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CLN Newsbrief: Jo-Ann's

The quarterly report and the conference call.

by Mike Hartnett (August 21, 2006)

Jo-Ann's Losses Grow.

For the second quarter ended July 29, there was a net loss of $21.2 million ($0.90/share), compared with a net loss of $5.1 million ($0.23) a year ago. Analysts had expected the loss to be $0.84. Operating losses for the quarter were $29.5 million, versus a $5.7 million loss a year ago.

Net sales were $363.2 million, down 5.4%, and same-store sales were down 8.4%. Execs blamed the problem on more clearance merchandise at a lower price than was sold a year ago, and temporary out-of-stocks caused by the implementation of certain "repair plan" initiatives.

Net sales for the year are down 2.1% to $787.9 million and same-store sales have declined 6.0%.

Gross margins for the quarter declined from 48.2% to 47.4% of net sales, due primarily to greater markdowns. Selling, general, and administrative expenses increased to 51.5% from 46.0% of net sales, due in part to the same-store sales and higher operating expenses. These include costs related to the separation of the former CEO, costs related to the opening of a new distribution center, and higher fixed-cost store expenses, due to the larger number of superstores.

The company reaffirmed its previous outlook for fiscal 2007. Execs expect year-over-year improvement in the second half of the year, based upon management's operating assumptions, which include anticipated benefits of certain repair plan initiatives recently completed.

Key considerations for understanding the company's outlook for the remainder of fiscal 2007 include A) same-store sales will decline, although improve slightly from the results in the first half of the year; B) gross margin will improve pre-fiscal 2006 rates; C) Selling, general, and administrative expenses, excluding the former CEO separation expenses, will increase, but not quite return to the level in fiscal 2006; D) capital spending for the full year remains at $45-$50 million, primarily for opening 26 new stores; E) strengthening of the balance sheet through inventory reduction of $45-$50 million by the end of the fiscal year, which will reduce debt by the end of the fiscal year by $40-$50 million.

During the quarter Jo-Ann's opened six superstores and two traditional stores, expanded a traditional store into a superstore, and closed 16 traditional stores. Year-to-date, Jo-Ann's has opened 15 superstores and five traditional stores, expanded a traditional store into a superstore, and closed 40 traditional stores and one superstore. For the balance of the year, the company expects to open five superstores and close 18 traditional stores. The current store count is 648 traditional stores and 169 superstores.

Jo-Ann's Conference Call.

Highlights of a a conference call following the release of the second-quarter results:

1. Separation expenses for former CEO Alan Rosskamm were $4.4 million.

2. Sales were hurt by a softening of home dec fabrics, fleece, yarn, and paper crafting. Customer traffic was about the same, but there were fewer transactions.

3. Execs are pleased with the initial results of the expanded jewelry and kids crafts. A beefed up marketing plan will launch later this summer to inform consumers about the new departments.

4. Jo-Ann's continues to employ Lehman Bros. for a variety of financial projects.

5. The debt level is up to $199 million, but the credit line still contains $122 million of "excess availability."

6. Store inventory levels are down about 13%

Comments from the new CEO Darrell Webb, on the job only three weeks:

1. Is still learning the industry. His first goals are filling a strong exec team, which he feels has been completed, and meeting with Jo-Ann's personnel and vendors. Will unveil additional plans early in the next fiscal year.

2. Committed to being much more competitive in the craft market.

3. Pleased with the repair plan already in place.

4. Complimented Michaels on its basic plan-o-gram integrity, inventory replenishment systems, and how the company has scaled back on high-risk seasonal goods.

5. Feels "pretty good" about the macro-competitive environment: if the rumor of Wal-Mart dropping by-the-yard fabric is true, Jo-Ann's should benefit, and could also benefit if the Michaels acquisition requires the company to service high debt levels.

6. Feels the keys to profitable growth are a strong team, good assortments, solid inventory management, and providing a pleasant shopping experience. Believes the existing IT systems are adequate.

7. Does not anticipate any massive store closures.

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