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EX-32.2 - EXHIBIT 32.2 - Ascena Retail Group, Inc.exhibit322fy16.htm
EX-32.1 - EXHIBIT 32.1 - Ascena Retail Group, Inc.exhibit321fy16.htm
EX-31.2 - EXHIBIT 31.2 - Ascena Retail Group, Inc.exhibit312fy16.htm
EX-31.1 - EXHIBIT 31.1 - Ascena Retail Group, Inc.exhibit311fy16.htm
EX-23 - EXHIBIT 23 - Ascena Retail Group, Inc.exhibit23fy16.htm
EX-21 - EXHIBIT 21 - Ascena Retail Group, Inc.exhibit21fy16.htm
EX-10.14 - EXHIBIT 10.14 - Ascena Retail Group, Inc.exhibit1014_duaneholloway.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 30, 2016
 
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 Global Select Market
 
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. ¨
 
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 $1.5 billion as of January 23, 2016, based on the last reported sales price on the NASDAQ Global Select Market on that date. As of September 14, 2016, 194,213,926 shares of voting common shares were outstanding.

Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on December 8, 2016 are incorporated into Part III of this Form 10-K.




ASCENA RETAIL GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 30, 2016
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,” “project,” “potential,” “continue,” "remains optimistic," 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.
 
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 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016”); fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015”); and fiscal year 2014 ended on July 26, 2014 and reflected a 52-week period (“Fiscal 2014”). All references to “Fiscal 2017” refer to our 52-week period that will end on July 29, 2017.
  
PART I

Item 1. Business.
 
General

The Company is a leading national specialty retailer of apparel for women and tween girls. The Company operates, through its 100% owned subsidiaries, ecommerce operations and approximately 4,900 stores throughout the United States, Canada and Puerto Rico. The Company had annual revenue for the fiscal year ended July 30, 2016 of approximately $7.0 billion. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.

Acquisition of ANN INC.

On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN INC. ("ANN"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands, for an aggregate purchase price of approximately $2.1 billion (the "ANN Acquisition"). The purchase price consisted of approximately $1.75 billion in cash and the issuance of 31.2 million shares of the Company's common stock valued at approximately $345 million, based on the Company's stock price on the date of the acquisition, as more fully described in Note 5 to the accompanying consolidated financial statements. The cash portion of the purchase price was funded with borrowings under a $1.8 billion seven-year, variable-rate term loan described in Note 11 to the accompanying consolidated financial statements. The acquisition is intended to diversify our portfolio of brands that serve the needs of women of different ages, sizes and demographics. ANN's operating results for the post-acquisition period from August 22, 2015 to July 30, 2016 are included in the accompanying consolidated statement of operations for Fiscal 2016.
 

3




Our Brands and Products
 
The Company classifies its businesses into six reportable segments: ANN, Justice, Lane Bryant, maurices, dressbarn and Catherines.
 
ANN

The ANN segment includes 1,022 specialty retail and outlet stores, ecommerce operations and certain licensed franchises in international territories which allow customers to shop in more than 100 countries worldwide. The ANN segment offers modern feminine classics and versatile fashion choices, sold primarily under the Ann Taylor and LOFT brands. ANN focuses on providing a wide selection of fashion and everyday essentials to help women look their best and feel confident. ANN retail stores are located in mall locations, lifestyle centers and outlet centers.

Justice
 
The Justice segment includes 937 specialty retail and outlet stores, ecommerce operations and certain licensed franchises in international territories. The Justice brand offers fashionable apparel to girls who are ages 6 to 12 in an environment designed to match the energetic lifestyle of tween girls. Justice creates, designs and develops its own exclusive Justice 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 girl wants in her store - a mix of apparel, accessories, footwear, intimates and lifestyle products, such as cosmetics, bedroom furnishings and electronics, to meet all of her needs. Justice retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers.
 
Lane Bryant
 
The Lane Bryant segment includes 772 specialty retail and outlet stores, and ecommerce operations. Lane Bryant is a widely recognized brand name in plus-size fashion with stores concentrated in suburban and small towns, offering fashionable and sophisticated apparel at a moderate price point to female customers in plus-sizes 14-28 through its namesake and Cacique private labels, along with select national brands. Merchandise assortment offerings include intimate apparel, wear-to-work and casual sportswear, accessories, select footwear and social occasion apparel. Lane Bryant retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers.
 
maurices
 
The maurices segment includes 993 specialty retail and outlet stores, and ecommerce operations, offering up-to-date core and plus-size fashion apparel. maurices stores are concentrated in small markets (approximately 25,000 to 150,000 people), and cater to local market preferences through a core merchandise assortment that is refined to reflect individual store demands. Through its proprietary label, the maurices product line encompasses women’s casual clothing, career wear, dressy apparel, active wear and accessories. maurices retail stores are typically located near large discount and department stores to capitalize on the traffic those retailers generate, while differentiating itself by offering a wider selection of style, color and current fashion, along with an elevated shopping experience.
 
dressbarn
 
The dressbarn segment includes 809 specialty retail and outlet stores, and ecommerce operations, offering moderate-to-better quality career, special occasion and casual fashion for working women in a comfortable, easy-to-shop environment staffed by friendly, service oriented associates. dressbarn’s individual store assortments vary depending on local demographics, seasonality and past sales patterns. dressbarn retail stores are located primarily in convenient strip shopping centers in major trading and high-density markets and in surrounding suburban areas.
 
Catherines
 
The Catherines segment includes 373 specialty retail stores and ecommerce operations, offering a full range of plus sizes (16-34) and extended sizes (28-34). Catherines offers classic apparel and accessories to female customers in the moderate price range for wear-to-work and casual lifestyles. Catherines retail stores are concentrated in suburban and small towns and are primarily located in strip shopping centers.


4



The tables below present net sales and operating income (loss) by segment for the last three fiscal years:
 
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Net sales:
 
(millions)
     ANN (a)
 
$
2,330.9

 
$

 
$

    Justice
 
1,106.3

 
1,276.8

 
1,384.3

    Lane Bryant
 
1,130.3

 
1,095.9

 
1,080.0

    maurices
 
1,101.3

 
1,060.6

 
971.4

    dressbarn
 
993.3

 
1,023.6

 
1,022.5

    Catherines
 
333.3

 
346.0

 
332.4

Total net sales
 
$
6,995.4

 
$
4,802.9

 
$
4,790.6

 
 
Fiscal 2016
 
Fiscal 2015
 
Fiscal 2014
Operating income (loss):
 
(millions)
     ANN (a)
 
$
13.3

 
$

 
$

    Justice
 
29.0

 
(62.8
)
 
99.3

    Lane Bryant
 
20.6

 
(308.0
)
 
(4.3
)
    maurices
 
105.6

 
125.9

 
86.0

    dressbarn
 
(13.6
)
 
10.7

 
39.4

    Catherines
 
16.3

 
31.0

 
24.4

    Unallocated acquisition and integration expenses
 
(77.4
)
 
(31.7
)
 
(34.0
)
Total operating income (loss)
 
$
93.8

 
$
(234.9
)
 
$
210.8

_______
(a) 
The results of ANN for the post-acquisition period from August 22, 2015 to July 30, 2016 are included within the Company's consolidated results of operations for Fiscal 2016.
 
Over the past five fiscal years, our sales have grown to approximately $7.0 billion in Fiscal 2016 from $3.4 billion in Fiscal 2012. This growth has been a result of both our acquisitions and organic growth. We currently operate approximately 4,900 stores throughout the United States, Canada and Puerto Rico. We have diversified our business by brand, price point and target consumer as well as by geography throughout North America. Our ANN, Justice and maurices segments now operate 13 stores, 42 stores and 35 stores, respectively, in Canada. We 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: anntaylor.com; LOFT.com; louandgrey.com; shopjustice.com; lanebryant.com; cacique.com; maurices.com; dressbarn.com and catherines.com.
 
Over the past five fiscal years, we have invested approximately $4.1 billion in acquisitions, capital improvements, supply chain integration and technology infrastructure improvements, which were funded through cash, debt and the issuance of common stock. We intend to continue to execute our long-term strategies, which include, among other things, growth through selective acquisitions, investment in our operational infrastructure and expansion of our omni-channel businesses and technology platforms.
 
Seasonality of Business
 
Our individual segments are 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. Our Lane Bryant, dressbarn and Catherines segments tend to experience higher sales during the spring season, which include the Easter and Mother's Day holidays. Our ANN and maurices segments have relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix. 
 
Omni-channel

The Company continues to invest in our technology platforms to support the growth of our omni-channel strategy, with different brands at different stages of implementation. ANN launched the first phase of their omni-channel initiative in calendar 2012 and has added various enhancements and functionalities since then. Justice and maurices launched their new ecommerce platforms in Fiscal 2016 and our other brands expect to roll out these platforms in Fiscal 2017. Our ecommerce platforms allow the brands

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to (i) enhance the customer shopping experience inside and outside our stores, (ii) integrate our marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance our capability to collect and analyze customer transaction data to support strategic decisions.
As our omni-channel strategy continues to mature, it is increasingly difficult to distinguish between store sales and ecommerce sales due to the following:
Stores increase ecommerce sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online;
Particular colors or sizes of merchandise not available in a store can be ordered online by our store associates and shipped from our ecommerce fulfillment center or another store directly to the customer;
Our websites increase store sales as in-store customers have often pre-shopped online before shopping in the store, including verification of which stores have merchandise in stock;
Ecommerce sales can be returned to our stores, creating mismatches between revenues and returns between the two channels;
Increased integration of brand specific merchandise planning, procurement and allocation functions serving stores and ecommerce channels together; and
The Company's marketing and loyalty programs become increasingly integrated to maintain customer relationships and improve traffic and conversion rates both in-store and online.

Our segments sell products online through their ecommerce sites:

ANN segment – www.anntaylor.com, www.LOFT.com and www.louandgrey.com
Justice segment – www.shopjustice.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

Store Locations

Our stores are typically open seven days a week and most evenings. As of July 30, 2016, we operated approximately 4,900 stores in 49 states, the District of Columbia, Canada and Puerto Rico. ANN has stores in 47 states, the District of Columbia, Canada and Puerto Rico as well as six international franchise stores. Justice has stores in 48 states and Canada as well as 68 international franchise stores, while maurices has stores in 45 states and Canada. dressbarn, Lane Bryant and Catherines have stores located in 48, 47 and 44 states, respectively.

During Fiscal 2016, no store accounted for more than 1% of our total sales. The table below indicates the type of shopping facility in which our stores were located as of July 30, 2016:
Type of Facility
 
ANN
 
Justice
 
Lane Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Strip Shopping Centers
 
56
 
209
 
383
 
568
 
600

 
362
 
2,178
Enclosed Malls
 
348
 
518
 
190
 
349
 
52

 
6
 
1,463
Outlet Malls and Outlet Strip Centers
 
265
 
113
 
115
 
56
 
157

 
2
 
708
Lifestyle Centers and Downtown Locations
 
353
 
97
 
84
 
20
 

 
3
 
557
Total
 
1,022
 
937
 
772
 
993
 
809

 
373
 
4,906
 
As of July 30, 2016, our stores had a total of 26.9 million square feet, consisting of ANN with 5.8 million square feet, Justice with 3.9 million square feet, Lane Bryant with 4.3 million square feet, maurices with 5.1 million square feet, dressbarn with 6.3 million square feet and Catherines with 1.5 million square feet. All of our store locations are leased. Some of our leases contain renewal options and termination clauses, particularly in the early years of a lease, which are exercisable if specified sales volumes are not achieved.
 

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Store Count by Segment
 
 
Fiscal 2016
 
 
ANN
 
Justice
 
Lane
Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Beginning of Period
 

 
978

 
765

 
951

 
824

 
377

 
3,895

Stores added from ANN Acquisition
 
1,039

 

 

 

 

 

 
1,039

Opened
 
21

 
8

 
30

 
52

 
15

 
3

 
129

Closed
 
(38
)
 
(49
)
 
(23
)
 
(10
)
 
(30
)
 
(7
)
 
(157
)
End of Period
 
1,022

 
937

 
772

 
993

 
809

 
373

 
4,906

 
 
Fiscal 2015
 
 
Justice
 
Lane
Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Beginning of Period
 
997

 
771

 
922

 
820

 
386

 
3,896

Opened
 
30

 
35

 
41

 
34

 

 
140

Closed
 
(49
)
 
(41
)
 
(12
)
 
(30
)
 
(9
)
 
(141
)
End of Period
 
978

 
765

 
951

 
824

 
377

 
3,895


Trademarks
 
Our principal owned trademarks include:
 
ANN TAYLOR®, LOFT®, ANN TAYLOR LOFT®, LOU & GREY®, JUSTICE®, LANE BRYANT®, LANE BRYANT OUTLET®, CACIQUE®, RIGHT FIT®, MAURICES®, DRESSBARN®, CATHERINES®, CATHERINES PLUS SIZES®, MAGGIE BARNES®, LIZ&ME®, SERENADA®, DRESSBAR®, 6th & LANE® and MAURICES IN MOTION®.

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 ANN TAYLOR®, LOFT®, ANN TAYLOR LOFT®, LOU & GREY®, JUSTICE®, LANE BRYANT®, LANE BRYANT OUTLET®, CACIQUE®, RIGHT FIT®, MAURICES®, DRESSBARN®, CATHERINES® and CATHERINES PLUS SIZES® trademarks are material to the continued success of our business. Accordingly, we intend to maintain our trademarks and related registrations and vigorously protect them against infringement.
 
Product Licensing
 
We earn licensing revenue through international franchise stores along with advertising and other marketing initiatives with partner companies. Licensing revenue is less than 1% of our consolidated annual net sales. As of July 30, 2016, ANN had six international franchise stores and Justice had 68 international franchise stores. We continue to explore other partnership opportunities to support our long-term growth.
 
International Operations
 
As of July 30, 2016, our ANN segment had 13 company-operated stores in Canada; our Justice segment had 42 company-operated stores in Canada; and our maurices segment had 35 company-operated stores in Canada. We continue to assess further Canadian expansion, as well as other international opportunities for our family of brands.
 
Sourcing
 
The Company's brands source their products through a variety of sourcing channels. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends.

The Company's sourcing entity operates under the name Ascena Global Sourcing (“AGS”). Through AGS’s offices in Seoul, South Korea, Shanghai, China and Hong Kong, AGS maintains direct relationships with manufacturing partners, enabling AGS to control the quality of goods, while achieving speed to market and favorable pricing. 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.


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In addition, the Company also sources some of its merchandise through third-party buying agents based mainly in Asia. The Company partners with these third-party buying agents to leverage their insight into fashion trends and customer preferences, which is then considered when making product development and fast-fashion decisions. We believe, in certain instances, this buying-agent sourcing network provides favorable cost, quality and/or flexibility for our merchandise selection.

Merchandising and Design

We continue to focus on building our merchandising and design functions to align with our market positions and support our direct souring model. Our merchandising and design teams determine the selection and needs of inventory for the upcoming season in response to fast changing fashion trends and customer preferences. Over the last few years, we made substantial investment in acquiring and retaining merchandising and design talent, which has resulted in improved merchandise selection and better inventory management.

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
 
We continue to make ongoing investments in our information technology systems to support our omni-channel strategy, merchandise procurement, inventory management and supply chain integration. Our information technology systems make the design, marketing, importing and distribution of our products more efficient by providing common platforms for, among other things, order processing, product and design information, and financial information. During Fiscal 2016, the Company completed the consolidation of Lane Bryant's and Catherines' financial systems and processes onto the Company's platforms. Justice and maurices launched their new ecommerce platforms in Fiscal 2016 and we expect other brands to roll onto these platforms in Fiscal 2017.

Advertising and Marketing 

We use a combination of broad-based and targeted marketing and advertising strategies to effectively define, evolve, and promote our brands. These strategies are designed to deliver a personalized and relevant shopping experience for our customers and include customer research, advertising and promotional events, window and in-store marketing materials, direct mail marketing, Internet and social media marketing, lifestyle magazines, catazines and other means of communication. Also, as a result of the growth of our omni-channel strategy, we increasingly focus on personalized email communications and social media marketing.

Customer Relationship Management

We are focused on building our customer relationships and promoting customer loyalty through various programs including brand specific loyalty points and credit card programs. Such programs allow us to better understand our customers’ needs and expectations, deliver a more targeted and personalized omni-channel shopping experience and further enhance the efficiency of our marketing programs. Customers enrolled in our loyalty points programs earn reward points by shopping at our brands which are redeemable toward future purchases. Our brands also offer credit card programs to eligible customers in the U.S. To encourage customers to apply for a credit card, we provide a discount to approved card members on all purchases made with a new card on the day of application acceptance. Rewards points are then earned on purchases made with the credit card at that brand. In addition, under the co-branded credit card program, certain of our brands offer the customer the option of earning additional reward points for purchases made at any other business in which the card is accepted.
Community Service

ascena and its family of brands have a rich history of giving. This is demonstrated through ascena cares, which reflects our culture and the extraordinary philanthropic efforts taking place within our organization. Together, we have a shared commitment for making the world a better place for the women and girls we serve, for the communities where we live and work and for our dedicated associates. The Company is also proud to sponsor the Roslyn S. Jaffe Awards, in which monetary grants are awarded to female social entrepreneurs who are making a meaningful difference for women and children. Whether through collective partnerships or individual brand outreach efforts, at ascena we support the women who buy, make and sell our products. More information about the history of our charitable giving, including the charities we support, is available at www.ascenacares.com.


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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, including reducing their selling prices. Some of our competitors are Walmart, Macy’s, JCPenney, Kohl’s, Old Navy, Target, TJX Companies and Amazon. 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 up-to-date fashion, superior customer service and shopping convenience across our multiple sales channels.
 
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 30, 2016, we had approximately 66,000 employees, 50,000 of whom worked on a part-time basis. We typically add temporary employees during peak selling periods, which vary throughout the year at each of our brands, and adjust the hours they work to coincide with holiday shopping patterns. Except for approximately 70 employees of Lane Bryant that were represented by unions at the end of Fiscal 2016, 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
 
90
 
Co-founder and Non-Executive Chairman of the Board
David Jaffe
 
57
 
President and Chief Executive Officer
John Pershing
 
45
 
Executive Vice President, Chief Human Resources Officer
Duane D. Holloway
 
44
 
Executive Vice President, General Counsel and Assistant Secretary
Robb Giammatteo
 
44
 
Executive Vice President and Chief Financial Officer
Ernest LaPorte
 
64
 
Senior Vice President, Chief Accounting Officer

Mr. Elliot S. Jaffe, our co-founder and Non-Executive 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 and has served as a member of the Board of Directors since 2001. Previously he had been Vice Chairman, Chief Operating Officer. He joined Company in 1992 as Vice President - Business Development and 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 of our Company.

Mr. John Pershing became Executive Vice President, Chief Human Resources Officer in 2015.  He joined the Company in 2011 as Senior Vice President, Human Resources of both the corporate shared services group and dressbarn. Prior to joining the Company, Mr. Pershing spent over 20 years at Best Buy in a variety of leadership roles and was most recently Executive Vice President, Human Capital.

Mr. Duane D. Holloway joined the Company in January 2016 as Senior Vice President, General Counsel and Assistant Secretary and became Executive Vice President, General Counsel and Assistant Secretary in July 2016. Prior to joining the Company, Mr. Holloway served as Vice President, Deputy General Counsel with CoreLogic, Inc., a leading publicly-traded real estate data, analytics and services company. Prior to CoreLogic, he held numerous leadership roles with publicly-traded Caesars Entertainment Corporation.


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Mr. Robb Giammatteo became Executive Vice President and Chief Financial Officer in 2015. He joined the Company in 2013 as the Senior Vice President of FP&A and Investor Relations. Prior to joining the Company, Mr. Giammatteo was the Vice President of Corporate FP&A at VF Corporation, and before that, the Divisional CFO of VF Outlet. Prior to VF, he spent several years in a variety of financial leadership roles at Limited Brands and General Motors.

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 to 2014. Prior to Saks, Mr. LaPorte was Vice President of Finance and Principal Accounting Officer at the Movado Group, Inc. from 2005 to 2007 and preceding that held several positions at Barnes & Noble, Inc. from 1999 to 2005. Mr. LaPorte began his career in public accounting and is a CPA.
 
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 operational results, 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 in a timely manner.

Fashion apparel trends and customer preferences are volatile and tend to change rapidly, particularly for women and tween girls. 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 operational results, financial position and cash flows.

In connection with the ANN Acquisition, we incurred significant additional indebtedness, which could adversely affect us.
We substantially increased our indebtedness in connection with the completion of the ANN Acquisition, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and further increasing our interest expense. We also incurred various costs and expenses associated with our financings. The amount of cash flows required to pay interest on our increased indebtedness levels resulting from the ANN Acquisition, and thus the demands on our cash resources, will be greater than the amount of cash flows required to service our indebtedness prior to the transaction. The increased levels of indebtedness could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the acquisition, or if the financial performance of the combined company does not meet current expectations, our ability to service our indebtedness may be adversely impacted.
The indebtedness incurred in connection with the acquisition bears interest at variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flows.
In addition, our credit ratings affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. In connection with the debt financing, we received ratings from S&P and Moody’s. There can be no assurance that we will maintain particular ratings in the future.
Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures or acquisitions or for other general corporate requirements. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We cannot be assured that we will be able to obtain additional financing on terms acceptable to us or at all.

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To service our indebtedness after the ANN Acquisition, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.
Our ability to make cash payments on our indebtedness as a result of the ANN Acquisition, as well as our ability to fund planned capital expenditures and operating or strategic initiatives will depend on our ability to generate significant operating cash flow in the future, which is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that will be beyond our control.
Our business may not generate sufficient cash flow from operations to enable us to pay our indebtedness or fund our other liquidity needs. In any such circumstance, we may need to refinance all or a portion of our indebtedness, on or before maturity, or incur additional debt subject to the restrictions of our borrowing agreements. We may not be able to refinance any indebtedness or incur additional debt on commercially reasonable terms or at all. If we cannot service our indebtedness or incur additional debt, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions and investments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness may restrict our ability to sell assets and our use of the proceeds from such sales.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, and the lenders under the term facility, the revolving facility and other indebtedness, or any replacement facilities in respect thereof, could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against the Company’s assets, and we could be forced into bankruptcy or liquidation.
Our Amended Revolving Credit Agreement and our Term Loan contain various covenants that impose restrictions on the Company and certain of its subsidiaries that may affect their ability to operate their businesses.

The Amended Revolving Credit Agreement and the Term Loan contain various affirmative and negative covenants that may, subject to certain significant exceptions, restrict the ability of the Company and certain of its subsidiaries to, among other things, have liens on their property, change the nature of their business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of their assets to any one person. In addition, the agreements that govern the financings contain financial covenants that, under certain circumstances, will require the Company to maintain certain financial ratios. The ability of the Company and its subsidiaries to comply with these provisions may be affected by our operating results as well as events beyond their control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate the Company’s repayment obligations.
Inability to access liquidity or capital markets could adversely affect the Company's business, operational results, 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 potential sources of future liquidity. As a result of general unpredictability 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 our availability under our $600 million Amended and Restated 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 borrowing agreements also have financial convents and certain restrictions which, if not met, may limit our ability to access funds.

In addition, we also have cash and cash equivalents on deposit at overseas financial institutions as well as at FDIC-insured financial institutions that are currently in excess of FDIC-insured limits. As a result, we cannot be assured that we will not experience losses with respect to cash on deposit at these financial institutions.

Our ability to successfully integrate new acquisitions.

The success of ascena's businesses continues to depend on our ability to integrate and manage our expanding operations, to realize opportunities for revenue growth and to eliminate redundant and excess costs. Achieving the anticipated benefits of previous and future acquisitions, including the ANN Acquisition, may present a number of significant risks and considerations, including, but not limited to:

unsuccessful, delayed or more costly integration;

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demands on management related to the increase in our size and the loss of key employees;
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 the anticipated omni-channel growth potential.

Our ability to successfully implement and optimize our omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for our customers.

We are committed to growing our business through our omni-channel retail strategy. Our goal is to offer our customer seamless access to our brands and merchandise whenever and wherever they choose to shop. Accordingly, our success also depends on our ability to anticipate and implement innovations in sales and marketing strategies to appeal to existing and potential customers who increasingly rely on multiple portals, including mobile technologies, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our customers’ shopping preferences could significantly impair our ability to meet our strategic business and financial goals. Failing to successfully implement and optimize our omni-channel retail strategy could have a material adverse effect on our business, operational results, financial position and cash flows.

We face challenges to grow our business and to manage our growth.

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, implementation of our omni-channel strategy, ability to maintain the appropriate store fleet size given the growth of the ecommerce business and its diversion of sales from brick-and-mortar 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. In addition, the challenges of declining store traffic and the inability to achieve acceptable results in new and existing store could lead to store closures and/or asset impairment charges, which could negatively impact our operational results, financial position and cash flows.

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, historically, have benefited 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 or continued decline of anchor stores that drive consumer traffic 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 operational results. In order to leverage customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable consumer locations where competition for suitable store locations is intense.

In addition, continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation continue, a large portion of our store base could be concentrated with one or fewer landlords that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable lease terms with these landlords, this could affect our ability to profitably operate our stores, which in turn could have a material effect on our business, operational results, financial condition and cash flows.

Existing and increased competition and fundamental shifts in the women’s and girls' retail apparel industry may reduce our net revenues, profits and market share.

The women’s and girls' 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, some of whom have advantages over us, including substantially greater financial, marketing or promotional resources. Many retailers, such as department stores, also offer a broader selection of merchandise than we offer and 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, operational results, financial position and cash flows.

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In addition, the growth and prominence of fast-fashion and value-fashion retailers and expansion of off-price retailers have fundamentally shifted customers’ expectations of affordable pricing of well-known brands and exacerbated the continued promotional pressure. The rise of these retailers as well as the shift in shopping preferences from brick-and-mortar stores to the ecommerce channel, where online-only businesses or those with robust ecommerce capabilities continue to grow, have increased the difficulty of maintaining and gaining market share. A downturn or an uncertain outlook in the women’s and girls’ specialty retail sector in which our brands sell their products could have a material adverse effect on our business, operational results, financial position and cash flows.

Our ability to maintain our brand image, engage new and existing customers and gain market share.

Our ability to maintain our brand image and reputation is integral to our business as well as the implementation of strategies to expand it. Maintaining, promoting and growing our brands will depend largely on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high-quality customer experience. In addition, while most of our brands are mature and we have extensive customer lists, our success depends, in part, on our ability to keep existing customers while engaging and attracting new customers to shop our brands. Our business and results of operations could be adversely affected if we fail to achieve these objectives for any of our brands and failure to achieve consistent, positive performance at several of our brands simultaneously could have an adverse effect on our sales and profitability. In addition, our ability to address the challenges of declining store traffic, including at strip shopping centers, shopping malls, outlet centers and other retail centers, in a highly promotional, low growth environment may impact our ability to maintain and gain market share and also impact our business, operational results, financial position and cash flows.

Our business depends on effective marketing, advertising and promotional programs.

Customer traffic and demand for our merchandise is influenced by our advertising, marketing and promotional activities, the name recognition and reputation of our brands, and the location and service offered in our stores. Although we use marketing, advertising and promotional programs to attract customers through various media, including social media, database marketing and print, our competitors may spend more or use different approaches, which could provide them with a competitive advantage. Our promotional activity and other programs may not be effective, may be perceived negatively or could require increased expenditures, which could adversely impact our business, operational results, financial position and cash flows.

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, operational results, financial position and cash flows.

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 or terrorist acts 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 or restrictions on the transfer of funds to and from foreign countries;
inability of our manufacturers to comply with local laws, including labor laws, health and safety laws or labor practices;
increased security and regulatory requirements and inspections applicable to imported goods;

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imposition or increases of duties, taxes and other charges on imports or exports;
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;
impact of natural disasters, extreme weather, public health concerns or other catastrophes on our foreign sourcing offices and vendor manufacturing operations;
delays in shipping due to port security or congestion issues, labor disputes or shortages, local business practices, vendor compliance with applicable import regulations or weather conditions;
violations under the U.S. Foreign Corrupt Practices Act or similar laws or regulations; 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 regulations and our internal requirements. Our vendor code of conduct, guidelines and other 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 their sources of raw materials. Any violation of labor, health, environmental, safety (e.g., building and fire codes) or other laws by any of the independent manufacturers that we use could damage our reputation and could have a material adverse effect on our business.

Any of the aforementioned risks, independently or in combination with others, could have an adverse effect on our operational results, 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. In addition, we cannot predict the impact of world-wide events, including inclement weather, natural or man-made disasters, public health issues, strikes, acts of terror or political, social or economic conditions on our major suppliers. Our suppliers could also face economic pressures as a result of rising wages and inflation or experience difficulty obtaining adequate credit or access to liquidity to finance their operations, which could lead to vendor consolidation. A manufacturer's failure to continue to work with us, ship orders in a timely manner or to meet our safety, quality and social compliance standards could result in supply shortages, failure to meet customer expectations and damage to our brands, which could have a material adverse impact on our business, operational results, 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 operational results. 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 or regulations 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

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States, could disrupt the shipment of products to our stores, force us to locate alternative manufacturing sources, reduce demand for our merchandise, damage our reputation or expose us to potential liability, which may result in a decrease in customer traffic to our stores or ecommerce websites that could adversely affect our operational results. Publicity regarding violation of the foregoing guidelines or practices or other social/compliance standards by any of our third-party manufacturers could have a material adverse impact on our business, operational results, financial position and cash flows.

Our business would suffer a material adverse effect if our distribution or fulfillment centers were shut down or disrupted.

Nearly all of the merchandise we purchase is shipped directly to our distribution and fulfillment centers, where it is prepared for shipment to the appropriate stores or to the customer directly through our ecommerce channel. As a result of damage to, or prolonged interruption of, operations at any of these facilities due to a work stoppage, supply chain disruption, inclement weather, natural or man-made disasters, system failures, slowdowns or strikes, acts of terror or other unforeseen events, 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, which in turn could have a material adverse effect on our financial position, operational results and cash flows.

Although we maintain business interruption and property insurance for these facilities, management cannot be assured that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us, if distribution or fulfillment centers are shut down or interrupted for any unplanned reason.

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, government regulations, economic inflation, market speculation and other unpredictable factors. Increases in the demand for and 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 or shortages of skilled labor, 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. 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. 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.

We may experience disruptions 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 operational results, 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 associated fulfillment operations, and to provide a shopping experience that will generate orders and return visits to our sites. Our ecommerce services are subject to numerous risks, including:

computer system failures, including but not limited to, inadequate system capacity, human error, change in programming, website downtimes, system upgrades or migrations, Internet service or power outages;
cyber incidents, including but not limited to, security breaches and computer viruses;
reliance on third-party computer hardware/software fulfillment and delivery providers;
unfavorable federal or state regulations or laws;
violations of federal, state or other applicable laws, including those related to online privacy;
disruptions in telecommunication systems, power outages or other technical failures;
credit card fraud;
constantly evolving technology;
liability for online content; and
natural or man-made disasters or adverse weather conditions.


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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 business, operational results, financial position and cash flows.

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, and financial systems. We regularly make investments to upgrade, enhance or replace these systems, as well as leverage new technologies to support our growth strategies. Any delays or difficulties transitioning to new systems or integrating them with current systems in an orderly and timely fashion could have a material adverse effect on our operational results, financial position and cash flows.

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 or man-made 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 our knowledge, we have not experienced any material loss or other unauthorized disclosure of confidential or personally identifiable information (“PII”) as a result of a security breach, or cyber-attack, such an event could adversely affect our business and operations, including our reputation and our relationships with our customers, employees and investors, expose us to risks of litigation and liability, and could impact our operational results, 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. Certain of our information technology support functions are performed by third-parties in overseas locations. Failure by any of these third-parties to implement and/or manage our information systems and infrastructure effectively and securely could impact our operational results, financial position, and cash flows.

In addition, our ability to continue to operate our business without significant interruption in the event of a disaster or other disruption depends, in part, on the ability of our information technology systems to operate in accordance with our disaster recovery and business continuity plans. Any disruptions affecting our information systems could impact our operational results, financial position and cash flows.

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 employ systems and websites that allow us to process credit card transactions containing PII, perform online ecommerce and social media activities, and store and transmit proprietary or confidential customer, employee, job applicant and other personal confidential information. Security and/or privacy breaches, acts of vandalism or terror, 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 significant and additional costs, including, but not limited to the costs to deploy additional personnel and protection technologies, training employees, engaging third-party experts and consultants and compliance costs associated with various applicable laws or industry standards regarding use and/or unauthorized disclosure of PII. We may also incur significant remediation costs, including liability for stolen client or employee information, repairing system damage or providing credit monitoring or other benefits to affected clients or employees. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data from 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. Although we maintain cyber-security insurance there can be no assurance that our insurance coverage will cover the particular cyber incident at issue or that such coverage will be sufficient, or that insurance proceeds will be paid to us in a timely manner.

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 actual or perceived misappropriation or 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), any of which could have a material adverse effect on our operational results, financial position and cash flows.


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We may be exposed to risks and costs associated with customer payment methods, including credit card fraud and identity theft, which 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 PII 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, reputational damage, regulatory fines and costs of litigation.

On October 1, 2015 the payment cards industry began shifting liability for certain debit and credit card transactions to retailers who do not accept Europay, MasterCard and Visa (“EMV”) chip technology transactions. Until we are able to fully implement and certify the EMV chip technology in our stores, we may be liable for chargebacks related to counterfeit transactions generated through EMV chip enabled cards, which could negatively impact our operational results, financial position and cash flows.

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, 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. Adverse economic, industry or market conditions could result in an increased risk to the Company associated with the potential financial distress or insolvency of such third parties. 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, operational results, financial position and cash flows.

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, volatility in national and international financial markets, consumer confidence, fiscal and monetary policies of government, high unemployment, lower wage levels, 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, tax policies, increasing interest rates, severe weather conditions, the threat of or actual terrorist attacks, military conflicts and the domestic or international political environment. 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, operational results, financial condition and cash flows.

Impairment to the carrying value of our goodwill or other intangible assets could result in significant non-cash charges.

As described in Note 6 to the accompanying consolidated financial statements included elsewhere herein, as of July 30, 2016, we had approximately $2.5 billion of goodwill and other intangible assets related to the acquisitions of maurices in January 2005, Tween Brands in November 2009, Lane Bryant and Catherines in June 2012 and ANN in August 2015. Current and future economic conditions, as well as the other risks noted in this Item 1A, may adversely impact our brands' 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 our brands' profitability and cash flow which could, in turn, lead to a further impairment of our goodwill and other intangible assets, in addition to the impairment losses of $306.4 million recorded during Fiscal 2015 to write down the carrying value of Lane Bryant's goodwill and intangible asset to their fair values. Furthermore, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. Any impairment could have a material effect on our operational results and financial condition.

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Our gross margins could be adversely affected if we are unable to manage our inventory effectively.

Fluctuations in the global apparel retail markets impact the levels of inventory owned by apparel retailers, as merchandise usually must be ordered well in advance of the applicable selling season and frequently before apparel trends are confirmed by customer purchases. In addition, the nature of the global apparel retail business requires us to carry a significant amount of inventory, especially prior to the peak holiday selling season when we build up our inventory levels. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. In the past, we have not always predicted our customers’ preferences and acceptance levels of our trend items with accuracy. If sales do not meet expectations, too much inventory may cause excessive markdowns and, therefore, lower than planned margins. Conversely, if we underestimate demand for our merchandise, we may experience inventory shortages resulting in missed sales and lost revenues. Either of these events could significantly affect our operating results and brand image and loyalty. Our margins may also be impacted by changes in our merchandise mix, a shift toward merchandise with lower selling prices or changes to our pricing structure. These changes could have a material effect on our business, operational results, financial condition and cash flows.

We have key strategic initiatives designed to optimize our inventory levels and increase the efficiency and responsiveness of our supply chain, including what we refer to as our seamless inventory and responsive supply chain initiatives. Aspects of seamless inventory include timelier matching of product supply and demand across markets and channels to reduce stranded inventory. Aspects of responsive supply chain include more vendor fabric platforming, product demand testing and in-season rapid response to demand. These initiatives involve significant systems and operational changes and we have limited experience operating in this manner. If we are unable to implement these initiatives successfully, we may not realize the return on our investments that we anticipate, and our operating results could be adversely affected.

Increases in labor costs, including wages and employee healthcare costs, could impact the Company's operational results, financial position and cash flows.
The Company's expenses relating to wages and employee healthcare costs are significant. Unfavorable changes in labor costs could negatively affect the Company's operational results, financial position and cash flows. Our wage rates may increase in the foreseeable future and are subject to various factors such as unemployment levels, prevailing wage rates, minimum wage requirements and economic conditions. A significant number of states in which we do business have recently increased or are considering increasing the minimum wage, and there is a possibility that Congress will increase the federal minimum wage. In addition, 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 and the lack of implementing regulations and interpretive guidance, the Company is not able to fully determine the impact that healthcare reform will have in the future on the Company-sponsored medical plans.
We are pursuing a strategy of international expansion.

We intend to expand our operations and presence in existing and new countries in the future. Currently, several of our brands have expanded their presence into Canada as well as certain countries in the Middle East, Southeast Asia, Central America and South America, either through their own retail operations or through franchise or other licensing operations.

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, finance, 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 who may have different preferences and purchasing trends;
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

18



achieve acceptable operating margins from new stores.

In addition, franchised stores are independently owned and operated, and franchisees are not our employees. Consequently, franchisees may not operate in accordance with our standards or requirements or in a manner consistent with applicable law. The quality of franchised operations may be diminished by any number of factors beyond our control. The failure of our franchisees to operate franchises successfully could have a material adverse effect on our reputation, operational results, financial position and cash flow.

Other challenges may include facing established competitors, as well as general economic conditions in specific countries or markets, disruptions or delays in shipments, changes in diplomatic and trade relationships and political instability. In addition, international expansion may divert financial, operational and managerial resources from our existing operations and/or result in increased costs, which could adversely impact our financial condition and results of operations. 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 compliance with the laws of foreign countries in which we operate. Violations of these laws could subject us to sanctions or other fines or penalties that would have an adverse effect on our reputation, operational results, 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 reasonably 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, advertising and marketing practices, product safety, transportation and logistics, healthcare, tax, accounting, privacy, operations or environmental issues, among others, could have an adverse impact on our operational results, financial position and cash flows.

While it is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will at all times comply with all such legal and regulatory requirements. A finding that we or our vendors or agents are out of compliance with applicable laws and regulations could subject us to civil remedies or criminal sanctions, which could have a material adverse effect on our business, reputation and stock price. In addition, even the claim of a violation of applicable laws or regulations could negatively affect our reputation. We are also involved from time to time in litigation arising primarily in the ordinary course of business. Litigation matters may include, among other things, employment, commercial, intellectual property, advertising or shareholder claims, and any adverse decision in any such litigation could adversely impact our brands, results of operations 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 control 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 control 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 our disclosure controls or our internal control over financial reporting or to comply with the requirements of the Sarbanes-Oxley Act could have a material adverse impact on our business, operational results, financial position and cash flows as well as on the price of our common stock.

Changes to accounting rules and regulations may adversely affect our operational results, financial position and cash flows.

The adoption of new accounting rules and regulations and varying interpretations of existing accounting rules and regulations have occurred in the past and may occur in the future. For instance, accounting regulatory authorities have issued guidance that requires lessees to recognize a right-of-use asset and a corresponding lease liability on the lessees’ balance sheet for all leases with terms of 12 months or more. The Company is currently evaluating this guidance, which becomes effective for fiscal years beginning after December 15, 2018 and interim periods therein, and the impact it will have on the Company’s consolidated financial statements. In addition, as discussed in Note 4 to our consolidated financial statements included elsewhere herein, accounting authorities issued a new revenue standard 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 operational results, financial position and cash flows.

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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 currently, or may in the future, source or offer our merchandise, our international expansion and our merchandising of products using these marks could be negatively impacted. 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 operational results, 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 generally 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, operational results 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, operational results 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, operational results, financial position and cash flows.

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, operational results, 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, and may cause a disruption in the shipment or receipt of our merchandise, which could negatively impact the Company's operational results. 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 operational results, financial position and cash flows.

Acts of terrorism, effects of war, public health, man-made and 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 significant risk to the global economy. Terrorism and potential military responses, political unrest, natural disasters, pandemics and other health issues have disrupted or could in the future disrupt commerce, impact our ability to operate our stores, offices or distribution and fulfillment centers 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 operational results, 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 operational results.

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Our ability to mitigate the adverse impact of any of the above disruptions also depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster or other catastrophic situation. In addition, although we maintain insurance coverage, there can be no assurance that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us.

Our stock price may be volatile.

Our common stock is quoted on the NASDAQ Global Select Market. Our 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, our operating performance and public perception of the prospects for our brands or for the women’s or girls' apparel industries in general, 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.

If we are unable to meet market expectations, particularly with respect to sales, operating margins, net income and earnings per share, it could result in a decline in the market value of our stock. Further, if the analysts that regularly follow the Company’s performance lower their ratings or lower their projections for future growth and financial performance, the Company’s stock price could be adversely impacted.

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. In addition, our merchandise is subject to import and excise duties and/or sales or value-added taxes in certain 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 jurisdictions or by changes to existing tax rules or regulations or interpretations thereof.

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 of ten years with one or more options to extend the lease. The table below, covering all open store locations leased by us on July 30, 2016, 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
2017
 
855
 
225
 
630
2018
 
879
 
488
 
391
2019
 
665
 
418
 
247
2020
 
418
 
249
 
169
2021
 
438
 
235
 
203
2022 and thereafter
 
1,651
 
687
 
964
Total
 
4,906
 
2,302
 
2,604
 
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

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operating leases in effect at July 30, 2016 and excluding locations acquired after July 30, 2016, are approximately $613.3 million for Fiscal 2017. In addition, we are typically responsible under our store leases for our pro rata share of maintenance expenses and common area charges in strip shopping centers, outlet centers and malls.
 
Certain of the store leases have termination clauses, providing us greater flexibility to close under-performing stores. In particular, certain leases have termination clauses during the first few years of the lease if certain specified sales volumes are not achieved. In addition, others leases provide co-tenancy requirement clauses allowing us to terminate if they are not being met.
 
Our investment in new stores consists primarily of inventory, leasehold improvements, fixtures and equipment, and information technology. We generally receive tenant improvement allowances from landlords to offset a portion of these initial investments in leasehold improvements.

Corporate Office Space
 
The Company owns both a 151,000 square foot building which serves as the corporate office for the dressbarn brand and a 51,000 square foot building adjacent to the dressbarn building which serves as the corporate office for ascena. These buildings are located in Mahwah, NJ.

The Company acquired leased corporate office facilities of approximately 308,000 square feet in New York City, NY and approximately 42,000 square feet in Milford, CT through the ANN Acquisition. The Company owns Justice’s corporate office facilities in New Albany, Ohio totaling approximately 280,000 square feet, along with 145,000 square feet in Bensalem, Pennsylvania which mainly houses the corporate offices of Catherines. The Company leases approximately 135,000 square feet in Columbus, Ohio that serves as Lane Bryant’s corporate headquarters.

During Fiscal 2016, the Company completed construction of its previously announced 200,000 square foot building located in Duluth, MN which now serves as maurices' corporate headquarters and as well as a home for a portion of the Company's shared services operations.

Internationally, the Company owns office space in Hong Kong and lease office space in Shanghai, China and Seoul, South Korea to support our sourcing operations. During Fiscal 2014, the Company purchased additional office space in Hong Kong to support our growing sourcing operations.

The Company owns a corporate office building in Etna Township, Ohio, adjacent to our distribution center, of approximately 168,000 square feet to house a portion of the Company's shared services operations.

Distribution and Fulfillment Center

The Company owns a 695,000 square foot distribution center in Etna Township, Ohio where it completed the centralization of the Company's Justice, Lane Bryant, maurices, dressbarn and Catherines ("legacy") brands' brick-and-mortar store distribution into a single location during Fiscal 2015. The Company owns a 903,000 square foot fulfillment center in Greencastle, Indiana where it completed the centralization of the distribution and fulfillment operations for the ecommerce operations of the Company's legacy brands into a single location during Fiscal 2015.

During Fiscal 2016, as a result of the ANN Acquisition, the Company acquired a 256,000 square foot distribution center in Louisville, Kentucky. The Company fully integrated ANN's ecommerce fulfillment into our Greencastle facility in August 2016 and is in the process of consolidating ANN's brick-and-mortar store distribution into our Etna facility, which is expected to be completed during Fiscal 2017.

During Fiscal 2016, the Company entered into a ten-year lease for a 583,000 square foot distribution center in Riverside, California to serve as the receiving and west coast distribution hub for the Company's merchandise sourced from Asia. The Riverside facility is expected to begin operations during Fiscal 2017.

Item 3. Legal Proceedings.
 
Information regarding legal proceedings is incorporated by reference from Note 14 to the accompanying consolidated financial statements.


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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 2016
 
Fiscal 2015
Fiscal
 
High
 
Low
 
High
 
Low
First Quarter
 
$14.20
 
$10.73
 
$17.54
 
$11.85
Second Quarter
 
$13.98
 
$7.56
 
$13.51
 
$10.52
Third Quarter
 
$11.06
 
$6.48
 
$15.36
 
$11.52
Fourth Quarter
 
$9.44
 
$6.59
 
$17.41
 
$12.56
 
Number of Holders of Record
 
As of September 14, 2016, we had approximately 4,471 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 borrowing arrangements as described in Note 11 to the accompanying consolidated financial statements.

Performance Graph
 
The following graph illustrates, for the period from August 1, 2011 through July 30, 2016, 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.

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.

performancechartlinefy16.jpg
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.
 

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Issuer Purchases of Equity Securities (a) 
 
The following table provides information about the Company’s repurchases of common stock during the quarter ended July 30, 2016.
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 24, 2016 – May 21, 2016)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 2 (May 22, 2016 – June 25, 2016)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 3 (June 26, 2016 – July 30, 2016)
 
 
 
 
$—
 
 
 
 
$181 million
 
 
(a) In December 2015, the Company’s Board of Directors authorized a $200 million share repurchase program (the “2016 Stock Repurchase Program”), which replaced and canceled the share repurchase program originally announced in Fiscal 2010, as amended in Fiscal 2011, which had a remaining availability of approximately $90 million. Under the 2016 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. Currently, share repurchases in excess of $100 million are subject to certain restrictions under the terms of the Company's borrowing agreements, as more fully described in Note 11 to the consolidated financial statements. 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.
 
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.
 

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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 2016 (“Fiscal 2016 10-K”). We utilize a 52-53 week fiscal year that ends on the last Saturday in July. As such, fiscal year 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016”); fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015”); and fiscal year 2014 ended on July 26, 2014 and reflected a 52-week period (“Fiscal 2014”). All references to “Fiscal 2017” refer to our 52-week period that will end on July 29, 2017.
 
INTRODUCTION
 
MD&A is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our operational results, financial condition, liquidity and changes in financial condition. MD&A is organized as follows:
 
Overview. This section includes recent developments, our objectives and risks, and a summary of our financial performance for Fiscal 2016. In addition, this section includes a discussion of transactions affecting comparability that we believe are important in understanding our operational results and financial condition, and in anticipating future trends.

Results of operations. This section provides an analysis of our operational results for Fiscal 2016, Fiscal 2015 and Fiscal 2014.

Financial condition and liquidity. This section provides an analysis of our cash flows for Fiscal 2016, Fiscal 2015 and Fiscal 2014, as well as a discussion of our financial condition and liquidity as of July 30, 2016. The discussion of our financial condition and liquidity includes (i) our available financial capacity under our revolving credit agreement, (ii) a summary of our outstanding debt and commitments as of July 30, 2016, (iii) a summary of our capital spending, and (iv) a summary of our contractual and other obligations as of July 30, 2016.

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 30, 2016.

Critical accounting policies. This section discusses accounting policies considered to be important to our operational results 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 consolidated financial statements.

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

OVERVIEW
 
Acquisition of ANN INC.

On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN INC. (the "ANN Acquisition"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands, for an aggregate purchase price of approximately $2.1 billion. The purchase price consisted of approximately $1.75 billion in cash and the issuance of 31.2 million shares of the Company's common stock valued at approximately $345 million, based on the Company's stock price on the date of the acquisition, as more fully described in Note 5 to the accompanying consolidated financial statements. The cash portion of the purchase price was funded with borrowings under a $1.8 billion seven-year, variable-rate term loan described in Note 11 to the accompanying consolidated financial statements. The acquisition is intended to diversify our portfolio of brands that serve the needs of women of different ages, sizes and demographics. ANN's operating results for the post-acquisition period from August 22, 2015 to July 30, 2016 are included in the accompanying consolidated statements of operations for Fiscal 2016.

Enterprise-wide Transformation Project

In the second half of Fiscal 2016, the Company engaged a leading global professional services company to assess the Company's operations and identify and review strategic initiatives to support our long-term growth. In August 2016, we completed the initial benchmarking phase of our engagement and are in the process of selecting and planning workstreams to address opportunities

25



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


with efficiency as well as enterprise capabilities. The operational assessment is expected to continue during the first quarter of Fiscal 2017. As a result, the Company is unable to estimate the financial impact of the project at this time.

Objectives and Initiatives
 
Our core strengths include a portfolio of value-oriented, lifestyle brands serving the female customer at various levels of maturity and sizes. This portfolio of brands is well-complemented by a strong and experienced management team and a disciplined investment philosophy. 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.
 
Over the past few years, we have identified a number of ongoing key initiatives aimed at positioning the Company for enhanced growth and value creation by increasing our profitability through comparable sales growth, gross margin rate improvement and expense rate leverage resulting from synergies achieved through integration of newly acquired businesses. We remain committed to our long-term growth initiatives and ongoing expense management discipline. While dilutive to our earnings in the short-term, we continue to expect that the investments we have completed will create long-term shareholder value.

These objectives and initiatives include, but are not limited to, the following:

Distribution and Fulfillment
As previously disclosed, our Justice, Lane Bryant, maurices, dressbarn and Catherines ("legacy") brands' distribution and fulfillment was centralized during Fiscal 2015 into our brick-and-mortar store distribution facility in Etna, Ohio and our ecommerce fulfillment facility in Greencastle, Indiana which has resulted in a reduction of our per-unit processing cost. Additionally, the Company completed the integration of ANN's ecommerce fulfillment into our Greencastle facility in August 2016 and is in the process of consolidating ANN's brick-and-mortar distribution from Louisville into our Etna facility. The Etna consolidation is expected to be completed during Fiscal 2017.

During Fiscal 2016, the Company entered into a ten-year lease for a 583,000 square foot distribution center in Riverside, California to serve as the receiving and west coast distribution hub for the Company's merchandise coming from Asia. The Riverside facility is expected to begin operations during Fiscal 2017.

We believe that the integration of ANN's distribution operations into Etna and Greencastle and the opening of the Riverside distribution center will result in a further reduction of our per-unit processing cost.

Transportation
During Fiscal 2017, with the addition of ANN, we expect to continue to realize savings associated with our shipping contracts. These savings will be enabled as a result of the centralization of our brands' distribution and fulfillment activity.

Sourcing
The Company's brands source their products through a variety of sourcing channels. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends.

We have internal sourcing operations under the name Ascena Global Sourcing ("AGS"). During Fiscal 2016, we continued our investment in personnel at AGS, and within the merchandising and design function at certain of our brands. Additionally, the Company currently sources some of its merchandise through third-party buying agents based mainly in Asia.

Non-merchandise Procurement
During Fiscal 2016, we continued our efforts to leverage our volume of non-merchandise related goods and services purchases to negotiate favorable pricing. As part of these efforts, we are consolidating suppliers of our brands across multiple areas, including information technology support contracts, facilities, marketing arrangements, and general services and suppliers, among others.


26



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


Omni-channel Expansion
We continue to invest in our technology platforms to support the growth of our omni-channel strategy, with different brands at different stages of implementation. ANN launched the first phase of their omni-channel initiative in calendar 2012 and has added various enhancements and functionalities since then. Justice and maurices launched their new ecommerce platforms in Fiscal 2016 and we expect other brands to roll onto these platforms in Fiscal 2017. Our ecommerce platforms allow the brands to (i) enhance the customer shopping experience inside and outside our stores, (ii) integrate our marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance our capability to collect and analyze customer transaction data to support strategic decisions.
Seasonality of Business

Our individual segments are 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. Our Lane Bryant, dressbarn, and Catherines segments tend to experience higher sales during the spring season, which include the Easter and Mother's Day holidays. Our ANN and maurices segments have relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix. 
 
Summary of Financial Performance

General Economic Conditions

Our performance is subject to macroeconomic conditions and their impact on levels and patterns of consumer spending. Some of the factors that could negatively impact discretionary consumer spending include general economic conditions, high unemployment, lower wage levels, reductions in net worth, higher energy and other prices, increasing interest rates and low consumer confidence. These factors above could have a negative effect on our operations, which in turn could have a material effect on our business, operational results, financial condition and cash flows.

The U.S. economy continued to show mixed signs of recovery during Fiscal 2016. Within the retail sector, consumer sentiment in certain industries such as automotive and home improvements was generally positive, while the apparel industry appeared to be more challenging and inconsistent from month-to-month and company-to-company. Uncertainty around the U.S. Presidential election and the mixed economic environment could cause inconsistent sales trends to continue through the first quarter of Fiscal 2017. Our brands will continue to monitor the respective spending patterns of their consumers and adjust their operating strategies as necessary to mitigate these challenges and maximize operating performance.

Omni-channel Strategy

As our omni-channel strategy continues to mature, it is increasingly difficult to distinguish between store sales and ecommerce sales due to the following:
Stores increase ecommerce sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online;
Particular colors or sizes of merchandise not available in a store can be ordered online by our store associates and shipped from our ecommerce fulfillment center or another store directly to the customer;
Our websites increase store sales as in-store customers have often pre-shopped online before shopping in the store, including verification of which stores have merchandise in stock;
Ecommerce sales can be returned to our stores, creating mismatches between revenues and returns between the two channels;
Increased integration of brand specific merchandise planning, procurement and allocation functions serving stores and ecommerce channels together; and
The Company's marketing and loyalty programs become increasingly integrated to maintain customer relationship and improve traffic and conversion rate both in-store and online.

27



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



We believe our ecommerce operations are interdependent with our brick-and-mortar store sales, and as a result, we only report combined comparable sales. Effective with the first quarter of Fiscal 2016, we ceased reporting store comparable sales and ecommerce sales separately.

Operating Results
 
Our Fiscal 2016 operating results reflected (i) ANN's operating income of $13.3 million for the post-acquisition period from August 22, 2015 to July 30, 2016, including approximately $165 million of purchase accounting adjustments; (ii) improved operating results at Justice; (iii) Acquisition and integration expenses and (iv) a challenging retail environment with inconsistent consumer spending patterns.

In order to mitigate the negative impacts on our operating performance, where possible, we continue to adjust our brands' operating strategies including implementing the omni-channel strategy, refining inventory assortment, developing our hybrid sourcing model, leveraging our economies of scale and improving supply chain efficiencies.

Operating highlights for Fiscal 2016 are as follows: 

Net sales for Fiscal 2016 increased $2.193 billion, or 45.6%, primarily due to the effect of the ANN Acquisition. For the legacy ascena brands, net sales were down 2.9%;
Comparable sales for the legacy ascena brands decreased by 5%, mainly caused by the anticipated decrease at Justice related principally to its new selling strategy. Comparable sales were down at all of our segments, with the exception of Lane Bryant which had a 1% increase in comparable sales during Fiscal 2016;
Gross margin rate increased by 60 basis points to 56.2% primarily due to higher margin rates at Justice. Gross Margin was negatively impacted in Fiscal 2016 by approximately $130 million of non-cash expenses for purchase accounting adjustments;
BD&O, SG&A and Depreciation and amortization expense were negatively impacted by $35 million of non-cash purchase accounting adjustments, bringing the total non-cash purchase accounting adjustments, when combined with the $130 million discussed above, to $165 million;
$77.4 million of Acquisition and integration expenses for Fiscal 2016, compared to $31.7 million for Fiscal 2015; and
Net loss per diluted share of $0.06 in Fiscal 2016, compared to net loss per diluted share of $1.46 for Fiscal 2015.

Liquidity highlights are as follows:
 
We were in a net debt position (total debt less cash and cash equivalents and short-term investments) of $1.275 billion as of the end of Fiscal 2016, compared to a net cash and investments position of $147.5 million as of the end of Fiscal 2015 primarily due to the term loan debt from the ANN Acquisition and our use of cash to support our capital expenditures;
Cash from operations was $445.4 million for Fiscal 2016, compared to $431.3 million for Fiscal 2015;
We used $1.495 billion of cash, net of cash acquired, for the ANN Acquisition and $366.5 million for capital expenditures for Fiscal 2016, compared to $312.5 million for capital expenditures for Fiscal 2015;
We used $18.6 million of available cash to purchase shares of our common stock for Fiscal 2016;
We borrowed $1.8 billion during the first quarter of Fiscal 2016 to fund the ANN Acquisition. We repurchased $72.0 million of the term loan for $68.4 million, made scheduled principal payments of $9.0 million and ended the year with an outstanding term loan principal balance of $1.719 billion; and
Net repayments under our revolving credit agreement totaled $116.0 million for Fiscal 2016, compared to net repayments of $56.0 million for Fiscal 2015.



28



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


Transactions Affecting Comparability of Results of Operations and Financial Condition
 
The comparability of the Company's operational results for the periods presented herein has been affected by certain transactions. A summary of the effect of these items on pretax income for each applicable period presented is noted below:
 
Fiscal Years Ended
 
July 30,
2016
 
July 25,
2015
 
July 26,
2014
 
(millions)
Purchase accounting adjustments related to the ANN Acquisition:
 
 
 
 
 
 Non-cash inventory expense associated with the purchase accounting write-up of ANN's inventory to fair market value
$
(126.9
)
 
$

 
$

 Depreciation and amortization related to the ANN purchase accounting adjustments to property and equipment and customer relationships (a)
(30.8
)
 

 

     Impact of ANN purchase accounting adjustments on deferred revenue (a)
(3.2
)
 

 

     Impact of ANN purchase accounting adjustments for leases (a)
(4.3
)
 

 

Acquisition and integration expenses (b)
(77.4
)
 
(31.7
)
 
(34.0
)
Gain on extinguishment of debt (see Note 11)
0.8

 

 

Impairment of Lane Bryant's goodwill and intangible assets (see Note 6)

 
(306.4
)
 

Impairment of maurices' intangible assets (see Note 6)

 

 
(13.0
)
Justice Pricing Lawsuits (see Note 14)

 
(50.8
)
 

Accelerated depreciation associated with the Company’s supply chain and technology integration efforts and the closure of Brothers (c) (see Note 8)

 
(6.5
)
 
(8.6
)
Certain costs related to the closure of Brothers (c)

 
(1.9
)
 

                   

(a) The remaining unamortized purchase accounting adjustments arising from the ANN Acquisition which will impact ANN's operating results in future periods are approximately $104 million with approximately $45 million to be recognized during Fiscal 2017.
(b) Fiscal 2016 primarily represented costs related to the acquisition and integration of ANN. Fiscal 2015 and Fiscal 2014 primarily represented costs related to the integration of the Company's supply chain and information technology platforms.
(c) Brothers was a separate boys apparel brand operating within the Justice segment and represented an immaterial portion of the Justice segment. During the third quarter of Fiscal 2015, the Company announced it was exiting the brand, which was completed by the end of Fiscal 2015.


29



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


RESULTS OF OPERATIONS
 
Fiscal 2016 Compared to Fiscal 2015
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 30,
2016
 
July 25,
2015
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
6,995.4

 
$
4,802.9

 
$
2,192.5

 
45.6
 %
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(3,066.7
)
 
(2,133.7
)
 
(933.0
)
 
43.7
 %
         Cost of goods sold as % of net sales
 
43.8
 %
 
44.4
 %
 
 

 
 

Gross margin
 
3,928.7

 
2,669.2

 
1,259.5

 
47.2
 %
        Gross margin as % of net sales
 
56.2
 %
 
55.6
 %
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(1,286.5
)
 
(856.9
)
 
(429.6
)
 
50.1
 %
        Buying, distribution and occupancy expenses as % of net sales
 
18.4
 %
 
17.8
 %
 
 

 
 

    Selling, general and administrative expenses
 
(2,112.3
)
 
(1,490.9
)
 
(621.4
)
 
41.7
 %
        SG&A expenses as % of net sales
 
30.2
 %
 
31.0
 %
 
 

 
 

    Acquisition and integration expenses
 
(77.4
)
 
(31.7
)
 
(45.7
)
 
144.2
 %
    Impairment of goodwill
 

 
(261.7
)
 
261.7

 
(100.0
)%
    Impairment of intangible assets
 

 
(44.7
)
 
44.7

 
(100.0
)%
    Depreciation and amortization expense
 
(358.7
)
 
(218.2
)
 
(140.5
)
 
64.4
 %
Total other operating expenses
 
(3,834.9
)
 
(2,904.1
)
 
(930.8
)
 
32.1
 %
Operating income (loss)
 
93.8

 
(234.9
)
 
328.7

 
(139.9
)%
        Operating income (loss) as % of net sales
 
1.3
 %
 
(4.9
)%
 
 

 
 

Interest expense
 
(103.3
)
 
(6.0
)
 
(97.3
)
 
NM

Interest and other income, net
 
0.4

 
0.3

 
0.1

 
33.3
 %
Gain on extinguishment of debt
 
0.8

 

 
0.8

 
NM

Loss before (provision) benefit for income taxes
 
(8.3
)
 
(240.6
)
 
232.3

 
(96.6
)%
(Provision) benefit for income taxes
 
(3.6
)
 
3.8

 
(7.4
)
 
(194.7
)%
        Effective tax rate (a)
 
(43.4
)%
 
1.6
 %
 
 

 
 

Net loss
 
$
(11.9
)
 
$
(236.8
)
 
$
224.9

 
(95.0
)%
 
 
 
 
 
 
 
 
 
Net loss per common share:
 
 

 
 

 
 

 
 

        Basic
 
$
(0.06
)
 
$
(1.46
)
 
$
1.40

 
(95.9
)%
        Diluted
 
$
(0.06
)
 
$
(1.46
)
 
$
1.40

 
(95.9
)%
_________

(a) Effective tax rate is calculated by dividing the (provision) benefit for income taxes by the loss before the (provision) benefit for income taxes.
(NM) Not meaningful.

Net Sales. Net sales increased by $2.193 billion, or 45.6%, to $6.995 billion in Fiscal 2016 from $4.803 billion in Fiscal 2015. The increase was primarily due to the effect of the ANN Acquisition. For the legacy ascena brands, on a consolidated basis, for Fiscal 2016 compared to Fiscal 2015, comparable sales decreased by $214.0 million, or 5%, to $4.233 billion from $4.447 billion mainly as a result of anticipated sales declines at Justice principally related to its new, less promotional selling model. Non-comparable sales decreased by $0.2 million, or essentially flat, to $206.0 million from $206.2 million. Wholesale, licensing and other revenues decreased by $6.6 million, or 4%, to $143.4 million from $150.0 million. Net sales for the legacy ascena brands also included incremental revenues of approximately $82 million due to the inclusion of the 53rd week in Fiscal 2016.
 

30



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


Net sales and comparable store sales data for our six business segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
July 30,
2016
 
July 25,
2015
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

    ANN
 
$
2,330.9

 
$

 
$
2,330.9

 
NM

    Justice
 
1,106.3

 
1,276.8

 
(170.5
)
 
(13.4
)%
    Lane Bryant
 
1,130.3

 
1,095.9

 
34.4

 
3.1
 %
    maurices
 
1,101.3

 
1,060.6

 
40.7

 
3.8
 %
    dressbarn
 
993.3

 
1,023.6

 
(30.3
)
 
(3.0
)%
    Catherines
 
333.3

 
346.0

 
(12.7
)
 
(3.7
)%
Total net sales
 
$
6,995.4

 
$
4,802.9

 
$
2,192.5

 
45.6
 %
 
 
 
 
 
 
 
 
 
Comparable sales (a)(b)
 
 
 
 

 
 

 
(5
)%
_______
(a) Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in 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). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales generally refer to growth of sales from the Company's ecommerce channel. The Company believes our ecommerce operations are interdependent with our brick-and-mortar store sales and we no longer feel that separate ecommerce and brick-and-mortar sales information is meaningful. Considering our customer cross channel behaviors, we believe that reporting one comparable sales metric is a more meaningful presentation.
(b) Sales for the newly acquired ANN segment and incremental revenues of approximately $82 million due to the inclusion of the 53rd week in Fiscal 2016 are excluded from the calculation of comparable sales.
(NM) Not meaningful.
 
ANN net sales of $2.331 billion represented ANN's net sales for the post-acquisition period from August 22, 2015 to July 30, 2016.

Justice net sales performance primarily reflects:
 
a decrease of $150.8 million, or 13%, in comparable sales during Fiscal 2016 mainly as a result of an anticipated decrease in customer transactions, which was caused by the less promotional selling model;
incremental revenues of $24.9 million due to the inclusion of the 53rd week in Fiscal 2016;
a $28.8 million decrease in non-comparable stores sales, caused by 41 net store closures during Fiscal 2016; and
a $15.8 million decrease in wholesale, licensing operations and other revenues.

Lane Bryant net sales performance primarily reflects:
 
an increase of $12.7 million, or 1%, in comparable sales during Fiscal 2016;
incremental revenues of $18.2 million due to the inclusion of the 53rd week in Fiscal 2016;
a $2.7 million decrease in non-comparable stores sales, as the positive effect of 30 new store openings was more than offset by 23 store closings in Fiscal 2016; and
a $6.2 million increase in other revenues.

maurices net sales performance primarily reflects:
 
a decrease of $16.2 million, or 2%, in comparable sales during Fiscal 2016;
incremental revenues of $18.0 million due to the inclusion of the 53rd week in Fiscal 2016;
a $36.0 million increase in non-comparable stores sales, caused by 42 net store openings during Fiscal 2016; and

31



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


a $2.9 million increase in other revenues.

dressbarn net sales performance primarily reflects:

a decrease of $45.5 million, or 5%, in comparable sales during Fiscal 2016;
incremental revenues of $16.5 million due to the inclusion of the 53rd week in Fiscal 2016;
a $0.9 million decrease in non-comparable stores sales, as the positive effect of 15 new store openings was more than offset by 30 store closings in Fiscal 2016; and
a $0.4 million decrease in other revenues.

Catherines net sales performance primarily reflects:
 
an decrease of $14.2 million, or 4%, in comparable sales during Fiscal 2016;
incremental revenues of $4.8 million due to the inclusion of the 53rd week in Fiscal 2016;
a $3.8 million decrease in non-comparable stores sales, caused by 4 net store closures during Fiscal 2016; and
a $0.5 million increase in other revenues.

Gross Margin, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by 60 basis points to 56.2% in Fiscal 2016 from 55.6% in Fiscal 2015. Gross margin was negatively impacted in Fiscal 2016 by approximately $130 million of non-cash expenses for purchase accounting adjustments, primarily related to the amortization of the purchase accounting write-up of ANN's inventory to fair market value. The gross margin rate for the legacy ascena brands increased by 290 basis points from 55.6% to 58.5% primarily due to the less promotional selling model 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 ("BD&O") Expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
 
BD&O expenses increased by $429.6 million, or 50.1%, to $1,286.5 million in Fiscal 2016 from $856.9 million in Fiscal 2015. BD&O expenses as a percentage of net sales increased by 60 basis points to 18.4% in Fiscal 2016 from 17.8% in Fiscal 2015. The increase in BD&O expenses was primarily attributable to the addition of $423.4 million related to ANN. The increase of $6.2 million from the legacy ascena brands was primarily due to increases in buying-related costs resulting from the expansion of merchandising and design functions, offset in part by synergy savings resulting from the supply chain integration of our ecommerce distribution facilities into one distribution center in Greencastle, Indiana that was completed in the third quarter of Fiscal 2015.
 
Selling, General and Administrative (“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 BD&O expenses. 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 $621.4 million, or 41.7%, to $2.112 billion in Fiscal 2016 from $1.491 billion in Fiscal 2015. SG&A expenses as a percentage of net sales decreased by 80 basis points to 30.2% in Fiscal 2016 from 31.0% in Fiscal 2015. The increase in SG&A expenses was due to the addition of $634.1 million related to ANN. The decrease of $12.7 million from the legacy ascena brands was primarily due to the establishment of a legal reserve in Fiscal 2015 of approximately $51 million in connection with the Justice pricing lawsuits in Fiscal 2015 and lower store-related expenses mainly at Justice, offset in part by incremental marketing investments mainly at Lane Bryant and maurices as well as general administrative increases.
 
Impairment of Goodwill represents the impairment loss recognized during Fiscal 2015 to write down the carrying value of Lane Bryant's goodwill to its implied fair value, as more fully described in Note 6 to the accompanying consolidated financial statements.


32



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


Impairment of Intangible Assets represents the impairment loss recognized to write down the carrying value of the Lane Bryant trade name to its implied fair value during Fiscal 2015, as more fully described in Note 6 to the accompanying consolidated financial statements.

Depreciation and Amortization Expense increased by $140.5 million, or 64.4%, to $358.7 million in Fiscal 2016 from $218.2 million in Fiscal 2015, with $128.0 million due to the addition of ANN. The remaining increase of $12.5 million from the legacy ascena brands primarily resulted from higher depreciation of Company-owned information technology assets placed into service during Fiscal 2015 offset in part by accelerated depreciation of $5.9 million for the store assets related to Brothers, which was completed in Fiscal 2015.

Operating Income (Loss). Operating results increased by $328.7 million, to an operating income of $93.8 million in Fiscal 2016 from an operating loss of $234.9 million in Fiscal 2015 primarily due to $306.4 million of impairment losses recognized during Fiscal 2015 at Lane Bryant to write down its goodwill and trade name to their respective fair values and the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits recognized during Fiscal 2015, offset in part by a $45.7 million increase in Acquisition and integration expenses in Fiscal 2016. The operating results also reflected operating income of $13.3 million for ANN, which included approximately $165 million of non-cash expenses for purchase accounting adjustments. These results are discussed in more detail on a brand-by-brand basis below.

Operating results for our six business segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 30,
2016
 
July 25,
2015
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating income (loss):
 
 

 
 

 
 

 
 

    ANN
 
$
13.3

 
$

 
13.3

 
NM

    Justice
 
29.0

 
(62.8
)
 
91.8

 
(146.2
)%
    Lane Bryant
 
20.6

 
(308.0
)
 
328.6

 
(106.7
)%
    maurices
 
105.6

 
125.9

 
(20.3
)
 
(16.1
)%
    dressbarn
 
(13.6
)
 
10.7

 
(24.3
)
 
(227.1
)%
    Catherines
 
16.3

 
31.0

 
(14.7
)
 
(47.4
)%
Unallocated acquisition and integration expenses
 
(77.4
)
 
(31.7
)
 
(45.7
)
 
144.2
 %
Total operating income (loss)
 
$
93.8

 
$
(234.9
)
 
$
328.7

 
(139.9
)%
_______
(NM) Not meaningful.

ANN operating income of $13.3 million is for the post-acquisition period from August 22, 2015 to July 30, 2016. The operating results for Fiscal 2016 were impacted by approximately $165 million of non-cash purchase accounting adjustments.
Justice operating results improved by $91.8 million. The operating results reflect a significant reduction in promotional activity, supported by execution of the new Justice strategy, which is based on a hybrid of everyday low price merchandise, along with full ticket fashion merchandise, supported by focused, category-level promotions. The decrease in sales for Fiscal 2016 was more than offset by an increase of approximately 980 basis points in gross margin rate resulting from an increased mix of full-ticket selling and tighter inventory management. BD&O and SG&A expenses decreased as a result of store closures related to ongoing market optimization and lower variable expenses associated with the decrease in sales volume. SG&A expenses also decreased due to the establishment of a legal reserve in Fiscal 2015 of approximately $51 million in connection with the Justice pricing lawsuits. Depreciation expense increased primarily as a result of higher allocated depreciation of Company-owned information technology assets placed into service during Fiscal 2015.

Lane Bryant operating results improved by $328.6 million primarily as a result of the $306.4 million of impairment losses recognized during Fiscal 2015 to write down the carrying values of the brand's goodwill and trade name to their fair values, as more fully described in Note 6 to the accompanying consolidated financial statements. Before the impact of the impairment charges, operating results improved by $22.2 million mainly as a result of increases in sales and improved gross margin rate related to reduced promotional selling and tighter seasonal inventory management. SG&A expenses increased primarily due to higher

33



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


marketing expenses associated with the current year marketing campaigns, offset in part by the elimination of duplicative corporate overhead as the Company completed its migration to common information technology platforms in the first quarter of Fiscal 2016.
 
maurices operating income decreased by $20.3 million as increases in sales from new store growth and improved gross margin rate were more than offset by negative comparable sales, along with increases in BD&O, SG&A and depreciation expenses. The gross margin rate benefited from an increased internally-sourced product mix resulting in a higher mark-on, offset in part by higher promotional markdowns. BD&O and SG&A expenses were higher due to general administrative increases and strategic investments expected to drive future growth, including new stores and incremental marketing investments. Depreciation expense increased mainly due to higher allocated depreciation of Company-owned information technology assets placed into service during Fiscal 2015.

dressbarn operating results decreased by $24.3 million mainly as an increase in gross margin rate was more than offset by lower sales volume and an increase in SG&A expenses. The increase in gross margin rate was primarily due to a higher mark-on and lower promotional markdowns resulting from tighter inventory management and reduced promotional selling. The increase in SG&A expenses was primarily due to general administrative increases and higher store asset impairment charges resulting from lower-than-expected operating performance of certain retail locations.

Catherines operating income decreased by $14.7 million mainly due to a reduced flow-through of margin dollars on a lower sales volume. Also contributing to the decrease in operating income was an increase in SG&A expenses and an increase in allocated depreciation of Company-owned information technology assets placed into service during Fiscal 2015.

Unallocated Acquisition and Integration Expenses of $77.4 million for Fiscal 2016 primarily represents costs related to the ANN acquisition consisting of $20.8 million of legal, consulting and investment banking-related transaction costs, $17.3 million of integration costs to combine the operations and infrastructures of the ANN business into the Company's and $37.5 million of severance and retention-related expenses. The $31.7 million for Fiscal 2015 related primarily to the Company's supply chain and technology integration, which was substantially completed by the end of Fiscal 2015.
 
Interest Expense increased by $97.3 million to $103.3 million for Fiscal 2016 as a result of the $1.8 billion seven-year, variable-rate term loan obtained to finance the ANN Acquisition on August 21, 2015. Interest expense included the non-cash amortization of $11.3 million related to the original issue discount and debt issuance costs.

Gain on extinguishment of debt. During Fiscal 2016, the Company repurchased $72.0 million of the outstanding principal balance of the Term Loan at an aggregate cost of $68.4 million through open market transactions, resulting in a $0.8 million pre-tax gain, net of the proportional write-off of unamortized original discount and debt issuance costs of $2.8 million.

(Provision) Benefit for Income Taxes represents federal, foreign, state and local income taxes. The provision (benefit) for income taxes increased by $7.4 million, or 194.7%, to a provision of $3.6 million in Fiscal 2016 from a benefit of $3.8 million in Fiscal 2015. In Fiscal 2016, we had a pretax loss of $8.3 million, compared to a pretax loss of $240.6 million for Fiscal 2015. Our effective tax rate was negative 43.4% for Fiscal 2016. The Company recorded a tax provision in Fiscal 2016 despite the net loss for the period primarily due to state and local taxes and certain expenses which are non-deductible for income tax purposes. The 1.6% effective tax rate for Fiscal 2015 is lower than the Company's Federal statutory rate as a result of the goodwill impairment loss for Lane Bryant which was treated as a permanent non-deductible item, offset in part by an approximate $13 million tax benefit related to the retirement agreement for the former President and CEO of Justice whereby previously non-deductible permanent items for income tax purposes in previous fiscal years, became fully deductible in Fiscal 2015.

Net Loss decreased by $224.9 million, or 95.0%, to $11.9 million in Fiscal 2016 from $236.8 million in Fiscal 2015, primarily due to a higher level of operating results as previously discussed, offset in part by an increase in acquisition and integration expenses and interest expense for Fiscal 2016.

Net Loss per Diluted Common Share decreased by $1.40, or 95.9%, to $0.06 per share in Fiscal 2016 from $1.46 per share in Fiscal 2015 primarily as a result of the decrease in net loss, as previously discussed.


34



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


Fiscal 2015 Compared to Fiscal 2014
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 25,
2015
 
July 26,
2014
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
4,802.9

 
$
4,790.6

 
$
12.3

 
0.3
 %
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,133.7
)
 
(2,130.6
)
 
(3.1
)
 
0.1
 %
         Cost of goods sold as % of net sales
 
44.4
 %
 
44.5
%
 
 

 
 

Gross margin
 
2,669.2

 
2,660.0

 
9.2

 
0.3
 %
        Gross margin as % of net sales
 
55.6
 %
 
55.5
%
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(856.9
)
 
(832.3
)
 
(24.6
)
 
3.0
 %
        Buying, distribution and occupancy expenses as % of net sales
 
17.8
 %
 
17.4
%
 
 

 
 

    Selling, general and administrative expenses
 
(1,490.9
)
 
(1,376.3
)
 
(114.6
)
 
8.3
 %
        SG&A expenses as % of net sales
 
31.0
 %
 
28.7
%
 
 

 
 

    Acquisition and integration expenses
 
(31.7
)
 
(34.0
)
 
2.3

 
(6.8
)%
    Impairment of goodwill
 
(261.7
)
 

 
(261.7
)
 
NM

    Impairment of intangible assets
 
(44.7
)
 
(13.0
)
 
(31.7
)
 
243.8
 %
    Depreciation and amortization expense
 
(218.2
)
 
(193.6
)
 
(24.6
)
 
12.7
 %
Total other operating expenses
 
(2,904.1
)
 
(2,449.2
)
 
(454.9
)
 
18.6
 %
Operating (loss) income
 
(234.9
)
 
210.8

 
(445.7
)
 
(211.4
)%
        Operating (loss) income as % of net sales
 
(4.9
)%
 
4.4
%
 
 

 
 

Interest expense
 
(6.0
)
 
(6.5
)
 
0.5

 
(7.7
)%
Interest income and other income (expense), net
 
0.3

 
(0.8
)
 
1.1

 
(137.5
)%
(Loss) income from continuing operations before benefit (provision) for income taxes
 
(240.6
)
 
203.5

 
(444.1
)
 
(218.2
)%
Benefit (provision) for income taxes from continuing operations
 
3.8

 
(65.3
)
 
69.1

 
(105.8
)%
        Effective tax rate (a)
 
1.6
 %
 
32.1
%
 
 

 
 

(Loss) income from continuing operations
 
(236.8
)
 
138.2

 
(375.0
)
 
(271.3
)%
Loss from discontinued operations, net of taxes (b)
 

 
(4.8
)
 
4.8

 
(100.0
)%
Net (loss) income
 
$
(236.8
)
 
$
133.4

 
$
(370.2
)
 
(277.5
)%
 
 
 
 
 
 
 
 
 
Net (loss) income per common share - basic:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
(1.46
)
 
$
0.86

 
$
(2.32
)
 
(269.8
)%
        Discontinued operations
 

 
(0.03
)
 
0.03

 
(100.0
)%
Total net (loss) income per basic common share
 
$
(1.46
)
 
$
0.83

 
$
(2.29
)
 
(275.9
)%
 
 
 
 
 
 
 
 
 
Net (loss) income per common share - diluted:
 
 

 
 

 
 

 
 

        Continuing operations
 
$
(1.46
)
 
$
0.84

 
$
(2.30
)
 
(273.8
)%
        Discontinued operations
 

 
(0.03
)
 
0.03

 
(100.0
)%
Total net (loss) income per diluted common share
 
$
(1.46
)
 
$
0.81

 
$
(2.27
)
 
(280.2
)%
_________

(a) Effective tax rate is calculated by dividing the (benefit) provision for income taxes by the (loss) income from continuing operations before the (benefit) provision for income taxes.
(b) Loss from discontinued operations is presented net of a $3.3 million income tax benefit for the year ended July 26, 2014.
(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 $12.3 million, or 0.3%, to $4.803 billion in Fiscal 2015 from $4.791 billion in Fiscal 2014. On a consolidated basis, for Fiscal 2015 compared to Fiscal 2014, comparable sales decreased by $45.9 million, or 1%, to $4.325 billion from $4.371 billion; non-comparable sales increased by $61.5 million, or 23%, to $327.9 million from $266.4 million; and wholesale, licensing and other revenues decreased by $3.3 million, or 2%, to $150.0 million from $153.3 million.
 
Net sales and comparable store sales data for our five business segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
July 25,
2015
 
July 26,
2014
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

    Justice
 
$
1,276.8

 
$
1,384.3

 
$
(107.5
)
 
(7.8
)%
    Lane Bryant
 
1,095.9

 
1,080.0

 
15.9

 
1.5
 %
    maurices
 
1,060.6

 
971.4

 
89.2

 
9.2
 %
    dressbarn
 
1,023.6

 
1,022.5

 
1.1

 
0.1
 %
    Catherines
 
346.0

 
332.4

 
13.6

 
4.1
 %
Total net sales
 
$
4,802.9

 
$
4,790.6

 
$
12.3

 
0.3
 %
 
 
 
 
 
 
 
 
 
Comparable sales (a)
 
 
 
 

 
 

 
(1
)%
_______
(a) Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in 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). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales generally refer to growth of sales from the Company's ecommerce channel. The Company believes our ecommerce operations are interdependent with our brick-and-mortar store sales and we no longer feel that separate ecommerce and brick-and-mortar sales information is meaningful. Considering our customer cross channel behaviors, we believe that reporting one comparable sales metric is a more meaningful presentation.
 
Justice net sales performance primarily reflects:
 
a decrease of $118.1 million, or 10%, in comparable sales during Fiscal 2015 mainly as a result of decreased store performance which was negatively impacted by reduced promotional activity;
a $16.7 million increase in non-comparable stores sales, as the positive effect of 30 new store openings was offset in part by 49 store closings in Fiscal 2015; and
a $6.1 million decrease in wholesale, licensing operations and other revenues.

Lane Bryant net sales performance primarily reflects:
 
an increase of $19.7 million, or 2%, in comparable sales during Fiscal 2015;
a $2.7 million decrease in non-comparable stores sales, caused by 6 net store closures during Fiscal 2015; and
a $1.1 million decrease in other revenues.

maurices net sales performance primarily reflects:
 
an increase of $49.5 million, or 5%, in comparable sales during Fiscal 2015;
a $40.4 million increase in non-comparable stores sales, primarily driven by an increase related to 29 net new store openings in Fiscal 2015; and
a $0.7 million decrease in other revenues.

dressbarn net sales performance primarily reflects:

a decrease of $12.8 million, or 1%, in comparable sales during Fiscal 2015;
an $11.3 million increase in non-comparable stores sales, caused by 4 net store openings in Fiscal 2015; and

36



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


a $2.6 million increase in other revenues.

Catherines net sales performance primarily reflects:
 
an increase of $15.8 million, or 5%, in comparable sales during Fiscal 2015;
a $4.2 million decrease in non-comparable stores sales, primarily driven by a decrease related to 9 store closings in Fiscal 2015; and
a $2.0 million increase in other revenues.

Gross Margin, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, was essentially flat, as higher margin rates at Lane Bryant, maurices and Catherines were offset by a lower margin rate 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 ("BD&O") Expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
 
BD&O expenses increased by $24.6 million, or 3.0%, to $856.9 million in Fiscal 2015 from $832.3 million in Fiscal 2014. BD&O expenses as a percentage of net sales increased by 40 basis points to 17.8% in Fiscal 2015 from 17.4% in Fiscal 2014. The increase in BD&O expenses, both in dollars and as a percentage of net sales, was primarily due to increases in buying-related costs resulting from the expansion of the merchandising and design functions throughout Fiscal 2014, higher store-occupancy costs, and higher fulfillment expense supporting the double-digit increase in ecommerce sales volume. Store occupancy costs were higher due to new store growth at maurices during the past twelve months, lease renewals, property taxes and other store-related costs. These increases in BD&O expenses were offset in part by synergy savings related to the supply chain integration at Etna, Ohio and Greencastle, Indiana.
 
Selling, General and Administrative (“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 BD&O expenses. 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 $114.6 million, or 8.3%, to $1.491 billion in Fiscal 2015 from $1.376 billion in Fiscal 2014. SG&A expenses as a percentage of net sales increased by 230 basis points to 31.0% in Fiscal 2015 from 28.7% in Fiscal 2014 as the dollar increases described below had a deleveraging effect when combined with the essentially flat sales. The increase in SG&A expenses was partly due to the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits. The remainder of the increase in SG&A expenses in terms of dollars was primarily due to (i) increases in store-related payroll costs and other store expenses resulting from the new store growth, (ii) higher marketing costs related to discrete marketing campaigns, (iii) higher administrative payroll costs, (iv) higher store asset impairment charges resulting from the lower-than-expected operating performance of certain retail locations, primarily at Justice and (v) higher expenses related to the Company's information technology initiatives, including ongoing support for our new merchandising system, point of sale system and ecommerce platforms.
 
Impairment of Goodwill represents the impairment loss recognized during Fiscal 2015 to write down the carrying value of Lane Bryant's goodwill to its implied fair value, as more fully described in Note 6 to the accompanying consolidated financial statements.

Impairment of Intangible Assets represents the impairment loss recognized to write down the carrying value of the Lane Bryant trade name to its implied fair value during Fiscal 2015 and the impairment loss recognized to write off the entire carrying value of maurices' Studio Y trade name during Fiscal 2014, as more fully described in Note 6 to the accompanying consolidated financial statements.

Depreciation and Amortization Expense increased by $24.6 million, or 12.7%, to $218.2 million in Fiscal 2015 from $193.6 million in Fiscal 2014. The increase was due to (i) new store openings during the last twelve months, (ii) our expanded distribution and

37



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


fulfillment centers in Ohio and Indiana being placed into service in the third quarter of Fiscal 2014, (iii) the relocation of our corporate offices to Mahwah, New Jersey in the third quarter of Fiscal 2014 and (iv) accelerated depreciation of $5.9 million for store assets related to the closure of Brothers, which was completed by the end of Fiscal 2015.

Operating (Loss) Income. Operating profit decreased by $445.7 million, to an operating loss of $234.9 million in Fiscal 2015 from operating income of $210.8 million in Fiscal 2014, primarily due to the $306.4 million of impairment losses recognized during Fiscal 2015 to write down the carrying values of Lane Bryant's goodwill and trade name to their respective fair values, the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits and a decrease in revenues and profitability at our Justice brand. These results are discussed in more detail on a brand-by-brand basis below.

Operating results for our five business segments is presented below.
 
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 25,
2015
 
July 26,
2014
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating (loss) income:
 
 

 
 

 
 

 
 

    Justice
 
$
(62.8
)
 
$
99.3

 
$
(162.1
)
 
(163.2
)%
    Lane Bryant
 
(308.0
)
 
(4.3
)
 
(303.7
)
 
7,062.8
 %
    maurices
 
125.9

 
86.0

 
39.9

 
46.4
 %
    dressbarn
 
10.7

 
39.4

 
(28.7
)
 
(72.8
)%
    Catherines
 
31.0

 
24.4

 
6.6

 
27.0
 %
Unallocated acquisition and integration expenses
 
(31.7
)
 
(34.0
)
 
2.3

 
(6.8
)%
Total operating (loss) income
 
$
(234.9
)
 
$
210.8

 
$
(445.7
)
 
(211.4
)%

Justice operating results decreased by $162.1 million as a result of a decrease in sales, a 280 basis point decline in gross margin rate and increases in BD&O, SG&A and depreciation expenses. The decrease in gross margin rate was mainly attributable to aggressive promotional activity resulting from the negative sales trend experienced during Fiscal 2015. BD&O expenses increased largely as a result of higher store occupancy costs and higher fulfillment expense related to the ecommerce sales growth. The increase in SG&A expenses was primarily attributable to the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits (see Note 14 to the accompanying consolidated financial statements) and higher store asset impairment charges resulting from the lower-than-expected operating performance of certain retail locations, offset in part by a decrease in administrative-payroll costs related to incentive compensation. Depreciation expense increased primarily as a result of higher allocated depreciation of Company-owned facilities placed into service during the third quarter of Fiscal 2014 and accelerated depreciation of $5.9 million during the second half of Fiscal 2015 related to the closure of Brothers. In the latter part of Fiscal 2015, Justice began execution of a plan to stabilize and turnaround its business. The plan focused on (i) improving inventory management, (ii) shifting its marketing strategy with the aim to reduce the number of promotional offers and (iii) refining its inventory assortment. 
 
Lane Bryant operating loss increased by $303.7 million primarily as a result of the $306.4 million of impairment losses recognized during Fiscal 2015 to write down the carrying values of the brand's goodwill and trade name to their fair values, as more fully described in Note 6 to the accompanying consolidated financial statements. Before the impact of the impairment charges, the operating loss decreased by $2.7 million as increases in sales and gross margin rate and a decrease in BD&O expenses were offset in part by increases in SG&A and depreciation expenses.
 
maurices operating income increased by $39.9 million as increases in sales and gross margin rate were offset in part by increases in BD&O, SG&A and depreciation expenses. The gross margin rate benefited from lower product costs achieved through sourcing more product internally and a decrease in promotional activity resulting from the strong positive sales trend. The increase in BD&O expenses was mainly due to increases in buying-related costs resulting from the expansion of the merchandising and design functions throughout Fiscal 2014, increases in store occupancy expenses, which resulted largely from new store growth, and higher fulfillment expense supporting the increase in ecommerce sales growth. The increase in SG&A expenses was primarily due to an increase in store-related payroll and other costs resulting from the new store growth, as well as higher marketing costs related to

38



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


increased digital marketing efforts to support the ecommerce growth. These factors were offset in part by synergy savings resulting from the integration of its ecommerce operations into the Company's distribution center in Greencastle, Indiana during the second half of Fiscal 2015. The increase in depreciation expense resulted mainly from new store growth and higher allocated depreciation of Company-owned facilities, which were placed into service during Fiscal 2014.

dressbarn operating income decreased by $28.7 million primarily as a result of increases in BD&O, SG&A and depreciation expenses. BD&O expenses increased due to the expansion of the merchandising and design functions and an increase in store occupancy costs which resulted from higher rent associated with lease renewals, new stores and higher property taxes. The increase in SG&A expenses was primarily due to higher marketing costs associated with its DRESSBAR marketing campaign during the second half of Fiscal 2015. The increase in depreciation expense resulted from higher allocated depreciation of Company-owned facilities, which were placed into service during Fiscal 2014.

Catherines operating income increased by $6.6 million as an increase in sales and gross margin rate and a decrease in BD&O expenses were offset in part by an increase in SG&A expenses. The gross margin rate increased as a result of sourcing more products internally. The decrease in BD&O expenses, both in dollars and as a percentage of net sales, resulted mainly from synergy savings from the supply chain integration. The increase in SG&A expenses was primarily due to higher marketing costs and higher expenses related to the Company's information technology initiatives.

Unallocated Acquisition and Integration Expenses of $31.7 million in Fiscal 2015 and $34.0 million in Fiscal 2014 related mainly to the Company's supply chain and technology integration efforts. During Fiscal 2015 we (i) completed the centralization of all of the legacy brands brick-and-mortar store distribution into one location in Etna, Ohio, (ii) completed the centralization of all of the legacy brands ecommerce fulfillment into one location in Greencastle, Indiana and (iii) principally completed the migration to our common information technology platforms for our legacy brands. The expenses for Fiscal 2015 also included $7.0 million of transaction costs incurred prior to the closing of the ANN Acquisition and represented legal, consulting and investment banking-related costs that were direct, incremental costs of the acquisition.

Interest Expense decreased by $0.5 million, or 7.7%, to $6.0 million for Fiscal 2015 from $6.5 million for Fiscal 2014, primarily as a result of lower average borrowings outstanding and a lower effective interest rate during Fiscal 2015.

(Benefit) Provision for Income Taxes represents federal, foreign, state and local income taxes. The provision for income taxes from continuing operations decreased by $69.1 million, or 105.8%, to a benefit of $3.8 million in Fiscal 2015 from a provision of $65.3 million in Fiscal 2014, primarily as a result of a pretax loss of $240.6 million for Fiscal 2015, compared to a pretax income of $203.5 million for Fiscal 2014. The 1.6% effective tax rate for Fiscal 2015 is lower than the Company's Federal statutory rate as a result of the goodwill impairment loss for Lane Bryant which was treated as a permanent non-deductible item, offset in part by an approximate $13 million tax benefit related to the retirement agreement for the former President and CEO of Justice whereby previously non-deductible permanent items for income tax purposes in previous fiscal years became fully deductible in Fiscal 2015. The 32.1% effective tax rate for Fiscal 2014 is lower than the Company's Federal statutory rate as a result of the Company’s indefinitely reinvested foreign earnings related to our Canadian store expansion.
 
Net (Loss) Income decreased by $370.2 million, or 277.5%, to a net loss of $236.8 million in Fiscal 2015 from net income of $133.4 million in Fiscal 2014, primarily due to a lower level of operating results as previously discussed, offset in part by a decrease in the provision for income taxes for Fiscal 2015.

Net (Loss) Income per Diluted Common Share decreased by $2.27, or 280.2%, to a net loss of $1.46 per share in Fiscal 2015 from net income of $0.81 per share in Fiscal 2014 primarily as a result of the decrease in net income, as previously discussed.



39



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


FINANCIAL CONDITION AND LIQUIDITY
 
Financial Condition
 
 
July 30,
2016
 
July 25,
2015
 
$ Change
 
 
(millions)
 
 
Cash and cash equivalents
 
$
371.8

 
$
240.6

 
$
131.2

Short-term investments (a)
 
1.8

 
13.4

 
(11.6
)
Total debt
 
(1,648.5
)
 
(106.5
)
 
(1,542.0
)
      Net (debt) cash and investments (b)
 
$
(1,274.9
)
 
$
147.5

 
$
(1,422.4
)
Equity
 
$
1,863.3

 
$
1,518.1

 
$
345.2

 ________

(a) 
Short-term investments include restricted cash of $1.8 million as of July 30, 2016 and $13.4 million as of July 25, 2015 which are included within Prepaid expenses and other current assets in the accompanying consolidated financial statements.
(b) 
“Net debt” is defined as total debt less cash and cash equivalents and short-term investments.