- Women's specialty apparel retailer Ascena Retail Group Inc. recently reported weak results for its fiscal second quarter ended Feb. 2, 2019, and we now expect that some of the company's brands will experience deteriorating sales and profitability, particularly in its value and plus segments.
- In addition, the company recently announced that it was selling a majority stake in maurices as part of its comprehensive brand portfolio and asset review.
- We expect Ascena's operating performance to remain challenged over the next 12 months because of continued competitive threats and the risks involved in executing its brand realignment strategy.
- We are downgrading Ascena to 'B-' from 'B'. At the same time, we are lowering our issue-level rating on its first-lien term loan facility to 'B' from 'B+'. The '2' recovery rating remains unchanged.
- The negative outlook reflects our expectation for continued weak performance and only moderately positive free operating cash flow generation over the next 12 months.
NEW YORK (S&P Global Ratings) April 5, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade reflects our forecast for further deterioration in Ascena's operating performance stemming largely from the company's weaker brands in its value and plus segments and the highly competitive and fragmented retail environment. While the company's premium segment (Ann Taylor and LOFT) has performed relatively well with improving sales and income, this has been overshadowed by the very weak overall performance of its value and plus segments, which comprise more than 40% of its sales. The downgrade also reflects the risks arising from Ascena's portfolio realignment plans, including the execution risk involved in the sale or winding down of its brands and the potential for further operational deterioration. While we continue to expect the company to generate moderate free operating cash flow and maintain adequate liquidity, we also believe it is facing increasing refinancing risk ahead of the August 2022 maturity of its term loan given its weak operating trends and our view of the risks to the long-term viability of some of its brands. The negative outlook on Ascena reflects our expectation that the company's operating results will continue to deteriorate over the next 12 months and weaken its credit metrics, including reducing its fixed-charge coverage ratio to the mid-1x range while it generates only modest positive free operating cash flow. We could lower our rating on Ascena if its recent negative operating trends persist and weaken its liquidity, if its fixed-charge ratio falls below the mid-1x area, or if we come to believe that its capital structure is potentially unsustainable. This could occur if its comparable sales decline by the low single digit percent area and its EBITDA margins contract by 100 bps or more, leading to negative free operating cash flow and an increased reliance on the asset-based lending (ABL) facility to fund its operations. We could also lower our rating on the company if we thought the likelihood of a distressed exchange had increased. We could revise our outlook on Ascena to stable if its performance stabilizes and we believe that the company will be able to refinance its debt facilities at par. Under such a scenario, the company would likely manage to steady its operating performance and improve its credit metrics, including increasing its fixed-charge coverage to the high-1x area while demonstrating prospects for consistent free operating cash flow generation above the assumptions in our base case. This would likely be driven by effective apparel merchandising and greater full-price selling that leads to positive comparable-store sales and good prospects for EBITDA margin expansion in 2020.
