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Edited Transcript of ASNA earnings conference call or presentation 3-Oct-19 8:30pm GMT

Q4 2019 Ascena Retail Group Inc Earnings Call

SUFFERN Oct 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Ascena Retail Group Inc earnings conference call or presentation Thursday, October 3, 2019 at 8:30:00pm 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 & CAO

* Gary P. Muto

Ascena Retail Group, Inc. - CEO & Director

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Conference Call Participants

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* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO & Chief Research Officer

* Jenna Loren Giannelli

Goldman Sachs Group Inc., Research Division - Fixed Income Analyst

* 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 Fourth Quarter 2019 Ascena Retail Group Earnings Conference Call. (Operator Instructions) 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 Fourth Quarter Fiscal 2019 Earnings Call.

Before we begin, I'd 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 October 3, 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 statements.

Additionally, today's call 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 the 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. The supplemental package includes detail about certain non-GAAP items, including noncash impairment charges. 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 for this afternoon. We made pivotal changes in the back half of fiscal 2019 to position us to deliver sustainable, profitable growth. We took steps to exit our value business with the divestiture of maurices, and we are extremely pleased with the progress we have made on the wind-down of Dressbarn. We are on track to complete these store closures by calendar year-end.

The exit of our Value segment will enable greater focus on our remaining brand where we see the biggest potential to drive profitability. While the changes we made in the back half of fiscal 2019 have been difficult, they were the right decisions for the long-term health of the business.

Beyond these accomplishments, we were also very pleased to have exceeded our guidance and with the continued progress we made on our transformation plan in the fourth quarter. Gary and Dan will provide additional details in their remarks. Our board and our executive management team continue to assess the portfolio as we remain committed to enhancing shareholder value by returning to sustainable growth, improving our operating margins and optimizing our capital structure.

To that end, the Board of Directors appointed 2 new independent directors, Gary Begeman and Paul Keglevic. We now have 75% of the Board represented by independent members. These new appointments demonstrate the board's ongoing commitment to ensuring ascena drives performance across our objectives in order to deliver value for our shareholders. Gary and Paul both bring strong financial and operational expertise that will be valuable to the company.

The company continues to consider options to optimize its balance sheet and liquidity from a position of strength. We have large iconic brands and a business with significant liquidity. Of the options being considered, to be clear and for the avoidance of doubt, bankruptcy of ascena is not one of the options being evaluated.

I've now been in my role and partnering with Gary for 5 months. As we approach the business at the brand level, I remain 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. As we simplify this business, we can better concentrate our efforts on fewer more meaningful initiatives that enhance for experience with our brands. We are clear about what's important, we know what we need to do to drive value and we are making steady progress.

Before turning it over to Gary, I would like to take a moment to share how pleased we are to have Dan in the CFO role. He is a seasoned finance executive who joined ascena 2 years ago as SVP and Chief Accounting Officer following finance leadership positions at other retailers, including Ralph Lauren and Vitamin Shoppe. Dan has played a critical role in our transformation work and strategic portfolio review. Gary and I look forward to partnering with Dan as we move forward in our transformation.

With that, let me turn it over to Gary to provide more detail on the quarter.

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

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Thanks, Carrie. For the fourth quarter, we exceeded our adjusted operating income guidance with a better-than-expected comp and lower expenses. Importantly, we were successful in getting inventories back in line ahead of the important fall and holiday season. As expected, this resulted in pressure on our gross margin during the quarter but put us in a much better inventory position in terms of the quality and composition.

Now I will share some highlights on our fourth quarter results and our initiatives on each of our segments, and then I will talk about our future direction.

In Premium, for the fourth quarter, comp sales grew 1% led by LOFT on top of a 5% increase last year. While promotional activity impacted profitability for the quarter, we successfully cleared excess inventory and are well positioned for the fall season.

We know that we have strong brand recognition at both LOFT and Ann Taylor. We also know that our customer wants versatility across seasons, occasions and outfitting choices so that she can get the most out of her wardrobe. For Ann Taylor specifically, we are shifting the perception of our brand away from wear-to-work towards more wearing occasions relevant to her lifestyle.

We are pleased to see the work we are doing to provide versatility in our assortment is being well received. We believe this shift in our merchandising strategy, combined with our flexibility to keep pace with her changing desires, positions us to deepen our customer loyalty with existing customers, reengage lapsed customers and attract new customers to the brand.

In Kids, comparable sales decreased 5% for the quarter, following an increase of 15% in Q4 last year. Similar to Premium, promotional activity was higher as we manage through excess inventory, and we ended the quarter with a clean and fresh assortment.

At Justice, we are looking to positively empower and help our customer build confidence at a young age. We need to appeal to both our girl and her mom. Our mission is to inspire every girl every day. While we can attract her attention with non-apparel themed products, we know that our apparel needs to resonate with her for us to succeed long term.

Justice caters to ages 6 to 12 and there are several aesthetics and product offerings that need to be represented within this age range. Everyday favorites leans to a younger customer and represents a new value proposition for her. We also offer assortments that have a more aspirational aesthetic and capture the higher end of the price spectrum. In the middle of the pyramid, we maintain a balance for all ages.

From a product perspective, based on customer insight, we are beginning to move away from sparkle. In general, the overall trend is now more toned down and we're responding to that shift. Sparkle will continue to play a role within the assortment, it will just be gone in a more subtle way. The shift in product assortment began with our fall deliveries, and we are seeing a positive initial response.

Overall, Justice has a strong market position with the tween age segment. We will continue to leverage our insights to more fully capitalize on our market position, and we look to effectively engage her and keep her excited in coming back.

In Plus, comps for the segment were down 4% compared to a 2% increase in the fourth quarter last year. We were encouraged to see performance improve through the last 6 weeks of the quarter. As we think about how we address our plus-size customer, we know that she values fit, quality and service. She also wants to be on trend in a way that makes her feel her best.

The inclusiveness of the customer experience at each of our Plus brands is an important differentiator. In response, we are enhancing our merchandise assortments to meet her needs with flattering fit and good quality while continuing to provide exceptional service. This focus will help us serve her better and deliver a more sustainable and profitable business.

As we look ahead to fiscal 2020, we are committed to enhancing the profitability of our business. In the past, we placed too much emphasis on building a platform, but we have fundamentally changed our approach with a heightened focus on maximizing the potential of each of our brands. As Carrie stated, we have a strong and diversified portfolio of powerful brands, and they all have meaningful and differentiated presence in the marketplace.

As we shift our attention to each and streamline the back end, we will be in a better position to optimize their growth and profitability. The work we are doing is rooted in the execution of 3 key priorities: driving sustainable growth, improving operating margins and optimizing our capital structure.

First, with respect to driving sustainable growth, we believe we can drive performance across our brands. As a more nimble and flexible organization, we can swiftly respond to our customers' rapidly changing needs by delivering relevant products, communicating more effectively across all our touchpoints and delivering exceptional customer experience across channels.

Beginning with products, our customer insight and advanced analytics capabilities are yielding valuable insight into each of our brands. We are leveraging this data to inform our product decision as well as our segmentation strategy. These insights enable us to provide her with more relevant and compelling product assortments that meet her personal lifestyle needs.

Our communication efforts will also be led by our analytics capabilities as we begin to segment our customer file and deepen our relationship with existing customers and target new customers through more relevant messaging across all media channels. We are in the early stages of our personalization efforts, and we see significant opportunity to engage with her in a more meaningful way as we implement these strategies.

Exceptional customer experience is an important way in which we can continue to drive greater loyalty across brand. We are capitalizing on omnichannel capabilities to engage her with our brands how, where and when she wants. We want to serve her through multiple points of contact and create a seamless shopping experience across channels. We see an opportunity to expand our reach and increase our penetration in our growing online business by offering convenience and accessibility as well as showcasing our product offerings in the best way.

Similar to the way we communicate with her, we also want to personalize our shopping experience across channels. Our loyalty programs play an important role in our personalization strategy. We extended our multi-tender customer loyalty program through our Premium and Plus segments of this brand. In addition to gaining valuable customer data, these programs enable increased customer and brand engagement. Based on deepening understanding of who she is and her preferences, we believe that we can drive higher retention and increased share of wallet across our segments as well as more effectively attract new customers to our brand.

Operating margin improvement is our second key priority. We expect to deliver improved merchandise margin through higher full price selling as well as improved promotional and markdown strategy across brands. We also continue to evaluate our operating structure to ensure that we have the right-sized teams and simplify standardized processes to drive improved profitability.

Third and finally, we continue to focus on optimizing our capital structure to support our business and growth objectives by prioritizing cash flow and maintaining appropriate financial flexibility. Dan will address this further in his remarks.

In summary, we are energized by the progress we've made and the opportunities we see in front of us. That said, there is still a lot of work to be done. We are moving our brands in the right direction as we capitalize on their distinct market leadership position. We believe the steps we are taking now set us up to successfully achieve double-digit EBITDA margin and enhanced shareholder value long term.

Let me now turn the call over to Dan.

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

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Thanks, Gary. I share Carrie and Gary's enthusiasm for the opportunities ahead for ascena and look forward to working together to position the business for long-term profitable growth.

Before getting started, let me note that my comments will reference non-GAAP results, which include Dressbarn but exclude items such as restructuring and noncash impairment charges recorded in the quarter as well as the impact of the 53rd week in the prior year. As Jean noted, we have posted a supplemental earnings package on our IR website and attached it to our 8-K to provide reconciliation and additional information on these items. We would also note that maurices' results have been classified as discontinued operations for the quarter.

Turning to our fourth quarter results. Total revenue from continuing operations for the quarter was $1.454 billion, up slightly from Q4 fiscal 2018. Total company comp sales for the quarter were flat to last year, driven by Dressbarn as well as our Premium segment. Excluding Dressbarn, comp sales were down 2%. The comp reflects heightened promotional activity to move through excess inventory, which positioned us well heading into the first quarter. As a result, gross margin rate from continuing operations came in at 54.3%.

Operating expenses improved 5% in the quarter versus last year, which was better than expectations. Adjusted operating income for the quarter came in at $16 million. This reflects the better-than-anticipated comp performance and lower operating costs as our rightsizing initiatives have begun to take hold. Excluding Dressbarn, adjusted operating income was $13 million.

Consistent with our ongoing store optimization strategy, we closed 75 stores during the quarter. This includes 45 closures at Dressbarn. There are 616 Dressbarn locations remaining and total store count for ascena at year-end was 3,445.

Turning to Dressbarn. As noted earlier, the wind-down is proceeding according to plan. We are pleased that agreements have been reached with the majority of landlords and negotiations with the remaining landlords are ongoing. We expect all Dressbarn stores will be closed by December 31.

Since the wind-down was announced, business has accelerated with Dressbarn delivering comparable sales growth of 12% in the fourth quarter. The accelerated sales margin will help offset costs associated with the wind-down. We appreciate the continued loyalty and dedication of our associates as we go through this process.

Now turning to the sale of maurices. We completed the transaction on May 6 and received a combination of cash proceeds and an equity interest in the go-forward business. Our share of operating results are being reported based on the equity method of accounting. And during the fourth quarter, maurices reported several purchase accounting-related adjustments, which resulted in a net loss for the quarter. Overall, the transition was smooth and service agreements are now in place.

Turning to the balance sheet. We ended the year with $328 million in cash and cash equivalents, reflecting proceeds from the maurices transaction and positive cash flow in the quarter. Note that proceeds from the maurices sale has been reinvested in the business in accordance with the terms of our credit agreement.

As for liquidity, we are in a healthy position with no borrowings under our revolving credit facility. Together with our cash balance, we ended the fiscal year with almost $0.75 billion in available liquidity.

Capital expenditures for the fourth quarter were $32 million resulting in a full year CapEx of $136 million, which is lower than our full year estimate of $150 million to $160 million. Long-term debt stood at $1.372 billion at quarter end reflecting the balance on our term loan. The term loan does not mature until August 2022 and our next amortization payment is due November 2020. Further, we are in full compliance with all of our covenants and intend to remain so.

Before turning to guidance, I'd like to briefly touch on our strategies to mitigate the impact of tariffs. We are negotiating with our vendors to share the higher cost, and we are selectively increasing prices where we believe we have flexibility. In addition, we continue to move a portion of our production out of China where we believe there will not be an impact on quality. We expect these mitigation efforts to ramp up in the first half and become more meaningful starting in Q3.

Turning to guidance, which will continue to exclude Dressbarn. For the first quarter, we expect comparable sales to be down low single digits, net sales of $1.1 billion to $1.125 billion as compared to $1.147 billion in Q1 of fiscal '19, gross margin rate down 50 to 100 basis points as compared to 60.3% in the first quarter of fiscal '19. This includes an estimated 50 basis points of impact relating to tariff increases. Excluding the tariff impact, we expect the gross margin rate to be flat to down 50 basis points. As I stated earlier, we expect our mitigation efforts will begin to have a meaningful impact beginning in Q3 and continue thereafter.

Depreciation and amortization of approximately $61 million and operating income of $15 million to $35 million. This compares to $32 million of income in Q1 fiscal '19. For the full year, we expect CapEx between $80 million to $100 million, down significantly compared to prior years. And we expect to drive sequential improvement in operating margin as our strategic initiatives take hold throughout the year and we lap softer performance in the second half.

Cash remains our #1 priority. We are in the process of rightsizing our cost structure to align with the scale of our go-forward business. We are well on our way to achieving the $150 million of annualized savings that we previously communicated, the bulk of which we expect to realize in fiscal 2020. Through a combination of achieving these annualized savings goals, rationalizing our CapEx and maintaining disciplined working capital management, we expect to strengthen our balance sheet over the course of fiscal '20.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Dana Telsey with Telsey Advisory Group.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [2]

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Two quick questions. As you think about long term, the gross margin opportunity, what do you see is the gross margin opportunity for the business or brand by brand, along with the go-forward strategy for each of the brands? And lastly, on real estate, how do you think of your portfolio, outlet versus full line and what the base really should be over the long term?

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Daniel Lamadrid, Ascena Retail Group, Inc. - Executive VP, CFO & CAO [3]

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Great. Thanks, Dana. This is Dan. I'll take the first question regarding gross margin rate opportunities. And currently, as we've shared in the back half of fiscal '19 with our elevated inventory positions that we had, we knew there was going to be pressure on gross margin rate. That pressure is now behind us.

We think we've started fiscal '20 at a healthy inventory position. However, some headwinds that we have coming into the new year are the impact of new tariffs as well as -- again, as our e-commerce business continues to grow at a healthy rate, e-comm penetration is increasing, also putting pressure on gross margin rate.

We do think as we get further into the year as we're comparing against FY '19's inventory liquidation periods that we'll have opportunity to show improvement in gross margin rate. But when you combine it as well with our cost reduction efforts that we're doing besides gross margin, we are focused on making sure that we can deliver operating margin improvement later in the year.

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

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Dana, it's Gary. And I think with the brands focused on customer and offering relevant products, we believe we continue to improve our margins go forward. Regarding your second question on real estate, we've had continued to optimize our real estate portfolio. We'll continue to do so. It's an ongoing process. We continue to rightsize both the full price fleet as well as the outlet fleet.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO & Chief Research Officer [5]

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Is there a number of stores for each set that you will target for outlet or a full line?

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Gary P. Muto, Ascena Retail Group, Inc. - CEO & Director [6]

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Dana, I think it really depends on the brand, and we look at it on an ongoing basis. The Premium segment probably has the larger penetration in outlet stores to full price. And we continually look to optimize both. And it really -- we take a holistic view. We get the demand at the market level, and then that determines the number of stores that we believe are appropriate based on that demand.

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Carrie W. Teffner, Ascena Retail Group, Inc. - Interim Executive Chairman [7]

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Yes. The only thing I would add to what Gary just said is the fact that it's going to evolve over time. Obviously, as the customer shift continues to move online, making sure we're balancing that mix of where the customer can shop and making it convenient for her is what's important and ensuring we're driving the right level of profitability.

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Operator [8]

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(Operator Instructions) Our next question comes from the line of Jenna Giannelli with Goldman Sachs.

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Jenna Loren Giannelli, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [9]

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Just to start off, I wanted to ask on the cost savings. You said that you're expecting $150 million to be realized this year. Is the 1Q guide a factor in some of these savings? And how should we think about them rolling through? Will they be falling -- rolling through to the bottom line? Or should we think about some of those being offset by other investments and/or inflationary pressures?

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Daniel Lamadrid, Ascena Retail Group, Inc. - Executive VP, CFO & CAO [10]

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Sure, Jenna. So as we look at even Q4 of fiscal '19, we already started seeing the benefit of some of our action, but we have plenty of work to execute to get to that $150 million. We have a clear road map. It will actually -- throughout the year of fiscal '20, it will build. The portion of it that affects the Q1 is reflected on the guide though. And as far as how much of it will drop to the bottom line, anything used to offset partially other headwinds such as inflation and the like, but we are expecting it to help drive again our operating margin improvement as we get throughout the year.

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Jenna Loren Giannelli, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [11]

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All right. And then just -- I wanted to ask on strategic alternatives. How are you thinking about options for some of your other brands and timing? Do you see these as more of potential asset sales like you did with maurices or something maybe more like a wind-down similar to Dressbarn? And I guess on the back of that, how are you thinking about your footprint by year-end?

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Carrie W. Teffner, Ascena Retail Group, Inc. - Interim Executive Chairman [12]

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Yes. So as we think about our portfolio, as we've announced, obviously, we're doing a -- continue our portfolio assessment. If you consider a wind-down option, obviously, I think the key there is really about looking at the profitability of the individual brands. And as we've looked at -- Dressbarn clearly was not driving profitability at the brand level, so that's obviously a key driver to that.

We have healthy brands that generate decent profitability. Our opportunity is really to continue to drive those brands and rightsize the cost structure so we can drive overall profitability for the business. So we'll continue our assessments, and when we have more information, obviously, we would share it at that time.

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Jenna Loren Giannelli, Goldman Sachs Group Inc., Research Division - Fixed Income Analyst [13]

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Great. And then just one final one if I can. As we think about your liquidity, your strong liquidity and the desire to manage leverage and given where the loan is trading, I know it's something you've engaged with in the past. Have you thought potentially about buying back some of the loan in the open market to take advantage of that discount and where it's trading?

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Carrie W. Teffner, Ascena Retail Group, Inc. - Interim Executive Chairman [14]

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Yes. We -- what I would say on that is we're looking at all opportunities available to us to optimize our capital structure and being really thoughtful about that.

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Operator [15]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Gary Muto for closing remarks.

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Gary P. Muto, Ascena Retail Group, Inc. - CEO & Director [16]

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Thank you. I want to thank our stakeholders for their continued support. Our focus is now committed to our brands. We are committed to driving sustainable growth, improving operating margins and optimizing our capital structure. We look forward to updating you on our further progress at our first quarter earnings call. Thank you for joining us today.

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Operator [17]

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This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.