Closing Dressbarn Should Be Good for Ascena Retail

Ascena Retail Group (NASDAQ: ASNA) recently announced it will wind down the Dressbarn brand, including its roughly 650 stores. This came after rumors circulated that Ascena was planning to sell the business. The news is certainly disappointing to shoppers and the chain's 6,800 employees, but could this be good news for shareholders?

Dressbarn has been a drag on the company

Ascena Retail Group has struggled for several years. The company has accumulated over $1 billion in debt to finance acquisitions, and net losses under GAAP (generally accepted accounting principles) have soared. Ascena's brands include Ann Taylor, Justice, Lane Bryant, Dressbarn, and Maurices. Dressbarn has lost money and seen its revenue shrink while some of the company's other brands have done well.

Metric FY 2017 FY 2018 Q1 2019 Q2 2019
Total company comp sales (5%) (2%) 3% 2%
Dressbarn comp sales (5%) (10%) (4%) (1%)

As the above table shows, Dressbarn has been a drag on the company's same-store sales (comps), which track revenue at stores open for one year or longer in order to give an idea of growth that isn't skewed by the opening of new stores. Dressbarn has consistently seen its comps decline despite the company's efforts to close underperforming stores and rebrand the business as a high-fashion retailer.

To make matters worse, Dressbarn has also been a money pit in terms of profitability. For 2018, Ascena's "value fashion" segment -- composed of Dressbarn and Maurices -- generated $83.2 million in operating losses. It is not clear how much of the loss was contributed by Dressbarn, however, during Ascena's quarterly conference call with analysts in mid-March, CEO Gary Muto said Dressbarn was "operating at an unacceptable level of profitability."

Based on Dressbarn's declining sales and lack of profitability, it's clear that the brand has been a sore spot for the company. Given Ascena's debt load, it can't afford to continue operating brands at a loss. The stores and Dressbarn's ecommerce operations are conducting business as usual for now. Closure plans will be announced as decisions are made.

Unable to sell the brand

It makes sense that Ascena would want to get rid of Dressbarn given the company's financial position, but investors may wonder why the company didn't sell it rather than shut it down. It seems like Ascena tried to.

Ascena has loudly telegraphed that it would be interested in selling some of its assets. In March, the company offloaded a majority stake in the Maurices brand to a private equity firm and noted that the divestiture represented "an initial step in [Ascena's] comprehensive portfolio review."

Almost immediately after the Maurices sale, rumors began to circulate that the company was exploring a sale of Dressbarn. Selling Dressbarn would have made sense because it would have provided cash to reduce the debt load. Since the company later announced it would wind down the brand, that must mean that buyers didn't show up or didn't show up offering what Ascena wanted.

Winding down will cause Ascena to incur a charge to its earnings, but it will end the bleeding. So far the company hasn't provided details on the magnitude of the financial impact.

A brighter future?

While it is sad to see a 57-year-old retailer close and thousands of people lose their jobs, the liquidation may be a step in the right direction for Ascena. The company's value fashion segment was the only segment that reported an operating loss in 2018, and now Ascena has come to a solution on value fashion's two brands -- Maurices and Dressbarn.

What's more, Ascena's "premium fashion" segment -- made up of Ann Taylor and LOFT -- is performing well. Premium fashion is the company's largest segment by revenue and earnings and has nearly 1,000 store locations. Last quarter both Ann Taylor and LOFT reported comp sales growth of 10%!

Liquidating Dressbarn and offloading Maurices will improve Ascena's cash flow, which may help it generate a profit and repay debt. This should give investors hope that the company can turn a new page and focus on the parts of the business that are most valuable. Ascena is scheduled to report earnings Monday. Look for more information then.

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