Q2 2021 JJill Inc Earnings Call
Okay.
Good morning, My name is Lee and I will be conference operator today.
At this time I would like to welcome everyone to the <unk> second quarter fiscal 2021 earnings conference call.
On today's call are riskier, Spofford, President and Chief Executive Officer, and Mark Webb Executive Vice President Chief financial and operating Pops here.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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Before we begin I need to remind you that certain comments made during these remarks may constitute forward looking statements and are made pursuant to do within the meaning of the safe Harbor provision of the private litigation Reform Act of 1995 as amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause the actual results to differ materially from such statements.
Those risks and uncertainties are described in our press release and Judy SEC filings.
The forward looking statements made on this recording Harris after September nine 2021, and <unk> does not undertake any obligation to update these forward looking statements.
Finally, J Jill may refer to certain adjusted or non-GAAP financial measures.
In today's remarks.
A reconciliation scheduled showing GAAP versus non-GAAP financial measures is available in the press release issued September 9th 2021.
If you didn't if you didn't have the copies of today's press release, you may obtain one by visiting the Investor Relations page of the website at <unk> Dot com.
I would now like to turn the call Neuvirth declare.
Okay.
Thank you and good morning, everyone.
Our second quarter results reflect the encouraging progress we've made against operating model changes and strategic initiatives. We laid out earlier this year with a focus on gross margin expansion and healthy growth of the company.
We're seeing strong full price selling and margin recovery and we're confident that we're laying the groundwork for profitable growth moving forward.
Before I dive into our results for the quarter I'd like to share my perspective on the element of this brand and business that provide a strong foundation and platform for sustainable growth.
J Jill is a brand with great heritage in equity, it's something I understood and recognized from my prior tenure as Chief Marketing Officer now deeply appreciate having returned to CEO.
There is a relevance and authenticity to the brand that really resonates with our customer. This results in a deep level of loyalty and allows us to engage with our customers season after season through our unique proprietary product offerings.
Our balanced omni channel business model is also a strength that we continue to advance we have the benefit of strong direct to consumer capabilities and practices, coupled with a store fleet that has a footprint in prime locations in most of the key markets for our demographic.
This balance provides optionality for our customer in terms of how she likes to shop and allows us to be agile and responsive to business and selling dynamics. We can assess response to our assortments quickly and react and respond accordingly, resulting an optimized sell throughs and improved margins.
The portfolio of our core J, Jill brand and our sub brands pure Jill wherever and fit serves different end uses and style preferences for our customer.
All under our value proposition grounded and offering her premium casual clothing, and it's easy and versatile and made it the finest fabrics.
For example, pure Joel is the ultimate expression of the brand and a great example of how we provide her products with a fabric first approach and a focus on natural fibers and our children all details.
And our customer understands that quality, she is affluent and well educated and discerning when she chooses to shop, she values quality and uniqueness and is willing and able to purchase at full price when she is inspired.
This quarter, our customers responded really well to both our core and novelty products as evidenced in our strong full price penetration.
We have also been focused on providing for a regular flow of new product, which has driven engagement and purchase frequency.
Mark will dive deeper into the quarter's results, but plainly stated we were pleased we recognized that the retail industry as a whole benefited from tailwind due in part to the reopening we witnessed across the nation and an increase in consumer sentiment.
Store sales direct sales and gross margins were up meaningfully as compared to the same quarter last year <unk>.
Importantly for J Jill direct sales for the quarter were approximately 46% of total sales reinforcing our belief in the balanced omni channel and nimble business model that we have and continue to build.
While we continue to be optimistic about the back half of the year and going forward.
Acknowledged that there are macroeconomic headwinds that could affect our business in the near and medium term.
Similar to the rest of the industry, we're exposed to rising supply chain in component costs and while we've done work building relationships with suppliers, we are likely to see the impact of these rising costs through the second half of this year and into the early part of next year.
I want to emphasize that we are driving recovery in our business and we are positioning ourselves for sustainable profitable growth going forward. Our focus remains on growing our customer base, ensuring the health of the business through gross margin expansion by inventory management and promotional strategy and delivering a steady flow of newness in our products.
Which altogether drive customer engagement and full price selling.
We're rebuilding the health of the customer file by focusing on servicing our core customers, while laying the groundwork for the next cohort and appealing to a larger audience of customers with similar lifestyle needs and aesthetic sensibilities.
As evidence of our tighter inventory management inventory at the end of the quarter were down double digits as compared to last year.
This is another data point that supports the lower markdowns and higher full price penetration model we're pursuing.
Another advantage of our model is our direct to consumer sides ability to gather useful data and develop insights based on our customer shopping behaviors and patterns are.
Our digital penetration enables us to respond to business changes, making our business model more dynamic and driving our ability to meet changing consumer demands.
We're proud of our work and the results. We've achieved thus far are encouraging I want to thank the team for their dedication and hard work.
And so before I turn this over to Mark I'd like to reiterate our continued confidence in our business model, our brand and in our team and with that I'll turn the call over to Mark.
Thank you Claire and good morning, everyone. As Clare mentioned, we are pleased with our performance in the second quarter as momentum continued to build in the store channel and customer response to full priced products showed continued strength in both channels.
Inventory levels remain well under control and gross margins in the quarter reflects strong product acceptance and renewed discipline to keep buys tight sell full price at no or low promotions and manage markdowns in season through pricing and promotional actions.
Total company sales sequentially improved compared to prior quarters with total sales up 72% versus Q2, 2020 and down 12% to Q2 2019.
Approximately 250 basis points of the decline versus 2019 was due to the lower store count in 2021 compared to 2019.
Store sales were up over 220% versus Q2 2020 as most stores were closed through June of last year due to COVID-19 related Lockdowns and we opened to lower traffic as restrictions in customer apprehension, we're still prevalent.
Store sales were down 18% compared to 2019 levels of which approximately 400 basis points is related to closed two stores closed since 2019.
Similar to what we saw in Q1 store sales in each month of the second quarter of 2021 were sequentially better than the prior months when compared against 2019.
Direct sales were up 11% versus 2020 and down 4% to 2019 direct sales as a percentage of total sales were 46% in the quarter.
Q2, gross profit was $113.0 million.
Up $54 million compared to Q2, 2020, and up $4 million compared to Q2 2019 Q2 gross margin was 68, 7% up 930 basis points over Q2, 2020, and up to 1040 basis points compared to Q2 2019.
The improvement in gross margin was driven by better full price selling fewer and lower global promotions and reduced third party liquidations associated with better tighter inventory buys and positive customer response to collections.
SG&A expenses were $86 million.
Up $8 million versus prior year increases to last year were driven by selling costs due to stores open and operating the full quarter. This year higher marketing investments and management incentives, we expect costs such as these to continue to build in the back half as we continue to support sales growth and as we.
Turn to more normalized store operating schedules.
Compared to 2019 SG&A expenses in Q2 were down $17 million driven by selling costs on fewer stores refined and reduced marketing investment and the impact of our new operating model on G&A overhead all of which were partially offset by higher management incentives.
Adjusted EBITDA was $39.0 million in the quarter compared to a loss of $11.0 million in Q2, 2020, and adjusted EBITDA of $18.0 million in Q2 2019.
Please refer to today's press release for a reconciliation of adjusted EBITDA.
Turning to cash flow for the quarter, we generated $32 million in cash from operations. We ended the quarter with total cash of $18 million and had zero borrowings against our ABL total liquidity as defined in the primary term loan agreement measured as ending cash balance plus check flows.
Plus ABL availability was $56 million at the end of the second quarter.
Also as disclosed in our previously filed 8-K on August 27th of this year, we exercised a pick paydown option on the prime and term loan paying down $25 million or.
We're over 10% of the outstanding loan from cash on hand.
In line with our goal to manage inventory tightly to support full price selling inventories at the end of the quarter were down 24% compared to the end of Q2 last year.
As previously disclosed warrants related to the subordinated credit facility and the embedded derivatives associated with the prime in term loan were mark to market for the final time during the second quarter due to the increase in <unk> stock price since the end of first quarter of 2021.
Resulting in a noncash charge to the income statement of approximately $39 million.
Associated with this we issued approximately 272000 shares to the priming lenders as of May 31.
The value of the warrant an embedded derivative liabilities are now considered equity rather than liabilities and classified as such on the second quarter balance sheet.
Capital expenditures in the quarter were about $2.0 million versus $800000 last year, we now expect to spend about $8 million in capital for full fiscal year 2021 with investments focused on maintenance and technology, specifically related to enhancing and upgrading our E Commerce site.
We closed four stores in the second quarter, ending with 261 stores and we still expect to close about 20 stores for the full year 2021.
Looking at the balance of the year barring any major disruption from the evolving COVID-19 situation. We expect revenues to continue to rebound from 2020 levels, though at a slowing pace as store sales have improved back closer to 2019 levels with respect to gross margin the fundamentals of inventory management.
Full price selling and reduced promotions should continue to support strong margins, but supply chain disruption is increasing resulting in both elevated shipping costs and delays. We expect this disruption to continue at least through the back half of the year and are working with our supplier base and logistics providers to prioritize.
<unk> and expedite product shipments to ensure as many on time deliveries as possible.
Our focus on driving full price selling at lower promotional discounts should help mitigate some of this pressure and support gross margin expansion compared to 2020 through the end of the year.
Moderating levels compared to year to date performance.
In summary, the second quarter results demonstrate the ability of our operating model fueled by healthy gross margin recovery to drive adjusted EBITDA and strong cash generation, while the macro tailwind is experienced in Q2 will likely abate somewhat in the back half of 2021, we believe the principles and.
Approach of our operating model should continue to drive meaningful progress. Thank you and I'll now hand, it back over to Claire.
Thanks, Mark I'd like to end the prepared remarks by reiterating three key things that make us optimistic about the potential for our business moving forward.
We continue to make progress against strengthening our foundation and executing against the operating model changes and strategic initiatives, we laid out earlier this year.
Second as a result, we're seeing healthy full price selling and margin recovery, leading to expanded EBITDA margins.
And third we're confident that our strategic approach is laying the groundwork for profitable sustainable growth built on a great brand and a loyal customer base.
We're committed to creating value for our shareholders and thank you for your time and appreciate your interest.
That concludes my prepared remarks, I will now turn the call back to the operator for questions.
Thank you.
As a reminder to ask a question. Please press star one on your telephone keypad to enjoy a question Brexit bounty. Please standby, while we compile the Q&A roster.
Your first question comes from Dana Telsey from Telsey. Your line is open.
Claire and Mark congratulations on the nice progress that you've had.
Couple of questions as you talked about the pure Jill line and fit can you give us an update on what youre seeing in the sell through either direct or in stores is it the same as they have differentiation in terms of the of the product and then can you expand on supply chain. We've been hearing call after call that its expect to potentially to last.
Through mid 2022, how are you positioned and what do you see in terms of port issues are you using airfreight and what percentage of goods comes from Vietnam, and then I have a follow up.
Thank you Dana.
Yes, we're seeing strong in Q2, we saw strong full price sell through pretty much across the board. There was some different across the sub brands. There was exceptional strength in pure Jill and also exceptional strength in fit although it's off a small base.
And we also saw strength in.
Mix and in novelties across the board and our and in our.
In our core basics programs as well so lots of sort of broad scale strength and you know we feel really good about the potential of of a lot of the business, but there's a great emphasis on peer tell as well.
And Dan I'll, just jump in on the supply chain.
First of all the issues clearly a real.
Being reported on in the media by our competitors by everybody.
I would first probably need to call out that we have a bunch of team members inside the business that are working very very diligently to.
The work around the problems in and make the best.
Of the situation that we can and doing so with great attitudes and in a lot of progress as well.
Yeah.
I think at this point it's anybody's.
<unk> forecast as to when we expect it to abate, we're certainly expecting the issues to continue through the deliveries through the back half of the year and into early next as Claire said in her remarks.
We're hearing out there maybe Chinese new year, maybe.
Maybe a little earlier, maybe a little later we're planning.
As if it continues and working our way.
To manage the both the country.
Ask that exists and then just specifically supply chain risk. So a lot of progress going on there, but a lot of work as well you mentioned Vietnam. It's it's the the hottest topic right now probably just due to some of the shutdowns that are happening in the country.
I would say that we have indicated that Vietnam is one of our top three.
Countries of origin, Vietnam, and India are probably right close to each other at the top Vietnam.
Our product that we're sourcing in Vietnam right now.
As the north of the country and the south the southeast the one experiencing unfortunately, most of the issues right now that's about a third of our Vietnam a product that we're sourcing the other two thirds are in the north and not subject to the specific issues, but still subject to supply chain disruption on the more macro level.
Got it and then I think.
Capex is moderated to $8 million from $10 million, what's changing or are being adjusted timeframe wise and then the gross margin, yes, adjusted EBITDA were very impressive.
Does the is the gross margin benefit is that how much of it is coming from product margin improving are there anything else under the hood that we should be noticing on the gross margin that can allow the solid gross margin to sustain.
Yes.
I'll jump in on both of those are Capex, Dana really when we came out of.
2020 into this year, we had planned on maybe a bit more maintenance coming back into the business and that's really the extent of the change in our guidance for this year we're still.
Committed to making investments as we indicated in some areas of technology, particularly related to the website.
And that's really the primary change.
Related to the Capex guidance.
Reduced to $8 million from 10 million previously.
With respect to the gross margin.
Predominantly full price driven it's predominantly product margin driven.
That said when addressing the future of the gross margin I think youre seeing now.
Operating model benefit before much of the disruption from the elevated cost to ship et cetera are are factored in so really as we look forward. There are a couple of factors that we would look at and it's mostly related to shipping costs, both ocean and air and probably more.
Shifting to air in the near term just given the delays and the disruption.
And then you know obviously, we're always watching the promotional environment at large we feel like the inventory levels that we have as we exit the quarter are in good shape and supportive of our strategies to drive full price selling.
That's another factor that will just keep in mind and make sure that we're competitive around.
Thank you nice to see the progress.
Thank you.
Your next question comes from Janet Kloppenburg from Geeky lease rates Associates. Your line is open.
Good morning, everyone.
I was Chris.
First of all congrats on the improvement.
I was wondering if you could talk a little bit about the store productivity levels I think you said Matt.
Maybe they were down about 12% versus 19, and how we should think about progress there and what you think it'll take to get back to that level and I know that you said your inventory levels, we're comfortable but.
Are you confident that you.
Holiday <unk>.
<unk> will be timely and afford you.
And opportunities to continue to enjoy strong momentum.
Thanks Janet.
I'll jump in.
<unk>.
The second part of your question first.
I would say that the the holiday shipments are.
Or something we're actively working on.
Probably pulling similar levels levers.
Most others out there in the industry.
We hope to get.
On some of those levers earlier, rather than later and also leveraging our our supplier relationships, which we take great pride in.
Should help us mitigate that said likely to be delays and.
We will be flowing new product along the way as we get it and are kind of expecting some level of that in the industry as we as we progress through holiday right now no no other news to update on that but but working to make sure that we get the goods at the port of origin.
As early as we can and get them in the shipping lanes as soon as we can.
With respect to <unk> with activity I'm, sorry go ahead, Mike could that it could that.
Bruce.
<unk>.
Oh.
<unk> gross margin opportunity as we look forward.
I think there's two elements that I would look at the first is.
There certainly will be elevated freight to get that Brian.
And that that will certainly.
Play right against the margin in a way that it hasnt year to date.
The second is as we get our product in and flowing.
Where the promotional environment is and whether or not we can.
To flow newness and flow and it ever more full price, which could be a mitigating factor I would I would say in Q2, you kind of got the best of the inventory positioning and the strategies and from that point forward. It's how do we manage that the inbound shipping impact as well as.
The strategy to maintain full price selling.
But feel good about where we are in Q2 as a starting point now as we as we look forward.
Thus the first part of your question was related to stores.
Uh-huh productivity. So so there is the metrics underlying the store growth and really the business growth. We mentioned that it's full price driven and on lower promos. So you can imagine that AUR average unit retail is the driving metric.
That's true in the stores I would say that traffic, while it's been out in.
In the stores.
And showed meaningful improvement.
In Q2 relative to where it was in Q1.
That's a metric that is still lagging.
And as we continue to assess where that traffic.
<unk> the opportunity along with the strong and stronger AUR should help us get back if not to historical productivity, perhaps even a little better.
Okay, Great and clear could you talk a little bit about them.
Underlying demand trends I mean, we all know that women, having bought close for a couple of years.
And that inventories throughout the industry are quite.
Quite low.
And it's driving.
Yeah.
Much more full price selling across the industry. So what what gives you confidence that once this pent up demand.
Wane a bit in the industry and inventory levels get back in stock.
J Jill can be a market share gain or as.
As we go into more normalized demand and pricing.
You know.
Periods.
That's a great question. Thank you Janet.
You know we are we have a great team in our design and product area that I think has a real beat on who our customer is.
The team has been.
In place that the leader of the team that's been in place for two years. Unfortunately, his first collections came out under the cloud of Covid.
Right.
Has it been lifting.
Seeing just really strong response.
Our response to the product excitement about the product I think you know we.
Have a modernized sensibility about color pallets, and novelties and we're giving her the right level of of fashion balanced with a strong basics program. So I feel really good about the balance of our product assortment and the response that we're seeing from our customer now.
Obviously, we have to pay attention to what's going on in the environment competitively from a promotional standpoint, but.
I feel like that strengthen our product capabilities are our underlying knowledge of our customer we have been a direct to consumer business since our since her origins and so we have a lot of great customer data that we always mine and develop insights around that help us stay in touch with her and continue to think.
Your own how we delight her in her experience with the product that we offer her so those strengths are things that aren't going to go away and I feel like I'm having.
I haven't been around the block for awhile myself I think.
We have just really strong capabilities there.
On a relative basis so.
And just my last question are you able to discuss.
As we move into into a more normalized environment, let's say second half 'twenty to either new product extensions or categories that J Jill has an opportunity to exploit to keep the momentum going.
Yes, that's that you know we will continue to use those insights and knowledge of our business and our customers to evaluate that I think because we already have a pretty developed portfolio. We have opportunities within the current portfolio to drive growth and then we're always assessing those opportunities for line extensions.
Pensions or category growth distorting things that are especially relevant as any given point in time.
Okay, great lots of luck.
Thank you. Thank you Jen.
Thank you.
There is no further question at this time and this concludes today's conference call. Thank you all for joining you may now disconnect.
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Yes.
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