New Jersey, United States – ascena retail group, inc. reported financial results for its fiscal first quarter ended October 24, 2015. All adjusted results presented as comparable throughout this release include the results of ANN INC. in both the current and prior-year periods for a full 13 week period. Reference should be made to the notes to the accompanying unaudited condensed consolidated financial information for a discussion of the ANN INC. acquisition and the use of Non-GAAP financial measures.
First Quarter GAAP EPS Loss of $0.10; Adjusted EPS Earnings of $0.36
For the first quarter of Fiscal 2016, the Company reported a net loss of $0.10 per diluted share compared to net income of $0.32 per diluted share in the same period of Fiscal 2015. The decrease was primarily due to the effect of purchase accounting adjustments and transaction costs related to the acquisition of ANN INC. which closed during the first quarter of Fiscal 2016. Adjusted earnings for the first quarter of Fiscal 2016 were $0.36 per diluted share compared to $0.33 per diluted share in the first quarter of fiscal 2015.
David Jaffe, President and Chief Executive Officer of ascena retail group, inc., commented, “On the operating front, we were pleased with first quarter earnings, which exceeded our expectations. We saw strong sales performance at maurices and Lane Bryant, and significant gross margin rate recovery at Justice, Ann Taylor and LOFT. We continue to execute well against controllable factors, and believe we have compelling product and the appropriate level and mix of inventory to maximize our holiday opportunity.”
Jaffe further commented, “Specific to the Black Friday / Cyber Monday period, we saw mixed performance across our portfolio. Importantly, we were very pleased with performance at Justice, which significantly exceeded our expectations during this critical peak period, delivering strong positive comp performance despite a reduced level of promotional activity.”
Jaffe concluded, “As we discussed in detail at our investor day last month, the initial phase of our integration of ANN INC. is progressing well, along with each of the synergy work-streams. We are increasingly confident that the Justice turnaround is gaining traction, and we’re excited about the continuing improvement of Lane Bryant fundamentals, along with the sustained strength of maurices performance. While dressbarn had another challenging quarter, we continue to work to build the foundation for future growth.”
Fiscal First Quarter Results
Net sales for the first quarter of Fiscal 2016 increased 40.0% to $1.672 billion, compared to $1.194 billion for the first quarter of last year. The increase was due to the ANN INC. acquisition. Inclusive of ANN INC. for the full thirteen week period, adjusted net sales were $1.794 billion versus $1.841 billion last year. For the legacy ascena brands, on a consolidated basis, comparable sales decreased 3%, to $1.077 billion from $1.116 billion for the first quarter of last year; non-comparable sales increased 8%, to $48.3 million from $44.7 million; and wholesale, licensing and other revenues increased 35%, to $45.4 million from $33.7 million.
The Company’s comparable sales data for the fiscal first quarter is summarized below:
(a) Information related to the ANN segment for the first quarter of Fiscal 2016 is for the post-acquisition period from August 22, 2015 to October 31, 2015.
Gross margin was $896.1 million, or 53.6% of sales for the first quarter of Fiscal 2016, compared to $694.5 million, or 58.2% of first quarter sales last year. The decrease in rate was mainly due to the effect of the ANN INC. acquisition, which included an unfavorable, non-cash purchase accounting adjustment of approximately $104 million for the first quarter of Fiscal 2016 associated with the write-up of inventory to fair market value. Inclusive of ANN INC. for the full thirteen week period and excluding the inventory-related purchase accounting adjustment, gross margin was $1.073 billion, or 59.8% of adjusted net sales compared to $1.050 billion, or 57.0% of adjusted net sales last year. The rate improvement was broad-based, with the largest increase at Justice, which was up over 700 basis points.
Buying, distribution and occupancy (“BD&O”) expenses for the first quarter of Fiscal 2016 were $296.4 million, or 17.7% of sales, compared to $214.4 million, or 18.0% of first quarter sales last year, with approximately $79 million of the increase resulting from the ANN INC. acquisition. Inclusive of ANN INC. for the full thirteen week period, adjusted BD&O expenses were $321.5 million, or 17.9% of adjusted net sales, compared to $320.4 million, or 17.4% of adjusted net sales last year. Expenses were up less than 1% versus last year, with higher buying expense at several brands mostly offset by reduced distribution expense, which improved from 1.3% of adjusted sales in the year-ago period to 1.1%, reflecting legacy ascena supply chain synergies.
Selling, general and administrative (“SG&A”) expenses for the first quarter of Fiscal 2016 were $486.7 million, or 29.1% of sales, compared to $354.5 million, or 29.7% of first quarter sales last year, with approximately $124 million of the increase resulting from the ANN INC. acquisition. The remaining increase of $8 million from our legacy ascena brands was primarily due to higher marketing costs at Lane Bryant and general administrative increases. Inclusive of ANN INC. for the full thirteen week period, SG&A expenses were $526.6 million, or 29.4% of adjusted net sales, compared to $524.3 million, or 28.5% of adjusted net sales last year as SG&A optimization savings at ANN INC. mostly offset expense growth at the legacy ascena brands as noted above.
The Company realized an operating loss for the first quarter of Fiscal 2016 of $12.0 million, or 0.7% of first quarter sales compared to operating income of $66.1 million, or 5.5% of first quarter sales last year. The decrease in operating results consisted of an operating loss of $48.1 million at ANN INC., which included approximately $110 million of non-cash purchase accounting adjustments, primarily due to the inventory-related purchase accounting adjustment, and a $33.5 million increase in Acquisition and integration expenses. Operating income at our legacy ascena brands increased by $3.5 million primarily reflecting increased results at maurices and Lane Bryant, offset in part by a decrease at dressbarn. Inclusive of ANN INC. for the full thirteen week period, operating income for the first quarter of Fiscal 2016 was $142.5 million, or 7.9% of adjusted net sales compared to $127.2 million, or 6.9% of adjusted net sales last year.
The effective tax rate increased to 43.3% for the first quarter of Fiscal 2016 from 17.1% last year, which was well below our statutory rate primarily due to the approximately $13 million income tax benefit related to the retirement agreement for a former Justice executive which was recorded in the first quarter of Fiscal 2015.
The Company incurred a net loss for the first quarter of Fiscal 2016 of $18.1 million compared to generating net income of $53.5 million last year. Inclusive of ANN INC. for the full thirteen week period, adjusted net income for the first quarter of Fiscal 2016 was $71.2 million as compared to $63.9 million last year.
The Company reported a net loss for the first quarter of Fiscal 2016 of $0.10 per diluted share compared to earnings of $0.32 per diluted share last year. On an adjusted basis, first quarter earnings per diluted share were $0.36 versus $0.33 last year.
Fiscal First Quarter Balance Sheet Highlights
The Company ended the first quarter of Fiscal 2016 with cash and cash equivalents of $322.9 million and total debt of $1.887 billion, inclusive of the term loan and the revolving credit facility. The Company ended Fiscal 2015 with $240.6 million of cash and cash equivalents and $116 million of total borrowing under the revolving credit facility.
Total inventory at cost was down 7% versus the year-ago period, inclusive of ANN INC. in both periods. Adjusting for the impact of purchase price accounting, total inventory at cost was down 8% versus the year ago period.
Fiscal 2016 Guidance
As a result of conforming adjustments between historical ANN INC. reporting and ascena reporting, certain expenses historically classified by ANN INC. within cost of goods sold are now classified as buying expenses for all periods presented to conform to ascena’s presentation for similar expenses. As a result, we now expect gross margin rate to be in the range of 56.3% – 56.8% compared to our previous outlook of 55.0% – 55.5%, with a corresponding offset within other operating expenses. There is no change to our EBITDA outlook as a result of this conforming adjustment and there is no change to our full year earnings per share outlook, which remains in the range of $0.75 to $0.80.
While our first quarter earnings performance exceeded our expectations, we are maintaining our view for the Fall season, and we continue to expect approximately equal earnings contributions from the Fall and Spring seasons.
To view the full report click here.
Source: Ascena Retail Group