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EX-32.1 - EXHIBIT 32.1 - Ascena Retail Group, Inc.asna10q-q3fy16xexx321.htm
EX-32.2 - EXHIBIT 32.2 - Ascena Retail Group, Inc.asna10q-q3fy16xexx322.htm
EX-31.2 - EXHIBIT 31.2 - Ascena Retail Group, Inc.asna10q-q3fy16xexx312.htm
EX-31.1 - EXHIBIT 31.1 - Ascena Retail Group, Inc.asna10q-q3fy16xexx311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One) 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended April 23, 2016
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 0-11736
 
ASCENA RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
30-0641353
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
933 MacArthur Boulevard, Mahwah, New Jersey
 
07430
(Address of principal executive offices)
 
(Zip Code)
 
(551) 777-6700
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The Registrant had 194,123,040 shares of common stock outstanding as of May 26, 2016.







INDEX
 
PART I.  FINANCIAL INFORMATION (Unaudited)
 
 
 
 
 
 
 
 
Page
Item 1.
Condensed Financial Statements:
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
Condensed Consolidated Statements of Cash Flows
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 





ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
April 23,
2016
 
July 25,
2015
 
(millions, except per share data)
(unaudited)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
246.0

 
$
240.6

Inventories
739.2

 
489.3

Deferred tax assets (Note 3)

 
88.5

Prepaid expenses and other current assets
254.6

 
131.5

Total current assets
1,239.8

 
949.9

Property and equipment, net
1,615.9

 
1,170.0

Goodwill
1,267.9

 
319.7

Other intangible assets, net
1,274.7

 
388.3

Other assets
86.9

 
78.3

Total assets
$
5,485.2

 
$
2,906.2

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 

 
 

Accounts payable
$
378.2

 
$
238.8

Accrued expenses and other current liabilities
397.9

 
403.2

Deferred income
117.9

 
64.1

Income taxes payable

 
11.6

Current portion of long-term debt
36.0

 

Total current liabilities
930.0

 
717.7

Long-term debt, less current portion
1,670.8

 
106.5

Lease-related liabilities
393.1

 
241.4

Deferred income taxes
461.3

 
181.8

Other non-current liabilities
179.1

 
140.7

Total liabilities
3,634.3

 
1,388.1

 
 
 
 
Commitments and contingencies (Note 14)


 


 
 
 
 
Equity:
 

 
 

Common stock, par value $0.01 per share; 194.1 million and 163.2 million shares issued and outstanding
1.9

 
1.6

Additional paid-in capital
1,044.4

 
669.8

Retained earnings
815.0

 
859.3

Accumulated other comprehensive loss
(10.4
)
 
(12.6
)
Total equity
1,850.9

 
1,518.1

Total liabilities and equity
$
5,485.2

 
$
2,906.2








See accompanying notes.

3



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions, except per share data)
(unaudited)
Net sales
$
1,669.3

 
$
1,150.3

 
$
5,183.1

 
$
3,633.1

Cost of goods sold
(652.6
)
 
(475.2
)
 
(2,295.7
)
 
(1,601.5
)
Gross margin
1,016.7

 
675.1

 
2,887.4

 
2,031.6

 
 
 
 
 
 
 
 
Other operating expenses:
 

 
 

 
 

 
 

Buying, distribution and occupancy expenses
(325.3
)
 
(214.2
)
 
(958.2
)
 
(645.0
)
Selling, general and administrative expenses
(535.7
)
 
(365.0
)
 
(1,571.9
)
 
(1,091.2
)
Acquisition and integration expenses
(8.4
)
 
(4.6
)
 
(66.9
)
 
(18.9
)
Depreciation and amortization expense
(89.9
)
 
(56.9
)
 
(261.8
)
 
(159.4
)
Total other operating expenses
(959.3
)
 
(640.7
)
 
(2,858.8
)
 
(1,914.5
)
Operating income
57.4

 
34.4

 
28.6

 
117.1

 
 
 
 
 
 
 
 
Interest expense
(27.4
)
 
(1.5
)
 
(75.7
)
 
(4.8
)
Interest and other income, net
0.9

 
0.1

 
0.7

 
0.2

Gain on extinguishment of debt

 

 
0.8

 

Income (loss) before provision for income taxes
30.9

 
33.0

 
(45.6
)
 
112.5

(Provision) benefit for income taxes
(15.9
)
 
(8.6
)
 
19.9

 
(25.9
)
Net income (loss)
$
15.0

 
$
24.4

 
$
(25.7
)
 
$
86.6

 
 
 
 
 
 
 
 
Net income (loss) per common share:
 

 
 

 
 

 
 

Basic
$
0.08

 
$
0.15

 
$
(0.13
)
 
$
0.53

Diluted
$
0.08

 
$
0.15

 
$
(0.13
)
 
$
0.53

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
194.0

 
162.8

 
191.5

 
162.4

Diluted
195.0

 
165.0

 
191.5

 
164.9


 




















See accompanying notes.

4



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions)
(unaudited)
Net income (loss)
$
15.0

 
$
24.4

 
$
(25.7
)
 
$
86.6

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
5.0

 
1.0

 
2.2

 
(7.3
)
Total other comprehensive income (loss)
5.0

 
1.0

 
2.2

 
(7.3
)
Total comprehensive income (loss)
$
20.0

 
$
25.4

 
$
(23.5
)
 
$
79.3


 
 









































See accompanying notes.

5



ASCENA RETAIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
(millions)
(unaudited)
Cash flows from operating activities:
 
Net (loss) income
$
(25.7
)
 
$
86.6

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Depreciation and amortization expense
261.8

 
159.4

Deferred income tax (benefit) expense
(13.4
)
 
29.7

Deferred rent and other occupancy costs
(51.7
)
 
(28.7
)
Gain on extinguishment of debt
(0.8
)
 

Gain on sale of assets

 
(1.6
)
Amortization of acquisition-related inventory write-up
126.9

 

Stock-based compensation expense
19.3

 
13.6

Impairments of tangible assets
9.7

 
8.7

Non-cash interest expense, net
8.6

 
0.7

Other non-cash income, net
(7.7
)
 
(1.7
)
Changes in operating assets and liabilities:
 

 
 

Inventories
21.5

 
9.6

Accounts payable, accrued liabilities and income tax liabilities
(230.7
)
 
(39.6
)
Deferred income
16.6

 
15.6

Lease-related liabilities
34.3

 
24.1

Other balance sheet changes, net
(5.3
)
 
6.9

Net cash provided by operating activities
163.4

 
283.3

 
 
 
 
Cash flows from investing activities:
 

 
 

Cash paid for the acquisition of ANN INC., net of cash acquired (Note 4)
(1,494.6
)
 

Capital expenditures
(268.8
)
 
(234.9
)
Proceeds from sale of assets

 
8.9

Purchase of investments
(0.9
)
 
(22.0
)
Proceeds from sales and maturities of investments
26.5

 
27.8

Net cash used in investing activities
(1,737.8
)
 
(220.2
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from term loan, net of original issue discount
1,764.0

 

Redemptions and principal repayments of term loan
(66.1
)
 

Proceeds from revolver borrowings
1,371.5

 
763.8

Repayments of revolver borrowings
(1,438.0
)
 
(780.8
)
Payment of deferred financing costs
(42.4
)
 

Purchases and retirements of common stock
(18.6
)
 

Proceeds from stock options exercised and employee stock purchases
9.4

 
5.9

Net cash provided by (used in) financing activities
1,579.8

 
(11.1
)
 
 
 
 
Net increase in cash and cash equivalents
5.4

 
52.0

Cash and cash equivalents at beginning of period
240.6

 
156.9

 
 
 
 
Cash and cash equivalents at end of period
$
246.0

 
$
208.9

 


See accompanying notes.

6



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Description of Business
 
ascena retail group, inc., a Delaware corporation (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls. On August 21, 2015, the Company acquired ANN INC. ("ANN"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands (the "ANN Acquisition"). The Company operates, through its 100% owned subsidiaries, ecommerce operations and approximately 4,900 stores throughout the United States, Canada and Puerto Rico. The Company's pro forma annual revenues for the fiscal year ended July 25, 2015 of approximately $7.3 billion assume that the ANN Acquisition had occurred as of the beginning of the fiscal year (See Note 4). The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.

The Company had the following reportable segments and store counts as of April 23, 2016: ANN 1,020 stores; Justice 938 stores; Lane Bryant 763 stores; maurices 979 stores; dressbarn 822 stores; and Catherines 373 stores.

All of our segments sell fashion merchandise to the women's and girls' apparel market across a wide range of ages, sizes and demographics. Our ANN segment offers modern feminine classics and versatile fashion choices, sold primarily under the Ann Taylor and LOFT brands. Our Justice segment offers fashionable apparel in an environment designed to match the energetic lifestyle of tween girls. Our Lane Bryant segment offers fashionable and sophisticated plus-size apparel, including its exclusive intimates label, Cacique. Our maurices segment offers up-to-date fashion including core and plus-size offerings, with stores concentrated in small markets (approximately 25,000 to 150,000 people). Our dressbarn segment offers moderate-to-better quality career, special occasion and casual fashion for working women. Finally, our Catherines segment offers classic apparel and accessories for wear-to-work and casual lifestyles in a full range of plus sizes, including a focus on extended size ranges.

2. Basis of Presentation and Summary of Significant Accounting Policies
 
Interim Financial Statements
 
These interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and are unaudited. In the opinion of management, however, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the condensed consolidated financial condition, results of operations, comprehensive income (loss) and cash flows of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with the accounting principles generally accepted in the U.S. (“US GAAP”) have been condensed or omitted from this report as is permitted by the SEC’s rules and regulations. However, the Company believes that the disclosures herein are adequate to ensure that the information is fairly presented.
 
The condensed consolidated balance sheet data as of July 25, 2015 is derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended July 25, 2015 (the “Fiscal 2015 10-K”), which should be read in conjunction with these interim financial statements. Reference is made to the Fiscal 2015 10-K for a complete set of financial statements.
 
Fiscal Period
 
The Company utilizes a 52-53 week fiscal year ending on the last Saturday in July. Fiscal year 2016 will end on July 30, 2016 and will be a 53-week period (“Fiscal 2016”). Fiscal year 2015 ended on July 25, 2015 and was a 52-week period (“Fiscal 2015”). The three months ended April 23, 2016 and the three months ended April 25, 2015 are both 13-week periods. The nine months ended April 23, 2016 and the nine months ended April 25, 2015 are both 39-week periods.

The ANN segment utilizes a 52-53 week fiscal year following the National Retail Federation calendar. Accordingly, ANN's results for the post-acquisition period from January 31, 2016 to April 30, 2016 have been included herein for the ascena third-quarter period ended April 23, 2016 and the results for the post-acquisition period from August 22, 2015 to April 30, 2016 have been included herein for the ascena nine-month period ended April 23, 2016. The effect of these one-week reporting period differences are not material to the condensed consolidated financial statements for either the three or nine months ended April 23, 2016. In addition, ANN's Fiscal 2016 will end on July 30, 2016 and will represent a 13-week period for the fourth quarter, compared to a

7



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

14-week period for the Company's other segments. As a result, ANN will be on the same fiscal calendar as the Company's other segments at the end of Fiscal 2016.

Summary of Significant Accounting Policies

There are no changes in the Company’s significant accounting policies as described in Notes 3 and 4 to the Fiscal 2015 10-K other than as a result of the ANN Acquisition, as described below. 

The ANN segment uses the weighted average cost method to value inventory while the Company’s other segments use the retail inventory method. Under the weighted average cost method, inventory is valued at the lower of average cost or market, at the individual item level. Inventory cost is adjusted when the current selling price or future estimated selling price is less than cost. 

Reclassifications

During the third quarter of Fiscal 2016, the Company determined that, for the first six months of Fiscal 2016, an expense for ANN which should have been classified as Buying, distribution and occupancy expenses, had been incorrectly classified as Cost of goods sold. As a result, during the third quarter of Fiscal 2016, the Company reclassified this expense in the Condensed Consolidated Statements of Operations for the nine months ended April 23, 2016 by increasing Buying, distribution and occupancy expenses and reducing Cost of goods sold by $16.5 million ($6.6 million for the first quarter of Fiscal 2016 and $9.9 million for the second quarter of Fiscal 2016). This change had no effect on Operating income or Net income (loss) for any periods.

3. Recently Issued Accounting Standards
 
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, “Improvements to Employee Share-based Payment Accounting” (“ASU 2016-09”). The guidance simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and the classification in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods therein, with early adoption permitted. The Company is currently evaluating the guidance and its impact on the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The guidance requires the lessee to recognize the assets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company is currently evaluating the guidance and its impact on the Company's condensed consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The guidance requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods therein. The guidance can be applied either prospectively or retrospectively, with early application permitted. The Company early adopted this guidance in the second quarter of Fiscal 2016 and, as a result, classified all deferred tax assets and liabilities as non-current as of April 23, 2016. As the Company elected to apply this guidance prospectively, no changes were made to the condensed consolidated balance sheet as of July 25, 2015.

In September 2015, the FASB issued ASU 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under this guidance, the acquirer must recognize measurement-period adjustments in the period in which the amounts are determined, including the effect on earnings of any amounts that would have been recorded in previous periods, as if the accounting had been completed at the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company elected to early adopt this ASU in the first quarter of Fiscal 2016. During the second and third quarters of Fiscal 2016, the Company recorded certain measurement-period adjustments for the ANN Acquisition, as more fully described in Note 4.

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory" ("ASU 2015-11"), which requires inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective prospectively for fiscal years and

8



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

interim periods within those fiscal years, beginning after December 15, 2016. The Company does not expect the adoption of the guidance to have a material impact on its condensed consolidated financial statements.
 
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The recognition and measurement for debt issuance costs are not affected and will continue to be recognized over the life of the debt instrument. The guidance is effective for fiscal years beginning after December 15, 2015 and interim periods therein. The guidance is to be applied retrospectively, with early application permitted. The Company early adopted this guidance in the first quarter of Fiscal 2016 and, as a result, reclassified unamortized debt issuance costs of $9.5 million as of July 25, 2015 from Other assets to a reduction of Long-term debt, less current portion in the accompanying condensed consolidated balance sheets.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which supersedes the revenue recognition requirements in FASB Accounting Standards Codification ("ASC"), "Revenue Recognition (Topic 605)." The guidance requires that an entity recognize revenue in a way that depicts the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. The guidance, which was deferred in July 2015, is effective for annual reporting periods beginning after December 15, 2017, and interim periods therein. The guidance may be applied retrospectively to each period presented or with the cumulative effect recognized as of the initial date of application. Early application is not permitted. The Company is currently evaluating the guidance and its impact on the Company's condensed consolidated financial statements.

4. Acquisition of ANN INC.

On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN for an aggregate purchase price of approximately $2.1 billion. The purchase price consisted of approximately $1.75 billion in cash and the issuance of 31.2 million shares of the Company's common stock valued at approximately $345 million, based on the Company's stock price on the date of the acquisition. The cash portion of the purchase price was funded with borrowings under a $1.8 billion seven-year, variable-rate term loan described in Note 10. The acquisition is intended to diversify our portfolio of brands that serve the needs of women of different ages, sizes and demographics. The Company expensed $21.3 million of transaction costs for the nine months ended April 23, 2016.

The Company accounted for the ANN Acquisition under the acquisition method of accounting for business combinations. Accordingly, the cost to acquire such assets was allocated to the underlying net assets in proportion to estimates of their respective fair values. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, which consists largely of the synergies and economies of scale expected from integrating ANN's operations. Goodwill is non- deductible for income tax purposes.

The allocation of the purchase price to the assets acquired and liabilities assumed, including the amount allocated to goodwill, is subject to change within the measurement period (up to one year from the acquisition date) as additional information that existed at the date of the acquisition related to the values of assets acquired and liabilities assumed is obtained. During the second and third quarters of Fiscal 2016, the Company recorded measurement-period adjustments which were not material to the condensed consolidated financial statements, as more fully described in the table below. The Company is currently in the process of finalizing the allocation of the purchase price to the assets acquired and liabilities assumed, and does not expect any changes to be material.


9



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The assessment of fair values of assets acquired and liabilities assumed as of August 21, 2015, as adjusted through April 23, 2016, is as follows:
 
Preliminary Allocation as of the acquisition date
 
Measurement-Period Adjustments
 
Preliminary Allocation, as adjusted through April 23, 2016
 
(millions)
Cash and cash equivalents
$
257.6

 
$

 
$
257.6

Inventories
398.3

 

 
398.3

Prepaid expenses and other current assets
100.8

 
7.5

 
108.3

Property and equipment
451.0

 
3.1

 
454.1

Goodwill
953.2

 
(5.0
)
 
948.2

Other intangible assets (Note 5):
 
 
 
 


   Trade names
815.0

 

 
815.0

   Customer relationships
51.5

 

 
51.5

   Favorable leases
49.0

 
(10.6
)
 
38.4

Other assets
3.5

 

 
3.5

Total assets acquired
3,079.9

 
(5.0
)
 
3,074.9

 
 
 
 
 
 
Accounts payable
155.6

 

 
155.6

Accrued expenses and other current liabilities (a)
197.0

 

 
197.0

Deferred income
46.0

 

 
46.0

Lease-related liabilities
176.6

 
(1.6
)
 
175.0

Deferred income taxes
374.1

 
(3.4
)
 
370.7

Other non-current liabilities
33.4

 

 
33.4

Total liabilities assumed
982.7

 
(5.0
)
 
977.7

 
 
 
 
 
 
Total net assets acquired
$
2,097.2

 
$

 
$
2,097.2

_______
(a) 
As part of the ANN Acquisition, the Company assumed employee-related obligations of approximately $100 million, including approximately $95 million paid during the nine months ended April 23, 2016. The remaining approximately $5 million is expected to be paid in the first half of Fiscal 2017.

The values assigned to the Ann Taylor and LOFT trade names were derived using the relief-from-royalties method under the income approach. This approach is used to estimate the cost savings that accrue for the owner of an intangible asset who would otherwise have to pay royalties or licensing fees on revenues earned through the use of the asset if they had not owned the rights to use the assets. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value. The Ann Taylor and LOFT trade names are deemed to have indefinite lives and are not amortized but subject to an impairment assessment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired.

The value assigned to customer relationships was derived using the multi-period excess earnings method under the income approach. This approach estimates the excess earnings generated over the lives of the customers that existed as of the acquisition date and discounts such earnings to present value. Customer relationships are amortized over five years based on the pattern of revenue expected to be generated from the use of the asset.

The values of favorable and unfavorable leasehold interests are determined by comparing the present value of the contract rent over the remaining lease term with that of the market rent, taking into account the type, size and location of the property. Favorable leasehold interests are included within Other intangible assets and unfavorable leasehold interests are included within Lease-related liabilities in the table above. ANN's historical lease-related liabilities of similar amounts were eliminated through purchase accounting.

The fair value of ANN's inventory as of the acquisition date was determined by using the estimated selling price, adjusted for the estimated costs of disposal and a reasonable profit margin. Approximately $104 million related to the write-up of inventory to its fair value was amortized to Cost of goods sold in the accompanying condensed consolidated statement of operations in the first

10



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

quarter of Fiscal 2016, and the remaining approximately $23 million of the inventory step-up was amortized in the second quarter of Fiscal 2016 as the remaining acquired inventory was sold.

The results of ANN for the post-acquisition periods from January 31, 2016 to April 30, 2016 and from August 22, 2015 to April 30, 2016 included in the Company’s accompanying condensed consolidated statements of operations for the three and nine months ended April 23, 2016, respectively, consist of the following:
 
For the period from January 31, 2016 to April 30, 2016
 
For the period from August 22, 2015 to April 30, 2016
 
(millions)
Net sales
$
575.1

 
$
1,713.8

Net income (loss)
$
8.3

 
$
(61.7
)

The following pro forma information has been prepared as if the ANN Acquisition and the issuance of stock and debt to finance the acquisition had occurred as of the beginning of Fiscal 2015:
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions, except per share data)
(unaudited)
Pro forma net sales
$
1,669.9

 
$
1,746.9

 
$
5,306.5

 
$
5,521.8

Pro forma net income
$
13.0

 
$
14.7

 
$
56.4

 
$
67.4

Pro forma net income per common share:
 
 
 
 
 
 
 
    Basic
$
0.07

 
$
0.08

 
$
0.29

 
$
0.35

    Diluted
$
0.07

 
$
0.07

 
$
0.29

 
$
0.34


The Fiscal 2015 pro forma amounts reflect the historical operational results for ascena and ANN and the effect of pro forma adjustments of $(23.1) million and $(62.8) million, net of taxes, for the three and nine months ended April 25, 2015, respectively. These adjustments primarily reflect charges for incremental interest expense related to the term loan and incremental depreciation and amortization expense related to the write-up of ANN’s tangible and intangible assets to fair market value that were not reflected in the historical results.
The Fiscal 2016 pro forma amounts reflect the historical operational results for ascena as well as those of ANN for the three-week stub period preceding the close of the transaction on August 21, 2015. The pro forma amounts also reflect the effect of pro forma adjustments of $(2.0) million and $82.1 million, net of taxes, for the three and nine months ended April 23, 2016, respectively. The adjustments for the nine months ended April 23, 2016 primarily reflect transaction costs and the amortization of the fair value adjustments to inventory, which are currently included in the reported results and are excluded from the Fiscal 2016 pro forma amounts due to their non-recurring nature.
The pro forma weighted-average number of common shares outstanding for each period assumes that 31.2 million shares of ascena common stock issued in connection with the acquisition had been issued as of the beginning of Fiscal 2015. The pro forma weighted-average number of diluted shares outstanding for the nine months ended April 23, 2016 includes potentially dilutive shares of 1.3 million, which are excluded from the historical amount due to the net loss reported for the period.
The pro forma financial information is not indicative of the operational results that would have been obtained had the transactions actually occurred as of that date, nor is it necessarily indicative of the Company’s future operational results.


11



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Goodwill and Other Intangible Assets

Goodwill

The following details the changes in goodwill for each reportable segment:
 
 
ANN (a)
 
Justice
 
Lane Bryant (b)
 
maurices
 
dressbarn
 
Catherines
 
Total
 
 
(millions)
Balance at July 25, 2015
 
$

 
$
103.6

 
$
57.4

 
$
130.7

 
$

 
$
28.0

 
$
319.7

Acquisition-related activity (Note 4)
 
948.2

 

 

 

 

 

 
948.2

Balance at April 23, 2016
 
$
948.2

 
$
103.6

 
$
57.4

 
$
130.7

 
$

 
$
28.0

 
$
1,267.9

 

(a) As more fully described in Note 4, the Company recorded measurement-period adjustments of $4.9 million in the second quarter and $0.1 million in the third quarter of Fiscal 2016, resulting in a decrease in goodwill of $5.0 million.
(b) Net of accumulated impairment losses of $261.7 million for the Lane Bryant segment as of July 25, 2015 and April 23, 2016.

Other Intangible Assets

Other intangible assets consist of the following:
 
April 23, 2016
 
July 25, 2015
Description
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Intangible assets subject to amortization:
(millions)
  Proprietary technology
$
5.8

 
$
(5.8
)
 
$

 
$
5.8

 
$
(5.8
)
 
$

  Customer relationships
54.2

 
(15.6
)
 
38.6

 
2.7

 
(2.7
)
 

  Favorable leases
38.4

 
(5.6
)
 
32.8

 

 

 

  Trade names
5.3

 
(5.3
)
 

 
5.3

 
(5.3
)
 

    Total intangible assets subject to amortization
103.7

 
(32.3
)
 
71.4

 
13.8

 
(13.8
)
 

Intangible assets not subject to amortization:


 


 
 

 
 

 
 

 
 

  Brands and trade names
1,192.4

 

 
1,192.4

 
377.4

 

 
377.4

  Franchise rights
10.9

 

 
10.9

 
10.9

 

 
10.9

    Total intangible assets not subject to amortization
1,203.3

 

 
1,203.3

 
388.3

 

 
388.3

       Total intangible assets
$
1,307.0

 
$
(32.3
)
 
$
1,274.7

 
$
402.1

 
$
(13.8
)
 
$
388.3


Amortization

The Company recognized amortization expense of $4.3 million and $12.9 million on finite-lived intangible assets, excluding favorable leases discussed below, for the three and nine months ended April 23, 2016, respectively, and $0.6 million and $2.1 million for the three and nine months ended April 25, 2015, respectively, which is classified within Depreciation and amortization expense in the accompanying condensed consolidated statements of operations. The Company amortizes customer relationships recognized as part of the ANN Acquisition over five years based on the pattern of revenue expected to be generated from the use of the asset.

12



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The expected amortization for each of the next five fiscal years is as follows:
 
Expected Amortization
 
(millions)
2016 (remaining three months)
$
4.3

2017
12.5

2018
9.4

2019
7.0

2020
5.4

Total
$
38.6


Favorable leases are amortized into either Buying, distribution and occupancy expenses or Selling, general and administrative expenses over a weighted-average lease term of approximately four years. The expected amortization for each of the next five fiscal years is as follows: the remainder of Fiscal 2016: $1.8 million; fiscal 2017: $7.2 million; fiscal 2018: $6.8 million; fiscal 2019: $6.3 million; and fiscal 2020 and thereafter: $10.7 million.

6. Inventories
 
Inventories substantially consist of finished goods merchandise. Inventory by segment is set forth below:
 
April 23,
2016
 
July 25,
2015
 
(millions)
ANN
$
235.9

 
$

Justice
88.9

 
136.0

Lane Bryant
151.1

 
126.5

maurices
105.2

 
103.8

dressbarn
116.4

 
93.3

Catherines
41.7

 
29.7

    Total inventories
$
739.2

 
$
489.3

 

7. Property and Equipment

Property and equipment, net, consist of the following:
 
 
April 23,
2016
 
July 25,
2015
 
 
(millions)
Property and Equipment:
 
 

 
 

     Land
 
$
31.9

 
$
30.4

     Buildings and improvements
 
199.7

 
189.3

     Leasehold improvements
 
941.4

 
652.7

     Furniture, fixtures and equipment
 
705.1

 
572.7

     Information technology
 
537.5

 
356.2

     Construction in progress
 
197.7

 
148.6

 
 
2,613.3

 
1,949.9

     Less: accumulated depreciation
 
(997.4
)
 
(779.9
)
     Property and equipment, net
 
$
1,615.9

 
$
1,170.0

 

13



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Long-Lived Assets Impairment
 
The charges below reduced the net carrying value of certain long-lived assets to their estimated fair value, which was determined based on discounted expected cash flows. These impairment charges were primarily related to the lower-than-expected operating performance of certain retail stores. Impairment losses for retail store-related assets and finite-lived intangible assets are included as a component of Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for all periods. There were no finite-lived intangible asset impairment losses recorded for any of the periods presented.

Impairment charges related to long-lived tangible assets by segment are as follows:
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions)
Justice
$
0.2

 
$
0.8

 
$
1.9

 
$
5.5

Lane Bryant
0.4

 

 
1.3

 
0.6

maurices
0.7

 
0.5

 
1.9

 
2.0

dressbarn
1.1

 
0.2

 
4.6

 
0.6

    Total impairment charges
$
2.4

 
$
1.5

 
$
9.7

 
$
8.7


8. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:
 
 
April 23,
2016
 
July 25,
2015
 
 
(millions)
Prepaid expenses (a)
 
$
120.5

 
$
45.6

Accounts and other receivables (b)
 
132.1

 
70.8

Short-term investments
 
1.6

 
13.4

Other current assets
 
0.4

 
1.7

    Total prepaid expenses and other current assets
 
$
254.6

 
$
131.5

_______

(a) Increase is mainly related to the inclusion of ANN and primarily reflects rent-related and other operations-related balances.
(b) Increase is mainly related to higher non-cash income tax receivables as of April 23, 2016 which are expected to reverse by the end of Fiscal 2016.

9. Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consist of the following:
 
 
April 23,
2016
 
July 25,
2015
 
 
(millions)
Accrued salary, wages and related expenses
 
$
177.3

 
$
176.9

Accrued operating expenses (a)
 
151.0

 
202.1

Sales and other taxes payable
 
22.2

 
14.2

Other
 
47.4

 
10.0

   Total accrued expenses and other current liabilities
 
$
397.9

 
$
403.2

_______

(a) Decrease is primarily due to the escrow payment related to the Justice pricing lawsuits, as more fully described in Note 14.


14



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

10. Debt
Debt consists of the following:
April 23,
2016
 
July 25,
2015
 
(millions)
Principal:
 
 
 
Revolving credit facility
$
49.5

 
$
116.0

Term loan
1,730.5

 

 
1,780.0

 
116.0

         Less: unamortized debt issuance costs (a)
(41.7
)
 
(9.5
)
                  unamortized original issue discount (a)
(31.5
)
 

 
1,706.8

 
106.5

    Less: current portion
(36.0
)
 

Total long-term debt
$
1,670.8

 
$
106.5

_______
(a) The original issue discount and debt issuance costs for the term loan are amortized over the life of the term loan using the interest rate method based on an imputed interest rate of approximately 6.3%. The unamortized debt issuance costs in connection with the Amended Revolving Credit Agreement, as defined below, are amortized on a straight-line basis over the life of the Amended Revolving Credit Agreement. Of the $73.2 million of unamortized debt issuance costs and original issue discount as of April 23, 2016, $67.1 million was related to the term loan and $6.1 million was related to the revolving credit facility.

Amended Revolving Credit Agreement

In August 2015, in connection with the ANN Acquisition, the Company and certain of its domestic subsidiaries amended the revolving credit facility. The amendment increased the aggregate revolving commitments from $500 million to $600 million, with an optional increase of up to $200 million and extended the maturity date to August 2020 (the “Amended Revolving Credit Agreement”). There are no mandatory reductions in aggregate revolving commitments throughout the term of the Amended Revolving Credit Agreement. However, borrowing availability under the Amended Revolving Credit Agreement (the "Availability") is limited by the amount of eligible inventory and receivables as defined in the Amended Revolving Credit Agreement.

The Amended Revolving Credit Agreement may be used for the issuance of letters of credit, to fund working capital requirements and capital expenditures and for general corporate purposes. The Amended Revolving Credit Agreement includes a $350 million letter of credit sub-limit, of which $100 million can be used for standby letters of credit, and a $30 million swing loan sub-limit.

Throughout the term of the Amended Revolving Credit Agreement, the Company can elect to borrow either Alternative Base Rate Borrowings ("ABR Borrowings") or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using the LIBOR for such Interest Period plus an applicable margin ranging from 125 basis points to 150 basis points based on the Company’s average availability during the previous fiscal quarter. ABR Borrowings bear interest at a variable rate determined using a base rate equal to the greatest of (i) prime rate, (ii) federal funds rate plus 50 basis points, or (iii) one-month LIBOR plus 100 basis points; plus an applicable margin ranging from 25 basis points to 50 basis points based on the average availability during the previous fiscal quarter. As of April 23, 2016, borrowings under the Amended Revolving Credit Agreement consisted entirely of ABR Borrowings at a rate of 3.75%.

Under the terms of the Amended Revolving Credit Agreement, the unutilized commitment fee ranges from 20 basis points to 25 basis points per annum based on the Company's average utilization during the previous fiscal quarter.

As of April 23, 2016, after taking into account the $49.5 million of revolving debt outstanding and the $27.4 million in outstanding letters of credit, the Company had $521.3 million of its availability under the Amended Revolving Credit Agreement.

Term Loan

Also in connection with the ANN Acquisition, the Company entered into a $1.8 billion variable-rate term loan (the "Term Loan"), which was issued at a 2% discount and provides for an additional term facility of $200 million. The Company is also eligible to borrow an unlimited amount, as long as the Company maintains a minimum senior secured leverage ratio as defined in the Term Loan (the "Senior Secured Leverage Ratio") among other factors.

15



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The Term Loan matures on August 21, 2022, and has mandatory quarterly repayments of $4.5 million in calendar 2016 and $22.5 million thereafter, with a remaining balloon payment of approximately $1.2 billion required at maturity. During the third quarter of Fiscal 2016, the Company made a scheduled principal repayment of $4.5 million. The Company is also required to make mandatory prepayments in connection with certain prepayment events, including (i) commencing with the fiscal year ending July 29, 2017 if the Company has excess cash flow, as defined in the Term Loan, for any fiscal year and the Senior Secured Leverage Ratio for such fiscal year exceeds certain predetermined limits and (ii) from Net Proceeds, as defined in the Term Loan, of asset dispositions and certain casualty events that are greater than $25 million in the aggregate in any fiscal year and not reinvested (or committed to be reinvested) within one year, in each case subject to certain conditions and exceptions. The Company has the right to prepay the Term Loan in any amount and at any time with no prepayment penalties, provided that any prepayment made prior to August 21, 2016 with the proceeds of certain re-pricing events will be subject to a premium equal to 1% of the aggregate principal amount of the Term Loan repaid.

At the time of initial borrowings and renewal periods throughout the term of the Term Loan, the Company may elect to borrow either ABR Borrowings or Eurodollar Borrowings. Eurodollar Borrowings bear interest at a variable rate using LIBOR (subject to a 75 basis points floor) plus an applicable margin of 450 basis points. ABR Borrowings bear interest at a variable rate determined using a base rate (subject to a floor of 175 basis points) equal to the greatest of (i) prime rate, (ii) federal funds rate plus 50 basis points, or (iii) LIBOR plus 100 basis points, plus an applicable margin of 350 basis points. As of April 23, 2016, borrowings under the Term Loan consisted entirely of Eurodollar Borrowings at a rate of 5.25%.

During the second quarter of Fiscal 2016, the Company repurchased $65.0 million of the outstanding principal balance of the Term Loan at an aggregate cost of $61.6 million through open market transactions, resulting in a $0.8 million pre-tax gain, net of the proportional write-off of unamortized original discount and debt issuance costs of $2.6 million. Such net gain has been recorded as Gain on extinguishment of debt in the condensed consolidated statements of operations.

Restrictions under the Term Loan and the Amended Revolving Credit Agreement (collectively the "Borrowing Agreements")
 
Under the Amended Revolving Credit Agreement, the Company is required to maintain a fixed charge coverage ratio, as defined in the Amended Revolving Credit Agreement, of at least 1.00 to 1.00 any time in which the Company is in a covenant period, as defined in the Amended Revolving Credit Agreement (the "Covenant Period"). Such Covenant Period is in effect if Availability is less than the greater of (a) 10% of the Credit Limit (the lesser of total Revolving Commitments and the Borrowing Base) and (b) $45 million for three consecutive business days and ends when Availability is greater than these thresholds for 30 consecutive days. The Covenant Period was not in effect as of April 23, 2016.

The Borrowing Agreements contain customary negative covenants, subject to negotiated exceptions, on (i) liens and guarantees, (ii) investments, (iii) indebtedness, (iv) significant corporate changes including mergers and acquisitions, (v) dispositions, (vi) restricted payments, cash dividends, stock repurchase and certain other restrictive agreements. The Borrowing Agreements also contain customary events of default, such as payment defaults, cross-defaults to certain material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control, or the failure to observe the negative covenants and other covenants related to the operation of the Company’s business, in each case subject to customary grace periods.

The Company's Amended Revolving Credit Agreement allows us to make restricted payments, including dividends and share repurchases subject to the Company satisfying certain conditions set forth in the Company's Amended Revolving Credit Agreement, notably that at the time of and immediately after giving effect to the restricted payment, (i) there is no default or event of default, and (ii) Availability is not less than 20% of the aggregate revolving commitments. The Company's Term Loan allows us to make restricted payments, including dividends and share repurchases up to a predetermined dollar amount. The dollar amount limitation is waived upon the satisfaction of certain conditions under the Term Loan, notably that at the time of and immediately after giving effect to such restricted payment, (i) there is no default or event of default, and (ii) the total leverage ratio, as defined in the Term Loan agreement, is below predetermined limits. Dividends are payable when declared by our Board of Directors.

The Company’s obligations under the Borrowing Agreements are guaranteed by certain of its domestic subsidiaries (the “Subsidiary Guarantors”). As collateral under the Borrowing Agreements and the guarantees thereof, the Company and the Subsidiary Guarantors have granted to the administrative agents for the benefit of the lenders a first priority lien on substantially all of their tangible and intangible assets, including, without limitation, certain domestic inventory and certain material real estate.


16



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Maturities of Debt
The Company's debt matures as follows:
Fiscal Year
 
Amount
 
 
(millions)
2016 (remaining three months)
 
$
4.5

2017
 
54.0

2018
 
90.0

2019
 
90.0

2020
 
90.0

Thereafter
 
1,451.5

Total maturities
 
$
1,780.0


11. Fair Value Measurements
 
Certain financial assets and liabilities are required to be carried at fair value. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes market data or assumptions that it believes market participants would use in pricing the asset or liability, which would maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
 
In evaluating the fair value measurement techniques for recording certain financial assets and liabilities, there is a three-level valuation hierarchy under which financial assets and liabilities are designated. The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the inputs used in valuation as of the measurement date. Valuations based on observable or market-based inputs for identical assets or liabilities (Level 1 measurement) are given the highest level of priority, whereas valuations based on unobservable or internally derived inputs (Level 3 measurement) are given the lowest level of priority. The three levels of the fair value hierarchy are defined as follows:
Level 1
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3
Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of the dates presented, the Company believes that the carrying value of Cash and cash equivalents, Accounts and other receivables and Accounts payable approximates fair value due to the short maturity of these financial instruments.


17



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The carrying amounts and fair values of the Company's Available-for-sale investments and Long-term debt are as follows:
 
As of April 23, 2016
 
 
 
Fair Value Measurements
 
Carrying value
 
Quoted Prices in Active Markets of Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
(millions)
Assets:
 
 
 
 
 
   Available-for-sale investments (a)
$
1.6

 
$
1.6

 
 
 
$
1.6

 
$
1.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
   Term loan (b)
$
1,663.4

 

 
$
1,700.2

   Revolving credit facility (c)
43.4

 
 
 
49.5

 
$
1,706.8

 

 
$
1,749.7


 
As of July 25, 2015
 
 
 
Fair Value Measurements
 
Carrying value
 
Quoted Prices in Active Markets of Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
(millions)
Assets:
 
 
 
 
 
   Available-for-sale investments (a)
$
13.4

 
$
13.4

 
 
 
$
13.4

 
$
13.4

 

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
   Revolving credit facility (c)
$
106.5

 
 
 
$
116.0

 
$
106.5

 
 
 
$
116.0

 

(a) Available-for-sale investments, included within Prepaid expenses and other current assets, consist of restricted cash and are recorded at fair value as of April 23, 2016 and July 25, 2015.
(b) The carrying amount of the Term Loan is net of unamortized original issue discount and debt issuance costs of $67.1 million as of April 23, 2016. The fair value of the Term Loan was determined based on quoted market prices which are considered Level 2 inputs within the fair value hierarchy.
(c) The carrying amount of the revolving credit facility is net of unamortized debt issuance costs of $6.1 million as of April 23, 2016 and $9.5 million as of July 25, 2015.

12. Equity
 
Nine Months Ended
Summary of Changes in Equity:
April 23,
2016
 
April 25,
2015
 
(millions)
  Balance at beginning of period
$
1,518.1

 
$
1,737.7

     Common stock issued in connection with the ANN Acquisition (Note 4)
344.9

 

     Net (loss) income
(25.7
)
 
86.6

     Other comprehensive income (loss)
2.2

 
(7.3
)
     Common stock issued and equity grants made pursuant to stock-based compensation plans
30.0

 
21.0

     Purchases and retirements of common stock
(18.6
)
 

  Balance at end of period
$
1,850.9

 
$
1,838.0



18



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Common Stock Repurchase Program

In December 2015, the Company’s Board of Directors authorized a $200 million share repurchase program (the “2016 Stock Repurchase Program”), which replaced and canceled the share repurchase program originally announced in Fiscal 2010, as amended in Fiscal 2011, which had a remaining availability of $89.9 million. Under the 2016 Stock Repurchase Program, purchases of shares of common stock may be made at the Company’s discretion from time to time, subject to overall business and market conditions. Currently, share repurchases in excess of $100 million are subject to certain restrictions under the terms of the Company's Borrowing Agreements, as more fully described in Note 10. Repurchased shares are retired and treated as authorized but unissued. The excess of repurchase price over the par value of common stock for the repurchased shares is charged entirely to retained earnings.

In the second quarter of Fiscal 2016, 2.1 million shares of common stock were repurchased by the Company at an aggregate cost of $18.6 million under the 2016 Stock Repurchase Program. The remaining availability under the 2016 Stock Repurchase Program was approximately $181.4 million at April 23, 2016.

Net Income (Loss) per Common Share
 
Basic net income (loss) per common share is computed by dividing the net income (loss) applicable to common shares after preferred dividend requirements, if any, by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share adjusts basic net income (loss) per common share for the effects of outstanding stock options, restricted stock units and any other potentially dilutive financial instruments, only in the periods in which such effect is dilutive under the treasury stock method.
 
The weighted-average number of common shares outstanding used to calculate basic net income (loss) per common share is reconciled to those shares used in calculating diluted net income (loss) per common share as follows:
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions)
Basic
194.0

 
162.8

 
191.5

 
162.4

Dilutive effect of stock options and restricted stock units
1.0

 
2.2

 

 
2.5

       Diluted shares
195.0

 
165.0

 
191.5

 
164.9


Options to purchase shares of common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive, and therefore not included in the computation of diluted net income (loss) per common share. In addition, the Company has outstanding restricted stock units that are issuable only upon the achievement of certain service conditions. Potentially dilutive instruments are not included in the computation of net loss per share for the nine months ended April 23, 2016 as the impact of those items in the period is anti-dilutive. For the three months ended April 23, 2016 and April 25, 2015, respectively, 13.7 million and 8.8 million shares of anti-dilutive options were excluded from the diluted share calculations. For the nine months ended April 23, 2016 and April 25, 2015, respectively, 17.6 million and 8.8 million shares of anti-dilutive options were excluded from the diluted share calculations.

13. Stock-based Compensation
 
Omnibus Incentive Plan
 
In November 2015, the Board of Directors approved the amendment and restatement of the Company’s 2010 Stock Incentive Plan, as amended in December 2012 (the "2010 Stock Incentive Plan"). The amended and restated 2010 Stock Incentive Plan (the “2016 Omnibus Incentive Plan”) was approved by the Company’s shareholders and became effective on December 10, 2015. The 2010 Stock Incentive Plan provided for granting of either incentive stock options or non-qualified options to purchase shares of common stock, as well as the award of shares of restricted stock and other stock awards (including restricted stock units). The 2016 Omnibus Incentive Plan generally incorporates the provisions of the 2010 Stock Incentive Plan and includes certain changes to (i) increase the aggregate number of shares that may be issued under the plan by an additional 19.5 million shares to 70.5 million, (ii) add the ability to grant performance-based cash incentive awards, (iii) retain the ability to grant performance-based stock awards for a period of five years, and (iv) extend the term until November 2025.

19



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 
As of April 23, 2016, there were approximately 23.1 million shares remaining under the 2016 Omnibus Incentive Plan available for future grants. The Company issues new shares of common stock when stock option awards are exercised and restricted stock units vest. 

Impact on Results
 
A summary of the total compensation expense and associated income tax benefit recognized related to stock-based compensation arrangements is as follows:
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions)
Compensation expense
$
7.0

 
$
6.4

 
$
19.3

 
$
13.6

Income tax benefit
$
(2.7
)
 
$
(2.4
)
 
$
(7.4
)
 
$
(5.1
)

Stock Options
 
The Company’s weighted-average assumptions used to estimate the fair value of stock options granted during the periods presented were as follows:
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
Expected term (years)
3.1

 
3.9

Expected volatility
35.3
%
 
38.9
%
Risk-free interest rate
1.5
%
 
1.8
%
Expected dividend yield
%
 
%
Weighted-average grant date fair value
$
4.17

 
$
4.97

 
A summary of the stock option activity under all plans during the nine months ended April 23, 2016 is as follows:
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Terms
 
Aggregate
Intrinsic
Value (a)
 
(thousands)
 
 

 
(years)
 
(millions)
Options outstanding – July 25, 2015
14,103.9

 
$
14.13

 
5.1
 
$
17.3

Granted
3,478.3

 
13.02

 
 
 
 
Exercised
(1,298.3
)
 
6.99

 
 
 
 
Canceled/Forfeited
(1,063.3
)
 
15.50

 
 
 
 
Options outstanding – April 23, 2016
15,220.6

 
$
14.39

 
5.1
 
$
3.5

 
 
 
 
 
 
 
 
Options vested and expected to vest at April 23, 2016 (b)
15,037.6

 
$
14.40

 
5.1
 
$
3.2

Options exercisable at April 23, 2016
8,378.0

 
$
14.03

 
4.5
 
$
3.2

_______
(a) 
The intrinsic value is the amount by which the market price at the end of the period of the underlying share of stock exceeds the exercise price of the stock option.
(b) 
The number of options expected to vest takes into consideration estimated expected forfeitures.

As of April 23, 2016, there was $25.9 million of total unrecognized compensation cost related to non-vested options, which is expected to be recognized over a remaining weighted-average vesting period of 2.2 years. The total intrinsic value of options exercised during the nine months ended April 23, 2016 was approximately $7.3 million and during the nine months ended April 25, 2015 was approximately $3.6 million. Of these amounts, $0.2 million was exercised during the three months ended April 23, 2016

20



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and $0.6 million was exercised during the three months ended April 25, 2015. The total grant date fair value of options that vested during the nine months ended April 23, 2016 was approximately $13.5 million and during the nine months ended April 25, 2015 was approximately $14.0 million. Of these amounts, $0.3 million was vested during the three months ended April 23, 2016 and $0.3 million was vested during the three months ended April 25, 2015.

Restricted Equity Awards
 
A summary of restricted equity awards activity during the nine months ended April 23, 2016 is as follows:
 
Service-based
Restricted Equity Awards
 
Performance-based
Restricted Equity Awards
 
Market-based
Restricted Equity Awards
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
Per Share
 
(thousands)
 
 
 
(thousands)
 
 
 
(thousands)
 
 

Nonvested at July 25, 2015
1,101.9

 
$
16.13

 
449.1

 
$
17.20

 
184.8

 
$
16.84

Granted
1,755.2

 
12.80

 

 

 

 

Vested
(371.9
)
 
15.83

 

 

 

 

Cancelled/Forfeited
(110.4
)
 
13.44

 
(449.1
)
 
17.20

 
(184.8
)
 
16.84

Nonvested at April 23, 2016
2,374.8

 
$
13.83

 

 
$

 

 
$

 
As of April 23, 2016, there was $20.0 million of total unrecognized compensation cost related to the service-based Restricted Equity Awards, which is expected to be recognized over a remaining weighted-average vesting period of 3.0 years.

In the first quarter of Fiscal 2016, the Compensation Committee of the Board of Directors (the "Compensation Committee") approved the cancellation of the Company's performance-based and market-based restricted equity awards. As a result, the previously unrecognized expense related to the market-based restricted equity awards was expensed in the first quarter of Fiscal 2016. In addition, the previously accrued expense related to the performance-based restricted equity awards was derecognized during the first quarter of Fiscal 2016. Such amounts were de minimis and have been included within Selling, general and administrative expenses in the accompanying condensed consolidated financial statements.

Cash-Settled Long-Term Incentive Plan Awards ("Cash-Settled LTIP Awards")
 
In the first quarter of Fiscal 2016, the Compensation Committee approved the cancellation of the Company's Cash-Settled LTIP Awards. As a result, an aggregate of approximately 1.3 million awards were canceled and previously accrued liabilities of $1.7 million were derecognized and recorded as a reduction of Selling, general and administrative expenses in the accompanying condensed consolidated financial statements.

14. Commitments and Contingencies

Lease Commitments

The Company’s operating lease obligations represent future minimum lease payments under non-cancelable operating leases as of April 23, 2016. The minimum lease payments do not include common area maintenance ("CAM") charges or real estate taxes, which are also required contractual obligations under the operating leases. In the majority of the Company’s operating leases, CAM charges are not fixed and can fluctuate from year to year.


21



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following is a schedule of the estimated future minimum rentals under non-cancelable operating leases, including ANN, as of April 23, 2016:
Fiscal Years
 
Minimum Operating
Lease Payments (a)(b)
 
 
(millions)
2016 (remaining three months)
 
$
153.0

2017
 
542.3

2018
 
457.3

2019
 
377.3

2020
 
319.8

Subsequent years
 
813.7

Total future minimum rentals
 
$
2,663.4

             

(a) Although such amounts are generally non-cancelable, certain leases are cancelable if specified sales levels are not achieved. All future minimum rentals under such leases have been included in the above table.
(b) Net of sublease income, which was not significant in any period.
 
Employment Agreements

The Company has employment agreements with certain executives in the normal course of business which provide for compensation and certain other benefits. These agreements also provide for severance payments under certain circumstances.

A former Justice executive retired effective January 24, 2015. As a result, previously accrued deferred compensation under the terms of his employment agreement of approximately $35 million became payable and was paid during the first quarter of Fiscal 2016. This amount, which was treated as a non-deductible permanent item for income tax purposes in previous periods, became fully deductible in the first quarter of Fiscal 2015. The related tax benefit of approximately $13 million was treated as a discrete item within the first quarter of Fiscal 2015 and was a significant factor in reducing the Company's effective income tax rate for the three and nine months ended April 25, 2015.

In addition to the deferred compensation above, and also pursuant to the terms of his employment agreement, a previously accrued severance payment of $9 million was paid into a Rabbi Trust in Fiscal 2015. As of July 25, 2015, these funds were recorded as restricted cash within short-term investments included in Prepaid expenses and other current assets with a corresponding liability included in Accrued expenses and other current liabilities. This balance was also paid during the first quarter of Fiscal 2016.

Other Commitments

The Company enters into various cancelable and non-cancelable commitments during the year. Typically, those commitments are for less than a year in duration and are principally focused on the construction of new retail stores and the procurement of inventory. The Company normally does not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier. Preliminary commitments with the Company’s private-label merchandise vendors typically are made five to seven months in advance of planned receipt date. A portion of these merchandise purchase commitments are cancelable up to 30 days prior to the vendor’s scheduled shipment date.
 
In addition, the Company has $27.4 million of outstanding letters of credit as of April 23, 2016.

Legal Matters

General

The Company is, from time to time, involved in routine litigation incidental to the conduct of our business, including litigation instituted by persons injured upon premises under our control; litigation regarding the merchandise that we sell, including our advertising and marketing practices and product and safety concerns; litigation with respect to various employment matters, including wage and hour litigation; litigation with present or former employees; and litigation regarding intellectual property rights.

22



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Although such litigation is routine and incidental to the conduct of our business, as with any business of our size with a significant number of employees and significant merchandise sales, such litigation could result in large monetary awards. However, management believes that, excluding the effect of the Justice pricing lawsuits discussed below, current pending litigation will not have a material adverse effect on our condensed consolidated financial statements.

Justice Pricing Litigation

The Company is a defendant in a number of class action lawsuits that allege that Justice’s promotional practices violated state comparative pricing laws in connection with advertisements promoting a 40% discount. The plaintiffs further allege false advertising, violation of state consumer protection statutes, breach of contract, breach of express warranty, and unfair benefit to Justice. The plaintiffs seek to stop Justice’s allegedly unlawful practice, and obtain damages for Justice’s customers in the named states. They also seek interest and legal fees.

In July 2015, an agreement was reached with the plaintiffs in the Rougvie case to settle the lawsuits on a class basis with all Justice customers who made purchases between January 1, 2012 and February 28, 2015 for approximately $50 million, including payments to members of the class, payment of legal fees and expenses of settlement administration. As a result, the Company established a reserve for approximately $50 million during Fiscal 2015. 

The proposed Settlement Agreement was filed with the United States District Court for the Eastern District of Pennsylvania for preliminary approval on September 24, 2015, and received preliminary approval by the court on October 27, 2015. The Company paid approximately $50 million representing the agreed settlement amount into an escrow account on November 16, 2015. Formal notice of settlement was sent to the class members on December 1, 2015.  The Company continues to believe that the previously accrued amount of approximately $50 million reflects a liability that is both probable and reasonably estimable.
 
The settlement remains subject to considerations of class members’ objections at the final approval hearing scheduled by the Court for May 20, 2016. Once final non-appealable approval is granted, it will resolve all claims in all of the outstanding class actions on behalf of customers who made purchases between January 1, 2012 and February 28, 2015, and any claims for purchases outside that time frame. 

Recently, potential claims related to purchases made in 2010 and 2011 have been raised. The Company believes it has strong defenses to any such claims and is prepared to defend any such claims. In the event that individual class members exclude themselves from the settlement, they would then only be able to pursue individual claims rather than class claims.  If class members who opt to exclude themselves from the settlement pursue individual claims, the Company believes that the liability associated with any of their individual cases would not be material. If the matters described herein do not occur and the pricing lawsuits are not settled, the ultimate resolution of these matters may or may not result in an additional material loss, which cannot be reasonably estimated at this time.

Reference is made to the Company’s Annual Report on Form 10-K for the fiscal year ended July 25, 2015 filed with the SEC on September 16, 2015, which includes a description of the lawsuits comprising the Justice pricing litigation and should be read in conjunction with the foregoing update.

15. Segment Information
 
The Company’s segment reporting structure reflects an approach designed to optimize the operational coordination and resource allocation of its businesses across multiple functional areas including specialty retail, ecommerce and licensing. The six reportable segments described below represent the Company’s activities for which separate financial information is available and utilized on a regular basis by the Company’s executive team to evaluate performance and allocate resources. In identifying reportable segments and disclosure of product offerings, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, the Company reports its operations in six reportable segments as follows: 
ANN segment – consists primarily of the specialty retail, outlet and ecommerce operations of the Ann Taylor and LOFT brands.
Justice segment – consists of the specialty retail, outlet, ecommerce and licensing operations of the Justice brand.
Lane Bryant segment – consists of the specialty retail, outlet and ecommerce operations of the Lane Bryant brand and its Cacique intimates label.

23



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

maurices segment – consists of the specialty retail, outlet and ecommerce operations of the maurices brand.
dressbarn segment – consists of the specialty retail, outlet and ecommerce operations of the dressbarn brand.
Catherines segment – consists of the specialty retail and ecommerce operations of the Catherines brand.

Other than ANN's inventory valuation method and reporting period differences described in Note 2, the accounting policies of the Company’s reporting segments are consistent with those described in the Fiscal 2015 10-K. All intercompany revenues are eliminated in consolidation. Corporate overhead expenses are allocated to the segments based upon specific usage or other reasonable allocation methods.

Net sales, operating income and depreciation and amortization expense for each segment are as follows:
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions)
Net sales:
 

 
 

 
 
 
 
ANN (a)
$
575.1

 
$

 
$
1,713.8

 
$

Justice
228.9

 
263.8

 
861.8

 
1,034.7

Lane Bryant
273.9

 
278.7

 
812.4

 
803.9

maurices
269.4

 
274.9

 
843.7

 
806.6

dressbarn
241.5

 
244.3

 
710.5

 
734.3

Catherines
80.5

 
88.6

 
240.9

 
253.6

Total net sales
$
1,669.3

 
$
1,150.3

 
$
5,183.1

 
$
3,633.1

 
 
 
 
 
 
 
 
Operating income (loss):
 

 
 

 
 

 
 
ANN (a) (b)
$
21.5

 
$

 
$
(32.4
)
 
$

Justice
(8.8
)
 
(17.5
)
 
44.6

 
35.9

Lane Bryant
10.9

 
6.9

 
3.4

 
(11.7
)
maurices
34.3

 
47.4

 
100.8

 
103.5

dressbarn
1.6

 
(6.3
)
 
(31.2
)
 
(13.4
)
Catherines
6.3

 
8.5

 
10.3

 
21.7

Unallocated acquisition and integration expenses
(8.4
)
 
(4.6
)
 
(66.9
)
 
(18.9
)
Total operating income
$
57.4

 
$
34.4

 
$
28.6

 
$
117.1

 
 
 
 
 
 
 
 
Depreciation and amortization expense:
 

 
 

 
 

 
 
ANN (a)
$
33.6

 
$

 
$
94.1

 
$

Justice
17.9

 
19.4

 
52.7

 
49.9

Lane Bryant
10.5

 
12.0

 
31.7

 
35.0

maurices
12.6

 
10.7

 
36.4

 
31.7

dressbarn
13.2

 
12.8

 
40.2

 
37.4

Catherines
2.1

 
2.0

 
6.7

 
5.4

Total depreciation and amortization expense
$
89.9

 
$
56.9

 
$
261.8

 
$
159.4

_______
(a) 
The results of ANN for the post-acquisition periods from January 31, 2016 to April 30, 2016 and from August 22, 2015 to April 30, 2016 are included within the Company's condensed consolidated results of operations for the three and nine months ended April 23, 2016, respectively.
(b) 
The results of ANN for the three and nine months ended April 23, 2016 include approximately $12 million and $153 million, respectively, of purchase accounting adjustments, as discussed in Notes 4 and 5.


24



ASCENA RETAIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

16. Additional Financial Information
 
Nine Months Ended
Cash Interest and Taxes:  
April 23,
2016
 
April 25,
2015
 
(millions)
Cash paid for interest
$
49.9

 
$
3.7

Cash paid for income taxes
$
20.1

 
$
20.6


Non-cash Transactions
  
In connection with the ANN Acquisition, as more fully described in Note 4, the Company issued 31.2 million shares of common stock valued at approximately $345 million, based on the Company's stock price on the date of the acquisition. Non-cash investing activities include accrued purchases of fixed assets in the amount of $43.0 million as of April 23, 2016 and $33.9 million as of April 25, 2015.

25



Item 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
Various statements in this Form 10-Q, in future filings by us with the Securities and Exchange Commission (the "SEC"), in our press releases and in oral statements made from time to time by us or on our behalf constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as "anticipate," "estimate," "expect," "project," "we believe," "is or remains optimistic," "currently envisions" and similar words or phrases and involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from the future results, performance or achievements expressed in or implied by such forward-looking statements.
 
These forward-looking statements are based largely on our expectations and judgments and are subject to a number of risks and uncertainties, many of which are unforeseeable and beyond our control. A detailed discussion of risk factors that have the potential to cause our actual results to differ materially from our expectations is included in our Annual Report on Form 10-K for the fiscal year ended July 25, 2015 (the "Fiscal 2015 10-K"). There are no material changes to such risk factors, nor are there any identifiable previously undisclosed risks as set forth in Part II, Item 1A — "Risk Factors" of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW
 
Our Business

ascena retail group, inc., a Delaware corporation (“ascena” or the “Company”), is a leading national specialty retailer of apparel for women and tween girls. On August 21, 2015, the Company acquired ANN INC. ("ANN"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands. The Company operates, through its 100% owned subsidiaries, ecommerce operations and approximately 4,900 stores throughout the United States, Canada and Puerto Rico. The Company had pro forma annual revenue for the fiscal year ended July 25, 2015 of approximately $7.3 billion, which reflects revenue as if the ANN Acquisition had occurred as of the beginning of the fiscal year. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.

Acquisition of ANN INC.

On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN INC. (the "ANN Acquisition") for an aggregate purchase price of approximately $2.1 billion. The purchase price consisted of approximately $1.75 billion in cash and the issuance of 31.2 million shares of the Company's common stock valued at approximately $345 million, based on the Company's stock price on the date of the acquisition. The cash portion of the purchase price was funded with borrowings under a $1.8 billion seven-year, variable-rate term loan described in Note 10 to the accompanying condensed consolidated financial statements. The acquisition is intended to diversify our portfolio of brands that serve the needs of women of different ages, sizes and demographics. ANN's operating results for the post-acquisition periods are included in the accompanying condensed consolidated statements of operations for the third quarter and year-to-date periods of Fiscal 2016.

Seasonality of Business
 
Our individual segments are typically affected by seasonal sales trends primarily resulting from the timing of holiday and back-to-school shopping periods.  In particular, sales at Justice tend to be significantly higher during the fall season, which occurs during the first and second quarters of our fiscal year, as this includes the back-to-school period and the December holiday season. Our Lane Bryant, dressbarn, and Catherines segments tend to experience higher sales during the spring season, which include the Easter and Mother's Day holidays. Our ANN and maurices segments have relatively balanced sales across the Fall and Spring seasons. As a result, our operational results and cash flows may fluctuate materially in any quarterly period depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and changes in merchandise mix. 


26



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


Summary of Financial Performance
 
General Economic Conditions
 
Our performance is subject to macroeconomic conditions and their impact on levels and patterns of consumer spending. Some of the factors that could negatively impact discretionary consumer spending include general economic conditions, high unemployment, lower wage levels, reductions in net worth, higher energy and other prices, increasing interest rates and low consumer confidence. These factors above could have a negative effect on our operations, which in turn could have a material effect on our business, operational results, financial condition and cash flows.

The U.S. economy continued to show mixed signs of recovery during the third quarter of Fiscal 2016. Among other factors, interest rates remained low, unemployment rates rose slightly in the third quarter and oil prices began to rise off of their March lows. As a result, expectations of the future state of the U.S. economy continue to remain uncertain as reflected in consumer spending, which remained inconsistent and challenging during the third quarter of 2016. Our brands will continue to monitor the respective spending patterns of their consumers and adjust their operating strategies as necessary to mitigate these challenges and maximize operating performance.

Omni-channel Strategy

As our omni-channel strategy continues to mature, it is increasingly difficult to distinguish between store sales and ecommerce sales due to the following:
Stores increase ecommerce sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online;
Particular colors or sizes of merchandise not available in a store can be ordered online by one of our store associates and shipped from our ecommerce fulfillment center to the customer;
Our websites increase store sales as in-store customers have often pre-shopped online before shopping in the store, including verification of which stores have online merchandise in stock;
Ecommerce sales can be returned to our stores, creating mismatches between revenues and returns between the two channels; and
The Company's marketing and loyalty programs are designed to promote in-store customers to shop and accrue points online and vice versa.
We believe our ecommerce operations are interdependent with our brick-and-mortar store sales. Therefore, we no longer feel that separate ecommerce and brick-and-mortar sales information is meaningful. Considering our customer cross channel behaviors, we believe that reporting one comparable sales metric is a more meaningful presentation. Accordingly, effective with the first quarter of Fiscal 2016, we are no longer reporting store comparable sales and ecommerce sales separately.

Third Quarter Summary and Key Developments

Operating highlights for the quarter are as follows: 
Net sales for the third quarter of Fiscal 2016 were $1.669 billion, up 45.1%, primarily due to the effect of the ANN Acquisition. For the legacy ascena brands, net sales were down 4.9%;
Comparable sales for the legacy ascena brands (excluding ANN) decreased 5%, caused mainly by the anticipated decrease at Justice related principally to its new selling strategy and, to a lesser degree, declines at maurices and Catherines. Comparable sales were down at all of our segments in the third quarter of Fiscal 2016 primarily due to inconsistent store traffic;
Gross margin rate increased by 220 basis points to 60.9% from 58.7%, mainly a result of an approximately 300 basis point gross margin rate increase for the legacy ascena brands from 58.7% to 61.7%, primarily due to higher margin rates at Justice, dressbarn and Catherines;
Operating income was $57.4 million for the third quarter of Fiscal 2016, compared to operating income of $34.4 million for the third quarter of Fiscal 2015 primarily due to the effect of the ANN Acquisition. At the legacy brands, improved performance at Justice, Lane Bryant and dressbarn was offset in part by declines at maurices and Catherines;

27



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


The effective tax rate was 51.5%, compared to 26.1% for the third quarter of Fiscal 2015, primarily due to the effect of higher state and local taxes and certain acquisition-related transaction costs which are non-deductible for tax purposes. The effective tax rate for the third quarter of Fiscal 2015 was lower than the statutory tax rate primarily due to the reversal of certain liabilities associated with uncertain tax positions that were resolved in the third quarter of Fiscal 2015; and
Net income per diluted share was $0.08, compared to $0.15 for the third quarter of Fiscal 2015.
Liquidity highlights are as follows:
We were in a net debt position (total debt less cash and cash equivalents and short-term investments) of $1.459 billion as of the end of the third quarter of Fiscal 2016, compared to a net cash position of $147.5 million as of the end of Fiscal 2015;
Cash provided by operations was $163.4 million for the nine months ended April 23, 2016, compared to $283.3 million for the nine months ended April 25, 2015;
We used $1.495 billion of cash, net of cash acquired, for the ANN Acquisition and $268.8 million for capital expenditures during the nine months ended April 23, 2016, compared to $234.9 million for capital expenditures for the nine months ended April 25, 2015;
We borrowed $1.8 billion during the first quarter to fund the ANN Acquisition. For the nine months ended April 23, 2016, we repurchased $65.0 million of the term loan for $61.6 million and made a scheduled principal repayment of $4.5 million;
Net repayments under our revolving credit agreement totaled $66.5 million for the nine months ended April 23, 2016, compared to net repayments of $17.0 million for the nine months ended April 25, 2015; and
We used $18.6 million of available cash to purchase shares of our common stock for the nine months ended April 23, 2016.

Transactions Affecting Comparability of Results of Operations and Financial Condition
 
The comparability of the Company's operational results for the periods presented herein has been affected by certain transactions. A summary of the effect of these items on pretax income for each applicable period presented is noted below:
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions)
Acquisition and integration expenses (a)
$
(8.4
)
 
$
(4.6
)
 
$
(66.9
)
 
$
(18.9
)
Non-cash inventory expense associated with the purchase accounting write-up of ANN's inventory to fair market value

 

 
(126.9
)
 

Depreciation and amortization related to the ANN purchase accounting adjustments to property and equipment and customer relationships (b)
(8.2
)
 

 
(21.9
)
 

Impact of ANN purchase accounting adjustments on deferred revenue (b)
(1.1
)
 

 
(2.1
)
 

Impact of ANN purchase accounting adjustments for leases (b)
(2.9
)



(1.9
)


Gain on extinguishment of debt

 

 
0.8

 

Accelerated depreciation associated with the Company's supply chain and technological integration efforts and the closure of Brothers (c)

 
(2.8
)
 

 
(3.4
)
Certain costs related to the closure of Brothers (c)

 
(1.9
)
 

 
(1.9
)
Total
$
(20.6
)
 
$
(9.3
)
 
$
(218.9
)
 
$
(24.2
)
                    

(a) Fiscal 2016 primarily represented costs related to the acquisition and integration of ANN. Fiscal 2015 primarily represented costs related to the integration of the Company's supply chain and information technology platforms.
(b) The remaining unamortized purchase accounting adjustments arising from the ANN Acquisition which will impact ANN's operating results in future periods are approximately $118 million with approximately $13 million to be recognized during the fourth quarter of Fiscal 2016.
(c) Brothers was a separate boys apparel brand operating within the Justice segment and represented an immaterial portion of the Justice segment. During the third quarter of Fiscal 2015, the Company announced it was exiting the brand, which was completed by the end of Fiscal 2015.

28



ASCENA RETAIL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (Continued)


The preceding discussion highlights, as necessary, the significant changes in operating results arising from these items and transactions. However, unusual items or transactions may occur in any period. Accordingly, investors and other financial statement users should individually consider the types of events and transactions that have affected operating trends.

Information Regarding Non-GAAP Financial Measure - Adjusted EBITDA

We present the financial performance measure of earnings before interest, taxes, depreciation and amortization, as adjusted ("Adjusted EBITDA") to exclude non-operating related items such as (i) costs related to acquisitions and integrations, (ii) certain costs related to the closure of Brothers, (iii) non-cash charges associated with the purchase accounting adjustments resulting from the ANN Acquisition, and (iv) other income and expenses classified outside of operating income. We consider Adjusted EBITDA to be an important indicator of the operational strength of the Company for the following reasons:
in addition to operating income, we use this measure to evaluate our consolidated performance, the performance of our operating segments and to allocate resources and capital to our operating segments;
it eliminates non-cash charges resulting from the purchase accounting for the ANN Acquisition;
it eliminates the significant level of non-cash depreciation and amortization expense that resulted from the capital expenditures and acquisitions we have undertaken over the last few fiscal years;
it enhances investors' ability to analyze trends in our business; and
it is a significant performance measure in our incentive compensation programs.

We believe that this measure is useful to investors because it is one of the bases for comparing our operating performance with those of other companies in our industry, although our measure may not be directly comparable to similar measures used by other companies. This measure should not be considered a substitute for performance measures in accordance with generally accepted accounting principles in the United States ("GAAP"), such as operating income, net income (loss), net cash provided by operating activities or other measures of performance or liquidity we have reported in our condensed consolidated financial statements.

The following table reconciles Adjusted EBITDA to net income (loss) as reflected in our condensed consolidated statements of operations prepared in accordance with GAAP:
 
Three Months Ended
 
Nine Months Ended
 
April 23,
2016
 
April 25,
2015
 
April 23,
2016
 
April 25,
2015
 
(millions)
Adjusted EBITDA
$
159.7

 
$
97.8

 
$
488.2

 
$
297.3

Acquisition and integration expenses
(8.4
)
 
(4.6
)
 
(66.9
)
 
(18.9
)
Non-cash inventory expense associated with the purchase accounting write-up of ANN's inventory to fair market value

 

 
(126.9
)
 

Impact of ANN purchase accounting adjustments for leases
(2.9
)
 

 
(1.9
)
 

Impact of the purchase accounting adjustments for deferred revenue
(1.1
)
 

 
(2.1
)
 

Certain costs related to the closure of Brothers