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Edited Transcript of ASNA earnings conference call or presentation 9-Dec-19 9:30pm GMT

Q1 2020 Ascena Retail Group Inc Earnings Call

SUFFERN Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Ascena Retail Group Inc earnings conference call or presentation Monday, December 9, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carrie W. Teffner

Ascena Retail Group, Inc. - Interim Executive Chairman

* Daniel Lamadrid

Ascena Retail Group, Inc. - Executive VP & CFO

* Gary P. Muto

Ascena Retail Group, Inc. - CEO & Director

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Conference Call Participants

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* Jean Fontana

ICR, LLC - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the First Quarter 2020 Ascena Retail Group Earnings Conference Call. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Jean Fontana of ICR. You may begin.

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Jean Fontana, ICR, LLC - MD [2]

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Thank you. Good afternoon, everyone, and welcome to ascena's first quarter fiscal 2020 earnings call. Before we begin, I would like to remind you that certain statements and information made available on today's call may be deemed to constitute forward-looking statements. These forward-looking statements reflect the company's current expectations as of December 9, 2019, and are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially. For factors that could cause actual results to differ from the forward-looking statements discussed on today's call, please see the risks and uncertainties identified under the heading risk factors in ascena's annual and quarterly reports filed with the SEC. The company undertakes no obligation to revise or update any forward-looking statement.

Additionally, today's call and webcast may refer to non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures discussed today is included in our earnings release, a copy of which was filed with the U.S. Securities and Exchange Commission in the current report Form 8-K earlier today.

Please refer to the Investors section of ascenaretail.com for a replay of today's conference call. Note that the company has posted a supplemental slide package to augment information provided on today's call on its IR website and as an attachment to its 8-K released earlier today.

Participating in today's call are Carrie Teffner, Interim Executive Chair; Gary Muto, Chief Executive Officer; and Dan Lamadrid, Chief Financial Officer.

Thank you, and I will now hand the call over to Carrie.

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Carrie W. Teffner, Ascena Retail Group, Inc. - Interim Executive Chairman [3]

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Thank you, Jean, and thank you all for joining us this afternoon. As I mentioned on last quarter's call, I am optimistic about the opportunities for ascena. We have a portfolio of strong brands, 3 of which individually generate revenue of approximately $1 billion or more. Our focus on driving all of our brands, combined with a streamlined back end, will enable us to optimize the growth and profitability potential of ascena.

We remain committed to simplifying this business and focusing on fewer and more meaningful initiatives that will enhance our experience with our brands. During fiscal Q1, we continued to make advances across our strategic initiatives, positioning us for improved performance. This progress enabled us to exceed our fiscal Q1 expectations with an operating income above last year.

Last month, Gary announced the appointment of 2 key executives to his team: Marisa Baldwin as EVP and Chief Human Resources Officer; and Justin MacFarlane as EVP and Chief Customer Officer. Both of these appointments will support the continued execution of our strategy and largely complete Gary's leadership team. I look forward to the contributions that Marisa and Justin will bring.

Our portfolio review continues as we evaluate options to enhance shareholder value. This process has been underway since the spring. And while I would like to provide a time line, it is more important that we run a thorough and complete process before speaking publicly.

As we indicated on the last earnings call, we are considering options to optimize our balance sheet and liquidity from a position of strength. Subsequent to the end of the first quarter, ascena opportunistically repurchased $80 million of term loan debt for $50 million in cash.

Regarding the Dressbarn wind down, progress continued during the quarter. As we've noted before, we have received tremendous support from our landlords, and we remain on track to close all stores by calendar year-end.

Thank you, and I will now turn the call over to Gary.

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Gary P. Muto, Ascena Retail Group, Inc. - CEO & Director [4]

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Thanks, Carrie. For the first quarter, operating income exceeded guidance, resulting from our cost-reduction efforts across the business. Comparable sales and gross margin results were in line with guidance. Importantly, we continued to carefully manage inventory, which was down 5% compared to the end of the first quarter last year. Inventory content was fresh and more relevant heading into holiday.

While we are seeing wins in our business, there's still much work to be done as we execute our strategic initiatives to drive improved performance across our business. Our 3 key priorities remain: driving sustainable growth, improving operating margins and optimizing our capital structure.

First, with respect to delivering sustainable growth, we are putting the customer at the center of everything that we do, by creating a more nimble and flexible organization that enables us to quickly react to our customers' rapidly changing needs, with better products, more effective communication and an exceptional customer service across channels.

Starting with product, we are making progress and leveraging customer insights gained from our advanced data analytics to deliver the right product at the right time as we address their lifestyle needs and continually provide a compelling assortment. Across our brands, we have tightened our test-and-react approach to more quickly respond to our preferences and shopping behaviors. We saw the biggest benefits of these insights in the performance of our Plus business this quarter.

Our communication strategies are designed to grow customer file by retaining existing customers and drawing new customers to our brand. To accomplish this, we are enhancing customer engagement by leveraging our analytics capabilities to segment the customer file and deliver more relevant messages across all media channels for our current and targeted customers.

We are also efficiently utilizing digital channels to prospective new customers. In addition, our loyalty program plays a key role in advancing our personalization efforts as we've taken steps to deepen our understanding of our customer to more effectively engage with her. Our goal is to deliver the right message to the right person at the right time to drive greater brand efficacy and engagement.

We have made the most progress in our Premium segment, where we have seen segmentation drive incremental revenue and profitability, and we are working quickly to expand this capability to Kids and Plus. In terms of a multi-tender loyalty program, this was extended to our Premium, Plus segment this past spring and enrollments are off to a great start.

Our e-commerce business drove strong growth across brands, driven by traffic and conversion in the first quarter. We attribute this to increased traffic-driving marketing initiatives and enhanced digital capabilities. The total company's e-commerce penetration has expanded to 34% as a result of these efforts. We are particularly pleased with the increase in mobile penetration conversion in the first quarter as this is increasingly becoming our preferred shopping method. In addition, we see continued opportunities to expand penetration in our growing online business through our segmentation strategies.

Operating margin improvement is our second key priority. As we move towards better aligning our assortment with customer preferences, we expect to drive higher full-price selling. In addition, our marketing initiatives are shifting to lead with compelling brand stories and product rather than promotional messaging as we improve engagement in full-price selling. That said, we will continue to be responsive to the broader promotional environment to protect our market share. Our promotional and market optimization initiatives, which as of first quarter have been fully rolled out across our portfolio, combined with disciplined inventory management to also support higher merchandise margin.

With respect to operating expense, we continue to work towards driving greater efficiency in our operating structure by rightsizing teams and delivering simplified, standardized processes to drive profitability. Our results over the past 2 quarters are clear evidence that we are making progress on this front.

Our third key priority is to optimize our capital structure to best support our business and growth objectives by prioritizing cash flow and maintaining financial flexibility. Dan will address this further in his remarks.

Turning to our segments. Beginning with Premium. Our Premium business comp declined 1.5% against a strong 8% comp increase in the prior year. This was the result of a 1% comp decline at Ann Taylor and a 1.8% decline at LOFT. Starting with Ann Taylor, which is our Premium brand that caters to the modern working women. She demands versatility for her on-the-go lifestyle, and we have continued to evolve our balance of fashion and key items to extend beyond her 9-to-5 day. Our customer wants a fashionable professional and comfortable wardrobe. We've made great progress in meeting that desire and continue to aggressively evolve our assortment to exceed her expectations. We are pleased with the overall performance despite the difficult compares as we delivered increased product versatility across season, occasion and outfitting choices.

In the first quarter, we increased our mix of fashion and are building on the positive momentum to deliver distinctive assortments that align with the ongoing shift towards more casual workwear. As part of this, we continue to comp our pant business, a key driver of customer loyalty, with new silhouettes. Accessories is another area where we see progress as we continue to enhance the assortment to drive outfitting and versatility. For holiday, our workwear assortment expands with more day and evening choices for her holiday event, showcasing the breadth, versatility and styling of our products.

Turning to LOFT. Our customer is optimistic, playful, inclusive and community-oriented. She enjoys versatility and fashion newness that takes her through her multifaceted life with vibrancy. Early on in the first quarter, the assortment was too serious, lacking newness in fashion tops and too many repeat styles. We have taken steps to adjust our offering with more compelling fashion tops and outfitting options. We are also increasing testing new trends online and will launch online-only limited capital to deliver relevant fashion and newness. While adjustments to the assortment will not be fully complete until spring, we did impact a portion of our assortment, particularly in our dress and knit category, starting in October. For holiday, our assortment will reflect the playful and festive spirit of our customer.

In both our Premium brands, our marketing strategy is focused on retention of existing customers, reengagement of lapsed customers and the acquisition of new customers. As I previously noted, segmentation is the foundation of our enhanced communication initiative with our customer, and it is already driving improvements in e-mail engagement, resulting in incremental sales and margin lift. We are further expanding our segmentation strategies, which represents approximately half of our customer communication at Ann Taylor and more than 1/3 at LOFT in the first quarter. We plan to increase this penetration and build personalization into our strategies to grow our customer file by improving retention and gaining new customers.

For both brands, we are elevating brand messages to drive greater engagement. At Ann Taylor, we are telling our brand story to build affinity and relevance with our customer with campaigns like our recent full social #WeAreBetterTogether. For LOFT, we have focused on our fashion with love campaign that speaks to our live out loud optimist. We are also driving the no one way to celebrate campaign, which enables more versatility and consistent messaging through the season.

Lastly, we are building on our omni-channel capabilities as we continue to enhance our mobile site. We have recently redesigned our mobile homepage to improve navigation and increase engagement, and we are continuing to improve the digital experience to deliver the same level of satisfaction she finds in our stores.

Turning to our Plus segment. We are on a mission to enable our customer to feel her best by creating value through the unique combination of inspiring fashion, flattering fit and ingenious solution. We are undertaking greater product testings to create the best fit and flattering solutions for our customer as we are focused on being her #1 resource in her lifestyle needs.

For first quarter, Plus delivered nearly a 1% comp increase. We are especially pleased with the inflection we saw in Lane Bryant, which signals that our initiatives are gaining traction. This represents the first positive comp in 5 quarters, illustrating that we are moving the product assortment in customer communication in the right direction. Our performance was led by our reengineered and enhanced comp offering, where we have rebalanced the assortment, redeveloped the product around 3 top priorities: fashion, fit and problem solve. We also redefined our pricing pyramid to offer a good, better, best structure and launched our in-store styling service. We have established a product aesthetic with the appropriate balance of fashion across the brand that is resonating with our customer, but there's still more work to be done.

We are implementing our customer-centric panel testing strategy in all major categories as we evolve our assortment, starting with pants. This will be an iterative process, but we have the right formula in place.

Looking ahead, we will maintain the mix of core seasonal and fashion trends, which is garnering a favorable response from our customer. For holiday, we are focused on all aspects of her life, from party to cozy, from work to weekend.

Again, our multi-initiatives are centered around customer retention and acquisition. We have just begun to implement our segmentation strategies in the Plus segment, where we are in the early stages of encouraging customers to shop across multiple categories. From a media perspective, we are focused on 2 main channels: direct mail and digital marketing. In direct mail, we have elevated our message to drive customer engagement as a fashion brand rooted in modern, current trend and timeless looks for her. In digital marketing, we are testing to understand the optimal timing and frequency of digital ads to ensure we capture the next purchase, whether that be through e-commerce or stores. We are also utilizing digital marketing to focus on new and lapsed customers with targeted ads highlighting categories that have a high propensity for customer acquisition. Social media is starting to play a larger role as we increase both our followership and engagement in brand-building activities.

Lastly, our Kids segment. Justice's mission is to essentially connect with tween girls through fashion, fun and community. We are uniquely positioned as the only specialty store that caters to the 6- to 12-year-old age group. Our store also creates a special mother/daughter experience as they tend to shop together.

For the first quarter, comparable sales declined 6% against a 12% increase in the first quarter last year. We saw positive reaction to our apparel assortment. However, traffic trends were disappointing as we fell short of our specialty offering. We identified areas we can leverage within specialty, including jewelry, beauty and toys, which are great categories for new customer acquisition and are quickly addressing the assortment for better representation.

In apparel, we've expanded the assortment to capture several aesthetics and product offerings to address girls across the age range we serve. Our everyday favorite lean more into the younger customer and represent our new value proposition. Our tests have shown that this program is resonating in driving both sales and profitability lift.

We are also seeing new customers drawn to the brand through this offering. We continue to build out Collection X, our more aspirational offering, which captures the high end of the price spectrum, particularly with the athleisure aesthetic. Our marketing initiatives are emphasizing campaigns to leverage product, storytelling and in-store events to drive traffic.

Similar to our Premium and Plus segments, we are amplifying investments in digital marketing for Justice using advanced analytics to develop segmented messaging across paid social and e-mail. We are also levering our loyalty program as we build on personalization strategy in future periods. In terms of our omni-channel capabilities, we recently completed our rollout of buy online, pick up in-store. We know Mom values convenience, and we are enhancing our online presence and capabilities to better meet her needs.

In summary, we continue to employ strategic initiatives across segments. While each are in various stages of evolution, we are encouraged by the progress we are making. We remain confident that the steps we are taking now sets us up to successfully achieve double-digit EBITDA margins and enhanced shareholder value long term.

Now let me turn the call over to Dan to discuss our financial results.

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Daniel Lamadrid, Ascena Retail Group, Inc. - Executive VP & CFO [5]

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Thanks, Gary. Before getting started, let me note that my comments will reference non-GAAP results, would exclude items such as restructuring charges recorded in the quarter. As Jean noted, we have posted a supplemental earnings package on our IR website and attached it to our 8-K to provide reconciliations and additional information on these items.

Turning to our first quarter results. We were pleased to have exceeded our operating income guidance as we continue to execute our cost savings initiatives. As a reminder, our guidance excluded Dressbarn results.

Total revenue from continuing operations for the first quarter was $1.297 billion, a 3.1% decrease as compared to the prior year period. Total company comp sales for the quarter were essentially flat to last year. Excluding Dressbarn, comp sales were down 2%, in line with our guidance. Our comp performance reflects positive trends in our Plus segment as our initiatives gain traction. This was offset by a comp decline in our Kids segment and a modest decline in our Premium segment. Both the Kids and Premium segments were up against strong comp sales performance in the prior year quarter.

Our gross margin was 59.6%, down 30 basis points compared to the same period last year. The gross margin rate was pressured by increased promotions and markdowns at both our Premium and Kids businesses. It was partially offset by higher gross margin rates at Dressbarn and our Plus segment.

Operating expenses improved 9% in the quarter versus last year, excluding restructuring costs, which was better than guidance. The decrease in operating expenses was largely attributable to our cost-reduction initiatives, including lower occupancy and store-related expenses, reduced headcount and nonmerchandise procurement savings. As a result, adjusted operating income for the first quarter of fiscal 2020 was $45 million compared to $9 million in the year ago period and primarily reflects the expense reductions, partially offset by the decline in gross profit. Excluding Dressbarn, adjusted operating income for the quarter was $37 million.

Consistent with our ongoing store optimization strategy, we closed 85 stores during the quarter. This included 72 closures at Dressbarn. There are 544 Dressbarn locations remaining, and the total store count for ascena at quarter end was 3,363.

Turning to Dressbarn. We are very pleased with the progress we're making in the winding down of Dressbarn and are firmly on track with our plan. Our liquidation began on November 1 and is proceeding as expected. We continue to make progress reaching agreements with the majority of our landlords, and we remain on track to close all Dressbarn stores by December 31. Dressbarn delivered comparable sales growth of 10% in the first quarter. The acceleration that began at the time we announced the wind down of the business has continued, with the accelerated sales and margin helping to offset cost associated with the wind down.

Turning to our balance sheet. We ended the quarter with $262 million in cash and equivalents, reflecting our continued strong cash position. And we are maintaining our disciplined approach to managing our inventory levels, which were down 5% this quarter compared to the prior year. As for liquidity, we remain in a healthy position with no borrowings under our revolving credit facility. Together with our cash balance, we ended the quarter with over $675 million in available liquidity.

Capital expenditures for the first quarter were $29 million. As of quarter end, long-term debt stood at $1.370 billion, reflecting the balance of our term loan. As Carrie mentioned previously, subsequent to quarter end, we repurchased $80 million of debt in the open market. Our term loan matures in August 2022, and our next amortization payment of $22.5 million is not due until November 2020. Further, we continue to be in full compliance with all of our covenants and intend to remain so.

Before turning to guidance, with regards to tariffs, as we stated last quarter, we are negotiating with our vendors to share the higher costs, and we are selectively increasing prices where we believe we have flexibility. Our guidance accounts for the expected impact from the tariffs.

Turning to guidance. Note that with the planned wind down of Dressbarn during the second quarter, Dressbarn results are expected to be reported as discontinued operations and are excluded from our guidance.

For the second quarter, we expect net sales of $1.200 billion to $1.225 billion as compared to $1.271 billion in fiscal Q2 2019, reflecting the reduction in store count and a low single-digit decline in comparable sales.

Gross margin rate to be between 51.2% to 51.7% as compared to 51.9% in the second quarter of fiscal 2019. Depreciation and amortization of approximately $64 million and an adjusted operating loss of $40 million to $60 million.

For the full year, we continue to expect CapEx between $80 million to $100 million, down significantly compared to prior years. And as we stated last quarter, cash remains our #1 priority. We continue to make progress in rightsizing our cost structure to better align the scale of our go-forward business. We are well on our way to achieving the $150 million of savings that we previously communicated, the bulk of which we are realizing this fiscal year. Through a combination of achieving these savings goals, rationalizing our CapEx and maintaining disciplined working capital, we are making progress on enhancing our balance sheet.

That concludes our prepared remarks. And with that, I will turn it back to the operator.

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Operator [6]

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(Operator Instructions) We have reached the end of the question-and-answer session. I will now turn the call back over to Gary Muto for any closing remarks.

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Gary P. Muto, Ascena Retail Group, Inc. - CEO & Director [7]

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Thank you, everyone, for calling in, wishing all of you a happy holiday season, and I would especially like to thank our associates for all their support. We look forward to updating you at our next conference call.

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Operator [8]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.