Ascena Retail Group Inc. continues to right-size its operating structure, including pruning back its Dressbarn business.
In a Nutshell: “We are pleased to have exceeded our adjusted operating income expectations for the first quarter through better than expected improvement in operating expenses,” Ascena CEO Gary Muto said.
Ascena generated $40.2 million in operating income for the period, versus $1.2 million in the year-ago quarter. The company attributed the improvement to cost reductions, offset in part by lower gross margin. The company began fine-tuning its expense structure in fiscal 2019, which included the sale of a majority interest in Maurices and the decision to shutter its Dressbarn business and close the remaining 616 stores when completed.
Excluding restructuring costs, the company generated $45 million in operating income in the quarter.
“We continue to make advances on right-sizing our cost structure, while focusing on driving sustainable growth and improved operating margin for each of our segments. In addition, we once again ended the quarter in a strong cash and liquidity position with no borrowings under our credit facility as we remain disciplined in managing working capital and rationalizing our capital expenditures,” Muto added.
Net Sales: For the three months ended Nov. 2, the company said net sales were down 3.1 percent to $1.30 billion from $1.34 billion. Comparable sales were flat in the quarter, or down 2 percent on an adjusted basis, excluding Dressbarn. Ascena is on track to wind down its Dressbarn business by the end of December 2019.
In it premium fashion segment, Ann Taylor posted a 1 percent decline in comparable sales, while Loft was down 2 percent. In its plus fashion segment, Lane Bryant posted comparable sales up 2 percent, while Catherines was down 5 percent. And girls’ fashion retailer Justice posted a 6 percent decrease in comparable sales. Value chain Dressbarn, which has been holding rotating special sales during the quarter to clear out its inventory, saw comparable sales rise 10 percent.
Gross margin fell to $773 million, or 59.6 percent of sales in the quarter. That compares with $801 million, or 59.9 percent of sales, in the year-ago quarter. The decline in gross margin rate was attributed to higher promotional activity at Justice and at its Ann Taylor and Loft businesses.
Earnings: Net income grew more than five-fold to $31.7 million, or 16 cents a diluted share, from net income of $5.9 million, or 3 cents, in the year-ago quarter.
Ascena’s inventory levels at the end of the first quarter totaled $673 million, reflecting a decrease of 5 percent from the year-ago period.
For the second quarter of fiscal 2020, the company expects sales of between $1.20 billion to $1.23 billion, with comparable sales of “negative low single digits” and a gross margin rate of 51.2 percent to 51.7 percent. Ascena also guided its adjusted operating loss at between $40 million to $60 million.
CEO’s Take: “While we are encouraged by the progress we are making, we know there is more work to be done. We are moving our brands in the right direction by capitalizing on their distinct market leadership positions while maintaining our focus on optimizing our capital structure. The steps we are taking now set us up to provide consistent profitable performance and enhance shareholder value over the longer term,” Muto said.