Ascena filed Chapter 11 bankruptcy protection last week citing challenges from COVID-19. However, the parent company for several brands including Ann Taylor and Loft has had financial performance difficulties for years. In addition to Ann Taylor Inc., the major brands under Ascena include Lane Bryant and Catherines for plus size, Justice for kids and the value brand Dressbarn. The stock price has declined 88% from last year, continuing a prolonged slide from over $462 in 2014 to $1.25 on July 2, 2020, according to Wright Investor Services.
The financial impact across brands is significant and in 2019 while Ann Taylor Inc. had a 4.2% increase in sales, all other Ascena brands showed declines, leading to a total drop of 1.3% in sales. Ascena’s store count of 2800 across all brands is 39% less than in 2018 and there will be continued store closings as stated by the company. In May 2019 the company announced that the Dressbarn brand would be dissolved and it began closing the stores, completing the process in February of 2020. Carrie Teffner, Interim Executive Chair of Ascena, stated in the Q2 earnings release, “During the second quarter we made solid progress on our commitment to simplify the business and focus on fewer and more meaningful initiatives.” Ascena plans to focus on Premium (Ann Taylor brands), Plus (Lane Bryant) and Kids (Justice). Ascena sales were down 2% for Q2 which ended February 1, 2020.
Over the past five years, Ascena has been underperforming in terms of net profit margin and return on assets. In 2019, the net profit margin was negative 12% and the return on assets negative 21% (as compared to the retail apparel industry averages of positive 6% and positive 10% respectively).
The financial position of Ascena is plagued by significant debt coming into fiscal 2020. As of July 2019, the long term debt ratio was 8.7 as compared to the industry average range of 0.02 to 0.05. The company’s inventory turn was 4.4 compared to the retail apparel industry average range of 8 to 9.
Ann Taylor Inc. was the star division for Ascena in 2019
With its sales increase of over 4%, Ann Taylor Inc. was the only division in the company that showed a positive net profit margin. Even though the net profit was 29% lower than the previous year, the brand was still profitable whereas all of the other Ascena brands were in the red. While the sales trend for 2019 ended on a positive note for Ann Taylor Inc., Q2 showed a decline of 2% which was prior to the shutdown of the stores due to coronavirus.
Consumer shift in fashion apparel spending
The pandemic has caused consumers to decrease spending on fashion apparel; sales are down 40.8% according to Amperity’s Retail Monitor Report, a benchmarking tool from North American retailers. Structured styles (wovens) in particular are showing steep declines. This category represents the large core of the Ann Taylor Inc. business for both the full line and off-price segments.
The remote working environment, less consumer spending on fashion apparel, and a shift to athleisure clothes will all be challenges for Ann Taylor. Activewear brand Lou & Grey, under the Ann Taylor umbrella, was founded in 2014 to target millennials. The styles are described as activewear chic but Lou and Grey has an uphill battle to take market share from the likes of Lululemon or Athleta. Financials are not available for Lou & Grey.
Chapter 11 restructure of Ascena will unload company dept and provide an opportunity to focus on specific business segments. Gary Muto, Chief Executive Officer of Ascena, stated in a press release, “By entering into a comprehensive plan to deleverage our balance sheet, right-size our operations and inject new capital into the business, we will be better positioned to deliver profitable growth of our iconic brands and drive value for all of our stakeholders.”
As part of its bankruptcy court-approved restructuring plan, Ascena announced 1,100 worldwide store closings including all Catherines stores, a significant number of Justice stores and selected Ann Taylor, LOFT, Lane Bryant and Lou & Grey stores. Ascena will be closing every store, regardless of brand, in Canada, Puerto Rico and Mexico.
Currently, the company’s operating with approximately 95% of its store base reopened and continues to serve customers in those stores and through its e-commerce brand websites.
Acena’s 19.1 million square feet of retail store space will be sharply reduced in 2020 with store closings and the sale of some portfolio brands. Ascena has been criticized as far back as 2011 for trying to serve too many markets. Currently, Ann Taylor Inc. has five divisions: Ann Taylor, Loft, Lou & Grey, Ann Taylor Factory, and Loft Outlet. Ann Taylor Inc. has an opportunity to focus on its core strengths if it does not get bogged down with the logistics of running too many brands.