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Ascena to Build Cash Position and Return to ‘Sustainable Growth’ After Q4 Loss

Ascena Retail Group was expected to post fourth-quarter profits, but managed only to beat Wall Street’s expectations for sales in the quarter.

In a Nutshell: Ascena ended up in the red for the quarter ended Aug. 3, hurt by higher promotional activity to clear out elevated inventory levels.

Interim executive chairman Carrie Teffner didn’t rule our the possibility of more asset sales over time: “Our board and executive team continue to actively assess the portfolio as we remain laser focused on our key objective of returning to sustainable growth, improving operating margins and optimizing our capital structure as we remain committed to enhancing shareholder value.”

But at least the company hasn’t increased its debt, and Ascena CEO Gary Muto noted that the company “ended the quarter with a strong cash and liquidity position, with no borrowings under its credit facility.”

Ascena ended the quarter with total debt of $1.37 billion, representing the balance remaining on a term loan. There were no borrowings outstanding under the firm’s revolving credit facility, which had $397 million of borrowing availability at the end of the fourth quarter. Ascena also is not required to make its next quarterly term loan payment of $22.5 million until November 2020. The company also ended the quarter with cash and cash equivalents of $328 million.

That said, Ascena is “taking steps to enhance its cash position over the course of Fiscal 2020 through a combination of cost savings initiatives, rationalization of our capital expenditures and disciplined working capital management,” Muto said.

Net Sales: The company said sales fell 4.6 percent to $1.45 billion from $1.52 billion, which was still better than Wall Street’s consensus estimate of $1.2 billion for the quarter.

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Excluding the winding down of its Dressbarn operations, consolidated comparable sales for the quarter were down 2 percent. By segment, premium fashion comps were up 1 percent, comprised of flat comps at Ann Taylor and up 2 percent at Loft. Plus fashion was down 4 percent, or down 3 percent at Lane Bryant and down 8 percent at Catherines. The company’s kids fashion segment saw comps at Justice fall 5 percent.

Gross margin fell to 54.3 percent of sales, compared with 58.1 percent in the year-ago quarter. The company said the decline was due to higher promotional activity due to elevated inventory levels. Ascena ended the quarter with inventory of $548 million, up 2 percent from the year-ago period. “The company took meaningful steps in the fourth quarter to bring inventories back in line while improving quality and composition,” Ascena said.

Earnings: Ascena posted a net loss of $358 million, or $1.81 a diluted share, against net earnings of $33.2 million, or 17 cents, a year ago. On an adjusted basis excluding one-time charges, the net loss from continuing operations would have been $25 million, or 13 cents a share.

Wall Street was expecting adjusted diluted earnings per share of 3 cents on sales of $1.2 billion.

The company guided first quarter estimates for net sales at between $1.10 billion to $1.13 billion, and comparable sales of negative low single digits. The forecast includes its premium fashion, plus fashion and kids fashion business segments.

Dressbarn is on track to complete the wind down of its business in December, and the divestiture of Maurices is complete.

CEO’s Take: Muto said, “Looking ahead, by shifting our focus to our brands and right-sizing our cost structure, we plan to capitalize on the meaningful and differentiated presence our brands have in the marketplace.”

The CEO added that the company is evolving its merchandising strategy to include greater versatility in its assortment so it can more easily adapt to its customers’ “changing desires in order to deepen loyalty with existing customers, re-engage lapsed customers and attract new customers.”