Q3 2021 JJill Inc Earnings Call
Good morning, My name is C D and I will be your conference operator today at this time I would like to welcome everyone to the Chi Joseph third quarter fiscal 2021 earnings conference call on today's call are clear at Safford, President and Chief Executive Officer, and Mark Webb Executive President Chi.
Financial and operating officer.
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 Jay.
Time simply press Star followed the number one on your telephone keypad. If you would like to enjoy your question press the pound key.
Before we begin I need to remind you that certain comments made.
During todays remarks may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act 1995.
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Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those risks and uncertainties are described in the press release and G. Young S E T filings.
Forward looking statements made on this recording or us.
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<unk> 2021 and J Jill does not undertake any obligations to update this forward looking statements. Finally, J Jill may refer to certain adjusted or non-GAAP financial measures during his remarks.
A reconciliation schedule showing the GAAP versus non-GAAP financial measures are available in the press release issued December 13th 'twenty 'twenty. One if you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page at website Janesville dotcom.
I will now turn the call over to Claire.
Thank you.
Thanks to everyone joining us on the call for your continued interest and support of J Jill.
I'm going to start with an update on our business strategy and operation and Marc will cover our financial results.
Overall, we're pleased with our results in the third quarter revenues are up more than 29% and margins improved 1000 basis points versus Q3, 2020, driven by strong full price selling and reduced promotion.
All of this is driving significant improvement in the bottom line, even as we deal with the supply chain challenges that everyone is faced with this quarter.
We are emerging from the turbulence of the past couple of years are much better more focused and stronger company that is well positioned for profitable growth moving forward.
Our strength comes from our knowledge of our brand and our customer women, who are confident and purposeful in their choices they value quality fabrications and versatile clothing that allows them to move freely through their busy lives.
We have a deep understanding of our customer and her wants and needs.
No how she likes to shop.
Where she likes to shop, and the kind of products that she likes to buy.
And we know the kind of experience that she's looking for and expect from J, Jill whether in store or online.
We're still in the early stages of our journey to realize the full potential of this brand and business, but we're making really significant progress and I'm proud of our J Jill team and their focus and commitment to deliver on our promise to our customer.
Their efforts have been especially productive in the navigation of the current turbulent with supply chain.
Supply chain disruption has influenced our business this quarter as it has for virtually everyone in the retail space.
But we're successfully managing all of the controllable factors as well as possible.
We have strong relationships with suppliers, helping us optimize the flow of goods.
<unk> production and logistics challenges and allowing us to present, a well curated assortment both online and in stores.
Our team is effectively managing the flow of product, resulting in a robust and engaging presentation in both channels.
We're comfortable with our inventory levels and our ability to have the right assortment coming into Q4.
I'd like to talk now about four specific topics that reflect how we're running the business to deliver on our objectives and drive strong financial performance.
First.
Our strategy of managing inventory more tightly to focus on full price selling is working.
In Q3, she loved her embroideries and pattern and textured fabrications, including our quarter or cables felt that an Ottoman.
Denim and knits did well all season, and sweaters really began to ramp up in October.
We're committed to our approach of flowing newness regularly and managing inventory levels diligently. This allows us to keep our customers focus on full price product.
Second and related to the first topic, our lower promotional cadence and decrease in markdown selling both continued to support our overall strategy.
This transition has a significant impact on the mix in our sales.
For example, if you look at our direct to consumer revenue this quarter, you'll see a decrease in overall volume.
Our direct to consumer channel has traditionally been where we've moved markdown inventory.
Given our lower level of markdowns this quarter, we had fewer units we needed to move through.
Therefore, the mix in our direct channel had a much higher penetration of full price sales and yield is significantly stronger maintain margin.
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One of the things that we've learned about our customers that she really seek newness and specialness she's willing to pay full price for our product when we offer her new and inspired assortments on a frequent basis.
So we continue to focus on the optimal flow of new products in both channels.
As an example, we moved away from 12 Big collection dropped a year, just spreading out newness and flowing design and color palettes frequently creating more engagement and optionality for our customer.
We're also focused on expanding our customer portfolio through products that attract and welcome. The next cohort of customers, who connect with the J Jill design aesthetics.
While there continue to be opportunities across our assortment to build on our relationships and increased sales with our existing customers. We're also introducing new customers to our value proposition. It is grounded in providing for premium casual clothing, that's easy and versatile and made of the finest fabrics.
Fourth we're sharpening our focus on our customer experience.
Our brand promise has always included a very personal high touch experience whether in store or online stores continues to be a critical part of our business model.
Our customer loves the personal attention she received and the unique connections he has to our in store team.
This bond speaks to why there is a fun celebratory environment when she visits our in store.
Whether she makes her in person appointment to get first access to a new assortment or just stopped by she loves our high touch personalized shopping experience our teams often pull items based on their knowledge for our preference is to create a truly individualized experience.
We continue to evaluate our retail footprint to ensure we have the right locations at the right economics. We also believe there are future opportunities for new store locations as we chart, our paas for profitable growth.
Similarly, our online presence continues to be a focus J.
J Jill starting as a direct to consumer retail brands and we built upon this heritage with advanced digital capabilities to provide a seamless experience tailored to our customers based on their behaviors and preferences.
We're investing to ensure that our online experience meets your expectations in terms of product presentation and ease of use.
Finally, I'd like to provide a little color on Q4 to date.
We continue to see the strategies outlined above working well.
We're pleased with customer response to our fall and holiday Assortments and we continue to operate with a lower promotional cadence and previous holiday season.
With that I'm going to hand, it over to Mark to discuss our financial results in more detail.
Thank you Claire and good afternoon, everyone.
We're pleased with performance in the third quarter as sales continued to recover versus 2020, and gross margin strength driven by strong full price acceptance and reduced overall promotional cadence continued in both channels.
Total company comparable sales increased 42% year over year, driven by the store channel total company sales were $152 million.
29% versus Q3, 2020, and down 9% compared to Q3 2019.
Store sales were up over 94% versus Q3, 2020, and down 12% compared to 2019 levels. While overall traffic levels remain below 2019, we are very encouraged by the continued recovery. We saw in Q3 as customers returned and responded well to product assortments.
Direct sales as a percentage of total sales were 45% in the quarter compared to the third quarter of fiscal 2020 direct sales were down 8% compared to the third quarter of fiscal 2019 were down 5%.
As <unk> reviewed direct sales were impacted by fewer markdown sales, while this negatively impact sales in the direct channel. It is a benefit to gross profit.
Q3 total company gross profit was $104 5 million.
$36 million compared to Q3, 2020, and down $2 million compared to Q3 2019.
Q3 gross margin was 68, 9% up 1000 basis points over Q3, 2020, and up 450 basis points compared to Q3, 2019, driven by better full price selling and reduced promotions.
Q3, 2021 gross margin included approximately 200 basis points of incremental freight charges S.
SG&A expenses were $86 million in the third quarter compared to $92 million in the third quarter last year, excluding one time costs of $13 million incurred last year related to our debt restructuring SG&A was up $7 million versus prior year, driven by marketing investments increased.
Selling costs due to higher store operating hours and shipping costs and management incentives.
Compared to 2019 SG&A expenses in Q3 were down $10 million driven by selling cost on fewer stores and lower marketing investments, partially offset by higher management incentive adjusted EBITDA was $27 million in the quarter compared to a loss of $2 million in Q3 2020.
And adjusted EBITDA of $20 million in Q3 2019. Please.
Please refer to today's press release for a reconciliation of adjusted EBITDA.
Turning to cash flow for the quarter, we generated $26 million in cash from operations. We ended the quarter with total cash of $17 million with zero borrowings against our ABL.
Total liquidity as defined in the primary term loan agreement measured as ending cash balance plus check flow plus ABL availability was $61 million at the end of the third quarter.
Also as previously disclosed early in the third quarter, we exercised the pick a pay down option on the prime and term loan paying down $25 million or over 10% of the outstanding loan from cash on hand.
Our operating strategy is to reduce reliance on promotions initially through right sized inventory buys as such we are comfortable with inventory levels down 16% year over year as we exit Q3 and enter the holiday season, we continue to manage the supply chain securing on time ocean deliveries whenever possible.
And utilizing airfreight when needed.
Through Q3 product floor sets were largely launched on time and we expect this trend to continue in Q4, but the gross margin impact from expedited shipping costs will increase to 250 to 300 basis points as air freight goods received in Q3 are sold over the holiday period.
Our teams are actively managing this situation doing a great job remaining flexible and adjusting plans as needed give.
Given the strength in our performance, we are continuing to invest back into the business capital expenditures in the quarter were about $1 1 million versus $300000 last year, we continue to make investments in technology, our E Commerce site and perform capital maintenance projects as necessary year to date.
Capital maintenance needs have been trending below initial expectations and we now expect to spend about $6 million in capital for full fiscal year 2021, compared to $3 5 million in 2020 during the third quarter, we closed one store ending with 260 stores the majority.
<unk> of 2021 lease action dates occur at the end of the fiscal year and we continue to negotiate our store leases aggressively with the aim to achieve fair rents and term for this important channel we are making good progress and continue to expect to close approximately 20 stores this year.
Store closures will have a near term impact on revenue any impact to EBITDA is negligible after factoring transferred sales to stores and ecommerce importantly, we believe that physical stores are a very important channel for our customer and at the right economics will lead to store openings in the future as a source of growth.
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Looking ahead to Q4, we expect revenues to continue to grow versus 2020, and gross margin driven by the fundamentals of inventory management full price selling and reduced promotions to improve compared to 2020, but at slightly lower levels than year to date improvements given elevated freight costs as previously stated.
We also.
Expect SG&A costs to continue to build from Q3 2021 levels, primarily due to increased store operating hours and shipping costs.
Despite the increased costs, we expect to drive strong year over year improvement in adjusted EBITDA for the period in.
In summary, third quarter and year to date results demonstrate the potential of our operating model executed by disciplined teams to drive adjusted EBITDA and generate strong cash flow.
Thank you and I'll now hand, it back over to Claire.
Thank you Mark.
I'm excited and confident in our progress against our strategy. The steps, we're taking to evolve the business model and delight our customers.
Fissioning us well for profitable growth as we move forward I will now turn it back to the operator for Q&A.
And ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the Pankey, please standby will be complaint.
Roster.
Forever first question, we have Dana Telsey from Telsey Advisory Group Dana Your line is open.
Congratulations Clara and Mark on the terrific results with a nice improvement to margins everywhere.
This progress.
Couple of things can you talk a little bit about with the full price sales any pricing adjustments that you're taking given inflation and rising cotton costs and secondly on the freight headwinds do you see them lingering into 2022. Thank you.
Thanks Dana.
I'll take the first one and I'll, let mark address the second one so.
We are always evaluating our tickets and our retail customers, we try to do it very strategically and surgically. So certainly as we move into 2022, we are anticipating some retail ticket increases, but what we've done is taken a really.
Sort of stepped back and taken not clear I look at the whole assortment and tried to think about where we think we can get more credit for the design and the make and the novelty and the product.
And then also just you know re grounding ourselves again on a category by category basis doing a style out and just making sure that everything on a relative basis makes sense from a retail pricing standpoint. So yes, you will see some of those increases coming through next year, but we didn't just take up across the board approach to it we tried to take a very strategic approach.
Based on where we think the consumer sees the value.
And Dana with respect.
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I would characterize right now the situation does not appear to be getting worse, which is good and as we look forward our views as well as.
Some of the industry views, we're seeing out there is that.
That's the cost increases some of the issues with capacity constraints et cetera are likely to.
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Our approach is to maintain the elevated level of focus.
On freight and managing receipts.
Until we're certain that they've worked their way through the system. So likely to linger current forecasts are likely lingering through at least the first half of the year and we're prepared to continue to manage it as we are.
Got it and then Claire as you think about the categories, where that's the pure Jill collection the wherever the fit what are you seeing in terms of those collections and how do you think about e-commerce and the progress there going forward, how do you get that to show increases as hopefully a transition from being more of a mark down channel.
Thank you.
Thanks, Dana Great question. So you know we continue to see strength in newness as we've talked about last time on the call that that continues to be a driver of.
Business, both in retail and on the in the direct channel.
We've seen them.
We've seen strong response to knits woven and dresses were the biggest over performing departments. This channel. This.
This quarter novelty continues to be really strong.
And that's a big part of driving the performance in those categories.
Footwear and sleeper they are small for us, but they were also very strong we did see a little bit of weakness in jackets, and outerwear and accessories.
Here, Jill which has been strong for us all year. We had that was the that was the one area. We did see a little bit of degradation due to some factory issues and we didn't have the product that we had hoped for so you know very focused.
Piece there but.
But basically you know, we're seeing still continuing to see a lot of strength across the assortment, we see the opportunity as we talked about last quarter for real growth to come from pure Jill and fit in particular, but but yeah really pleased with the continued engagement with our newness.
Across a lot of the assortment.
Got it.
Anything on e-commerce that we should be watching for going forward.
No you know, we always are focusing on trying to improve our customer experience online, we're making some investments in.
In that front this year and we are seeing this this sort of full price customer response in both channels, which which I mentioned in my remarks.
So we feel like we're very focused on driving growth in both channels.
And E Commerce will certainly be a piece of that it's just as you know the direct channel has been where we'd always move through all our liquidation inventory and and so that's why you saw the 8% decline on the top line and direct this quarter, but a much better yield on the margin side.
Got it thank you.
For our next question, we have Janet Kloppenburg from J J K Research Associates Kenneth Your line is open.
Hi, everyone.
Good evening, congratulations on a nice quarter.
I wanted to just touch base a little bit.
Talk a little bit about what things have gone up about the.
Headwinds.
Wondering I think you said in the fourth quarter would be 200 to 250 to 300.
If I'm right Mark.
That is a step up from the third quarter, how should we be thinking about next year and then as you think about the price increases clarity do you think that.
Between that and other programs.
Alright.
More full price selling.
That you'll be able to compensate for the freight headwinds going forward.
And I guess, what I'm asking is the cadence of gross margin improvement outlook as we go forward incorporating.
Incremental fleet.
But let me help first with the.
With the headwinds and the guidance that indicated okay.
So Jana we started really in earnest, making the decisions.
Expedite and reroute certain.
Certain shipments to airframe.
And starting to execute on that during Q3, so not not in the product that we were entering into the season may not have had the level of expediting needed or necessary to land them. So as we were landing product through Q3, not all of that sold in Q3 or was expected to sell in Q3 that product will.
Sell in Q4, so just the sheer amount of expedited product.
It is sold and that's when you recognize the freight charge is right.
Probably getting in and I'll be as helpful. As I can be on the forward look because Q4 as long as we're operating under the current situation is probably a more holistic corner quarter's worth of impact mhm mhm expedited goods, so I think until.
They are made.
Probably a good starting point for for any airframe impacts as we move forward.
So what does that mean about gross margin comparisons versus 2019, I think third quarter was about 450 basis points higher on a two year basis. So how should we be modeling as we move forward with those comparisons start to know.
Well and I think that the way so if we think about 2021.
And then we'll be as helpful. As we can be as we get onto the Q4 call. When we wrap up 2021 physically but in 2021 we've seen the real power of the operating model to generate.
Significant gross margin rates at driven by full price and reduce promos and.
The industry and everything else, that's supporting it along the way the airframe, which we've guided to into Q4 as an incremental pressure into Q4.
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Promotional cadence and our.
And our strategies will remain intact in Q4 and that are our plans will be to maintain promotional levels below historical years promotional levels by Q4 promotional levels will it traditionally does and will likely tick up versus year to date promotional level, so when you're thinking of.
That cadence across the year and then as we get into next year, you have the freight associated issues, which we've talked about through potentially the first half of the year again, just giving sort of industry.
Prognostications on that at this point as well as our best.
Estimates and then.
And then we will try to help with that as we get further through the fourth quarter and talk about next year.
But as you're starting to.
Place orders now for delivery in the first quarter and even for the second quarter could you say that.
Is staying at the same level as it was for the third and the fourth quarter or do you see more ocean coming in.
I wouldn't guide to any major difference than kind of where we are now.
Penetrators Ocean itself Janice.
As elevated costs as well not yet not quite the driver of at air and Ocean versus air decision, but likely the mix will stay as it is as we continue to every day, we get better at it. So we would hope to try to.
As we learn about the different routes and how with what we can rely on and what we can't.
Maybe it gets nominally better, but I wouldn't I wouldn't guide to any any different mix at this point.
Where we are okay.
And as you look forward with a combination of full price sell through IV for Claire.
And the higher Asps.
As a result of your targeted price increases.
Could we expect that.
The momentum Youre seeing in full price business.
Can be sustained or how do you think we should think about that and obviously that has something to do with your inventory levels as well.
Yeah, Yeah. So certainly the inventory levels. We continue you know we.
Have.
We continue to manage inventories more tightly that's something we it's part of our core strategy and where.
Yeah and we're.
Yeah.
Obviously, that's part of the way, we're operating the business and expect to continue to operate the business.
The other piece.
Janet is that you know it all depends on the strength of the product and you know our ability to.
Asked our customer to get our customer to pay full price for the product.
It means the product has to be great I had a lot of confidence in our team's ability to continue to deliver great assortments and and so.
That gives me confidence.
I think there is a tipping point as you well know we can't we can't raise prices indiscriminately to try to cover all else in terms of what's going on in the world right now, but I think we're being a strategic as possible and the way, we're looking at those asps and and.
In and fully intend to support sort of the full price business model as much as we possibly can going forward.
And you might have talked about this but given the lower clearance in the direct channel should we expect that question will continue.
On the top line, though.
Yeah, I think we we've been getting cleaner and cleaner throughout the year and so.
We at some point, we'll lap that and then it will be less of a less of an impact, but but certainly there will continue to be some pressure from that just from a topline standpoint, but.
As I said the yield is is proving to be.
Much better.
Okay. Good luck.
Nathan.
For our next question, we have Daniel Lupo from Jefferies. Daniel Your line is open.
Hey, Thank you very much for hosting the call and nice quarter.
Maybe talk a little bit more kind of about your labor situation, what you're seeing across the footprint.
Within your store base, and then also maybe a little bit more on the supply chain can you give some maybe details around some of the sourcing strategies that you have in place and are you seeing any disruption from a labor standpoint within your supply chain. Thank you.
Sure.
So with regard to stores and the labor pressures.
We have a.
A pretty tenured store associate population and as a result, you know they are.
More loyal I guess and and less likely to you know take a job elsewhere for a.
A couple of dollars more than our I think also because their tenure. They you know they tend to be paid a little bit more than the average probably store associates in the stores.
So we haven't seen undue pressure in terms of wage increases in the stores, we obviously.
As everybody is has been has seen some in.
In our distribution centers. So that's been something that we've certainly been dealing with but but overall I think from our store associates standpoint, we've been in a really good position.
Mark I don't know if you can take the other one I would I would add that.
In terms of finding and staffing that has gotten marginally better in terms of the candidates for some of the areas that were more challenging, particularly around the distribution center in those areas.
And then you had mentioned the supply chain.
Nothing really to call out with respect.
Supply chain anything related to labor I think as you know back in Q2, there were some closures and countries of origin, which have since reopened and that has been primarily the impact to our labor base in those countries.
In terms of staffing the requirements that they would have to staff during some of those.
Issues, if they were having but.
The majority of them are reopened.
Most of them are operating back close to capacity.
And having nothing really more to provide in terms of anything we're seeing underneath the labor side of that equation.
At this time.
Okay. That's helpful. I appreciate that and then just last one for me.
On the capital structure, maybe how do you think about the small start small term loan stuff coming due and the multiple tranches of debt you have in the capital structure right now.
Yes, the stuff is doing and may.
Fully intend and ready to pay that down when we need to and and then the overall stack right now with the priming term loan and we have a subordinated note and then our ABL.
It's something I think as we continue to strengthen our foundation to out of.
2020, and really this year with the with the EBITDA performance.
It's opportunity right now where we're happy to have that in place that we do at this point and looking forward to continuing to optimize as we go forward.
Okay. Thanks for your time, saying nice quarter.
Thanks.
Thank you.
We don't have any questions at this time I'll turn the call over back to Claire suffered for closing remarks.
Thank you everyone for your time and attention. This afternoon and appreciate the questions and the engagement have a great holiday season, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you all for participating you may now disconnect.
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