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ASNA > SEC Filings for ASNA > Form 10-Q on 8-Dec-2011All Recent SEC Filings

Show all filings for ASCENA RETAIL GROUP, INC.

Form 10-Q for ASCENA RETAIL GROUP, INC.


8-Dec-2011

Quarterly Report


Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Various statements in this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "project," "we believe," "is or remains optimistic," "currently envisions" and similar words or phrases and involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking statements.

These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended July 30, 2011 (the "Fiscal 2011 10-K"). There are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A - "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

INTRODUCTION

Management discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the accompanying unaudited interim consolidated financial statements and footnotes to help provide an understanding of our financial condition and liquidity, changes in financial condition and results of our operations. MD&A is organized as follows:

Overview. This section provides a general description of our business and a summary of financial performance for the three months ended October 29, 2011. In addition, this section includes a discussion of recent developments and transactions affecting comparability that we believe are important in understanding our results of operations and financial condition, and in anticipating future trends.

Results of operations. This section provides an analysis of our results of operations for the three-month periods ending October 29, 2011 and October 30, 2010.

Financial condition and liquidity. This section provides an analysis of our cash flows for the three-month periods ending October 29, 2011 and October 30, 2010, as well as a discussion of our financial condition and liquidity as of October 29, 2011. The discussion of our financial condition and liquidity includes (i) our available financial capacity under our credit facility,
(ii) a summary of our key debt compliance measures and (iii) any material changes in financial condition and commitments since the end of Fiscal 2011.

Market risk management. This section discusses any significant changes in our risk exposures related to interest rates, foreign currency exchange rates and our investments, as well as the underlying market conditions since the end of Fiscal 2011.

Critical accounting policies. This section discusses any significant changes in our accounting policies since the end of Fiscal 2011. Significant changes include those considered to be important to our financial condition and results of operations, which require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Notes 3 and 4 to our audited consolidated financial statements included in our Fiscal 2011 10-K.

Recently issued accounting pronouncements. This section notes that we have assessed the potential impact to our reported financial condition and results of operations of accounting standards that have been recently issued, as discussed in more detail in Note 4 to the unaudited consolidated financial statements.

In this Form 10-Q, references to "Ascena," "ourselves," "we," "our," "us" and the "Company" refer to Ascena Retail Group, Inc. and its subsidiaries, unless the context indicates otherwise. We utilize a 52-53 week fiscal year ending on the last Saturday in July. As such, fiscal year 2012 will end on July 28, 2012 and will be a 52-week period ("Fiscal 2012"). Fiscal 2011 ended on July 30, 2011 and reflected a 52-week period ("Fiscal 2011"). The first quarter for Fiscal 2012 ended on October 29, 2011 and was a 13-week period. The first quarter for Fiscal 2011 ended on October 30, 2010 and was also a 13-week period.


OVERVIEW

Our Business

Our Company is a leading national specialty retailer of apparel for women and tween girls operating, through its wholly owned subsidiaries, the dressbarn, maurices, and Justice brands. We operate (through our subsidiaries) over 2,500 stores throughout the United States, Puerto Rico and Canada, with annual revenues of over $2.9 billion for Fiscal 2011.

We classify our businesses into three segments following a brand-oriented approach: dressbarn, maurices and Justice. The dressbarn segment includes approximately 836 specialty retail and outlet stores, as well as an e-commerce operation that was launched in the first quarter of Fiscal 2011. The dressbarn brand primarily attracts female consumers in the mid-30's to mid-50's age range and offers moderate-to-better quality career and casual fashion to the working woman. The maurices segment includes approximately 797 specialty retail and outlet stores, and e-commerce operations. The maurices brand offers up-to-date fashion designed to appeal to the 17 to 34 year-old female, with stores primarily concentrated in small markets (approximately 25,000 to 100,000 people). The Justice segment includes approximately 917 specialty retail and outlet stores, e-commerce operations, and certain licensed franchises in international territories. The Justice brand stores offer fashionable apparel to girls who are ages 7 to 14 in an environment designed to match the energetic lifestyle of tween girls.

Seasonality of Business

Our business is typically affected by seasonal sales trends primarily resulting from the timing of holiday and back-to-school shopping periods. In particular, the dressbarn and maurices brands have historically experienced substantially lower earnings in the second fiscal quarter ending in January than during the three other fiscal quarters, reflecting the intense promotional environment that generally has characterized the holiday shopping season in recent years. Justice sales and operating profits tend to be significantly higher during the fall season which occurs during the first and second quarters of our fiscal year, as this includes the back-to-school period and the holiday selling period which is focused on gift giving merchandise. In addition, our operating results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays, and changes in merchandise mix.

Summary of Financial Performance

General Economic Conditions

Our performance is subject to macroeconomic conditions and their impact on levels of consumer spending. Some of the factors negatively impacting discretionary consumer spending include general economic conditions, wages and high unemployment, high consumer debt, reductions in net worth based on severe market declines (such as in residential real estate markets), increased taxation, higher fuel, energy and other prices, increasing interest rates, and low consumer confidence. In addition, the recent significant volatility in our financial markets related, in part, to the downgrade in the credit rating of U.S. government-issued debt and the European sovereign debt crisis could also negatively impact the levels of future discretionary domestic consumer spending. While the U.S. and certain other international economies have improved since the global financial crisis experienced in Fall 2008, a prolonged economic downturn and slow recovery, including high rates of unemployment, rising commodity prices and declining real estate market values, could have a material effect on our business, financial condition and results of operations.

Operating Results

For the three months ended October 29, 2011, we reported net sales of $768.3 million, net income of $47.5 million and net income per diluted share of $0.60. This compares to net sales of $713.3 million, net income of $48.0 million and net income per diluted share of $0.60 for the three months ended October 30, 2010.

Our operating performance for the three months ended October 29, 2011 was positively affected by a 7.7% increase in net sales. The increase in net sales was driven by both our comparable store sales and new store growth, as well as strong growth in all e-commerce brand sales. Our increase in net sales was offset by a modest decline in our gross profit rate of 40 basis points to 42.3%. The decrease in our gross profit rate was mainly due to higher markdowns for increased promotional activity, offset in part by the leveraging of buying and occupancy costs. SG&A expenses increased by $20.1 million, or 60 basis points, to 29.2% of net sales in the first quarter of Fiscal 2012. Contributing to the increase in SG&A as a percentage of net sales were increased marketing expenses, higher costs due to new business initiatives, and certain one-time executive contractual obligation costs.


Net income and net income per diluted share remained flat for the three months ended October 29, 2011 when compared to the three months ended October 30, 2010. In addition, the provision for income taxes also remained flat for both periods at approximately $30 million, or a 38.5% effective tax rate.

Financial Condition and Liquidity

Our financial position reflects the overall relative strength of our business results. We ended the first quarter of Fiscal 2012 in a net cash and investments position (total cash and cash equivalents, plus short-term and non-current investments less total debt) of $437.6 million, compared to $436.1 million as of the end of Fiscal 2011.

The slight improvement in our financial position was primarily due to our operating cash flows, which were largely offset by our treasury stock repurchases and capital expenditures. Our equity increased to $1.186 billion as of October 29, 2011, compared to $1.158 billion as of July 30, 2011, primarily due to our net income during Fiscal 2012, offset in part by our share repurchase activity.

We generated $56.8 million of cash from operations during the three months ended October 29, 2011, compared to $58.9 million during the three months ended October 30, 2010. During the first quarter of Fiscal 2012, we used $28.7 million of our cash to repurchase 1.1 million shares of common stock and $27.6 million for capital expenditures, primarily associated with our retail store expansion and investments in our facilities and technological infrastructure.

Transactions Affecting Comparability of Results of Operations and Financial Condition

The comparability of the Company's operating results for three months ended October 29, 2011 and October 30, 2010 presented herein has been affected by certain transactions, including:

Pretax charges related to certain one-time, executive contractual obligation costs in Fiscal 2012, and market-related expenses for our deferred compensation plan, and certain merger and integration-related costs incurred in both periods.

A summary of the effect of these items on pretax income for each applicable period presented is noted below:

                                                                 Three Months Ended
                                                            October 29,       October 30,
                                                               2011              2010
                                                                     (millions)
Executive contractual obligation costs                     $        (5.4 )   $           -
Market-related expenses for deferred compensation plan              (0.7 )            (1.3 )
Merger, integration, and reorganization-related costs               (0.7 )            (2.1 )
 Total                                                     $        (6.8 )   $        (3.4 )

The following discussion of results of operations highlights, as necessary, the significant changes in operating results arising from these items and transactions. However, unusual items or transactions may occur in any period. Accordingly, investors and other financial statement users individually should consider the types of events and transactions that have affected operating trends.

RESULTS OF OPERATIONS

Our segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of our businesses across multiple functional areas, including specialty retail, e-commerce and licensing. The three reportable segments described below represent our brand-based activities for which separate financial information is available, and which is utilized on a regular basis by our executive team to evaluate performance and allocate resources. In identifying our reportable segments, we consider economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, we report our operations in three reportable segments as follows:

dressbarn segment - consists of the specialty retail, outlet and e-commerce operations of our dressbarn brand.

maurices segment - consists of the specialty retail, outlet and e-commerce operations of our maurices brand.

Justice segment - consists of the specialty retail, outlet, e-commerce and licensing operations of our Justice brand.


Due to changes in the Company's corporate overhead allocation methodology implemented in Fiscal 2012, as discussed in Notes 2 and 12, segment information for the three months ended October 30, 2010 has been recasted to conform to the current period's presentation. These changes entirely related to the reallocation of corporate overhead costs to each of its three segments, and had no impact on total net sales, total operating income or total depreciation and amortization expense.

The following table summarizes our results of operations and expresses the percentage relationship to net sales of certain financial statement captions:

                                                      Three Months Ended
                                                October 29,        October 30,
                                                    2011               2010          $ Change       % Change
                                                      (millions, except per share data)
Net Sales                                      $        768.3     $       713.3     $     55.0            7.7 %

Cost of goods sold(a)                                  (443.5 )          (408.5 )        (35.0 )          8.6 %
Cost of goods sold as % of net sales                     57.7 %            57.3 %
Selling, general and administrative expenses           (224.2 )          (204.1 )        (20.1 )          9.8 %
SG&A as % of net sales                                   29.2 %            28.6 %
Depreciation and amortization expense                   (24.1 )           (23.0 )         (1.1 )          4.8 %
Operating income                                         76.5              77.7           (1.2 )         (1.5 )%
Operating income as % of net sales                       10.0 %            10.9 %

Interest expense                                         (0.2 )            (0.6 )          0.4          (66.7 )%
Interest and other income, net                            0.9               0.9              -              -
Income before provision for income taxes                 77.2              78.0           (0.8 )         (1.0 )%

Provision for income taxes                              (29.7 )           (30.0 )          0.3           (1.0 )%
Effective tax rate(b)                                    38.5 %            38.5 %
Net income                                     $         47.5     $        48.0     $     (0.5 )         (1.0 )%

Net income per common share:
Basic                                          $         0.62     $        0.61     $     0.01            1.6 %
Diluted                                        $         0.60     $        0.60     $        -              -



(a) Includes buying and occupancy costs and excludes depreciation.

(b) Effective tax rate is calculated by dividing the provision for income taxes by income before provision for income taxes.

Net Sales. Net sales increased by $55.0 million, or 7.7%, to $768.3 million for the three months ended October 29, 2011 from $713.3 million for the three months ended October 30, 2010. The increase in net sales was driven by both our comparable store sales growth and new store growth, as well as strong growth in all e-commerce brand sales. On a consolidated basis, comparable store sales increased 4% during the three months ended October 29, 2011. The sales increases at each of our brands were as follows: Justice sales increased by $29.4 million; maurices sales increased by $20.4 million; and dressbarn sales increased by $5.2 million.


Net sales and comparable store sales data for our three business segments is presented below.

                                         Three Months Ended
                                    October 29,       October 30,                                    Comparable
                                        2011              2010        $ Change      % Change       Store Sales (a)
                                             (millions)              (millions)
Net sales:
dressbarn                          $        245.4    $       240.2   $       5.2          2.2 %                   - %
maurices                                    202.9            182.5          20.4         11.2 %                   4 %
Justice                                     320.0            290.6          29.4         10.1 %                   8 %
Total net sales                    $        768.3    $       713.3   $      55.0          7.7 %                   4 %



(a) Comparable store sales refer to the growth of sales on stores open throughout the full period and throughout the full prior period (including stores relocated within the same shopping center and stores with minor square footage additions). The determination of which stores are included in the comparable store sales calculation only changes at the beginning of each fiscal year, except for stores that close during the fiscal year, which are excluded from comparable store sales beginning with the fiscal month the store actually closes.

dressbarn net sales. The net increase primarily reflects:

an increase of $0.4 million in comparable store sales during the three months ended October 29, 2011;

a $1.8 million increase in non-comparable stores sales, primarily driven by 16 stores opened during the last twelve months; and

an increase of $3.0 million in revenues from e-commerce operations.

maurices net sales. The net increase primarily reflects:

an increase of $6.2 million, or 4%, in comparable store sales during the three months ended October 29, 2011;

a $10.6 million increase in non-comparable stores sales primarily driven by an increase related to 39 net new store openings during the last twelve months; and

an increase of $3.6 million in revenues from e-commerce operations.

Justice net sales. The net increase primarily reflects:

an increase of $19.8 million, or 8%, in comparable store sales during the three months ended October 29, 2011;

a $7.6 million increase in non-comparable stores sales primarily driven by an increase related to 26 net new store openings during the last twelve months; and

an increase of $4.0 million in revenues from its e-commerce operations and a $1.7 million increase licensing operations, offset in part by a $3.7 million decrease in its wholesale and other revenues. The decrease in wholesale operations was due to a decrease in third-party sales.

Cost of Goods Sold, including occupancy and buying costs, excluding depreciation. Cost of goods sold consists of all costs of merchandise (net of purchase discounts and vendor allowances), merchandise acquisition costs (primarily commissions and import fees), freight (including costs to ship merchandise between our distribution centers and our retail stores), store occupancy costs (excluding utilities and depreciation), direct costs changes in reserve levels for inventory realizability and shrinkage, and all costs associated with the buying and distribution functions, including the costs for e-commerce.

Cost of goods sold increased by $35.0 million, or 8.6%, to $443.5 million for the three months ended October 29, 2011 from $408.5 million for the three months ended October 30, 2010. Cost of goods sold as a percentage of net sales increased by 40 basis points to 57.7% in the three months ended October 29, 2011 from 57.3% for the three months ended October 30, 2010. Gross profit, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, decreased by 40 basis points to 42.3% for the three months ended October 29, 2011 from 42.7% for the three months ended October 30, 2010. The decrease in the gross profit rate was mainly due to higher markdowns, including pre-planned promotional activity, at our dressbarn and maurices segments, offset in part by the leveraging of buying and occupancy costs.

Cost of goods sold as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities, and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from year to year.


Selling, General and Administrative ("SG&A") Expenses. SG&A expenses consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under cost of goods sold. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, utility costs, insurance costs, legal costs and costs related to other administrative services.

SG&A expenses increased by $20.1 million, or 9.8%, to $224.2 million in for the three months ended October 29, 2011 from $204.1 million for the three months ended October 30, 2010. SG&A expenses as a percentage of net sales increased by 60 basis points to 29.2% in Fiscal 2012 from 28.6% in Fiscal 2011. The increase in SG&A expenses was mainly due to increased marketing costs, higher costs due to new business initiatives, and payroll-related costs and other store expenses, which resulted from the higher net sales growth, and a $5.4 million one-time executive contractual obligation incurred in Fiscal 2012.

Depreciation and Amortization Expense. Depreciation and amortization expense increased by $1.1 million, or 4.8%, to $24.1 million for the three months ended October 29, 2011 from $23.0 million for the three months ended October 30, 2010. The increase was primarily due to an increase in capital expenditures, which resulted, in part, from the net opening of 63 stores during the past twelve months.

Operating Income. Operating income decreased by $1.2 million, or 1.5%, to $76.5 million for the three months ended October 29, 2011 from $77.7 million for the three months ended October 30, 2010. Operating income as a percentage of net sales decreased 90 basis points, to 10.0% in the three months ended October 29, 2011 from 10.9% in the three months ended October 30, 2010. The decrease was primarily due to lower gross profit resulting from lower merchandise margins and the de-leveraging of SG&A expenses, offset in part by the higher sales levels.

Operating income data for our three business segments is presented below.

                                  Three Months Ended
                            October 29,         October 30,
                               2011                2010           $ Change        % Change
                                      (millions)                 (millions)
  Operating income:
  dressbarn                $         5.0       $         7.2     $      (2.2 )        (30.6 )%
  maurices                          23.7                25.3            (1.6 )         (6.3 )%
  Justice                           47.8                45.2             2.6            5.8 %
  Total operating income   $        76.5       $        77.7     $      (1.2 )         (1.5 )%

dressbarn operating income decreased by approximately $2.2 million primarily as a result of a lower gross profit rate and an increase in SG&A expenses, which more than offset the modest increase in sales. The lower gross profit rate was mainly attributable to higher markdowns. The increase in SG&A expenses during the three months ended October 29, 2011 was mainly due to higher marketing costs.

maurices operating income decreased by approximately $1.6 million primarily as a result of a lower gross profit rate and an increase in SG&A expenses, which more than offset the strong increase in sales. The lower gross profit rate was mainly attributable to higher markdowns. The increase in SG&A expenses during the three months ended October 29, 2011 was due to a number of factors including the following: an increase in store expenses, relating to the overall net sales increases; and increased marketing expenses.

Justice operating income increased by approximately $2.6 million primarily as a result of an increase in sales and related gross profit rates, offset in part by an increase in SG&A expenses. The higher gross profit rate benefited from selected price increases, merchandise mix, successful promotional activity, and better leveraging of buying and occupancy costs. The increase in SG&A expenses during the three months ended October 29, 2011 was due to a number of factors including the following: an increase in store expenses, relating to the overall net sales increases; higher marketing expenses; and a $5.4 million one-time executive contractual obligation cost.

Interest Expense. Interest expense decreased by $0.4 million, or 66.7%, to $0.2 million for the three months ended October 29, 2011 from $0.6 million for the three months ended October 30, 2010. The decrease was primarily the result of . . .

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