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EX-23 - EXHIBIT - Ascena Retail Group, Inc.exhibit23fy14.htm
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EX-32.2 - EXHIBIT - Ascena Retail Group, Inc.exhibit32-2fy14.htm
EX-31.1 - EXHIBIT - Ascena Retail Group, Inc.exhibit31-1fy14.htm
EX-32.1 - EXHIBIT - Ascena Retail Group, Inc.exhibit32-1fy14.htm
EX-31.2 - EXHIBIT - Ascena Retail Group, Inc.exhibit31-2fy14.htm
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EX-10.16 - EXHIBIT - Ascena Retail Group, Inc.exhibit1016fy14.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended July 26, 2014
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
Commission file number 0-11736

ASCENA RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation or organization)
30-0641353
(I.R.S. Employer Identification No.)
 
 
933 MacArthur Boulevard, Mahwah, New Jersey
(Address of principal executive offices)
07430
(Zip Code)
 
(551) 777-6700
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer x
Accelerated filer ¨ 
Non-accelerated filer ¨   (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ¨ No ý
 
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $3.2 billion as of January 25, 2014, based on the last reported sales price on the NASDAQ Global Select Market on that date. As of September 17, 2014, 161,972,916 shares of voting common shares were outstanding. The registrant does not have any authorized, issued or outstanding non-voting common stock.

Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on December 11, 2014 are incorporated into Part III of this Form 10-K.




ASCENA RETAIL GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 26, 2014
TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
 
 
 
 
Item 1.
 
Business
 
 
Item 1A.
 
Risk Factors
 
 
Item 1B.
 
Unresolved Staff Comments
 
 
Item 2.
 
Properties
 
 
Item 3.
 
Legal Proceedings
 
PART II
 
 
 
 
 
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
Item 6.
 
Selected Financial Data
 
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 8.
 
Financial Statements and Supplementary Data
 
 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
Item 9A.
 
Controls and Procedures
 
 
Item 9B.
 
Other Information
 
PART III
 
 
 
 
 
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
 
Item 11.
 
Executive Compensation
 
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
 
Item 14.
 
Principal Accounting Fees and Services
 
PART IV
 
 
 
 
 
Item 15.
 
Exhibits, Financial Statement Schedules
 
 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K, including the section labeled Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and the risk factors that we have included elsewhere in this report. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our results, level of activity, performance or achievements to be materially different from any future results, level of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. We generally identify these statements by words or phrases such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “may,” “should,” “estimate,” “predict,” “potential,” “continue,” or the negative of such terms or other similar expressions.
 
Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed below under Item 1A. Risk Factors, and other factors discussed in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. We disclaim any intent or obligation to update or revise any forward-looking statements as a result of developments occurring after the period covered by this report.
 
WEBSITE ACCESS TO COMPANY REPORTS
 
We maintain our corporate Internet website at www.ascenaretail.com. The information on our Internet website is not incorporated by reference into this report. We make available, free of charge through publication on our Internet website, a copy of our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, including any amendments to those reports, as filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after they have been so filed or furnished. Information relating to corporate governance at Ascena Retail Group, Inc., including our Code of Ethics for the Chief Executive Officer and Senior Financial Officers, information concerning our directors, committees of the Board of Directors, including committee charters, and transactions in Ascena Retail Group, Inc. securities by directors and executive officers, is also available at our website. Paper copies of these filings and corporate governance documents are available to stockholders without charge by written request to Investor Relations, Ascena Retail Group, Inc., 933 MacArthur Boulevard, Mahwah, New Jersey 07430.
 
In this Form 10-K, references to “Ascena,” “ourselves,” “we,” “us,” “our” or “Company” or other similar terms refer to Ascena Retail Group, Inc. and its subsidiaries, unless the context indicates otherwise. The Company utilizes a 52-53 week fiscal year ending on the last Saturday in July. As such, fiscal year 2014 ended on July 26, 2014 and reflected a 52-week period (“Fiscal 2014”); fiscal year 2013 ended on July 27, 2013 and reflected a 52-week period (“Fiscal 2013”); fiscal year 2012 ended on July 28, 2012 and reflected a 52-week period (“Fiscal 2012”). All references to “Fiscal 2015” refer to our 52-week period that will end on July 25, 2015.
  
PART I

Item 1. Business.
 
General
 
Ascena is a leading national specialty retailer offering clothing, shoes and accessories for missy and plus-size women, through its 100% owned subsidiaries, under the Lane Bryant, maurices, dressbarn and Catherines brands; and for tween girls and boys, under the Justice brand. The Company operates through its subsidiaries approximately 3,900 stores throughout the United States and Canada, with annual revenues of approximately $4.8 billion for the fiscal year ended July 26, 2014.
 
On June 14, 2012, the Company acquired Charming Shoppes, Inc. (“Charming Shoppes”) and its related family of retail brands (the "Charming Shoppes Acquisition"). Charming Shoppes owned and operated multiple retail brands through over 1,800 retail stores and ecommerce operations, including Lane Bryant and Catherines. Charming Shoppes also owned and operated a specialty retail business named Fashion Bug and a food and specialty gift products business named Figi’s. The Fashion Bug business ceased operations in February 2013 and the Figi’s business was sold during the first quarter of Fiscal 2014. These businesses have been classified as discontinued operations within the accompanying audited consolidated financial statements of the Company.
 

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Our Brands and Products
 
The Company classifies its businesses into five segments following a brand-oriented approach: Justice, Lane Bryant, maurices, dressbarn and Catherines.
 
Justice
 
The Justice segment includes approximately 997 specialty retail and outlet stores (of which 189 sell dual-gender merchandise), ecommerce operations, and certain licensed franchises in international territories. The Justice brand offers fashionable apparel to girls who are ages 7 to 14 in an environment designed to match the energetic lifestyle of tween girls, and fashionable apparel to boys who are ages 7 to 14 under the Brothers brand. Justice creates, designs and develops its own exclusive Justice and Brothers branded merchandise in-house. This allows Justice to maintain creative control and respond as quickly as fashion trends dictate. The Justice merchandise mix represents the broad assortment that its boy or girl wants in their store - a mix of apparel, accessories, footwear, intimates and lifestyle products, such as bedroom furnishings and electronics, to meet all their needs. Justice’s store footprint primarily includes mall locations, strip centers, lifestyle centers and outlet centers.
 
Lane Bryant
 
The Lane Bryant segment includes approximately 771 specialty retail and outlet stores, and ecommerce operations. Lane Bryant is a widely recognized brand name in plus-size fashion. Through private labels such as Lane Bryant and Cacique, and select national brands, fashionable and sophisticated apparel is offered to female customers in plus-sizes 14-28, including intimate apparel, wear-to-work and casual sportswear, accessories, select footwear and social occasion apparel. Lane Bryant has a loyal customer base, generally ranging in age from 25 to 45 years old, which shops for fashionable merchandise in the moderate price range. Lane Bryant retail stores are located in a combination of destination malls, lifestyle centers and strip shopping centers.
 
maurices
 
The maurices segment includes approximately 922 specialty retail and outlet stores, and ecommerce operations. The maurices brand offers up-to-date fashion designed to appeal to the 20 to 35 year-old female, including both a core and plus-size offering, with stores concentrated in small markets (approximately 25,000 to 150,000 people). Through its proprietary maurices label, the maurices product line encompasses women’s casual clothing, career wear, dressy apparel, active wear and accessories. maurices stores are typically located near large discount and department stores to capitalize on the traffic those retailers generate. maurices seeks to differentiate itself from those retailers by offering a wider selection of style, color and current fashion, as well as the shopping experience offered, which emphasizes a visually stimulating environment with a helpful staff. While maurices stores offer a core merchandise assortment, individual maurices stores vary their merchandise assortment to reflect individual store demands and local market preferences.
 
dressbarn
 
The dressbarn segment includes approximately 820 specialty retail and outlet stores, and ecommerce operations. The dressbarn brand primarily caters to women in their mid-30’s to mid-50’s age range with moderate-to-better quality career, special occasion and casual fashion in both missy and plus sizes. dressbarn stores are located primarily in convenient strip shopping centers in major trading and high-density markets, and in surrounding suburban areas. dressbarn’s centrally managed merchandise selection is changed and augmented frequently to keep its merchandise presentation fresh and exciting. Individual store assortments vary depending on local demographics, seasonality and past sales patterns. Carefully edited, coordinated merchandise is featured in a comfortable, easy-to-shop environment, which is staffed by friendly, service-oriented associates.
 
Catherines
 
The Catherines segment includes approximately 386 specialty retail stores and ecommerce operations. Catherines carries a full range of plus sizes (16-34 and 0X-5X) and is particularly known for extended sizes (28-34). Catherines offers classic apparel and accessories to female customers for wear-to-work and casual lifestyles. Catherines customers are generally in the 45 years old and older age group, shop in the moderate price range, and are concerned with comfort, fit and value. Catherines retail stores are primarily located in strip shopping centers and outlet locations.


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The tables below present net sales and operating income by segment for the last three fiscal years.
 
 
Fiscal 2014
 
Fiscal 2013
 
Fiscal 2012
 
 
(millions)
Net sales:
 
 

 
 

 
 

    Justice
 
$
1,384.3

 
$
1,407.4

 
$
1,306.7

    Lane Bryant (a)
 
1,080.0

 
1,050.1

 
119.7

    maurices
 
971.4

 
917.6

 
852.9

    dressbarn
 
1,022.5

 
1,020.7

 
1,037.6

    Catherines (a)
 
332.4

 
319.1

 
36.4

Total net sales
 
$
4,790.6

 
$
4,714.9

 
$
3,353.3

 
 
Fiscal 2014
 
Fiscal 2013
 
Fiscal 2012
 
 
(millions)
Operating income (loss):
 
 

 
 

 
 

    Justice
 
$
99.3

 
$
182.3

 
$
172.5

    Lane Bryant (a)
 
(4.3
)
 
(30.1
)
 
(10.1
)
    maurices
 
86.0

 
107.0

 
102.7

    dressbarn
 
39.4

 
30.3

 
56.9

    Catherines (a)
 
24.4

 
10.4

 
(4.0
)
    Unallocated acquisition-related, integration and restructuring costs
 
(34.0
)
 
(34.6
)
 
(25.4
)
Total operating income
 
$
210.8

 
$
265.3

 
$
292.6

 _______

(a) The Charming Shoppes Acquisition was consummated on June 14, 2012; therefore, data related to Lane Bryant and Catherines is only included for a partial period in Fiscal 2012.

Over the past five fiscal years, our sales have grown to approximately $4.8 billion in Fiscal 2014 from $2.4 billion in Fiscal 2010. This growth has been a result of both our acquisitions and organic growth. We currently operate approximately 3,900 stores throughout the United States and Canada. We have diversified our business by brand, price point and target consumer, as well as by geography throughout North America. Our Justice and maurices brands now operate 35 stores and 27 stores, respectively, in Canada. We plan to continue our global expansion during Fiscal 2015, and will continue evaluating other international opportunities for our family of brands. In addition to our store presence, we sell merchandise through our primary ecommerce websites: shopjustice.com; shopbrothers.com; lanebryant.com; cacique.com; maurices.com; dressbarn.com and catherines.com.
 
Over the past five fiscal years, we have invested approximately $2.1 billion in acquisitions, capital improvements, and technology infrastructure improvements, primarily funded through cash, common stock and debt. We intend to continue to execute our long-term strategy, which includes, among other things, expanding our presence internationally, expanding through selective acquisitions, investing in our operational infrastructure and expanding our ecommerce businesses.
 
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, sales at Justice 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 December holiday season that is focused on gift-giving merchandise. The maurices brand experiences peak sales during the December holiday season as well as during the early spring which includes the Easter holiday season. The dressbarn brand has historically experienced higher sales in the spring, which includes the Easter and Mother’s Day holidays. The Lane Bryant and Catherines brands typically experience peak sales during the Easter, Mother’s Day and December holiday seasons.  Lane Bryant’s peak sales around Mother’s Day typically extend through Memorial Day and into the early summer. As a result, our results of operations 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. 

Store Locations
 
Our stores are primarily open seven days a week and most evenings. As of July 26, 2014, we operated approximately 3,900 stores in 48 states, the District of Columbia and Canada. Justice is currently located across 48 states and Canada. Justice also has 63

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international franchise stores. dressbarn has stores in 48 states, which are mostly concentrated in the northeast while maurices has stores in 44 states and Canada, with the largest concentration in the Midwest. The Lane Bryant and Catherines stores are located in suburban and small towns in 46 states and 44 states, respectively.
 
During Fiscal 2014, no store accounted for more than 1% of our total sales. The table below indicates the type of shopping facility in which the stores were located:
Type of Facility
 
Justice
 
Lane Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Strip Shopping Centers
 
224

 
393

 
519

 
595

 
325

 
2,056

Free Standing, Downtown and Enclosed Malls
 
568

 
211

 
339

 
56

 
54

 
1,228

Outlet Malls and Outlet Strip Centers
 
101

 
114

 
43

 
169

 
3

 
430

Lifestyle Centers
 
104

 
53

 
21

 

 
4

 
182

Total
 
997

 
771

 
922

 
820

 
386

 
3,896

 
As of July 26, 2014, our stores had a total of 21.2 million square feet, consisting of Justice with 4.2 million square feet, Lane Bryant with 4.3 million square feet, maurices with 4.7 million square feet, dressbarn with 6.4 million square feet and Catherines with 1.6 million square feet. All of our store locations are leased. Our leases often contain renewal options and termination clauses, particularly in the early years of a lease, if specified sales volumes are not achieved.
 
Store Count by Segment
 
 
Fiscal 2014
 
 
Justice
 
Lane
Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Stores (Beginning of Period)
 
971

 
788

 
877

 
826

 
397

 
3,859

Stores Opened
 
49

 
36

 
55

 
34

 

 
174

Stores Closed
 
(23
)
 
(53
)
 
(10
)
 
(40
)
 
(11
)
 
(137
)
Stores (End of Period)
 
997

 
771

 
922

 
820

 
386

 
3,896

 
 
Fiscal 2013
 
 
Justice
 
Lane
Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Stores (Beginning of Period)
 
942

 
805

 
832

 
827

 
422

 
3,828

Stores Opened
 
53

 
51

 
54

 
35

 

 
193

Stores Closed
 
(24
)
 
(68
)
 
(9
)
 
(36
)
 
(25
)
 
(162
)
Stores (End of Period)
 
971

 
788

 
877

 
826

 
397

 
3,859

 
Trademarks
 
Our principal owned trademarks include:
 
JUSTICE®, BROTHERS®, LANE BRYANT®, LANE BRYANT OUTLET®, LANE BRYANT WOMAN®, CACIQUE®, RIGHT FIT BY LANE BRYANT®, MAURICES®, DRESSBARN®, CATHERINES®, CATHERINES PLUS SIZES®, MAGGIE BARNES ®, LIZ&ME®, SERENADA® and RIGHT FIT BY CATHERINES®.
 
We have U.S. Certificates of Registration of Trademark and trademark applications pending for the operating names of our stores and our major private label merchandise brands. We believe our JUSTICE®, LANE BRYANT®, LANE BRYANT OUTLET®, LANE BRYANT WOMAN®, CACIQUE®, MAURICES®, DRESSBARN®, CATHERINES® and CATHERINES PLUS SIZES® trademarks are material to the continued success of our business. We also believe that our rights to these trademarks are adequately protected.
 
Ecommerce
 
All of our brands have ecommerce operations, and the Company continues to focus on this sales channel as an opportunity for continued growth. Total ecommerce revenues amounted to approximately $450 million during Fiscal 2014, which represented an increase of approximately 22% over revenues of approximately $368 million during Fiscal 2013. To support this growth, during Fiscal 2014, the Company began initiatives that will enhance our customer’s shopping experience across all of the Company's

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various shopping channels.  These initiatives will allow the brands to (i) improve website and mobile functionality, (ii) improve product availability online, (iii) offer flexible customer loyalty programs and (iv) offer an enhanced customer service experience inside and outside our stores. Our brands will begin utilizing this functionality in a phased transition which is expected to begin in late Fiscal 2015. As a result of this investment, we continue to believe that this will be an on-going source of sales growth in future periods.  

Our segments sell products online through their ecommerce sites:
 
Justice segment – www.shopjustice.com and www.shopbrothers.com
Lane Bryant segment – www.lanebryant.com and www.cacique.com
maurices segment – www.maurices.com
dressbarn segment – www.dressbarn.com
Catherines segment – www.catherines.com

Product Licensing
 
We earn licensing revenue through our Justice brand’s international franchise stores along with advertising and other “tween-right” marketing initiatives with partner companies. Licensing revenue is less than 1% of our consolidated annual net sales. As of July 26, 2014, Justice has 63 international franchise stores.
 
International Store Expansion
 
As of July 26, 2014, our Justice brand has 35 company-operated stores in Canada and is planning on additional expansion in Canada during Fiscal 2015. In addition, our maurices brand has 27 company-operated stores in Canada and is also planning on additional expansion in Canada during Fiscal 2015. We will continue to evaluate other international opportunities for our family of brands.
 
Sourcing
 
The Company's sourcing business operates under the name Ascena Global Sourcing (“AGS”). During Fiscal 2014, the Company principally completed its integration of the Charming Shoppes sourcing operations acquired in the Charming Shoppes Acquisition. Through AGS’s offices in Seoul, South Korea, Shanghai and Hong Kong, China, AGS continues to develop and expand relationships with manufacturing partners within sourcing networks, enabling AGS to control the quality of goods, while achieving speed to market and better/favorable pricing. With AGS’s successful sourcing operations, it is able to eliminate the middleman, reduce costs and increase initial markup. AGS has registered various trademarks related to the Company’s brands in foreign countries to the degree necessary to protect these marks, although there may be restrictions on the use of these marks in a limited number of foreign jurisdictions.
 
Office and Distribution Centers
 
For a detailed discussion of our office and distribution centers, see Part I, Item 2 “Properties” in this Annual Report on Form 10-K.

Information Technology Systems
 
Our information technology systems make the design, marketing, importing and distribution of our products more efficient by providing, among other things, comprehensive order processing, product and design information, and financial information. During Fiscal 2014, in connection with the integration of the technological infrastructure of Charming Shoppes, the Company continued its migration to common information technology platforms for its Company-wide, point-of-sales systems, merchandise systems, warehouse management systems and financial systems. This transition is expected to continue over approximately the next two years.

Advertising and Marketing 

We use a variety of broad-based and targeted marketing and advertising strategies to effectively define, evolve and promote our brands. These strategies include customer research, advertising and promotional events, window and in-store marketing materials, direct mail marketing, internet marketing, lifestyle magazines, catazines and other measures to communicate our fashion and

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promotional message. We utilize a customer relationship management system to track customer transactions and determine strategic decisions for our direct mail initiatives and we offer various customer loyalty programs at our brands. We also pursue a public relations strategy to garner editorial exposure.

Community Service

Within Ascena, there is a rich history of charitable giving.  This history is especially evident within each of our brands.  Underneath Ascena’s philanthropic framework of "Empowering Women and Children To Be Their Best," each brand has its own giving philosophy specifically geared to their business and communities.  Across the brands and Ascena, we support programs like children’s hospitals, American Cancer Society and Dress for Success.  Ascena is also proud to sponsor the Roslyn S. Jaffe Awards, in which a monetary award up to a predetermined limit is awarded to an individual/organization making a difference for women and children.  More information is available at www.ascenacares.com.

Competition
 
The retail apparel industry is highly competitive and fragmented, with numerous competitors, including department stores, off-price retailers, specialty stores, discount stores, mass merchandisers and internet-based retailers, many of which have substantially greater financial, marketing and other resources than us. Many of our competitors are able to engage in aggressive promotions, reducing their selling prices. Some of our competitors are Walmart, Macy’s, JCPenney, Kohl’s, Old Navy and Target. Other competitors may move into the markets that we serve. Our business is vulnerable to demand and pricing shifts, and to changes in customer tastes and preferences. If we fail to compete successfully, we could face lower net sales and may need to offer greater discounts to our customers, which could result in decreased profitability. We believe that we have established and reinforced our image as a source of fashion and value by focusing on our target customers and by offering superior customer service and convenience.
 
Merchandise Vendors
 
We purchase our merchandise from many domestic and foreign suppliers. We have no long-term purchase commitments or arrangements with any of our suppliers, and believe that we are not dependent on any one supplier as no third-party supplier accounts for more than 10% of our merchandise purchases. We believe that we have good working relationships with our suppliers.
 
Employees
 
As of July 26, 2014, we had approximately 48,000 employees, 34,000 of whom worked part-time. We typically add temporary employees during peak selling periods. Except for approximately 100 employees of Lane Bryant that were represented by unions at the end of Fiscal 2014, none of our other employees are covered by any collective bargaining agreement. We consider our employee and union relations to be good.
 
Executive Officers of the Registrant
 
The following table sets forth the name, age and position of our Executive Officers:
Name
 
Age
 
Positions
Elliot S. Jaffe
 
88
 
Co-founder and Chairman of the Board
David Jaffe
 
55
 
President and Chief Executive Officer
John Sullivan
 
61
 
Executive Vice President and Chief Operating Officer
Michael W. Rayden
 
65
 
Chief Executive Officer, Tween Brands, Inc.
Kevin Trolaro
 
44
 
Interim Chief Financial Officer
Ernest LaPorte
 
62
 
Senior Vice President, Chief Accounting Officer
Gene Wexler
 
59
 
Senior Vice President, General Counsel and Assistant Secretary
David L. Johns
 
55
 
Senior Vice President, Chief Information Officer
Ronnie Robinson
 
49
 
President, Ascena Global Sourcing
 
Mr. Elliot S. Jaffe, our co-founder and Chairman of the Board, was Chief Executive Officer of our company from 1966 until 2002.

Mr. David Jaffe became President and Chief Executive Officer in 2002. Previously he had been Vice Chairman, Chief Operating Officer and a member of the Board of Directors since 2001. He joined us in 1992 as Vice President-Business Development and

8



became Senior Vice President in 1995 and Executive Vice President in 1996. Mr. Jaffe is the son of Elliot S. and Roslyn S. Jaffe. Mrs. Jaffe, our co-founder, serves as Secretary and Treasurer of our Company.

Mr. John Sullivan joined the Company in 2011 as Executive Vice President and Chief Operating Officer, responsible for IT, distribution and Human Resources Information Systems. Prior to joining the Company, Mr. Sullivan was Executive Vice President and Chief Information Officer for QVC from 2007 to 2011, and preceding that Senior Vice President for sourcing, service, systems and Chief Information Officer for Liz Claiborne from 1996 to 2007.

Mr. Michael W. Rayden is the Chief Executive Officer of Tween Brands, Inc. (“Tween Brands”) and a member of the Ascena Board of Directors since November 2009. Prior to the Company’s merger with Tween Brands on November 25, 2009, Mr. Rayden served as Chief Executive Officer of Tween Brands since March 1996 and was elected Chairman of the Board of Tween Brands in August 1999. Mr. Rayden also served as the President of Tween Brands from March 1996 until January 2007. Before joining Tween Brands, he served as President, Chief Executive Officer and Chairman of the Board of Pacific Sunwear of California, Inc. from 1990 to 1996; President and Chief Executive Officer of The Stride Rite Corporation from 1987 to 1989 and President and Chief Executive Officer of Eddie Bauer Inc. from 1984 to 1987.

Mr. Kevin Trolaro was appointed Interim Chief Financial Officer in August 2014. Mr. Trolaro joined the company in April 2013 as Assistant Vice President, Assistant Controller. Prior to joining the Company, Mr. Trolaro held several positions at Time Inc. from 2001 to 2012 where he was most recently Senior Director, Financial Reporting. Mr. Trolaro began his career at KPMG LLP as an auditor and has been a certified public accountant since 1994.
 
Mr. Ernest LaPorte joined the Company in September 2014 as Senior Vice President and Chief Accounting Officer. Prior to joining the Company, Mr. LaPorte was Senior Vice President, Controller at Saks Incorporated from 2007-2014. Prior to Saks, Mr. LaPorte was Vice President of Finance and Principal Accounting Officer at the Movado Group, Inc. from 2005-2007 and preceding that held several positions at Barnes & Noble, Inc. from 1999-2005. Mr. LaPorte began his career in public accounting and is a CPA.
 
Mr. Gene Wexler has been Senior Vice President, General Counsel and Assistant Secretary of our Company since 2005. 

Mr. David Johns joined the Company in March 2013 as Senior Vice President and Chief Information Officer. Prior to joining the Company, Mr. Johns held several senior leadership roles at Owens Corning since 1994.  Most recently, he was Senior Vice President, Chief Information Officer & Chief Global Shared Services officer.  Prior to his experience at Owens Corning, Mr. Johns held technology positions with Honeywell, Inc. and Time Warner Inc.
 
Mr. Ronnie Robinson became President, Ascena Global Sourcing in February 2013. His current responsibilities include global sourcing, product integrity and production operations for all of the Company’s brands. Mr. Robinson joined Tween Brands as Vice President of Sourcing in 2001.
 
Item 1A. Risk Factors.
 
There are risks associated with an investment in our securities. The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our prospects, our results of operations, our financial condition, our liquidity, the trading prices of our securities, and the actual outcome of matters as to which forward-looking statements are made in this report. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. We may also be adversely affected by additional risks not presently known to us or that we currently believe are immaterial.
 
Our business is dependent upon our ability to accurately predict fashion trends and customer preferences.
 
Fashion apparel trends and customer preferences are volatile and tend to change rapidly, particularly for women and tween girls and boys. Our success depends largely on our ability to anticipate and respond to changing merchandise trends and consumer preferences in a timely manner. Accordingly, any failure by us to anticipate, identify and respond to changing fashion trends could adversely affect consumer acceptance of the merchandise in our stores, which in turn could adversely affect our business and our image with our customers. Because we enter into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, price shifting, and the optimal selection and timing of merchandise purchases. If we miscalculate either the demand for our merchandise or our customers’ tastes or purchasing habits, we may be required to sell a significant amount of unsold inventory at below average markups over cost, or below cost, which would have an adverse effect on our results of operations, financial position and cash flows.

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Inability to access liquidity or capital markets could adversely affect the Company's business, results of operations, financial position or cash flows.

Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict the Company’s access to this potential source of future liquidity. As a result of occasional instability in the global financial markets, there can be no assurance that our liquidity will not be affected or that our capital resources will at all times be sufficient to satisfy our liquidity needs. Although we believe that our existing cash and cash equivalents, cash provided by operations and available borrowings under our $500 million Amended and Restated Credit Agreement (the “Revolving Credit Agreement”) will be adequate to satisfy our capital needs for the foreseeable future, any renewed tightening of the credit markets could make it more difficult for us to access funds, enter into an agreement for new indebtedness or obtain funding through the issuance of our securities. Our Revolving Credit Agreement also has financial covenants which, if not met, may further impede our ability to access funds under the Revolving Credit Agreement.
 
In addition, we also have significant amounts of cash and cash equivalents on deposit at FDIC-insured financial institutions that are currently in excess of federally-insured limits. Since the deposit insurance provision of the Dodd-Frank Wall Street Reform Act expired on December 31, 2012, we cannot be assured that we will not experience losses with respect to cash on deposit in excess of federally-insured limits.
 
Existing and increased competition in the women’s, girls' and boys' retail apparel industry may reduce our net revenues, profits and market share.
 
The women’s, girls' and boys' retail apparel industry is highly competitive. Although the Company is one of the nation’s largest specialty retailers, we have numerous and varied competitors at the national and local level, primarily consisting of department stores, off-price retailers, other specialty stores, discount stores, mass merchandisers, Internet and mail-order retailers, many of which have substantially greater financial, marketing, promotional and other resources than we have. Many department stores offer a broader selection of merchandise than we offer. In addition, many department stores continue to be promotional and reduce their selling prices, and in some cases are expanding into markets in which we have a significant presence. As a result of this competition, we may experience pricing pressures, increased marketing expenditures and loss of market share, which could have a material adverse effect on our business, results of operations, financial position and cash flows.

Our ability to successfully integrate Charming Shoppes.
 
The success of the Charming Shoppes Acquisition continues to depend on our ability to integrate and manage both our and Charming Shoppes’s operations, to realize opportunities for revenue growth and to eliminate redundant and excess costs. Achieving the anticipated benefits of the Charming Shoppes Acquisition may present a number of significant risks and considerations, including, but not limited to:
 
demands on management related to the increase in our size;
the diversion of management’s attention from the management of daily operations to the integration of operations;
expected cost savings not being achieved in full, or taking longer or requiring greater investment to achieve; and
not achieving transition or new store growth potential.

We depend on strip shopping center and mall traffic and our ability to identify suitable store locations.
 
Many of our stores are located in strip shopping centers, shopping malls and other retail centers that benefit from their proximity to “anchor” retail tenants, generally large department stores, and other attractions, which generate consumer traffic in the vicinity of our stores. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of anchor stores or changes in customer shopping preferences. A decline in the popularity of strip shopping center or mall shopping among our target customers could have a material adverse effect on customer traffic and our results of operations.
 
To take advantage of customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable locations where competition for suitable store locations is intense.
 
Our ability to successfully adapt to ongoing organizational change could impact our business results.
 
We have executed a number of significant business and organizational changes including acquisitions, workforce and technology optimization projects and distribution center consolidation projects to support our growth strategies. We expect these types of changes to continue for the foreseeable future. Successfully managing these changes, including retention of key employees, is critical to our business success. In addition, our success is dependent on identifying, developing and retaining key employees to

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provide uninterrupted leadership and direction for our business. This includes developing organizational capabilities in key growth markets where the depth of skilled employees is limited and competition for these resources is intense. Further, business and organizational changes may result in more reliance on third parties for various services, and that reliance may increase compliance risks, including anti-corruption. Finally, our financial targets assume a consistent level of productivity improvement. If we are unable to deliver the expected productivity improvements while continuing to invest in business growth, our results of operations, financial position and cash flows could be adversely impacted.
 
Our business could suffer if our information technology systems fail to operate effectively, are disrupted or compromised.
 
We rely on our existing information technology systems in operating and monitoring all major aspects of our business, including sales, warehousing, distribution, purchasing, inventory control, merchandise planning and replenishment, as well as various financial systems. The reliability and capacity of our information technology systems (including third-party hardware and software systems or services) are critical to our continued operations. Despite our precautionary efforts, our information technology systems are vulnerable from time to time to damage or interruption from, among other things, natural disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses, and security breaches, which may require significant investment to fix or replace, and we may suffer loss of critical data and interruptions or delays to our operations in the interim. While, to the best of our knowledge, we have not experienced any material loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a security breach or cyber-attack, such a security breach or cyber-attack could adversely affect our business and operations, including our reputation and our relationship with our customers, employees and investors and expose us to risks of litigation and liability and could impact our results of operations, financial position and cash flows. While we believe that we are diligent in selecting vendors, systems and services to assist us in maintaining the integrity of our information technology systems, we realize that there are risks and that no guarantee can be made that future disruptions, service outages, service failures or unauthorized intrusions will not occur.
 
We rely on foreign sources of production.
 
We purchase a significant portion of our merchandise directly from foreign markets, including Asia, the Middle East and Africa, and indirectly through domestic vendors with foreign sources. We face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad, including but not limited to:
 
financial or political instability in any of the countries in which our merchandise is manufactured or the channels through which it passes;
fluctuations in the value of the U.S. Dollar against foreign currencies;
inability of our manufacturers to comply with local laws, including labor laws, health and safety laws or labor practices;
increased security and regulatory requirements applicable to imported goods;
imposition or increases of duties, taxes and other charges on imports;
imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our merchandise that may be imported into the United States from countries in regions where we do business;
currency and exchange risks;
impact of natural disasters and public health concerns on our foreign sourcing offices and vendor manufacturing operations;
delays in shipping due to port security considerations or labor disputes;
regulations under the United States Foreign Corrupt Practices Act; and
increased costs of transportation.

New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, could increase the cost of products purchased from suppliers in such countries or restrict the importation of products from such countries. The future performance of our business depends on foreign suppliers and may be adversely affected by the factors listed above, all of which are beyond our control. The foregoing may result in our inability to obtain sufficient quantities of merchandise or increase our costs.

We require our independent manufacturers to operate in compliance with applicable laws and our internal requirements. Our vendor code of conduct, guidelines for vendors or other vendor compliance programs promote ethical business practices and we monitor compliance with them; however, we do not control these manufacturers, their labor practices, the health and safety conditions of their facilities, or from where they buy their raw materials. Any violation of labor, health, environmental, safety (e.g., building and fire codes) or other laws by any of the independent manufacturers we use could damage our reputation and could have a material adverse effect on our business.


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Any of the aforementioned risks, independently or in combination with others, could have an adverse effect on our results of operations, financial position and cash flows.

Our business could suffer as a result of a third-party manufacturer’s inability to produce goods for us on time and to our specifications.
 
We do not own or operate any manufacturing facilities and therefore depend upon independent third parties for the manufacture of all of the goods that we sell. Both domestic and international manufacturers produce these goods. The Company is at risk for increases in manufacturing costs and we cannot be certain that we will not experience operational difficulties with these third-party manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control and failure to meet production deadlines. The inability of a manufacturer to ship orders in a timely manner or to meet our safety, quality and social compliance standards could have a material adverse impact on our business, results of operations, financial position and cash flows.

We may suffer negative publicity and our business may be harmed if we need to recall any product we sell or if we fail to comply with applicable product safety laws.

The products our brands sell are regulated by many different governmental bodies, including but not limited to the Consumer Product Safety Commission and the Food and Drug Administration in the U.S., Health Canada in Canada, and similar state, provincial and international regulatory authorities. Although we test the products sold in our brands’ stores and on our brands’ websites, selected products still could present safety problems of which our brands are not aware. This could lead one or more of our brands to recall selected products, either voluntarily or at the direction of a governmental authority, and may lead to a lack of consumer acceptance or loss of consumer trust. Product safety concerns, recalls, defects or errors could result in the rejection of our products by customers, damage to our reputation, lost sales, product liability litigation and increased costs, any or all of which could harm our business and have a material adverse effect on our financial position, results of operations and cash flows.

The cost of compliance with current requirements and any future requirements of federal, state or international regulatory authorities could have a material adverse effect on our financial position, results of operations and cash flows.  Examples of these requirements include regulatory testing, certification, packaging, labeling, advertising, and reporting requirements affecting broad categories of consumer products. In addition, any failure of one or more of our brands to comply with such requirements could result in significant penalties, require one or more of our brands to recall products, and harm our reputation, any or all of which could have a material adverse effect on our business, results of operations, financial position and cash flows.

Risks associated with ecommerce sales.
 
The successful operation of our ecommerce business depends on our ability to maintain the efficient and continuous operation of our ecommerce websites and our fulfillment operations, and on our ability to provide a shopping experience that will generate orders and return visits to our sites. Our ecommerce services are subject to numerous risks, including:
 
the failures of the computer systems that operate our websites and their related support systems, including but not limited to, inadequate system capacity, computer viruses, human error, change in programming, security breaches, system upgrades or migrations, internet service or power outages, causing, among other things, website downtimes and other technical/functional failures;
reliance on third-party computer hardware/software fulfillment and delivery providers;
unfavorable federal or state regulations and laws;
violations of federal, state or other applicable laws, including those related to online privacy;
disruptions in telephone service or power outages;
credit card fraud;
constantly evolving and changing technology;
liability for online content;
diversion of sales from our stores; and
natural disasters or adverse weather conditions.

The Company's failure to successfully address and respond to any one or more of these risks could damage the reputation of our brands and have a material adverse effect on our results of operations, financial position and cash flows.


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We are subject to cybersecurity risks and may incur increased expenses to mitigate our exposure.

Our business, and that of our third-party service providers, employs systems and websites that allow us to process credit card transactions (containing personally identifiable information, “PII”), perform online ecommerce and social media activities, store and transmit proprietary or confidential customer, employee , job applicant and other information. Security and/or privacy breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human error or other similar events could expose us to a risk of loss or misuse of this information, litigation and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber-attacks or intrusions. Attacks may be targeted at us, our customers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Advances in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by our third-party service providers that result in the unauthorized release of personal or confidential information.

The protection of customer, employee, and Company data is critical. The regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, customers have a high expectation that we will adequately protect their personal information. Any breach involving this data could attract negative media attention, cause harm to our reputation or result in liability (including but not limited to fines, penalties or lawsuits), either of which could have a material adverse effect on our results of operations, financial position and cash flows.

We may be exposed to risks and costs associated with credit card fraud and identity theft that would cause us to incur unexpected expenses and loss of revenues.

In the standard course of business, we process customer information, including payment information, through our stores and ecommerce sites. There is an increased concern over the security of personally-identifiable information transmitted over the Internet, consumer identity theft and user privacy. We endeavor to protect consumer identity and payment information through the implementation of security technologies, processes, and procedures. It is possible that an individual or group could defeat our security measures and access sensitive consumer information. Actual or anticipated attacks may cause us to incur increased costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Incidents which result in exposure of customer data will be handled in accordance with applicable laws and regulations. Exposure of customer data through any means could materially harm the Company by, but not limited to, reputation loss, regulatory fines, and costs of litigation.

Our business would suffer a material adverse effect if our distribution centers were shut down or disrupted.
 
Most of the merchandise we purchase is shipped directly to our distribution centers in Etna, Ohio, Greencastle, Indiana or Des Moines, Iowa, where it is prepared for shipment to the appropriate stores or to the customer directly. As a result of damage to, or prolonged interruption of, operations at any of these facilities due to a work stoppage, supply chain disruption, weather conditions such as tornado, flood, blizzard or other natural disaster or event, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores or customers during the time it takes for us to reopen or replace any of these facilities.

Additionally, freight costs are impacted by changes in fuel prices. Fuel prices affect freight costs on inbound freight from vendors to the distribution centers, outbound freight from the distribution centers to our stores and shipments directly to our customers.
 
Although we maintain business interruption and property insurance, management cannot be assured that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us, if any of the distribution centers are shut down for any unplanned reason.

Our business could suffer if parties with whom the Company does business are subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.
 
The Company is party to contracts, transactions and business relationships with various third parties, including vendors, suppliers, service providers and lenders, pursuant to which such third parties have performance, payment and other obligations to the Company. In some cases, the Company depends upon such third parties to provide essential products, services or other benefits, including with respect to merchandise fulfillment, advertising, software development and support, logistics, and other agreements for goods and services in order to operate the Company’s business in its ordinary course. Current economic, industry and market conditions could result in increased risk to the Company associated with the potential financial distress or insolvency of such third parties.

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If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, the rights and benefits of the Company in relation to its contracts, transactions and business relationships with such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot make any assurance that it would be able to arrange alternate or replacement contracts, transactions or business relationships on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability on the part of the Company to do so could negatively affect the Company’s business, results of operations, financial position and cash flows.

Our business could suffer if we need to replace manufacturers.
 
We compete with other companies for the production capacity of our manufacturers and import quota capacity. Many of our competitors have greater financial and other resources than we have and thus may have an advantage in the competition for production capacity. If we experience a significant increase in demand, or if an existing manufacturer of the goods that we sell must be replaced, we may have to increase purchases from our other third-party manufacturers and we cannot guarantee we will be able to do so at all or on terms that are acceptable to us. This may negatively affect our results of operations. We enter into a number of purchase order commitments each season specifying a time for delivery, method of payment, design and quality specifications and other standard industry provisions, but we do not have long-term contracts with any manufacturer.
 
Our business could suffer if one of the manufacturers of the goods that we sell fails to use acceptable labor practices.
 
We require manufacturers of the goods that we sell to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines promote ethical business practices and our staff and our agents periodically visit and monitor the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of local labor, employment or other laws by an independent third-party manufacturer used by us, or the divergence of an independent third-party manufacturer’s labor practices from those generally accepted as ethical in the United States, could interrupt or otherwise disrupt the shipment of products to us or damage our reputation, which may result in a decrease in customer traffic to our stores that could adversely affect our results of operations. Publicity regarding violation of the foregoing guidelines or practices or other social/compliance standards by any of our third-party manufacturers could adversely affect our results of operations.
 
Acts of terrorism, effects of war, public health, natural disasters, other catastrophes or political unrest could have a material adverse effect on our business.
 
The threat, or actual acts, of terrorism continue to be a risk to the global economy. Terrorism and potential military responses, political unrest, natural disasters (such as Hurricane Sandy in 2012), pandemics or other health issues have disrupted or could disrupt commerce, impact our ability to operate our stores or offices in the affected areas or impact our ability to provide critical functions or services necessary to the operation of our business. A disruption of commerce, or an inability to recover critical functions or services from such a disruption, could interfere with the production, shipment or receipt of our merchandise in a timely manner or increase our costs to do so, which could have a material adverse impact on our results of operations, financial position and cash flows. In addition, any of the above disruptions could undermine consumer confidence, which could negatively impact consumer spending or customer traffic, and thus have an adverse effect on our results of operations.
 
We could suffer a decline in our profitability as a result of increasing pressure on margins.
 
The apparel industry is subject to significant pricing pressure caused by many factors, including intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer spending patterns. These factors may cause us to reduce our sales prices to consumers, which could cause our gross margin to decline if we are unable to appropriately manage inventory levels and/or otherwise offset price reductions with comparable reductions in our operating costs. If our sales prices decline and we fail to sufficiently reduce our product costs or operating expenses, our profitability will decline. This could have a material adverse effect on our results of operations, financial position and cash flows.

Our business could suffer as a result of increases in the price of raw materials, labor, energy and freight.
 
Raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high or low demand for fabrics, labor conditions, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, economic inflation and other unpredictable factors. Increases in the price of cotton, wool and other raw materials used in the production of fabric and accessories, as well as increases in labor and energy costs, could result in increases for the costs of our products as well as their distribution to our distribution centers, retail locations and to our customers. Consequently, higher product costs could have a negative effect on our gross profit margin and increased selling prices could have a negative effect on our sales volume.

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We depend on key personnel in order to support our existing business and future expansion and may not be able to retain or replace these employees or recruit additional qualified personnel.
 
Our success and our ability to execute our business strategy depend largely on the efforts of our current management teams at the Company and the respective brands. Executives at the Company and the brands have substantial experience in the retail business and have made significant contributions to the growth and success of our business. The loss of the services of one or more of our key personnel could have a material adverse effect on our business, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. Competition for key personnel in the retail industry is intense, and our operations could be adversely affected if we fail to attract, hire, motivate and retain qualified personnel or if we fail to attract additional qualified individuals.

Our performance also depends in large part on the talents and contributions of engaged and skilled associates in all areas of the Company. If we are unable to identify, hire, develop, motivate and retain talented individuals, we may be unable to compete effectively which could adversely impact our business, results of operations, financial position and cash flows.
 
Covenants in our Revolving Credit Agreement may impose operating restrictions.
 
Our Revolving Credit Agreement contains financial covenants with respect to minimum availability limits. If we fail to meet these covenants or obtain appropriate waivers, our lenders may terminate the Revolving Credit Agreement. Such termination could negatively impact our liquidity, which could have a negative impact on the flow of goods and services, adversely impacting our operations.

The inability to obtain credit on commercially reasonable terms, or a default under the current Revolving Credit Agreement, would have an adverse effect on our results of operations, financial position and cash flows.

Our business may be affected by regulatory, administrative and litigation developments.
 
Laws and regulations at the local, state, federal, and international levels frequently change, and the ultimate cost of compliance cannot be precisely estimated. In addition, we cannot predict the impact that may result from regulatory or administrative changes. Changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation that impacts employment and labor, trade, product safety, transportation and logistics, healthcare, tax, accounting, privacy, operations, or environmental issues, among others, could have an adverse impact on our results of operations, financial position and cash flows.

For example, the Dodd-Frank Act contains provisions governing “conflict minerals,” certain minerals originating from the Democratic Republic of Congo and adjoining countries. As a result, the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals in their products that require an assessment about whether conflict minerals used in the company's products are sourced from the designated countries. There will be costs associated with providing the required disclosures, including due diligence to determine the sources of minerals used in our merchandise and possible changes to sources of our raw materials.
 
Additionally, from time-to-time, we are involved in litigation incidental to our business, including litigation regarding overtime compensation and other employment or wage and hour related matters. Our current exposure could change in the event of the discovery of damaging facts with respect to legal matters pending against us or determinations by judges, juries or other finders of fact that are not in accordance with management's evaluation of the claims. Should management's evaluation prove incorrect, our exposure could greatly exceed expectations and have a material adverse effect on our results of operations, financial position and cash flows.
 
Increases in the cost of employee health benefits could impact the Company's results of operations, financial position and cash flows.
 
The Company's expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could negatively affect the Company's results of operations, financial position and cash flows. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. Due to the breadth and complexity of the healthcare reform legislation, the lack of implementing regulations and interpretive guidance and the phased-in nature of the implementation of the legislation, the Company is not able at this time to fully determine the impact that healthcare reform will have on the Company-sponsored medical plans.


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We are pursuing a strategy of international expansion.
 
We currently intend to expand our operations into other countries in the future. Currently, our Justice brand has licensed stores in certain Middle Eastern countries, Australia, Southeast Asia, Central and South America and Russia. During Fiscal 2014, both our Justice and maurices brands continued their expansion into Canada. As we expand internationally, we may incur significant costs associated with the start-up and maintenance of foreign operations. Costs may include, but are not limited to, obtaining locations for stores, setting up foreign offices, hiring experienced management and maintaining good relations with associates. We may be unable to open and operate new stores successfully, or we may face operational issues that delay our intended pace of international store growth. In any such case, our expansion may be limited, unless we can:
 
identify suitable markets and sites for store locations;
address the different operational characteristics present in each country to which we expand, including employment and labor, transportation, logistics, real estate, lease provisions and local reporting or legal requirements;
negotiate acceptable lease terms, in some cases in locations in which the relative rights and obligations of landlords and tenants differ significantly from the customs and practices in the U.S.;
hire, train and retain competent store personnel;
gain and retain acceptance from foreign customers;
manage inventory effectively to meet the needs of new and existing stores on a timely basis;
expand infrastructure to accommodate growth;
manage foreign government regulations;
manage foreign currency exchange risk effectively; and
achieve acceptable operating margins from new stores.

Failure to implement our international expansion plan consistent with our internal expectations, whether as a result of one or more of the factors listed above or other factors, could adversely affect our ability to achieve the objectives that we have established.

As we continue to expand our international operations, we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as the laws of foreign countries in which we operate. We are required to use reasonable efforts to ensure compliance with these laws. Violations of these laws could subject us to sanctions or other penalties that would have an adverse effect on our reputation, results of operations, financial position and cash flows.

Disruption at ports used to import our products from Asia and other regions.
 
We currently ship the vast majority of our products by ocean. If a disruption occurs in the operation of ports through which our products are imported, we and our vendors may have to ship some or all of our products from Asia or other regions by air freight or to alternative shipping destinations in the United States. Shipping by air is significantly more expensive than shipping by ocean and our profitability could be reduced. Similarly, shipping to alternative destinations in the United States could lead to increased lead times and costs for our products. A disruption at ports (domestic or abroad) through which our products are imported could have a material adverse effect on our results of operations, financial position and cash flows.
 
We may experience fluctuations in our tax obligations and effective tax rate.
 
We are subject to income taxes in the United States and numerous international jurisdictions. We record tax expense based on our estimates of future tax payments, which include reserves for estimates of probable settlements of international and domestic tax audits, including uncertain tax positions. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and reserves are re-evaluated. Further, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings by taxing jurisdiction or by changes to existing tax rules or regulations.
 
Changes to accounting rules and regulations may adversely affect our results of operations, financial position and cash flows.
 
Changes to existing accounting rules or regulations may impact our future results of operations or cause the perception that we are more highly leveraged. Other new accounting rules or regulations and varying interpretations of existing accounting rules and regulations have occurred and may occur in the future. For instance, accounting regulatory authorities have indicated that they may begin to require lessees to capitalize operating leases in their financial statements in the next few years. If adopted, such a change would require us to record a significant amount of lease related assets and liabilities on our balance sheet and make other changes to the recording and classification of lease related expenses in the consolidated statements of operations and cash flows. In addition, as discussed in Note 4 to our audited consolidated financial statements included elsewhere herein, accounting authorities

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issued a new revenue standard during Fiscal 2014 and the Company is still evaluating the impact of this new standard. These and other future changes to accounting rules or regulations, or the questioning of current accounting practices, may adversely affect our results of operations, financial position and cash flows.

Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact our business, the price of our common stock and market confidence in our reported financial information.

We must continue to document, test, monitor and enhance our internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We cannot be assured that our disclosure controls and procedures and our internal controls over financial reporting required under Section 404 of the Sarbanes-Oxley Act will prove to be adequate in the future. Any failure to maintain the effectiveness of internal controls over financial reporting or to comply with the requirements of the Sarbanes-Oxley Act could have a material adverse impact on our business, results of operations, financial position and cash flows as well as on the price of our common stock.

We may be unable to protect our trademarks and other intellectual property rights.
 
We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and service marks on a worldwide basis, including in the countries in which we have business operations or plan to have business operations. Because we have not registered all of our trademarks in all categories, or in all foreign countries in which we source or offer our merchandise now, or may in the future, our international expansion and our merchandising of products using these marks could be limited. We are not aware of any material claims of infringement or material challenges to our right to use any of our trademarks in the United States or Canada. Nevertheless, the actions we have taken, including to establish and protect our trademarks and service marks, may not be adequate to prevent others from imitating our products or to prevent others from seeking to block sales of our products. Also, others may assert proprietary rights in our intellectual property and we may not be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Any litigation regarding our trademarks could be time-consuming and costly. The loss of exclusive use of our trademarks could have a material adverse effect on our results of operations, financial position and cash flows.

We face challenges to grow our business and to manage our growth.
 
Our growth is dependent, in large part, upon our ability to successfully add new stores. In addition, on a routine basis, we close under-performing stores, which may result in write-offs. The success of our growth strategy depends upon a number of factors, including, among others, the identification of suitable markets and sites for new stores, negotiation of leases on acceptable terms, construction or renovation of sites in a timely manner at acceptable costs and maintenance of the productivity of our existing store base. We also must be able to effectively renew our existing store leases. We must be able to hire, train and retain competent managers and personnel and manage the systems and operational components of our growth. Our failure to open new stores on a timely basis, obtain acceptance in markets in which we currently have limited or no presence, attract qualified management and personnel or appropriately adjust operational systems and procedures could have an adverse effect on our growth prospects.

General economic conditions may adversely affect our business.
 
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, high unemployment, increased taxation, high consumer debt, reductions in net worth based on severe market declines (such as in residential real estate markets), higher fuel, energy and other prices, increasing interest rates, severe weather conditions and low consumer confidence. In addition, any significant volatility in our financial markets could also negatively impact the levels of future discretionary consumer spending.  Such macroeconomic and other factors could have a negative effect on consumer spending in the U.S., which in turn could have a material effect on our business, results of operations, financial condition and cash flows.

As described in Note 10 to our audited consolidated financial statements included elsewhere herein, we have significant goodwill and other intangible assets related to our acquisition of maurices in January 2005, the merger with Tween Brands consummated in November 2009 and the Charming Shoppes Acquisition consummated in June 2012. Current and future economic conditions may adversely impact Justice’s, Lane Bryant’s, maurices’s, dressbarn’s or Catherines’s ability to attract new customers, retain existing customers, maintain sales volumes and maintain margins. As discussed in our Critical Accounting Policies included elsewhere herein, these events could materially reduce Justice’s, Lane Bryant’s, maurices’s, dressbarn’s or Catherines’s profitability and cash flow which could, in turn, lead to an impairment of Justice’s, Lane Bryant’s, maurices’s or Catherines’s

17



goodwill and intangible assets. Furthermore, if customer attrition were to accelerate significantly, the value of Justice’s, Lane Bryant’s, maurices’s or Catherines’s intangible assets could be impaired or subject to accelerated amortization.
 
Our business could suffer a material adverse effect from extreme or unseasonable weather conditions.
 
Extreme weather conditions in the areas in which the Company's stores are located could negatively affect the Company's business, results of operations, financial position and cash flows. Frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over an extended period could make it difficult for our customers to travel to our stores, which could negatively impact the Company's results of operations. The Company's business is also susceptible to unseasonable weather conditions, which could influence customer trends, consumer traffic and shopping habits. For example, extended periods of unseasonably warm temperatures during the winter season or cool temperatures during the summer season could reduce demand and thereby would have an adverse effect on our results of operations, financial position and cash flows.

Our stock price may be volatile.

Our common stock is quoted on the NASDAQ Global Select Market. The Company’s stock price, like that of other retail companies, is subject to significant volatility due to many factors, including, but not limited to, general economic conditions, stock and credit market conditions, quarter to quarter variations in our actual or anticipated financial results and investor sentiment. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies.

Further, if the analysts that regularly follow the Company’s performance lower their rating or lower their projections for future growth and financial performance, the Company’s stock price could be adversely impacted.

Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties.
 
Retail Store Space

We lease space for all our retail stores in various domestic and international locations. Store leases generally have an initial term ranging from 5 to 10 years with one or more options to extend the lease. The table below, covering all open store locations leased by us on July 26, 2014, indicates the number of leases expiring during the period indicated and the number of expiring leases with and without renewal options:
Fiscal Years
 
Leases Expiring
 
Number with
Renewal Options
 
Number without
Renewal Options
2015
 
598
 
216
 
382
2016
 
564
 
319
 
245
2017
 
624
 
363
 
261
2018
 
579
 
374
 
205
2019
 
476
 
315
 
161
2020 and thereafter
 
1,055
 
443
 
612
Total
 
3,896
 
2,030
 
1,866
 
Our store leases generally provide for a base rent per square foot per annum. Certain leases have formulas requiring the payment of additional rent as a percentage of sales, generally when sales reach specified levels. Our aggregate minimum rentals under operating leases in effect at July 26, 2014 and excluding locations acquired after July 26, 2014, are approximately $399.1 million for Fiscal 2015. In addition, we are typically responsible under our store leases for our pro rata share of maintenance expenses and common charges in strip shopping centers, outlet centers and malls.
 
Many of the store leases have termination clauses if certain specified sales volumes are not achieved. This affords us greater flexibility to close under-performing stores. Generally, these provisions are operative only during the first few years of a lease.
 
Our investment in new stores consists primarily of inventory, leasehold improvements, fixtures and equipment. We generally receive tenant improvement allowances from landlords to offset a portion of these initial investments in leasehold improvements.

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Corporate Office Space
 
In April 2012, the Company purchased a 137,000 square-foot building in Mahwah, NJ. During the third quarter of Fiscal 2014, the Company completed the renovation and expansion of this building which now has 151,000 square-feet and serves as the corporate office for the dressbarn brand. In addition, a newly constructed 51,000 square foot building adjacent to the dressbarn building now serves as the corporate office for Ascena.

We own Justice’s corporate office facilities in New Albany, Ohio totaling approximately 280,000 square feet, along with 44 acres of adjacent land. We own maurices’s corporate headquarters in downtown Duluth, Minnesota, which is composed of three office buildings totaling approximately 151,000 square feet.  We own 145,000 square feet of space in Bensalem, Pennsylvania which mainly houses the corporate offices of Catherines. We lease approximately 135,000 square feet in Columbus, Ohio which serves as Lane Bryant’s corporate headquarters.

Internationally, we own office space in Hong Kong, China and lease office space in Shanghai, China and Seoul, South Korea to support our sourcing operations. During Fiscal 2014, we purchased 28,000 square feet of office space in Hong Kong to support our growing sourcing operations.

In December 2013, the Company announced its plans for a new approximately 200,000 square-foot building located in Duluth, MN to house its maurices headquarters and shared service operations. The project is scheduled for completion in the spring of calendar 2016. A portion of the building cost will be offset by state and municipal bond funding.
 
Distribution Centers

We own distribution centers in Etna Township, Ohio, Greencastle, Indiana and Des Moines, Iowa.  During the third quarter of Fiscal 2014, both the Etna Township and the Greencastle facilities became operational in their new capacities. The expanded Etna facility, which now has approximately 767,000 square feet, will centralize all of the Company's brick-and-mortar store distribution into one location. The newly renovated Greencastle facility, which was acquired in the Charming Shoppes Acquisition, now has 865,000 square feet and will serve as the distribution and fulfillment center for all of the Company’s ecommerce operations. The phased transition of all brands into the Etna and Greencastle distribution centers is expected to be completed during Fiscal 2015.

Our distribution center in Des Moines, which has 360,000 square feet of space on approximately 13.5 acres of land, currently houses maurices warehousing and distribution for its brick-and-mortar operations. These operations will be combined with the Company’s distribution center in Etna Township, Ohio during Fiscal 2015 and the facility is expected to be sold subsequent to that time.

Tax Incentives
 
In connection with the Company’s relocation of its dressbarn and corporate offices to New Jersey, as well as the expansion of its distribution centers in Ohio and Indiana, that are more fully discussed in Note 9 to our audited consolidated financial statements, the Company was approved for various state and local tax incentives.  In order to receive these incentives, the Company will generally need to meet certain minimum employment or expenditure commitments, as well as comply with periodic reporting requirements.  These incentives, estimated to total approximately $60 million, are expected to be recognized over a 10-15 year period commencing in Fiscal 2015.

Other

Also in connection with the Charming Shoppes Acquisition, we acquired facilities that serviced the acquired Fashion Bug and Figi’s businesses. In Fiscal 2013, we sold the distribution center in White Marsh, Maryland, which primarily serviced the discontinued Fashion Bug brand. Through Figi’s, which was sold in the first quarter of Fiscal 2014, we acquired and retained multiple buildings in Marshfield, Wisconsin, totaling 316,000 square feet.  The Company is currently seeking buyers for these buildings.
 
Lastly, for brands not yet in our Greencastle ecommerce distribution center, we have short-term agreements with contract logistics providers who provide warehousing and fulfillment services for the brand’s ecommerce operations. These agreements are cancelable at the option of the Company.


19



Item 3. Legal Proceedings.
 
The Company is, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation instituted by persons injured upon premises under our control, litigation regarding the merchandise that we sell, including product and safety concerns, litigation with respect to various employment matters, including wage and hour litigation; litigation with present or former employees; and litigation regarding intellectual property rights. Although such litigation is routine and incidental to the conduct of our business, like any business of our size which has a significant number of employees and sells a significant amount of merchandise, such litigation can result in large monetary awards. The consequences of these matters cannot be finally determined by management at this time. However, in the opinion of management, we believe that current pending litigation will not have a material adverse effect on our consolidated financial statements.
 
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Prices of Common Stock
 
The common stock of Ascena Retail Group, Inc. is quoted on the NASDAQ Global Select Market under the ticker symbol “ASNA.”
 
The table below sets forth the high and low prices as reported on the NASDAQ Global Select Market for the last eight fiscal quarters.
 
 
Fiscal 2014
 
Fiscal 2013
Fiscal
 
High
 
Low
 
High
 
Low
First Quarter
 
$20.94
 
$16.15
 
$22.18
 
$16.99
Second Quarter
 
$23.14
 
$19.43
 
$20.94
 
$15.95
Third Quarter
 
$19.99
 
$16.37
 
$19.61
 
$16.20
Fourth Quarter
 
$18.25
 
$15.94
 
$20.58
 
$16.99
 
Number of Holders of Record
 
As of September 17, 2014, we had approximately 4,899 holders of record of our common stock.

Dividend Policy
 
We have never declared or paid cash dividends on our common stock. However, payment of dividends is within the discretion and are payable when declared by our Board of Directors. Payments of dividends are limited by our Revolving Credit Agreement as described in the Financial Condition and Liquidity section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Performance Graph
 
The following graph illustrates, for the period from July 25, 2009 through July 26, 2014, the cumulative total shareholder return of $100 invested (assuming that all dividends, if any, were reinvested) in (1) our common stock, (2) the S&P Composite-500 Stock Index and (3) the S&P Specialty Apparel Retailers Index.


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The comparisons in this table are required by the rules of the SEC and, therefore, are not intended to forecast, or be indicative of, possible future performance of our common stock.

 
Securities Authorized for Issuance under Equity Compensation Plans
 
The information set forth in Item 12 of Part III of this Annual Report on Form 10-K is incorporated by reference herein.
 
Issuer Purchases of Equity Securities (a) 
 
The following table provides information about the Company’s repurchases of common stock during the quarter ended July 26, 2014.
Period
 
Total
Number of
Shares
Purchased
 
Average Price
Paid per
Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(a)
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Month # 1 (April 27, 2014 – May 24, 2014)
 
 
 
 
$—
 
 
 
 
$90 million
 
Month # 2 (May 25, 2014 – June 28, 2014)
 
 
 
 
$—
 
 
 
 
$90 million
 
Month # 3 (June 29, 2014 – July 26, 2014)
 
 
 
 
$—
 
 
 
 
$90 million
 
 
(a) In Fiscal 2010, the Company’s Board of Directors authorized a $100 million share repurchase program (the “2010 Stock Repurchase Program”). The program was then expanded in Fiscal 2011 to cover an additional $100 million of authorized purchases. Under the 2010 Stock Repurchase Program, purchases of shares of common stock may be made at the Company’s discretion from time to time, subject to overall business and market conditions. Purchases will be made at prevailing market prices, through open market purchases or in privately negotiated transactions and will be subject to applicable SEC rules.

Item 6. Selected Financial Data.
 
See the "Index to Consolidated Financial Statements and Supplementary Information" and specifically "Selected Financial Information" appearing at the end of this Annual Report on Form 10-K. This selected financial data should be read in conjunction with Item 7 — "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 — "Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K. Historical results may not be indicative of future results.
 

21



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
 
The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto, which are included elsewhere in this Annual Report on Form 10-K for Fiscal 2014 (“Fiscal 2014 10-K”). We utilize a 52-53 week fiscal year that ends on the last Saturday in July. As such, fiscal year 2014 ended on July 26, 2014 and reflected a 52-week period (“Fiscal 2014”); fiscal year 2013 ended on July 27, 2013 and reflected a 52-week period (“Fiscal 2013”); and fiscal year 2012 ended on July 28, 2012 and reflected a 52-week period (“Fiscal 2012”). All references to “Fiscal 2015” refer to our 52-week period that will end on July 25, 2015.
 
INTRODUCTION
 
MD&A is provided as a supplement to the accompanying audited consolidated financial statements and footnotes to help provide an understanding of our results of operations, financial condition, liquidity and changes in financial condition. MD&A is organized as follows:
 
Overview. This section provides a general description of our business, including our objectives and risks, and a summary of our financial performance for Fiscal 2014. 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 Fiscal 2014, Fiscal 2013 and Fiscal 2012.

Financial condition and liquidity. This section provides an analysis of our cash flows for Fiscal 2014, Fiscal 2013 and Fiscal 2012, as well as a discussion of our financial condition and liquidity as of July 26, 2014. 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) a summary of our outstanding debt and commitments as of July 26, 2014.

Market risk management. This section discusses how we manage our risk exposures related to interest rates, foreign currency exchange rates and our investments, as well as the underlying market conditions as of July 26, 2014.

Critical accounting policies. This section discusses accounting policies considered to be important to our results of operations and financial condition, 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 Note 3 to our accompanying audited consolidated financial statements.

Recently issued accounting pronouncements. This section discusses the potential impact to our reported results of operations and financial condition of accounting standards that have been recently issued.

OVERVIEW
 
Our Business
 
Ascena is a leading national specialty retailer offering clothing, shoes and accessories for missy and plus-size women, through its 100% owned subsidiaries, under the Lane Bryant, maurices, dressbarn and Catherines brands; and for tween girls and boys, under the Justice brand. The Company operates through its subsidiaries approximately 3,900 stores throughout the United States and Canada, with annual revenues of approximately $4.8 billion for the fiscal year ended July 26, 2014.
 
On June 14, 2012, the Company acquired Charming Shoppes, Inc. (“Charming Shoppes”) and its related family of retail brands (the "Charming Shoppes Acquisition"). Charming Shoppes owned and operated multiple retail brands through over 1,800 retail stores and ecommerce operations, including Lane Bryant and Catherines. Charming Shoppes also owned and operated a specialty retail business named Fashion Bug and a food and specialty gift products business named Figi’s. The Fashion Bug business ceased operations in February 2013 and the Figi’s business was sold during the first quarter of Fiscal 2014. These businesses have been classified as discontinued operations within the accompanying audited consolidated financial statements of the Company.

We classify our businesses into five segments following a brand-oriented approach: Justice, Lane Bryant, maurices, dressbarn and Catherines. The Justice segment includes approximately 997 specialty retail and outlet stores (of which 189 sell dual-gender merchandise), ecommerce operations, and certain licensed franchises in international territories. The Justice brand offers fashionable apparel to girls who are ages 7 to 14 in an environment designed to match the energetic lifestyle of tween girls, and

22



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


fashionable apparel to boys who are ages 7 to 14 under the Brothers brand. The Lane Bryant segment includes approximately 771 specialty retail and outlet stores, and ecommerce operations. The Lane Bryant brand offers fashionable and sophisticated plus-size apparel under multiple private labels to female customers in the 25 to 45 age range. The maurices segment includes approximately 922 specialty retail and outlet stores, and ecommerce operations. The maurices brand offers up-to-date fashion designed to appeal to the 20 to 35 year-old female, including both a core and plus-size offering, with stores concentrated in small markets (approximately 25,000 to 150,000 people). The dressbarn segment includes approximately 820 specialty retail and outlet stores, and ecommerce operations. The dressbarn brand primarily caters to women in the mid-30’s to mid-50’s age range and offers moderate-to-better quality career, special occasion and casual fashion in both missy and plus sizes. The Catherines segment includes approximately 386 specialty retail stores and ecommerce operations. The Catherines brand offers classic apparel and accessories for female customers for wear-to-work and casual lifestyles in a full range of plus sizes, generally catering to the female customer 45 years and older.
 
Our Objectives and Risks
 
Objectives
 
Our core strengths include a portfolio of value-oriented, lifestyle brands primarily serving the female customer at various levels of maturity and sizes, beginning from age 7. This portfolio of brands is well complemented by a strong and experienced management team, a disciplined investment philosophy and a solid balance sheet. Despite the various risks associated with the current global economic environment as further discussed below, we believe our core strengths will allow us to continue to execute our strategy for long-term sustainable growth in revenue, net income and operating cash flow.
 
We continue to focus on a number of ongoing key initiatives aimed at increasing our profitability and integrating newly acquired businesses, including reducing expenses and improving our comparable store sales trends.  These initiatives include, but are not limited to, the following:
 
Technological and Supply Chain Integration
During Fiscal 2014, in connection with our continued integration of Charming Shoppes, we continued our technological and supply chain integration projects. These initiatives are expected to allow us to streamline corporate overhead and achieve operational efficiencies and cost savings, which are discussed in more detail below. In particular, we principally completed the integration of the Charming Shoppes sourcing operations, which now operates as part of Ascena Global Sourcing. In addition, we continued the consolidation of our distribution network into our facilities in Etna Township, Ohio and Greencastle, Indiana. Lastly, we continue to integrate our respective companies’ technology platforms. These integration projects, along with any required investment costs, are expected to continue principally over the next two years.

Store Expansion
We continuously explore expansion opportunities both within our current market areas and in other regions, including international expansion. During Fiscal 2014, we opened a net 37 stores. This included net openings of 26 stores at Justice; net openings of 45 stores at maurices; and was partially offset by net closings of 17 stores at Lane Bryant; net closings of 6 stores at dressbarn and net closings of 11 stores at Catherines. During Fiscal 2015, we currently plan to increase our net store count by 30-40 stores in the aggregate for all our brands.
 
During Fiscal 2014, our Justice brand continued to increase its international presence by opening 12 stores in Canada, for a total of 35 stores. In addition, maurices continued to expand in Canada during Fiscal 2014 by opening 12 stores, for a total of 27 stores. Both Justice and maurices plan to continue their Canadian expansion during Fiscal 2015.

Ecommerce
Over the past few years, the Company has experienced significant growth in its ecommerce channel across all brands. During Fiscal 2014, total ecommerce revenues amounted to approximately $450 million, which represented an increase of approximately 22% over Fiscal 2013. As a result of this growth, we continue to look for ways to develop our ecommerce platform to support that growth. In that regard, during Fiscal 2014, the Company began initiatives that will enhance our customer’s shopping experience across all of the Company's various shopping channels.  Our brands will begin utilizing this functionality in a phased transition which is expected to begin in late Fiscal 2015.
 

23



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Cost-Saving Initiatives
Over the past few years we have undertaken a number of initiatives aimed at reducing our cost structure. In addition to the initiatives discussed above, we have (i) centralized our information technology operations, (ii) centralized our payroll processing operations, (iii) consolidated certain of our financial systems and processes, which include a common general ledger and consolidation platform, across our legacy family of brands, which include Justice, maurices, and dressbarn, and (iv) leveraged our volume of goods and services purchases to negotiate favorable pricing. We began to realize cost savings from some of these initiatives during the latter half of Fiscal 2014 and expect incremental savings in Fiscal 2015. We expect to continue to leverage our shared resources among our brands and believe these efforts will continue to lead to increased cost savings and efficiencies in future periods.

Risks
 
There are trends and other factors, including those described below, which we face as a women’s and girls’ and boys’ specialty apparel retailer that could have a material impact on our consolidated financial statements. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A “Risk Factors” of the Fiscal 2014 10-K.
 
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, high unemployment, increased taxation, high consumer debt, reductions in net worth based on severe market declines (such as in residential real estate markets), higher fuel, energy and other prices, increasing interest rates, severe weather conditions and low consumer confidence. In addition, any significant volatility in our financial markets could also negatively impact the levels of future discretionary consumer spending.  Such macroeconomic and other factors could have a negative effect on consumer spending in the U.S., which in turn could have a material effect on our business, results of operations, financial condition and cash flows.

In that regard, during Fiscal 2014 we experienced lower and inconsistent customer traffic and spending patterns which contributed to a decline in our comparable store sales. We believe that the lower level of consumer spending during this time frame was at least partially related to some of the macroeconomic and other conditions mentioned above. In addition, traffic and consumer spending patterns experienced to date in the first quarter of Fiscal 2015 remain challenging and could have a negative impact on our comparable store sales performance during Fiscal 2015 if these trends continue. We will continue to monitor the spending patterns of consumers at each of our brands and adjust, as necessary, our operating strategies to mitigate the impact on our operating results.

Weather Conditions. Weather conditions can affect our net sales because inclement weather may discourage travel or require temporary store closures, thereby reducing customer traffic. Unseasonably warmer weather during typically colder months or unseasonably colder weather during typically warmer months can also affect the seasonal composition and demand for our merchandise.

Integration of Charming Shoppes. The success of the Charming Shoppes Acquisition will depend on our ability to manage our combined operations, to realize opportunities for revenue growth, and to eliminate redundant and excess costs. Achieving the anticipated benefits of integrating Charming Shoppes may present a number of significant risks and uncertainties.
 
Price Increases. The raw materials used to manufacture our products, in particular cotton, and our transportation and contract manufacturing labor costs, are subject to availability constraints and price volatility. Consequently, higher product costs could have a negative effect on our gross profit margin and increased selling prices could have a negative effect on our sales volume.
 
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, sales at Justice 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 December holiday season which is focused on gift-giving merchandise.   The maurices brand experiences peak sales during the December holiday season as well as during the early spring which includes the Easter holiday season. The dressbarn brand has historically experienced higher sales in the spring, which includes the Easter and Mother’s Day holidays. The Lane Bryant and Catherines brands typically experience peak sales during the Easter, Mother’s Day and December holiday seasons.  Lane Bryant’s peak sales around Mother’s Day typically extend through Memorial Day and into the early summer. In addition, our results of operations and cash flows may

24



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


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. 
 
Competition. The retail apparel industry is highly competitive and fragmented, with numerous competitors, including department stores, off-price retailers, specialty stores, discount stores, mass merchandisers and Internet-based retailers, many of which have substantially greater financial, marketing and other resources than we do. Many of our competitors are able to engage in aggressive promotions, which include reducing their selling prices. Some of our competitors include Walmart, Macy’s, JCPenney, Kohl’s, Old Navy and Target. Other competitors may move into the markets that we serve, particularly in the plus-size women’s apparel market where we have a high concentration of sales. Our business is vulnerable to demand and pricing shifts, and to changes in customer tastes and preferences. If we fail to compete successfully, we could face lower net sales and may need to offer greater discounts to our customers, which could result in decreased profitability. We believe that we have established and reinforced our image as a source of fashion and value by focusing on our target customers, and by offering superior customer service and convenience.
 
Customer Tastes and Fashion Trends. Customer tastes and fashion trends are volatile and can change rapidly. Our success depends in part on our ability to effectively predict and respond to changing fashion trends and consumer demands, and to translate market trends into appropriate, saleable product offerings. If we are unable to successfully predict or respond to changing styles or trends and misjudge the market for our products or any new product lines, our sales will be lower and we may be faced with a substantial amount of unsold inventory. In response, we may be forced to rely on additional markdowns or promotional sales to dispose of excess or slow-moving inventory, which may have a material adverse effect on our results of operations, financial position and cash flows.

Summary of Financial Performance
 
Operating Results
 
In Fiscal 2014, we reported net sales of $4.791 billion, income from continuing operations of $138.2 million and net income from continuing operations per diluted share of $0.84. This compares to net sales of $4.715 billion, income from continuing operations of $155.2 million and net income from continuing operations per diluted share of $0.95 in Fiscal 2013. Including a loss from discontinued operations of $4.8 million, or $0.03 per diluted share, net income was $133.4 million in Fiscal 2014 and net income per diluted share was $0.81. This compares to a loss from discontinued operations of $3.9 million, or $0.02 per diluted share, and net income of $151.3 million, or $0.93 per diluted share, in Fiscal 2013.
 
As discussed earlier under the section entitled General Economic Conditions, the operating environment for the better part of Fiscal 2014 remained challenging as customer traffic in the brick-and-mortar sales channel was inconsistent. This, in turn, had a significant impact on our operating results. Nevertheless, our operating performance for Fiscal 2014 was positively affected by a 1.6% increase in net sales and an overall increase in gross margin rate. The increase in net sales was primarily due to higher combined store and ecommerce comparable sales at our Lane Bryant, maurices and Catherines brands and new store growth at our Justice and maurices brands, offset in part by lower combined store and ecommerce comparable sales of our Justice and dressbarn brands. On a consolidated basis, comparable store sales and ecommerce sales for the Company were relatively flat. Our gross margin rate increased by 80 basis points to 55.5% for Fiscal 2014, which reflected the absence in Fiscal 2014 of approximately $20 million of one-time, non-cash inventory expenses associated with the Charming Shoppes Acquisition purchase accounting write-up of inventory to fair market value as of the acquisition date, which was recognized as expense during Fiscal 2013. Excluding the impact of the purchase accounting adjustments, our gross margin rate increased by 40 basis points, primarily due to stronger margins at Lane Bryant, maurices, dressbarn and Catherines, which more than offset lower margins at Justice.

Operating income decreased $54.5 million, or 20.5%, to $210.8 million during Fiscal 2014. Operating income as a percentage of net sales decreased 120 basis points, to 4.4% for Fiscal 2014. Excluding the impact of the purchase accounting adjustments discussed above, operating income as a percentage of net sales decreased by 160 basis points. The decrease primarily reflected an overall increase in gross margin, which was more than offset by increases in Buying, distribution and occupancy costs, SG&A expenses, depreciation expense and an impairment of intangible assets.
 
The provision for income taxes from continuing operations decreased by $22.1 million, to $65.3 million. The effective tax rate decreased 390 basis points to 32.1% for Fiscal 2014 from 36.0% for Fiscal 2013. The decrease in the effective tax rate was primarily

25



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


the result of an increase in the benefit resulting from the Company's indefinite reinvestment assertion for foreign earnings in Fiscal 2014 and lower non-tax deductible expenses, offset in part by higher tax benefits recorded in 2013 from the expiration of federal and certain state income tax statutes of limitations and the favorable resolution of tax settlements.
 
Income from continuing operations decreased $17.0 million, or 11.0%, to $138.2 million, primarily due to the lower level of operating income, offset in part by the absence of the loss on extinguishment of debt in Fiscal 2013, lower interest expense and a decrease in the provision for income taxes.
 
Net income from continuing operations per diluted share decreased by $0.11, or 11.6%, to $0.84 per share for Fiscal 2014 from $0.95 per share for Fiscal 2013. The decrease in diluted earnings per share results was primarily due to the lower level of net income from continuing operations and an increase in the weighted average diluted common shares outstanding.

Financial Condition and Liquidity
 
We ended Fiscal 2014 in a net cash and investments position (total cash and cash equivalents, plus short-term and non-current investments less total debt) of $15.3 million, compared to $53.8 million as of the end of Fiscal 2013. The decrease in our net financial position as of July 26, 2014 as compared to July 27, 2013 was primarily due to our use of available cash and additional Revolving Credit Agreement borrowings to support our capital expenditures (as discussed below under "Capital Spending”), partially offset by our operating cash flows. Our equity increased to $1.738 billion as of July 26, 2014, compared to $1.556 billion as of July 27, 2013, primarily due to our net income and the effect on equity of stock-based compensation in Fiscal 2014.
 
We generated $374.7 million of cash from operations during Fiscal 2014, compared to $450.0 million during Fiscal 2013. During Fiscal 2014, we used $477.5 million for capital expenditures primarily associated with our retail store expansion and investments in our facilities and technological infrastructure and received $36.4 million from incremental net borrowings of debt.

Transactions Affecting Comparability of Results of Operations and Financial Condition
 
The comparability of the Company's operating results for the three fiscal years presented herein has been affected by certain transactions, including:
 
The Charming Shoppes Acquisition that closed on June 14, 2012, as described in Note 5 to the accompanying audited consolidated financial statements;
Impairment of intangible assets related to the write-off of the entire carrying value of the Studio Y trade name, as described in Note 11 to the accompanying audited consolidated financial statements;
Certain acquisition-related, integration and restructuring costs, as more fully described in the "Capital Spending" section below;
Accelerated depreciation of fixed assets related to our integration initiatives;
Certain expenses related to the purchase accounting write-up of inventory acquired in the Charming Shoppes Acquisition;
Certain losses on extinguishment of debt;
Certain acquisition-related, transaction costs; and
Pretax charges related to certain one-time, executive contractual obligation costs.


26



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


A summary of the effect of certain of these items on pretax income for each applicable fiscal year presented is noted below (references to "Notes" are to the notes to the accompanying audited consolidated financial statements):
 
 
Fiscal Years Ended
 
 
July 26,
2014
 
July 27,
2013
 
July 28,
2012
 
 
(millions)
Acquisition-related, integration and restructuring costs
 
$
(34.0
)
 
$
(34.6
)
 
$
(25.4
)
Impairment of intangible assets (see Note 11)
 
(13.0
)
 

 

Accelerated depreciation associated with the Company’s supply chain and technological integration efforts (see Note 9)
 
(8.6
)
 
(14.2
)
 

Non-cash inventory expense associated with the purchase accounting write-up of inventory to fair market value
 

 
(19.9
)
 
(13.5
)
Loss on extinguishment of debt (see Note 14)
 

 
(9.3
)
 

Acquisition-related, transaction costs (see Note 5)
 

 

 
(14.0
)
Executive contractual obligation costs
 

 

 
(5.4
)
Total
 
$
(55.6
)
 
$
(78.0
)
 
$
(58.3
)
 
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 should individually consider the types of events and transactions that have affected operating trends.
 
Reclassifications
 
Historically, the Company included freight costs to move merchandise from its distribution centers to its retail stores within Buying, distribution and occupancy costs. As these costs were appropriately treated as a component of inventory, such costs should have been expensed to Cost of goods sold as the inventories were sold. In the fourth quarter of Fiscal 2014, the Company restated its prior period information by reclassifying these freight costs of $47.4 million in Fiscal 2013 and $23.3 million in Fiscal 2012 from Buying, distribution and occupancy costs to Cost of goods sold. There were no changes to historical operating income or historical net income for any period as a result of this change.

In addition, given the significant increase in ecommerce revenues and related shipping costs, the Company concluded that freight costs to bring ecommerce merchandise to its final destination should be classified consistently with brick-and-mortar freight charges. This presentation aligns with how the Company now evaluates the effect of the increased ecommerce business on its results from operations. As a result, in the fourth quarter of Fiscal 2014, the Company changed its financial statement presentation of these shipping costs for all periods presented. Costs of $23.5 million in Fiscal 2013 and $7.8 million in Fiscal 2012, which previously were recorded in Buying, distribution and occupancy costs, are now included in Costs of goods sold. There were no changes to historical operating income or historical net income for any period as a result of this change.

Certain other immaterial reclassifications have been made to the prior period financial information in order to conform to the current period's presentation.

Information Regarding Non-GAAP Financial Measure - Adjusted EBITDA

We present the financial performance measure of earnings before interest, taxes, depreciation and amortization, as adjusted ("Adjusted EBITDA") to exclude non-operating related items such as (i) costs related to acquisitions, integrations and restructuring costs, (ii) extinguishments of debt and (iii) other income and expenses classified outside of operating income. These items are discussed more fully above in Transactions Affecting Comparability of Results of Operations and Financial Condition.

We consider Adjusted EBITDA to be an important indicator of the operational strength of the Company for the following reasons:
in addition to operating income, we use this measure to evaluate our consolidated performance, the performance of our operating segments and to allocate resources and capital to our operating segments;

27



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


it eliminates the significant level of non-cash depreciation and amortization expense that resulted from the significant capital expenditures and acquisitions we have undertaken over the last few fiscal years;
it enhances investor's ability to analyze trends in our business; and
it is a significant performance measure in our annual incentive compensation programs.

We believe that this measure is useful to investors because it is one of the bases for comparing our operating performance with those of other companies in our industry, although our measure may not be directly comparable to similar measures used by other companies. This measure should not be considered a substitute for performance measures in accordance with generally accepted accounting principles in the United States ("GAAP"), such as operating income, net income, net cash provided by operating activities, or other measures of performance or liquidity we have reported in our consolidated financial statements.

The following table reconciles Adjusted EBITDA to net income as reflected in our Consolidated statements of operations prepared in accordance with GAAP:
 
Fiscal Year Ended
 
July 26,
2014
 
July 27,
2013
 
July 28,
2012
 
(millions)
Adjusted EBITDA
$
438.4

 
$
495.8

 
$
438.9

Acquisition-related, integration and restructuring costs
(34.0
)
 
(34.6
)
 
(25.4
)
Non-cash inventory expense associated with the purchase accounting write-up of inventory to fair market value

 
(19.9
)
 
(13.5
)
Depreciation and amortization expense
(193.6
)
 
(176.0
)
 
(107.4
)
Operating income
210.8

 
265.3

 
292.6

 
 
 
 
 
 
Interest expense
(6.5
)
 
(13.8
)
 
(4.3
)
Interest and other (expense) income, net
(0.8
)
 
0.4

 
4.7

Acquisition-related, transaction costs

 

 
(14.0
)
Loss on extinguishment of debt

 
(9.3
)
 

Income from continuing operations before provision for income taxes
203.5

 
242.6

 
279.0

Provision for income taxes from continuing operations
(65.3
)
 
(87.4
)
 
(107.2
)
Income from continuing operations
138.2

 
155.2

 
171.8

Loss from discontinued operations, net of taxes
(4.8
)
 
(3.9
)
 
(9.6
)
Net income
$
133.4

 
$
151.3

 
$
162.2


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, ecommerce and licensing. The five reportable segments described below represent our brand-based activities for which separate financial information is available and 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 five reportable segments as follows:
Justice segment – consists of the specialty retail, outlet, ecommerce and licensing operations of the Justice brand, as well as the specialty retail and ecommerce operations of the Brothers brand.
Lane Bryant segment – consists of the specialty retail, outlet and ecommerce operations of the Lane Bryant and Cacique brands.
maurices segment – consists of the specialty retail, outlet and ecommerce operations of the maurices brand.
dressbarn segment – consists of the specialty retail, outlet and ecommerce operations of the dressbarn brand.
Catherines segment – consists of the specialty retail and ecommerce operations of the Catherines brand.

28



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Fiscal 2014 Compared to Fiscal 2013
 
The following table summarizes our results of operations and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 26,
2014
 
July 27,
2013
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
4,790.6

 
$
4,714.9

 
$
75.7

 
1.6
 %
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,130.6
)
 
(2,137.7
)
 
7.1

 
(0.3
)%
         Cost of goods sold as % of net sales
 
44.5
%
 
45.3
%
 
 

 
 

Gross margin
 
2,660.0

 
2,577.2

 
82.8

 
3.2
 %
        Gross margin as % of net sales
 
55.5
%
 
54.7
%
 
 

 
 

Other costs and expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy costs
 
(832.3
)
 
(770.5
)
 
(61.8
)
 
8.0
 %
        Buying, distribution and occupancy costs as % of net sales
 
17.4
%
 
16.3
%
 
 

 
 

    Selling, general and administrative expenses
 
(1,376.3
)
 
(1,330.8
)
 
(45.5
)
 
3.4
 %
        SG&A expenses as % of net sales
 
28.7
%
 
28.2
%
 
 

 
 

    Acquisition-related, integration and restructuring costs
 
(34.0
)
 
(34.6
)
 
0.6

 
(1.7
)%
    Impairment of intangible assets
 
(13.0
)
 

 
(13.0
)
 
NM

    Depreciation and amortization expense
 
(193.6
)
 
(176.0
)
 
(17.6
)
 
10.0
 %
Total other costs and expenses
 
(2,449.2
)
 
(2,311.9
)
 
(137.3
)
 
5.9
 %
Operating income
 
210.8

 
265.3

 
(54.5
)
 
(20.5
)%
        Operating income as % of net sales
 
4.4
%
 
5.6
%
 
 

 
 

Interest expense
 
(6.5
)
 
(13.8
)
 
7.3

 
(52.9
)%
Interest and other (expense) income, net
 
(0.8
)
 
0.4

 
(1.2
)
 
(300.0
)%
Loss on extinguishment of debt
 

 
(9.3
)
 
9.3

 
(100.0
)%
Income from continuing operations before provision for income taxes
 
203.5

 
242.6

 
(39.1
)
 
(16.1
)%
Provision for income taxes from continuing operations
 
(65.3
)
 
(87.4
)
 
22.1

 
(25.3
)%
        Effective tax rate (a)
 
32.1
%
 
36.0
%
 
 

 
 

Income from continuing operations
 
138.2

 
155.2

 
(17.0
)
 
(11.0
)%
Loss from discontinued operations, net of taxes (b)
 
(4.8
)
 
(3.9
)
 
(0.9
)
 
23.1
 %
Net income
 
$
133.4

 
$
151.3

 
$
(17.9
)
 
(11.8
)%
 
 
 
 
 
 
 
 
 
Net income per common share - basic:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
0.86

 
$
0.99

 
$
(0.13
)
 
(13.1
)%
        Discontinued operations
 
(0.03
)
 
(0.03
)
 

 
 %
Total net income per basic common share
 
$
0.83

 
$
0.96

 
$
(0.13
)
 
(13.5
)%
 
 
 
 
 
 
 
 
 
Net income per common share - diluted:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
0.84

 
$
0.95

 
$
(0.11
)
 
(11.6
)%
        Discontinued operations
 
(0.03
)
 
(0.02
)
 
(0.01
)
 
50.0
 %
Total net income per diluted common share
 
$
0.81

 
$
0.93

 
$
(0.12
)
 
(12.9
)%
_________

(a) Effective tax rate is calculated by dividing the provision for income taxes by income from continuing operations before provision for income taxes.
(b) Loss from discontinued operations is presented net of a $3.3 million income tax benefit for both of the years ended July 26, 2014 and July 27, 2013.
(NM) Not Meaningful

29



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Net Sales. Net sales increased by $75.7 million, or 1.6%, to $4.791 billion in Fiscal 2014 from $4.715 billion in Fiscal 2013. The increase was primarily due to higher combined store and ecommerce comparable sales at our Lane Bryant, maurices and Catherines brands and new store growth at our Justice and maurices brands, offset in part by lower combined store and ecommerce comparable sales of our Justice and dressbarn brands. The Company believes our ecommerce operations are interdependent with our brick-and-mortar store sales and, as such, we believe that reporting combined store and ecommerce comparable sales on a brand-by-brand basis, as discussed below, is a more appropriate presentation. On a consolidated basis, comparable store sales decreased by $75.5 million, or 1.9%, to $3.807 billion during Fiscal 2014 from $3.882 billion during Fiscal 2013. Also on a consolidated basis, ecommerce sales increased by $82.1 million, or 22%, to $450.2 million during Fiscal 2014 from $368.1 million during Fiscal 2013.
 
Net sales and comparable store sales data for our five business segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
 
July 26,
2014
 
July 27,
2013
 
$ Change
 
% Change
 
 
 
(millions)
 
 
 
 

 
Net sales:
 
 

 
 

 
 

 
 

 
    Justice
 
$
1,384.3

 
$
1,407.4

 
$
(23.1
)
 
(1.6
)%
 
    Lane Bryant
 
1,080.0

 
1,050.1

 
29.9

 
2.8
 %
 
    maurices
 
971.4

 
917.6

 
53.8

 
5.9
 %
 
    dressbarn
 
1,022.5

 
1,020.7

 
1.8

 
0.2
 %
 
    Catherines
 
332.4

 
319.1

 
13.3

 
4.2
 %
 
Total net sales
 
$
4,790.6

 
$
4,714.9

 
$
75.7

 
1.6
 %
 
 
 
 
 
 
 
 
 
 
 
Comparable store sales (a)
 
 
 
 
 
 
 
(2
)%
 
Ecommerce comparable sales
 
 

 
 

 
 

 
22
 %
 
Combined store and ecommerce comparable sales
 
 
 
 

 
 

 
Flat

 
_______

(a) 
Comparable store sales generally refers to the growth of sales in only stores open in both the current period and comparative period in the prior year (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 normally 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.
 
Justice net sales. The net decrease primarily reflects:
 
a decrease of $48.2 million, or 4%, in combined store and ecommerce comparable sales during Fiscal 2014;
a $29.9 million increase in non-comparable stores sales, primarily driven by an increase related to 26 net new store openings in Fiscal 2014; and
a $4.8 million decrease in wholesale, licensing operations and other revenues.

Lane Bryant net sales. The net increase primarily reflects:
 
an increase of $30.2 million, or 3%, in combined store and ecommerce comparable sales during Fiscal 2014;
a $5.8 million decrease in non-comparable stores sales, as the positive effects of 36 new store openings was more than offset by 53 store closings during Fiscal 2014; and
a $5.5 million increase in other revenues.

maurices net sales. The net increase primarily reflects:
 
an increase of $9.6 million, or 1%, in combined store and ecommerce comparable sales during Fiscal 2014;
a $44.3 million increase in non-comparable stores sales, primarily driven by an increase related to 45 net new store openings in Fiscal 2014; and
a $0.1 million decrease in other revenues.

30



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


dressbarn net sales. Net sales were up slightly and primarily reflect:

a decrease of $7.1 million, or 1%, in combined store and ecommerce comparable sales during Fiscal 2014;
a $8.3 million increase in non-comparable stores sales, as the positive effect of 34 new store openings was only partially offset by 40 store closings in Fiscal 2014; and
a $0.6 million increase in other revenues.

Catherines net sales. The net increase primarily reflects:
 
an increase of $22.1 million, or 8%, in combined store and ecommerce comparable sales during Fiscal 2014;
a $10.2 million decrease in non-comparable stores sales, primarily driven by a decrease related to 11 store closings in Fiscal 2014; and
a $1.4 million increase in other revenues.

Gross Margin. Gross margin, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by 80 basis points to 55.5% in Fiscal 2014 from 54.7% in Fiscal 2013. Excluding the impact of the approximately $20 million of purchase accounting adjustments recorded in Fiscal 2013, our gross margin rate increased by 40 basis points. Our gross margin rate increased primarily due to stronger margins at Lane Bryant, maurices, dressbarn and Catherines, which more than offset lower margins at Justice.
 
Gross margin 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.
 
Buying, Distribution and Occupancy Costs. Buying, distribution and occupancy costs consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
 
Buying, distribution and occupancy costs increased by $61.8 million, or 8.0%, to $832.3 million in Fiscal 2014 from $770.5 million in Fiscal 2013. Buying, distribution and occupancy costs as a percentage of net sales increased by 110 basis points to 17.4% in Fiscal 2014 from 16.3% in Fiscal 2013. The increase in Buying, distribution and occupancy costs, both in dollars and as a percentage of net sales, was primarily due to increases in buying-related costs due mainly to the further development of the merchandising and design functions, higher store-occupancy costs related to the overall new store growth and higher handling costs related to the increased ecommerce sales volume.
 
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 Buying, distribution and occupancy costs. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
 
SG&A expenses increased by $45.5 million, or 3.4%, to $1.376 billion in Fiscal 2014 from $1.331 billion in Fiscal 2013. SG&A expenses as a percentage of net sales increased by 50 basis points to 28.7% in Fiscal 2014 from 28.2% in Fiscal 2013. SG&A expenses, expressed both in dollars and as a percentage of sales, increased largely due to new store growth, increased selling costs related to ecommerce growth, higher marketing costs and increased administrative expenses offset by cost-savings achieved from the on-going reduction of the duplicative overhead structure acquired in the Charming Shoppes Acquisition. This reduction is expected to continue over the next couple of years.
 
Impairment of Intangible Assets. Impairment of intangible assets represents the entire write-off of the Studio Y trade name as more fully described in Note 11 to the accompanying audited consolidated financial statements.

Depreciation and Amortization Expense. Depreciation and amortization expense increased by $17.6 million, or 10.0%, to $193.6 million in Fiscal 2014 from $176.0 million in Fiscal 2013. The increase was primarily due to higher capital expenditures, which mainly resulted from the new store openings during the last twelve months, our expanded distribution centers in Ohio and Indiana becoming operational and the relocation of our corporate office space for dressbarn and Ascena to Mahwah, NJ. Also contributing

31



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


to the increase was accelerated depreciation of existing assets whose useful lives were shortened as a result of the Company’s supply chain and technological integration efforts.

Operating Income. Operating income decreased by $54.5 million, or 20.5%, to $210.8 million in Fiscal 2014 from $265.3 million in Fiscal 2013. Operating income as a percentage of net sales decreased 120 basis points, to 4.4% in Fiscal 2014 from 5.6% in Fiscal 2013. Excluding the impact of the approximately $20 million of purchase accounting adjustments recorded in the first quarter of Fiscal 2013 as discussed above, operating income as a percentage of net sales decreased by 160 basis points. The decrease primarily reflected an overall increase in gross margin, as discussed on a brand-by-brand basis below, which was more than offset by increases in Buying, distribution and occupancy costs, SG&A expenses, depreciation expense and an impairment of intangible assets.

Operating income data for our five business segments is presented below.
 
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 26,
2014
 
 July 27,
2013  
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating income (loss):
 
 

 
 

 
 

 
 

    Justice
 
$
99.3

 
$
182.3

 
$
(83.0
)
 
(45.5
)%
    Lane Bryant
 
(4.3
)
 
(30.1
)
 
25.8

 
(85.7
)%
    maurices
 
86.0

 
107.0

 
(21.0
)
 
(19.6
)%
    dressbarn
 
39.4

 
30.3

 
9.1

 
30.0
 %
    Catherines
 
24.4

 
10.4

 
14.0

 
134.6
 %
Unallocated acquisition-related, integration and restructuring costs
 
(34.0
)
 
(34.6
)
 
0.6

 
(1.7
)%
Total operating income
 
$
210.8

 
$
265.3

 
$
(54.5
)
 
(20.5
)%

Justice operating income decreased by $83.0 million primarily as a result of a decrease in gross margin rates and increases in Buying, distribution and occupancy costs and depreciation expense. The lower gross margin rate was mainly attributable to higher promotional markdowns, which resulted from increased promotional activity required to sell through seasonal merchandise. Buying, distribution and occupancy costs increased largely as a result of higher store occupancy costs primarily related to store growth and handling costs associated with an increase in ecommerce sales volume. The increase in depreciation expense resulted from the new store growth and accelerated depreciation as a result of the Company’s supply chain integration efforts.
 
Lane Bryant operating loss decreased by $25.8 million partly due to the absence of approximately $15.3 million of one-time, non-cash inventory expense associated with the purchase accounting write-up of inventory to fair market value recognized in the first quarter of Fiscal 2013. Excluding the impact of the purchase accounting adjustments, the operating results reflected the flow-through of margin on the higher sales volume and higher gross margin rate offset in part by increases in Buying, distribution and occupancy costs. The higher gross margin rate benefited from lower product costs and lower markdowns which resulted from tighter inventory control. The higher Buying, distribution and occupancy costs resulted primarily from increases in buying-related costs due mainly to the further development of the merchandising and design functions, offset in part by lower store-occupancy costs which resulted from the net store closings during the last twelve months.
 
maurices operating income decreased by $21.0 million as an increase in sales and gross margin rates was more than offset by increases in Buying, distribution and occupancy costs, SG&A expenses, depreciation expense and an impairment of intangible assets. The gross margin rate benefited from lower product costs and selected price increases. The increase in Buying, distribution and occupancy costs was mainly a result of increases in buying-related costs due mainly to the further development of the merchandising and design functions and increases in store occupancy and distribution expenses, which resulted largely from new store growth and the increased ecommerce sales volume. The increase in SG&A expenses was primarily due to store-related payroll costs and other store expenses resulting from the new store growth and increased selling costs related to ecommerce growth. The SG&A expense comparison was also impacted by a favorable product-related vendor settlement recorded during Fiscal 2013. The increase in depreciation expense resulted mainly from new store growth and accelerated depreciation as a result of the Company’s supply chain integration efforts.


32



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


dressbarn operating income increased by $9.1 million primarily as a result of an increase in gross margin rates, offset in part by increases in Buying, distribution and occupancy costs, SG&A expenses and depreciation expense. The higher gross margin rate was mainly attributable to lower markdowns as tighter inventory control resulted in a better sell-through of merchandise. Buying, distribution and occupancy costs increased due to the further development of the design function, increases in store occupancy costs and distribution expenses. The increase in store occupancy costs resulted primarily from higher rent associated with new stores while distribution expenses increased due to the higher ecommerce sales volume. The increase in SG&A expenses was primarily due to higher administrative payroll costs and increased administrative expenses related to ecommerce growth, offset in part by lower store-related payroll costs. The increase in depreciation expense is primarily due to accelerated depreciation as a result of the Company’s supply chain and technological integration efforts.

Catherines operating income increased by $14.0 million partly due to the absence of approximately $4.6 million of one-time, non-cash inventory expense associated with the purchase accounting write-up of inventory to fair market value recognized in Fiscal 2013. Excluding the impact of the purchase accounting adjustments, the operating results reflected the flow-through of margin on the higher sales volume and higher gross margin rate, offset in part by increases in Buying, distribution and occupancy costs and SG&A expenses. The gross margin rate increased as a result of lower product costs and lower markdowns. The increase in Buying, distribution and occupancy costs was a result of higher buying-related costs due to the further development of the design function. The increase in SG&A expenses was due to higher marketing costs.

Unallocated acquisition-related, integration and restructuring costs. The unallocated expenses of $34.0 million in Fiscal 2014 and $34.6 million in Fiscal 2013 represent acquisition-related, integration and restructuring costs related mainly to its supply chain and technological integration efforts.
 
Interest Expense. Interest expense decreased by $7.3 million, or 52.9%, to $6.5 million in Fiscal 2014 from $13.8 million in Fiscal 2013. The decrease was primarily the result of a decrease in the average borrowings outstanding and a decrease in the average interest rate on borrowings outstanding during Fiscal 2014 as compared to Fiscal 2013. The decrease in average borrowings outstanding resulted from the Company’s net repayment of debt during Fiscal 2013. The decrease in the average interest rate resulted from the Company’s refinancing of its then outstanding higher-rate term loan borrowings to lower-rate Revolving Credit Agreement borrowings in the third quarter of Fiscal 2013.

Loss on Extinguishment of Debt. During Fiscal 2013, the Company prepaid (i) the outstanding term loan borrowings in full and (ii) the mortgage on its distribution center in Greencastle, Indiana, resulting in a $9.3 million pretax loss on extinguishment of debt. No such loss was recognized during Fiscal 2014.
 
Provision for Income Taxes. The provision for income taxes represents federal, foreign, state and local income taxes. The provision for income taxes from continuing operations decreased by $22.1 million, or 25.3%, to $65.3 million in Fiscal 2014 from $87.4 million in Fiscal 2013. The decrease in provision for income taxes was primarily a result of lower pretax income in Fiscal 2014 and a lower effective income tax rate. The effective tax rate decreased 390 basis points to 32.1% for Fiscal 2014 from 36.0% for Fiscal 2013. The decrease in the effective tax rate was primarily due to an increase in the benefit resulting from the Company's indefinite reinvestment assertion for foreign earnings in Fiscal 2014 and lower non-tax deductible expenses, offset in part by higher tax benefits recorded in 2013 from the expiration of federal and certain state income tax statutes of limitations and the favorable resolution of tax settlements.
 
Net Income. Net income includes income from continuing operations and results from discontinued operations. Net income decreased by $17.9 million, or 11.8%, to $133.4 million in Fiscal 2014 from $151.3 million in Fiscal 2013. Results from discontinued operations generated losses of $4.8 million and $3.9 million for Fiscal 2014 and Fiscal 2013, respectively. Income from continuing operations decreased $17.0 million, or 11.0%, primarily due to the lower level of operating income, offset in part by the absence of the loss on extinguishment of debt in Fiscal 2013, lower interest expense and a decrease in the provision for income taxes.

Net Income from Continuing Operations per Diluted Common Share. Net income from continuing operations per diluted common share decreased by $0.11, or 11.6%, to $0.84 per share in Fiscal 2014 from $0.95 per share in Fiscal 2013. The decrease in diluted per common share results was due to the lower level of income from continuing operations, as previously discussed. Weighted-average diluted common shares outstanding increased to 165.1 million shares during Fiscal 2014 from 163.3 million shares during Fiscal 2013, which also reduced net income from continuing operations per diluted common share. 


33



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Net Income per Diluted Common Share. Net income per diluted common share decreased by $0.12, or 12.9%, to $0.81 per share in Fiscal 2014 from $0.93 per share in Fiscal 2013. The decrease in diluted per share results was primarily due to a lower level of net income from continuing operations.
 

34



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Fiscal 2013 Compared to Fiscal 2012
 
The following table summarizes our results of operations and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 27, 
2013
 
July 28,
2012
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
4,714.9

 
$
3,353.3

 
$
1,361.6

 
40.6
 %
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,137.7
)
 
(1,505.8
)
 
(631.9
)
 
42.0
 %
         Cost of goods sold as % of net sales
 
45.3
%
 
44.9
%
 
 

 
 

Gross margin
 
2,577.2

 
1,847.5

 
729.7

 
39.5
 %
        Gross margin as % of net sales
 
54.7
%
 
55.1
%
 
 

 
 

Other costs and expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy costs
 
(770.5
)
 
(523.3
)
 
(247.2
)
 
47.2
 %
        Buying, distribution and occupancy costs as % of net sales
 
16.3
%
 
15.6
%
 
 

 
 

    Selling, general and administrative expenses
 
(1,330.8
)
 
(898.8
)
 
(432.0
)
 
48.1
 %
        SG&A expenses as % of net sales
 
28.2
%
 
26.8
%
 
 

 
 

    Acquisition-related, integration and restructuring costs
 
(34.6
)
 
(25.4
)
 
(9.2
)
 
36.2
 %
    Depreciation and amortization expense
 
(176.0
)
 
(107.4
)
 
(68.6
)
 
63.9
 %
Total other costs and expenses
 
(2,311.9
)
 
(1,554.9
)
 
(757.0
)
 
48.7
 %
Operating income
 
265.3

 
292.6

 
(27.3
)
 
(9.3
)%
        Operating income as % of net sales
 
5.6
%
 
8.7
%
 
 

 
 

Interest expense
 
(13.8
)
 
(4.3
)
 
(9.5
)
 
220.9
 %
Interest and other income, net
 
0.4

 
4.7

 
(4.3
)
 
(91.5
)%
Acquisition-related, transaction costs
 

 
(14.0
)
 
14.0

 
(100.0
)%
Loss on extinguishment of debt
 
(9.3
)
 

 
(9.3
)
 
NM

Income from continuing operations before provision for income taxes
 
242.6

 
279.0

 
(36.4
)
 
(13.0
)%
Provision for income taxes from continuing operations
 
(87.4
)
 
(107.2
)
 
19.8

 
(18.5
)%
        Effective tax rate (a)
 
36.0
%
 
38.4
%
 
 

 
 

Income from continuing operations
 
155.2

 
171.8

 
(16.6
)
 
(9.7
)%
Loss from discontinued operations, net of taxes (b)
 
(3.9
)
 
(9.6
)
 
5.7

 
(59.4
)%
Net income
 
$
151.3

 
$
162.2

 
$
(10.9
)
 
(6.7
)%
 
 
 
 
 
 
 
 
 
Net income per common share - basic:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
0.99

 
$
1.12

 
$
(0.13
)
 
(11.6
)%
        Discontinued operations
 
(0.03
)
 
(0.06
)
 
0.03

 
(50.0
)%
Total net income per basic common share
 
$
0.96

 
$
1.06

 
$
(0.10
)
 
(9.4
)%
 
 
 
 
 
 
 
 
 
Net income per common share - diluted:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
0.95

 
$
1.08

 
$
(0.13
)
 
(12.0
)%
        Discontinued operations
 
(0.02
)
 
(0.06
)
 
0.04

 
(66.7
)%
Total net income per diluted common share
 
$
0.93

 
$
1.02

 
$
(0.09
)
 
(8.8
)%
________

(a) Effective tax rate is calculated by dividing the provision for income taxes by income from continuing operations before provision for income taxes.
(b) Loss from discontinued operations is presented net of a $3.3 million and $5.1 million income tax benefit for the years ended July 27, 2013 and July 28, 2012, respectively.
(NM) Not Meaningful

35



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Net Sales. Net sales increased by $1.362 billion, or 40.6%, to $4.715 billion in Fiscal 2013 from $3.353 billion in Fiscal 2012. The increase in net sales consisted of 4.6% organic growth from our legacy family of brands and 36.0% from the Charming Shoppes Acquisition. The increase in net sales from our legacy family of brands was driven by both higher comparable store sales at Justice, new store growth at both our Justice and maurices brands and strong growth in ecommerce sales at all of our legacy brands. Partially offsetting those increases was a decrease in comparable store sales at our dressbarn brand. After giving effect to the Charming Shoppes Acquisition as of the beginning of 2012, comparable store sales were flat during Fiscal 2013. Ecommerce sales increased by $90.9 million, or 33% to $368.1 million during Fiscal 2013 from $277.2 million during Fiscal 2012. On a combined basis, these two categories increased 2% during Fiscal 2013. Our comparable store sales trends during Fiscal 2013 reflected lower and inconsistent customer traffic and spending patterns, which generally began in November 2012.
 
Net sales and comparable store sales data for our five business segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
July 27,
2013
 
July 28,
2012
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

    Justice
 
$
1,407.4

 
$
1,306.7

 
$
100.7

 
7.7
 %
    Lane Bryant
 
1,050.1

 
119.7

 
930.4

 
NM

    maurices
 
917.6

 
852.9

 
64.7

 
7.6
 %
    dressbarn
 
1,020.7

 
1,037.6

 
(16.9
)
 
(1.6
)%
    Catherines
 
319.1

 
36.4

 
282.7

 
NM

Total net sales
 
$
4,714.9

 
$
3,353.3

 
$
1,361.6

 
40.6
 %
 
 
 
 
 
 
 
 
 
Comparable store sales (a)
 
 
 
 
 
 
 
flat

Ecommerce comparable sales
 
 

 
 

 
 

 
33
 %
Combined store and ecommerce comparable sales
 
 
 
 

 
 

 
2
 %
________

(a) 
Comparable store sales generally refers to the growth of sales in only stores open in both the current period and comparative period in the prior year (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 normally 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. However, for acquired stores, such as in the case of Lane Bryant and Catherines, comparable store sales metrics for the initial first year of acquisition reflect sales from the acquisition date through the end of the fiscal period for all stores that were open in both that period and the comparable period in the prior year.
(NM) Not Meaningful
 
Justice net sales. The net increase primarily reflects:
 
an increase of $35.7 million, or 3%, in combined store and ecommerce comparable sales during Fiscal 2013;
a $47.4 million increase in non-comparable store sales, primarily driven by an increase related to 29 net new store openings in Fiscal 2013;
a $22.7 million increase in wholesale, licensing operations and other revenues; and
a $5.1 million decrease in revenues from gift card breakage.

Lane Bryant net sales. The net increase reflects:

the operation of 788 stores in the current year for the entire year, as the acquisition was consummated during the fourth quarter of Fiscal 2012; and
a 2% increase in combined store and ecommerce comparable sales.


36



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


maurices net sales. The net increase primarily reflects: 

an increase of $19.1 million, or 2%, in combined store and ecommerce comparable sales during Fiscal 2013;
a $44.6 million increase in non-comparable store sales, primarily driven by an increase related to 45 net new store openings in Fiscal 2013; and
a $1.0 million increase in wholesale, licensing operations and other revenues.

dressbarn net sales. The net decrease primarily reflects:
 
a decrease of $20.4 million, or 2%, in combined store and ecommerce comparable sales during Fiscal 2013;
a $2.0 million increase in non-comparable store sales, primarily driven by 35 store openings in Fiscal 2013. The positive effect of the new store openings was partially offset by 36 stores closing during Fiscal 2013; and
a $1.5 million increase in wholesale, licensing operations and other revenues.

Catherines net sales. The net increase reflects:

the operation of 397 stores in the current year for the entire year, as the acquisition was consummated during the fourth quarter of Fiscal 2012; and  
a 9% increase in combined store and ecommerce comparable sales.

Gross Margin. Gross margin, 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 54.7% in Fiscal 2013 from 55.1% in Fiscal 2012. The gross margin rate decreased primarily due to slightly lower margin rates at our legacy family of brands. The overall gross margin rate was negatively affected by the incurrence of approximately $20 million and $14 million in Fiscal 2013 and 2012, respectively, of one-time, non-cash inventory expenses associated with the purchase accounting write-up of Charming Shoppes’s inventory to fair market value as of the acquisition date.
 
Gross margin 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.
 
Buying, Distribution and Occupancy Costs. Buying, distribution and occupancy costs consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
 
Buying, distribution and occupancy costs increased by $247.2 million, or 47.2%, to $770.5 million in Fiscal 2013 from $523.3 million in Fiscal 2012. Buying, distribution and occupancy costs as a percentage of net sales increased by 70 basis points to 16.3% in Fiscal 2013 from 15.6% in Fiscal 2012. The increase in Buying, distribution and occupancy costs, both in dollars and as a percentage of net sales, was primarily due to a change in store location mix, as Lane Bryant’s higher mall-based mix of stores has higher store occupancy costs as a percentage of sales. From our legacy family of brands, increases in store occupancy and distribution expenses, which resulted largely from new store growth and the increased sales volume, also contributed to the increase.
 
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 Buying, distribution and occupancy costs. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
 
SG&A expenses increased by $432.0 million, or 48.1%, to $1.331 billion in Fiscal 2013 from $898.8 million in Fiscal 2012. SG&A expenses as a percentage of net sales increased by 140 basis points to 28.2% in Fiscal 2013 from 26.8% in Fiscal 2012. SG&A expenses, expressed both in dollars and as a percentage of sales, increased largely due to the current, duplicative corporate overhead structure resulting from the Charming Shoppes Acquisition. From our legacy family of brands, SG&A expenses remained flat as a percentage of sales.
 

37



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Depreciation and Amortization Expense. Depreciation and amortization expense increased by $68.6 million, or 63.9%, to $176.0 million in Fiscal 2013 from $107.4 million in Fiscal 2012. The increase was primarily due to the inclusion of Charming Shoppes, which contributed $43.7 million of incremental depreciation and amortization expense during Fiscal 2013. Also contributing to the increase were higher capital expenditures, which resulted, in part, from the net opening of 73 stores from our legacy family of brands during the last twelve months and accelerated depreciation of existing assets whose useful lives were shortened primarily by the Company’s supply chain and technological integration efforts.
 
Operating Income. Operating income decreased by $27.3 million, or 9.3%, to $265.3 million in Fiscal 2013 from $292.6 million in Fiscal 2012. Operating income as a percentage of net sales decreased 310 basis points, to 5.6% in Fiscal 2013 from 8.7% in Fiscal 2012. The change consisted of a $12.5 million, or 3.8% decrease, from our legacy family of brands, $9.2 million of incremental unallocated acquisition-related, integration and restructuring costs and a $5.6 million decrease relating to the acquired operations of Lane Bryant and Catherines. The operating results of Lane Bryant and Catherines reflect approximately $20 million and $14 million in Fiscal 2013 and 2012, respectively, of one-time, non-cash inventory expenses associated with the purchase accounting write-up of Charming Shoppes’s inventory to fair market value as of the acquisition date and a duplicative corporate overhead structure. The decreased operating income from our legacy family of brands primarily reflected a decrease in sales and gross margin rate at our dressbarn brand, offset in part by the flow through of margin on the higher sales volume at Justice and maurices.

Operating income data for our five business segments is presented below.
 
 
 
Fiscal Years Ended
 
 
 
 
 
 
 July 27,
2013  
 
July 28,
2012
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating income (loss):
 
 

 
 

 
 

 
 

    Justice
 
$
182.3

 
$
172.5

 
$
9.8

 
5.7
 %
    Lane Bryant
 
(30.1
)
 
(10.1
)
 
(20.0
)
 
198.0
 %
    maurices