JOANN Inc. [JOAN] Conference call transcript for 2022 q1
2021-06-03 22:36:03
Fiscal: 2022 q1
Operator: Welcome to the First Quarter Fiscal 2022 Earnings Call for JOANN, Inc. My name is Adrian, and I'll be your operator for today's call. Please note this conference is being recorded. And I'll turn the call over to Ajay Jain, Director of Investor Relations. You may begin.
Ajay Jain: Thank you, operator and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and the company undertakes no obligation to update or revise any forward looking statement to reflect subsequent events, new information or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC.
Wade Miquelon: Good afternoon. And thank you for joining us today. I would be remiss if I didn't start by welcoming Ajay Jain into the JOANN team. Ajay will be leading our investor relations efforts and is an extremely talented leader with an extensive background in the financial markets. I know you will really enjoy getting to know him as we share the JOANN story to current and potential stakeholders. Relatedly, it's truly gratifying to be part of JOANN return to the public equity markets. Many of you may already be familiar with our company's history going back more than 75 years from its humble origins as a single location shop in Cleveland to what has become the nation's largest fabric and crafts retailer. For those who are new to our story, at JOANN, our mission is to inspire the great spirit in each of us with a strong legacy as a nation's category leader in selling, we are also one of the fastest growing retailers in the arts and crafts category with a robust omni-channel platform. Our vision is to be an inspirational leader that helps everyone find their happy place, through superior assortments, strong merchandising execution, and a relentless focus on customer service and experience. Our first full quarter as a public company was successful one and exceeded our internal expectations. Our sales trends remained strong growing at 15% over last year's first quarter, with that strength spread broadly across our merchandise categories, customer segments, channels and geographies. We also drove gross margin expansion and controlled expense to increase net income to $15.1 million and expand adjusted EBITDA margins by 570 basis points, the 10% of sales, resulting in a $35.8 million or 165% increase in adjusted EBITDA versus last year's first quarter. While Matt will provide more detail on our financial performance. I want to also briefly highlight our momentum in debt reduction over the past year. Driven by our many balance sheet initiatives and $77 million in net proceeds from our recent IPO, we’ve reduced our long-term net debt by $570 million from the same period last year to $760 million at the end of our latest quarter. And we anticipate further debt reduction to a level of $600 million to $650 million by the end of fiscal 2022.
Matt Susz: Thank you, Wade. I too truly grateful for the efforts of our entire organization, collectively our field, distribution center and corporate teams on wavering focus on serving our customers and communities resulted in strong first quarter results for JOANN. Now, let me share highlights of our first quarter fiscal 2022 performance, which exceeded our internal plans on top-line sales performance, operating margins, and bottom line profit. Net income was $15.1 million in the first quarter of fiscal year 2022, compared to a loss of $23.6 million last year. Diluted earnings per share was $0.38 compared to a loss of $0.68 in the same period last year. Adjusted diluted earnings per share was $0.46 compared to an adjusted loss per share of $0.31 in the first quarter of last year.
Operator: Thank you. And our first question comes from Liz Suzuki from Bank of America. Your line is open.
Liz Suzuki: Great. Thank you. Can you just walk us through the biggest drivers of that gross margin this quarter and I guess, or either quantify or rank order the impact of the strategic sourcing efforts, the promotion activity, and shrank, or any other good guys to gross margin?
Matt Susz: Sure, Liz. This is Matt. Happy to do that. Yes. Primarily driven by what we would quantify internally as product margins. So I would say the primary driver of that being our ability to optimize discounting relative to what we were able to do a year ago. I would say pretty closely followed by what’s been ongoing success of our direct sourcing wins in terms of being able to go direct to factory in many cases or negotiate better terms with the existing vendors. After that, I would say definitely the strength initiative has been a big win for us. Again, just the overall inventory carrying values is helpful there, but we’ve also implemented a number of controls in our stores over the last 12 months to 18 months, that are starting to really bear fruit. And then one I would put shortly after that, but I think longer-term is something that we’re quite excited about is just the overall lower penetration of clearance to our total inventory. If you look at sales of markdown goods to our total left down about a 100 basis points. We actually feel for the coming quarters that’s actually going to be one of the nicer tailwinds for us going forward.
Liz Suzuki: Great. And it seems like a lot of those benefits would theoretically continue in the subsequent quarters. I mean, is there anything of a one-time or temporary nature that we should think about or a lot of these benefits likely to continue?
Matt Susz: I am Matt, jump in here. I think these benefits will likely continue again, the one thing we’re seeing now is really a primarily these massive ocean freight increases. And these are – I’d say, the bad news is they’re probably unprecedented in their nature, but the good news is they’re not sustainable, at some point they’re going to fade and will go back to normalcy.
Wade Miquelon: Yeah, I think the rest of it kind of tailwinds I talked to we do feel they’re sustainable. Certainly the promotional environment could change. I think that’s a portion of the benefit we’re seeing, but I would also attribute much of that to just our own analytics and really reading of the unprecedented number of new customers we have coming in to the space and really understanding their sensitivity to promotions and our ability to leverage our high-low model against that. We do feel that most of that is sustainable.
Unidentified Analyst: Great, thanks very much.
A - : Thank you.
Operator: And our next question comes from Paul Kearney from Barclays. Your line is open.
Paul Kearney: Hi everyone. Thanks for taking my question and congrats on a first good quarter out of the gate.
Wade Miquelon: Thank you.
Matt Susz: Thank you.
Paul Kearney: Can you talk a little bit about what categories drove some of the sales growth and where you’re seeing continued momentum?
Wade Miquelon: Yeah, I mean our results were broad-based, really all of our core divisions were up and growing nicely, especially on the stronger side was really our arts and crafts and seasonal was a bit stronger than balance, but very broad-based. Sewing wasn’t as strong, but one of the things even though sewing is up nicely on a two-year stack. But what we’re pretty optimistic about is some of our biggest businesses in sewing has actually – are actually still much shutdown. So, our things like our fashion apparel, our special occasion and then there’s obviously sales that come with that in terms of sewing construction, these businesses have largely been shutdown, because there haven’t been weddings, cosplay events, , there hasn’t been lot of program, those kinds of things. And as we see different geographies and zip codes open up, we’re seeing those businesses now start to blossom, but we see that’s going to be actually a nice little tailwind for us too, as we get back to the new normal.
Paul Kearney: Great, thanks. And just a quick follow-up, maybe on the store front on the refresh plan, if maybe you can just remind us how many projects do you plan for this year, what would be the expected timing and just broadly, what kind of returns do you see on a store refresh program in terms of comp lift or profitability? Thank you.
Matt Susz: A great question, so this is Matt. We’ll have a fairly modest number of projects this year somewhere between 10 to 15 that will be completed, as we’ve talked earlier a bit of an impairment in our ability to plan those projects this year, just given the pandemic and the ability to have construction crews in our stores in many markets. We’ve just completed a thorough review of our whole chain in terms of our strategy for those refresh projects and are well on our way to ramping up to full rollout mode starting really at the end of this fiscal year and moving into early next, that’ll result in about 60 to 70 projects per year. We endeavor to have a blended return on those projects of about four-years payback on the initial investment into those projects, some of them will blend a bit longer than that, a lot of them more quickly where we’re getting pretty healthy lifts on those projects for relatively modest investments.
Paul Kearney: Thank you very much.
Operator: And our next question comes from Steven Forbes with Guggenheim. Your line is open.
Steven Forbes: Hi, good evening. Maybe a follow-up for you, you mentioned machine sales, like during the prepared remarks here, but just curious if you could provide some color on the quarterly performance, any update – updated thoughts on how you expect machine sales to trend this year versus last year holistically? And then any sort of change in those year one or year two spending trends to call out or relatively consistent to what we've talked about before?
Wade Miquelon: Yeah, the machine sales across the board have been very strong. I think around plus 200% or so versus on a two year stack basis and they continue to be strong. And, you know the days of sewing from mass making are long gone. I mean, they kind of stopped in September, October, so. On that side of the house we feel very, very good, and we're still seeing a lot of young consumers coming in and learning the art and evolving the machine, experienced consumers continue to trade up. On the other side of the house, the craft machine house a very strong, very good pipeline of innovation still coming. And customers are engaging and we're seeing, very good follow-on sales. We're running the metrics now to see if it's the same as historic, selling again, I think is a little bit distorted because a lot of these major events that do a lot of selling are not happening yet, but they're starting to. And so we're seeing, good life where that is happening. But we're pretty optimistic that these trends are here to stay. And that we're not going to see a big drop off on these.
Matt Susz: Yeah, we're still seeing – we did some tracking of our newer customers recently. We're still seeing their frequency of visit at about twice what our average customer is and their average ticket about 15% to 20% higher. So yeah, we're still seeing very good follow-on activities in those customers that bought their first machine last year.
Steven Forbes: And maybe just a quick follow-up on the expense side of the P&L. Any sort of update on how you're tracking relative to those indirect spending saving targets that you laid out, because it did seem like you sort of a beat on expenses here relative to the internal plan, was that something specific to call out or just a broad-based achievement against those goals?
Wade Miquelon: Yeah, that's a great question. It's a little of both. I would say we definitely have seen some good traction on bids and projects that we've run this year. I would also say we're seeing nice ability to be more efficient on our lower inventory carry that provides some nice labor efficiencies for us and our distribution centers, as well as our stores. And we've done a, I think a pretty good job leveraging those. I think that's also a bit of a potential tailwind for us as we continue to be able to manage pretty well on that lower inventory investment.
Steven Forbes: Thank you.
Wade Miquelon: Thank you.
Matt Susz: Thanks Steve.
Operator: And our next question comes from Peter Keith from Piper Sandler. Your line is open.
Peter Keith: Hi, good afternoon. My congratulations on the first quarter out as well. Maybe just to follow-up on, Matt some of your most recent comments off of Steve's question with new customers. I know in the past we've talked about the 2020 cohort of customers that bought either a sewing machine or a Cricut machine, and felt that the sales view for 2021 was based on retaining about 65% of those customers and that those customers on average would see about a 66% increase in spend from year one to year two, all align with the historical measures. Is that something now, as we're getting into Q2 and we're lapping these compares that you guys are still continuing to see hold true?
Matt Susz: Yeah, I think definitely, as I mentioned earlier, the frequency and the basket value from that customer is at least as strong as we've seen historically in what we've hoped. I would say on the retention piece, was also talking with our Chief Customer Officer a bit on this earlier in the week. Probably a little bit early to tell if we're going to be kind of in that mid-60% to 70% retention rates. Just because we've – some of these customers were added in the fourth quarter last year, but certainly we're on trend for that and expect to be able to achieve that.
Peter Keith: Okay. All right. And I guess there's no formal guidance for the second quarter, but at least where the consensus number sits would have your sales growing on a two-year basis at about 15%. And that's coming off of Q1 where sales on a two-year basis grew 11%. So is there anything nuanced with Q2 where on a two-year basis we could see some acceleration or conversely, do you think maybe the two-year trend will hold steady or decline coming off of Q1?
Wade Miquelon: So what I would say about the two-year trend for second quarter is the thing you probably need to think about with that and what we look at is that, the year, or two years ago, that second quarter was a pretty weak quarter for us. And actually our first quarter of that year was by far our strongest quarter, so some of this is really the trends in that two years ago time period. We actually feel like, our kind of quarter-to-quarter trends in terms of sales are going to somewhat normalize this year. I think maybe the one piece that would go against that is, as Wade mentioned, we deal – we do still have some businesses that have been shutdown, due to COVID things like our celebration category, special occasions, and so on. We are hopeful; those will pick-up some steam as we move through the year.
Peter Keith: Okay, great. Maybe one last question, just thinking forward as well. I believe we were looking for some ongoing gross margin expansion year-on-year through the rest of the year. You are highlighting now freight costs as a headwind, and you expect to offset those. Does that imply you think gross margin will probably run more flat-ish year-on-year, or do you still expect to see year-on-your gains in the coming quarters?
Wade Miquelon: Yes. So we're really speaking to being able to offset relative to our expectations. So we had expectations to grow margins. We still have expectations to grow margins. What we're really saying is we have some tailwinds that maybe would have had it, even more optimistic. Those are going to be softened a bit by the supply chain cost.
Matt Susz: I mean, for perspective on the ocean freight, what we're seeing now on some of the broken containers that we're getting is as high as 10 times is what historically paid. So again, that's going to ultimately subside, I know others are seeing similar issues, but that's probably the one anomaly and that didn't hit us very much in the first quarter. That really is the thing that misses throughout the balance of year and then ultimately we will expect, we'll return to normal. So we grew gross margins by 350 basis points in the first quarter. We don't expect to give all of that back, but certainly not be that strong on a over-over-year basis for the balance of the year.
Peter Keith: Yeah. Okay. Very helpful. Thanks so much.
Operator: And the next question comes from Zach Fadem from Wells Fargo. Your line is open.
Zach Fadem: Hey, good afternoon. So again on the tougher comparing Q2; is there any color on your May trends you could talk about? And then on the SG&A side, could you walk us through the de-leveraging impact on your model? And to what extent you're able to flex down any of the SG&A costs to better manage the profitability?
Wade Miquelon: Yes. I mean, I'll just for someone may be newer to the company, the Q2 compares last year had not only this kind of huge PPE surge, which has been long gone. It also had one of our largest competitors in our space, such other stores now for a while. So that's part of that really anomalous Q2 that we're up against. But for May, we feel good. I mean, May always just kind of low in the middle of the month. But we finished really strong and there's nothing that makes us feel that these underlying trends that we've been able to enjoy and these incremental customers are fading. So…
Matt Susz: I think on the de-levering point, on the SG&A side. Q2 is historically our slower quarter. We do tend to try and control cost, even absent. The unusual trend we're up against from last year. The one thing I would say as we – we also make a lot of our already in the back half of the year and allowed what we need to do to prepare for that occurs in the second quarter. So while we're going to be able to manage at or below our internal expectations and what we may have shared earlier around SG&A, we are also not going to put the bank at risk by trying to cut costs and allow us. They're allowing us to be ready to do the stronger business in back half.
Wade Miquelon: I guess one thing I would say too, is, we've really spared no expense to make sure that we're standing strong and our in stock positions and our seasonal, being able to really run through the year. So we feel good about that versus the opposite of trying to save costs and not being able to, to be as relevant or as strong to our customers. So it's the choice we've made and we think it's going to serve as well.
Zach Fadem: Got it. That makes sense. And then on the e-com mix taking a little bit of a step down in the quarter, I assume that, that has to do with customers returning to stores. Maybe you could talk about whether there was any mix impact to gross margin compared to your plan. And then as we move through the year, whether you expect that e-com mix to step back up and should we expect any offsetting gross margin get back as a result?
Wade Miquelon: On the e-com, the thing to remember is as we got into April last year, and then, as we move forward, we had many of our stores that were shutdown completely to visitors entering. So the only way we can serve them was online. But now we're at a point, this quarter is much more of a normalized quarter, if you will. I'm not one of our higher for e-com, but the numbers you see now; I mean all of our stores are fully opened. The customers are coming back. So I thank you, you are getting a good view of what normal looks like as we grow from here.
Matt Susz: Yes. So we think that 12% to 15% penetration on an annualized basis is a healthy place for us to be. We certainly have some initiatives where that may grow in the future. But it is seasonal, so we view typically even with a normalized pandemic environment and economy. We would typically have a bit higher penetration from e-commerce in the back half of the year, relative to what we see in the early part of the year. There's a little bit primarily related to freight – direct consumer freight that has on our margins. But I would say it's relative to the other things we've talked about, it's pretty minor.
Wade Miquelon: You know, our e-com business is now very profitable and we've got a couple of very big leavers that we can make it even more so from a cost perspective and as well as the top line, now that we're kind of at the new normal moving forward, so we are encouraged by that.
Zach Fadem: Got it. That all makes sense. Appreciate the time tonight.
Operator: And your next question comes to Cristina Fernandez from Telsey Advisory Group. Your line is open.
Cristina Fernandez: Hi, good afternoon, and congratulations on a good quarter. You didn't mention the government stimulus there in your prepared remarks. Do you think it had a benefit during the quarter in and perhaps, could you quantify any benefit from that?
Wade Miquelon: I would, probably never say that we didn't have any benefit, right. But if we did it's very hard to measure. I mean for a purchase of under $30 and the kinds of customers we have, it's very different than, I would say automotive, appliances and the likes. So there's nothing there that we think distorts the quarter versus a normalized one in any meaningful way.
Matt Susz: Particular as for this quarter specifically, those occurred in what was already expected by us to be the strongest part of the quarter. It's when we are on a year-over-year basis. It's when we were up against the, kind of the worst store COVID shutdowns last year. We also had in earlier Eastern this year, which has beneficial to our business. So again, I think that's Wade's point that makes it even a little muddier for us to really kind of sort out how much of that strong period of the quarter was due to the stimulus.
Cristina Fernandez: Thank you. And then I had a follow-up question on promotions. Can you comment on what you're seeing across the industry? And this industry traditionally has been promotional to the extent that some of your competitors bring back promotions. Would you feel compelled to follow them, or do you think with your data and sort of differentiation in your product, you can stay at a lower level versus your historic historical pattern? Thanks.
Wade Miquelon: Yes. Maybe I'll throw my opinion, Matt can throw his, but I think we're seeing, it's a pretty rational environment out there and we still promote – we're always going to promote, but I think we're getting smarter and smarter of how and when and why we promote. Our customers seem to be with us, and both are historic customers with us, but I think importantly we do get great value. We don't want to promote the way we promote now, and a lot of the new customers that maybe haven't been with us for a long time. They're very accepting of our value proposition. We think it's still very robust. So I don't see that personally changing. I mean, I'd never say never, but I think right now it's a good environment and I anticipate the be for some time.
Cristina Fernandez: Totally agreed.
Operator: And we have no further questions. I'll turn the call back over to Mr. Wade Miquelon for any closing remarks.
Wade Miquelon: Well, look, I just want to thank all of you. It's been – it's been I'm sure for all of you and your families; it's been a crazy year. But here we are and hopefully we're all moving forward to brighter times. A lot of the good results we're seeing, we really feel it's really because of this transformational journey. We started several years ago here raising our game and all aspects of assortment, our store experience, or omni-digital market, our capabilities, talent. We've got our 27,000 JOANN employees who work very hard every day. And it takes every single one doing their part and I'm grateful for all of them as well. And for those of you that are stakeholders and we'll possibly be, I just want you to know that we're working as hard as we can every day on your behalf. We think we've got a great company here and we're really committed to take it to even higher heights.
Operator: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
