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Why Shares of Ascena Retail Group Are Surging on Monday

Lou Whiteman, The Motley Fool

What happened

Shares of Ascena Retail Group (NASDAQ: ASNA) jumped more than 15% on Monday morning after the struggling specialty apparel maker said it would sell a majority interest in its Maurices Inc. chain to private equity in a deal valued at about $300 million.

So what

Shares of Ascena have been under pressure in the days since it reported a fiscal second-quarter loss and provided a bleak outlook. The company, best known for women's apparel brands including Ann Taylor, Lane Bryant, Justice, and Dress Barn, attributed its troubles to its value brands, which CEO David Jaffe said are "operating at an unacceptable level of profitability."

Maurices, one of those value brands, will be sold to an affiliate of OpCapita LLP as part of Ascena's broader restructuring plan. The company expects to net about $200 million in cash after expenses from the deal while maintaining a minority interest in the brand, with plans to use the proceeds to pay down existing debt.

Women with shopping bags walking together.

Image source: Getty Images.

Ascena is working through a plan announced in 2016 designed to extract $300 million in annual costs by midyear via improved marketing and merchandise planning systems, and has identified upwards of $150 million in additional opportunities to cut costs. Jaffe, in a statement announcing the Maurices sale, said Ascena is considering other "deliberate actions to generate more profitable growth" from its top brands.

Now what

Ascena shares are enjoying one of their best days of 2019 on the news, but the stock is still down nearly 50% for the year. The sale of Maurices highlights the value of the brands within the portfolio. But for Ascena to really climb higher, management is going to have to show progress in bringing down the company's $1.3 billion in total debt and delivering sustainable growth.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.