ascena retail group, inc. Reports First Quarter Results

Buying, distribution, and occupancy expenses

Buying, distribution, and occupancy (“BD&O”) expenses for the first quarter of Fiscal 2017 were $321 million, or 19.1% of sales, compared to $303 million, or 18.1% of sales in the year-ago period, which excluded roughly $27 million of ANN expenses in the stub period that preceded the ANN acquisition date. BD&O expenses as a percent of net sales de-levered as occupancy cost reductions from the lower store count and synergy savings achieved in the quarter were more than offset by the impact of declining comparable sales volume.

Selling, general, and administration expenses

Selling, general, and administrative (“SG&A”) expenses for the first quarter of Fiscal 2017 were $525 million, or 31.2% of sales, compared to $487 million, or 29.1% of sales in the year-ago period, which excluded roughly $40 million of ANN expenses in the stub period that preceded the ANN acquisition date. SG&A expenses as a percent of net sales increased as contingency cost reductions, lower performance-based compensation and synergy savings related to the integration of ANN were offset by the impact of declining comparable sales volume.

Operating income

The Company generated Operating income for the first quarter of Fiscal 2017 of $51 million, or 3.1% of first quarter sales compared to an Operating loss of $12 million, or (0.7)% of first quarter sales last year. The increase in current year Operating income reflects the lower level of non-cash purchase accounting adjustments and lower expenses related to the acquisition of ANN, offset in part by the impact of negative comparable sales, increases in operating expenses discussed above, along with expenses incurred under the Company’s Change for Growth initiative. Refer to Note 2 of the unaudited condensed consolidated financial information for more information on the items affecting comparability between the periods.

Effective tax rate

The effective tax rate was 44.2% for the three months ended October 29, 2016 versus 43.3% in the year-ago period. The effective tax rates were higher than the statutory tax rate primarily due to the effect of state and local taxes.

Net income and earnings per share

The Company reported Net income of $14 million, or $0.07 per diluted share, in the first quarter of Fiscal 2017, compared to a Net loss of $18 million last year, or $0.10 per diluted share. Net income for the first quarter of Fiscal 2017 reflects lower purchase accounting adjustments and acquisition and integration costs, which were offset in part by the lower comparable sales performance.

Fiscal First Quarter Balance Sheet Highlights

Cash and cash equivalents

The Company ended the first quarter of Fiscal 2017 with Cash and cash equivalents of $271 million. Of this amount, approximately $207 million was held outside of the U.S.

Inventory

The Company ended the first quarter of Fiscal 2017 with inventory of $808 million, down 9% from the $889 million at the end of the first quarter of Fiscal 2016. The inventory balance as of the first quarter of Fiscal 2016 included approximately $23 million of unamortized inventory step-up related to the ANN acquisition.

Capital expenditures

In the first quarter of Fiscal 2017, capital expenditures totaled $107 million. The first quarter amount includes payments of approximately $62 million for Fiscal 2016 capital purchases that were accrued as of the end of Fiscal 2016.

Capital allocation

The Company ended the first quarter of Fiscal 2017 with total debt of $1.67 billion, which represents the remaining balance on its $1.8 billion term loan used to acquire ANN, along with $49 million of borrowings outstanding under the Company's revolving credit facility. The Company did not repurchase any additional shares during the quarter under its existing stock repurchase program, and ended the quarter with availability of $181 million under its outstanding authorization.

Second Quarter and Fiscal Year 2017 Outlook

Excluding restructuring, acquisition and integration related expenses, and non-cash ANNpurchase accounting adjustments, the Company expects non-GAAP EPS of $(0.05) to $0.00 during the second quarter of Fiscal 2017 and continues to expect full year Fiscal 2017 non-GAAP EPS in the range of $0.60 to $0.65.

Real Estate

The Company's store information on a brand-by-brand basis for the first quarter is as follows:

Conference Call Information

The Company will conduct a conference call today, December 1, 2016, at 4:30 PM Eastern Time to review its first quarter Fiscal 2017 results, followed by a question and answer session. Parties interested in participating in this call should dial in at (877) 930-8316 prior to the start time, the conference ID is 16154932. The call will also be simultaneously broadcast at www.ascenaretail.com. A recording of the call will be available shortly after its conclusion and until December 8, 2016 by dialing (855) 859-2056, the conference ID is 16154932, and until January 1, 2017 via the Company’s website at www.ascenaretail.com.

Non-GAAP Financial Results

As noted above, the comparability of the Company's operational results for the periods presented herein has been affected by certain transactions. To provide investors information to assist them in assessing the Company’s ongoing operations on a comparable basis, the Company has provided a reconciliation of EPS on a GAAP basis to EPS on a non-GAAP basis. Non-GAAP EPS excludes costs that Management believes are not indicative of the Company’s underlying operating performance such as (i) acquisition and integration expenses, (ii) restructuring and other related charges incurred under the Company's Change for Growth initiative, and (iii) non-cash charges associated with the purchase accounting adjustments of ANN's assets and liabilities to fair market value, primarily reflecting inventory expense, depreciation and amortization expense, and lease-related adjustments. Reference is made to Note 2 of the unaudited condensed consolidated financial information included herein for more information.

Non-GAAP EPS is considered an important indicator of the operational strength of the Company’s businesses as this measure eliminates amounts that do not reflect the fundamental performance of the Company’s businesses. Many investors also use a non-GAAP EPS measure as a common basis for comparing the performance of different companies. A general limitation of non-GAAP measures is that they are not prepared in accordance with U.S. generally accepted accounting principles and may not be comparable to similarly titled measures of other companies due to differences in methods of calculation and excluded items. Non-GAAP EPS should be considered in addition to, not as a substitute for, the Company’s Operating income (loss) and Net income (loss) per common share, as well as other measures of financial performance and liquidity reported in accordance with U.S. generally accepted accounting principles.

Additionally, a reconciliation of the projected non-GAAP EPS, which are forward-looking non-GAAP financial measures, to the most directly comparable GAAP financial measures, is not provided because the Company is unable to provide such reconciliation without unreasonable effort. The inability to provide a reconciliation is due to the uncertainty and inherent difficulty predicting the occurrence, the financial impact and the periods in which the non-GAAP adjustments may be recognized. These GAAP measures may include the impact of such items as restructuring charges, acquisition and integration related expenses, asset impairments and the tax effect of all such items. As previously stated, the Company has historically excluded these items from non-GAAP financial measures. The Company currently expects to continue to exclude these items in future disclosures of non-GAAP financial measures and may also exclude other items that may arise (collectively, “non-GAAP adjustments”). The decisions and events that typically lead to the recognition of non-GAAP adjustments, such as actions under the Company's Change for Growth program, or acquisition and integration expenses, are inherently unpredictable as to if or when they may occur. For the same reasons, the Company is unable to address the probable significance of the unavailable information, which could be material to future results.

Forward-Looking Statements

Certain statements made within this press release may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially. The Company does not undertake to publicly update or review its forward-looking statements even if experience or future changes make it clear that our projected results expressed or implied will not be achieved. Detailed information concerning a number of factors that could cause actual results to differ materially from the information contained herein is readily available in the Company’s most recent Annual Report on Form 10-K.

See accompanying notes.

See accompanying notes.

ascena retail group, inc.
Notes to Unaudited Condensed Consolidated Financial Information

Note 1. Basis of Presentation

On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN INC. ("ANN"). ANN, which comprises the operations of the Company's Premium Fashion segment, utilizes a 52-53 week fiscal year following the National Retail Federation calendar. Accordingly, ANN's results for the first quarter of Fiscal 2016 have been included herein for the post-acquisition period from August 22, 2015 to October 31, 2015. The remainder of the Company's businesses ended the first quarter of Fiscal 2016 on October 24, 2015. The effect of ANN's one-week reporting period difference is not material to the condensed consolidated financial statements for the three months ended October 24, 2015. All segments of the Company are on the same fiscal calendar as of the end of Fiscal 2016.

Note 2. Use of Non-GAAP Earnings Per Share

As noted above, the comparability of the Company's operational results for the periods presented herein has been affected by certain transactions. To provide investors information to assist them in assessing the Company’s ongoing operations on a comparable basis, the Company has provided the table below which reconciles EPS on a GAAP basis to EPS on a non-GAAP Basis. Non-GAAP EPS excludes costs such as (i) acquisition and integration expenses, (ii) restructuring and other related charges incurred under the Company's Change for Growth initiative, and (iii) non-cash charges associated with the purchase accounting adjustments of ANN's assets and liabilities to fair market value, primarily reflecting inventory expense, depreciation and amortization expense, and lease-related adjustments.

Non-GAAP EPS is considered an important indicator of the operational strength of the Company’s businesses as this measure eliminates amounts that do not reflect the fundamental performance of the Company’s businesses. Many investors also use a non-GAAP EPS measure as a common basis for comparing the performance of different companies. A general limitation of non-GAAP measures is that they are not prepared in accordance with U.S. generally accepted accounting principles and may not be comparable to similarly titled measures of other companies due to differences in methods of calculation and excluded items. Non-GAAP EPS should be considered in addition to, not as a substitute for, the Company’s Operating income (loss) and Net income (loss) per common share, as well as other measures of financial performance and liquidity reported in accordance with U.S. generally accepted accounting principles.