The Ascena Retail Group may well be betting on the wisdom of Aristotle, who is supposed to have said that “the whole is greater than the sum of its parts.” Thus Ascena’s impending acquisition of Ann Inc., parent of Ann Taylor and Loft, is poised to create one of the largest women’s-apparel retailers in the U.S., with an aggregate projected $7.3 billion in annual sales and nearly 5,000 stores.
The deal, which the parties expect to close later this year, is meant to strengthen both Ann and Ascena (owner of Lane Bryant and Dressbarn) in the highly competitive women’s apparel sector. The resulting seven-chain retail conglomerate stands to enjoy some enhanced economies of scale, lower operating costs, higher profit margins and greater purchasing power, analysts say.
The merger also marries the operational prowess of Ascena with Ann’s fashion and merchandising savvy. Ascena’s healthy balance sheet will give the Ann brands — Ann Taylor, Loft and Lou & Grey — “the capital to invest in both inventory and the online -business,” according to Janet Kloppenburg, a specialty retail analyst at JJK Research.
Ascena’s acquisitions and new-store openings have been financed largely by internally generated profits. And its debt-to-equity ratio is low relative to its peers: 0.1, versus the 0.6 industry average, according to analysts. Ascena estimates that the combined companies will generate some $150 million in savings over a three-year period. The merger also positions the two chains to negotiate better deals with suppliers, given the resulting grander scale: Ann adds 1,030 stores to Ascena’s 3,900.
“Ascena has built its business to acquire brands,” said Oliver Chen, a managing director and retail analyst at Cowen & Co. He points to the company’s acquisitions of the Lane Bryant, Justice and Maurices chains this -decade alone. Indeed, its “shared services model” is unique, experts say, even among such multibrand chains as Williams-Sonoma, which counts Pottery Barn among its spinoffs, or Gap, parent of Old Navy and Banana Republic. Ascena’s retail brands share a single supply chain, distribution channels, and information technology platform, among other back-office functions, which helps reap efficiency and cost savings, and this, says Chen, is “part of Ascena’s DNA.” The shared-services model and Ann’s SG&A [selling, general and administrative] optimization program (which the company hopes will reap some $35 million in annualized savings by 2016) “will free up the [Ann] businesses to focus on what they do best, which is merchandise execution, running stores, fashion and -design,” Chen said.
But these gains could take longer to realize than expected. “As evidenced by Ascena’s past acquisitions, there is always the potential for challenges and delays to reach the cost-savings target over the expected time frame,” wrote Dana Telsey, CEO of Telsey Advisory Group, in a research note. Her prediction is that the union’s targeted synergies will not be realized for about three years yet. Chen concurs: Lane Bryant, acquired in 2012, is a year behind in reaching its profitability target, he observes in a research note of his own.
At the time of the announcement, Ascena President and CEO David Jaffe says the merger combines complementary organizations and management teams. The Ann brands grant Ascena its first foothold in the higher-end women’s apparel business plus access to a new crop of shoppers. “They get two dominant women’s brands that are currently generating higher margins than Ascena’s,” Kloppenburg noted. That may come as little surprise. Ann Taylor and Loft offer upper--moderate career wear and upper-moderate casual wear, respectively, with higher-priced fare than Ascena’s affordable missy brands Dressbarn (career wear), Maurices (sportswear), Lane Bryant (plus-size apparel) and Justice (tween).
Ascena has not disclosed the role of Ann’s management team in the pair-up, but analysts speculate that the Ascena brands will tap Ann’s merchandising expertise and online strengths. “In career wear, Ann Taylor dominates,” Kloppenburg said. This trend and product-development expertise could trickle down to the Ascena base, particularly at Dressbarn and Lane Bryant, which have been underperforming.
Still, Ann’s business has been dampened in view of the growing ranks of Millennials with eclectic tastes and the rise of online shopping. For the fiscal first quarter (ended in May), Ann’s total same-store sales fell by 1.5 percent from the year-ago period. Ann Taylor in particular has taken a hit from a shift away from formal work wear toward casual fashions. “The apparel industry at large is being impacted by an overall increase and acceptability of casualization in all forms, both socially and in work settings,” according to a Mintel report published in May. “One key area of significant growth is ‘athleisurewear’ — or fitness clothing that is being worn progressively more for casual purposes. Women are driving this trend because they more frequently wear informal clothing like yoga pants and leggings.”
While Ann Taylor is making strides in broadening its appeal with new shoppers “and driving growth through a more balanced assortment … [it] has some work to do to claw market share from its competitors,” wrote Telsey in a research note.
Ann introduced a supply-chain initiative last November to “improve our production speed and flexibility and increase product sell-through,” Ann CEO Katherine Krill said during an earnings call in March.
This is no doubt a move to counter the encroachment of fast-fashion retailers like H&M and off-price chains such as T.J.Maxx, the hottest segment of the apparel market. These tend to replenish the clothing mix fairly quickly, so there is always something new in their stores, and they have accordingly managed to siphon off market share.
Greg Maloney, president and CEO of JLL, which counts about 50 Ascena and Ann stores in its retail portfolio, is upbeat about the merger. He describes it as an opportunity to refresh and optimize the store bases of the brands and to grow their businesses. “It opens up negotiations,” he said. “You’re merging and acquiring to get bigger and better.” When these deals occur, he said, “the leasing people get excited. It’s an opportunity to enhance our properties.”
These mergers spark conversations, he says, and JLL is anticipating a conversation with Ascena to run along these lines: “‘What do our next five years look like to capture more market share?’”
