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Here's Why Ascena Retail Shares Dropped on Tuesday

Lou Whiteman, The Motley Fool

What happened

Shares of Ascena Retail Group (NASDAQ: ASNA) continued their downward spiral on Tuesday, falling 6.5% by midafternoon following a debt downgrade that presented a bleak outlook for the specialty apparel maker.

So what

Moody's late Monday downgraded Ascena one notch, to B1 from Ba3, due to "ongoing execution challenges and margin pressure." The rating remains toward the upper end of the noninvestment range sometimes referred to as junk.

Women with shopping bags walking together down a street.

Image source: Getty Images.

Shares of Ascena have lost 35% of their value since March 14, when the company -- owner of women's apparel brands including Ann Taylor, Lane Bryant, Justice, and Dress Barn -- reported a quarterly loss and provided a grim outlook for the current quarter.

In the downgrade, Moody's paints the picture of a business without a certain future, saying the company's rating is "constrained by company-specific execution missteps and the broader challenge of achieving material earnings improvement with a portfolio of primarily mature, mid- and value-priced brands amid a highly competitive apparel retail environment."

Now what

The news isn't all bad for Ascena shareholders. Moody's said that Ascena's "conservative financial policies" and good liquidity should allow the company to pay down a portion of its $1.3 billion in total debt over the next 12 to 18 months, saying that its outlook for the company is stable.

Ascena is attempting to address the execution issues, closing 110 underperforming stores in the recently completed quarter and working through an internal overhaul designed to extract $300 million in annual savings by midyear via improved marketing and merchandise planning systems.

Shares of Ascena are down nearly 70% in the last six months. That's only a bargain if management can figure out a way to spark growth in a highly competitive retail environment.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Moody's. The Motley Fool has a disclosure policy.