Closure of Dressbarn should be good for Ascena Retail

Ascena Retail Group (OTC: ASNA) recently announced the discontinuation of the Dressbarn brand, including its approximately 650 stores. This came after rumors circulated that Ascena planned to sell the business. The news is certainly disappointing for buyers and the chain’s 6,800 employees, but could it be good news for shareholders?

Dressbarn has been a drag on the business

Ascena Retail Group has been struggling for several years. The company racked up more than $1 billion in debt to fund acquisitions and net GAAP losses (generally accepted accounting principles) soared. Ascena brands include Ann Taylor, Justice, Lane Bryant, Dressbarn and Maurices. Dressbarn lost money and saw revenue decline while some of the company’s other brands performed well.

Metric FISCAL YEAR 2017 FISCAL YEAR 2018 Q1 2019 Q2 2019
Company total sales (5%) (2%) 3% 2%
Dressbarn Comp Sales (5%) (ten%) (4%) (1%)

Source of data: Ascena Retail Group. Learn more about comparable store sales here. Ascena’s fiscal year ends August 4th.

As shown in the chart above, Dressbarn has held back the company’s same-store (coms) sales, which track revenue from stores that have been open for a year or more to provide insight into growth that is not distorted by the opening of new stores. Dressbarn has consistently seen competitors decline despite the company’s efforts to close underperforming stores and rebrand the company as a high fashion retailer.

To make matters worse, Dressbarn has also been a money pit in terms of profitability. For 2018, Ascena’s “value fashion” segment – made up of Dressbarn and Maurices – generated $83.2 million in operating losses. It is unclear how much of the loss was caused by Dressbarn, however, during Ascena’s quarterly report conference call with analysts in mid-March, CEO Gary Muto said Dressbarn was “operating at an unacceptable level of profitability”.

Based on Dressbarn’s declining sales and lack of profitability, it’s clear the brand has been a sore spot for the company. Given Ascena’s indebtedness, it cannot afford to continue operating its brands at a loss. Dressbarn’s stores and e-commerce operations are operating as usual at this time. Closure plans will be announced as decisions are made.

Unable to sell the brand

It makes sense that Ascena would want to get rid of Dressbarn given the company’s financial situation, but investors may wonder why the company didn’t sell it rather than shut it down. It looks like Ascena tried.

Ascena has telegraphed loud and clear that it would be interested in selling some of its assets. In March, the company sold a majority stake in the Maurices brand to a private equity firm and noted that the sale represented “a first step in [Ascena’s] full portfolio review. »

Almost immediately after the sale of Maurices, rumors began to circulate that the company was planning to sell Dressbarn. Selling Dressbarn would have made sense as it would have provided cash to reduce the debt burden. Given that the company later announced that it would be ending the brand, that must mean buyers didn’t show up or show up to deliver what Ascena wanted.

Liquidation will cause Ascena to take a toll on its income, but it will end the bleeding. So far, the company has not provided details on the extent of the financial impact.

Image source: Getty Images.

A better future ?

While it’s sad to see a 57-year-old retailer close and thousands of people lose their jobs, the liquidation could be a step in the right direction for Ascena. The company’s economy fashion segment was the only segment to record an operating loss in 2018, and now Ascena has reached a solution on both economy fashion brands, Maurices and Dressbarn.

Additionally, Ascena’s “premium fashion” segment, comprised of Ann Taylor and LOFT, is doing well. High-end fashion is the company’s largest segment in terms of revenue and profit and has nearly 1,000 stores. In the last quarter, Ann Taylor and LOFT recorded a growth in model sales of 10%!

Liquidating Dressbarn and offloading Maurices will improve Ascena’s cash flow, which could help it generate profits and pay down debt. This should give investors hope that the company can turn over a new leaf and focus on the parts of the business that are most valuable. Ascena is due to release its results on Monday. Look for more information then.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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