Ascena Retail Group CEO, David Jaffe, said the company remains on track with all cost takeout and capability building components of its transformation programme, despite a widening of its net loss and a drop in revenue in the second quarter.
For the three months ended 2 February, the company reported a net loss of US$72m, compared to a net loss of $39m in the year-ago period as an increase in comparable sales was more than offset by the impact of a lower gross margin rate and a lower benefit related to income taxes.
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Gross margin in the period narrowed to 52.2% from 54% last year, caused primarily by Justice, where the company said an “overly aggressive” inventory buy required significantly elevated clearance activity to achieve target carryover inventory levels. The remainder of the rate decline was caused by product acceptance challenges at Lane Bryant, along with increased freight expense resulting from higher direct channel penetration across all brands.
Net sales, meanwhile, were $1.69bn, compared to $1.72bn in the year-ago period, with a 2% increase in comparable sales more than offset by lower non-comparable sales. The decrease in non-comparable sales was caused by the unfavorable impact of the 53rd week in the prior fiscal year, and fewer stores as a result of the company’s ongoing fleet optimisation programme.
In 2016 Ascena announced a restructuring under the “change for growth” programme to focus on key customer segments, improve its time-to-market and reduce working capital, with the changes including a new brand services team to oversee supply chain, sourcing and logistics. It is expected to realise cost savings of up to US$150m by 2019, on top of the $235m savings also expected from its integration of Ann Inc, owner of the Ann Taylor and Loft chains, which it acquired in August 2015.
CEO Jaffe said the company remains on track with all cost takeout and capability building components of the transformation programme and expects to realise $300min run rate savings by this coming July.
However, the third, and most critical component of the programme – growth from the group’s core – proves more problematic.
“We have made progress here over the past three quarters, but February performance was very challenging, and as a result, we are well off our planned trajectory for top-line growth,” Jaffe said
He added: “While we believe the challenging selling environment is the result of macro headwinds impacting our sector, our third quarter outlook represents an unacceptable profit shortfall to the expectations we shared at the beginning of our fiscal year. As a result, we are working to accelerate plans that were already in development to take much more fundamental action to address our cost structure. We are committed to addressing performance at our under-performing brands, and continue to explore opportunities within our portfolio that can allow us to focus capital and management attention on those brands that we believe can deliver sustained growth and profitability by maintaining a differentiated position in the marketplace.”
Susan Anderson, analyst at B Riley, notes the second quarter demonstrated a “mixed performance” across the portfolio with improvements in premium and value fashion, offset by weaker results from kids and the plus segment.
“We remain on the sidelines until we see consistent positive same-store-sales and margin improvement across the broader portfolio. We reiterate our neutral rating and lower our price target from $3 to $2.50,” she added.
