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EX-32.2 - EXHIBIT 32.2 - Ascena Retail Group, Inc.exhibit322fy17.htm
EX-32.1 - EXHIBIT 32.1 - Ascena Retail Group, Inc.exhibit321fy17.htm
EX-31.2 - EXHIBIT 31.2 - Ascena Retail Group, Inc.exhibit312fy17.htm
EX-31.1 - EXHIBIT 31.1 - Ascena Retail Group, Inc.exhibit311fy17.htm
EX-23 - EXHIBIT 23 - Ascena Retail Group, Inc.exhibit23fy17.htm
EX-21 - EXHIBIT 21 - Ascena Retail Group, Inc.exhibit21fy1782317.htm
EX-10.18 - EXHIBIT 10.18 - Ascena Retail Group, Inc.exhibit1018formofasnatrans.htm
EX-10.17 - EXHIBIT 10.17 - Ascena Retail Group, Inc.exhibit1017asnatransformat.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended July 29, 2017
 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
(State or other jurisdiction of incorporation or organization)
30-0641353
(I.R.S. Employer Identification No.)
 
 
933 MacArthur Boulevard, Mahwah, New Jersey
(Address of principal executive offices)
07430
(Zip Code)
(551) 777-6700
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
The NASDAQ Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $0.8 billion as of January 28, 2017, based on the last reported sales price on the NASDAQ Global Select Market on that date. As of September 21, 2017, 195,276,654 shares of voting common shares were outstanding.

Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on December 7, 2017 are incorporated into Part III of this Form 10-K.




ASCENA RETAIL GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED JULY 29, 2017
TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
 
 
 
 
Item 1.
 
Business
 
 
Item 1A.
 
Risk Factors
 
 
Item 1B.
 
Unresolved Staff Comments
 
 
Item 2.
 
Properties
 
 
Item 3.
 
Legal Proceedings
 
PART II
 
 
 
 
 
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
Item 6.
 
Selected Financial Data
 
 
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 8.
 
Financial Statements and Supplementary Data
 
 
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
Item 9A.
 
Controls and Procedures
 
 
Item 9B.
 
Other Information
 
PART III
 
 
 
 
 
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
 
Item 11.
 
Executive Compensation
 
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
 
Item 14.
 
Principal Accounting Fees and Services
 
PART IV
 
 
 
 
 
Item 15.
 
Exhibits, Financial Statement Schedules
 
 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K, including the section labeled Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and the risk factors that we have included elsewhere in this report. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our results, level of activity, performance or achievements to be materially different from any future results, level of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. We generally identify these statements by words or phrases such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “may,” “should,” “estimate,” “predict,” “project,” “potential,” “continue,” "remains optimistic," or the negative of such terms or other similar expressions.
 
Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed below under Item 1A. Risk Factors, and other factors discussed in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission. We disclaim any intent or obligation to update or revise any forward-looking statements as a result of developments occurring after the period covered by this report.
 
WEBSITE ACCESS TO COMPANY REPORTS
 
We maintain our corporate Internet website at www.ascenaretail.com. The information on our Internet website is not incorporated by reference into this report. We make available, free of charge through publication on our Internet website, a copy of our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, including any amendments to those reports, as filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after they have been so filed or furnished. Information relating to corporate governance at Ascena Retail Group, Inc., including our Code of Ethics for the Chief Executive Officer and Senior Financial Officers, information concerning our directors, committees of the Board of Directors, including committee charters, and transactions in Ascena Retail Group, Inc. securities by directors and executive officers, is also available at our website.
 
In this Annual Report on Form 10-K, references to “ascena,” “ourselves,” “we,” “us,” “our” or “Company” or other similar terms refer to Ascena Retail Group, Inc. and its subsidiaries, unless the context indicates otherwise. Fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”); fiscal year 2016 ended on July 30, 2016 and reflected a 53-week period (“Fiscal 2016”); and fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015”). All references to “Fiscal 2018” refer to our 53-week period that will end on August 4, 2018 when the Company conforms its fiscal period ends to the calendar of the National Retail Federation.
  
PART I

Item 1. Business.
 
General

The Company is a leading national specialty retailer of apparel for women and tween girls. The Company operates, through its 100% owned subsidiaries, ecommerce operations and approximately 4,800 stores in the United States, Canada and Puerto Rico. The Company had annual revenue for Fiscal 2017 of approximately $6.6 billion.

Change for Growth Program

In the first quarter of Fiscal 2017, the Company initiated a transformation plan with the objective of supporting sustainable long-term growth and increasing shareholder value (the "Change for Growth" program). In connection with the program, the Company (i) refined its operating model by eliminating a number of executive positions and making organizational changes resulting in the creation of the Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion operating segments, (ii) further consolidated certain support functions into its brand services group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, (iii) began transitioning certain transaction processing functions within the brand services group to an independent third-party managed-service provider, and (iv) conducted a review of its store fleet with the goal of reducing the number of marginally profitable stores through either rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprint and convert sales from these stores into ecommerce sales or to nearby store locations ("Fleet Optimization"). The Company realized savings of approximately $65 million during Fiscal 2017 and we expect to realize an

3



additional $185-$235 million in cost savings through fiscal 2020. Activities associated with the Change for Growth program are currently expected to continue through fiscal 2019.

Integration of ANN

On August 21, 2015, the Company acquired 100% of the outstanding common stock of ANN INC. ("ANN"), a retailer of women’s apparel, shoes and accessories sold primarily under the Ann Taylor and LOFT brands, for an aggregate purchase price of approximately $2.1 billion (the "ANN Acquisition"), as more fully described in Note 5 to the accompanying 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.

During Fiscal 2017, integration activities continued as the Company (i) completed the integration of ANN’s ecommerce operations into its Greencastle fulfillment center, (ii) negotiated favorable contracts with vendors and (iii) realized cost reductions from sourcing merchandise through third-party buying agents. As a result of these initiatives, the Company has realized cumulative integration-related cost savings of approximately $160 million through Fiscal 2017. We expect to realize additional synergies of approximately $75 million related to the integration of ANN in Fiscal 2018 and fiscal 2019.

Our Brands and Products
 
In connection with the Change for Growth program described above, effective the first quarter of Fiscal 2017, the Company reorganized into four operating segments: Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion.

Premium Fashion

The Premium Fashion segment consists of the Ann Taylor and LOFT brands.

Ann Taylor includes 322 specialty retail and outlet stores and ecommerce operations. Ann Taylor has been at the forefront of American fashion, leading the way with the idea that style shouldn’t be work and getting dressed should be about getting ready for really big days and those just as important small moments. Ann Taylor is polished, modern feminine classics with an iconic style point of view for every aspect of her life. Its retail stores are predominantly located in mall locations, lifestyle centers and outlet centers.

LOFT includes 678 specialty retail and outlet stores, ecommerce operations and certain licensed franchises in international territories. LOFT offers modern, feminine and versatile clothing for a wide range of women with one common goal: to help them look and feel confident, wherever the day takes them. From everyday essentials to attainable trends, LOFT consistently serves up head-to-toe outfits and perfect pieces that make getting dressed feel effortless. Its retail stores are predominantly located in mall locations, lifestyle centers and outlet centers.

Value Fashion

The Value Fashion segment consists of the maurices and dressbarn brands.

maurices includes 1,005 specialty retail and outlet stores and ecommerce operations, offering up-to-date core and plus-size fashion apparel. maurices stores are concentrated in small markets (approximately 25,000 to 150,000 people), and cater to local market preferences through a core merchandise assortment that is refined to reflect individual store demands. Through its proprietary label, the maurices product line encompasses women’s casual clothing, career wear, dressy apparel, active wear and accessories. maurices retail stores are typically located near large discount and department stores to capitalize on the traffic those retailers generate, while differentiating itself by offering a wider selection of style, color and current fashion, along with an elevated customer shopping experience.
 
dressbarn includes 779 specialty retail and outlet stores and ecommerce operations, offering moderate-to-better quality career, special occasion and casual fashion for working women in a comfortable, easy-to-shop environment staffed by friendly, service oriented associates. dressbarn’s individual store assortments vary depending on local demographics, seasonality and past sales patterns. dressbarn retail stores are located primarily in convenient strip shopping centers in major trading and high-density markets and in surrounding suburban areas.


4



Plus Fashion
 
The Plus Fashion segment consists of the Lane Bryant and Catherines brands.

Lane Bryant includes 764 specialty retail and outlet stores and ecommerce operations. Lane Bryant is a widely recognized brand name in plus-size fashion with stores concentrated in suburban and small towns, offering fashionable and sophisticated apparel at a moderate price point to female customers in plus-sizes 14-28 through its namesake and Cacique intimates private labels, along with select national brands. Merchandise assortment offerings include intimate apparel, wear-to-work apparel, sportswear, accessories, select footwear and social occasion apparel. Lane Bryant retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers.
  
Catherines includes 359 specialty retail stores and ecommerce operations, offering a full range of plus sizes (16-34) and extended sizes (28-34). Catherines offers classic apparel and accessories to female customers in the moderate price range for wear-to-work and casual lifestyles. Catherines retail stores are concentrated in suburban and small towns and are primarily located in strip shopping centers.

Kids Fashion

The Kids Fashion segment, which consists of the Justice brand, includes 900 specialty retail and outlet stores, ecommerce operations and certain licensed franchises in international territories. The Justice brand offers fashionable apparel to girls who are ages 6 to 12 in an environment designed to match the energetic lifestyle of tween girls. Justice's merchandise mix represents the broad assortment that its girl wants in her store - a mix of apparel, accessories, footwear, intimates and lifestyle products, such as cosmetics and bedroom furnishings, to meet all of her needs. Justice retail stores are located in mall locations, strip shopping centers, lifestyle centers and outlet centers.
 
The tables below present net sales and operating (loss) income by operating segment for the last three fiscal years:
 
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
Net sales:
 
(millions)
Premium Fashion (a)
 
$
2,322.6

 
$
2,330.9

 
$

Value Fashion
 
1,950.2

 
2,094.6

 
2,084.2

Plus Fashion
 
1,353.9

 
1,463.6

 
1,441.9

Kids Fashion
 
1,023.1

 
1,106.3

 
1,276.8

Total net sales
 
$
6,649.8

 
$
6,995.4

 
$
4,802.9

 
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
Operating (loss) income:
 
(millions)
Premium Fashion (a) (b)
 
$
140.9

 
$
13.3

 
$

Value Fashion
 
12.2

 
92.0

 
136.6

Plus Fashion
 
15.5

 
36.9

 
29.4

Kids Fashion
 
(36.7
)
 
29.0

 
(62.8
)
Unallocated acquisition and integration expenses
 
(39.4
)
 
(77.4
)
 
(31.7
)
Unallocated restructuring and other related charges
 
(81.9
)
 

 

Unallocated impairment of goodwill
 
(596.3
)
 

 
(261.7
)
Unallocated impairment of intangible assets
 
(728.1
)
 

 
(44.7
)
Total operating (loss) income
 
$
(1,313.8
)
 
$
93.8

 
$
(234.9
)
_______
(a) 
The results of the Premium Fashion segment for the post-acquisition period from August 22, 2015 to July 30, 2016 are included within the Company's consolidated results of operations for Fiscal 2016.
(b) 
The results of the Premium Fashion segment for Fiscal 2016 include approximately $126.9 million of non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value.
 
Over the past five fiscal years, the Company has invested approximately $3.5 billion in acquisitions, capital improvements, supply chain integration and technology infrastructure improvements, which were funded through cash, debt and the issuance of common stock. As a result, net sales increased to approximately $6.6 billion in Fiscal 2017 from $4.7 billion in Fiscal 2013.

5



Omni-channel

The Company continues to invest in initiatives that support our omni-channel strategies. During Fiscal 2017, we completed the transition of all brands onto our new ecommerce platform with our dressbarn, Lane Bryant and Catherines brands added to the platform. The aforementioned initiatives allow our brands to (i) provide customers a seamless omni-channel shopping experience in-store and online, (ii) integrate our marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance our capability to collect and analyze customer transaction data to support strategic decisions. Additionally, the Company's new distribution center in Riverside, California commenced west coast brick-and-mortar distribution this past spring. The Company's distribution centers in Etna, Ohio and Riverside, California, and its fulfillment center in Greencastle, Indiana, are expected to enhance its fulfillment capability and distribution efficiency.
Our brands sell products online through their ecommerce sites:

Ann Taylor – www.anntaylor.com
LOFT – www.LOFT.com and www.louandgrey.com
Justice – www.shopjustice.com
Lane Bryant – www.lanebryant.com
maurices – www.maurices.com
dressbarn – www.dressbarn.com
Catherines – www.catherines.com

Store Locations

Our stores are typically open seven days a week and most evenings. As of July 29, 2017, we operated approximately 4,800 stores in the United States, Canada and Puerto Rico. Ann Taylor and LOFT have stores in 41 and 46 states, respectively, as well as the District of Columbia, Canada and Puerto Rico. In addition, LOFT has five international franchise stores. Justice has stores in 48 states and Canada as well as 87 international franchise stores, while maurices has stores in 45 states and Canada. dressbarn has stores in 48 states and the District of Columbia. Lane Bryant and Catherines have stores located in 47 and 44 states, respectively.

During Fiscal 2017, no store accounted for more than 1% of our total sales. The table below indicates the type of shopping facility in which our stores were located as of July 29, 2017:
Type of Facility
 
Ann Taylor
 
LOFT
 
Justice
 
Lane Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Strip Shopping Centers
 
3
 
53
 
195
 
380
 
583
 
582

 
349
 
2,145
Enclosed Malls
 
118
 
219
 
503
 
187
 
344
 
47

 
6
 
1,424
Outlet Malls and Outlet Strip Centers
 
125
 
155
 
114
 
115
 
57
 
150

 
1
 
717
Lifestyle Centers and Downtown Locations
 
76
 
251
 
88
 
82
 
21
 

 
3
 
521
Total
 
322
 
678
 
900
 
764
 
1,005
 
779

 
359
 
4,807
 
As of July 29, 2017, our stores had a total of 26.4 million square feet, consisting of Ann Taylor with 1.7 million square feet, LOFT with 3.9 million square feet, Justice with 3.8 million square feet, Lane Bryant with 4.2 million square feet, maurices with 5.1 million square feet, dressbarn with 6.2 million square feet and Catherines with 1.5 million square feet. All of our store locations are leased. Some of our leases contain renewal options and termination clauses, particularly in the early years of a lease, which are exercisable if specified sales volumes are not achieved.
 
Store Count by Brand
 
 
Fiscal 2017
 
 
Ann Taylor
 
LOFT
 
Justice
 
Lane
Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Beginning of Period
 
340

 
682

 
937

 
772

 
993

 
809

 
373

 
4,906

Opened
 
3

 
15

 
2

 
8

 
28

 
6

 
1

 
63

Closed
 
(21
)
 
(19
)
 
(39
)
 
(16
)
 
(16
)
 
(36
)
 
(15
)
 
(162
)
End of Period
 
322

 
678

 
900

 
764

 
1,005

 
779

 
359

 
4,807



6



 
 
Fiscal 2016
 
 
Ann Taylor
 
LOFT
 
Justice
 
Lane
Bryant
 
maurices
 
dressbarn
 
Catherines
 
Total
Beginning of Period
 

 

 
978

 
765

 
951

 
824

 
377

 
3,895

Stores added from ANN Acquisition
 
359

 
680

 

 

 

 

 

 
1,039

Opened
 
6

 
15

 
8

 
30

 
52

 
15

 
3

 
129

Closed
 
(25
)
 
(13
)
 
(49
)
 
(23
)
 
(10
)
 
(30
)
 
(7
)
 
(157
)
End of Period
 
340

 
682

 
937

 
772

 
993

 
809

 
373

 
4,906


As discussed above, in connection with the Change for Growth program in Fiscal 2017, the Company conducted a strategic review of its store fleet with the goal of improving overall profitability and cash flows of its store portfolio through either rent concessions or store closures. That review identified 667 stores for action, of which 120 were closed in Fiscal 2017. Store actions under the Change for Growth program are expected to continue through fiscal 2019.

Trademarks
 
We have U.S. Trademark Registration Certificates and trademark applications pending for the operating names of our stores and our major private label merchandise brands. We believe our trademarks such as ANN TAYLOR®, LOFT®, ANN TAYLOR LOFT®, LOU & GREY®, JUSTICE®, LANE BRYANT®, LANE BRYANT OUTLET®, CACIQUE®, RIGHT FIT®, MAURICES®, DRESSBARN®, CATHERINES®, CATHERINES PLUS SIZES® and DRESSBAR® and 6th & LANE® are essential to the continued success of our business. We intend to maintain our trademarks and related registrations and vigorously protect them against infringement.

International Operations
 
As of July 29, 2017, Ann Taylor, LOFT, Justice and maurices had 4, 9, 39 and 37 company-operated stores in Canada, respectively. Additionally, we earn licensing revenue through international franchise stores operated under franchise arrangements. Licensing revenue is less than 1% of our consolidated annual net sales. As of July 29, 2017, LOFT and Justice had 5 and 87 international franchise stores, respectively. We continue to explore international opportunities for our brands. International revenue from company-owned stores and franchised stores accounts for approximately 2% of our consolidated annual net sales.
 
Sourcing
 
The Company's brands source their products either through its internal sourcing operations, Ascena Global Sourcing (“AGS”), or through third-party buying agents. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends.

Operating through offices primarily located in Seoul, South Korea, Shanghai, China and Hong Kong, AGS maintains direct relationships with manufacturing partners, enabling desired product quality control and speed to market, along with favorable pricing as compared to market vendors.

The Company also sources some of its merchandise through third-party buying agents based mainly in Asia. The Company partners with these agents to inform product development by leveraging insight into fashion trends and customer preferences. In certain instances (e.g. sourcing in developing countries, or for specific product attribute or unique capability), this buying-agent sourcing network provides favorable cost, quality and/or flexibility for the Company's merchandising teams.

Merchandising and Design

We continue to focus on building our merchandising and design functions to align with our market positions and support our direct sourcing model. Our merchandising and design teams determine inventory needs for the upcoming season in response to fast changing fashion trends and customer preferences. Over the last few years, we have made substantial investment in acquiring and retaining merchandising and design talent to allow us to differentiate our fashion offering, which we believe is a critical enabler for our long-term success.

Office and Distribution Centers
 
For a detailed discussion of our office and distribution centers, see Part I, Item 2 “Properties” in this Annual Report on Form 10-K.

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Information Technology Systems
 
We continue to make ongoing investments in our information technology systems to support our omni-channel strategy, merchandise procurement, inventory management and supply chain integration. Our information technology systems make the design, marketing, importing and distribution of our products more efficient by providing common platforms for, among other things, order processing, product and design information, and financial information.

Advertising and Marketing 

We use a combination of broad-based and targeted marketing and advertising strategies to effectively define, evolve, and promote our brands. These strategies are designed to deliver a personalized and relevant shopping experience for our customers and include customer research, advertising and promotional events, window and in-store marketing materials, direct mail marketing, Internet and social media marketing, lifestyle magazines, catazines and other means of communication.

Customer Relationship Management

We continue to focus on building our customer relationships and promoting customer loyalty through various programs including brand-specific loyalty and credit card programs. Customers shopping at our brands who are enrolled in our loyalty programs earn reward points that are redeemable toward future purchases. Our brands also offer credit card programs to eligible customers in the United States. To encourage customers to apply for a credit card, we provide a discount to approved card members on all purchases made with a new card on the day of application acceptance. Rewards points are then earned on purchases made with the credit card at that brand. In addition, under the co-branded credit card program, certain of our brands offer the customer the option of earning additional reward points for purchases made at any other business in which the card is accepted.
These programs provide useful information that allows us to enhance our existing customer relationship management capabilities. Using data analytic tools, we obtain more insightful information about our customer preferences and shopping behaviors, allowing us to deliver a more targeted and personalized shopping experience.
Community Service

ascena and its brands have a rich history of giving. This is demonstrated through ascena cares, which reflects our culture and the extraordinary philanthropic efforts taking place within our organization. Together, we have a shared commitment for making the world a better place for the women and girls we serve, for the communities where we live and work and for our dedicated associates. The Company is also proud to sponsor the Roslyn S. Jaffe Awards, in which monetary grants are awarded to female social entrepreneurs who are making a meaningful difference for women and children. Whether through collective partnerships or individual brand outreach efforts, ascena supports the women who buy, make and sell our products. More information about the history of our charitable giving, including the charities we support, is available at www.ascenacares.com.

Competition

The retail apparel industry is highly competitive and increasingly fragmented. We compete with numerous retailers, including department stores, off-price retailers, specialty stores and Internet-based retailers, on pricing, styles and fulfillment capability. Our business is vulnerable to demand and pricing shifts, channel shifts and changes in customer preferences. Some of our competitors operate at a lower cost structure, and are able to offer better pricing; others have more sophisticated ecommerce or omni-channel capacities. Some of our competitors include Gap Inc., Amazon, Walmart, Macy’s, JCPenney, Target and TJX Companies. Other competitors may enter the markets that we serve. If we fail to compete successfully, we could face continued sales declines and may need to offer greater discounts to our customers, which could result in decreased profitability. We are aggressively working to differentiate our brands and our assortments to reinforce the value proposition we deliver by focusing on our target customers and by offering up-to-date fashion, superior customer service and shopping convenience across our multiple sales channels.
 
Merchandise Vendors
 
We purchase our merchandise from many domestic and foreign suppliers. We have no long-term purchase commitments or arrangements with any of our suppliers, and believe that we are not dependent on any one supplier as no third-party supplier accounts for more than 10% of our merchandise purchases. We believe that we have good working relationships with our suppliers.
 

8



Employees
 
As of July 29, 2017, we had approximately 64,000 employees, 48,000 of whom worked on a part-time basis. We typically add temporary employees during peak selling periods, which vary throughout the year at each of our brands, and adjust the hours they work to coincide with holiday shopping patterns. None of our other employees are covered by any collective bargaining agreement at the end of Fiscal 2017 except for approximately 60 employees of Lane Bryant that were represented by unions. We believe that we have good working relations with our employees and unions.
 
Executive Officers of the Registrant
 
The following table sets forth the name, age and position of our Executive Officers:
Name
 
Age
 
Positions
David Jaffe
 
59
 
Chief Executive Officer and Chairman of the Board
Brian Lynch
 
59
 
President and Chief Operating Officer
Gary Muto
 
58
 
President and Chief Executive Officer-ascena Brands
John Pershing
 
46
 
Executive Vice President, Chief Human Resources Officer
Duane D. Holloway
 
45
 
Executive Vice President, General Counsel and Assistant Secretary
Robb Giammatteo
 
45
 
Executive Vice President and Chief Financial Officer
Daniel Lamadrid
 
42
 
Senior Vice President and Chief Accounting Officer

Mr. David Jaffe serves as a director (since 2001), as our CEO (since 2002) and as Chairman of the Board (since 2016). Mr. Jaffe was appointed Chairman and Chief Executive Officer in July 2017. Previously, he had been President from 2002-2017, and Vice Chairman and Chief Operating Officer since 2001. Mr. Jaffe joined our Company in 1992 as Vice President, Business Development and became Senior Vice President in 1995, Executive Vice President in 1996 and Vice Chairman in 2001. Mr. Jaffe is the son of Elliot S. Jaffe, our co-founder and Chairman Emeritus and Roslyn S. Jaffe, our co-founder and Company Secretary.

Mr. Brian Lynch became President and Chief Operating Officer in 2017.  Prior to his most recent appointment, Mr. Lynch served as Chief Operating Officer of the Company. He joined our organization in 2015 as President and Chief Executive Officer of the Company’s Justice brand.  Mr. Lynch has over 35 years of fashion and retail experience, having previously held a variety of executive leadership positions with ANN INC., Gap Inc. and The Walt Disney Company.

Mr. Gary Muto became President and Chief Executive Officer, ascena Brands in 2017. Prior to his most recent appointment, Mr. Muto served as President and Chief Executive Officer of the Company’s Premium Fashion segment since October 2016, and as President and Chief Executive Officer of ANN, since October 2015. Mr. Muto has over 25 years of fashion and retail experience, having previously held a variety of executive leadership positions with Gap Inc.

Mr. John Pershing became Executive Vice President, Chief Human Resources Officer in 2015.  He joined the Company in 2011 as Senior Vice President, Human Resources of both the corporate brand services group and dressbarn. Prior to joining the Company, Mr. Pershing spent over 20 years at Best Buy in a variety of leadership roles and was most recently Executive Vice President, Human Capital.

Mr. Duane D. Holloway joined the Company in January 2016 as Senior Vice President, General Counsel and Assistant Secretary and became Executive Vice President, General Counsel and Assistant Secretary in July 2016. Prior to joining the Company, Mr. Holloway served as Vice President, Deputy General Counsel with CoreLogic, Inc., a leading publicly-traded real estate data, analytics and services company. Prior to CoreLogic, he held numerous leadership roles with publicly-traded Caesars Entertainment Corporation.

Mr. Robb Giammatteo became Executive Vice President and Chief Financial Officer in 2015. He joined the Company in 2013 as the Senior Vice President of FP&A and Investor Relations. Prior to joining the Company, Mr. Giammatteo was the Vice President of Corporate FP&A at VF Corporation, and before that, the Divisional CFO of VF Outlet. Prior to VF, he spent several years in a variety of financial leadership roles at Limited Brands and General Motors.

Mr. Daniel Lamadrid was appointed Senior Vice President and Chief Accounting Officer in August 2017. Prior to joining the Company, Mr. Lamadrid was the Senior Vice President, Chief Accounting Officer and Controller at Vitamin Shoppe, Inc. Prior to Vitamin Shoppe, Mr. Lamadrid held various financial leadership roles at Polo Ralph Lauren, Hartz Mountain Corporation and Babies R Us, a division of Toys R Us. Mr. Lamadrid began his career in public accounting.


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Effective on August 25, 2017, Mr. Kevin Trolaro, 47, Vice President, Financial Reporting, was designated as the Company’s interim Principal Accounting Officer for the purpose of signing the Company’s Fiscal 2017 Annual Report on Form 10-K. Immediately following the filing of the Fiscal 2017 Annual Report on Form 10-K Mr. Lamadrid, the Chief Accounting Officer of the Company, will assume the role of Principal Accounting Officer.

Item 1A. Risk Factors.

There are risks associated with an investment in our securities. The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our prospects, our operational results, our financial condition, our liquidity, the trading prices of our securities, and the actual outcome of matters as to which forward-looking statements are made in this report. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. Our operational results, financial position and cash flows could be negatively impacted by a number of factors including, but not limited to those described below. Many of these factors are outside of our control, currently believed to be immaterial and/or not presently known to us. If we are not successful in managing these risks, they could have a negative impact our business, operational results, financial position and cash flows.

Macroeconomic and Industry Risks

General economic conditions may adversely affect our business.

Our performance is subject to macroeconomic conditions and their impact on levels of consumer spending. Some of the factors negatively impacting consumer spending include volatility in national and international financial markets, consumer confidence, fiscal and monetary policies of government, high unemployment, lower wage levels, increased taxation, credit availability, high consumer debt, reductions in net worth, higher fuel, energy and other prices, tax policies, increasing interest rates, severe weather conditions, the threat of or actual terrorist attacks, military conflicts, the domestic or international political environment, and general uncertainty regarding the overall future economic environment. Lastly, consumer spending habits continue to shift on an accelerated pace towards an increasing preference to purchase merchandise digitally as opposed to in traditional brick-and-mortar retail stores. Such macroeconomic and other factors could have a negative effect on consumer spending in the U.S., which in turn could have a material effect on our business, operational results, financial condition and cash flows

Existing and increased competition and fundamental shifts in the women’s and girls' retail apparel industry may reduce our net revenues, operational results and market share.

The women’s and girls’ retail apparel industry is highly competitive. Although the Company is one of the nation’s largest specialty retailers, we have numerous and varied competitors at the national and local level, primarily consisting of department stores, off-price retailers, other specialty stores, discount stores, mass merchandisers, Internet and mail-order retailers, some of whom have advantages over us, including substantially greater financial, marketing or promotional resources. Many retailers, such as department stores, also offer a broader selection of merchandise than we offer, continue to be promotional by reducing their selling prices, and in some cases are expanding into markets in which we have a significant presence.

In addition, the growth and prominence of fast-fashion and value-fashion retailers and expansion of off-price retailers have fundamentally shifted customers’ expectations of affordable pricing of well-known brands and continued promotional pressure. The rise of these retailers as well as the shift in shopping preferences from brick-and-mortar stores to the ecommerce channel, where online-only businesses or those with robust ecommerce capabilities continue to grow, have increased the difficulty of maintaining and gaining market share. Such competition, pricing pressures, shopping preferences and loss of market share could have a material adverse effect on our business, operational results, financial position and cash flows.

Our stock price may be volatile.

The market price of our stock has fluctuated substantially and may continue to fluctuate significantly. Future announcements or disclosures concerning us or any of our competitors, our strategic initiatives, our sales and profitability, our financial condition, any quarterly variations in actual or anticipated operating results or comparable sales, any failure to meet analysts’ expectations and sales of large blocks of our stock, among other factors, could cause the market price of our stock to fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks that have often been unrelated or disproportionate to the operating performance of these companies. This volatility could affect the price at which shares of our stock could be sold.

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Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of the company’s securities. Such litigation could result in substantial costs, divert our management’s attention and resources and have a material adverse effect on our business, operational results, financial position and cash flows.

We may experience fluctuations in our tax obligations and effective tax rate.

We are subject to income taxes in the United States and numerous international jurisdictions. In addition, our merchandise is subject to import and excise duties and/or sales or value-added taxes in certain jurisdictions. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and reserves are re-evaluated. In addition, our effective tax rate in any given financial reporting period may be materially impacted by changes in the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules, regulations or interpretations thereof.

Operational Risks

Our business is dependent upon our ability to accurately predict fashion trends and customer preferences in a timely manner.

Fashion apparel trends and customer preferences are volatile and tend to change rapidly, particularly for women and tween girls. Our success depends largely on our ability to anticipate and respond to changing merchandise trends and consumer preferences in a timely manner. Accordingly, any failure by us to anticipate, identify and respond to changing fashion trends could adversely affect consumer acceptance of the merchandise, which in turn could adversely affect our business and our image with our customers. Because we enter into agreements for the manufacture and purchase of merchandise well in advance of the applicable selling season, we are vulnerable to changes in consumer preferences and demand, price shifting, and the optimal selection and timing of merchandise purchases. If we miscalculate either the demand for our merchandise or our customers’ tastes or purchasing habits, we may be required to sell a significant amount of unsold inventory at below average markups over cost, or below cost, which would have an adverse effect on our business, operational results, financial position and cash flows.

We may not fully realize the expected cost savings and/or operating efficiencies from the Change for Growth program.

We have implemented, and plan to continue to implement the Change for Growth program, as described in Item 1 - Business. The Change for Growth program is designed to deliver long-term sustainable growth by enhancing our operating effectiveness and efficiency, rightsizing and increasing the quality of our distribution channels, and reducing our operating costs. The Change for Growth program presents significant potential risks that may impair our ability to achieve anticipated operating enhancements and/or cost reductions, or otherwise harm our business, including:

higher than anticipated costs in implementing planned workforce reductions;
higher than anticipated lease termination and store closure costs related to the Fleet Optimization, which is discussed below;
failure to meet operational targets or customer requirements due to the loss of employees or inadequate transfer of knowledge;
failure to maintain adequate controls and procedures while executing, and subsequent to, completing the Change for Growth program;
diversion of management’s attention and resources from ongoing business activities and/or a decrease in employee morale;
attrition beyond any planned reduction in workforce; and
damage to our reputation and brand image due to our restructuring-related activities, including certain store closures.

If we are not successful in implementing and managing the Change for Growth program, we may not be able to achieve targeted operating enhancements and/or cost reductions within the expected time frame, which could adversely impact our business, results of operations and financial condition. Our failure to achieve targeted operating enhancements and/or cost reductions could also result in the implementation of additional restructuring-related activities, which may be dilutive to our earnings in the short term.

We may not fully realize the benefits from the Fleet Optimization initiative as part of the Change for Growth program.

In Fiscal 2017, as part of its Change for Growth program, the Company completed the Fleet Optimization review. This review had the goal of reducing the number of marginally profitable stores, through rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprint. The estimated costs and benefits associated with this initiative may vary

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materially based on various factors including: timing in execution, outcome of negotiations with landlords, and changes in management’s assumptions and projections. As a result of these events and circumstances, delays and unexpected costs may occur, which could result in our not realizing all, or any portion, of the anticipated benefits of the Fleet Optimization initiative.

Our ability to successfully implement and optimize our omni-channel retail strategy and maintain a relevant and reliable omni-channel experience for our customers.

We are committed to growing our business through our omni-channel retail strategy. Our goal is to offer our customer seamless access to our brands and merchandise whenever and wherever they choose to shop. Accordingly, our success also depends on our ability to anticipate and implement innovations in sales and marketing strategies to appeal to existing and potential customers who increasingly rely on multiple portals, including mobile technologies, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our customers’ shopping preferences could significantly impair our ability to meet our strategic business and financial goals. Failing to successfully implement and optimize our omni-channel retail strategy could have a material adverse effect on our business, operational results, financial position and cash flows.

As we transition certain functions to an external managed service provider, we will become more dependent on the third party performing these functions.

As part of our long-term strategy, we look for opportunities to cost effectively enhance capability of business services. In some cases, this requires that we work with third parties to provide services and/or functions that can be provided more effectively by external third party providers, as more fully described in Note 7 to the accompanying consolidated financial statements. While we believe we conduct appropriate due diligence before entering into agreements with these third parties, the failure of any of these third parties to provide the expected services, provide them on a timely basis or to provide them at the prices we expect could disrupt or harm our business. Any significant interruption in the operations of these service providers, over which we have no control, could also have an adverse effect on our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.

Our international service providers and our own international operations subject us to additional risks, which could have an adverse effect on our results of operations and may impair our ability to operate effectively.

Recently, we engaged in efforts to reduce our costs by utilizing lower-cost labor outside the U.S. through outsourcing arrangements. It is likely that the countries where our outsourcing vendors are located may be subject to higher degrees of political and/or social instability than the U.S. and may lack the infrastructure to withstand political unrest or natural disasters. Such disruptions could impact our ability to deliver our products and services on a timely basis, if at all, and to a lesser extent could decrease efficiency and increase our costs. Fluctuations of the U.S. dollar in relation to the currencies used and higher inflation rates experienced in these countries may also reduce the savings we planned to achieve. Furthermore, the practice of utilizing labor based in foreign countries has come under increased scrutiny in the U.S., which ultimately could have an adverse effect on our results of operations.

In addition, the U.S. or the foreign countries in which we have service provider arrangements or operate could adopt new legislation or regulations that would adversely affect our business by making it difficult, more costly or impossible for us to continue our foreign activities as currently being conducted. Furthermore, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act ("FCPA"). Any violations of FCPA or local anti-corruption laws by us, our subsidiaries or our local agents could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.

Our ability to maintain our brand image, engage new and existing customers and gain market share.

Our ability to maintain our brand image and reputation is integral to our business as well as the implementation of strategies to expand it. Maintaining, promoting and growing our brands will depend largely on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high-quality customer experience. In addition, our success depends, in part, on our ability to keep existing customers, while engaging and attracting new customers to shop our brands. Our business and results of operations could be adversely affected if we fail to achieve these objectives for any of our brands and failure to achieve consistent, positive performance at several of our brands simultaneously could have an adverse effect on our sales and profitability. In addition, our ability to address the challenges of declining store traffic at our brick-and-mortar stores, in a highly promotional, low growth environment may impact our ability to maintain and gain market share and also impact our business, operational results, financial position and cash flows.


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Our business depends on effective marketing, advertising and promotional programs.

Customer traffic and demand for our merchandise is influenced by our advertising, marketing and promotional activities, the name recognition and reputation of our brands, and the location and service offered in our stores. Although we use marketing, advertising and promotional programs to attract customers through various media, including social media, database marketing and print, our competitors may spend more or use different approaches, which could provide them with a competitive advantage. Our promotional activity and other programs may not be effective, may be perceived negatively or could require increased expenditures, which could adversely impact our business, operational results, financial position and cash flows.

We depend on key personnel in order to support our existing business and future initiatives and may not be able to retain or replace these employees, recruit additional qualified personnel or effectively manage succession.

We believe that we have benefited substantially from our leadership and the experience of our senior executives. The loss of the services of our senior executives could have a material adverse effect on our business and projects, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. In addition, as our business develops, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. Competition for senior management is intense and we may not be successful in attracting and retaining key personnel. 

We rely on foreign sources of production.

We purchase a significant portion of our merchandise directly from foreign markets. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult for goods sourced outside the United States. We face a variety of risks generally associated with doing business in foreign markets and importing merchandise from abroad, including, but not limited to:

financial or political instability or terrorist acts in any of the countries in which our merchandise is manufactured, or the channels through which it passes;
fluctuations in the value of the U.S. Dollar against foreign currencies or restrictions on the transfer of funds to and from foreign countries;
inability of our manufacturers to comply with local laws, including labor laws, health and safety laws or labor practices;
increased security and regulatory requirements and inspections applicable to imported goods;
imposition or increases of duties, taxes and other charges on imports or exports;
imposition of new legislation relating to import quotas or other restrictions that may limit the quantity of our merchandise that may be imported into the United States from countries in regions where we do business;
impact of natural disasters, extreme weather, public health concerns or other catastrophes on our foreign sourcing offices and vendor manufacturing operations;
delays in shipping due to port security or congestion issues, labor disputes or shortages, local business practices, vendor compliance with applicable import regulations or weather conditions;
violations under the U.S. Foreign Corrupt Practices Act or similar laws or regulations; and
increased costs of transportation.

New legislative initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, could increase the cost of products purchased from suppliers in such countries or restrict the importation of products from such countries. The future performance of our business depends on foreign suppliers, and may be adversely affected by the factors listed above, all of which are beyond our control. The foregoing may result in our inability to obtain sufficient quantities of merchandise or increase our costs.

We require our independent manufacturers to operate in compliance with applicable laws and regulations and our internal requirements. Our vendor code of conduct, guidelines and other compliance programs promote ethical business practices, and we monitor compliance with them; however, we do not control these manufacturers, their labor practices, the health and safety conditions of their facilities, or their sources of raw materials, and from time to time these manufactures may not be in compliance with these standards or applicable laws. Significant or continuing noncompliance with such standards and laws by one or more manufacturer could have a negative impact on our reputation and our business.

Any of the aforementioned risks, independently or in combination with others, could have an adverse effect on our business, operational results, financial position and cash flows.


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Our business could suffer as a result of a third-party manufacturer’s inability to produce goods for us on time and to our specifications.

We do not own or operate any manufacturing facilities and therefore depend upon independent third-parties for the manufacture of all of the goods that we sell. Both domestic and international manufacturers produce these goods. The Company is at risk for increases in manufacturing costs, and we cannot be certain that we will not experience operational difficulties with these third-party manufacturers, such as reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control and failure to meet production deadlines. In addition, we cannot predict the impact of world-wide events, including inclement weather, natural or man-made disasters, public health issues, strikes, acts of terror or political, social or economic conditions on our major suppliers. Our suppliers could also face economic pressures as a result of rising wages and inflation or experience difficulty obtaining adequate credit or access to liquidity to finance their operations, which could lead to vendor consolidation. A manufacturer's failure to continue to work with us, ship orders in a timely manner or to meet our safety, quality and social compliance standards could result in supply shortages, failure to meet customer expectations and damage to our brands, which could have a material adverse impact on our business, operational results, financial position and cash flows.

Our business could suffer a material adverse effect if our distribution or fulfillment centers were shut down or disrupted.

Nearly all of the merchandise we purchase is shipped directly to our distribution and fulfillment centers, where it is prepared for shipment to the appropriate stores or to the customer directly through our ecommerce channel. We depend in large part on the orderly operation of our receiving and distribution process, which depends, in turn, on adherence to shipping schedules, proper functioning of our information technology and inventory control systems and overall effective management of our distribution and fulfillment centers. As a result of damage to, or prolonged interruption of, operations at any of these facilities due to a work stoppage, supply chain disruption, inclement weather, natural or man-made disasters, system failures, slowdowns or strikes, acts of terror or other unforeseen events, we could incur significantly higher costs and longer lead times associated with distributing our products to our stores or customers, which in turn could have a material adverse effect on our business, financial position, operational results and cash flows.

Although we maintain business interruption and property insurance for these facilities, management cannot be assured that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us, if our distribution or fulfillment centers are shut down or interrupted for any unplanned reason.

Our business could suffer as a result of increases in the price of raw materials, labor, energy, freight and trade relations.

Raw materials used to manufacture our merchandise are subject to availability constraints and price volatility caused by high or low demand for fabrics, labor conditions, transportation or freight costs, currency fluctuations, weather conditions, supply conditions, government regulations, economic inflation, market speculation and other unpredictable factors. Increases in the demand for and price of cotton, wool and other raw materials used in the production of fabric and accessories, as well as increases in labor and energy costs or shortages of skilled labor, could result in increases for the costs of our products as well as their distribution to our distribution centers, retail locations and to our customers. The Company is also susceptible to fluctuations in the cost of transportation. Additionally, greater uncertainty with respect to trade relations, such as the imposition of unilateral tariffs on imported products, could result in higher product costs, which could have a material adverse effect on our business, operational results, financial position and cash flows.

Our business could suffer as a result of disruptions at ports used to import our products.

We currently ship the vast majority of our products by ocean. If a disruption occurs in the operation of ports through which our products are imported, we and our vendors may have to ship some or all of our products from Asia or other regions by air freight or to alternate shipping destinations in the United States. Shipping by air is significantly more expensive than shipping by ocean and our profitability could be reduced. Similarly, shipping to alternate destinations in the United States could lead to increased lead times and costs for our products. A disruption at ports (domestic or abroad) through which our products are imported could have a material adverse effect on our business, operational results, financial position and cash flows.

Risks associated with ecommerce sales.

The successful operation of our ecommerce business depends on our ability to maintain the efficient and continuous operation of our ecommerce websites and our associated fulfillment operations, and to provide a shopping experience that will generate orders and return visits to our sites. Our ecommerce services are subject to numerous risks, including:


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computer system failures, including but not limited to, inadequate system capacity, human error, change in programming, website downtimes, system upgrades or migrations, Internet service or power outages;
cyber incidents, including but not limited to, security breaches and computer viruses;
reliance on third-party computer hardware/software fulfillment and delivery providers;
unfavorable federal or state regulations or laws;
violations of federal, state or other applicable laws, including those related to online privacy;
disruptions in telecommunication systems, power outages or other technical failures;
credit card fraud;
constantly evolving technology;
liability for online content; and
natural or man-made disasters or adverse weather conditions.

The Company's failure to successfully address and respond to any one or more of these risks could damage the reputation of our brands and have a material adverse effect on our business, operational results, financial position and cash flows.

Our business could suffer if our information technology systems fail to operate effectively, are disrupted or compromised.

We rely on our existing information technology systems in operating, supporting and monitoring all major aspects of our business, including sales, warehousing, fulfillment, distribution, purchasing, inventory control, merchandise planning and replenishment, and financial systems. We regularly evaluate and make investments to upgrade, enhance or replace these systems, as well as leverage new technologies to support our growth strategies. We are aware of inherent risks associated with operating, replacing and modifying these systems, including inaccurate system information and system disruptions. We believe we are taking appropriate action to mitigate the risks through testing, training, staging implementation and in-sourcing certain processes, as well as securing appropriate commercial contracts with third-party vendors supplying such replacement and redundancy technologies; however, there is a risk that information technology system disruptions and inaccurate system information, if not anticipated and/or appropriately mitigated, could have a material adverse effect on our business, operational results, financial position and cash flows.

The reliability and capacity of our information technology systems (including third-party hardware and software systems or services) are critical to our continued operations. Despite our precautionary efforts, our information technology systems are vulnerable from time to time to damage or interruption from, among other things, natural or man-made disasters, technical malfunctions, inadequate systems capacity, power outages, computer viruses and security breaches, which may require significant investment to fix or replace, and we may suffer loss of critical data and interruptions or delays to our operations.

While we believe that we are diligent in selecting vendors, systems and services to assist us in maintaining the integrity of our information technology systems, we realize that there are risks and that no guarantee can be made that future disruptions, service outages/failures or unauthorized intrusions will not occur. Certain of our information technology support functions are performed by third-parties in overseas locations. Failure by any of these third-parties to implement and/or manage our information systems and infrastructure effectively and securely could impact our operational results, financial position and cash flows.

We are subject to cybersecurity risks and may incur increased expenses to mitigate our exposure.

Our business and that of our third-party service providers employ systems and websites that allow us to process credit card transactions containing personally identifiable information ("PII"), perform online ecommerce and social media activities, and store and transmit proprietary or confidential customer, employee, job applicant and other personal confidential information. Security and/or privacy breaches, acts of vandalism or terror, computer viruses, misplaced or lost data, programming, and/or human error or other similar events could expose us to a risk of loss or misuse of this information, litigation and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks or intrusions. Attacks may be targeted at us, our customers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur significant and additional costs, including, but not limited to the costs to deploy additional personnel and protection technologies, training employees, engaging third-party experts and consultants and compliance costs associated with various applicable laws or industry standards regarding use and/or unauthorized disclosure of PII. We may also incur significant remediation costs, including liability for stolen customer, job applicant or employee information, repairing system damage or providing credit monitoring or other benefits to affected customers, job applicants or employees. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data from being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by our third-party service providers that result in the unauthorized release of personal or confidential information. We have recently identified signs of unauthorized access to a web application server and engaged a third-party cyber-security firm to determine the nature and extent of such access. This investigation remains ongoing. At this time, the Company is not able to estimate the costs, or a range of costs, related to this incident. Although we maintain cyber-security insurance there can be no assur

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ance that our insurance coverage will cover the particular cyber incident at issue or that such coverage will be sufficient, or that insurance proceeds will be paid to us in a timely manner.

The protection of customer, employee and Company data is critical. The regulatory environment surrounding information security and privacy is demanding, with the frequent imposition of new and changing requirements. In addition, customers have a high expectation that we will adequately protect their personal information. Any actual or perceived misappropriation or breach involving this data could attract negative media attention, cause harm to our reputation or result in liability (including but not limited to fines, penalties or lawsuits), any of which could have a material adverse effect on our business, operational results, financial position and cash flows.

We may be exposed to risks and costs associated with customer payment methods, including credit card fraud and identity theft, which would cause us to incur unexpected expenses and loss of revenues.

In the standard course of business, we process customer information, including payment information, through our stores and ecommerce sites. There is an increased concern over the security of PII transmitted over the Internet, consumer identity theft and user privacy. We endeavor to protect consumer identity and payment information through the implementation of security technologies, processes and procedures. It is possible that an individual or group could defeat our security measures and access sensitive consumer information. Actual or anticipated attacks may cause us to incur increased costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. Incidents which result in exposure of customer data will be handled in accordance with applicable laws and regulations. Exposure of customer data through any means could materially harm the Company by, but not limited to, reputational damage, regulatory fines and costs of litigation.

On October 1, 2015 the payment cards industry began shifting liability for certain debit and credit card transactions to retailers who do not accept Europay, MasterCard and Visa (“EMV”) chip technology transactions. All ascena brands have implemented EMV chip technology in its stores and are in the final process of certification. Until we have final verification on certification, we may be liable for chargebacks related to counterfeit transactions generated through EMV chip enabled cards, which could negatively impact our operational results, financial position and cash flows.

Our ability to successfully integrate new acquisitions.

The success of our businesses depends on our ability to integrate and manage our expanding operations, to realize opportunities for revenue growth and to eliminate redundant and excess costs. Achieving the anticipated benefits of previous and future acquisitions, including the ANN Acquisition, may present a number of significant risks and considerations, including, but not limited to:

unsuccessful, delayed or more costly integration;
demands on management related to the increase in our size and the loss of key employees;
the diversion of management’s attention from the management of daily operations to the integration of operations;
expected cost savings not being achieved in full, or taking longer or requiring greater investment to achieve; and
not achieving the anticipated omni-channel growth potential.

Impairment to the carrying value of our goodwill or other intangible assets could result in significant non-cash charges.

Under generally accepted accounting principles, we review our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Identifiable intangible assets with an indefinite useful life, including goodwill, are not amortized but are evaluated annually for impairment. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. As described in Note 6 to the accompanying consolidated financial statements included elsewhere herein, in the third quarter of Fiscal 2017, we recorded impairment charges of $596.3 million related to goodwill and $728.1 million related to other intangible assets. As of July 29, 2017, we had approximately $1.2 billion of goodwill and other intangible assets related to the acquisitions of maurices in January 2005, Justice in November 2009, Lane Bryant and Catherines in June 2012 and ANN in August 2015. Current and future economic conditions, as well as the other risks noted in this Item 1A, may adversely impact our brands' ability to attract new customers, retain existing customers, maintain sales volumes and maintain margins. As discussed in our Critical Accounting Policies included elsewhere herein, these events could materially reduce our brands' profitability and cash flow which could, in turn, lead to a further impairment of our goodwill and other intangible assets. Furthermore, significant negative industry or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of the assets may result in additional impairments to our goodwill, intangible assets and other long-lived assets. Any impairment could have a material effect on our operational results and financial condition.

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Our gross margins could be adversely affected if we are unable to manage our inventory effectively.

Our profitability depends upon our ability to manage appropriate inventory levels and respond quickly to shifts in consumer demand patterns. We must properly execute our inventory management strategies by appropriately allocating merchandise among our stores and online, timely and efficiently distributing inventory to stores, maintaining an appropriate mix and level of inventory in stores and online, adjusting our merchandise mix between our brands, appropriately changing the allocation of our product categories to respond to customer demand and effectively managing pricing and markdowns. If we overestimate customer demand for our merchandise, we may need to sell the excess inventory at lower prices which would negatively impact our gross margins and could have a material effect on our business, operational results, financial condition and cash flows. If we underestimate customer demand for our merchandise, we may experience inventory shortages which may result in missed sales opportunities that could have a material effect on our business, operational results, financial condition and cash flows.

Our efforts to expand internationally may not be successful.

We intend to expand our operations and presence in existing and new countries in the future. Several of our brands have expanded their presence into Canada as well as certain countries in the Middle East, Southeast Asia, Central America and South America, either through their own retail operations or through franchise or other licensing operations.

As we expand internationally, we may incur significant costs associated with the start-up and maintenance of foreign operations. Costs may include, but are not limited to, obtaining locations for stores, setting up foreign offices, hiring experienced management and maintaining good relations with associates. We may be unable to open and operate new stores successfully, or we may face operational issues that delay our intended pace of international store growth. In many of these new locations, we face major, established competitors. In addition, in many of these locations, the real estate, employment and labor, transportation and logistics, regulatory, and other operating requirements differ dramatically from those in the places where we have more experience. Consumer tastes and trends may differ in many of these locations and, as a result, the sales of our merchandise may not be successful or result in the margins we anticipate. If our international expansion plans are unsuccessful or do not deliver an appropriate return on our investments, could adversely affect our ability to achieve the objectives that we have established.

In addition, franchised stores are independently owned and operated, and franchisees are not our employees. Consequently, franchisees may not operate in accordance with our standards or requirements or in a manner consistent with applicable law. The quality of franchised operations may be diminished by any number of factors beyond our control. The failure of our franchisees to operate franchises successfully could have a material adverse effect on our reputation, operational results, financial position and cash flow.

Other challenges associated with international expansion may include diverting financial, operational and managerial resources from our existing operations and/or result in increased costs, which could adversely impact our financial condition and results of operations. Failure to implement our international expansion plan consistent with our internal expectations, whether as a result of one or more of the factors listed above or other factors, could adversely affect our ability to achieve the objectives that we have established.

As we continue to expand our international operations, we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, as well as compliance with the laws of foreign countries in which we operate. Violations of these laws could subject us to sanctions or other fines or penalties that would have an adverse effect on our reputation, operational results, financial position and cash flows.

We may be unable to protect our trademarks and other intellectual property rights.

We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and service marks on a worldwide basis, including in the countries in which we have business operations or plan to have business operations. Because we have not registered all of our trademarks in all categories, or in all foreign countries in which we currently, or may in the future, source or offer our merchandise, our international expansion and our merchandising of products using these marks could be negatively impacted. We are not aware of any material claims of infringement or material challenges to our right to use any of our trademarks in the United States or Canada. Nevertheless, the actions we have taken, including to establish and protect our trademarks and service marks, may not be adequate to prevent others from imitating our products or to prevent others from seeking to block sales of our products. Also, others may assert proprietary rights in our intellectual property and we may not be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Any litigation regarding our trademarks could

17



be time-consuming and costly. The loss of exclusive use of our trademarks could have a material adverse effect on our operational results, financial position and cash flows.

We may suffer negative publicity and our business may be harmed if we need to recall any product we sell or if we fail to comply with applicable product safety laws.

The products our brands sell are regulated by many different governmental bodies, including but not limited to the Consumer Product Safety Commission and the Food and Drug Administration in the U.S., Health Canada in Canada, and similar state, provincial and international regulatory authorities. Although we generally test the products sold in our brands’ stores and on our brands’ websites, selected products still could present safety problems of which our brands are not aware. This could lead one or more of our brands to recall selected products, either voluntarily or at the direction of a governmental authority, and may lead to a lack of consumer acceptance or loss of consumer trust. Product safety concerns, recalls, defects or errors could result in the rejection of our products by customers, damage to our reputation, lost sales, product liability litigation and increased costs, any or all of which could harm our business and have a material adverse effect on our financial position, operational results and cash flows.

The cost of compliance with current requirements and any future requirements of federal, state or international regulatory authorities could have a material adverse effect on our financial position, operational results and cash flows. Examples of these requirements include regulatory testing, certification, packaging, labeling, advertising and reporting requirements affecting broad categories of consumer products. In addition, any failure of one or more of our brands to comply with such requirements could result in significant penalties, require one or more of our brands to recall products and harm our reputation, any or all of which could have a material adverse effect on our business, operational results, financial position and cash flows.

We depend on strip shopping center and mall traffic and our ability to identify suitable store locations.

Many of our stores are located in strip shopping centers, shopping malls and other retail centers that, historically, have benefited from their proximity to “anchor” retail tenants, generally large department stores, and other attractions, which generate consumer traffic in the vicinity of our stores. Strip shopping center and mall traffic may be adversely affected by, among other things, economic downturns, the closing of, or continued decline of, anchor stores that drive consumer traffic or changes in customer shopping preferences. A decline in the popularity of strip shopping center or mall shopping among our target customers could have a material adverse effect on customer traffic and our operational results. In order to leverage customer traffic and the shopping preferences of our customers, we need to maintain or acquire stores in desirable consumer locations, however competition for such suitable store locations is intense.

In addition, continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation continue, a large portion of our store base could be concentrated with one or fewer landlords that could then be in a position to dictate unfavorable terms to us due to their significant negotiating leverage. If we are unable to negotiate favorable lease terms with these landlords, this could affect our ability to profitably operate our stores, which in turn could have a material effect on our business, operational results, financial condition and cash flows.

Acts of terrorism, effects of war, public health, man-made and natural disasters, other catastrophes or political unrest could have a material adverse effect on our business.

The threat, or actual acts, of terrorism continue to be a significant risk to the global economy. Terrorism and potential military responses, political unrest, natural disasters, pandemics and other health issues have disrupted or could in the future disrupt commerce, impact our ability to operate our stores, offices or distribution and fulfillment centers in the affected areas or impact our ability to provide critical functions or services necessary to the operation of our business. A disruption of commerce, or an inability to recover critical functions or services from such a disruption, could interfere with the production, shipment or receipt of our merchandise in a timely manner or increase our costs to do so, which could have a material adverse impact on our business, operational results, financial position and cash flows. In addition, any of the above disruptions could undermine consumer confidence, which could negatively impact consumer spending or customer traffic, and thus have an adverse effect on our operational results.

Our ability to mitigate the adverse impact of any of the above disruptions also depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster or other catastrophic situation. In addition, although we maintain insurance coverage, there can be no assurance that our insurance coverage will be sufficient, or that insurance proceeds will be timely paid to us.

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Our business could suffer a material adverse effect from extreme or unseasonable weather conditions.

Extreme weather conditions in the areas in which the Company's stores are located could negatively affect the Company's business, operational results, financial position and cash flows. Frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather conditions over an extended period could make it difficult for our customers to travel to our stores, and may cause a disruption in the shipment or receipt of our merchandise, which could negatively impact the Company's operational results. The Company's business is also susceptible to unseasonable weather conditions, which could influence customer trends, consumer traffic and shopping habits. For example, extended periods of unseasonably warm temperatures during the winter season or cool temperatures during the summer season could reduce demand and thereby would have an adverse effect on our business, operational results, financial position and cash flows.

Capital Risks

We incurred significant additional indebtedness in connection with the ANN Acquisition, which could adversely affect us.

We substantially increased our indebtedness in connection with the completion of the ANN Acquisition, which could have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and further increasing our interest expense. We also incurred various costs and expenses associated with our financings. The amount of cash flows required to pay interest on our increased indebtedness levels resulting from the ANN Acquisition, and thus the demands on our cash resources, will be greater than the amount of cash flows required to service our indebtedness prior to the transaction. The increased levels of indebtedness could also reduce funds available for working capital, capital expenditures, acquisitions and other general corporate purposes and may create competitive disadvantages for us relative to other companies with lower debt levels. If we do not achieve the expected benefits and cost savings from the acquisition, or if the financial performance of the combined company does not meet current expectations, our ability to service our indebtedness may be adversely impacted.

The indebtedness incurred in connection with the acquisition bears interest at variable interest rates. If interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flows.

In addition, our credit ratings affect the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect each rating organization’s opinion of our financial strength, operating performance and ability to meet our debt obligations. In connection with the debt financing, we received ratings from S&P and Moody’s. There can be no assurance that we will maintain particular ratings in the future.

Moreover, we may be required to raise substantial additional financing to fund working capital, capital expenditures or acquisitions or for other general corporate requirements. Our ability to arrange additional financing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. We cannot be assured that we will be able to obtain additional financing on terms acceptable to us or at all.

To service our indebtedness after the ANN Acquisition, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.

Our ability to make cash payments on our indebtedness as a result of the ANN Acquisition, as well as our ability to fund planned capital expenditures and operating or strategic initiatives will depend on our ability to generate significant operating cash flow in the future, which is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that will be beyond our control.

Our business may not generate sufficient cash flow from operations to enable us to pay our indebtedness or fund our other liquidity needs. In any such circumstance, we may need to refinance all or a portion of our indebtedness, on or before maturity, or incur additional debt subject to the restrictions of our borrowing agreements. We may not be able to refinance any indebtedness or incur additional debt on commercially reasonable terms or at all. If we cannot service our indebtedness or incur additional debt, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions and investments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. The instruments governing our indebtedness may restrict our ability to sell assets and our use of the proceeds from such sales.

If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, and the lenders under the term facility, the revolving facility and other indebtedness, or any replacement facilities in respect thereof, could elect to terminate their commitments thereunder, cease making

19



further loans and institute foreclosure proceedings against the Company’s assets, and we could be forced into bankruptcy or liquidation.

Our Amended Revolving Credit Agreement and our Term Loan contain various covenants that impose restrictions on the Company and certain of its subsidiaries that may affect their ability to operate their businesses.

The Amended Revolving Credit Agreement and the Term Loan contain various affirmative and negative covenants that may, subject to certain exceptions, restrict the ability of the Company and certain of its subsidiaries to, among other things, have liens on their property, change the nature of their business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of their assets to any one person. In addition, the agreements that govern the financings contain financial covenants that, under certain circumstances, will require the Company to maintain certain financial ratios. The ability of the Company and its subsidiaries to comply with these provisions may be affected by our operating results as well as events beyond our control. Failure to comply with these covenants could result in an event of default, which, if not cured or waived, could accelerate the Company’s repayment obligations.

Inability to access liquidity or capital markets could adversely affect the Company's business, operational results, financial position or cash flows.

Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict the Company’s access to potential sources of future liquidity. As a result of general unpredictability in the global financial markets, there can be no assurance that our liquidity will not be affected or that our capital resources will at all times be sufficient to satisfy our liquidity needs. Although we believe that our existing cash and cash equivalents, cash provided by operations, and our availability under our $600 million Amended and Restated Credit Agreement will be adequate to satisfy our capital needs for the foreseeable future, any renewed tightening of the credit markets could make it more difficult for us to access funds, enter into an agreement for new indebtedness or obtain funding through the issuance of our securities. Our borrowing agreements also have financial convents and certain restrictions which, if not met, may limit our ability to access funds.

In addition, we also have cash and cash equivalents on deposit at overseas financial institutions as well as at FDIC-insured financial institutions that are currently in excess of FDIC-insured limits. As a result, we cannot be assured that we can access the cash and cash equivalents overseas when we are in need of liquidity, or that we will not experience losses with respect to cash on deposit at these financial institutions.

Legal and Regulatory Risks

Our business may be affected by regulatory, administrative and litigation developments.

Laws and regulations at the local, state, federal and international levels frequently change, and the ultimate cost of compliance cannot be reasonably estimated. In addition, we cannot predict the impact that may result from regulatory or administrative changes. Changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation that impacts employment and labor, trade, advertising and marketing practices, product safety, transportation and logistics, healthcare, tax, accounting, privacy, operations or environmental issues, among others, could have an adverse impact on our business, operational results, financial position and cash flows.

While it is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance, we cannot assure that all of our operations will at all times comply with all such legal and regulatory requirements. A finding that we or our vendors or agents are out of compliance with applicable laws and regulations could subject us to civil remedies or criminal sanctions, which could have a material adverse effect on our business, reputation and stock price. In addition, even the claim of a violation of applicable laws or regulations could negatively affect our reputation. We are also involved from time to time in litigation arising primarily in the ordinary course of business. Litigation matters may include, among other things, employment, commercial, intellectual property, advertising or shareholder claims, and any adverse decision in any such litigation could adversely impact our business, operational results, financial position and cash flows.

Increases in labor costs related to changes in employment laws or regulations could impact our business, operational results, financial position and cash flows.

Various foreign and domestic labor laws govern our relationship with our employees and affect our operating costs. These include minimum wage requirements, overtime and sick pay, paid time off, work scheduling, healthcare reform and the Patient Protection and Affordable Care Act (“ACA”), unemployment tax rates, workers’ compensation rates, and union organizations. A number of factors could adversely affect our operating costs, including additional government-imposed increases in minimum wages, overtime

20



and sick pay, paid leaves of absence and mandated health benefits, and changing regulations from the National Labor Relations Board or other agencies. Additionally, recent political changes could lead to the repeal of, or changes to, some or all of the ACA. Complying with any new legislation and/or reversing changes implemented under the ACA could be time-intensive and expensive and could have a material adverse impact on our business, operational results, financial position and cash flows.

Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact our business, the price of our common stock and market confidence in our reported financial information.

We must continue to document, test, monitor and enhance our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We cannot be assured that our disclosure controls and procedures and our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act will prove to be adequate in the future. Any failure to maintain the effectiveness of our disclosure controls or our internal control over financial reporting or to comply with the requirements of the Sarbanes-Oxley Act could have a material adverse impact on our business, operational results, financial position and cash flows.

Changes to accounting rules and regulations may adversely affect our operational results, financial position and cash flows.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regards to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, leases, impairment of goodwill and intangible assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change or increase volatility of our reported or expected financial performance or financial condition. See Note 4, “Recently Issued Accounting Standards,” in the Notes to our Consolidated Financial Statements included herein for a description of recently issued accounting pronouncements, and “Critical Accounting Policies,” included herein which discusses accounting policies considered to be important to our operational results and financial condition. These and other future changes to accounting rules or regulations could have an adverse impact on our business, operational results, financial position and cash flows.
   
Item 1B. Unresolved Staff Comments.
 
None.

Item 2. Properties.
 
Retail Store Space

We lease space for all our retail stores in various domestic and international locations. Store leases generally have an initial term of approximately ten years, although certain leases are cancelable if specified sales levels are not achieved or co-tenancy requirements are not being satisfied. Just over half of our leases have terms that either expire, or have upcoming lease action dates available to us, within the next two years. As a result, our median lease life is approximately two years as of the end of Fiscal 2017, which will allow us to aggressively negotiate new lease terms and continue to shorten our average lease life.

The table below, covering all open store locations leased by us on July 29, 2017, indicates the number of leases expiring during the period indicated and the number of expiring leases with and without renewal options:
Fiscal Years
 
Leases Expiring
 
Number with
Renewal Options
 
Number without
Renewal Options
2018
 
1,031
 
320
 
711
2019
 
799
 
446
 
353
2020
 
540
 
311
 
229
2021
 
469
 
265
 
204
2022
 
575
 
221
 
354
2023 and thereafter
 
1,393
 
645
 
748
Total
 
4,807
 
2,208
 
2,599
 
Our store leases generally provide for a base rent per square foot per annum. Certain leases have formulas requiring the payment of additional rent as a percentage of sales, generally when sales reach specified levels. Our aggregate minimum rentals under

21



operating leases in effect at July 29, 2017 and excluding locations acquired after July 29, 2017, are approximately $585.1 million for Fiscal 2018. In addition, we are typically responsible under our store leases for our pro rata share of maintenance expenses and common area charges in strip shopping centers, outlet centers and malls.
 
Certain of the store leases have termination clauses, providing us greater flexibility to close under-performing stores. In particular, certain leases have termination clauses during the first few years of the lease if certain specified sales volumes are not achieved. In addition, others leases provide co-tenancy requirement clauses allowing us to terminate if they are not being met.
 
Our investment in new stores consists primarily of inventory, leasehold improvements, fixtures and equipment, and information technology. We generally receive tenant improvement allowances from landlords to offset a portion of these initial investments in leasehold improvements.

Corporate Office Space
 
The Company owns the following facilities:

a 202,000 square foot campus which serves as the corporate office for the dressbarn brand and for ascena located in Mahwah, NJ;
a 280,000 square foot campus which serves as the corporate office for the Justice brand, located in New Albany, Ohio;
a 145,000 square foot building which serves as the corporate office for the Catherines brand, located in Bensalem, Pennsylvania;
a 200,000 square foot building which serves as the corporate office for the maurices brand and for a portion of the Company's brand services operations, located in Duluth, Minnesota; and
a 168,000 square foot building which serves as the corporate office for the majority of the Company's brand services operations, located in Etna Township, Ohio, adjacent to our distribution center.

The Company acquired leased corporate office facilities of approximately 308,000 square feet in New York City, NY and approximately 42,000 square feet in Milford, CT through the ANN Acquisition. The Company also leases approximately 135,000 square feet in Columbus, Ohio that serves as Lane Bryant’s corporate headquarters.

Internationally, the Company owns office space in Hong Kong and leases office space in Shanghai, China and Seoul, South Korea to support our sourcing operations.

Distribution and Fulfillment Facilities

The Company owns a 695,000 square foot distribution center in Etna Township, Ohio, which serves as the Company's primary brick-and-mortar store distribution center.

The Company also owns a 903,000 square foot fulfillment center in Greencastle, Indiana, which serves as the Company's primary ecommerce fulfillment center.

During Fiscal 2016, the Company entered into a ten-year lease for a 583,000 square foot distribution center in Riverside, California to serve as the receiving and west coast distribution hub for the Company's merchandise sourced from Asia. The Riverside facility began operations in March 2017.

During Fiscal 2016, as a result of the ANN Acquisition, the Company acquired a 256,000 square foot distribution center in Louisville, Kentucky. The Company has substantially completed the transition out of the distribution center and expects to sell the facility in the Fall of calendar 2017.
 
Item 3. Legal Proceedings.
 
Information regarding legal proceedings is incorporated by reference from Note 15 to the accompanying consolidated financial statements.


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PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Prices of Common Stock
 
The common stock of ascena retail group, inc. is quoted on the NASDAQ Global Select Market under the ticker symbol “ASNA.”
 
The table below sets forth the high and low prices as reported on the NASDAQ Global Select Market for the last eight fiscal quarters.
 
 
Fiscal 2017
 
Fiscal 2016
Fiscal
 
High
 
Low
 
High
 
Low
First Quarter
 
$9.02
 
$4.75
 
$14.20
 
$10.73
Second Quarter
 
$8.11
 
$4.70
 
$13.98
 
$7.56
Third Quarter
 
$5.41
 
$3.64
 
$11.06
 
$6.48
Fourth Quarter
 
$3.91
 
$1.72
 
$9.44
 
$6.59
 
Number of Holders of Record
 
As of September 21, 2017, we had approximately 4,414 holders of record of our common stock.

Dividend Policy
 
We have never declared or paid cash dividends on our common stock. However, payment of dividends is within the discretion and are payable when declared by our Board of Directors. Payments of dividends are limited by our borrowing arrangements as described in Note 12 to the accompanying consolidated financial statements.

Performance Graph
 
The following graph illustrates, for the period from July 28, 2012 through July 29, 2017, the cumulative total shareholder return of $100 invested (assuming that all dividends, if any, were reinvested) in (1) our common stock, (2) the S&P Composite-500 Stock Index and (3) the S&P Specialty Apparel Retailers Index.

The comparisons in this table are required by the rules of the SEC and, therefore, are not intended to forecast, or be indicative of, possible future performance of our common stock.

performancechartfy17.jpg

Securities Authorized for Issuance under Equity Compensation Plans
 
The information set forth in Item 12 of Part III of this Annual Report on Form 10-K is incorporated by reference herein.
 

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Issuer Purchases of Equity Securities
 
The following table provides information about the Company’s repurchases of common stock during the quarter ended July 29, 2017.
Period
 
Total
Number of
Shares
Purchased
 
Average Price
Paid per
Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(a)
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Month # 1 (April 30, 2017 – May 27, 2017)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 2 (May 28, 2017 – July 1, 2017)
 
 
 
 
$—
 
 
 
 
$181 million
 
Month # 3 (July 2, 2017 – July 29, 2017)
 
 
 
 
$—
 
 
 
 
$181 million
 
 
(a) In December 2015, the Company’s Board of Directors authorized a $200 million share repurchase program (the “2016 Stock Repurchase Program”). 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 12 to the consolidated financial statements. Purchases will be made at prevailing market prices, through open market purchases or in privately negotiated transactions and will be subject to applicable SEC rules.


Item 6. Selected Financial Data.
 
This selected financial data should be read in conjunction with Item 7 — "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 — "Financial Statements and Supplementary Data" included in this Annual Report on Form 10-K. Historical results may not be indicative of future results.
 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
 
The following discussion should be read in conjunction with our audited consolidated financial statements and related notes thereto, which are included elsewhere in this Annual Report on Form 10-K for Fiscal 2017 (“Fiscal 2017 10-K”). Fiscal year 2017 ended on July 29, 2017 and reflected a 52-week period (“Fiscal 2017”); fiscal year 2016 ended on July 30 2016 and reflected a 53-week period (“Fiscal 2016”); and fiscal year 2015 ended on July 25, 2015 and reflected a 52-week period (“Fiscal 2015”). All references to “Fiscal 2018” refer to our 53-week period that will end on August 4, 2018.
 
INTRODUCTION
 
MD&A is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our operational results, financial condition, liquidity and changes in financial condition. MD&A is organized as follows:
 
Overview. This section includes recent developments, our objectives and risks, and a summary of our financial performance for Fiscal 2017. In addition, this section includes a discussion of transactions affecting comparability that we believe are important in understanding our operational results and financial condition, and in anticipating future trends.

Results of operations. This section provides an analysis of our operational results for Fiscal 2017, Fiscal 2016 and Fiscal 2015.

Financial condition and liquidity. This section provides an analysis of our cash flows for Fiscal 2017, Fiscal 2016 and Fiscal 2015, as well as a discussion of our financial condition and liquidity as of July 29, 2017. The discussion of our financial condition and liquidity includes (i) our available financial capacity under our revolving credit agreement, (ii) a summary of our capital spending, and (iii) a summary of our contractual and other obligations as of July 29, 2017.

Market risk management. This section discusses how we manage our risk exposures related to interest rates, foreign currency exchange rates and our investments, as well as the underlying market conditions as of July 29, 2017.

Critical accounting policies. This section discusses accounting policies considered to be important to our operational results and financial condition, which require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 3 to our accompanying consolidated financial statements.

Recently issued accounting pronouncements. This section discusses the potential impact to our reported operational results and financial condition of accounting standards that have been recently issued.

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, as more fully described in Note 5 to the accompanying consolidated financial statements, 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 results of ANN are represented by our Premium Fashion segment. The Company had annual revenue of approximately $6.6 billion for Fiscal 2017. The Company and its subsidiaries are collectively referred to herein as the “Company,” “ascena,” “we,” “us,” “our” and “ourselves,” unless the context indicates otherwise.
 
Objectives and Initiatives
 
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.

During the latter half of Fiscal 2017, the U.S. economy continued to show signs of recovery. However, improved employment and wage growth have not translated into higher spending in nondurable goods, as consumer spending continues to shift towards experiences, services, health care and durable goods such as home improvements. Brick-and-mortar retailers, particularly those

25



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


in the specialty retail sector, continued to face intense competition and channel disruption which accelerated during the third quarter. In addition, consumer spending habits continue to shift on an accelerated pace towards an increasing preference to purchase merchandise digitally as opposed to in traditional brick-and-mortar retail stores. As a result, store traffic remained relatively weak and inconsistent during Fiscal 2017. Store traffic declines pressured comparable sales which, in turn, resulted in a more promotional operating environment. We expect store traffic headwinds and the promotional operating environment to continue into Fiscal 2018. We have responded to the continued trends by scaling back overall spending levels and continuously refining our operating model to ensure we remain competitive in our rapidly evolving sector. The more significant of these initiatives are described below.

Change for Growth Program
During the first quarter of Fiscal 2017, the Company initiated a transformation plan with the objective of supporting sustainable long-term growth and increasing shareholder value (the "Change for Growth" program). In connection with the program, the Company (i) refined its operating model by eliminating a number of executive positions and making organizational changes resulting in the creation of the Premium Fashion, Value Fashion, Plus Fashion and Kids Fashion operating segments, (ii) further consolidated certain support functions into its brand services group, including Human Resources, Real Estate, Non-Merchandise Procurement, and Asset Protection, (iii) began transitioning certain transaction processing functions within the brand services group to an independent third-party managed-service provider, and (iv) conducted a review of its store fleet with the goal of reducing the number of marginally profitable stores through either rent reductions or store closures, in an effort to increase the overall profitability of the remaining store footprint and convert sales from these stores into ecommerce sales or to nearby store locations ("Fleet Optimization"). Charges incurred as a result of these actions are described within the section Results of Operations.

The Company realized approximately $65 million in cost savings, including $55 million in Selling, general and administrative expenses ("SG&A") and $10 million in Buying, distribution and occupancy ("BD&O") during Fiscal 2017 related to Change for Growth program actions identified and in process as of the end of the Fiscal 2017. Subsequent to Fiscal 2017, the Company expects to realize an additional $185 to $235 million in cost savings through fiscal 2020, bringing the total expected annual cost savings from these actions to a range of $250 to $300 million. These savings are expected to be achieved through (i) operating expense reductions in the areas of professional services, travel and facilities management, among others, (ii) refinement of our operating model to eliminate duplicative overhead, and increase utilization of our brand services functions, (iii) creating a platform that reduces product costs and improves information technology efficiencies and (iv) Fleet Optimization. These savings are expected to be realized in our operating segment results generally in proportion to their sales.

As the Company continues to execute on the initiatives identified under the Change for Growth program, we currently expect to incur additional charges in Fiscal 2018 of approximately $35-$50 million. In addition, we have identified capital projects of approximately $40 million, which are expected to be incurred during Fiscal 2018. The Company may incur significant additional charges and capital expenditures in future periods as it more fully defines incremental Change for Growth program initiatives, and moves into the execution phases of those projects. Actions associated with the Change for Growth program are currently expected to continue through fiscal 2019.

Integration of ANN
During Fiscal 2017, the Company (i) completed the integration of its Premium Fashion segment’s ecommerce operations into its Greencastle fulfillment center, (ii) negotiated favorable contracts with vendors and (iii) realized cost reductions from sourcing merchandise through third-party buying agents. As a result of these initiatives, the Company has realized cost savings of approximately $95 million during Fiscal 2017, with approximately $55 million in freight and product cost savings related to the Company's ongoing supply chain integration, and cost of goods sold initiative at its Premium Fashion segment, approximately $10 million in BD&O synergies related to the consolidation of its Premium Fashion segment brands into the Company's ecommerce fulfillment center and approximately $30 million in SG&A synergies primarily related to the elimination of redundant leadership and non-merchandise procurement savings. We expect to realize additional synergies of approximately $65 million in Fiscal 2018 and approximately $10 million in fiscal 2019. Annual synergies and cost savings related to the integration of ANN (the "ANN integration"), including amounts achieved from Fiscal 2016 through fiscal 2019, are expected to approximate $235 million.

Distribution and Fulfillment
As previously disclosed, our Justice, Lane Bryant, maurices, dressbarn and Catherines brands' distribution and fulfillment was centralized over the last few fiscal years into our brick-and-mortar store distribution facility in Etna, Ohio and our ecommerce

26



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


fulfillment facility in Greencastle, Indiana which has resulted in increased processing efficiencies. Additionally, during Fiscal 2017, the Company completed the integration of ANN's ecommerce fulfillment into our Greencastle facility and completed the integration of ANN's brick-and-mortar distribution from Louisville into our Etna facility.

During Fiscal 2016, the Company entered into a ten-year lease for a 583,000 square foot distribution center in Riverside, California to serve as the receiving and west coast distribution hub for merchandise sourced from Asia. During the third quarter of Fiscal 2017, the Riverside facility became operational and is expected to further enhance our processing efficiencies.

We expect that shipping savings resulting from consolidation into these facilities will continue during Fiscal 2018.

Sourcing
The Company's brands source their products through a variety of sourcing channels including internally through our Ascena Global Sourcing ("AGS") subsidiary and externally through third-party buying agents based mainly in Asia. Factors affecting the selection of sourcing channels include cost, speed-to-market, merchandise selection, vendor capacity and fashion trends. We continue to increase the penetration of internally sourced products and manage our relationships with third-party buying agents.

Non-merchandise Procurement
During Fiscal 2017, we continued our efforts to leverage our volume of non-merchandise related goods and services purchases to negotiate favorable pricing. As part of these efforts, we are consolidating suppliers of our brands across multiple areas, including information technology support contracts, facilities, marketing arrangements, and general services and suppliers, among others. Savings in this area are expected to continue to be achieved through Fiscal 2019.

Omni-channel Expansion
We continue to invest in initiatives that support our omni-channel strategies. During Fiscal 2017, we completed the transition of all brands onto our new ecommerce platform with our dressbarn, Lane Bryant and Catherines brands added to the platform. The aforementioned initiatives allow our brands to (i) provide customers a seamless omni-channel shopping experience in-store and online, (ii) integrate our marketing efforts to increase in-store and online traffic, (iii) improve product availability and fulfillment efficiency and (iv) enhance our capability to collect and analyze customer transaction data to support strategic decisions. Additionally, the Company's new distribution center in Riverside, California commenced west coast brick-and-mortar distribution this past spring. The Company's distribution centers in Etna, Ohio and Riverside, California, and its fulfillment center in Greencastle, Indiana, are expected to enhance its fulfillment capability and distribution efficiency.
Private Label and Co-branded Credit Card Programs
Our brands also offer various credit card programs to eligible customers in the United States. In January 2017, the Company's Value Fashion segment replaced its previous private label credit card arrangement with a new arrangement offered under an agreement with Capital One, National Association ("Capital One"). Accordingly, Capital One began offering private label credit cards to new and existing customers (the “Program”) at our Value Fashion segment, which recognized approximately $24 million of revenue under the Program during Fiscal 2017. The Company's Value Fashion segment expects to continue to recognize incremental revenue from this new arrangement through the second quarter of Fiscal 2018.
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 our Kids Fashion segment 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 Plus Fashion segment tends to experience higher sales during the spring season, which include the Easter and Mother's Day holidays. Our Premium Fashion and Value Fashion 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. 
 

27



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


Summary of Financial Performance

Goodwill and Other Indefinite-lived Intangible Asset Impairment Charges
As a result of the aforementioned negative business conditions which accelerated during the third quarter of Fiscal 2017, the Company performed an interim assessment of its goodwill and other intangible assets and recorded non-cash impairment charges to write down the carrying values of its trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade name and $161.8 million of our Lane Bryant trade name. In addition, the Company recognized the following goodwill impairment charges: $428.9 million at the ANN reporting unit, $107.2 million at the maurices reporting unit and $60.2 million at the Lane Bryant reporting unit to write down the carrying values of the reporting units to their fair values. These impairment charges are more fully described in Note 6 to the accompanying consolidated financial statements.

Operating Results
 
Our Fiscal 2017 operating results reflected (i) weaker store traffic and a more promotional environment, (ii) the impairment of a substantial portion of goodwill and other intangible assets, (iii) costs and savings related to our Change for Growth program, (iv) costs and synergies from the continued integration of our Premium Fashion segment, which was acquired in Fiscal 2016, and (v) lower non-cash purchase accounting expenses in our Premium Fashion segment.

Operating highlights for Fiscal 2017 are as follows: 

Comparable sales decreased by 5%, and were down at all four segments, primarily due to declines in store traffic;
Gross margin rate increased by 180 basis points to 58.0% primarily due to an approximately $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair value recorded in the year-ago period. Excluding the prior year impact of the inventory amortization, gross margin rate was essentially flat;
Operating loss was $1.314 billion compared to operating income of $93.8 million for the year-ago period, with the loss primarily due to the impairment of goodwill and other intangible assets; and
Net loss per diluted share of $5.48 in Fiscal 2017 (caused primarily by the aforementioned impairment charges), compared to net loss per diluted share of $0.06 for Fiscal 2016.

Liquidity highlights for Fiscal 2017 are as follows:
 
Cash from operations was $343.6 million, compared to $445.4 million in the year-ago period;
Cash used in investing activities for Fiscal 2017 was $268.9 million, consisting primarily of capital expenditures of $258.1 million, compared to $1.836 billion in the year-ago period, consisting primarily of $1.495 billion of cash paid in the ANN Acquisition and capital expenditures of $366.5 million; and
Cash used in financing activities for Fiscal 2017 was $120.9 million, consisting primarily of term loan repayments of $122.5 million, compared to cash provided by financing activities of $1.522 billion in the year-ago period, consisting primarily of $1.8 billion of borrowing under our new term loan, offset in part by net repayments of debt under our amended revolving credit agreement of $116.0 million, $77.4 million of redemptions and principal repayments of our term loan debt and $42.6 million of payments made for deferred financing costs.


28



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


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:
 
Fiscal Years Ended
 
July 29,
2017
 
July 30,
2016
 
July 25,
2015
 
(millions)
Acquisition and integration expenses (a)
$
(39.4
)
 
$
(77.4
)
 
$
(31.7
)
Restructuring and other related charges (b)
(81.9
)
 

 

Impairment of goodwill and other intangible assets (c)
(1,324.4
)
 

 
(306.4
)
Non-cash inventory expense associated with the purchase accounting write-up of ANN's inventory to fair market value

 
(126.9
)
 

Justice Pricing Lawsuits

 

 
(50.8
)
                   

(a) Fiscal 2017 primarily represented severance and retention costs associated with the post-acquisition integration of ANN's operations as well as costs associated with the post-acquisition integration of ANN's operations. 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 technology platforms.
(b) Fiscal 2017 primarily represented severance and benefit costs, store asset impairment charges and professional fees incurred in connection with identification and implementation of the initiatives associated with the Change for Growth program.
(c) Fiscal 2017 represents the impact of non-cash impairments of goodwill and other intangible assets by segment as follows: $428.9 million of goodwill and $566.3 million of other intangible assets at the Premium Fashion segment, $107.2 million of goodwill at the Value Fashion segment and $60.2 million of goodwill and $161.8 million of other intangible assets at the Plus Fashion segment. Fiscal 2015 represents the impact of non-cash impairments of $261.7 million of goodwill and $44.7 million other intangible assets at our Plus Fashion segment.

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.


29



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


RESULTS OF OPERATIONS
 
Fiscal 2017 Compared to Fiscal 2016
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 29,
2017
 
July 30,
2016
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
6,649.8

 
$
6,995.4

 
$
(345.6
)
 
(4.9
)%
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(2,790.2
)
 
(3,066.7
)
 
276.5

 
9.0
 %
         Cost of goods sold as % of net sales
 
42.0
 %
 
43.8
 %
 
 

 
 

Gross margin
 
3,859.6

 
3,928.7

 
(69.1
)
 
(1.8
)%
        Gross margin as % of net sales
 
58.0
 %
 
56.2
 %
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(1,274.3
)
 
(1,286.5
)
 
12.2

 
0.9
 %
        Buying, distribution and occupancy expenses as % of net sales
 
19.2
 %
 
18.4
 %
 
 

 
 

    Selling, general and administrative expenses
 
(2,068.5
)
 
(2,112.3
)
 
43.8

 
2.1
 %
        SG&A expenses as % of net sales
 
31.1
 %
 
30.2
 %
 
 

 
 

    Acquisition and integration expenses
 
(39.4
)
 
(77.4
)
 
38.0

 
49.1
 %
    Restructuring and other related charges
 
(81.9
)
 

 
(81.9
)
 
NM

    Impairment of goodwill
 
(596.3
)
 

 
(596.3
)
 
NM

    Impairment of intangible assets
 
(728.1
)
 

 
(728.1
)
 
NM

    Depreciation and amortization expense
 
(384.9
)
 
(358.7
)
 
(26.2
)
 
(7.3
)%
Total other operating expenses
 
(5,173.4
)
 
(3,834.9
)
 
(1,338.5
)
 
34.9
 %
Operating (loss) income
 
(1,313.8
)
 
93.8

 
(1,407.6
)
 
NM

        Operating (loss) income as % of net sales
 
(19.8
)%
 
1.3
 %
 
 

 
 

Interest expense
 
(102.2
)
 
(103.3
)
 
1.1

 
1.1
 %
Interest and other income, net
 
1.8

 
0.4

 
1.4

 
350.0
 %
Gain on extinguishment of debt
 

 
0.8

 
(0.8
)
 
NM

Loss before benefit (provision) for income taxes
 
(1,414.2
)
 
(8.3
)
 
(1,405.9
)
 
NM

Benefit (Provision) for income taxes
 
346.9

 
(3.6
)
 
350.5

 
NM

        Effective tax rate (a)
 
24.5
 %
 
(43.4
)%
 
 

 
 

Net loss
 
$
(1,067.3
)
 
$
(11.9
)
 
$
(1,055.4
)
 
NM

 
 
 
 
 
 
 
 
 
Net loss per common share:
 
 

 
 

 
 

 
 

        Basic
 
$
(5.48
)
 
$
(0.06
)
 
$
(5.42
)
 
NM

        Diluted
 
$
(5.48
)
 
$
(0.06
)
 
$
(5.42
)
 
NM

_________

(a) Effective tax rate is calculated by dividing the benefit (provision) for income taxes by the loss before the benefit (provision) for income taxes.
(NM) Not meaningful.

Net Sales. Net sales decreased by $345.6 million, or 4.9%, to $6.650 billion in Fiscal 2017 from $6.995 billion in the year-ago period. The decline in net sales primarily reflected a 5% decline in comparable sales which was offset in part by three additional weeks of net sales for the Premium Fashion segment in Fiscal 2017 compared to Fiscal 2016 which included only the 49-week post-acquisition period. The comparable sales decline resulted from reduced store traffic. Non-comparable sales decreased by $23.5 million, or 14.0%, to $144.2 million from $167.7 million, as discussed on a segment basis below. Wholesale, licensing and other revenues increased by $8.8 million, or 6.1%, to $152.2 million from $143.4 million. Also contributing to the decline was the 53rd week in Fiscal 2016, which represented an incremental $82 million in net sales in the year-ago period.

30



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



Net sales data for our four operating segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
July 29,
2017
 
July 30,
2016
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

Premium Fashion
 
$
2,322.6

 
$
2,330.9

 
$
(8.3
)
 
(0.4
)%
Value Fashion
 
1,950.2

 
2,094.6

 
(144.4
)
 
(6.9
)%
Plus Fashion
 
1,353.9

 
1,463.6

 
(109.7
)
 
(7.5
)%
Kids Fashion
 
1,023.1

 
1,106.3

 
(83.2
)
 
(7.5
)%
Total net sales
 
$
6,649.8

 
$
6,995.4

 
$
(345.6
)
 
(4.9
)%
 
 
 
 
 
 
 
 
 
Comparable sales (a)
 
 
 
 

 
 

 
(5
)%
_______
(a) Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales refer to growth of sales from the Company's ecommerce channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, the Company reports a single, consolidated comparable sales metric, inclusive of store and ecommerce channels.

Premium Fashion net sales performance primarily reflected:

a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in the year-ago period;
a decrease of 7% in comparable sales at Ann Taylor and a decrease of 4% in comparable sales at LOFT; and
18 net store closures at Ann Taylor and 4 net store closures at LOFT in Fiscal 2017.

Value Fashion net sales performance primarily reflected:
 
a decrease of $88.7 million, or 9%, in comparable sales at maurices and a decrease of $46.6 million, or 5%, in comparable sales at dressbarn during Fiscal 2017;
an increase of $22.4 million in non-comparable sales due to 12 net store openings at maurices in Fiscal 2017, offset in part by a decrease of $19.8 million due to 30 net store closures at dressbarn in Fiscal 2017;
a decrease of $34.5 million due to the inclusion of the 53rd week in the year-ago period; and
an increase of $22.8 million in other revenues primarily due to the segment's new private label credit card program.

Plus Fashion net sales performance primarily reflected:
 
a decrease of $67.3 million, or 7%, in comparable sales at Lane Bryant and a decrease of $11.3 million, or 4%, in comparable sales at Catherines during Fiscal 2017;
a decrease of $2.3 million in non-comparable sales due to 8 net store closures at Lane Bryant and 14 net store closures at Catherines in Fiscal 2017;
a decrease of $23.0 million due to the inclusion of the 53rd week in the year-ago period; and
a decrease of $5.8 million in other revenues due to lower revenue from product sell-off and gift card breakage.

Kids Fashion net sales performance primarily reflected:
 
a decrease of $26.3 million, or 3%, in comparable sales at Justice during Fiscal 2017;
a decrease of $23.8 million in non-comparable sales caused by 37 net store closures in Fiscal 2017;
a decrease of $24.9 million due to the inclusion of the 53rd week in the year-ago period; and
a decrease of $8.2 million in other revenue due to lower wholesale and licensing revenue.
 

31



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


Gross Margin. Gross margin rate, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by 180 basis points from 56.2% in Fiscal 2016 to 58.0% in Fiscal 2017. The increase was due to an approximate $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded during Fiscal 2016 in our Premium Fashion segment. Excluding the prior year impact of the inventory amortization, gross margin rate was essentially flat, as improved performance at our Premium Fashion and Plus Fashion segments was offset by declines at our Value Fashion and Kids Fashion segments. On a consolidated basis, gross margin benefited from the realization of approximately $55 million in combined integration synergies and cost savings related to the Company's ongoing supply chain integration and the cost of goods sold initiatives at its Premium Fashion segment.

Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from period to period.

Gross margin rate highlights on a segment basis are as follows:

Premium Fashion gross margin rate performance reflected an approximate $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory recorded during Fiscal 2016 discussed above. Excluding the prior year impact of the inventory amortization, gross margin rate performance improved by approximately 220 basis points reflecting significant improvement at both Ann Taylor and LOFT. Both brands benefited from realization of freight cost synergies related to the Company's ongoing supply chain integration and the segment's cost of goods sold initiative.
Value Fashion gross margin rate performance declined approximately 110 basis points as a result of a higher level of promotional selling across the segment and increased markdown requirements to maintain appropriate inventory levels on lower than expected customer demand.
Plus Fashion gross margin rate performance improved by approximately 120 basis points mainly due to more effective inventory management at both Lane Bryant and Catherines.
Kids Fashion gross margin rate performance declined approximately 370 basis points as a result of a higher level of promotional selling and increased markdown requirements to maintain appropriate inventory levels on lower than expected customer demand.

Buying, Distribution and Occupancy ("BD&O") Expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.
 
BD&O expenses decreased by $12.2 million, or 0.9%, to $1.274 billion in Fiscal 2017 from $1.287 billion in the year-ago period. BD&O expenses for the Premium Fashion segment increased by $14.7 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in the year-ago period. For our other segments, BD&O expenses decreased by $26.9 million primarily due to lower occupancy expenses on a reduced store count and lower performance-based compensation. On a consolidated basis, BD&O expenses also included approximately $10 million in transformation initiatives and approximately $10 million of synergies related to the ANN Acquisition associated with the consolidation of the Premium Fashion segment brands into the Company's ecommerce fulfillment center. BD&O expenses as a percentage of net sales increased by 80 basis points to 19.2% in Fiscal 2017 from 18.4% in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.

Selling, General and Administrative (“SG&A”) Expenses consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs and costs related to other administrative services.
 
SG&A expenses decreased by $43.8 million, or 2.1%, to $2.069 billion in Fiscal 2017 from $2.112 billion in Fiscal 2016. SG&A expenses for the Premium Fashion segment increased by $25.2 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in Fiscal 2016. For our other segments, SG&A expenses decreased by $69.0 million primarily due to store closures and the lower sales volume, reduced marketing expenses, lower performance-based compensation and a decrease in administrative payroll costs mainly associated with the Change for Growth program. On a consolidated basis, SG&A expenses also included approximately $85 million in synergies and transformation initiatives, primarily due to the elimination of redundant leadership and non-merchandise procurement savings. SG&A expenses as a percentage of net

32



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


sales increased by 90 basis points to 31.1% in Fiscal 2017 from 30.2% in the year-ago period, primarily due to the de-leveraging effect of lower comparable sales.

Depreciation and Amortization Expense increased by $26.2 million, or 7.3%, to $384.9 million in Fiscal 2017 from $358.7 million in the year-ago period. Depreciation and amortization expense for the Premium Fashion segment increased by $6.2 million primarily as the results reflected a 52-week period in Fiscal 2017 compared to the 49-week post-acquisition period in the year-ago period. For our other segments, depreciation and amortization expense increased by $20.0 million primarily due to the Company's ecommerce platform investment which was placed in service in the third quarter of the year-ago period and investments in the Company's distribution network primarily to integrate the operations of ANN.

Operating (Loss) Income. Operating loss was $1.314 billion for Fiscal 2017 compared to operating income of $93.8 million for the year-ago period primarily due to the impairment of goodwill and other intangible assets, as well as the decrease in operating results discussed on a segment basis below. The operating results for the year-ago period reflected an approximately $127 million non-cash purchase accounting expense related to the amortization of the write-up of inventory to fair market value recorded in our Premium Fashion segment.

Operating results for our four operating segments are presented below.
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 29,
2017
 
July 30,
2016
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating (loss) income:
 
 

 
 

 
 

 
 

Premium Fashion
 
$
140.9

 
$
13.3

 
127.6

 
NM

Value Fashion
 
12.2

 
92.0

 
(79.8
)
 
(86.7
)%
Plus Fashion
 
15.5

 
36.9

 
(21.4
)
 
(58.0
)%
Kids Fashion
 
(36.7
)
 
29.0

 
(65.7
)
 
(226.6
)%
Unallocated acquisition and integration expenses
 
(39.4
)
 
(77.4
)
 
38.0

 
(49.1
)%
Unallocated restructuring and other related charges
 
(81.9
)
 

 
(81.9
)
 
NM

Unallocated impairment of goodwill
 
(596.3
)
 

 
(596.3
)
 
NM

Unallocated impairment of intangible assets
 
(728.1
)
 

 
(728.1
)
 
NM

Total operating (loss) income
 
$
(1,313.8
)
 
$
93.8

 
$
(1,407.6
)
 
NM

_______
(NM) Not meaningful.
Premium Fashion operating income increased by $127.6 million as a result of lower non-cash purchase accounting expenses primarily due to approximately $127 million related to the write-up of inventory to fair market value recorded in the year-ago period. The operating results for Fiscal 2017 reflected an improvement in gross margin rate, partially offset by a decrease in comparable sales, both discussed above. Operating expenses for Fiscal 2017 reflected lower performance-based compensation, synergies savings associated with the transition into the Company's ecommerce fulfillment center, lower occupancy expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program and integration-related activities.
Value Fashion operating income decreased by $79.8 million as a result of the decreases in net sales and gross margin rate, both discussed above, as well as an increase in depreciation expense, offset in part by decreases in operating expenses. Operating expense reductions were driven by lower performance-based compensation, lower store variable expenses resulting from the decrease in sales volume and a decrease in administrative payroll costs mainly associated with the Change for Growth program.
Plus Fashion operating income decreased by $21.4 million as a result of the decrease in net sales and an increase in depreciation expense. These items were offset in part by an improvement in gross margin rate and decreased operating expenses. Operating expense reductions were driven by lower occupancy expenses, reduced marketing expenses and a decrease in administrative payroll costs mainly associated with the Change for Growth program.

33



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


Kids Fashion operating results decreased by $65.7 million as a result of the decreases in net sales and gross margin rate and the additional peak back-to-school week included in the year-ago period as a result of the 53rd week, offset in part by a decrease in operating expenses. The impact of the additional peak back-to-school week in the year-ago period was approximately $10 million. Operating expense reductions were driven by lower occupancy expenses, lower performance-based compensation and a decrease in administrative payroll costs mainly associated with the Change for Growth program.

Unallocated Acquisition and Integration Expenses of $39.4 million for Fiscal 2017 included $14.3 million of severance and retention costs, $8.0 million of settlement charges and professional fees related to the termination of the pension plan acquired in the ANN Acquisition, and $17.1 million of other costs associated with the post-acquisition integration of ANN's operations. The $77.4 million in the year-ago period represents costs related to the ANN Acquisition consisting of $20.8 million of legal, consulting and investment-banking related transaction costs, $37.5 million of severance and retention-related expenses and $17.3 million of integration costs primarily to combine the operations and infrastructure of the ANN business into the Company's.

Unallocated Restructuring and Other Related Charges of $81.9 million for Fiscal 2017 included $33.2 million of severance and other related expenses, $15.3 million for charges related to the previously disclosed Fleet Optimization and $33.4 million for professional fees incurred in connection with the identification and implementation of the transformation initiatives associated with the Change for Growth program.

Unallocated impairment of goodwill reflects the write down of the carrying values of the reporting units to their fair values. The impairment charges by operating segment are as follows: $428.9 million at our Premium Fashion segment, $107.2 million at our Value Fashion segment and $60.2 million at our Plus Fashion segment.

Unallocated impairment of intangible assets reflects the write down of the Company's trade name intangible assets to their fair values as follows: $210.0 million of our Ann Taylor trade name, $356.3 million of our LOFT trade name and $161.8 million of our Lane Bryant trade name.
 
Interest Expense decreased by $1.1 million to $102.2 million for Fiscal 2017. The decrease was primarily the result of the principal redemptions and repayments of the term loan during Fiscal 2017, mostly offset by a higher interest rate and an additional three weeks of interest expense on the term loan for Fiscal 2017 due to the timing of the ANN Acquisition.

Gain on extinguishment of debt. During the year-ago period, the Company repurchased $72.0 million of the outstanding principal balance of the Term Loan at an aggregate cost of $68.4 million through open market transactions, resulting in a $0.8 million pre-tax gain, net of the proportional write-off of unamortized original issuance discount and debt issuance costs of $2.8 million.

Benefit (provision) for Income Taxes represents federal, foreign, state and local income taxes. The benefit (provision) for income taxes increased by $350.5 million to a benefit of $346.9 million in Fiscal 2017 from a provision of $3.6 million in the year-ago period. Our effective tax rate was 24.5% for Fiscal 2017 and negative 43.4% for the year-ago period. The effective tax rate computing the benefit on the pre-tax loss for Fiscal 2017 is lower than the statutory federal and state tax rate primarily as $526.5 million of the goodwill impairment charge is non-deductible for income tax purposes and is treated as a permanent difference. The negative effective tax rate for the year-ago period despite a net loss was primarily due to state and local taxes and certain expenses which were non-deductible for income tax purposes.

Net Loss increased by $1.055 billion to $1.067 billion in Fiscal 2017 from $11.9 million in the year-ago period, primarily due to the impairment of goodwill and other intangible assets, as well as lower operating results discussed above.

Net Loss per Diluted Common Share increased by $5.42 to $5.48 per share in Fiscal 2017 from $0.06 per share in Fiscal 2016 due to the higher net loss discussed above.


34



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


Fiscal 2016 Compared to Fiscal 2015
 
The following table summarizes our operational results and expresses the percentage relationship to net sales of certain financial statement captions:
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 30,
2016
 
July 25,
2015
 
$ Change
 
% Change
 
 
(millions, except per share data)
 
 
Net sales
 
$
6,995.4

 
$
4,802.9

 
$
2,192.5

 
45.6
 %
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
(3,066.7
)
 
(2,133.7
)
 
(933.0
)
 
(43.7
)%
         Cost of goods sold as % of net sales
 
43.8
 %
 
44.4
 %
 
 

 
 

Gross margin
 
3,928.7

 
2,669.2

 
1,259.5

 
47.2
 %
        Gross margin as % of net sales
 
56.2
 %
 
55.6
 %
 
 

 
 

Other operating expenses:
 
 

 
 

 
 

 
 

    Buying, distribution and occupancy expenses
 
(1,286.5
)
 
(856.9
)
 
(429.6
)
 
(50.1
)%
        Buying, distribution and occupancy expenses as % of net sales
 
18.4
 %
 
17.8
 %
 
 

 
 

    Selling, general and administrative expenses
 
(2,112.3
)
 
(1,490.9
)
 
(621.4
)
 
(41.7
)%
        SG&A expenses as % of net sales
 
30.2
 %
 
31.0
 %
 
 

 
 

    Acquisition and integration expenses
 
(77.4
)
 
(31.7
)
 
(45.7
)
 
(144.2
)%
    Impairment of goodwill
 

 
(261.7
)
 
261.7

 
NM

    Impairment of intangible assets
 

 
(44.7
)
 
44.7

 
NM

    Depreciation and amortization expense
 
(358.7
)
 
(218.2
)
 
(140.5
)
 
(64.4
)%
Total other operating expenses
 
(3,834.9
)
 
(2,904.1
)
 
(930.8
)
 
(32.1
)%
Operating income (loss)
 
93.8

 
(234.9
)
 
328.7

 
NM

        Operating income (loss) as % of net sales
 
1.3
 %
 
(4.9
)%
 
 

 
 

Interest expense
 
(103.3
)
 
(6.0
)
 
(97.3
)
 
NM

Interest and other income, net
 
0.4

 
0.3

 
0.1

 
33.3
 %
Gain on extinguishment of debt
 
0.8

 

 
0.8

 
NM

Loss before (provision) benefit for income taxes
 
(8.3
)
 
(240.6
)
 
232.3

 
(96.6
)%
(Provision) Benefit for income taxes
 
(3.6
)
 
3.8

 
(7.4
)
 
NM

        Effective tax rate (a)
 
(43.4
)%
 
1.6
 %
 
 

 
 

Net loss
 
$
(11.9
)
 
$
(236.8
)
 
$
224.9

 
(95.0
)%
 
 
 
 
 
 
 
 
 
Net loss per common share:
 
 

 
 

 
 

 
 

Basic
 
$
(0.06
)
 
$
(1.46
)
 
$
1.40

 
(95.9
)%
Diluted
 
$
(0.06
)
 
$
(1.46
)
 
$
1.40

 
(95.9
)%
_________

(a) Effective tax rate is calculated by dividing the (provision) benefit for income taxes by the loss before the (provision) benefit for income taxes.
(NM) Not meaningful.

Net Sales. Net sales increased by $2.193 billion, or 45.6%, to $6.995 billion in Fiscal 2016 from $4.803 billion in Fiscal 2015. The increase was primarily due to the acquisition of ANN, which represented our Premium Fashion segment. For our other operating segments, comparable sales decreased by $214.0 million, or 5%, to $4.233 billion in Fiscal 2016 from $4.447 billion in Fiscal 2015 mainly as a result of anticipated sales declines at our Kids Fashion segment principally related to its less promotional selling model. Non-comparable sales decreased by $0.2 million, or essentially flat, to $206.0 million from $206.2 million. Wholesale, licensing and other revenues decreased by $6.6 million, or 4%, to $143.4 million from $150.0 million. Net sales excluding our Premium Fashion segment also reflected incremental revenues of approximately $82 million due to the inclusion of the 53rd week in Fiscal 2016.


35



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


Net sales data for our four operating segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 

 
 
July 30,
2016
 
July 25,
2015
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 

Net sales:
 
 

 
 

 
 

 
 

     Premium Fashion
 
$
2,330.9

 
$

 
$
2,330.9

 
NM

     Value Fashion
 
2,094.6

 
2,084.2

 
10.4

 
0.5
 %
     Plus Fashion
 
1,463.6

 
1,441.9

 
21.7

 
1.5
 %
     Kids Fashion
 
1,106.3

 
1,276.8

 
(170.5
)
 
(13.4
)%
Total net sales
 
$
6,995.4

 
$
4,802.9

 
$
2,192.5

 
45.6
 %
 
 
 
 
 
 
 
 
 
Comparable sales (a)
 
 
 
 

 
 

 
(5
)%
_______
(a) Comparable sales represent combined store comparable sales and ecommerce sales. Store comparable sales generally refers to the growth of sales in only stores open in the current period and comparative calendar period in the prior year (including stores relocated within the same shopping center and stores with minor square footage additions). Stores that close during the fiscal year are excluded from store comparable sales beginning with the fiscal month the store actually closes. Ecommerce sales refer to growth of sales from the Company's ecommerce channel in the current period and comparative calendar period in the prior year. Due to customer cross-channel behavior, the Company reports a single, consolidated comparable sales metric, inclusive of store and ecommerce channels.
(NM) Not meaningful.

Premium Fashion net sales of $2.331 billion represented ANN's net sales for the post-acquisition period from August 22, 2015 to July 30, 2016.

Value Fashion net sales performance primarily reflected:
 
a decrease of $16.2 million, or 2%, in comparable sales at maurices and a decrease of $45.5 million, or 5%, in comparable sales at dressbarn during Fiscal 2016;
an increase of $36.0 million in non-comparable sales due to 42 net store openings at maurices in Fiscal 2016, offset in part by a decrease of $0.9 million in non-comparable sales due to the timing of 15 net store closures at dressbarn in Fiscal 2016;
incremental revenue of $34.5 million due to the inclusion of the 53rd week in Fiscal 2016; and
a $2.5 million increase in other revenues.

Plus Fashion net sales performance primarily reflected:
 
an increase of $12.7 million, or 1%, in comparable sales at Lane Bryant and a decrease of $14.2 million, or 4%, in comparable sales at Catherines during Fiscal 2016;
a decrease of $2.7 million in non-comparable sales primarily due to the timing of 7 net store openings at Lane Bryant in Fiscal 2016 and a decrease of $3.8 million in non-comparable sales due to 4 net store closures at Catherines in Fiscal 2016;
incremental revenue of $23.0 million due to the inclusion of the 53rd week in Fiscal 2016; and
a $6.7 million increase in other revenues.

Kids Fashion net sales performance primarily reflected:
 
a decrease of $150.8 million, or 13%, in comparable sales during Fiscal 2016 mainly as a result of an anticipated decrease in customer transactions, which was caused by the less promotional selling model;
a $28.8 million decrease in non-comparable stores sales, caused by 41 net store closures during Fiscal 2016;
incremental revenues of $24.9 million due to the inclusion of the 53rd week in Fiscal 2016; and
a $15.8 million decrease in wholesale, licensing operations and other revenues.


36



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


Gross Margin, which represents the difference between net sales and cost of goods sold, expressed as a percentage of net sales, increased by 60 basis points to 56.2% in Fiscal 2016 from 55.6% in Fiscal 2015. Gross margin was negatively impacted in Fiscal 2016 by approximately $130 million of non-cash purchase accounting expenses, primarily related to the amortization of the purchase accounting write-up of inventory to fair market value recorded in our Premium Fashion segment. The gross margin rate for our other operating segments increased by 290 basis points from 55.6% to 58.5% primarily due to the less promotional selling model at our Kids Fashion segment.
 
Gross margin as a percentage of net sales is dependent upon a variety of factors, including changes in the relative sales mix among brands, changes in the mix of products sold, the timing and level of promotional activities and fluctuations in material costs. These factors, among others, may cause cost of goods sold as a percentage of net revenues to fluctuate from year to year.

Gross margin rate highlights of our other operating segments are as follows:

Value Fashion gross margin rate performance improved mainly due to higher mark-on resulting from an increased internally-sourced product mix.
Plus Fashion gross margin rate performance improved slightly as a result of reduced promotional selling and tighter inventory management.
Kids Fashion gross margin rate performance improved by approximately 980 basis points as a result of an increased mix of full-ticket selling and tighter inventory management. The gross margin performance reflected a significant reduction in promotional activity, supported by execution of the new strategy, which was based on a hybrid of everyday low price merchandise, along with full ticket fashion merchandise, supported by focused, category-level promotions.
 
Buying, Distribution and Occupancy ("BD&O") Expenses consist of store occupancy and utility costs (excluding depreciation) and all costs associated with the buying and distribution functions.

BD&O expenses increased by $429.6 million, or 50.1%, to $1,286.5 million in Fiscal 2016 from $856.9 million in Fiscal 2015. BD&O expenses as a percentage of net sales increased by 60 basis points to 18.4% in Fiscal 2016 from 17.8% in Fiscal 2015. The increase in BD&O expenses was primarily attributable to the addition of $423.4 million related to the Premium Fashion segment. The increase of $6.2 million from our other operating segments was primarily due to increases in buying-related costs resulting from the expansion of merchandising and design functions, offset in part by synergy savings resulting from the supply chain integration of our ecommerce distribution facilities into one distribution center in Greencastle, Indiana that was completed in the third quarter of Fiscal 2015.
 
Selling, General and Administrative (“SG&A”) Expenses consist of compensation and benefit-related costs for sales and store operations personnel, administrative personnel and other employees not associated with the functions described above under BD&O expenses. SG&A expenses also include advertising and marketing costs, information technology and communication costs, supplies for our stores and administrative facilities, insurance costs, legal costs, and costs related to other administrative services.
 
SG&A expenses increased by $621.4 million, or 41.7%, to $2.112 billion in Fiscal 2016 from $1.491 billion in Fiscal 2015. SG&A expenses as a percentage of net sales decreased by 80 basis points to 30.2% in Fiscal 2016 from 31.0% in Fiscal 2015. The increase in SG&A expenses was due to the addition of $634.1 million related to the Premium Fashion segment. The decrease of $12.7 million from our other operating segments was primarily due to the establishment of a legal reserve in Fiscal 2015 of approximately $51 million in connection with the Justice pricing lawsuits and lower store-related expenses mainly at the Kids Fashion segment, offset in part by incremental marketing investments mainly at the Plus Fashion and Value Fashion segments as well as general administrative increases.
 
Depreciation and Amortization Expense increased by $140.5 million, or 64.4%, to $358.7 million in Fiscal 2016 from $218.2 million in Fiscal 2015, with $128.0 million related to the Premium Fashion segment. The remaining increase of $12.5 million from other operating segments primarily resulted from higher depreciation of Company-owned information technology assets placed into service during Fiscal 2015 offset in part by accelerated depreciation of $5.9 million for the store assets due to the closure of Brothers, which was completed in Fiscal 2015.

Operating Income (Loss). Operating results increased by $328.7 million, to an operating income of $93.8 million in Fiscal 2016 from an operating loss of $234.9 million in Fiscal 2015 primarily due to $306.4 million of impairment losses recognized during

37



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


Fiscal 2015 at the Plus Fashion segment to write down Lane Bryant's goodwill and trade name to their respective fair values and the establishment of a legal reserve of approximately $51 million in connection with the Justice pricing lawsuits recognized during Fiscal 2015, offset in part by a $45.7 million increase in Acquisition and integration expenses in Fiscal 2016. The operating results also reflected operating income of $13.3 million for the Premium Fashion segment, which included non-cash purchase accounting expenses of approximately $165 million.

Operating results for our four operating segments is presented below.
 
 
Fiscal Years Ended
 
 
 
 
 
 
July 30,
2016
 
July 25,
2015
 
$ Change
 
% Change
 
 
(millions)
 
 
 
 
Operating income (loss):
 
 

 
 

 
 

 
 

     Premium Fashion
 
$
13.3

 
$

 
$
13.3

 
NM

     Value Fashion
 
92.0

 
136.6

 
(44.6
)
 
(32.7
)%
     Plus Fashion
 
36.9

 
29.4

 
7.5

 
25.5
 %
     Kids Fashion
 
29.0

 
(62.8
)
 
91.8

 
(146.2
)%
Unallocated acquisition and integration expenses
 
(77.4
)
 
(31.7
)
 
(45.7
)
 
144.2
 %
Unallocated impairment of goodwill
 

 
(261.7
)
 
261.7

 
NM

Unallocated impairment of intangible assets
 

 
(44.7
)
 
44.7

 
NM

Total operating income (loss)
 
$
93.8

 
$
(234.9
)
 
$
328.7

 
NM

_______
(NM) Not meaningful.

Premium Fashion operating income of $13.3 million was for the post-acquisition period from August 22, 2015 to July 30, 2016. The operating results for Fiscal 2016 were impacted by non-cash purchase accounting expenses of approximately $165 million.
Value Fashion operating income decreased by $44.6 million as increases in sales and improved gross margin rate were more than offset by increases in BD&O, SG&A and depreciation expenses. BD&O and SG&A expenses were higher due to general administrative increases, strategic investments expected to drive future growth, including new stores and incremental marketing investments, and higher store asset impairment charges resulting from lower-than-expected operating performance of certain retail locations. Depreciation expense increased mainly due to higher allocated depreciation of Company-owned information technology assets placed into service during Fiscal 2015.
Plus Fashion operating income increased by $7.5 million as an increase in sales and gross margin rate was offset in part by an increase in SG&A expenses. The increase in SG&A expenses was primarily due to higher marketing expenses associated with incremental marketing campaigns during Fiscal 2016, offset in part by the elimination of duplicative corporate overhead as the Company completed its migration to common information technology platforms in the first quarter of Fiscal 2016.
Kids Fashion operating results increased by $91.8 million as the decrease in sales was more than offset by the significant improvement in gross profit margin rate and lower operating expenses. BD&O and SG&A expenses decreased as a result of store closures related to ongoing market optimization and lower variable expenses associated with the decrease in sales volume. SG&A expenses also decreased due to the establishment of a legal reserve in Fiscal 2015 of approximately $51 million in connection with the Justice pricing lawsuits. Depreciation expense increased primarily as a result of higher allocated depreciation of Company-owned information technology assets placed into service during Fiscal 2015.

Unallocated Acquisition and Integration Expenses of $77.4 million for Fiscal 2016 primarily represents costs related to the ANN Acquisition consisting of $20.8 million of legal, consulting and investment banking-related transaction costs, $17.3 million of integration costs to combine the operations and infrastructures of the ANN business into the Company's and $37.5 million of severance and retention-related expenses. The $31.7 million for Fiscal 2015 related primarily to the Company's supply chain and technology integration, which was substantially completed by the end of Fiscal 2015.

Impairment of Goodwill represents the impairment loss recognized during Fiscal 2015 to write down the carrying value of Lane Bryant's goodwill to its implied fair value, as more fully described in Note 6 to the accompanying consolidated financial statements.


38



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


Impairment of Intangible Assets represents the impairment loss recognized to write down the carrying value of the Lane Bryant trade name to its implied fair value during Fiscal 2015, as more fully described in Note 6 to the accompanying consolidated financial statements.

Interest Expense increased by $97.3 million to $103.3 million for Fiscal 2016 as a result of the $1.8 billion seven-year, variable-rate term loan obtained to finance the ANN Acquisition on August 21, 2015. Interest expense included the non-cash amortization of $11.3 million related to the original issue discount and debt issuance costs.

Gain on extinguishment of debt. During Fiscal 2016, the Company repurchased $72.0 million of the outstanding principal balance of the Term Loan at an aggregate cost of $68.4 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 $2.8 million.

(Provision) Benefit for Income Taxes represents federal, foreign, state and local income taxes. The provision for income taxes was $3.6 million for Fiscal 2016, compared to a benefit of $3.8 million for Fiscal 2015. In Fiscal 2016, we had a pretax loss of $8.3 million, compared to a pretax loss of $240.6 million for Fiscal 2015. Our effective tax rate was negative 43.4% for Fiscal 2016. The Company recorded a tax provision in Fiscal 2016 despite the net loss for the period primarily due to state and local taxes and certain expenses which are non-deductible for income tax purposes. The 1.6% effective tax rate for Fiscal 2015 is lower than the Company's Federal statutory rate as a result of the goodwill impairment loss recorded in the Plus Fashion segment which was treated as a permanent non-deductible item, offset in part by an approximate $13 million tax benefit related to the retirement agreement for the former President and CEO of Justice whereby previously non-deductible permanent items for income tax purposes in previous fiscal years, became fully deductible in Fiscal 2015.

Net Loss decreased by $224.9 million, or 95.0%, to $11.9 million in Fiscal 2016 from $236.8 million in Fiscal 2015, primarily due to a higher level of operating results as previously discussed, offset in part by an increase in acquisition and integration expenses and interest expense for Fiscal 2016.

Net Loss per Diluted Common Share decreased by $1.40, or 95.9%, to $0.06 per share in Fiscal 2016 from $1.46 per share in Fiscal 2015 primarily as a result of the decrease in net loss, as previously discussed.




39



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


FINANCIAL CONDITION AND LIQUIDITY
 
Cash Flows
 
Fiscal 2017 Compared to Fiscal 2016
 
The table below summarizes our cash flows for the years presented as follows:
 
 
Fiscal Years Ended
 
 
July 29,
2017
 
July 30,
2016
 
 
(millions)
Net cash provided by operating activities
 
$
343.6

 
$
445.4

Net cash used in investing activities
 
(268.9
)
 
(1,835.7
)
Net cash (used in) provided by financing activities
 
(120.9
)
 
1,521.5

Net (decrease) increase in cash and cash equivalents
 
$
(46.2
)
 
$
131.2


Net cash provided by operating activities. Net cash provided by operating activities was $343.6 million for Fiscal 2017, compared with $445.4 million during the year-ago period. Cash provided by operations was lower during Fiscal 2017 as lower net income and unfavorable working capital outflows related to timing of payments and lower incentive compensation accruals were offset in part by cash used for non-recurring payments made during the year-ago period, primarily reflecting an escrow payment of approximately $51 million for the Justice pricing litigation settlement and a payment of approximately $44 million to a former Justice executive.

Net cash used in investing activities. Net cash used in investing activities for Fiscal 2017 was $268.9 million, compared with $1.836 billion for the year-ago period. Net cash used in investing activities in Fiscal 2017 consisted primarily of capital expenditures of $258.1 million and the purchase of an intangible asset of $11.6 million. Net cash used in investing activities in the year-ago period was $1.836 billion, consisting primarily of $1.495 billion of cash paid in the ANN Acquisition and cash used for capital expenditures of $366.5 million, partially offset by net proceeds from the sale of investments of $25.4 million.

Net cash (used in) provided by financing activities. Net cash used in financing activities was $120.9 million during Fiscal 2017, consisting primarily of principal repayments of our term loan. Net cash provided by financing activities was $1.522 billion during the year-ago period, consisting primarily of $1.8 billion of borrowing under our new term loan, offset in part by net repayments of debt under our amended revolving credit agreement of $116.0 million, $77.4 million of redemptions and principal repayments of our term loan debt and $42.6 million of payments made for deferred financing costs related to the new borrowing arrangements entered into during the first quarter of the year-ago period.

Fiscal 2016 Compared to Fiscal 2015

The table below summarizes our cash flows for the years presented as follows:
 
 
Fiscal Years Ended
 
 
July 30,
2016
 
July 25,
2015
 
 
(millions)
Net cash provided by operating activities
 
$
445.4

 
$
431.3

Net cash used in investing activities
 
(1,835.7
)
 
(298.1
)
Net cash provided (used in) financing activities
 
1,521.5

 
(49.5
)
Net increase in cash and cash equivalents
 
$
131.2

 
$
83.7


Net Cash Provided by Operating Activities. Net cash provided by operating activities was $445.4 million for Fiscal 2016, compared with $431.3 million during Fiscal 2015. Cash provided by operations increased during Fiscal 2016 as higher net income before non-cash expenses such as depreciation and amortization expense, goodwill and intangible asset impairment charges and the amortization of the acquisition-related inventory write-up was mostly offset by an approximately $44 million payment made to a

40



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


former Justice executive, an approximately $51 million escrow payment for the proposed Justice pricing litigation settlement and the payment of approximately $95 million of employee-related obligations assumed in the ANN Acquisition.

Net Cash Used in Investing Activities. Net cash used in investing activities for Fiscal 2016 was $1.836 billion, compared with $298.1 million for Fiscal 2015. Net cash used in investing activities in Fiscal 2016 consisted primarily of $1.495 billion of cash paid in the ANN Acquisition, net of cash acquired, and $366.5 million of capital expenditures, offset in part by $25.4 million of net proceeds from the sale of investments. Net cash used in investing activities in Fiscal 2015 was $298.1 million, consisting primarily of cash used for capital expenditures of $312.5 million, partially offset by proceeds from the sale of assets of $8.9 million and net proceeds from the sale of investments of $5.5 million.
 
Net Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities was $1.522 billion during Fiscal 2016, consisting primarily of $1.8 billion of borrowing under our new term loan, offset in part by net repayments of debt under our amended revolving credit agreement of $116.0 million, $77.4 million of redemptions and principal repayments of our term loan debt and $42.6 million of payments made for deferred financing costs related to the new borrowing arrangements entered into during the first quarter of Fiscal 2016. Net cash used in financing activities for Fiscal 2015 was $49.5 million, consisting primarily of $56.0 million of repayments of debt (net of borrowings) and proceeds relating to our stock-based compensation plans.

Capital Spending
 
In Fiscal 2017, we had $258.1 million in capital expenditures, which included both routine spending in connection with ongoing investments in our retail store network, construction and renovation of our existing portfolio of retail stores as well as spending for non-routine capital investments in our technology and supply chain infrastructure. The most significant non-routine initiatives are described below.

During Fiscal 2017, we continued to invest in initiatives that support our omni-channel strategies. We completed the transition of all brands onto our new ecommerce platform with our dressbarn, Lane Bryant and Catherines brands added to the platform. Additionally, the Company's new distribution center in Riverside, California commenced west coast brick-and-mortar distribution this past spring. The Company's distribution centers in Etna, Ohio and Riverside, California, and its fulfillment center in Greencastle, Indiana, are expected to enhance its fulfillment capability and distribution efficiency. Also, in connection with the Change for Growth program, we incurred approximately $5 million in Fiscal 2017 and expect to incur approximately $40 million in Fiscal 2018 on projects to improve operational efficiency and enhance our customer-facing capabilities.
As a result of the Fleet Optimization review in connection with the Change for Growth program, we expect fewer new store openings during Fiscal 2018. Thus, we expect that total capital spending for Fiscal 2018, including (i) routine spending, (ii) technological spending for the projects discussed above, and (iii) spending required to support the Change for Growth program, will be in the range of $190-$220 million. Our routine and non-routine capital requirements are expected to be funded primarily with available cash and cash equivalents, operating cash flows and, to the extent necessary, borrowings under the Company’s Amended Revolving Credit Agreement which is discussed below.

Liquidity
 
Our primary sources of liquidity are the cash flow generated from our operations, remaining availability under our Amended Revolving Credit Agreement after taking into account outstanding borrowings, letters of credit and the collateral limitation, available cash and cash equivalents and other available financing options. These sources of liquidity are used to fund our ongoing cash requirements, including working capital requirements, construction and renovation of stores, any future dividend requirements, investment in technology and supply chain infrastructure, acquisitions, debt servicing requirements, stock repurchases, contingent liabilities (including uncertain tax positions) and other corporate activities. Management believes that our existing sources of liquidity will be sufficient to support our operating needs, capital requirements and any debt service requirements for the foreseeable future.
 
As of July 29, 2017, approximately $224 million, or 69%, of our available cash and cash equivalents was held overseas by our foreign subsidiaries. For the Company to have access to those cash and cash equivalents in the U.S, we would incur a current U.S. tax liability of between 15% to 20% on a substantial portion of the cash repatriated. A U.S. tax liability has been previously provided for in the provision for income taxes for the portion that is not permanently reinvested as discussed in Note 14, and is currently

41



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


classified within Deferred income taxes on the accompanying consolidated balance sheets. We continue to assess options for the use of our overseas cash and cash equivalents.
 
As of July 29, 2017, we had no borrowings outstanding under the Amended Revolving Credit Agreement. After taking into account the $31.1 million in outstanding letters of credit, the Company had $500.4 million of availability under the Amended Revolving Credit Agreement.

Debt

For a detailed description of the terms and restrictions under the amended revolving credit agreement ("Amended Revolving Credit Agreement") and the $1.8 billion seven-year term loan (the "Term Loan"), see Note 12 to the accompanying consolidated financial statements. 

Amended Revolving Credit Agreement

We believe that our Amended Revolving Credit Agreement is adequately diversified with no undue concentrations in any one financial institution. Upon the closing of the Amended Revolving Credit Agreement, there were seven financial institutions participating in the Amended Revolving Credit Facility, with no one participant maintaining a maximum commitment percentage in excess of 25%. Management has no reason at this time to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the Amended Revolving Credit Agreement in the event of our election to draw funds in the foreseeable future. The Company was in compliance with all financial covenants contained in the Amended Revolving Credit Agreement as of July 29, 2017. The Company believes the Amended Revolving Credit Agreement will provide sufficient liquidity to continue to support the Company’s operating needs and capital requirements for the foreseeable future.

Term Loan

For Fiscal 2017, the Company repaid a total of $122.5 million, which was applied to future quarterly scheduled payments such that the Company is not required to make its next quarterly payment until May 2018. We may from time to time seek to repay or purchase our outstanding debt through open market transactions, privately negotiated transactions or otherwise depending on prevailing market conditions and our liquidity requirements, subject to any restrictions under our debt arrangements, among other factors.

The Company is required to make principal payments of $44 million in Fiscal 2018. Additionally, the Company expects to incur cash interest expense of approximately $90 million on the Term Loan in Fiscal 2018 based on the outstanding balance and interest rates in effect as of July 29, 2017. Such interest and principal payments are expected to be funded with our cash flows from operations.

Common Stock Repurchase Program

There were no purchases of common stock by the Company during Fiscal 2017 under its repurchase program. For a complete description of the Company's 2016 Stock Repurchase Program, see Note 16 to the accompanying consolidated financial statements.

We may from time to time continue to repurchase additional shares depending on prevailing market conditions and our liquidity requirements, subject to any restrictions under our debt agreements, among other factors.

42



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



CONTRACTUAL AND OTHER OBLIGATIONS
 
Firm Commitments
 
The following table summarizes certain of the Company's aggregate contractual obligations as of July 29, 2017, and the estimated timing and effect that such obligations are expected to have on the Company's liquidity and cash flows in future periods. The Company expects to fund the firm commitments with operating cash flow generated in the normal course of business and, if necessary, availability under its Amended Revolving Credit Agreement.