Ascena Retail Group (ASNA +0.00%) has found itself in a precarious position. The women's clothing retailer, which owns several brands including Ann Taylor, Lane Bryant, and Dressbarn, has accumulated over $1 billion in debt while running its business at a net loss. To help alleviate its situation, the company has been aggressively cutting costs and Bloomberg reported late last month that, according to "people familiar with the matter," the company is exploring a sale of Dressbarn.
Would selling Dressbarn be a good idea?
Acquisition binge
Ascena will be exiting the decade with the opposite strategy it employed at the start of the decade. Over the past 10 years, the company has made at least three significant acquisitions to beef up its portfolio of brands. Most notably, it acquired Ann Taylor in 2015 for an enterprise value of $2 billion.
| Company Acquired | Company Description | Price | Date Announced |
|---|---|---|---|
| Ann Taylor | Women's apparel stores including Ann Taylor and Loft | $2 billion | May 2015 |
| Charming Shoppes | Women's plus-size apparel stores including Lane Bryant | $890 million | May 2012 |
| Tween Brands | Children's apparel stores including Justice | $157 million | June 2009 |
Data Source: Ascena press releases.
Ascena's goal was to become the largest fashion chain dedicated to women across price points and segments of the market. For example, Dressbarn is positioned as a discount store for casual wear, while Ann Taylor is a premium-priced store for dressy occasions or office work.
Targeting different market segments has given the company a larger total addressable market. At the same time, the company could theoretically find synergies in its corporate overhead and supply chain. However, the benefits of running a portfolio of retail brands have failed to materialize in profits.
ASNA Net Income (TTM) data by YCharts
Ascena hasn't had a profitable year since 2014 -- before its acquisition of Ann Taylor -- and has cumulatively lost over $1 billion in GAAP earnings since 2015. At the same time, debt has soared to over $1 billion to finance M&A.
The company has acknowledged its shortcomings, though, and is now charting a new course.
Cost cuts and asset sales
Management initiated a major cost-cutting program in 2016, but has also turned to selling some of its brands.
In March, the company announced the sale of a majority stake in its Maurices brand to OpCapita, a private equity company specializing in operational turnarounds. The company said it planned to receive about $200 million in cash after expenses.
The Maurices deal was notable not just because it is the only time Ascena has sold a brand, but also because in the announcement the company pledged to evaluate selling more assets, saying the transaction "represents an initial step in [Ascena's] comprehensive portfolio review."
Ascena has publicly stated that debt reduction is the best path for creating shareholder value, so it should come as no surprise that the company used the $200 million in proceeds from the Maurices sale for that purpose. The company has also doubled down on cost-cutting efforts, and claims it can cut costs another $150 million on top of the $300 million it cut from the 2016 program.
But that won't clear the company's more than $1 billion in debt. Thus it makes sense that Ascena would be looking into selling other assets, including Dressbarn.
Image Source: Getty Images.
Should Ascena sell Dressbarn?
Selling additional brands would improve Ascena's financial position, but is Dressbarn the asset to sell?
Diving into the company's different segments reveals that the brands selling at lower price points -- such as Dressbarn -- are significantly underperforming the premium-priced brands. The value brands have reported negative comparable sales figures, and operate at lower levels of profitability. On the Q2 2019 earnings call, CEO David Jaffe said that Dressbarn is "operating at an unacceptable level of profitability."
The premium brands are likely more valuable, and would be beneficial to keep. At the same time, Dressbarn could be an attractive asset to sell because it has brand name recognition as a retailer, and a buyer may believe they can orchestrate a turnaround.
Although Dressbarn has some sentimental value for the company -- Ascena's corporate name was changed from Dressbarn -- the move could be a saving grace for shareholders. Without more asset sales, the company's large debt load will continue to weigh over its share price and cripple its ability to operate due to a need to focus on debt repayments, rather than growing the business. If Dressbarn can fetch a reasonable price, then it should absolutely be sold.
