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ASCENA: ODDS OF SURVIVAL IN SPECIALTY RETAIL? In the first quarter of 2017 ten retailers filed for bankruptcy, with nineteen others teetering on a “distressed” list, giving 2017 the dubious distinction of being the worst year for retailing since 2009 when eighteen entities closed shop. Names of shuttered and at-risk stores in 2017 included footwear and apparel retailers BCBG Max Azria, Eastern Outfitters, Wet Seal, Limited Stores, Payless, Bon-Ton, Claire’s Stores, rue21, Gymboree, and Toms Shoes. Other chains such as the department stores Macy’s, J.C. Penney, Sears, and Kmart, and smaller specialty retailers Aeropostale, Abercrombie & Fitch, and Sports Authority were closing stores, consolidating operations, and trying to figure out what to do when top-line growth inevitably slowed. Customers need a reason to shop. Whether it be in a physical location or online, the shopping experience needs to be appealing, not only in quality and assortment of merchandise, but also in customer service and personalization options, including how browsing, ordering, and payment systems are integrated seamlessly across channels. Although analysts expected 2017 to be no worse for apparel retailers than 2016, and even expected single digit growth in some venues, the opinion was that the apparel sector would “struggle to remain a priority spend . . . as younger consumers seek and spend on services and experiences more than ever.” There was a need for innovative concepts in both the shopping experience and back-end operations, and those retailers who didn’t embrace change would suffer: “it will be mission-critical for brands to converge all their channels and touchpoints into single, seamless, branded shopping experiences.” Commenting on the closing of Ralph Lauren’s New York City flagship store, one researcher noted, “at the end of the day, there is no natural law that suggests that an iconic brand, as iconic as his has been, is guaranteed to be successful forever and always.” This comment could also apply to other iconic retailers. Just having a powerful brand strategy might not be enough. There was a paradigm shift under way, and only those with results-oriented operations might be able to survive and thrive. Going into 2017, Ascena Retail Group, Inc. (NASDAQ: ASNA), owners of a well-rounded portfolio of brands providing women’s and girl’s specialty apparel, was trying to digest recent acquisitions and position itself for this challenge. The biggest and most recent news concerned Ascena’s acquisition of ANN INC., iconic specialty retailer of women’s apparel provided under its Ann Taylor, LOFT, and Lou & Grey brands. Since 2014 ANN had seen poor product performance in its core Ann Taylor brand, forcing it to engage in widespread discounting in order to move product. Although this discounting activity was not an unusual strategy employed by retailers facing declining traffic, ANN had other problems. ANN’s missed earning projections, stagnant same-store sales, slow inventory turnover, and significant margin compression had activist investors demanding additional changes. These realities led to the announcement, in August 2015, that ANN INC. had been acquired by Ascena. With the acquisition of ANN, Ascena Retail Group became the largest U.S. specialty retailer focused exclusively on women and girls. Only exceeded in net sales by L Brands, the owner of Victoria’s Secret and Bath & Body Works, and by The Gap, Inc., Ascena offered apparel, shoes, and accessories for women and girls. Ascena operated four focused, branded retail options: the “Premium Fashion” segment with brands Ann Taylor, LOFT, and Lou & Grey; the “Value Fashion” segment, represented by the brands Maurices and Dressbarn; its “Plus Fashion” segment with Lane Bryant and Catherine’s stores; and merchandise for tween girls via the Justice brand, under the “Kids Fashion” segment. Ascena also offered intimate apparel via Cacique and Catherine’s Intimates. The ANN acquisition meant Ascena had expanded its brand profile even further across multiple segments, and would operate over 4,900 stores with annual projected sales of more than $7 billion. Ascena Retail Group acquired ANN INC. in 2015 for $47 per share in an accretive transaction where ANN stockholders received $37.34 in cash and 0.68 of a share of Ascena common stock in exchange for each share of ANN. After the closing, ANN stockholders ended up owning approximately 16 percent of Ascena. As a result of the acquisition, Ascena not only gained a presence in the premium women’s fashion market, but also hoped to realize $150 million in annualized run rate synergies through the integration of ANN’s sourcing, procurement, distribution, and logistics operations. This anticipated synergy was a potential lifeline for ANN, but what might it mean for Ascena? Ascena had had disappointing same-store sales in its previous portfolio for several years, and had boosted overall revenue primarily through acquisitions. Industrywide retail sales projections continued to be on the soft side, and many analysts worried that the increased debt Ascena now carried into 2017 would need positive cash flow in order to provide adequate coverage. Given the uncertainty, analysts wondered if Ascena had pursued a growth strategy at the wrong time, asking, “did Ascena overplay its hand and is ANN’s acquisition a threat for the company?” Ascena Retail Group Background In 1962 there were few wear-to-work dresses and other clothing options for women entering the workforce, so Roslyn Jaffe and her husband Eliot opened the first Dress Barn in Stanford, Connecticut. By 1982 the company had become successful enough to go public as NASDAQ:DBRN and by 1985 they were operating 200 stores through the U.S. Their vision of working women ages 35 to 55 expanded in 1989 with the opening of Dress Barn Woman, targeting plus-size individuals. In the 1990s trends in workplace fashion for women had shifted to a more casual look, and the company began to offer more sportswear, and expanded into shoes, petites, and jewelry. In 2002, Eliot and Roslyn’s son David succeeded Eliot as CEO, while the elder Jaffe remained as chairman. Then, following the diversification trend, in 2005 Dress Barn Inc. acquired Maurices, a clothing chain from Duluth, Minnesota, that catered to women ages 17 to 34 who shopped primarily in the small-town strip malls of mid-America. Maurices was known for having sizing from 0–26 and employing “stylists” who could outfit customers for a reasonable price. In 2009, Dress Barn acquired Justice, the tween brand chain from New Albany, Ohio, that offered reasonably priced clothing and accessories to girls aged 7 to 14. Justice was formerly owned by Tween Brands, originally a subsidiary of The Limited. In 2011 Dress Barn reorganized as Ascena Retail Group and changed its stock symbol to NASDAQ:ASNA. The following year Ascena acquired Charming Shoppes, adding the Land Bryant and Catherine’s plus-size brands to its portfolio. The Cacique line of intimates, sleepwear, and swimwear and Catherine’s Intimates were added later to round out the offerings for full-sized women. The acquisition of ANN with its brands Ann Taylor, LOFT, and Lou & Grey in 2015 meant Ascena had ten brands across four segments, a portfolio meant to serve the many wardrobing needs of women and tween girls, in all different ages, sizes, and demographics. The New Acquisition: ANN Brands Founded in 1954, Ann Taylor had been the traditional wardrobe source for busy, socially upscale women, and the classic basic black dress and woman’s power suit with pearls were Ann Taylor staples. The Ann Taylor client base consisted of fashion-conscious women from age 25 to 55. The overall Ann Taylor concept was designed to appeal to professional women who had limited time to shop and who were attracted to Ann Taylor stores by their total wardrobing strategy, personalized client service, efficient store layouts, and continual flow of new merchandise. ANN had regularly appeared in the Women’s Wear Daily Top 10 list of firms selling dresses, suits, and evening wear and the Top 20 list of publicly traded women’s specialty retailers, and had three branded divisions focused on different segments of its customer base: · Ann Taylor (AT), the company’s original brand, provided sophisticated, versatile, and high-quality updated classics. · Ann Taylor LOFT (LOFT), launched in 1998, was a newer brand concept that appealed to women who had a more relaxed lifestyle and work environment and who appreciated the more casual LOFT style and compelling value. Certain clients of Ann Taylor and LOFT cross-shopped both brands. · Lou & Grey had evolved from the LOFT lounge collection in 2014 as a full lifestyle brand. Incorporating easygoing, texture-rich clothing with a selection of accessories and more, handcrafted by independent U.S. makers, Lou & Grey was for the woman on the go who didn’t want to have to choose between style and comfort. Additional Ascena Portfolio Brands In addition to the Premium Fashion ANN brands Ann Taylor, LOFT, and Lou & Grey, the Ascena portfolio included the following: Total Value Fashion · Dressbarn—over 800 store locations throughout the U.S. with private label and contemporary fashions at great value to women in their mid-30s to mid-50s, including women’s career, special occasion, casual, activewear, accessories, and footwear. · Maurices—up-to-date casual, career/dressy, and athleisure fashion designed to appeal to middle-income females in their 20s and 30s in core and plus sizes who preferred a “hometown retailer.” Over 40 percent of the almost 1,000 stores were in the Midwest, with 37 stores in Canada. Total Plus Fashion · Lane Bryant—with over 770 locations, this was the most widely recognized brand name in plus-size fashion, catering to middle-income, female customers aged 25 to 45 in sizes 12–28 through private labels Lane Bryant, Cacique, and Livi Active. Products included intimate apparel, wear-to-work, casual sportswear, activewear, accessories, select footwear, and social occasion apparel. · Catherine’s—catered to women in U.S. sizes 16W– 34W and 0X–5X. With over 370 stores nationwide, Catherine’s had a competitive advantage with female consumers looking for hard-to-find extended sizes in clothing and intimates. Total Kids Fashion · Justice—offering fashionable apparel to 6 to12-year-old tween girls in an energetic environment. In over 930 locations, products included apparel, activewear, footwear, intimates, accessories, and lifestyle products. The brand was positioned at the mid- to upper-end of pricing. In 2017, with this portfolio, Ascena appeared solidly positioned to serve the specialty apparel needs of women and girls from multiple consumer sectors. However, there were some significant challenges. Apparel Retail Industry Industry Sectors To better appreciate the issues facing Ascena, it’s helpful to understand the apparel retail industry. Several industry publications report data within the clothing sector. In addition to industry associations such as the National Retail Federation (NRF), the Daily News Record (DNR)