Dive Brief:

• After some product and marketing missteps, Ascena Retail Group is likely to continue losing sales this year, but the retailer has the liquidity to buy time for a potential turnaround, Moody's analysts said in a recent report emailed to Retail Dive.
• The analysts, led by Raya Sokolyanska, expect in their base case for comparable sales to decline 2% in fiscal 2019, which would represent a slowdown in declines from past periods. But even in a downside case of a 4% drop in comps, the analysts think Ascena would still make cash from its operations for at least the next 12 to 18 months, thanks to its borrowing capacity and lack of debt maturities in the near term.
• Raya and her team said that merchandising improvements, personalization and loyalty programs, as well as a "seamless omnichannel experience" can help improve the position of Ascena's brands, though "[e]xecution risk remains very high." In their view, Ascena's Lane Bryant, Justice, Loft and Ann Taylor brands are all "better positioned" than Maurices and Catherines. Dressbarn remains in the most precarious position among the retailer's brands, the analysts said.

Dive Insight:

After years of sluggish performance and more recent "catch-up" investments, Ascena "is on a path to developing a strong 'backbone' of retail capabilities," the Moody's team wrote.  

Among those new tools are buy online-pick up in store, order-in-store and ship-from-store, as well as a new merchandising system. Sokolyanska and her team also think Ascena's comps will benefit from its effort to close 14% of its least profitable stores, which currently number nearly 4,700. Ascena said last summer it plans to close 250 locations, or 25% of its stores, by the end of 2019.

But the retailer, with some $1.5 billion in long-term debt on its books, has some hefty challenges to overcome. It has posted a loss for three years running, including a $1 billion loss in fiscal 2017 (which ended in July), and the retailer's top-line sales in 2017 declined by about 5%.

The retailer went into the holiday season in need of "some holiday cheer," as Moody's analysts wrote at the time, but instead it reported in March that top-line sales fell year over year again in the quarter, and comparable sales fell 2% across its units, with comps falling 8% at Ann Taylor and 1% at Loft. In January, Ascena brought in a new chief for Dress Barn after poor performances in the unit.

Bloomberg Gadfly columnist Sarah Halzack wrote in March that the retailer should be put on "death watch" along with other specialty retailers seemingly on the brink. In trying to explain the "inexplicable" reasons Ascena had been left out of the retail failure talk so far, Halzack noted that Ascena hadn't had any mass defections as at the Gap, or major product misfires as at J. Crew.

Data from CreditRiskMonitor, a service that tracks the risk of a company filing for bankruptcy based on several metrics, indicates that Ascena has between a 4% and 9.99% chance of filing for bankruptcy within the next 12 months. Moody's analysts suggest that Ascena has time to turn things around, but in a rapidly evolving and highly competitive retail world, the risk of failure is high. And they note that if comparable sales declines continue, they would weaken the company's earnings, cash flow and liquidity over time.