|Shares Out. (in M):||193||P/E||0||0|
|Market Cap (in M):||2,900||P/FCF||0||0|
|Net Debt (in M):||1,700||EBIT||0||0|
We believe ASNA is interesting at this price in light of the announced acquisition of ANN. We think this acquisition will create significant value for ASNA shareholders for a number of reasons including (1) the acquisition of 2 strong brands (Ann Taylor and Loft) at a good valuation (4.9x LTM EBITDA including expected synergies) which will be mostly financed by cheap debt, (2) the diversification it provides for ASNA – it doesn’t have to rely on Justice as much as it did before and (3) the powerful delevering that will take place over the next few years as the debt is paid down.
Elke528 posted a write up on ASNA in November 2014 where he provided a good overview of the business. At the time, my view was that the stock was interesting if Justice could get back closer to its historical level of profitability. I believe that at today’s price and in light of the ANN’s acquisition, very few things need to go right for the stock to do very well and the story doesn’t depend as much on a Justice recovery.
Bigger picture, by buying shares in ASNA, we are partnering with an owner operator (David Jaffe whose family owns around 20% of the company) with a good track record of capital allocation at an inflection point in the company’s history because:
1. The company is in the process of completing a significant capex program to create a shared service platform. Starting in 2016 (fiscal year starts in August so we are almost there), capex will come down significantly and the company is expected to start generating significant free cash flow. Capex was $478 million in 2014, is $350 in 2015 and was expected to come down to around $250 million going forward (this $250 million number is prior to the ANN acquisition so the number will go up to include capex related to ANN). This decrease in CAPEX is about to unleash a lot of free cash flow. This cash flow will be used to pay down the debt that is being used to buy ANN. The timing is perfect.
2. Expense savings related to this new platform, other investments, and the 2012 Charming Shoppes’ acquisition are starting to flow through the P&L. The company expects $95 million of savings through 2016 with $60 million to come through in 2015 and 2016 (we have assumed an additional $45 million to come on top of the LTM numbers since we are already through the first half of 2015 – the company has said they would generate $30 million in savings in 2015 and another $30 million in 2016).
3. The acquisition of ANN which we will discuss in more details below.
4. The optimization of the company’s balance sheet – ASNA will have around $1.8 billion of (cheap) debt after the ANN purchase. Over the next few years, ASNA will use all its FCF to delever, increasing the equity value along the way (assuming the enterprise value doesn’t go down!).
5. The company has built a platform infrastructure that will allow it to be the best buyer of assets in the future. There are not a lot of other strategic buyers in this space. In the future ASNA will mostly compete with private equity but given the level of synergies (as evidenced by the $150 million of synergies for ANN), ASNA has de facto become the best buyer in the industry. They just have to pay a little bit more than PE firms and can pick up assets cheaply (after synergies). Over time, we believe that this will be reflected in an increasing multiple for the company.
On Monday May 18, ASNA announced the purchase of ANN for around $2 billion. ANN shareholders will receive $37.34 in cash and 0.68 ASNA shares for each ANN share. This represents a purchase price of 7.7x LTM EBITDA excluding synergies and 4.9x LTM EBITDA including synergies.
The combination creates a company with $7.3 billion in LTM sales, $670 million of combined LTM EBITDA but most importantly $821 million in pro forma LTM EBITDA that includes $150 million in estimated annual run rate synergies. Having followed ASNA and its CEO David Jaffe for a while, we believe these synergies are conservative and will be achieved over a 3 year time frame.
How does ANN fit with ASNA?
Since its purchase of Charming Shoppes in 2012, ASNA has spent hundreds of millions of dollar to create a strong shared-service platform. The idea is for ASNA to be a holding company where the brands focus on the marketing and merchandising side of the business while the shared service functions take care of sourcing, IT, and all non-customer-facing back office activities. The beauty of the model is that ASNA can buy a concept like ANN and create significant synergies by plugging the brands into its platform.
We expect the company to delever rapidly as it did after the purchase of Charming Shoppes. Jaffe’s track record of capital allocation is good. Maurices and Justice were good acquisitions. Charming Shoppes is still a question mark (they haven’t turned around Lane Bryant yet). Based on the purchase price and the strong brands, we believe that ANN will prove to be a smart bet. The company also bought back close to $150 million of its own shares during the 2010-2012 period at attractive prices.
Pro-forma of the acquisition, ASNA will have around 193 million shares outstanding for a market cap around $2.9 billion. Net debt will be around $1.7 billion for an enterprise value of $4.6 billion. Pro-forma LTM EBITDA was $821 million (including the $150 million in synergies). Add to that the $45 million in expense savings the company is expected to realize by the end of 2016 and we get to a pro forma normalized LTM EBITDA of $865 million. The current EBITDA run rate is a little bit lower because 2015 EBITDA expectations at Justice and Lane Bryant are lower than LTM. Let’s assume that 2018 EBITDA is around $850 million (which would assume very little improvements for Lane Bryant, Justice or the other brands). We expect capex around $300 million, interest of $60 million ($1.2 billion at 5% - $600 million of debt repayment in 2016 and 2017 during the next 2 years) and taxes around $115 million for a FCF of around $375 million. The company would be pretty unlevered by then with leverage slightly above 1x EBITDA. Assuming a 7.5% free cash flow yield, the market cap would be almost $5 billion versus the current $2.9 billion or an upside of almost 80%. We expect the market to start focusing on 2018 numbers in around 2.5 years.
During the analyst day, the company highlighted the profit potential if ASNA can improve Justice, Lane Bryant and Dress Barn. The additional EBITDA could be close to $200 million which would be additional benefit on top of our numbers but we don’t need that for the investment to work very well. If 2018 EBITDA was $950 million instead ($100 million improvement), we have FCF at $440 million and a market cap close to $6 billion for a 110% upside.
On the downside, if EBITDA were to go down to $600 million, the company would still generate $200 million in FCF and at a 7.5% FCF yield, the downside would be around 5%.
A few words on Justice. I would recommend interested readers to take a look at the Company’s analyst day. The company explains its plan for the brand. The highlights are:
1. Still a very strong brand with mom and especially with the girl.
2. The challenge has been too much inventory which slows down turns which forces you to take more aggressive promotions to clear the goods and depress margins.
3. As a result, the company is shrinking inventory, reducing promotion cadence, and reducing the amount of fashion goods.
Based on my experience in retail, the plan makes sense. They will certainly have to tweak things along the way but they are clearly attacking the issues heads on. We may not get back to the peak level of Justice profitability but I expect improvements compared to the 2015 level of profitability.
1. Deal closing during the second half of 2015
2. Company providing updated guidance for their free cash flow targets including ANN
3. Debt pay down
1. Deal closing during the second half of 2015
2. Company providing updated guidance for their free cash flow targets including ANN
3. Debt pay down
|Entry||05/22/2015 02:30 PM|
Maurice was a good acquisition. They bought it cheaply years ago and grew it significantly over the years. Tween Brands (justice) was a distressed purchase at a great price. It is not doing as well as last couple of years but better than when it was purchased and it has contributed a lot of cash in the meantime. ASNA shares were bought at good prices a couple of years ago. Charming Shoppes is still an open question. I think ANN will prove to be a good purchase as well. So except for Charming, I think the capital has been well deployed.
|Entry||07/16/2015 06:36 PM|
Thanks for the idea aa123. What do you make of the guide down? Mgmt suggests that the (mix) issues are largely contained within Dressbarn and Justice - do you agree? if so, is this temporary or structural?
|Subject||Re: Negative pre-announcement|
|Entry||07/24/2015 04:01 PM|
We have been shocked by the move in ASNA and think the stock has greater than >100% upside.
We believe the pre-announce is a temporary issue as it mostly relates to Justice and wipes the inventory slate clean for Back to School.
It’s important to provide some history to give context to the current situation. Back in March 2015, Justice hired Brian Lynch to turn around the brand. Brian was the President of Ann Taylor and is considered a great operator. Under the prior CEO, Michael Rayden, Justice did experience a strong period of growth, but in recent years has stumbled with EBIT going from ~$180mm to $0 in this fiscal year. That represents $0.90 of earnings on a baseline they guided of $0.57 to $0.60. A staggering number to say the least.
So what happened? Part of this is a more challenging environment for apparel. Many companies in the space have reported deteriorating earnings (e.g. ANF, ARO and even AEO up until a few quarters ago). It’s been a deflationary environment with heavy promotions coupled with weak mall traffic. However, a lot of the Justice issues are self-inflicted, which gives us confidence a turnaround is possible.
Under the old Justice management, the strategy to drive comps was to increase ticket. The company couldn’t simply raise prices, so what they did was increase the penetration of “Over-the-top” fashion product (think shirts covered in sequins and bedazzle stones), which carried higher ticket. These products had very high initial markups (“IMU”) and Justice would then use promotions such as 40% off the whole store to give the customer the perception of a deal to drive conversion. The problem with this strategy was simple, the customer didn’t actually want “over-the-top” fashion. The product didn’t sell and the Justice was forced into heavy clearance to get rid of the product before Brian launched the new product and floor set on July 19th. That led to the recent pre-announce.
We believe the shares have come under pressure more recently as investors are concerned with the Justice pricing strategy to scale back promotions and comparing it to JC Penney. We believe those comparisons are unfounded.
Under the old management, there was heavy use of a 40% off-the-whole store promotion that reduced “out-the-door” price from their high initial ticket prices. E.g. they would sell a ~$40 ticket pair of jeans, but with the 40% off along with other coupons etc. the customer ended up paying $20. Customers were trained to wait for those promotions. Brian is reducing the ticket prices so the pair of jeans is priced at $20 to start. Why does Justice need to do this? If you run promotions constantly, you can’t use promotions to move bad product. Customers will use the 40% off and buy the good stuff, leaving you over-inventoried, forcing you to promote your clearance product which kills your margins.
Now why has the stock traded-off so meaningfully?
The market is concerned that this scale back in promotions mirrors that strategy JCP used under Ron Johnson that resulted in same-store-sales cratering. There are very important differences being overlooked.
1) JCP was trying to go upscale and alienated their core customer base. When they scaled back promotions, they did not institute a commensurate reduction in ticket prices. This effectively was a massive price increase to their value conscious customers. Justice is reducing ticket prices across the board so the “out-the-door” price comparing the new full ticket vs. 40% off is the same. So unlike JCP, Justice is not increasing prices to their customers.
2) Justice has huge brand equity vs. JCP. A 10 year old girl wants to buy clothes from Justice because it’s considered a fashionable brand. The girl does not want to tell their friends at school they got their clothes from Target or Walmart. The JCP brand is “the place your mom dragged you to buy clothes you hated in 1984.”
Now with ASNA’s stock price at $12.50, you don’t need to believe in a major Justice turnaround to win. What is the market pricing in at this point?
ASNA Capitalization Pro Forma for ANN
Stock Price: $12.50
Pro Forma Shares: 197
Market Cap: $2,463
Net Debt: $1,700
Enterprise Value: $4,163
Pro Forma EBITDA (pre-synergies / standalone cost saves / turnarounds):
ASNA: $370 (midpoint of recent pre-announce)
ANN: $259 (LTM per deal slides)
TEV / EBITDA Multiple: 6.6x
Free Cash Flow: $179 (Assumes $300 capex, $81 interest, $360 D&A, 37% tax rate)
FCF per Share: $0.91
FCF Yield: 7.2%
So at the current price, the market is giving ASNA little to no credit for synergies or operational turnarounds.
Now let’s layer in all the incremental EBITDA drivers from the ANN deal.
ANN Synergies: $150
ANN Standalone Cost Saves: $85 (it was made clear on ASNA’s recent earnings call the $150 of synergies is fully incremental to the standalone cost takeouts ANN had discussed before)
New Total Pro Forma EBITDA: $864
TEV / EBITDA Multiple: 4.8x
Free Cash Flow: $327 (Assumes $300 capex, $81 interest, $360 D&A, 37% tax rate)
FCF per Share: $1.66
Putting a 15x multiple on that you get to $24.87 share price or 99% upside. So if you just believe in the synergies at ANN and the ANN cost takeouts, the stock is a double.
Now let’s layer in ASNA specific EBITDA drivers.
Justice Turnaround: $90 (note, embedded in the base ASNA EBITDA from before is $0 ebit from Justice. Peak Justice EBIT is $182 from 2 years ago. Assume we can get half that back)
Remaining CHRS synergies: $10 (per mgmt. guidance)
Lane Bryant Margin Improvement: $30 (Lane Bryant has generated zero ebit today. We think it’s reasonable to assume it can get to low single digit margins give it has scale and the lowest performers within ASNA portfolio is low singles). Management believes this business should be a high single – low double digit EBIT margin business.
New Pro Forma EBITDA: $994
TEV / EBITDA Multiple: 4.2x
Free Cash Flow: $408 (Assumes $300 capex, $81 interest, $360 D&A, 37% tax rate)
FCF per Share: $2.07
At 15.0x you would get a $31.10 stock or 149% upside from here.
|Subject||Golden Gate filed a 13D|
|Entry||10/08/2015 05:26 PM|
Golden Gate purchased a 9% stake in ASNA and filed a 13D. They wrote a letter to the Company, pasted below. We continue to believe this idea is a double.
October 8, 2015
Mr. David Jaffe
President and Chief Executive Officer
ascena retail group, inc.
933 MacArthur Boulevard
Mahwah, NJ 07430
Thank you for our recent conversations. As we have discussed, Golden Gate Capital is very pleased to have become a significant shareholder in ascena retail group, inc. (“ASNA”), and we look forward to working collaboratively and constructively with you as a long-term public investor to assist in creating value for the Company and its shareholders.
We believe that ascena is a great business, with a well-crafted multi-brand strategy and with significant synergy and profit improvement opportunities, in particular given the recent acquisition of ANN. We are supporters of ASNA’s strong management team who has built the Company into a leader in women’s specialty apparel over the course of the past decade. And we believe that the Company’s stock is significantly undervalued, especially in light of the numerous value creation opportunities on which you are currently executing.
Golden Gate Capital and Public Equities
As you know, Golden Gate is a private investment firm with over $15 billion of committed capital. Our perpetual fund structure and highly flexible investment mandate allow us to invest in multiple asset classes and securities across our industry groups without a fixed time horizon or liquidity constraints.
Our investment activities are broader than those of a typical private equity firm, and include (a) Structured Public Minority Investments (such as Zale and Pacific Sunwear), (b) Scale Public Equity Investments (such as ANN and ASNA), (c) Fixed Income Investments via our wholly-owned specialty finance company (with nearly $1 billion invested in the debt of retail and consumer businesses), and (d) Private Control Buyouts (including J. Jill, Eddie Bauer, and Red Lobster, among others). Investments in retail comprise approximately one-third of our total invested capital – in fact, we are one of the most active investors in specialty retail in the country today. We are also highly active in Technology, Industrials, and Business and Financial Services.
Golden Gate’s public equities strategy is to leverage our industry expertise, private equity experience, and ownership mentality in a public company context. We seek to invest in high-quality companies with great management teams that are meaningfully undervalued relative to their cash flow and earnings growth potential.
We endeavor to operate in a transparent and straightforward manner, and we intend to be a long-term holder with a multi-year investment horizon, working collaboratively with management and the Board to help achieve a business’s full potential as a standalone public company. We do not invest with the intention to put companies ‘in play’ or to change management or directors. We believe our strategy delivers strong returns for Golden Gate’s investors and creates value for the other stakeholders of the companies in which we invest.
One Embarcadero Center, 39th Floor, San Francisco, CA 94111 tel 415.983.2700 fax 415.983.2701 www.goldengatecap.com
Golden Gate’s Investment in ascena
We believe ascena is a great business with a number of assets and advantages including:
Further, we believe management is already executing on multiple opportunities for value creation, including:
As such, we believe management has a clear path to meaningfully improved operating margins consistent with its well performing peers and its long operating history, and in particular given the additional scale, synergies, and profit improvement opportunities offered by the ANN acquisition.
Lastly, we believe the Company’s shares are significantly undervalued, offering meaningful upside with material downside protection (via brand diversification, strong free cash flow, depressed margins at Justice and Lane Bryant, and yet-to-be-realized synergy and efficiency opportunities at ANN), presenting a unique opportunity for a firm such as Golden Gate to become a significant shareholder in a scale, high-quality, and well-managed business like ASNA at a very attractive valuation.
We have tremendous respect for you and your Company, and we look forward to working with you as a meaningful, constructive, long-term investor. We recognize the potential impact that a 13D filing can have on a company and its shareholder base, and we therefore wanted to be very clear and transparent about our intentions regarding this exciting investment.
We believe that our extensive experience in the specialty retailer sector and our proven track record of working collaboratively with public company management teams and Boards uniquely position Golden Gate to partner with ASNA to meaningfully contribute to our collective goal of maximizing shareholder value. We look forward to continuing our discussion about the opportunities available to your Company.
|Subject||Re: Aviclara/AA... are you still involved?|
|Entry||09/20/2016 11:56 AM|
We are not involved. We realized our bet was predicated on Maurice's not falling apart and with such strong performance and with material exposure to Oil-industry states, we did not feel comfortable with that component of the thesis. Unfortunately, we were correct in our worries. in Q4, Justice improved as did Lane Bryant. However, the rest of the portfolio appears bad.