Market Overview

ascena retail group, inc. Reports Fourth Quarter and Full Year Fiscal 2017 Results and Provides Guidance for First Quarter of Fiscal 2018; Fourth Quarter GAAP EPS Loss of $0.08; Non-GAAP Adjusted EPS of $0.05; Comparable Sales Down 4%

Share:

ascena retail group, inc. (NASDAQ:ASNA) ("ascena" or the
"Company") today reported financial results for its fiscal fourth
quarter and full year ended July 29, 2017. For the fourth quarter of
Fiscal 2017, the Company reported a GAAP loss of $0.08 per diluted share
compared to GAAP earnings of $0.07 per diluted share in the year-ago
period. The decrease was primarily driven by the comparable sales
decline of 4%, costs associated with the Company's Change for Growth
transformation program, and the 53rd week in the year-ago period related
to our reporting calendar. For the fourth quarter of Fiscal 2017, the
Company reported non-GAAP adjusted earnings of $0.05 per diluted share
compared to non-GAAP adjusted earnings of $0.08 per diluted share in the
year-ago period.

For full year Fiscal 2017, the Company reported a GAAP loss of $5.48 per
diluted share which included a non-cash pre-tax impairment charge of
$1.324 billion (after tax impact of $5.22 per diluted share) recorded in
the third quarter to write-down a portion of the Company's goodwill and
other intangible assets. Also contributing to the loss was a comparable
sales decline of 5%, costs associated with the Company's Change for
Growth transformation program, and acquisition and integration costs
related to the acquisition of ANN INC. The Company reported a GAAP loss
of $0.06 per diluted share in the year-ago period. Non-GAAP adjusted
earnings for full year Fiscal 2017 were $0.22 per diluted share compared
to non-GAAP adjusted earnings of $0.60 per diluted share in the year-ago
period.

David Jaffe, Chief Executive Officer of ascena retail group, inc.,
commented, "Our fourth quarter adjusted earnings per share of five cents
came in well above our guidance range, reflecting a modest easing of
store traffic headwinds. To be clear, conditions remain challenging -
store traffic was down mid-single digits for the quarter, and we are
planning for this trend to continue for the foreseeable future. While
comp sales performance was several points better than our guide, we were
not pleased with the results, and we will not be satisfied until we
deliver positive, sustained enterprise-level comp sales."

Jaffe continued, "Last month, we announced a major change to the
structure of our executive leadership team. This is an important part of
our efforts to reinvigorate top-line growth, enhance our culture of
performance and accountability, drive efficiencies and cost savings, and
create sustainable shareholder value. This change has unified the
leadership of all brands under Gary Muto, which will allow our
customer-facing team to leverage Gary's expertise in fashion execution
and customer experience to drive improved performance going forward."

Jaffe concluded, "I am encouraged by the major, decisive actions our
team has taken across all aspects of our business. As part of our
transformation efforts, we are investing in leading edge planning and
marketing capabilities to support top-line growth and improved margin,
and we remain on track to deliver cost savings of $250 to $300 million.
Transformation-related expense efficiencies delivered to-date have
provided a meaningful offset to the negative top-line environment, and
we will continue to look to identify additional sources of cost savings
as we aggressively transform ascena into an agile competitor - one that
can deliver sustainable growth in an environment that we expect to
remain intensely competitive."

Fiscal Fourth Quarter Results - Consolidated

Overview

The current year period includes Restructuring and other related charges
incurred under the Company's Change for Growth transformation program.
Current and prior year fourth quarter results include certain
acquisition and integration costs, as well as non-cash purchase
accounting adjustments associated with the acquisition of ANN INC. ("ANN"),
which was completed on August 21, 2015. A summary of year-over-year
changes in these items is presented in the notes to the unaudited
condensed consolidated financial information, which are included herein.

Net Sales and Comparable Sales

Net sales on a GAAP basis for the fourth quarter of Fiscal 2017 were
$1.658 billion compared to $1.812 billion in the year-ago period. The
decrease in sales reflected the impact of a 4% comparable sales decline,
which was caused primarily by mid-single digit declines in average
selling price and store traffic, offset in part by double-digit
transaction growth in the direct channel. In addition, the year-ago
period included approximately $82 million associated with the 53rd week
in our reporting calendar. The Company's sales and comparable sales data
for the fiscal fourth quarter on a brand and segment basis is summarized
below:

            Net Sales (millions)

Comparable
Sales

Three Months Ended

July 29,
2017

 

July 30,
2016

Ann Taylor (2)% $   196.5 $  

202.9

 

LOFT (3)% 402.9   414.2  
Total Premium Fashion (3)% 599.4 617.1
 
maurices (8)% 229.6 257.6
dressbarn (4)% 249.8   282.8  
Total Value Fashion (6)% 479.4 540.4
 
Lane Bryant (6)% 276.8 317.9
Catherines 1% 83.5   92.4  
Total Plus Fashion (4)% 360.3 410.3
 
Justice (4)% 219.0   244.5  
Total Kids Fashion (4)% 219.0 244.5
   
Total Company (4)% $   1,658.1   $   1,812.3  
 

Gross margin

Gross margin on a GAAP basis decreased to $951 million, or 57.4% of
sales, for the fourth quarter of Fiscal 2017 compared to $1,041 million,
or 57.5% of sales in the year-ago period. Gross margin dollars decreased
year-on-year primarily as a result of the decline in comparable sales,
along with the 53rd week included in the year-ago period, which
represented approximately $48 million. Gross margin rate was essentially
flat as product cost savings at our Premium Fashion segment,
tight inventory management at our Plus Fashion segment, improved
economics related to our Value Fashion segment's new credit card
program, and freight-related synergies were offset by lower average
selling price at our Value Fashion and Kids Fashion
segments.

Buying, distribution, and occupancy expenses

Buying, distribution, and occupancy ("BD&O") expenses on a GAAP basis
for the fourth quarter of Fiscal 2017 declined 2% to $320 million, or
19.3% of sales, compared to $328 million, or 18.1% of sales in the
year-ago period. The decrease in BD&O expenses was primarily due to
lower occupancy expenses resulting from ongoing fleet optimization and
the 53rd week included in the year-ago period, which represented
approximately $3 million. BD&O expenses as a percentage of net sales
increased primarily due to the de-leveraging effect of lower comparable
sales.

Selling, general, and administration expenses

Selling, general, and administrative ("SG&A") expenses on a GAAP basis
for the fourth quarter of Fiscal 2017 declined 8% to $500 million, or
30.1% of sales, compared to $540 million, or 29.8% of sales in the
year-ago period. The decrease in SG&A expenses was primarily due to
lower store expenses associated with ongoing fleet optimization and
lower sales volume, lower performance-based compensation, and
approximately $40 million in synergies and transformation initiatives,
primarily due to the elimination of redundant leadership and
non-merchandise procurement savings, along with the 53rd week included
in the year-ago period, which represented approximately $18 million.
SG&A expenses as a percentage of net sales increased primarily due to
the de-leveraging effect of lower comparable sales.

Operating (loss) income

Operating loss on a GAAP basis for the fourth quarter of Fiscal 2017 was
$9 million compared to operating income of $65 million in the year-ago
period. The decrease reflects the lower operating results discussed
above and costs associated with the Company's Change for Growth
transformation program, along with the 53rd week included in the
year-ago period, which represented approximately $27 million.

Effective tax rate

For the three months ended July 29, 2017, the Company recorded a tax
benefit of $17 million on a pre-tax loss of $33 million. The effective
tax rate for the quarter was higher than the statutory tax rate
primarily due to the impact of permanent items and the effect of state
and local taxes.

Net (loss) income and net (loss) earnings per diluted share

The Company reported a Net loss of $16 million, or $0.08 per diluted
share in the fourth quarter of Fiscal 2017, compared to Net income of
$14 million in the year-ago period, or $0.07 per diluted share, which
included the impact of approximately $15 million of income, or $0.08 per
diluted share from the 53rd week in our reporting calendar.

Fiscal Fourth Quarter Balance Sheet Highlights

Cash and cash equivalents

The Company ended the fourth quarter of Fiscal 2017 with Cash and cash
equivalents of $326 million. Of this amount, approximately $224 million
was held outside of the U.S.

Inventories

The Company ended the fourth quarter of Fiscal 2017 with inventory of
$639 million, down 2% from $649 million at the end of the year-ago
period.

Capital expenditures

Capital expenditures totaled $51 million in the fourth quarter of Fiscal
2017.

Debt

The Company ended the fourth quarter of Fiscal 2017 with total debt of
$1.597 billion, which represents the remaining balance on its $1.8
billion term loan used to acquire ANN. The Company ended the
fourth quarter with no borrowings outstanding under the Company's
revolving credit facility.

Fiscal Year 2018 First Quarter Outlook

Fiscal year 2018 first quarter non-GAAP earnings per share are estimated
in the range of $0.08 to $0.13, supported by the following assumptions:

  • Net sales in the range of $1.58 to $1.62 billion;
  • Comparable sales in the range of down 4% to down 5%;
  • Gross margin rate in the range of 60.8% to 61.3%;
  • Depreciation and amortization expense of approximately $90 million;
  • Operating income in the range of $55 to $70 million;
  • Interest expense of approximately $24 million;
  • Effective tax rate of approximately 50%; and
  • Diluted share count of 196 million.

At this point in time, the Company is not issuing full year guidance for
Fiscal 2018 earnings per share due to limited visibility to macro trends
impacting sales. The following assumptions can be used for full year
fiscal 2018:

  • Gross margin rate in the range of 58.1% to 58.6%, including
    approximately $30 million of gross margin dollar improvement related
    to ANN deal synergies and cost savings;
  • Transformation and synergy-related operating expense reductions of
    approximately $120 million, which will be partially offset by
    inflationary pressure of 2.0% to 2.5% on our operating expense base;
  • Depreciation and amortization in the range of $358 to $363 million;
  • Interest expense in the range of $100 to $105 million;
  • Capital expenditures in the range of $190 to $220 million, with
    roughly two-thirds of planned spending on technology investments;
  • Diluted share count of 197 million; and
  • Store count in the range of 4,600 to 4,650 by the end of fiscal 2018.

Real Estate

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

          Quarter Ended July 29, 2017
     

Store Locations

Store Locations

Store Locations

Store Locations

Beginning of Q4

 

Opened

 

Closed

 

End of Q4

Ann Taylor 325 1 (4) 322
LOFT 674 10 (6) 678
maurices 1,012 2 (9) 1,005
dressbarn 791 (12) 779
Lane Bryant 767 (3) 764
Catherines 363 (4) 359
Justice 918     (18)   900
Total 4,850   13   (56)   4,807

Conference Call Information

The Company will conduct a conference call today, September 25, 2017, at
4:30 PM Eastern Time to review its fourth quarter and full year Fiscal
2017 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 82349149. 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 October 2, 2017 by dialing (855) 859-2056, the conference ID
is 82349149, and until October 25, 2017 via the Company's website at www.ascenaretail.com.

Non-GAAP Financial Results

As noted above, the comparability of the Company's operational results
for the periods presented herein has been affected by certain
transactions. The Company believes that non-GAAP financial measures,
when reviewed in conjunction with GAAP financial measures, can provide
more information to assist investors in evaluating current period
performance, trends and period-over-period comparative results. Non-GAAP
measures eliminate amounts that do not reflect the fundamental
performance of the Company's businesses. Such items include costs such
as (i) acquisition and integration expenses, (ii) restructuring,
tangible asset impairments and other related charges incurred under the
Company's Change for Growth initiative, (iii) non-cash charges
associated with the purchase accounting adjustments of ANN's
assets and liabilities to fair market value, primarily reflecting
inventory expense, depreciation and amortization expense, and
lease-related adjustments, (iv) non-cash impairment charges of goodwill
and other intangible assets and (v) the impact of the 53rd week included
in the fourth quarter of the year-ago period. Reference is made to Notes
1 and 2 of the unaudited condensed consolidated financial information
included herein for more information.

Many investors also use non-GAAP measures as a common basis for
comparing the performance of different companies. A general limitation
of non-GAAP measures is that they are not prepared in accordance with
U.S. generally accepted accounting principles and may not be comparable
to similarly titled measures of other companies due to differences in
methods of calculation and excluded items. Non-GAAP measures should be
considered in addition to, not as a substitute for, the Company's
Operating income (loss) and Net income (loss) per common share, as well
as other measures of financial performance and liquidity reported in
accordance with U.S. generally accepted accounting principles.

Additionally, a reconciliation of the projected non-GAAP EPS, which are
forward-looking non-GAAP financial measures, to the most directly
comparable GAAP financial measures, is not provided because the Company
is unable to provide such reconciliation without unreasonable effort.
The inability to provide a reconciliation is due to the uncertainty and
inherent difficulty predicting the occurrence, the financial impact and
the periods in which the non-GAAP adjustments may be recognized. These
GAAP measures may include the impact of such items as restructuring
charges, acquisition and integration related expenses, asset impairments
and the tax effect of all such items. As previously stated, the Company
has historically excluded these items from non-GAAP financial measures.
The Company currently expects to continue to exclude these items in
future disclosures of non-GAAP financial measures and may also exclude
other items that may arise (collectively, "non-GAAP adjustments"). The
decisions and events that typically lead to the recognition of non-GAAP
adjustments, such as actions under the Company's Change for Growth
transformation program, or acquisition and integration expenses, are
inherently unpredictable as to if or when they may occur. For the same
reasons, the Company is unable to address the probable significance of
the unavailable information, which could be material to future results.

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.

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 Premium
Fashion
segment (Ann Taylor, LOFT, and Lou & Grey),
Value Fashion segment (maurices and dressbarn), Plus
Fashion
segment (Lane Bryant and Catherines), and
for tween girls under the Kids Fashion segment (Justice).
ascena retail group, inc. operates ecommerce websites and approximately
4,800 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, maurices.com,
dressbarn.com, lanebryant.com, Catherines.com, and shopjustice.com.

ascena retail group, inc.

Condensed Consolidated Statements of Operations (Unaudited)

(millions, except per share data)

 
  Three Months Ended

July 29,
2017

 

% of Net
Sales

 

July 30,
2016

 

% of Net
Sales

Net sales $ 1,658.1 100.0 % $ 1,812.3 100.0 %
Cost of goods sold (706.7 ) (42.6 )% (771.0 ) (42.5 )%
Gross margin 951.4 57.4 % 1,041.3 57.5 %
Other costs and expenses:
Buying, distribution and occupancy expenses (320.2 ) (19.3 )% (328.3 ) (18.1 )%
Selling, general and administrative expenses (499.7 ) (30.1 )% (540.4 ) (29.8 )%
Acquisition and integration expenses (7.8 ) (0.5 )% (10.5 ) (0.6 )%
Restructuring and other related charges (33.9 ) (2.0 )% %
Impairment of goodwill % %
Impairment of intangible assets % %
Depreciation and amortization expense (98.3 ) (5.9 )% (96.9 ) (5.3 )%
Operating (loss) income (8.5 ) (0.5 )% 65.2 3.6 %
Interest expense (26.1 ) (1.6 )% (27.6 ) (1.5 )%
Interest income and other income (expense), net 1.7   0.1 % (0.3 ) %
(Loss) income before benefit (provision) for income taxes (32.9 ) (2.0 )% 37.3 2.1 %
Benefit (provision) for income taxes 17.1   1.0 % (23.5 ) (1.3 )%
Net (loss) income $ (15.8 ) (1.0 )% $ 13.8   0.8 %
 
Net (loss) income per common share:
Basic $ (0.08 ) $ 0.07  
Diluted $ (0.08 ) $ 0.07  
 
Weighted average common shares outstanding:
Basic 195.1   194.1  
Diluted 195.1   195.1  

See accompanying notes.

 

ascena retail group, inc.

Condensed Consolidated Statements of Operations (Unaudited)

(millions, except per share data)

 
  Twelve Months Ended

July 29,
2017

 

% of Net
Sales

 

July 30,
2016

 

% of Net
Sales

Net sales $ 6,649.8 100.0 % $ 6,995.4 100.0 %
Cost of goods sold (2,790.2 ) (42.0 )% (3,066.7 ) (43.8 )%
Gross margin 3,859.6 58.0 % 3,928.7 56.2 %
Other costs and expenses:
Buying, distribution and occupancy expenses (1,274.3 ) (19.2 )% (1,286.5 ) (18.4 )%
Selling, general and administrative expenses (2,068.5 ) (31.1 )% (2,112.3 ) (30.2 )%
Acquisition and integration expenses (39.4 ) (0.6 )% (77.4 ) (1.1 )%
Restructuring and other related charges (81.9 ) (1.2 )% %
Impairment of goodwill (596.3 ) (9.0 )% %
Impairment of intangible assets (728.1 ) (10.9 )% %
Depreciation and amortization expense (384.9 ) (5.8 )% (358.7 ) (5.1 )%
Operating (loss) income (1,313.8 ) (19.8 )% 93.8 1.3 %
Interest expense (102.2 ) (1.5 )% (103.3 ) (1.5 )%
Interest income and other income, net 1.8 % 0.4 %
Gain on extinguishment of debt   % 0.8   %
Loss before benefit (provision) for income taxes (1,414.2 ) (21.3 )% (8.3 ) (0.1 )%
Benefit (provision) for income taxes 346.9   5.2 % (3.6 ) (0.1 )%
Net loss $ (1,067.3 ) (16.1 )% $ (11.9 ) (0.2 )%
 
Net loss per common share:
Basic $ (5.48 ) $ (0.06 )
Diluted $ (5.48 ) $ (0.06 )
 
Weighted average common shares outstanding:
Basic 194.8   192.2  
Diluted 194.8   192.2  

See accompanying notes.

 

ascena retail group, inc.

Condensed Consolidated Balance Sheets (Unaudited)

(millions)

 
 

July 29,
2017

 

July 30,
2016

ASSETS
Current assets:
Cash and cash equivalents $ 325.6 $

371.8

 

Inventories 639.3 649.3
Prepaid expenses and other current assets 157.4   218.9  
Total current assets 1,122.3 1,240.0
Property and equipment, net 1,437.6 1,630.1
Goodwill 683.0 1,279.3
Other intangible assets, net 532.4 1,268.7
Other assets 96.2   88.2  
Total assets $ 3,871.5   $ 5,506.3  
 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 411.6 $ 429.4
Accrued expenses and other current liabilities 352.9 413.7
Deferred income 121.5 110.0
Income taxes payable 7.1 6.6
Current portion of long-term debt 44.0   54.0  
Total current liabilities 937.1 1,013.7
Long-term debt 1,494.1 1,594.5
Lease-related liabilities 348.3 387.1
Deferred income taxes 79.3 442.2
Other non-current liabilities 191.7   205.5  
Total liabilities 3,050.5   3,643.0  
Equity 821.0   1,863.3  
Total liabilities and equity $ 3,871.5   $ 5,506.3  

See accompanying notes.

 

ascena retail group, inc.

Segment Information (Unaudited)

(millions)

 
  Three Months Ended   Twelve Months Ended
July 29, 2017   July 30, 2016 July 29, 2017   July 30, 2016
Net sales:
Premium Fashion (a) $ 599.4 $ 617.1 $ 2,322.6 $ 2,330.9
Value Fashion 479.4 540.4 1,950.2 2,094.6
Plus Fashion 360.3 410.3 1,353.9 1,463.6
Kids Fashion   219.0     244.5     1,023.1     1,106.3  
Total net sales $ 1,658.1   $ 1,812.3   $ 6,649.8   $ 6,995.4  
 
Three Months Ended Twelve Months Ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Operating (loss) income:
Premium Fashion (a)(b) $ 52.4 $ 45.7 $ 140.9 $ 13.3
Value Fashion (3.2 ) 22.4 12.2 92.0
Plus Fashion 9.0 23.2 15.5 36.9
Kids Fashion (25.0 ) (15.6 ) (36.7 ) 29.0
Unallocated acquisition and integration expenses (7.8 ) (10.5 ) (39.4 ) (77.4 )
Unallocated restructuring and other related charges (33.9 ) (81.9 )
Unallocated impairment of goodwill (c) (596.3 )
Unallocated impairment of intangible assets (c)           (728.1 )  

 
Total operating (loss) income $ (8.5 ) $ 65.2   $ (1,313.8 ) $ 93.8  
 
Three Months Ended Twelve Months Ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Non-GAAP adjusted operating income:
Premium Fashion (b) (d) $ 63.0 $ 58.1 $ 184.8 $ 179.8
Value Fashion (a) (3.2 ) 13.6 12.2 83.2
Plus Fashion (a) 9.0 16.1 15.5 29.8
Kids Fashion (a)   (25.0 )   (26.6 )   (36.7 )   18.0  
Total non-GAAP adjusted operating income $ 43.8   $ 61.2   $ 175.8   $ 310.8  

(a)

 

Results for the twelve months ended July 30, 2016 include the
post-acquisition results of ANN, which was acquired on
August 21, 2015. Accordingly, ANN's results for Fiscal 2016
have been included herein for the post-acquisition period from
August 22, 2015 to July 30, 2016. Results for the Premium
Fashion
segment for the fourth quarter of Fiscal 2016 reflect
13 weeks of operations whereas results for the Company's other
brands for the fourth quarter of Fiscal 2016 reflect 14 weeks of
operations. All segments of the Company are on the same fiscal
calendar as of the end of Fiscal 2016. Results for the additional
week are excluded from non-GAAP adjusted operating income.
Reference is made to Notes 1 and 2 of the Unaudited Condensed
Consolidated Financial Information.

 

(b)

Operating (loss) income includes the impact of non-cash expenses
associated with the purchase accounting adjustments of ANN's
assets and liabilities to fair market value. For the three months
and twelve months ended July 29, 2017, adjustments of $10.6 and
$43.9, respectively, primarily consist of depreciation and
amortization associated with the write-up of ANN's customer
relationships and property and equipment and other purchase
accounting adjustments, which are primarily lease-related. For the
three and twelve months ended July 30, 2016, adjustments of $12.4
and $165.2, respectively, primarily consist of the impact of
non-cash inventory expense associated with the purchase accounting
adjustment of ANN's inventory to fair market value, and
depreciation and amortization expense associated with the write-up
of ANN's customer relationships and property and equipment.
These items have been excluded from the non-GAAP adjusted
operating income. Reference is made to Note 2 of the unaudited
condensed consolidated financial information included herein for a
reconciliation of operating (loss) income on a GAAP basis to
non-GAAP adjusted operating income.

 

(c)

Includes the impact of non-cash impairments of goodwill and other
intangible assets by segment as follows: $428.9 of goodwill and
$566.3 of other intangible assets at the Premium Fashion
segment, $107.2 of goodwill at the Value Fashion segment,
and $60.2 of goodwill and $161.8 of other intangible assets at the Plus
Fashion
segment. These items have been excluded from the
non-GAAP adjusted operating income. Reference is made to Note 2 of
the unaudited condensed consolidated financial information
included herein for a reconciliation of operating (loss) income on
a GAAP basis to non-GAAP adjusted operating income.

 

(d)

Results for the twelve months ended July 30, 2016 include $1.3
reflecting ANN's operating income for the three-week stub
period from the end of their last fiscal quarter prior to the
acquisition date through the acquisition date. Reference is made
to Note 2 of the unaudited condensed consolidated financial
information included herein for a reconciliation of operating
(loss) income on a GAAP basis to non-GAAP adjusted operating
income.

 

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

(millions, except per
share data)

Note 1. Basis of Presentation

On August 21, 2015, the Company acquired 100% of the outstanding common
stock of ANN INC. ("ANN"). ANN, which comprises
the operations of the Company's Premium Fashion segment, utilizes
a 52-53 week fiscal year following the National Retail Federation
calendar. Accordingly, ANN's results for Fiscal 2016 have been
included herein for the post-acquisition period from August 22, 2015 to
July 30, 2016.

Fiscal Year

The Company utilizes a 52-53 week fiscal year ending on the last
Saturday in July. As such, fiscal year 2017 ended on July 29, 2017 and
reflected a 52-week period ("Fiscal 2017") and fiscal year 2016 ended on
July 30, 2016 and reflected a 53-week period ("Fiscal 2016"). 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 2. Reconciliation of Non-GAAP Financial Measures

As noted above, the comparability of the Company's operational results
reported in accordance with U.S. generally accepted accounting
principles ("GAAP") for the periods presented herein has been affected
by certain transactions. The Company believes that the non-GAAP
financial measures presented below, when reviewed in conjunction with
GAAP financial measures, can provide more information to assist
investors in evaluating current period performance, trends and
period-over-period comparative results. Non-GAAP measures eliminate
amounts that do not reflect the fundamental performance of the Company's
businesses. These items include costs such as (i) acquisition and
integration expenses, (ii) restructuring, tangible asset impairments and
other related charges incurred under the Company's Change for Growth
initiative, (iii) non-cash charges associated with the purchase
accounting adjustments of ANN's assets and liabilities to fair
market value, primarily reflecting inventory expense, depreciation and
amortization expense, and lease-related adjustments, and (iv) non-cash
impairment charges of goodwill and other intangible assets.

Many investors also use non-GAAP measures as a common basis for
comparing the performance of different companies. A general limitation
of non-GAAP measures is that they are not prepared in accordance with
GAAP and may not be comparable to similarly titled measures of other
companies due to differences in methods of calculation and excluded
items. Non-GAAP measures should be considered in addition to, not as a
substitute for, the Company's Operating income (loss) and Net income
(loss) per common share, as well as other measures of financial
performance and liquidity reported in accordance with GAAP.

The following tables reconcile non-GAAP financial measures to the most
directly comparable GAAP financial measures and include Gross margin,
BD&O expense, SG&A expense, Operating (loss) income, Income tax benefit
(provision), Net (loss) income, Diluted net (loss) income per common
share and earnings before interest, taxes, depreciation and
amortization, as adjusted ("Adjusted EBITDA") to Net (loss) income for
all periods presented.

  Three Months Ended   Twelve Months Ended

July 29,
2017

 

July 30,
2016

July 29,
2017

 

July 30,
2016

Net sales - reported GAAP basis $ 1,658.1 $ 1,812.3 $ 6,649.8 $ 6,995.4
Impact of non-cash purchase accounting adjustments (a) 0.7 1.1 2.7 3.2
Impact of ANN prior to August 21, 2015 (b) 122.0
Estimated impact of the 53rd week (c)   (82.4 )   (82.4 )
 
Non-GAAP Net sales $ 1,658.8   $ 1,731.0   $ 6,652.5   $ 7,038.2  
 

ascena retail group, inc.

Notes to Unaudited Condensed Consolidated Financial Information
- (continued)

(millions, except per share data)

 

Note 2. Reconciliation of Non-GAAP Financial Measures
(continued)

 
  Three Months Ended   Twelve Months Ended
July 29, 2017   July 30, 2016 July 29, 2017   July 30, 2016
Cost of goods sold - reported GAAP basis (706.7 ) $ (771.0 ) $ (2,790.2 ) $ (3,066.7 )
Impact of non-cash purchase accounting adjustments (a) 126.9
Impact of ANN prior to August 21, 2015 (b) (47.5 )
Estimated impact of the 53rd week (c)       34.1         34.1  
 
Non-GAAP Cost of goods sold $ (706.7 ) $ (736.9 ) $ (2,790.2 ) $ (2,953.2 )
 
Three Months Ended Twelve Months Ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Buying, distribution & occupancy expense - reported GAAP basis $ (320.2 ) $ (328.3 ) $ (1,274.3 ) $ (1,286.5 )
Impact of non-cash purchase accounting adjustments (a) 0.4 0.8 2.8 (0.6 )
Impact of ANN prior to August 21, 2015 (b) (27.4 )
Estimated impact of the 53rd week (c)       3.2         3.2  
 
Non-GAAP Buying, distribution & occupancy expense $ (319.8 ) $ (324.3 ) $ (1,271.5 ) $ (1,311.3 )
 
Three Months Ended Twelve Months Ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Selling, general & administrative expense - reported GAAP basis $ (499.7 ) $ (540.4 ) $ (2,068.5 ) $ (2,112.3 )
Impact of non-cash purchase accounting adjustments (a) 1.7 1.6 6.3 4.9
Impact of ANN prior to August 21, 2015 (b) (39.9 )
Estimated impact of the 53rd week (c)       18.2         18.2  
 
Non-GAAP Selling, general & administrative expense $ (498.0 ) $ (520.6 ) $ (2,062.2 ) $ (2,129.1 )
 
Three Months Ended Twelve Months Ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Operating (loss) income - reported GAAP basis $ (8.5 ) $ 65.2 $ (1,313.8 ) $ 93.8
Impact of non-cash purchase accounting adjustments (a) 10.6 12.4 43.9 165.2
Impact of ANN prior to August 21, 2015 (b) 1.3
Estimated impact of the 53rd week (c) (26.9 ) (26.9 )
Impairment of goodwill and other intangible assets (d) 1,324.4
Acquisition and integration expenses (e) 7.8 10.5 39.4 77.4
Restructuring and other related charges (f)   33.9         81.9      
 
Non-GAAP Operating income $ 43.8   $ 61.2   $ 175.8   $ 310.8  
 

ascena retail group, inc.

Notes to Unaudited Condensed Consolidated Financial Information
- (continued)

(millions, except per share data)

 

Note 2. Reconciliation of Non-GAAP Financial Measures
(continued)

 
  Three Months Ended   Twelve Months Ended
July 29, 2017   July 30, 2016 July 29, 2017   July 30, 2016
Income tax benefit (provision) - reported GAAP basis $ 17.1 $ (23.5 ) $ 346.9 $ (3.6 )
Income tax impact of non-GAAP adjustments (g)   (26.2 )   4.2     (380.1 )   (80.6 )
 
Non-GAAP income tax provision $ (9.1 ) $ (19.3 ) $ (33.2 ) $ (84.2 )
 
Three Months Ended Twelve Months Ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Net (loss) income - reported GAAP basis $ (15.8 ) $ 13.8 $ (1,067.3 ) $ (11.9 )
Impact of non-cash purchase accounting adjustments (a) 10.6 12.4 43.9 165.2
Impact of ANN prior to August 21, 2015 (b) (5.6 )
Estimated impact of the 53rd week (c)

(25.2

)

(25.2 )
Impairment of goodwill and other intangible assets (d) 1,324.4
Acquisition and integration expenses (e) 7.8 10.5 39.4 77.4
Restructuring and other related charges (f) 33.9 81.9
Gain on extinguishment of debt (0.8 )
Income tax impact of non-GAAP adjustments (g)   (26.2 )   4.2     (380.1 )   (80.6 )
 
Non-GAAP Net income $ 10.3   $ 15.7   $ 42.2   $ 118.5  
 
Three Months Ended Twelve Months Ended

 

July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Diluted net (loss) income per common share - reported GAAP basis $ (0.08 ) $ 0.07 $ (5.48 ) $ (0.06 )
 
Per share impact of non-cash purchase accounting adjustments (a) 0.05 0.06 0.22 0.84
Per share impact of ANN prior to August 21, 2015 (b) (0.03 )
Per share estimated impact of the 53rd week (c) (0.12 ) (0.12 )
Per share impact of impairment of goodwill and other intangible
assets (d)
6.80
Per share impact of acquisition and integration related expenses (e) 0.04 0.05 0.20 0.40
Per share impact of restructuring and other related charges (f) 0.17 0.42
Per share income tax impact of non-GAAP adjustments (g) (0.13 ) 0.02 (1.94 ) (0.41 )
Per share impact of ANN acquisition on EPS (h)               (0.02 )
 
Non-GAAP diluted net income per common share (h)(i) $ 0.05   $ 0.08   $ 0.22   $ 0.60  
 

ascena retail group, inc.

Notes to Unaudited Condensed Consolidated Financial Information
- (continued)

(millions, except per share data)

 

Note 2. Reconciliation of Non-GAAP Financial Measures
(continued)

 
  Three Months Ended   Twelve Months Ended

July 29,
2017

 

July 30,
2016

July 29,
2017

 

July 30,
2016

Adjusted EBITDA $ 134.3 $ 149.2 $ 528.6 $ 644.6
Impact of non-cash purchase accounting adjustments (a) (2.8 ) (3.5 ) (11.8 ) (7.5 )
Non-cash expense associated with the write-up of ANN's
inventory to fair market value (a)
(126.9 )
Impact of ANN prior to August 21, 2015 (b) (7.2 )
Estimated impact of the 53rd week (c) 26.9 26.9
Impact of goodwill and intangible assets impairment (d) (1,324.4 )
Acquisition and other integration expenses (e) (7.8 ) (10.5 ) (39.4 ) (77.4 )
Restructuring and other related charges (f) (33.9 ) (81.9 )
Depreciation and amortization expense (98.3 ) (96.9 ) (384.9 ) (358.7 )
Operating (loss) income (8.5 ) 65.2 (1,313.8 ) 93.8
Interest expense (26.1 ) (27.6 ) (102.2 ) (103.3 )
Interest income and other income (expense), net 1.7 (0.3 ) 1.8 0.4
Gain on extinguishment of debt       0.8  
(Loss) income before benefit (provision) for income taxes (32.9 ) 37.3 (1,414.2 ) (8.3 )
Benefit (provision) for income taxes 17.1   (23.5 ) 346.9   (3.6 )
Net (loss) income $ (15.8 ) $ 13.8   $ (1,067.3 ) $ (11.9 )

(a)

 

Includes the impact of non-cash expenses associated with the
purchase accounting adjustments of ANN's assets and
liabilities to fair market value such as adjustments to Cost of
goods sold related to the write-up of ANN's inventory,
depreciation and amortization related to the write-up of ANN's
customer relationships and property and equipment and other
purchase accounting adjustments, which are primarily
lease-related. Amounts recorded in each period presented are as
follows:

          Three Months Ended   Twelve Months Ended

July 29,
2017

 

July 30,
2016

July 29,
2017

 

July 30,
2016

Net sales $ 0.7 $ 1.1 $ 2.7 $

3.2

 

Cost of goods sold 126.9
Other operating expenses 2.1 2.4 9.1 4.3
Depreciation and amortization 7.8   8.9   32.1   30.8  
$ 10.6   $ 12.4   $ 43.9   $ 165.2  

(b)

 

Represents ANN's results for the three-week stub period
from the end of their last fiscal quarter prior to the acquisition
date through the acquisition date and has been adjusted to exclude
transaction-related expenses incurred by ANN resulting from
the acquisition.

 

(c)

GAAP results for Fiscal 2016 reflect a 53-week period whereas our
normal annual results reflect a 52-week period. As a result of the
53rd week, the fourth quarter of Fiscal 2016 reflects results for
a 14-week period. To enhance comparability between periods, we
have presented results that reflect both a 52-week and a 53-week
period. The adjustment included herein reflects the results of the
53rd week period.

 

(d)

Represents the impact of non-cash impairments of goodwill and
other intangible assets by segment as follows: $428.9 of goodwill
and $566.3 of other intangible assets at the Premium Fashion
segment, $107.2 of goodwill at the Value Fashion segment,
and $60.2 of goodwill and $161.8 of other intangible assets at the Plus
Fashion
segment.

 

ascena retail group, inc.
Notes to Unaudited Condensed
Consolidated Financial Information - (continued)

(millions,
except per share data)

Note 2. Reconciliation of Non-GAAP Financial Measures (continued)

(e)

 

Primarily reflects costs related to the ANN acquisition
including severance and retention-related expenses, settlement
charges and professional fees related to a pension plan acquired
in the ANN acquisition which was terminated in the second
quarter of Fiscal 2017, legal, consulting and investment-banking
related transaction costs and other integration costs to combine
the operations and infrastructure of the ANN business into
the Company's. Amounts recorded in each period presented are as
follows:

          Three Months Ended   Twelve Months Ended

July 29,
2017

 

July 30,
2016

July 29,
2017

 

July 30,
2016

Severance and retention $ 3.6 $ 3.8 $ 14.3 $

37.5

 

ANN pension settlement 8.0
Transaction costs (0.5 ) 20.8
Other integration expenses 4.2   7.2   17.1   19.1  
$ 7.8   $ 10.5   $ 39.4   $ 77.4  
(f)   For the three and twelve months ended July 29, 2017 primarily
reflects costs incurred under the Company's Change for Growth
transformation program. Expenses for the three months ended July 29,
2017 include $13.2 of severance and related expenses, $10.0 for
asset impairments and lease termination payments related to planned
store closures and $10.7 for professional fees. For the twelve
months ended July 29, 2017 expenses include $33.2 of severance and
related expenses, $15.3 for asset impairments and lease termination
payments related to planned store closures and $33.4 for
professional fees.
 
(g) Non-GAAP income tax benefit (provision) is calculated based on the
full year effective tax rate for non-GAAP net income.
 
(h) Reflects the impact on EPS of using 195.1 million weighted average
common shares for both GAAP net income per diluted common share and
adjusted net income per diluted common share for the three months
ended July 30, 2016. For the twelve months ended July 30, 2016,
reflects the impact on EPS of using 196.0 million weighted average
common shares for adjusted net income per diluted common share
compared to the 192.2 million used to calculate EPS on a reported
GAAP basis. The weighted average number of diluted common shares on
an adjusted basis reflects the dilutive effect of stock options and
other securities, which were excluded from the reported GAAP amount
due to the net loss reported during the period.
 
(i) Reflects the impact on EPS of using 196.3 and 195.7 million weighted
average common shares for the three and twelve months ended July 29,
2017, respectively, for adjusted net income per diluted common
share. The weighted average number of diluted common shares on an
adjusted basis reflects the dilutive effect of stock options and
other securities, which were excluded from the reported GAAP amount
due to the net loss reported during the period.

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