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