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Maurices, Dressbarn: What Could Ascena Sell Next?

So far the sale of value-chain Maurices is a “credit positive” for Ascena Retail Group Inc., but whether Ascena can get any other deals done remains unclear.

Raya Sokolyanski, credit analyst for ratings firm Moody’s Investors Service, said the Maurices sale is a credit positive because it “results in a better quality core portfolio and allows for accelerated debt repayment.”

The credit analyst said Maurices faces challenges from increased apparel retail competition and a high fixed cost structure. Other brands, she noted, like “Loft and Justice, are better positioned from a competitive standpoint and have benefited from significant resource investment.”

While further strategic actions could be credit positive, there’s a chance they “would likely be difficult to execute at attractive valuations in a market environment that is broadly unfavorable to underperforming apparel retailers,” Sokolyanski said.

Ascena on Monday said it inked a definitive agreement to sell a majority stake in Maurices to private equity firm OpCapita in a transaction valued at $300 million. Net proceeds are expected to be $200 million, which Ascena said would be used in part to pay down the company’s existing term loan balance. The deal also is testing Ascena’s shared services platform as a template for offering the same option to others. And Ascena earlier this month posted disappointing second-quarter results. At the time, David Jaffe, Ascena’s chairman and chief executive officer, said the company was exploring opportunities within its portfolio so it can focus capital and management attention on the better performing brands. In the quarter, Ann Taylor and Loft from the premium group did well, with the group comps up 10 percent in the period.

“De-leveraging the balance sheet, while simultaneously removing one of the consistent laggards (comp and profitability) from [Ascena’s] portfolio, is certainly viewed positively,” CL King equity analyst Steven Marotta said.

As for the creative structure of the transaction involving the shared service platform, Marotta said that given the soft retail mergers and acquisitions market, “[W]e do not expect anything similar in the new future.” He also said that while the current structure of the deal wasn’t expected, perhaps Ascena management might surprise again with another creative model in the future “aimed squarely at de-leveraging the balance sheet and de-risking the income statement.”

On Thursday, Bloomberg reported that Ascena was pitching its Dressbarn retail concept to potential buyers. There’s been speculation that perhaps other nameplates under the Ascena umbrella–Lane Bryant and Catherines in the plus-fashion group, which saw sales drop 10.2 percent and comps down 8 percent–could also be put on the market once the company completes its evaluation of options. But that begs the question of who would buy a brand or retailer that isn’t doing well? That’s to the point of Moody’s Sokolyanski about the difficulty in trying to get favorable valuations for retailers in a market that isn’t so hospitable to under-performers.

Bahige El-Rayes, partner in the consumer and retail practice of global management consultancy A.T. Kearney, said that as a general rule there could be a private equity firm out there who wouldn’t mind doing a turnaround situation. He explained that there are financial sponsors on the hunt with a mindset of “what can I grab at a discount that I can do a turnaround for?”

And while some see limited value in certain assets, El-Rayes said that in the current market, “Everything has a buyer at the right price.”

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