ASNA
#Thanks, <UNK>.
Good afternoon, everyone, and thank you for joining us.
Our third quarter adjusted earnings per share for the quarter were $0.05, within the revised guidance range we provided several weeks ago.
This performance reflects an extremely competitive market environment, characterized by persistent store traffic decline and intense promotional activity.
We expect these factors will remain major headwinds for the foreseeable future and reflect an accelerated shift of consumer demand toward e-commerce.
Responding to this shift requires fundamental changes in the retail operating models, and we have made significant progress towards transforming our business to compete in this new environment.
Make no mistake, we were very disappointed with our performance for the quarter, and we must accelerate our transformation and improve execution across our portfolio.
Today, I want to focus on the aggressive actions we are taking to navigate current market conditions.
Our transformation work is proceeding simultaneously on 2 tracks: an accelerated and relentless attack on structural cost and an elevation of our platform capabilities to unlock top line performance.
I'd like to start by talking about our accelerated cost-reduction initiatives.
We recently increased the cost takeout target of our Change for Growth transformation program to a range of $250 million to $300 million by fiscal 2019.
This is as much as double our previously announced $150 million target and reflects our determination to increase the intensity and scope of our program activity.
A major driver of the increased cost-savings commitment is our fleet optimization program, which has already begun.
As you know, we have been developing this program for several quarters.
And over this period, we have performed a comprehensive analysis of our fleet, customer behavior and sales transfer rates.
We are aggressively going after the 60% of our fleet with lease terms that mature by July of 2019, and are confident that the strategy shared today will create a leaner, more profitable ascena.
Over the next 2 years, we expect to close or achieve substantial rent reductions in more than 650 stores, which represents almost 25% of the total store population with lease term maturity between 2017 and July of 2019.
We've identified more than 250 locations that will be permanently closed through July 2019.
An additional 400 or so more stores will be closed if specific rate concessions are not obtained through landlord negotiations over the same period.
We expect our fleet optimization program will be earnings accretive and will deliver working capital benefits.
The other drivers of our increased cost-savings commitment are primarily related to efficiency opportunities across both front end, and back-office functions and deeper reductions in non-merchandising procurement spending.
I want to be very clear here.
The $250 million to $300 million cost takeout target is not where this process ends.
We are embedding new behaviors in our organization to continually seek incremental opportunities to become more and more efficient while maintaining sight of our overarching objective: To drive profitable growth from a compelling portfolio of leading brands, supported by a highly competitive set of platform capabilities.
As a result of this $300 million multiyear technology and investment ---+ and infrastructure investment cycle, we have developed a highly efficient supply chain and foundational omni-channel platform that will enable us to respond to fundamental changes in consumer behavior that are disrupting our industry.
The unprecedented store traffic declines in the retail apparel sector are currently masking what we see as an ongoing opportunity to create value through our powerful brands.
At the enterprise level we are working aggressively to accelerate our product development cycle and to elevate our digital capabilities through implementation of new customer experience management tools.
In addition to our platform-level capability work, each segment is developing discrete initiatives designed to enhance performance at a more granular level.
Some specific examples include: We're excited about clienteling projects now being tested at Ann Taylor and Lane Bryant.
LOFT will launch a plus-size assortment in fiscal 2018, and Justice has recently rolled out plus sizes for their girls.
We are expanding our Cacique Intimates brands across our Plus segment and exploring potential synergies as we evaluate Intimates opportunities at maurices.
We are continuing our smart store implementation at dressbarn and expect to fully realize the benefit of rationalized choice counts and increased fashion depth as we approach the end of July.
We're also evaluating opportunities to capitalize on the strength of the Justice brand, which is the second most relevant brand for the tween girl behind Disney.
On this front, we continue to grow our international franchise business and explore potential licensing partnerships.
Our combination of talented teams, leading-edge omni-channel platform capabilities and portfolio of iconic brands is unique in our industry.
We're confident that our brand initiatives, enterprise transformation work and capital structure will enable us to navigate this period of disruption and emerge as a well-positioned, agile competitor.
We will continue to evaluate all of our capital allocation options, including potential share and debt repurchases as well as portfolio options that could simultaneously represent opportunity to both strengthen our balance sheet and create meaningful value for our shareholders.
Before I hand it over to <UNK>, I wanted to highlight our ongoing commitment to strong corporate governance.
Earlier today, following an extensive search process, Marc Lasry and Stacey Rauch were appointed as new independent directors to our Board effectively immediately.
For those of you don't know Marc, he's a member of ascena's board from 2004 to 2006.
He is the CEO of Avenue Capital Group and brings tremendous depth and experience with capital allocation strategies.
Stacey is Director Emeritus of McKinsey and Company, where she was senior partner for 12 years and leader of McKinsey's North American retail practice for many years.
She's currently non-executive chairman of Fiesta Restaurant Group and non-executive director of Land Securities, PLC.
We're thrilled to have Marc and Stacey join our board, and their addition underscores our commitment to successfully position ascena for growth in our highly competitive marketplace.
With that, I'll hand it over to <UNK>, our COO, to provide an update on key enterprise-level work streams, including our Change for Growth transformation program.
<UNK>.
Thank you, <UNK>, and good afternoon, everyone.
Before I jump into our operational performance, I want to highlight that my comments on this call will reference non-GAAP results, which excludes certain items that affect year-on-year comparability.
One such item for the third quarter was $1.3 billion noncash impairment charge related to enterprise goodwill and trade names.
This charge represents a significant change in the market environment we've seen over the past couple of years.
I will note that it has no impact on our operations, ability to service debt, compliance with financial covenants or underlying liquidity.
As <UNK> referenced earlier, third quarter adjusted earnings of $0.05 per share were in line with the revised outlook we provided last month.
Our performance relative to our initial expectations was primarily the result of a roughly 10-point store traffic decline for all segments, except our Kids Fashion segment.
While store traffic was slightly positive at Justice, promotions were significantly elevated as we were forced to clear 2 key fashion launches that failed to resonate with the customer.
Comp sales were down 8% across our portfolio, representing a deceleration of the business on a 2-year stack base from the trend coming out of holiday.
Gross margin rate, while down 30 basis points to last year, was supported by freight-related deal synergies, the cost of goods sold initiative at our Premium Fashion segment and improved economics related to our new Value Fashion segment credit card program.
Our segments were able to effectively use promotional levers to maintain appropriate inventory levels despite softer-than-expected overall demand.
We continue to deliver significant reductions and structural costs from our transformation initiatives, along with committed synergies related to the ANN acquisition.
Non-GAAP operating expense was down more than $40 million in the quarter or 4.8%, with the largest reductions coming from home office expense, which was down approximately 15% for the quarter as a result of our transformation work.
More detail on both our transformation savings target and our ANN deal synergies and cost savings is provided on Slide 11 of our supplemental earnings package.
The revised full year fiscal 2017 outlook that we shared on May 17 reflects an assumption that our 8% third quarter comp decline will continue through the fourth quarter, with full year fiscal 2017 non-GAAP earnings per share expected between $0.10 and $0.15.
For the fourth quarter, we expect net sales in the range of $1.575 billion and $1.625 billion; gross margin rates in the range 56.5% to 57%; operating income in the range of $0 million to $15 million; and earnings per share in the range of negative $0.06 to negative $0.01.
Regarding fourth quarter performance to date.
Comp sales are up modestly versus our third quarter trend, while demand continues to be inconsistent.
As a result, we are maintaining our negative 8% comp outlook for the quarter.
For more detail on our fourth quarter and full year fiscal 2017 guide, please reference Page 9 of our supplemental slide package.
Turning to our balance sheet.
We ended the third quarter with $300 million in cash and cash equivalents.
Of this amount, $251 million is outside the U.S. We ended the quarter with total debt of $1.67 billion, which represents the remaining balance on our $1.8 billion term loan and a draw of approximately $70 million on our $600 million asset-based revolver.
Between revolver availability and on-hand cash, we currently have approximately $750 million in liquidity and $68.5 million of the $90 million scheduled fiscal 2018 term loan amortization has been prepaid with our next required payment not due until May of 2018.
While we remain focused on deleveraging our balance sheet, we are comfortable with our capital structure.
Net debt to trailing 12-month EBITDA is reasonable at 2.5x, and our trailing 12-month EBITDA provides approximately 6.3x interest coverage.
Our segment teams have controlled inventory well despite the challenging top line trends.
Total inventory cost was $714 million at the close of the third quarter, down 3% to last year.
Adjusting for intercompany differences from the prior year that are reflected in the reported segment inventory balances, quarter-end inventory was down mid- to high single digits across our Premium, Value and Plus segments, while the increase at our Kids segment was related to earlier receipt flow this year to support the floorset timing shift what that was in week 1 of May this year versus week 3 in the year-ago period.
Please reference Slide 5 in our supplemental slide package for additional segment-level inventory detail.
Capital expenditures for the third quarter were $52 million, and we continue to expect full year fiscal 2017 CapEx in the range of $235 million to $260 million.
We plan to continue to reduce CapEx levels as we move into fiscal 2018, with reductions in store capital outlays partially offset by increased investments in our e-comm channel.
I'll close by commenting that the third quarter reminded us again of the changing nature of our competitive space and the need for us to operate in a more agile, efficient manner.
We recognize the severity of the challenge in front of us and are committed to navigating current market conditions by leveraging the strength of our operating platform and accelerating our enterprise transformation work to position the company as an aggressive omni-channel competitor.
Thank you for your attention.
That concludes our prepared remarks, and we'll now open it up for questions.
<UNK>, it's Robb.
I'll start and then we'll kick things around here.
Regarding the working capital benefit, there's some supplemental material out there.
But at the end of the day, as <UNK> alluded to, we're going to be closing 268 of these program stores and potentially up to 667 of these stores.
The 268 store closure would represent the best-case scenario for us where we've achieved $50 million in EBITDA benefit from negotiated occupancy rate settlements.
That situation would give us a lower balance working capital benefit of about $15 million, 1 5.
If we don't get participation from our landlords, this is the highly unlikely scenario, but if we don't get any participation from our landlords, we will close all 667 of these stores and we would see a working capital benefit of about $55 million.
So that information is laid out in the pack.
We certainly don't expect to be at full achievement or 0 achievement.
We expect to be somewhere in the middle there, but at least gives you sense of the working capital dimensions.
Regarding the sales transfer, as we've highlighted here, we are starting this journey off being very mindful of free cash flow.
We have a lot of analytics that suggest that the rate of sales transfer could be in the 15% to 30% range.
We are using lower-bound estimates for the initial assessment here to make sure that we learn before we start closing profitable stores.
If we find out that sales transfer rates are at 30% north of that, if we can put it some of these benefit from some of these CEM tools and get really efficient to transferring sales, this gets very interesting in terms of what the number of closures could be.
In today's environment, not likely to walk away from a store that's kicking out $200,000 in free cash.
In the future, if a store is able to transfer 30%, 35% higher, things get very interesting in terms of how profitable we can be with a significantly smaller fleet.
So hopefully, some color for you there.
I'll kick over to <UNK> for additional comments.
Okay.
So on the last point, <UNK>, I think as we look forward to the journey to positive comps, one thing I want to make sure everybody's clear, we are not assuming that traffic is suddenly, obviously, going to turn positive.
I think we have a long-term secular decline in traffic.
I think all of us gets the ShopperTrak numbers every week and I don't see that flattening out or reversing, suddenly become positive.
So we really have to own it ourselves.
So let me go through a few things that I think are important.
First, when we look at our comps, it includes our online comps.
So we blend them together.
And our online business is growing nicely.
Unfortunately, not enough to offset the declines at the brick-and-mortar level, but that's the continuation, as <UNK> talked about, with the move to our platform, we see opportunities to further enhance the growth at all of our brands.
Second, when you think about going into the store, it's what's new in the store, why would I want to go in it.
So first and foremost, we are a fashion retailer and we need to drive fashion at all of our brands.
In the last year or so, we've brought on 3 new merchants, a Chief Merchandising Officer, and we actually are in the search for one more.
So we believe in bringing the best talent we can.
We think it all starts with fashion, and we're pretty pleased with the direction we're going at all of our brands for fall.
Next, we need to create special experiences at the store to give her a reason to come in.
So it could range from a bra-fitting event at Cacique within our Lane Bryant stores or perhaps a fashion show at our Justice stores.
And so we're experimenting with all different types of programs, including a personal selling appointment as well.
Also, at the store level, we have loyalty programs that ---+ some are in place and some are being enhanced, that we think will help create greater share of wallet with our customers.
Within our omnichannel platform, we have 3 different programs that I think will enhance our store traffic and volume.
One is buy online, pickup in store.
So it takes a customer that's shopping online comes into the store and saves on any shipping cost.
But also when she comes into the store, typically, she'll buy something else and she converts at a similar level to a customer coming in.
And it's very convenient for her to exchange or what have you.
Another program we have is order in store.
So if she has the confidence and even if she can't find what she wants for the size or the color that she can get it through this order-in-store system.
I think that's another reason for her to feel confident to coming into the stores.
And so these types of omnichannel capabilities are going to continue to be enhanced, and we have a goal of trying to make her shopping experience as seamless and frictionless as possible.
Another point, store closings.
We believe that, on average, we're going to have about a 30% retention rate from a closed store, which means that we think we'll transfer 30% either online or to other stores, and we're working on programs to further enhance that number.
Great.
And if anybody has any other thoughts on that, let us know.
And Ed, the ---+ regarding the benefit we talked about.
So the reduction that we ---+ the perfect world is that we get $50 million in negotiated occupancy reductions and we get everything we want from all of our landlord partners.
Obviously, we're going to push as hard as we can to get there.
In the event that we can't get there, as we close more and more stores, we're going to have more benefit from what we're calling EBITDA transfer as we transfer sales from closed stores to remaining network stores which become more profitable.
So again, there's some supplemental material out there which show you that we intend to get $50 million.
In the event that the occupancy reductions are short, we're going to go make it up, again, outside these program stores.
So I think <UNK> always tells me there's no acceptable rent.
And I think that while we're focused hard on these program stores, we're going to also look at the remainder of the fleet.
And as you all know, we've got a lot of stores.
There's a lot of opportunity on every store that's out there that's got a relatively short-term lease duration, we're going after all of it.
So again, anything that's short on occupancy reduction, we're going to go ---+ really work hard to make up on the sales transfer side.
And again, our intent is to go as deep as we can, and these are numbers that we feel confident we're going to get.
There's hope that there's more.
But again, there's a lot of work to be done here, and <UNK>'s got a team set up to go work that.
Yes, you're thinking about it right in terms of the cumulative store base and in terms of what top line volume it has.
And yes, we're using right now, from a financial standpoint, assuming a 10% lower balance transfer.
To <UNK>'s point earlier, we have models from Accenture's, and then internally we're suggesting that number's as high as 30%.
Again, we're going to be very cautious on that until we can read these.
And as you might imagine, when we close a store, we're not going to immediately see the transfer.
We're not going to be able to say if we see it for a month, 2 months, if that's going to stick for 12 months, right, we have to make really informed decisions here in terms of getting a couple quarters to read what the transfer rate is and doesn't hold.
And refresh me memory on the last question, I'm sorry.
Sorry.
So we are focused right now on driving cash flow, Ed.
And so to the extent that something makes sense where we can get out of it without a cash draw, we\
I think maurices has had some challenges in the smaller markets.
There were some possible commodity issues that we saw, energy, et cetera, and we saw some challenges at our colleagues that are also in these markets, like Stage Stores and Buckle.
And one of our smaller local competitors, Vanity, actually went bankrupt.
Another small-market player, rue21, has also gone bankrupt.
So there were certainly challenges in these smaller markets.
I think that some of it may be, as I say, cyclically tied to the commodity business.
But I think of there is also a shift, these customers that may be 10 years ago didn't have access to fashion now do through e-commerce, and that may be one of the contributing factors.
I think another factor simply is, for both Lane Bryant and maurices, we had a few fashion misses, and that's natural in our business.
And perhaps, we had more than our fair share as we look at what we're doing for fall, as I mentioned earlier.
We've got a terrific new merchant on apparel at Lane Bryant that we're very excited about and think that our fall line looks great.
And at maurices, the same thing.
We're very, very pleased with what we're seeing in the initial reads for fall.
So they both had a difficult season, difficult year, but we're optimistic that things will turn out for the fall.
To add just a couple of things on that from a store traffic standpoint, those were the brands that the 2 most challenging store traffic for the quarter.
One other point of note, we talked to you several quarters ago about opening price point strategies, both maurices and Lane Bryant rolled out opening price point strategies this spring.
Those strategies were tested.
We expected them to hit.
Unfortunately, we realized as we put those price points out that we did not get the unit velocity acceleration that we were expecting.
So as you might imagine, lowering the initial ticket price, which we thought was the right thing for the customer, we didn't get the unit velocity.
We had to take promos and markdowns off of a lower ticket price.
So there was an ASP, average selling price, pressure for the quarter for both of those brands.
We are unwinding that.
So for fall season, that pricing pressure should not be there.
And to <UNK>'s point earlier, both brands are working on trying ---+ every brand in the sector is working on trying to drive traffic and some of the things we talked about clienteling and really engaging with the customer on a one-on-one basis at the store level.
That's the unlock that everyone's looking for.
This is <UNK> on for <UNK>.
Robb, I guess, just as we're thinking about the longer-term CapEx run rate of $200 million and $250 million, just as you're implementing the store closure program, could we think that maybe that could tick down even further just as you emphasize the cash flow.
And then secondly, understanding it's a bit too early to guide fiscal '18, but at your Analyst Day previously, you talked about the $580 million to $670 million EBITDA target in '18, assuming the flat to down 2 to 6 comps.
I guess, just keeping in mind the update to the Change for Growth and some of these investments that you're making in clienteling, omnichannel, et cetera, how can we think about net expense savings maybe hitting the P&L next year, just given the traffic volatility in line with some of these investments.
Sure, <UNK>.
So regarding the capital budget, as I mentioned in the prepared remarks, we are dialing back our store capital as is and distorting investment to e-commerce, and then I'll let <UNK> talk a little bit about that in a moment.
So yes, I think that as we take stores out, if we take out 667 stores, if we take out more right at the store channel with more channels than we expect always, you would obviously expect store capital to come down even further.
We are tightening back significantly on new stores.
There's still opportunities for new stores out there in small markets and in some urban areas I think.
But outside of very, very select opportunities, where we may have year-on-year cash payback and a 1- or 2-year out where there's almost no risk, those are coming down and therefore capital is coming down on the store side.
Again, we are being very aggressive on the e-comm side, I'll let <UNK> talk about it in a moment.
But we are very focused on making sure we have a best-in-class omnichannel platform and really competitive on that front.
Regarding fiscal '18, I ---+ we've talked before about there is limited visibility out there, and our fourth quarter guide is based on what we know from Q3.
We've learned before by getting out in front and assuming things, and right now you should expect us to say very short on forward visibility until we have a strong point of view.
Very, very focused on rebuilding credibility in our guide.
And again, you should expect us to be really thoughtful about that going forward.
So do you want ---+ any comments on the e-comm (inaudible).
I think what I would say is generally, we're seeing the same sort of trends that we saw in Q3.
Again, the comment I made about things being inconsistent.
We had a little bit of a stronger period the beginning of May.
Memorial Day was a bit more challenging.
Again, some of it is northeast and weather, and there were many pieces out written about how traffic was challenging that week across the sector.
So I think that I would tell you that we're generally seeing the same sort of trends that we saw in the third quarter.
Just really a slight modest improvement, but nothing that I would articulate as any significant change we've been looking at.
In terms ---+ now we ---+ from the standpoint of the specific brands, nothing I'd call out at this point.
Most of my questions have been asked and answered, I just have one question.
Stated in the press release that portfolio options that could simultaneously represent opportunities to strengthen the balance sheet and create meaningful value for shareholders, could that be interpreted as anything beyond the scope of what's been spoken already about on the call.
Steve, I'm not sure what you mean by spoken about in the call.
We made the comment in the prepared remarks, but let me just make sure I articulate clearly what we mean there.
We have a portfolio of brands.
So we've got 7 brands ---+ 8 if you think about Lou & Grey, which is really in the incubator, and each of those have their strengths and their challenges.
And we've got to evaluate them individually when it comes to, for example, on cap allocation, et cetera.
So as we think about our future, if we have an opportunity to create value by selling one of those brands, we've got to consider it.
And over the years, we've gotten interest in various of our brands, so these are some ---+ these are steps that we have to take to make sure that we're managing our portfolio as best we can.
Great.
Thank you, everyone, for your interest in ascena.
Everyone, have a great summer, and we'll talk you again in September.
Take care.
