Dive Brief:
- Ascena Retail Group in recent weeks has tried to buffer its strained balance sheet through buying back a total of $122 million of the principle on a term loan due in 2022, according to an S&P Global release.
- Because the company bought back its own loan at market prices below face value, S&P deemed the purchase as a "selective default" — a technical term indicating the original loan terms were not met. After issuing the technical default rating, S&P raised Ascena's corporate credit rating this week to CCC-, but that is below the CCC rating Ascena had as of last week, before its loan repurchase.
- S&P analysts issued a negative outlook for the company, citing Ascena's continued business struggles, debt load, and the likelihood of debt restructuring ahead. In a press release, Ascena said it has "significant" liquidity at $600 million. "Bankruptcy is not being considered," the company stated.
Dive Insight:
Ascena's move to buy back its own debt was opportunistic — a move to give itself relief from debt payments while it was trading below its issue price (or par). During its most recent reporting period, Ascena bought back $80 million of its term loan at a market price of $49 million, according to a press release.
But that low price is also a signal that investors expect the company to default at some point. (Credit analysts typically considered deals like an equity-for-debt exchange and other transactions to be default, as they come short of the original terms.)
Analyst expectations for a restructuring are based on the financial and competitive challenges Ascena faces. "Our opinion considers the company's unsustainable capital structure, its still significant debt burden following the repurchases, and our expectation for weak performance amid a highly challenging operating environment," S&P analysts Mathew Christy and Helena Song said Monday in an emailed press release.
They added that "the recent coronavirus outbreak in the U.S. will further pressure store traffic and limit conventional refinancing prospects." More, Ascena could have a tough time "turning around its weak operating performance amid an intensively competitive environment," the analysts said.
While the company has reduced its inventory — an important step in taming discounts and protecting margins — and beaten its own estimates on operating income, sales are still declining. In the period ending Feb. 1, comparable sales fell 2% companywide.
By unit, comps at LOFT were down 1%, down 1% at Catherines in the quarter and down 15% at Justice. Comps rose 3% at Ann Taylor, rose 10% at Lane Bryant and were up 7% in Ascena's plus fashion business overall.
Ascena's Q4 performance
| Metric | Q4 | YoY |
|---|---|---|
| Net sales | $1.2 billion | -4.3% |
| Comparable sales | -2% | - |
| Operating loss | -$140.3 million | -120% |
| Gross margin rate | 52.2% | +30 BPS |
| Net loss | -$97.4 million | -36.2% |
Source: Ascena Retail Group press release. Adjustments made for Ascena's fiscal calendar.
In recent months, as it tries to reduce its losses and refocus its business, Ascena finished its out-of-court wind down of its Dressbarn banner and completed the sale of a majority stake in Maurices. Interim executive chair Carrie Teffner told analysts last week the company was not currently in talks around any other deals around its brands, according to a Seeking Alpha transcript.
"As such, we are proceeding with a clear focus on our Premium, Plus and Kids segments by driving brand strategies, which ensure long-term relevance and differentiation, while streamlining our back-end to improve efficiency and profitability," she said.
