Dive Brief:

• Citing "persistent execution missteps" and the cost of a turnaround, Moody's Investors Service on Thursday downgraded Ascena Retail Group, Inc.'s corporate family rating to Caa2 from B3, its probability of default rating to Caa2-PD from B3-PD and its senior secured term loan rating to Caa2 from B3. The firm left the retail groups speculative grade liquidity rating at SGL-2 and its outlook of the company at negative.

• According to a report emailed to Retail Dive, "The downgrades reflect Moody's view that Ascena's capital structure is likely unsustainable as a result of its weak operating performance, high leverage, and negative free cash flow, creating an elevated risk of a debt restructuring including a material debt repurchase at a significant discount."

• The rating does take into account Ascena's strengths, including its "scale and portfolio of well-known women's apparel brands." Moody's analysts also said the company's "good liquidity over the next 12-18 months provides flexibility to execute its turnaround strategies."

Dive Insight:

Ascena executives earlier this month were adamant that bankruptcy is off the table, but the "unsustainable" capital structure cited in Moody's note demonstrates how real the possibility may be nevertheless. The apparel company recently landed on Retail Dive's recent list of 28 retailers with a high chance of filing.

While Moody's noted poor execution of the company's turnaround, which has been ongoing for years, those analysts also noted how it's operating in a sector that is under siege. "A sustained turnaround will be challenging, as it requires materially better execution amid a highly competitive environment with changing consumer purchasing habits," they wrote.

Shopping for clothes is less in focus for Americans these days, as they prioritize other spending and have less need to wear more formal attire for work or even special occasions. Many younger shoppers, when they do purchase fashion, choose companies that have made strides in producing clothes more sustainably and orienting marketing to address diversity and other social issues, research shows.

The company's remaining five banners (Ann Taylor, Loft, kids line Justice and two plus-size stores, after its divestiture of discount brand Maurices and its wind-down of Dressbarn), offer mid-priced apparel — another difficult sector to be in considering the financial challenges of the country's shrinking middle class. That could emerge as a stumbling block at the holidays in light of high levels of consumer debt.

"The company's earnings declines have been driven by persistent execution missteps and the challenges of offsetting competitive pressure and the cost of omni-channel transition for a portfolio of primarily mature, mid-priced brands," Moody's said, noting that "meaningful EBITDA improvement" is growing more possible because high clearance activity at its premium and kids brands will soon be behind it. "However in Moody's view, Ascena needs to achieve a significantly higher level of earnings on a sustained basis in order to support its current debt structure and a refinancing at par with higher interest rates."

Two of those brands, Lane Bryant and Catherine's, are plus-size specialists that are fending off rising competition from mainstream players that now offer a wide range of sizing and fit to appeal to those customers. Unloading that business may also be under consideration, Bloomberg reported last month.

Ascena does have some wiggle room. Moody's notes that the apparel company has a $328 million cash balance, plus room under a $500 million asset-based revolver provide capacity to fund the costs of restructuring and the wind-down of its Dressbarn unit, as well as a $22.5 million of quarterly term loan amortization that restarts in November 2020. The company also faces no other maturities until its August 2022 term loan due date, according to Moody's.