. Actions associated with the Change for Growth program were completed in Fiscal 2019.
In addition to the Change for Growth program, the Company announced an additional organizational restructuring in the fourth quarter of Fiscal 2019, which included job eliminations, as it continues its cost reduction initiatives.
As a result of the cost reduction initiatives, the Company incurred the following charges, which are included within Restructuring and other related charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
July 29, 2017
|
|
Cash restructuring charges:
|
(millions)
|
|
Severance and benefit costs (a)
|
$
|
43.0
|
|
|
$
|
5.7
|
|
|
$
|
30.8
|
|
|
Lease termination and store closure costs
|
0.7
|
|
|
—
|
|
|
1.2
|
|
|
Other related charges (b)
|
38.6
|
|
|
59.2
|
|
|
33.4
|
|
|
Total cash charges
|
82.3
|
|
|
64.9
|
|
|
65.4
|
|
|
|
|
|
|
|
|
|
Non-cash charges:
|
|
|
|
|
|
|
Impairment of store assets (c)
|
45.4
|
|
|
11.7
|
|
|
12.7
|
|
|
Total non-cash charges
|
45.4
|
|
|
11.7
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
Total restructuring and other related charges
|
$
|
127.7
|
|
|
$
|
76.6
|
|
|
$
|
78.1
|
|
_______
(a) Severance and benefit costs reflect severance accruals as well as adjustments to true up estimates of previously accrued severance-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, professional fees in connection with the Dressbarn wind down, and third-party costs associated with the relocation of the Catherines brand to Ohio in Fiscal 2018.
(c) Non-cash asset impairments primarily reflect the write-down of the Dressbarn corporate headquarters to fair market value as a result of the wind down and the write-down of a corporate-owned office building in Duluth, MN to fair market value as a result of the sale of maurices, decisions within the Company's fleet optimization program to close certain under-performing stores, primarily at the Premium Fashion segment, and write-downs associated with a Plus Fashion segment building to fair market value. The amount for Fiscal 2018 includes asset impairments of $12.8 million and was offset by the write-off of $1.1 million of tenant allowances.
A summary of activity for Fiscals 2017, 2018 and 2019 in the restructuring-related liabilities, which is included within Accrued expenses and other current liabilities, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs
|
|
Lease termination and store closure costs
|
|
Other related charges
|
|
Total
|
|
|
(millions)
|
|
Balance at July 30, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Additions charged to expense
|
30.8
|
|
|
1.2
|
|
|
33.4
|
|
|
65.4
|
|
|
Cash payments
|
(15.2
|
)
|
|
(1.2
|
)
|
|
(28.3
|
)
|
|
(44.7
|
)
|
|
Balance at July 29, 2017
|
15.6
|
|
|
—
|
|
|
5.1
|
|
|
20.7
|
|
|
Additions charged to expense
|
5.7
|
|
|
—
|
|
|
59.2
|
|
|
64.9
|
|
|
Cash payments
|
(17.3
|
)
|
|
—
|
|
|
(58.3
|
)
|
|
(75.6
|
)
|
|
Balance at August 4, 2018
|
4.0
|
|
|
—
|
|
|
6.0
|
|
|
10.0
|
|
|
Additions charged to expense (a)
|
47.7
|
|
|
0.7
|
|
|
38.6
|
|
|
87.0
|
|
|
Cash payments
|
(7.0
|
)
|
|
(0.7
|
)
|
|
(39.8
|
)
|
|
(47.5
|
)
|
|
Balance at August 3, 2019
|
$
|
44.7
|
|
|
$
|
—
|
|
|
$
|
4.8
|
|
|
$
|
49.5
|
|
_______
(a) Additions charged to expense for Fiscal 2019 exclude $(4.7) million of long-term incentive program expense reversals related to the announced changes to the Company's senior leadership team.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Inventories
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
|
|
(millions)
|
|
Premium Fashion
|
|
$
|
226.3
|
|
|
$
|
212.2
|
|
|
Plus Fashion
|
|
156.5
|
|
|
153.0
|
|
|
Kids Fashion
|
|
107.9
|
|
|
103.8
|
|
|
Value Fashion
|
|
57.0
|
|
|
66.1
|
|
|
Total inventories
|
|
$
|
547.7
|
|
|
$
|
535.1
|
|
8. Property and Equipment
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
|
|
(millions)
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
Land
|
|
$
|
22.5
|
|
|
$
|
27.3
|
|
|
Buildings and improvements
|
|
194.9
|
|
|
236.8
|
|
|
Leasehold improvements
|
|
748.6
|
|
|
791.4
|
|
|
Furniture, fixtures and equipment
|
|
637.3
|
|
|
644.1
|
|
|
Information technology
|
|
868.6
|
|
|
792.3
|
|
|
Construction in progress
|
|
13.5
|
|
|
29.2
|
|
|
|
|
2,485.4
|
|
|
2,521.1
|
|
|
Less: accumulated depreciation
|
|
(1,638.4
|
)
|
|
(1,414.3
|
)
|
|
Property and equipment, net
|
|
$
|
847.0
|
|
|
$
|
1,106.8
|
|
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 consolidated statements of operations for all periods.
Impairment charges related to retail store assets by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
(millions)
|
|
Premium Fashion
|
$
|
2.2
|
|
|
$
|
2.3
|
|
|
$
|
0.7
|
|
|
Plus Fashion
|
17.8
|
|
|
5.1
|
|
|
6.3
|
|
|
Kids Fashion
|
1.7
|
|
|
1.8
|
|
|
3.5
|
|
|
Value Fashion
|
16.1
|
|
|
20.3
|
|
|
7.4
|
|
|
Total impairment charges (a)
|
$
|
37.8
|
|
|
$
|
29.5
|
|
|
$
|
17.9
|
|
________
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(a) The Company incurred additional impairment charges, which are considered to be outside the Company’s typical quarterly real-estate review. These additional charges are included within Restructuring and other related charges and are more fully described in Note 6.
Depreciation
The Company recognized depreciation expense of $292.9 million in Fiscal 2019, $314.0 million in Fiscal 2018 and $338.3 million in Fiscal 2017, which is classified within Depreciation and amortization expense in the accompanying consolidated statements of operations.
9. Investment and Variable Interest Entity
As discussed in Note 2, on May 6, 2019, the Company and OpCapita 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 of approximately $210 million 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 inception, the Company determined, in accordance with ASC 810, based on the corporate structure, voting rights and contributions of the Company and OpCapita, that Viking is a VIE and not subject to consolidation, as the Company is not the primary beneficiary of Viking because the Company does not have the power to direct the activities that most significantly impact Viking’s economic performance. As a result, the Company has recorded its initial investment in Viking of $53.9 million, based on a third-party valuation that utilized a binomial lattice model, and will account for its investment under the equity method of accounting.
As part of the Transaction, the Company has guaranteed that maurices will receive annual revenues from its private label credit card arrangements in line with those received historically over the period ranging from June 2019 through May 2023. The Company believes that the income generated by these arrangements will be substantially in line with the amount contemplated by the guarantee and has provided for the projected shortfall as a component of the gain on the sale of maurices.
Viking, primarily through its investment in maurices, reported a loss of approximately $12 million in the fourth quarter of Fiscal 2019, which represents results from the operations of maurices for the post acquisition period in Fiscal 2019. 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. Accordingly, the Company recognized its share of the loss in the accompanying 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.
As of August 3, 2019, the Company's investment in Viking was recorded at $42.1 million and the Company had a receivable due from maurices of $59.8 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 August 3, 2019. The Company's investment balance, plus the receivable and the private label credit card revenue guarantee, both previously discussed, represent our maximum exposures to any potential loss.
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 range from 3-36 months and include services such as legal, tax, logistics, sourcing and other back office functions. For the three months ended August 3, 2019, the Company recognized fees from these services of approximately $13.9 million.
10. Debt
Debt consists of the following:
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
|
(millions)
|
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
—
|
|
|
Less: unamortized debt issuance costs (a)
|
(3.2
|
)
|
|
(4.3
|
)
|
|
|
(3.2
|
)
|
|
(4.3
|
)
|
|
|
|
|
|
|
Term loan
|
1,371.5
|
|
|
1,371.5
|
|
|
Less: unamortized original issue discount (b)
|
(13.8
|
)
|
|
(18.0
|
)
|
|
unamortized debt issuance costs (b)
|
(15.9
|
)
|
|
(20.5
|
)
|
|
|
1,341.8
|
|
|
1,333.0
|
|
|
|
|
|
|
|
Less: current portion
|
—
|
|
|
—
|
|
|
Total long-term debt
|
$
|
1,338.6
|
|
|
$
|
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 of its revolving credit agreement dated August 21, 2015, as amended 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. Refer to Note 22 for more details on the amendment. 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, as defined in the Amended Revolving Credit Agreement (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.
Throughout the term of the Amended Revolving Credit Agreement, the Company can elect to borrow either Alternative Base Rate Borrowings ("ABR Borrowings") or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using the LIBOR for such Interest Period plus an applicable margin ranging from 125 basis points to 150 basis points based on the Company’s average availability during the previous fiscal quarter. ABR Borrowings bear interest at a variable rate determined using a base rate equal to the greatest of (i) prime rate, (ii) federal funds rate plus 50 basis points or (iii) one-month LIBOR plus 100 basis points; plus an applicable margin ranging from 25 basis points to 50 basis points based on the average availability during the previous fiscal quarter.
Under the terms of the Amended Revolving Credit Agreement, the unutilized commitment fee ranges from 20 basis points to 25 basis points per annum based on the Company's average utilization during the previous fiscal quarter.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of August 3, 2019, there were no borrowings outstanding under the Amended Revolving Credit Agreement. After taking into account the $43.5 million in outstanding letters of credit, the Company had $396.5 million of availability under the Amended Revolving Credit Agreement.
Term Loan
In connection with the ANN Acquisition, 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 a term facility of $200 million. The Company would also be eligible to borrow an unlimited amount, if it were to maintain a minimum senior secured leverage ratio as defined in the Term Loan (the "Senior Secured Leverage Ratio") among other requirements.
The Term Loan matures on August 21, 2022 and its terms require quarterly repayments of $4.5 million during the first half of Fiscal 2017 and $22.5 million thereafter, with a remaining balloon payment of approximately $1.2 billion required at maturity. During Fiscal 2018, the Company made repayments totaling $225 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, including (i) commencing with the fiscal year ending July 29, 2017 if the Company has excess cash flows, as defined in the Term Loan, for any fiscal year and the Senior Secured Leverage Ratio for such fiscal year exceeds certain predetermined limits and (ii) from Net Proceeds, as defined in the Term Loan, of asset dispositions and certain casualty events that are greater than $25 million in the aggregate in any fiscal year and not reinvested (or committed to be reinvested) within one year, in each case subject to certain conditions and exceptions. No such mandatory prepayments are due for Fiscal 2019. The Company has the right to prepay the Term Loan in any amount and at any time with no prepayment penalties.
At the time of initial borrowings and renewal periods throughout the term of the Term Loan, the Company may elect to borrow either ABR Borrowings or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using LIBOR (subject to a 75 basis points floor) plus an applicable margin of 450 basis points. ABR Borrowings bear interest at a variable rate determined using a base rate (subject to a 175 basis points floor) equal to the greatest of (i) prime rate, (ii) federal funds rate plus 50 basis points or (iii) LIBOR plus 100 basis points, plus an applicable margin of 350 basis points. As of August 3, 2019, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of 6.79%. The Company entered into an interest rate swap agreement in March 2019 to mitigate some of the risk associated the variable rate. Refer to Note 13 for additional information.
In connection with the Fiscal 2018 principal prepayments of $180.0 million referred to above, the Company recorded a $5.0 million loss on the early extinguishment of debt.
Restrictions under the Term Loan and the Amended Revolving Credit Agreement (collectively the "Borrowing Agreements")
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 30 consecutive days. The Covenant Period was not in effect as of August 3, 2019.
The Borrowing Agreements contain customary negative covenants, subject to negotiated exceptions, on (i) liens and guarantees, (ii) investments, (iii) indebtedness, (iv) significant corporate changes including mergers and acquisitions, (v) dispositions and (vi) restricted payments, cash dividends, stock repurchases and certain other restrictive agreements. The Borrowing Agreements also contain customary events of default, such as payment defaults, cross-defaults to certain material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation of the Company’s business, in each case subject to customary grace periods.
The Company's Amended Revolving Credit Agreement allows us to make restricted payments, including dividends and share repurchases, subject to the Company satisfying certain conditions set forth in the Company's Amended Revolving Credit Agreement, notably that at the time of and immediately after giving effect to the restricted payment, (i) there is no default or event of default, and (ii) Availability is not less than 20% of the aggregate revolving commitments. The Company's Term Loan allows us to make restricted payments, including dividends and share repurchases, up to a predetermined dollar amount. The dollar amount limitation is waived upon the satisfaction of certain conditions under the Term Loan, notably that at the time of and immediately after giving
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
effect to such restricted payment, (i) there is no default or event of default, and (ii) the total leverage ratio, as defined in the Term Loan agreement, is below predetermined limits. Dividends are payable when declared by our Board of Directors.
The Company’s obligations under the Borrowing Agreements are guaranteed by certain of its domestic subsidiaries (the “Subsidiary Guarantors”). As collateral under the Borrowing Agreements and the guarantees thereof, the Company and the Subsidiary Guarantors have granted to the administrative agents for the benefit of the lenders a first priority lien on substantially all of their tangible and intangible assets, including, without limitation, certain domestic inventory and certain material real estate.
Maturities of Debt
The Company's debt matures as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
|
(millions)
|
|
2020
|
|
$
|
—
|
|
|
2021
|
|
66.5
|
|
|
2022
|
|
90.0
|
|
|
2023
|
|
1,215.0
|
|
|
Total maturities
|
|
$
|
1,371.5
|
|
11. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
|
|
(millions)
|
|
Prepaid expenses
|
|
$
|
131.6
|
|
|
$
|
134.2
|
|
|
Accounts and other receivables (a)
|
|
131.1
|
|
|
93.5
|
|
|
Restricted cash
|
|
1.2
|
|
|
1.2
|
|
|
Other current assets
|
|
15.4
|
|
|
0.5
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
279.3
|
|
|
$
|
229.4
|
|
________
(a) Increase primarily reflects the third-party receivables due from maurices for services performed under the agreements described in Note 2.
12. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
|
|
(millions)
|
|
Accrued salary, wages and related expenses
|
|
$
|
114.1
|
|
|
$
|
119.0
|
|
|
Accrued operating expenses
|
|
169.3
|
|
|
134.5
|
|
|
Sales tax payable
|
|
19.0
|
|
|
24.0
|
|
|
Income taxes payable
|
|
6.8
|
|
|
5.4
|
|
|
Other
|
|
24.7
|
|
|
21.1
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
333.9
|
|
|
$
|
304.0
|
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Derivative Financial Instruments
As discussed in Note 10, 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 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 August 3, 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 of $6.3 million as of August 3, 2019 based on Level 2 measurements. Amounts included in the 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 $6.3 million as of August 3, 2019. The amount of classification of gains and losses from Accumulated other comprehensive loss into earnings related to the Company's derivative instrument during the fiscal year ended August 3, 2019 was de minimis. Based on current valuations, we estimate $3.3 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 fiscal year ended August 3, 2019.
14. 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); model-derived valuations whose inputs are observable or whose significant value drivers are observable; 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 August 3, 2019 and August 4, 2018, the Company believes that the carrying values of cash and cash equivalents approximates its fair value based on Level 1 measurements. The fair value of the Term Loan was determined to be $850.3 million as of August 3, 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 and Note 8, during Fiscal 2019, assets of $145.5 million related to 649 under-performing stores and two corporate buildings were written down to their estimated fair values of $60.2 million, resulting in total impairment charges
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
of $85.3 million. In Fiscal 2018, store-related assets of $65.0 million related to (i) 327 under-performing stores and (ii) 105 stores and one office building under the fleet optimization review were written down to their estimated fair values of $15.8 million, resulting in total impairment charges of $49.2 million. In Fiscal 2017, store-related assets of $38.4 million related to approximately 120 under-performing stores and approximately 130 stores under the fleet optimization review were written down to their estimated fair values of $2.8 million, resulting in total impairment charges of $35.6 million. Key assumptions used to determine fair values were future cash flows including, among other things, expected future operating performance, changes in economic conditions as well as other market information obtained from brokers. Significant inputs related to valuing the store-related assets are classified as Level 3 in the fair value measurement hierarchy.
For further discussion of the determination of fair values of goodwill and other intangible assets, see Note 5.
15. Income Taxes
Taxes on Income
Domestic and foreign pretax loss from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3, 2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
|
(millions)
|
|
Domestic
|
|
$
|
(838.5
|
)
|
|
$
|
(239.6
|
)
|
|
$
|
(1,471.8
|
)
|
|
Foreign
|
|
53.5
|
|
|
34.3
|
|
|
36.3
|
|
|
Total loss before benefit for income taxes and loss from equity method investment
|
|
$
|
(785.0
|
)
|
|
$
|
(205.3
|
)
|
|
$
|
(1,435.5
|
)
|
The benefit for current and deferred income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
Current:
|
|
(millions)
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(2.2
|
)
|
|
$
|
(8.1
|
)
|
|
State and local
|
|
(4.0
|
)
|
|
(1.1
|
)
|
|
(11.7
|
)
|
|
Foreign
|
|
(8.9
|
)
|
|
(5.7
|
)
|
|
(5.2
|
)
|
|
|
|
(12.9
|
)
|
|
(9.0
|
)
|
|
(25.0
|
)
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
21.5
|
|
|
93.9
|
|
|
328.2
|
|
|
State and local
|
|
5.5
|
|
|
(22.4
|
)
|
|
66.0
|
|
|
Foreign
|
|
0.4
|
|
|
(0.2
|
)
|
|
(1.7
|
)
|
|
|
|
27.4
|
|
|
71.3
|
|
|
392.5
|
|
|
Total benefit for income taxes
|
|
$
|
14.5
|
|
|
$
|
62.3
|
|
|
$
|
367.5
|
|
The Company's net income tax benefit in Fiscal 2019 was unfavorably impacted by certain non-routine, discrete items, including an increase of its valuation allowance for U.S. Federal and state jurisdictions. The Company has evaluated the available positive and negative evidence and has concluded that, for some of its deferred tax assets, it is more likely than not that it will not be realized in the foreseeable future. A valuation allowance is a non-cash charge, which does not eliminate the deferred tax asset but instead reduces the benefit expected to be realized from it in the future.
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 Company's Annual Report on Form 10-K for the fiscal year ended August 4, 2018 and should be read in conjunction with the update below.
The SEC staff issued Staff Accounting Bulletin Number 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
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
Effective Tax Rate
The Company’s effective tax rate is reflective of the jurisdictions where the Company has operations. As shown below, the effective tax rate for Fiscal 2019 was 1.8%. The effective tax rate was impacted primarily by a valuation allowance on the Company’s net Federal deferred tax asset ("DTA") and a non-deductible impairment to goodwill.
As a result of the Company’s recent financial performance, the Company has determined it is appropriate to record a valuation allowance on its net Federal and state DTAs. This tax expense during Fiscal 2019 was $99.2 million.
As of August 4, 2018, the Company had a $53.3 million valuation allowance against the aggregate carrying value of its deferred tax assets. Such valuation allowance provides for the uncertainty that a portion of the recognized deferred tax assets may not be realizable. The valuation allowance increased by $99.2 million in Fiscal 2019 to $152.5 million as of August 3, 2019.
Tax Rate Reconciliation
The differences between income taxes expected at the U.S. federal statutory income tax rate and income taxes provided are as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
(millions)
|
|
Benefit for income taxes at the U.S. federal statutory rate (a)
|
$
|
167.4
|
|
|
$
|
54.9
|
|
|
$
|
501.3
|
|
|
Increase (decrease) due to:
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
18.6
|
|
|
0.8
|
|
|
41.2
|
|
|
Foreign rate differential
|
2.8
|
|
|
1.9
|
|
|
—
|
|
|
Tax Cuts and Job Act
|
—
|
|
|
36.9
|
|
|
—
|
|
|
Federal valuation allowance
|
(84.7
|
)
|
|
—
|
|
|
—
|
|
|
State valuation allowance
|
(14.5
|
)
|
|
(21.8
|
)
|
|
—
|
|
|
Share-based compensation
|
(3.5
|
)
|
|
(4.6
|
)
|
|
—
|
|
|
Goodwill impairment
|
(57.9
|
)
|
|
—
|
|
|
(171.2
|
)
|
|
Net change relating to uncertain income tax benefits
|
(2.5
|
)
|
|
0.7
|
|
|
(3.2
|
)
|
|
GILTI
|
(7.7
|
)
|
|
—
|
|
|
—
|
|
|
Other – net
|
(3.5
|
)
|
|
(6.5
|
)
|
|
(0.6
|
)
|
|
Total benefit for income taxes
|
$
|
14.5
|
|
|
$
|
62.3
|
|
|
$
|
367.5
|
|
_______
(a) The U.S. federal statutory rate for Fiscal 2017 was 35%. The 2017 Act reduced the statutory rate from 35% to 21% effective January 1, 2018, and under Section 15 of the Internal Revenue Code resulted in a blended statutory rate of 27% for Fiscal 2018. The statutory rate for Fiscal 2019 was 21%. The Fiscal 2019 benefit of $167.4 million includes the $11.8 million Loss from equity method investment at the federal statutory tax rate.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tax Incentives
In connection with the Company’s relocation of its Dressbarn and corporate offices to New Jersey, as well as the expansion of its distribution centers in Ohio and Indiana, the Company was approved for various state and local tax incentives. In order to receive these incentives, the Company will generally need to meet certain minimum employment or expenditure commitments, as well as comply with periodic reporting requirements. These incentives, estimated to total approximately $23.5 million, are expected to be recognized over a 10-15 year period. Approximately $5.9 million was recognized in Fiscal 2019, $4.3 million in Fiscal 2018 and $6.1 million in Fiscal 2017.
Deferred Taxes
Significant components of the Company's net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
Deferred tax assets (a):
|
|
(millions)
|
|
Inventories
|
|
$
|
18.0
|
|
|
$
|
21.5
|
|
|
Net operating loss carryforwards and tax credits
|
|
98.6
|
|
|
65.2
|
|
|
Accrued payroll and benefits
|
|
40.1
|
|
|
41.5
|
|
|
Share-based compensation
|
|
12.3
|
|
|
15.5
|
|
|
Straight-line rent
|
|
37.8
|
|
|
40.5
|
|
|
Federal benefit of uncertain tax positions
|
|
24.6
|
|
|
23.6
|
|
|
Gift cards and merchandise credits
|
|
10.1
|
|
|
8.9
|
|
|
Investments
|
|
6.8
|
|
|
—
|
|
|
Other
|
|
19.7
|
|
|
12.1
|
|
|
Total deferred tax assets
|
|
268.0
|
|
|
228.8
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Depreciation
|
|
26.5
|
|
|
55.1
|
|
|
Amortization
|
|
62.8
|
|
|
97.6
|
|
|
Foreign unremitted earnings
|
|
—
|
|
|
0.4
|
|
|
Other
|
|
17.3
|
|
|
22.4
|
|
|
Total deferred tax liabilities
|
|
106.6
|
|
|
175.5
|
|
|
Valuation allowance
|
|
(152.5
|
)
|
|
(53.3
|
)
|
|
Net deferred tax asset
|
|
$
|
8.9
|
|
|
$
|
—
|
|
_______
(a) Deferred tax asset of $9.5 million as of August 3, 2019 and $2.6 million as of August 4, 2018 are included within Other assets.
Net Operating Loss Carry Forwards
As of August 3, 2019, the Company had U.S. Federal net operating loss carryforwards of $264.6 million and state net operating loss carryforwards of $594.5 million that are available to offset future U.S. Federal and state taxable income. The U.S. Federal net operating losses generated prior to Fiscal 2018 have a twenty-year carryforward period, with $49.0 million to expire in Fiscal 2036 and $32.5 million to expire in Fiscal 2037. Due to the 2017 Act, the U.S. Federal net operating losses generated in Fiscal 2018 and forward have an unlimited carryforward, therefore, $183.1 million will carryforward indefinitely. The state net operating losses have carryforward periods of five to twenty years, with varying expiration dates and amounts as follows: $33.9 million in one to five years, $51.9 million in six to ten years, $115.7 million in eleven to fifteen years, $355.7 million in sixteen to twenty years and $37.3 million will carryforward indefinitely.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Uncertain Income Tax Benefits
Reconciliation of Liabilities
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
|
(millions)
|
|
Unrecognized tax benefit beginning balance
|
|
$
|
50.9
|
|
|
$
|
45.3
|
|
|
$
|
43.2
|
|
|
Additions related to current period tax positions
|
|
—
|
|
|
—
|
|
|
2.0
|
|
|
Additions related to tax positions in prior years
|
|
0.9
|
|
|
9.8
|
|
|
1.9
|
|
|
Reductions related to prior period tax positions
|
|
(0.8
|
)
|
|
(0.5
|
)
|
|
(0.2
|
)
|
|
Reductions related to settlements with taxing authorities
|
|
(0.1
|
)
|
|
(1.3
|
)
|
|
(0.1
|
)
|
|
Reductions related to expiration of statute of limitations
|
|
(0.6
|
)
|
|
(2.4
|
)
|
|
(1.5
|
)
|
|
Unrecognized tax benefit ending balance
|
|
$
|
50.3
|
|
|
$
|
50.9
|
|
|
$
|
45.3
|
|
The Company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. A reconciliation of the beginning and ending amounts of accrued interest and penalties related to unrecognized tax benefits is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
|
(millions)
|
|
Accrued interest and penalties beginning balance
|
|
$
|
22.1
|
|
|
$
|
19.4
|
|
|
$
|
17.2
|
|
|
Additions (reductions) charged to expense, net
|
|
3.1
|
|
|
2.7
|
|
|
2.2
|
|
|
Accrued interest and penalties ending balance
|
|
$
|
25.2
|
|
|
$
|
22.1
|
|
|
$
|
19.4
|
|
The Company’s liability for unrecognized tax benefits (including accrued interest and penalties), which is primarily included in Other non-current liabilities in the accompanying consolidated balance sheets, was $72.8 million as of August 3, 2019 and $69.4 million as of August 4, 2018.
Future Changes in Unrecognized Tax Benefits
The amount of unrecognized tax benefits relating to the Company's tax positions is subject to change based on future events including, but not limited to, the settlements of ongoing audits and/or the expiration of applicable statutes of limitations. Although the outcomes and timing of such events are highly uncertain, the Company anticipates that the balance of the liability for unrecognized tax benefits will decrease by approximately $1.9 million during the next twelve months. However, changes in the occurrence, expected outcomes and timing of those events could cause the Company’s current estimate to change materially in the future. The Company’s portion of gross unrecognized tax benefits that would affect its effective tax rate, including interest and penalties, is $48.4 million.
The Company files tax returns in the U.S. federal and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by the relevant tax authorities for years prior to Fiscal 2013.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. Commitments and Contingencies
Lease Commitments
The Company leases all of its retail stores. Certain leases provide for additional rents based on percentages of net sales, charges for real estate taxes, insurance and other occupancy costs. Store leases generally have an initial term of approximately ten years, although certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. Leases may also have one or more five-year options to extend the lease or have provisions for rent escalations during the initial term.
The Company’s operating lease obligations represent future minimum lease payments under non-cancelable operating leases as of August 3, 2019. The minimum lease payments do not include common area maintenance ("CAM") charges or real estate taxes, which are also required contractual obligations under the operating leases. In the majority of the Company’s operating leases, CAM charges are not fixed and can fluctuate from year to year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of occupancy costs for continuing operations are as follows:
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
|
(millions)
|
|
Base rentals
|
|
$
|
492.1
|
|
|
$
|
509.7
|
|
|
$
|
539.3
|
|
|
Percentage rentals
|
|
23.3
|
|
|
32.1
|
|
|
26.2
|
|
|
Other occupancy costs, primarily CAM and real estate taxes
|
|
203.0
|
|
|
205.7
|
|
|
198.8
|
|
|
Total (a)
|
|
$
|
718.4
|
|
|
$
|
747.5
|
|
|
$
|
764.3
|
|
(a) Total occupancy costs included in discontinued operations were $66.8 million for Fiscal 2019, $94.9 million for Fiscal 2018 and $99.2 million for Fiscal 2017.
The following is a schedule of future minimum rentals under non-cancelable operating 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.
Employment Agreements
The Company has employment agreements with certain executives in the normal course of business which provide for compensation and certain other benefits. These agreements also provide for severance payments under certain circumstances.
Other Commitments
The Company enters into various cancelable and non-cancelable commitments during the year. Typically, those commitments are for less than a year in duration and are principally focused on the construction of new retail stores and the procurement of inventory.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company normally does not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. Preliminary commitments with the Company’s private-label merchandise vendors typically are made five to seven months in advance of planned receipt date. A portion of these merchandise purchase commitments are cancelable up to 30 days prior to the vendor’s scheduled shipment date.
In addition, the Company had $43.5 million of outstanding letters of credit as of August 3, 2019.
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. The Notification Letter does not impact the Company’s listing on The Nasdaq Global Select Market at this time. The Company has been provided a period of 180 calendar days, or until January 27, 2020, in which to regain compliance. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible to transfer to the Nasdaq Capital Market and seek an additional compliance period of 180 calendar days if the Company (i) meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and (ii) provides written notice to Nasdaq of the Company’s intent to cure the deficiency during this second compliance period. The Company is considering actions that it may take in order to regain compliance, including whether to effect a reverse stock split.
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. James Newman did not move for appointment as lead plaintiffs. 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.
Defendants believe they have strong defenses to these claims and will respond accordingly. The range of loss, if any, is not reasonably estimable at this time.
Derivative Action
On August 19, 2019, William Cunningham, an Ascena Retail Group, Inc. shareholder, filed a derivative action, purportedly on behalf of Ascena, in federal court in Delaware against certain of Ascena’s current and former officers and directors. The complaint alleges that the management and the board breached their fiduciary duties by failing to exercise proper oversight of Ascena, including by failing to disclose issues regarding the acquisition of ANN, the true condition of the ANN brands purchased in the acquisition, and the timing of certain impairment charges to the value of ANN’s goodwill. The plaintiffs seek damages on behalf of Ascena for the alleged breaches of fiduciary duty, reforms to the corporate governance and internal procedure to ensure compliance with governance obligations and applicable law, as well as an award to plaintiff of attorneys’ fees and costs incurred in pursuing this action.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Defendants believe they have strong defenses to these claims and will respond accordingly. The range of damages, if any, is not reasonably estimable at this time.
Other litigation
The Company is involved in routine litigation arising in the normal course of its business. In the opinion of management, such litigation is not expected to have a material adverse effect on the Company's consolidated financial statements.
17. Equity
Capital Stock
The Company’s capital stock consists of one class of common stock and one class of preferred stock. There are 360 million shares of common stock authorized to be issued and 100,000 shares of preferred stock authorized to be issued. There are no shares of preferred stock issued or outstanding.
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”). Under the 2016 Stock Repurchase Program, purchases of shares of common stock may be made at the Company’s discretion from time to time, subject to overall business, liquidity, and market conditions. Currently, share repurchases in excess of $100 million are subject to certain restrictions under the terms of the Company's Borrowing Agreements, as more fully described in Note 10. Repurchased shares are retired and treated as authorized but unissued. The excess of repurchase price over the par value of common stock for the repurchased shares is charged entirely to retained earnings.
No shares of common stock were repurchased in Fiscal 2019, Fiscal 2018 or Fiscal 2017. Cumulative repurchases under the 2016 Stock Repurchase Program total 2.1 million shares of common stock, which were repurchased at an aggregate cost of $18.6 million and the remaining availability under the 2016 Stock Repurchase Program was approximately $181.4 million at August 3, 2019.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing the net loss 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 loss per common share is reconciled to those shares used in calculating diluted net loss per common share as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
July 29, 2017
|
|
|
|
(millions)
|
|
Basic
|
|
197.5
|
|
|
196.0
|
|
|
194.8
|
|
|
Dilutive effect of stock options, restricted stock and restricted stock units (a)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Diluted shares
|
|
197.5
|
|
|
196.0
|
|
|
194.8
|
|
(a) There was no dilutive effect of stock options, restricted stock and restricted stock units for all periods presented as the impact of these items was anti-dilutive because of the Company's net loss incurred during these 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 loss per common share. In addition, the Company has outstanding restricted stock units that are issuable only upon the achievement of certain service conditions. Any performance or market-based restricted stock units outstanding are included in the computation of diluted shares
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. Potentially dilutive instruments are not included in the computation of net loss per share for Fiscal 2019, Fiscal 2018 and Fiscal 2017 as the impact of those items would have been anti-dilutive due to the net loss incurred for these periods. For Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively, 24.4 million, 24.1 million and 19.5 million shares of anti-dilutive options and restricted stock units were excluded from the diluted share calculations.
Dividends
The Company has never declared or paid cash dividends on its common stock. However, payment of dividends is within the discretion of, and are payable only when declared by, the Company’s Board of Directors. Additionally, payments of dividends are limited by the Company's liquidity and borrowing arrangements as described in Note 10.
18. 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 "2016 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 that may be issued under the plan by an additional 13.1 million shares to 83.6 million shares of stock-based awards to eligible employees and directors of the Company. 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 August 3, 2019, there were approximately 18.8 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
|
(millions)
|
|
Compensation expense
|
|
$
|
11.5
|
|
|
$
|
19.8
|
|
|
$
|
24.5
|
|
|
Income tax benefit
|
|
$
|
2.4
|
|
|
$
|
5.3
|
|
|
$
|
9.3
|
|
Stock Options
Stock option awards outstanding under the Company’s current plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period of two to five years and expire at either seven or ten years after the grant date. The Company recognizes compensation expense ratably over the vesting period, net of estimated forfeitures. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:
Expected Term — The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the option grants.
Expected Volatility — The expected volatility factor is based on the historical volatility of the Company's common stock for a period equal to the expected term of the stock option.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Risk-free Interest Rate — The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock option.
Expected Dividend Yield — The expected dividend yield is based on the Company's historical practice of not paying dividends on its common stock.
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the fiscal years presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4, 2018
|
|
July 29,
2017
|
|
Expected term (years)
|
|
5.2
|
|
|
5.1
|
|
|
5.1
|
|
|
Expected volatility
|
|
47.5
|
%
|
|
43.9
|
%
|
|
37.6
|
%
|
|
Risk-free interest rate
|
|
2.9
|
%
|
|
2.0
|
%
|
|
1.3
|
%
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Weighted-average grant date fair value
|
|
$
|
1.77
|
|
|
$
|
0.98
|
|
|
$
|
1.87
|
|
A summary of the stock option activity under service-based plans during Fiscal 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
|
|
(6,788.1
|
)
|
|
8.54
|
|
|
|
|
|
|
|
Options outstanding – August 3, 2019
|
|
17,025.4
|
|
|
$
|
7.80
|
|
|
4.1
|
|
$
|
—
|
|
|
Options vested and expected to vest at August 3, 2019 (b)
|
|
16,879.7
|
|
|
$
|
7.83
|
|
|
4.1
|
|
$
|
—
|
|
|
Options exercisable at August 3, 2019
|
|
10,311.9
|
|
|
$
|
10.53
|
|
|
3.1
|
|
$
|
—
|
|
______
|
|
|
|
(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.
|
As of August 3, 2019, there was $4.7 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 1.1 years. The total intrinsic value of options exercised during Fiscal 2019 and Fiscal 2017 was de minimis. There were no options exercised during Fiscal 2018. The total grant date fair value of options that vested during Fiscal 2019, Fiscal 2018 and Fiscal 2017, was approximately $9.6 million, $11.2 million and $13.4 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 NQSO 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 award based on an expected term of 7 years, a risk-free interest rate of 2.3%, an expected dividend yield of zero and an expected volatility measure of 56.4% 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.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company granted 3.5 million of NQSO Awards during the third quarter of Fiscal 2019 at an exercise price of $1.17 per share. The weighted-average grant date fair value of the awards was $0.22 per share. The total unrecognized compensation cost at August 3, 2019 was $0.8 million to be recognized over 2.8 years. There were no vestings of the NQSOs Awards as of August 3, 2019.
Restricted Equity Awards
The 2010 Stock Plan allowed for the issuance of shares of restricted stock and restricted stock units (“RSUs”) with service-based, market-based and performance-based conditions (collectively, “Restricted Equity Awards”).
Under the 2016 Omnibus Incentive Plan, shares of Restricted Equity Awards are issuable with service-based, market-based or performance-based conditions. Any shares of Restricted Equity Awards issued are counted against the shares available for future grant limit as 2.3 shares for every one Restricted Equity Award granted. In general, if options are canceled for any reason or expire, the shares covered by such options again become available for grant. If a share of restricted stock or a RSU is forfeited for any reason, 2.3 shares become available for grant.
Service-based Restricted Equity Awards entitle the holder to receive unrestricted shares of common stock of the Company at the end of a vesting period, subject to the grantee’s continuing employment. Service-based Restricted Equity Awards generally vest over a three or four year period of time.
The fair values of service-based Restricted Equity Awards are based on the fair value of the Company’s unrestricted common stock at the date of grant. Compensation expense for service-based Restricted Equity Awards is recognized over the vesting period based on the grant-date fair values of the awards that are expected to vest based upon the service and performance-based conditions.
A summary of Service-based Restricted Equity Awards activity during Fiscal 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Service-based
Restricted Equity Awards
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value Per
Share
|
|
|
(thousands)
|
|
|
|
Nonvested at August 4, 2018
|
4,171.3
|
|
|
$
|
4.57
|
|
|
Granted
|
269.9
|
|
|
3.75
|
|
|
Vested
|
(1,825.8
|
)
|
|
5.22
|
|
|
Canceled/Forfeited
|
(1,266.9
|
)
|
|
3.49
|
|
|
Nonvested at August 3, 2019
|
1,348.5
|
|
|
$
|
4.57
|
|
As of August 3, 2019, there was $1.5 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 0.8 years. The total fair value of the service-based Restricted Equity Awards vested during Fiscal 2019, Fiscal 2018 and Fiscal 2017 was $5.6 million, $2.8 million and $3.9 million, respectively. The weighted-average grant-date fair value per share of the service-based Restricted Equity Awards granted during Fiscal 2019, Fiscal 2018 and Fiscal 2017 was $3.75, $2.45 and $5.28, respectively.
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. A Monte-Carlo simulation model estimates the fair value of the market-based award based on an expected term of 3 years, a risk-free interest rate of 2.3%, an expected dividend yield of zero and an expected volatility measure of 74.2% for the Company. 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.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company granted approximately 2.5 million of market-based Restricted Equity Awards during the third quarter ended May 4, 2019. The weighted-average grant day fair value of the awards was $0.47 per share. The total unrecognized compensation at August 3, 2019 was $1.2 million to be recognized over 2.7 years. There were no vestings of the market-based Restricted Equity Awards as of August 3, 2019.
19. Employee Benefit Plans
Long-Term Incentive Plans
During Fiscal 2016, the Company created 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 $0.1 million, $(7.2) million and $13.6 million in compensation expense under the LTIP during Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively, which was recorded within Selling, general and administrative expenses in the accompanying consolidated financial statements. The net credits recorded in Fiscal 2018 primarily reflect (1) the Compensation Committee's determination in late September 2017 that although certain metrics within the 2017 LTIP were achieved, negative discretion should be applied based upon the overall performance of the Company, thus the LTIP amounts were not distributed and (2) the Company's determination in Fiscal 2018 that certain performance targets for the 2018 LTIP year would not be achieved.
As of August 3, 2019, there was $19.1 million of expected unrecognized compensation cost related to the LTIP, which is expected to be recognized over a remaining weighted-average vesting period of 1.8 years. As of August 3, 2019, the liability for LTIP Awards was $10.7 million, which was all classified within Other non-current liabilities in the accompanying consolidated balance sheets. No amounts were paid during Fiscal 2019 or Fiscal 2018 and $10.4 million was paid during Fiscal 2017.
Retirement Savings Plan (401(k))
The Company currently sponsors a defined contribution retirement savings plan (the "401(k)" plan). This plan covers substantially all eligible U.S. employees. Participating employees may contribute a percentage of their annual compensation, subject to certain limitations under the U.S Internal Revenue Code. The Company's contribution is made in accordance with a matching formula established prior to the beginning of each plan year. Effective with the plan year started January 1, 2015, the Company contributes a matching amount based on eligible salary contributed by an employee equal to 100% of the first 3% contributed and 50% of the next 2% contributed. Under the terms of the plan, such matching contributions are immediately vested. The Company incurred expenses relating to its contributions to and administration of its 401(k) plan of $15.3 million in Fiscal 2019, $15.8 million in Fiscal 2018 and $17.1 million in Fiscal 2017.
Defined Benefit Plan
During Fiscal 2017, the Company completed its plan to terminate a defined benefit plan assumed in the ANN Acquisition whereby eligible participants elected to receive lump sum distributions. Subsequent to those distributions, also during Fiscal 2017, the remaining obligation was transferred to a third-party and settled through a non-participating annuity contract whereby the trust was fully liquidated. As a result, during Fiscal 2017, the accumulated actuarial loss of $7.4 million (net of an income tax benefit of $2.9 million) was reclassified from Accumulated other comprehensive loss to Acquisition and integration expenses. In addition, the Company recorded total settlement charges and professional fees of $8.0 million within Acquisition and integration expenses during Fiscal 2017.
Executive Retirement Plan
The Company sponsors an Executive Retirement Plan (the “ERP Plan”) for certain officers and key executives. The ERP Plan is a non-qualified deferred compensation plan. The purpose of the ERP Plan is to attract and retain a select group of management and to provide them with an opportunity to defer compensation on a pretax basis above U.S. Internal Revenue Service
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
limitations. ERP Plan balances cannot be rolled over to another qualified plan or IRA upon distribution. Unlike a qualified plan, the Company is not required to pre-fund the benefits payable under the ERP Plan.
ERP Plan participants can contribute up to 50% of base salary and 75% of bonuses, before federal and state taxes are calculated. The Company makes a matching contribution to the ERP Plan in the amount of 100% on the first 1% of base salary and bonus salary deferred up to $270,000. The Company makes an additional matching contribution to the ERP Plan in the amount of 100% on the first 5% of base salary and bonus salary deferred in excess of $270,000. Plan participants vest immediately in their voluntary deferrals and are incrementally vested in their employer matching contributions over a five year vesting period after which they are 100% vested. The Company incurred expenses related to its matching contributions of approximately $1.0 million in Fiscal 2019, $1.0 million in Fiscal 2018 and $0.9 million in Fiscal 2017 relating to the ERP Plan. In addition, as the ERP Plan is unfunded by the Company, the Company is also required to pay an investment return to participating employees on all account balances in the ERP Plan based on 27 reference investment fund elections offered to participating employees. As a result, the Company’s obligations under the ERP Plan are subject to market appreciation and depreciation, which resulted in expense of $1.0 million in Fiscal 2019, $6.7 million in Fiscal 2018 and $8.6 million in Fiscal 2017. The Company’s obligations under the ERP Plan, including employee compensation deferrals, matching employer contributions and investment returns on account balances, were $60.5 million as of August 3, 2019 and $71.6 million as of August 4, 2018. As of August 3, 2019, $31.6 million was classified within Accrued expenses and other current liabilities and $28.9 million was classified within Other non-current liabilities in the accompanying consolidated balance sheets. As of August 4, 2018, $4.2 million was classified within Accrued expenses and other current liabilities and $67.4 million was classified within Other non-current liabilities in the accompanying consolidated balance sheets. The increase in the current portion of the liability as of August 3, 2019 reflects amounts due to former senior executives who left the Company during in the second half of Fiscal 2019. The amounts are expected to be paid during Fiscal 2020.
Employee Stock Purchase Plan
The Company also sponsors an Employee Stock Purchase Plan, which allows employees to purchase shares of the Company’s common stock during each quarterly offering period at a 15% discount through payroll deductions. During the fourth quarter of Fiscal 2017 the plan reached the maximum number of authorized shares to be issued and purchases under the plan were automatically terminated. On December 7, 2017, stockholders approved an amended and restated Employee Stock Purchase Plan effective as of January 1, 2018. The principal purpose of adopting this amended and restated plan was to approve a 4,000,000 share increase to the number of shares of common stock available for issuance under the plan. Purchases under the amended and restated plan began in the third quarter of Fiscal 2018. Expenses incurred during Fiscal 2019, Fiscal 2018 and Fiscal 2017 relating to this plan were de minimis.
20. Segments
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 four reportable operating segments: Premium Fashion, Plus Fashion, Kids Fashion and Value 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. The financial information presented below reflects such changes for all periods presented, including the prior year financial information.
The four reportable 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.
|
|
|
|
|
•
|
Value Fashion segment – consists of the specialty retail, outlet and direct channel operations of the Dressbarn brand.
|
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The accounting policies of the Company’s reporting segments are consistent with those described in Notes 3 and 4. All intercompany revenues are eliminated in consolidation. 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.
Net sales and operating (loss) income for each operating segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29,
2017
|
|
Net sales (a) (b):
|
|
(millions)
|
|
Premium Fashion
|
|
$
|
2,415.1
|
|
|
$
|
2,317.8
|
|
|
$
|
2,322.6
|
|
|
Plus Fashion
|
|
1,240.5
|
|
|
1,340.0
|
|
|
1,353.9
|
|
|
Kids Fashion
|
|
1,079.1
|
|
|
1,100.0
|
|
|
1,023.1
|
|
|
Value Fashion
|
|
758.7
|
|
|
808.6
|
|
|
917.7
|
|
|
Total net sales
|
|
$
|
5,493.4
|
|
|
$
|
5,566.4
|
|
|
$
|
5,617.3
|
|
|
|
|
|
|
|
|
|
|
Operating loss (a) (b):
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
|
$
|
72.7
|
|
|
$
|
102.3
|
|
|
$
|
129.6
|
|
|
Plus Fashion
|
|
(71.4
|
)
|
|
0.6
|
|
|
(12.7
|
)
|
|
Kids Fashion
|
|
(42.4
|
)
|
|
18.7
|
|
|
(60.5
|
)
|
|
Value Fashion
|
|
(101.7
|
)
|
|
(128.5
|
)
|
|
(56.0
|
)
|
|
Unallocated restructuring and other related charges (c)
|
|
(127.7
|
)
|
|
(76.6
|
)
|
|
(78.1
|
)
|
|
Unallocated impairment of goodwill (Note 5)
|
|
(276.0
|
)
|
|
—
|
|
|
(489.1
|
)
|
|
Unallocated impairment of other intangible assets (Note 5)
|
|
(134.9
|
)
|
|
—
|
|
|
(728.1
|
)
|
|
Unallocated acquisition and integration expenses
|
|
—
|
|
|
(5.4
|
)
|
|
(39.4
|
)
|
|
Total operating loss
|
|
$
|
(681.4
|
)
|
|
$
|
(88.9
|
)
|
|
$
|
(1,334.3
|
)
|
_______
(a) Prior period amounts have not been restated due to the adoption of ASU 2014-09 and continue to be reported under the accounting standards in effect for those periods. For more information on ASU 2014-09, refer to Note 4.
(b) For Fiscal 2019, Fiscal 2018 and Fiscal 2017, respectively, the maurices business was excluded from the Value Fashion segment and has been classified as discontinued operations within the consolidated financial statements. As a result, shared expenses of $78 million, $96 million and $81 million, respectively, for the fiscal years ended August 3, 2019, August 4, 2018 and July 29, 2017, which were previously allocated to maurices have been reallocated to the remaining operating units for all periods presented.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(c) Restructuring and other related charges by operating segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
July 29, 2017
|
|
|
(millions)
|
|
Cash related charges(1):
|
|
|
|
|
|
|
|
|
Severance and benefit costs:
|
|
|
|
|
|
|
Premium Fashion
|
$
|
3.3
|
|
|
$
|
1.3
|
|
|
$
|
3.0
|
|
|
Plus Fashion
|
3.5
|
|
|
3.2
|
|
|
9.4
|
|
|
Kids Fashion
|
1.8
|
|
|
0.2
|
|
|
2.4
|
|
|
Value Fashion
|
26.9
|
|
|
(0.8
|
)
|
|
5.7
|
|
|
Corporate
|
7.5
|
|
|
1.8
|
|
|
10.3
|
|
|
Total Severance and benefit costs
|
43.0
|
|
|
5.7
|
|
|
30.8
|
|
|
|
|
|
|
|
|
|
Professional fees and other related charges:
|
|
|
|
|
|
|
Plus Fashion
|
—
|
|
|
2.2
|
|
|
1.2
|
|
|
Value Fashion
|
6.1
|
|
|
—
|
|
|
—
|
|
|
Corporate
|
33.2
|
|
|
57.0
|
|
|
33.4
|
|
|
Total Professional fees and other related charges
|
39.3
|
|
|
59.2
|
|
|
34.6
|
|
|
|
|
|
|
|
|
|
Total Cash related charges
|
82.3
|
|
|
64.9
|
|
|
65.4
|
|
|
|
|
|
|
|
|
|
Non-cash charges:
|
|
|
|
|
|
|
Impairment of assets:
|
|
|
|
|
|
|
Premium Fashion
|
—
|
|
|
6.5
|
|
|
3.2
|
|
|
Plus Fashion
|
—
|
|
|
4.4
|
|
|
4.8
|
|
|
Kids Fashion
|
—
|
|
|
0.2
|
|
|
1.6
|
|
|
Value Fashion
|
0.5
|
|
|
0.6
|
|
|
3.1
|
|
|
Corporate
|
44.9
|
|
|
—
|
|
|
—
|
|
|
Total Non-cash charges
|
45.4
|
|
|
11.7
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
Total restructuring and other related charges
|
$
|
127.7
|
|
|
$
|
76.6
|
|
|
$
|
78.1
|
|
(1) The charges incurred under the Company's cost reduction initiatives are more fully described in Note 6.
ASCENA RETAIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation and amortization expense and capital expenditures for each operating segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29, 2017
|
|
Depreciation and amortization expense (a):
|
|
(millions)
|
|
Premium Fashion
|
|
$
|
125.3
|
|
|
$
|
134.4
|
|
|
$
|
135.3
|
|
|
Plus Fashion
|
|
65.9
|
|
|
69.4
|
|
|
76.6
|
|
|
Kids Fashion
|
|
64.2
|
|
|
66.4
|
|
|
78.8
|
|
|
Value Fashion
|
|
44.5
|
|
|
53.3
|
|
|
60.1
|
|
|
Total depreciation and amortization expense
|
|
$
|
299.9
|
|
|
$
|
323.5
|
|
|
$
|
350.8
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (a):
|
|
|
|
|
|
|
|
|
|
|
Premium Fashion
|
|
$
|
28.6
|
|
|
$
|
40.7
|
|
|
$
|
64.2
|
|
|
Plus Fashion
|
|
8.5
|
|
|
8.8
|
|
|
21.2
|
|
|
Kids Fashion
|
|
6.1
|
|
|
6.1
|
|
|
17.9
|
|
|
Value Fashion
|
|
3.1
|
|
|
5.7
|
|
|
13.5
|
|
|
Corporate (b)
|
|
85.9
|
|
|
118.3
|
|
|
119.2
|
|
|
Total capital expenditures
|
|
$
|
132.2
|
|
|
$
|
179.6
|
|
|
$
|
236.0
|
|
(a) Depreciation and amortization expense and capital expenditures related to the maurices business, historically reported within the Value Fashion segment, has been excluded from the tables and is now classified as discontinued operations within the consolidated financial statements. Refer to Note 2.
(b) Includes capital expenditures for technology and supply chain infrastructure.
The Company’s executive team does not regularly review asset information by operating segment and, as a result, we do not report asset information by operating segment. In addition, the Company’s operations are largely concentrated in the United States and Canada. Accordingly, net sales and long-lived assets by geographic location are not meaningful at this time.
21. Additional Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Cash Interest and Taxes:
|
|
August 3,
2019
|
|
August 4,
2018
|
|
July 29, 2017
|
|
|
|
(millions)
|
|
Cash paid for interest
|
|
$
|
97.4
|
|
|
$
|
112.9
|
|
|
$
|
90.8
|
|
|
Cash paid for income taxes (a)
|
|
$
|
5.9
|
|
|
$
|
5.1
|
|
|
$
|
3.5
|
|
_______
(a) Includes a net refund of $0.2 million for Fiscal 2019 and net payments of $0.5 million and $0.8 million for Fiscal 2018 and 2017, respectively, related to the maurices business, which is classified in discontinued operations.
Non-cash Transactions
Non-cash investing activities of continuing operations include the accrued purchases of fixed assets in the amount of $19.3 million as of August 3, 2019, $20.6 million as of August 4, 2018 and $24.7 million as of July 29, 2017.
22. Subsequent Events
On September 20, 2019, the Company and certain of its domestic subsidiaries entered into an amendment to our Amended Revolving Credit Agreement among the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The amendment expands the limit on the letter of credit sublimit available for standby letters of credit from $100 million to $200 million, which offers the Company greater financing flexibility to meet its working capital needs.