Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter
Cash running low. Brick & mortar meltdown for landlords. Shares annihilated.
Ascena Retail Group – which operated 3,519 stores of the brands Dressbarn, Ann Taylor, Loft, Lou & Grey, Lane Bryant, Cacique, Catherines, and Justice – may soon file for bankruptcy. That is the fear of a group of about 40 lenders that Ascena owes over $1.4 billion.
The lender group, which includes Franklin Resources (Franklin Templeton Investments), Eaton Vance, Lord Abbett, and Greywolf Capital, has retained Milbank as legal counsel “because of all the uncertainty over what the company might do next,” the New York Post reported today, citing a “source with knowledge of the situation.”
The lender group is fretting because “Ascena has not returned the lenders’ calls and e-mails for at least a month,” which is raising concerns that the company may be preparing to file for bankruptcy protection, according to the New York Post, citing the source.
Ascena has already interviewed two bankruptcy law firms – Weil Gotshal & Manges and Kirkland & Ellis – the source told the paper. At this point, Ascena has not missed any payments to the lenders, according to the source.
Ascena’s shares [ASNA] closed at 28 cents today – after having become a penny stock in May this year. Back in 2012 through 2014, shares were bouncing around between $17 to $22. At the current share price, the stock market has already written off its stake, figuring that a restructuring in bankruptcy court, where stockholders are wiped out, would be the endgame.
The company started out as Dress Barn in 1962. A decade ago, it embarked on an acquisition binge
- 2009: Tween Brands, which operates the Justice stores
- 2012, Lane Bryant and Catherines.
- 2015: Ann Inc., parent of Ann Taylor, Loft, and Lou & Grey, for $2.16 billion
In 2011, the company reorganized its structure and renamed itself Ascena Retail Group. All its store brands became subsidiaries. Dressbarn Inc., instead of being the parent company, became a subsidiary of Ascena.
This suddenly became an important issue for landlords on May 20 when Ascena announced that it would close all its 661 Dressbarn stores. To get out of the leases, it dangled the possibility of a bankruptcy filing by its Dressbarn Inc. subsidiary in front of the landlords if they didn’t agree with one of the two options: Dressbarn stays open through August and pays rent through October, or stays open through December and pays rent through December.
On July 18, Ascena announced that it had obtained “overwhelming landlord support” for its plan, that “provides the best recovery for our landlords.” It said that Dressbarn stores were being closed and that the last stores would be closed by the end of 2019. And it made a special effort to point out in the press release: “Further, we are current, and expect to remain so, with our vendors and suppliers.”
But that was the last thing the frazzled lenders had heard from the company. Now they fear that Ascena, the parent company, is considering filing for bankruptcy.
In its Q3 earnings report, released in June, the company reported revenues of $1.27 billion. It also reported that at the end of Q3, it was operating 3,519 stores:
- Justice: 831 stores
- Lane Bryant: 731 stores
- LOFT: 670 stores
- Dressbarn: 661 stores
- Catherines: 332 stores
- Ann Taylor: 294 stores.
The company also reported a net loss in Q3 of $238 million. Unless a miracle happens, this will mark the fifth year in a row of losses.
And its cash balance plunged from $344 million a year earlier to only $100 million as of May 4, enough to cover about six weeks of losses.
But wait. The plot thickens further. This cash balance does not include the $210 million in cash before expenses and fees that Ascena received from selling its Maurices stores to an affiliate of PE firm OpCapita (Ascena also received a 49.6% stake in that affiliate). That sale closed on May 6, after the end of the fiscal quarter on May 4.
The company was supposed to pay the proceeds from the sale of Maurices to the group of 40 lenders to pay down debt. But the source told the New York Post that the lenders have not seen any of this money. The debt has stayed the same, but the company – and likely the collateral – has shrunk.
“Why would you pay down your debt if you know you are going to file for bankruptcy?” the source told the New York Post.
At the top, it was either house cleaning or rats abandoning a sinking ship: On May 25, the company announced that David Jaffe CEO and Chairman “will retire … effective today.” A company executive, Gary Muto, was promoted into the CEO slot. And on July 25, the company announced that its CFO would be replaced by a company executive “effective August 4.”
The brick-and-mortar meltdown first melted down the retailers that had been acquired in leveraged buyouts by private equity firms or hedge fund and had subsequently been asset-stripped and strangled by debt. The list is long and includes the biggies Toys ‘R’ Us and Sears Holdings. But now, publicly traded retailers are going into final meltdown. J. C. Penney is getting situated for this fate. And Ascena may beat it to it.
Retailers are notoriously difficult to restructure in bankruptcy court. They have so much debt and few assets. By that time, their brand has been mangled. And they have failed to make the transition to ecommerce in a big way. But the bankruptcy court can only reduce the debt burden. It cannot fix the mangled brand or the ecommerce failure.
For those reasons, most retailers are either liquidated in bankruptcy court the first time around, or if they emerge as a new company, they end up filing for bankruptcy again a year or two later to be liquidated for good.
Retail overall, when ecommerce is included, is doing well in the US, because ecommerce is booming. For ecommerce, the retail stores at malls are sitting ducks that get picked off one after the other. A company that has failed to build a vibrant presence online that can battle all its competitors around the internet and that is big enough to gradually replace most of its brick-and-mortar stores is doomed. Read… How the Ecommerce Boom Crushes “Mall Retailers” One by One