Distressed retailer Ascena (ASNA) , whose brands include Ann Taylor, Loft, Lane Bryant, Catherine's and Justice, announced an interesting move on Tuesday, The company adopted a "tax benefits preservation plan", which is supposed to protect shareholders in the event of an ownership change that would limit ASNA's ability to utilize net operating losses. Translation: the company wants to stave off a hostile takeover by an acquirer seeking to utilize the company's tax-loss carryforwards.
In order to do this, ASNA will give (actually termed a "dividend") shareholders one right for each share owned as of June 5th. Under the plan, if any group (without approval of the board of directors) acquires 4.9% or more of ASNA stock, the rights would be triggered, and shares outstanding diluted significantly. For current holders that own 4.9% or more of the company, a 1% increase in ownership would trigger the rights plan.
As of March 31st, there were five institutional owners that held more than 4.9% of ASNA; their total holdings were about 38% of the outstanding shares, and total institutional ownership is about 65% of the company. Top holders include (as of 3/31/2010):
- Stadium Capital Management (9.6%)
- Charles Schwab (SCHW) (9.4%)
- Dimensional Fund Advisors (7%)
- BlackRock (BLK) (6.3%)
- Renaissance Technologies (5.5%)
ASNA shares rose 73% on Wednesday, on the back of the rights plan announcement, on volume of more than 6 million shares which was more than 10 times normal average volume. Likely, some of this activity was short-covering; as of May 15 short interest was 3.15 million shares, or 31.5% of the total outstanding. Yesterday, ASNA shares gave back some of Wednesday's gain, falling 16.5%.
Following Thursday's market close, the company issued an update on current conditions. All 2800 stores were closed on March 18, due to the pandemic, as of Wednesday, 450 had been reopened. While total revenues for the third quarter (ended May 2) was down 45% versus the same period last year, e-commerce was up 9% in April. Prior to the store closings, 60% of company revenue was generated in-store, so e-commerce is significant.
Debt is the primary reason that the markets have presumed for many months that ASNA will be going under. Pre-Covid, ASNA was on the upswing as the presumed damage from the Dressbarn closing (store leases) never materialized. While Covid has not helped matters, the company ended its third quarter with $439 million in cash and cash equivalents, and debt of about $1.5 billion. That includes a $1.292 billion term loan, and $230 million drawn from the company's revolver, due to the shutdown. The company has paid ahead on its term loan, and the next interest payment of $22.5 million is due in November.
The markets are viewing ASNA as just one of the next retailers that will go under. With a current enterprise value (EV) of about $1.1 billion (Debt- Cash+ Market Cap), the current market cap represents just $20 million of that figure.
I think ASNA still has a shot at survival. It is certainly not a safe bet, and not for the faint of heart, but could have an asymmetric payoff, if indeed, the company is able to muddle through.
