How Ascena went bankrupt
Retail Dive _July 23,2020
The retailer went big in the new millennium, even as clothing sales growth shrank. Its Chapter 11 filing Thursday isn't just about the pandemic.
Ann Taylor and Lane Bryant owner Ascena last year pushed back on the notion that it was anywhere near bankruptcy — its interim board chief in October pointed to its "large iconic brands and a business with significant liquidity" — and it doubled down on that as recently as March.
That didn't last. The company is restructuring under Chapter 11, filing documents on Thursday in the U.S. Bankruptcy Court for the Eastern District of Virginia that include a restructuring support agreement with more than 68% of its secured term lenders, $150 million in a new term loan from existing lenders and a plan "to significantly reduce debt" by about $1 billion, according to a company press release.
It won't emerge unscathed. After ditching its discount banners last year, (liquidating Dressbarn and all its 544 stores and selling a majority stake in Maurices), Ascena is now further dismantling its stable. That includes selling its Catherine's plus-size banner to online plus retailer City Chic, closing all Catherine's stores in the process. Stores run by its Justice tween brand will close, probably a significant number, according to GlobalData Retail Managing Director Neil Saunders, considering the brand's troubling "roller coaster" performance.
While the overall number of store closures across any of the brands is yet to be determined, the company seems to be leaving its Ann Inc. premium brands — Ann Taylor, Loft and Lou & Grey — and its Lane Bryant plus brand more or less intact, according to information posted to its website.
Any hope of turning around its already struggling business appears to have been dashed by the COVID-19 pandemic, which in the first quarter forced its stores shut and swept away demand as people need and want fewer clothes in a wavering, work-from-home economy. It's been bleak for Ascena, as it has for all nonessential retailers, especially those selling apparel — and the recovery as stores have reopened has been feeble.
But its troubled story is less about the pandemic and more about how it decided to go big in the last decade as clothing sales growth steadily declined. Well before COVID-19 shook the retail industry, sales at all of Ascena's banners steadily tumbled. The company notched an overall net sales decline in 2019, $5.49 billion compared to $5.57 billion in 2018, and an operating loss that widened to $681.4 million in 2019 from $88.9 million in 2018. Operating losses in the last half year were $125.8 million, and it was weighed down by more than $1.2 billion of long-term debt, according to GlobalData Retail.
"They built their own coffin," Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, told Retail Dive in an interview.
The horse had left the barn
Roslyn Jaffe founded Dress Barn in 1962, when she opened her first clothing store in Connecticut for working mothers. That innovation caught on, and she and her husband grew it into a chain. In 1993, son David Jaffe left a Wall Street career to help lead the company, taking the CEO spot in 2002.
It was in the 21st century that Dress Barn changed to "Ascena" (a made-up name courtesy of a consulting firm) and began collecting other brands, many of them cast-offs of Les Wexner's Limited-then-L Brands empire. Ascena bought Justice (formerly Limited Too) in 2009, and plus banners Lane Bryant and Catherine's (also former L Brands labels) in 2012, according to a timeline on Ascena's website. Then, after hedge fund and Ann Inc. activist investor Golden Gate Capital reportedly agitated for a sale, Ascena obliged, buying Ann Inc. (Ann Taylor and Loft) in 2015. That $2.15 billion purchase has been a headache ever since, in the form of disappointing sales, a major asset write-down and an investor lawsuit.
"Les Wexner was dumping anything that was apparel," said Peterson, who worked with Wexner for 11 years at The Limited, before Wexner soured on the clothing business. "At a time when you see Amazon stock going from a hundred to a thousand dollars [per share], when people are investing in e-commerce and logistics companies, somebody goes in there and buys these antiquated apparel brands. Golden Gate Capital and Les Wexner must have been laughing their asses off."
Certainly, the COVID-19 crisis has exacerbated Ascena's woes. The retailer in March furloughed employees when it temporarily closed all 2,800 stores in the U.S., Canada and Puerto Rico and drew all $230 million from its credit facility to stay afloat. But its leverage was already a problem by then, as it took on debt to pay for its earlier acquisition spree.
An unworkable approach
Wexner (who just recently left as CEO of L Brands, which now runs only embattled lingerie brand Victoria's Secret and personal care retailer Bath & Body Works), was bailing out of the apparel business for good reason. Or a few good reasons.
Households, especially those in the middle class, have watched their discretionary budgets get squeezed for decades, and working professionals haven't needed to dress up as much for their jobs — two forces that have dragged down apparel sales. But Wexner also found running a sprawling conglomerate less than ideal, according to Peterson.
While Wexner's idea was to have a collection of retail banners that would draw in all women by selling to any woman at any age and stage of her life, the business didn't generally turn out that way. The brands competed with each other internally, sometimes dragging down each other's performance and stealing each other's share, Peterson said. And shoppers didn't always obey the lines drawn by the conglomerate and its various brands, interfering with the company's ability to divide and conquer the market.
But if the Chapter 11 process presents any opportunity to rethink the strategy, Ascena doesn't appear to be taking it.
"Ann Taylor, LOFT, Lane Bryant, Justice and Lou & Grey have incredibly loyal customers who are at the center of everything we do. These iconic brands have significant long-term potential and we continue to deliver on their mission to provide all women and girls with fashion and inspiration to live confidently every day," Gary Muto, who replaced David Jaffe as CEO last year, said in a statement.
A 'new' start?
Also in his statement, Muto called the prearranged restructuring "a new start for our company."
Yet, in key ways, it isn't. The leadership team, including Muto, will be the same one put in place over the last year, according to the company's release. More importantly, and possibly more risky, is the emphasis being placed on Ann Taylor and the other Ann Inc. brands, which GlobalData Retail's Saunders said lacks a "clear sense of identity" making it "all too easy to overlook."And its customer has turned away, according to Jane Hali, CEO of investment research firm Jane Hali & Associates.
"Ascena was/is a combination of all the plus-size and baby boom brands that are not important to the customer," she said. "Baby boomers have closets full of clothes. This is not where they are spending their money. They were spending on travel, and now due to Covid, they're upgrading their home. The fashions at Ann Taylor and Loft have been last on their list. Both stores were also selling to the staid professional women. Women have become much more casual at work and now even more so due to Covid. Justice was the only chain that had a chance."
It's true that with namesake Dressbarn gone (the spelling was changed in 2012) and once well-performing Justice also faltering, the conglomerate had few options as it headed toward bankruptcy. But rather than putting its chips on Ann Taylor and breaking up its plus-size segment, it may have been wise to focus on plus instead, considering that remains an underserved market and those retailers each enjoy strong loyalty, according to Kristin Bentz, president of KB Advisory Group.
"Ann Taylor doesn’t fit into this vertical, and Justice is an outlier, but if they maintained a plus-size vertical and acquired [teen plus brand] Torrid and any of these other extended-sizes brands, it could work," she told Retail Dive in an interview. "Lane Bryant rescued that customer from the department store, which was the only place to get plus clothes but on a separate store level, where you're ostracized. Catherine's is for church on Sunday, gloves and hats. They both have brand equity and an intense following."
Instead, with so much riding on Ann Taylor, Ascena will have to reckon not just with declining demand for its apparel, but also with its often unkempt state. In visits to Ann Taylor over the holidays, where seasonal merchandise came in late compared to rivals, DeAnna McIntosh, founder of retail and e-commerce consultancy The Affinity Group International, noted "quality and fit issues happening across multiple product categories," even the brand's signature "Essential" shirt.
This "is shocking as it is a key driver for their assortment," she said. "With the rapidly changing retail environment, and fierce competition, retailers simply cannot afford to make these critical mistakes."
The grim state of apparel sales will continue to complicate Ascena's prospects, though its place in the murky middle makes that even harder, according to Saunders. "It delivers neither great value nor great fashionability," he said. "That was a slow killer before the pandemic hit. In the midst and aftermath of the current disruption, such a position has become a fast track to failure."