Ascena retail group, inc. : Reports Fourth Quarter and Full Year Fiscal 2016 Results and Provides Full Year Fiscal 2017 Guidance

ascena retail group, inc. (NASDAQ - ASNA) (the “Company”) today reported financial results for its fiscal fourth quarter and full year ended July 30, 2016. Fiscal 2016 reflected a 53-week fiscal year for the Company, and as a result, the Company's fourth quarter GAAP results for Fiscal 2016 reflect a 14-week period, while non-GAAP adjusted results reflect a 13-week period comparable to the prior year 13-week period. Additionally, the Company's non-GAAP adjusted financial results for its fiscal fourth quarter ended July 30, 2016 exclude acquisition and integration expenses, and non-cash expenses associated with the purchase accounting adjustments of ANN's assets and liabilities to fair market value. The Company’s non-GAAP adjusted financial results for its fiscal fourth quarter ended July 25, 2015 exclude a $306 million impairment of goodwill and an intangible asset related to Lane Bryant, and an expense of $51 million related to Justice pricing lawsuits.

For the fourth quarter of Fiscal 2016, the Company reported GAAP earnings of $0.07 per diluted share compared to a loss of $1.98 per diluted share in the same period of Fiscal 2015. The increase was driven by the acquisition of ANN, which closed during the first quarter of Fiscal 2016, along with prior year items including the impairment of goodwill and an intangible asset at Lane Bryant and the expense related to the Justice pricing lawsuits. For the fourth quarter of Fiscal 2016, the Company reported non-GAAP adjusted earnings of $0.08 per diluted share which excludes the purchase accounting expenses and acquisition and integration costs associated with the acquisition of ANN, as well as the estimated impact of the 53^rd week.

For full year Fiscal 2016, the Company reported a GAAP loss of $0.06 per diluted share as a result of acquisition and integration costs, and the effect of non-cash purchase accounting adjustments, all of which were related to the acquisition of ANN. The Company reported a loss of $1.46 per diluted share in the same period of Fiscal 2015 primarily due to the previously discussed charges for the Lane Bryant impairments and Justice pricing lawsuits. Non-GAAP adjusted earnings for the 52-week period ending July 23, 2016 were $0.60 per diluted share, which excludes the aforementioned ANN items and the estimated impact of the 53^rd week.

David Jaffe, President and Chief Executive Officer of ascena retail group, inc., commented, "Fiscal 2016 was a challenging year for ascena, characterized by a highly competitive selling environment and significant store traffic headwinds. While we are seeing good customer demand during peak periods, off-peak demand has been inconsistent, and fourth quarter financial performance fell well below our expectations."

Jaffe concluded, "Aside from the challenging business trend we’ve seen, I’d like to highlight progress in four key areas of our business that I believe lay the foundation for stronger future performance. First, we were pleased by the Justice turnaround. The Justice team delivered full-year operating margin in the middle of the guidance range we provided last September. Second, our integration of ANN continues to progress well, and we remain ahead of plan with our synergy and cost savings workstreams. Third, the new ascena omni-channel platform went live at Justice in the fourth quarter, and the early reads on demand growth have significantly exceeded our expectations. And finally, we continue to make progress with our enterprise transformation work, and we are currently moving forward to address identified opportunities."

Fiscal Fourth Quarter 2016 Results

Net Sales and Comparable Sales

On a GAAP basis, Net sales for the fourth quarter of Fiscal 2016 were $1.812 billion compared to $1.170 billion last year, with the increase driven by the acquisition of ANN, which was not included in the prior year. Fiscal 2016 also includes Net sales of approximately $82 million associated with the 53^rd week. Comparable sales at the legacy ascena brands (excluding ANN) were down 4% for the quarter based on the comparable 13-week period. On a non-GAAP adjusted basis, Net sales were $1.731 billion.

The Company’s comparable sales data for the fiscal fourth quarter is summarized below:

Gross margin

On a GAAP basis, Gross margin increased to $1,041 million, or 57.5% of sales, for the fourth quarter of Fiscal 2016. This compared to $638 million, or 54.5% of fourth quarter sales last year with dollar growth driven primarily by the acquisition of ANN which added $355 million in the fourth quarter of Fiscal 2016. Fiscal 2016 GAAP gross margin includes approximately $48 million associated with the 53^rd week. The strong improvement in gross margin rate was driven primarily by performance at Justice related to the successful implementation of its new, less promotional selling model, along with a generally reduced level of promotional activity and disciplined inventory planning and management across our brand portfolio. On a non-GAAP adjusted basis, Gross margin was $994 million, or 57.4% of sales.

Buying, distribution, and occupancy expenses

On a GAAP basis, Buying, distribution, and occupancy (“BD&O”) expenses for the fourth quarter of Fiscal 2016 were $328 million, or 18.1% of sales, compared to $212 million, or 18.1% of fourth quarter sales last year, with approximately $111 million of the increase related to the acquisition of ANN and approximately $3 million associated with the 53^rd week. On a non-GAAP adjusted basis, BD&O expenses were $324 million, or 18.7% of sales.

Selling, general, and administration expenses

On a GAAP basis, Selling, general, and administrative (“SG&A”) expenses for the fourth quarter of Fiscal 2016 were $540 million, or 29.8% of sales, compared to $400 million, or 34.2% of fourth quarter sales last year with the growth mostly being driven by the acquisition of ANN which added $164 million of expense in the fourth quarter of Fiscal 2016. Also contributing to the increase were expenses associated with the 53^rd week of approximately $18 million, primarily reflecting payroll costs. These increases were partially offset by prior year expense of $51 million related to Justice pricing lawsuits. On a non-GAAP adjusted basis, SG&A expenses were $521 million, or 30.1% of sales.

Operating income

On a GAAP basis, the Company generated Operating income for the fourth quarter of Fiscal 2016 of $65 million, or 3.6% of fourth quarter sales compared to an Operating loss of $352 million, or 30.1% of fourth quarter sales last year. The increase in operating results reflected the addition of $46 million for ANN (which included $12 million of non-cash purchase accounting adjustments) and approximately $27 million from the 53^rd week, along with prior year items including the $306 million impairment of goodwill and an intangible asset at Lane Bryant and the $51 million expense related to Justice pricing lawsuits.

Effective tax rate

On a GAAP basis, the effective tax rate increased to 63.0% for the fourth quarter of Fiscal 2016 from 8.4% last year. The effective tax rate for the quarter was higher than the statutory tax rate primarily due to the effect of state and local tax rates on the full year earnings, and certain expenses which are non-deductible for tax purposes.

Net income and earnings per share

On a GAAP basis, the Company reported Net income of $14 million, or $0.07 per diluted share, in the fourth quarter of Fiscal 2016, compared to a Net loss of $323 million last year, or $1.98 per diluted share. Net income for the fourth quarter of Fiscal 2016 includes the impact of approximately $15 million of income, or $0.08 per diluted share from the 53^rd week, and approximately $17 million of expense, or $0.09 per diluted share, related to acquisition and integration costs as well as the impact of non-cash purchase accounting adjustments related to the acquisition of ANN.

Fiscal Fourth Quarter Balance Sheet Highlights

Cash and cash equivalents

The Company ended the fourth quarter of Fiscal 2016 with Cash and cash equivalents of $372 million. Of this amount, approximately $199 million is held outside of the U.S.

Inventory

The Company ended the fourth quarter of Fiscal 2016 with inventory of $649 million. On a non-GAAP adjusted basis, Inventory (excluding ANN) was down 8% versus the year-ago period. Due to the timing of the ANN acquisition in 2015, prior year audited comparable data for ANN is not available.

Capital expenditures

In the fourth quarter of Fiscal 2016, capital expenditures totaled $116 million. Full year Fiscal 2016 capital expenditures totaled $367 million.

Capital allocation

The Company ended the fourth quarter of Fiscal 2016 with total debt of $1.72 billion, which represents the remaining balance on its $1.8 billion term loan used to acquire ANN. The Company had no borrowings outstanding on its asset-based revolver at the end of the quarter. During the fourth quarter of Fiscal 2016, the Company made a $5 million scheduled principal payment on its $1.8 billion term loan. In addition, subsequent to year-end, on August 1, 2016, the Company repaid $100 million of the term loan such that the Company's next mandatory quarterly repayment does not occur until calendar 2018. The Company did not repurchase any additional shares during the quarter under its existing stock repurchase program and ended the quarter with a remaining availability of $181 million.

Fiscal Year 2017 Outlook

The Company is providing full year guidance for Fiscal 2017 that reflects continued store traffic headwinds and a negative quarter-to-date comparable sales trend as follows:

Given that Fiscal 2017 represents a normal 52-week period that will have comparable results inclusive of ANN in both current and prior year data as well as recently issued SEC interpretative guidance relating to the use of non-GAAP financial measures, the Company is transitioning back to its historical practice of providing forward looking guidance on a GAAP basis. As such, the Company will be providing GAAP guidance and highlighting significant items impacting that guidance. To aid in the transition from non-GAAP adjusted EPS guidance to GAAP EPS guidance, we are providing the following comparison of Fiscal 2016 EPS guidance and our full year Fiscal 2017 EPS guidance as follows:

The above guidance for fiscal year 2017 excludes any impact from our enterprise transformation work and the continued integration of ANN as the Company is unable to fully estimate the related impacts at this time.

Real Estate

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

Conference Call Information

The Company will conduct a conference call today, September 19, 2016, at 4:30 PM Eastern Time to review its fourth quarter and full year Fiscal 2016 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 76516611. 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 September 26, 2016 by dialing (855) 859-2056, the conference ID is 76516611, and until October 19, 2016 via the Company’s website at www.ascenaretail.com.

Non-GAAP Financial Results

The Company's financial results for its fiscal fourth quarters ended July 30, 2016 and July 25, 2015 reflect acquisition and integration expenses, non-cash expenses associated with the purchase accounting adjustments of ANN's assets and liabilities to fair market value, prior year impairment of goodwill and an intangible asset related to Lane Bryant, a prior year expense related to Justice pricing lawsuits, and other income and expenses classified outside of operating income.

Additionally, our GAAP results for Fiscal 2016 reflect a 53-week period whereas results for Fiscal 2015 reflect a 52-week period. As a result of the 53^rd week, the fourth quarter of Fiscal 2016 reflects results for a 14-week period. To enhance comparability between the periods, GAAP results for the fourth quarter of Fiscal 2016 have been adjusted to reflect a 13-week period.

Non-GAAP adjusted results for Fiscal 2016 and Fiscal 2015, which exclude the effect of these aforementioned items, have been presented to supplement the reported results. Reference should be made to Note 3 of the unaudited condensed consolidated financial information included herein for a reconciliation of non-GAAP adjusted financial measures to the most directly comparable GAAP financial measures.

About ascena retail group, inc.

ascena retail group, inc. (NASDAQ: ASNA) is a leading national specialty retailer offering apparel, shoes, and accessories for women under the Ann Taylor, LOFT, Lou & Grey, Lane Bryant, maurices, dressbarn and Catherines brands, and for tween girls under the Justice brand. ascena retail group, inc. operates ecommerce websites and approximately 4,900 stores throughout the United States, Canada and Puerto Rico.

For more information about ascena retail group, inc. visit: ascenaretail.com, AnnTaylor.com, LOFT.com, louandgrey.com, lanebryant.com, cacique.com, maurices.com, dressbarn.com, Catherines.com, and shopjustice.com.

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.

See accompanying notes.

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

Note 1. Acquisition of ANN INC.

On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN INC. ("ANN") for an aggregate purchase price of approximately $2.1 billion (the "ANN Acquisition"). The ANN segment utilizes a 52-53 week fiscal year following the National Retail Federation calendar. Accordingly, ANN's results have been included herein for the post-acquisition period from August 22, 2015 to July 30, 2016.

Note 2. Basis of Presentation

Fiscal Year

The Company utilizes a 52-53 week fiscal year ending on the last Saturday in July. As such, fiscal year 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016") and fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015"). Results of the Company's ANN segment for the fourth quarter of Fiscal 2016 reflect a 13-week period, whereas results for the Company's other brands for the fourth quarter of Fiscal 2016 reflect a 14-week period. The effect of ANN's one-week reporting period difference is not material to the condensed consolidated financial statements for either the three or twelve months ended July 30, 2016. As of the end of Fiscal 2016, all of the Company's brands have the same fiscal period end.

Note 3. Use of Non-GAAP Financial Measures

To provide investors information to assist them in assessing the Company’s ongoing operations on a comparable basis, the Company has provided financial measures in this press release that exclude (i) acquisition and integration expenses, (ii) non-cash charges associated with the purchase accounting adjustments of ANN's assets and liabilities to fair market value, primarily reflecting inventory expense and depreciation and amortization expense, (iii) impairment of goodwill and an intangible asset related to Lane Bryant, (iv) an expense related to Justice pricing lawsuits, and (v) other income and expenses classified outside of operating income.

Further, our GAAP results for Fiscal 2016 reflect a 53-week period whereas results for Fiscal 2015 reflect a 52-week period. As a result of the 53^rd week, the fourth quarter of Fiscal 2016 reflects results for a 14-week period. The Company performed an analysis to determine which costs were fixed and not impacted by the existence of a 53^rd week and which costs would be considered incremental to the 52-week period. Only costs deemed incremental were included in the impacts disclosed below. In general, the results for the 53^rd week reflect the flow through of margin on the related sales volume for the week less direct costs to fulfill the orders and payroll costs incurred during the week. Specifically, Net sales reflect sales generated for the period July 24, 2016 through July 30, 2016. Cost of revenues reflects the cost of product and any freight and shipping costs incurred during that week. BD&O expenses includes fulfillment expenses incurred by the Company’s fulfillment centers during the 53^rd week. BD&O expenses do not include an allocation of rent or depreciation to the 53^rd week period, as such costs were not considered incremental to the 52-week period. Finally, SG&A expenses primarily reflect payroll costs incurred during the 53^rd week.

Throughout this release, the term “reported” refers to information prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"), while the term “adjusted” refers to non-GAAP financial information adjusted to exclude certain non-recurring costs as well as the results of the 53^rd week.

ascena retail group, inc.
Notes to Unaudited Condensed Consolidated Financial Information - (continued)
(millions, except per share data)

Note 3. Use of Non-GAAP Financial Measures (continued)

In addition, the following table presents the financial performance measure of earnings before interest, taxes, depreciation and amortization, as adjusted ("Adjusted EBITDA") to exclude non-operating related items such as (i) acquisition and integration expenses, (ii) non-cash charges associated with the purchase accounting adjustments of ANN's assets and liabilities to fair market value, primarily reflecting inventory expense and depreciation and amortization expense, (iii) impairment of goodwill and an intangible asset related to Lane Bryant, (iv) an expense related to Justice pricing lawsuits, (v) the impact of the 53^rd week, and (vi) other income and expenses classified outside of operating income. These measures may not be directly comparable to similar measures used by other companies and should not be considered a substitute for performance measures in accordance with GAAP such as operating income and net income reported herein. The table below reconciles Adjusted EBITDA to Net income (loss) as reflected in our unaudited condensed consolidated statements of operations.

ascena retail group, inc.
Notes to Unaudited Condensed Consolidated Financial Information - (continued)
(millions, except per share data)

Note 3. Use of Non-GAAP Financial Measures (continued)

The following table presents a reconciliation of our reported GAAP earnings per share for the three and twelve months ended July 30, 2016 to our non-GAAP adjusted earnings per share:

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