Dive Brief:
- S&P Global downgraded Ascena Retail Group's credit rating deeper into junk territory based on what analysts saw as an "elevated risk" of the retailer pursuing a debt restructuring deal. An Ascena spokesperson said in a statement: "ascena remains in full compliance under its term loan and revolving credit facility, and intends to remain so. The company continues to consider options to optimize its balance sheet from a position of strength. We have large iconic brands and a business with significant liquidity."
- The downgrade, to an issuer rating of CCC from CCC+, comes as Ascena "continues to post weak results and faces increasingly intense industry difficulties," S&P analysts said in a press release emailed on Wednesday.
- S&P has a negative outlook on Ascena's rating, indicating a risk for further downgrade on the likelihood that Ascena would cut a debt exchange deal at terms below its original issuance or buy back its own debt at prices below face value.
Dive Insight:
Ascena has been rapidly downsizing this year as it tries to manage shrinking sales. The sales declines have turned its debt pile — a legacy of its acquisition binge in the mall-based apparel space — into a major burden.
In recent years, sales at the conglomerate have been tepid or declining, losses are widening, and the company has turned over executives. S&P analysts view Ascena's capital structure, which includes $1.3 billion in long-term debt, as "unsustainable" and expect the company to generate negative cash flow over the next year.
Further, the retailer's ability to refinance its debt at face value is hobbled both by the macroeconomic environment as well as Ascena's prospects in a heavily challenged apparel and specialty retail sector, according to the analysts.
Ascena's sales continued their downward slide in the company's most recent reporting period. Top-line sales fell by more than 4% and comp sales fell 2% with Dressbarn factored out. Aside from Dressbarn's going-out-of-business sales, only Loft posted growth in comp sales for the quarter. Moody's downgraded the retailer shortly after the report, citing Ascena's "persistent execution missteps." Despite the poor quarterly results, Ascena's interim board chief told analysts in October that the company wasn't contemplating a bankruptcy.
Ascena moved to shutter Dressbarn — the banner that the company was once named after before reimaging itself as "Ascena" — and sell its brand property as part of a broader effort to get its finances under control and rightsize the business. The company has also sold its majority stake in discounter Maurices and is reportedly considering the sale of its plus brands, Lane Bryant and Catherines.
These moves and possible moves follow years of mergers as Ascena fashioned itself into an apparel conglomerate, buying up the Justice, Maurices, Lane Bryant, Catherines, Fashion Bug, Ann Taylor and Loft banners over the course of 15 years.
"And they did that right at the point where the mall business was about to collapse, and when TJX was about to reach its zenith, and Ross too," Nick Egelanian, founder and president of retail real estate consultancy Siteworks, told Retail Dive in a previous interview. "They literally bought right at the top of the market."
