Q4 2021 JJill Inc Earnings Call
Good morning, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the J Jill fourth quarter and full year 2021 earnings conference call.
On today's call are Claire Spofford, President and Chief Executive Officer, and Mark Webb Executive Vice President Chief Financial Officer, and Chief operating Officer.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question. Please press the balance sheet.
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 and within the meaning of the safe Harbor Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.
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 J <unk> SEC filings.
The forward looking statements made on this recording or as at March 22nd 2021.
2022, apologies 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 during his remarks.
A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in the press release issued March 22nd.
2022.
If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of the website at J Jill Dot com.
I'll now turn the call over to Claire.
Yeah.
Thank you operator, and Hello, everyone and thank you for your interest in J Jill.
To provide an overview of our results and an update on our business strategy and operations as we move into 2022, then Mark will cover our financial results in detail.
Fiscal 2021 might be a significant recoveries for take out.
Some of the highlights for the year, our sales grew to 585 million an increase of 37% versus 2020 gross margin improved 980 basis points compared to fiscal 2020, and increased 540 basis points compared to 2019, driven by strong consumer response to our product.
Disciplined inventory management.
SG&A expenses were tightly managed and significantly leveraged at the rate of sales.
Adjusted EBITDA saw strong with high rates of $92 million, reflecting a significant year over year increase.
The rate of sales expanded 620 basis points compared to pre Covid 2019 levels.
I want to thank all of my teammates at J Jill for their efforts in 2021 and their contributions to driving our strategic objective of cost and inventory management slowing great new products regularly and a focus on full price selling.
In Q4, we were pleased to have delivered results above our previously provided guidance for the strong increase in adjusted EBITDA driven by gross margin expansion disciplined expense management.
The holiday period reflected some changes in shopping behaviors consumer starz, you're shopping a bit earlier than last year.
We saw store traffic negatively impacted by the Omicron variant beginning Black Friday weekend and continuing into early January but we were pleased to see traffic recovered later in January of cases began to taper off.
Total company sales in the quarter increased 15% over Q4, 2020, driven primarily by the store channel.
As previously mentioned in Q4 and throughout 2021, we are focused on disciplined inventory management and the regular flow of new product, yielding improved flow through to EBITDA.
Continued to see strong consumer response to our product offerings, and we were able to drive sales with a higher penetration of full price yielding more than 700 basis point improvement in gross margin versus Q4 2020, despite being impacted in the quarter by elevated freight and logistics expenses.
As we look forward to 2022 and beyond we will remain focused on executing with discipline against our new business model with a continued diligence around inventory and expense management.
The hallmark of our business will continue to be strong and relevant product assortments slowed regularly that are valuable and loyal customer base response to at full price and an engaging experience across channels for our customer wherever and whenever she chooses to shop with us.
Our strategy for driving profitable growth going forward is built on five main areas of opportunity.
[noise] modernize the J, Jill brand and value proposition to increase relevance for our current customers and position J Jill for the next cohort of customers.
Attract and convert new customers through focused strategic brand and performance marketing programs.
Drive growth and high potential sub brands and categories. For example, we've seen strong response to our peer Joe and Jay Chou fifth sub brands and we'll continue to lean into the opportunity to build these further.
Enhance the customer experience across our business and channels to drive engagement and productivity.
And finally develop and execute the plan for new store growth in the highest potential locations.
We look forward to updating you on progress against these initiatives on future calls.
In summary.
We're pleased with the progress and the results we drove throughout the year, despite a dynamic and challenging macro environment.
We continue to be very focused on the discipline that we established in 2021, particularly with regard to inventory and expense management.
We believe this disciplined approach to managing the business coupled with a continuous flow of great product that delights, our loyal customers will continue to yield strong margin performance going forward.
As we move into 2022, we're pleased with our performance to date, while macro related headwinds persist our unique value proposition and re engineered operating model give us confidence in our ability to deliver continued traction and results as we turn our focus to driving profitable growth and introducing new customers to our relevant and.
<unk> brand and product.
With that I'm going to hand, it over to mark to share more detail on our financial results.
Thank you Claire and good morning, everyone.
As Claire mentioned fiscal 2021 was a year or so.
Financial recovery for J, Jill as we delivered total sales growth of 37% over full year 2020, and then adjusted EBITDA, an improvement of over $129 million compared to full year 2020, when compared to full year 2019, pre COVID-19 results consistent with the expectations of our updated opera.
Rating model, while sales were lower gross margins expanded expenses were well controlled and adjusted EBITDA improved $26 million.
To $92 million for fiscal year 2021.
We are very pleased with the results of the changes made to our operating model.
<unk> more focused product assortments more frequent product newness, despite fewer large floor sets and a disciplined inventory and expense management.
In addition to the recovery in gross margin and adjusted EBITDA dollars. These actions also resulted in significant cash generation with cash flow from operations for about $75 million, including tax refund proceeds a voluntary pay down of our long term debt of $25 million.
And ending cash of about $36 million.
I would like to add my thanks to the <unk> teams for their considerable effort and success.
Uncertainty in 2021.
With respect to the fourth quarter results for the quarter represents continued recovery over 2020.
Total company comparable sales for the fourth quarter increased 20% driven by the stores channel.
Total company sales for the quarter were $145 million.
Up 15% versus Q4, 2020, and down 14% compared to Q4 2019 sales compared to prior year were strongest in November followed by December with Omicron, Covid cases, increasing and impacting sales in early January .
Store sales for Q4 were up over 62% versus Q4, 2020, and down 21% compared to 2019 levels.
<unk> levels fell off of year to date trends slightly in Q4, most likely due to the impact of <unk>. The results did strengthen in the back half of January as cases, subsided, which contributed to our above guidance performance in the quarter.
Direct sales as a percentage of total sales were 52% in the quarter compared to the fourth quarter of fiscal 2020 direct sales were down 9% driven by lower markdown sales, partially offset by higher full price sales. These results are consistent with our strategy to manage inventories with discipline and reduced the amount of <unk>.
Markdowns sold.
Which historically skewed more heavily to the direct channel while this negatively impacts total sales in the direct channel. It is a benefit to gross profit.
Q4 total company gross profit was $93 million up $21 million compared to Q4 2020 Q4 gross margin was 63, 9% up 710 basis points over Q4, 2020, driven by better full price selling and reduced promotions.
Q4, 2021 gross margin included approximately 300 basis points of incremental freight charges in line with our expectations.
SG&A expenses were $85 million compared to $86 million last year with increases in store selling costs marketing and management incentives offset by savings in G&A overhead.
Adjusted EBITDA was $15 million in the quarter compared to a loss of $4 million in Q4, 2020, and adjusted EBITDA of $12 million in 2019.
Please refer to today's press release for a reconciliation of adjusted EBITDA.
Turning to cash flow for the quarter, we generated $22 million of cash from operations, including about $18 million of our expected $25 million plus tax refund, resulting in end of quarter cash of $36 million.
With zero borrowings against our ABL.
We continue to focus on tight inventory management and work to offset supply chain disruption through the use of expedited freight options at early shipment of goodness when possible. We ended the year with inventory levels down three 5% compared to the end of the year 2020, with a healthier balance of full price versus markdown units.
Capital expenditures in the quarter were about $3 million, bringing total spend for the year to just over $5 million compared.
Compared to $3 $5 million last year, we made targeted investments this year in technology, our ecommerce site and performs necessary capital maintenance and repair projects.
Actual capital spend was below prior guidance due to lower capital repairs costs than expected and some timing of projects that pushed into 2022.
Turning now to our outlook for fiscal 2022.
For the first quarter of fiscal 2022, we expect sales to grow between 11, and 14% compared to Q1, 2021, and adjusted EBITDA to be between 20 and $22 million.
As it relates to the full year, we will continue to operate with discipline and build on the operating model enhancements enacted this year, we expect to grow sales modestly although below the growth rate expected in Q1, which is the last quarter aided by recovery related tailwind given the timing of vaccination rollout in the spring of 2021.
With respect to gross margin, we aim to maintain the gross margin achieved in 2021 as strategic price increases further improvements in promo rates and reductions in markdown selling will help offset product cost inflation from raw materials and freight pressure, which we expect to continue at least through the first half of the year.
Important to note with respect to quarterly cadence, while our goal is to maintain the gross margin achieved in 2021 throughout the year, we expect year over year comparisons to be most challenging in Q2 and Q3 as we anniversaried a significant recovery experience in those quarters last year.
With respect to EBITDA, we expect annual adjusted EBITDA dollars to be relatively flat to up slightly compared to 2021, including the expected pressure from expense inflation and investments, we will be making in talent store operations and marketing.
Regarding store count we plan to close approximately 10 stores in fiscal 2022 with six coming in the first half of the year. We are selectively reviewing store opening opportunities and are planning for up to four new stores weighted to the fourth quarter.
And with respect to full year capital, we expect to spend between 15 and $18 million as we increase investments in business process enhancing technology complete e-commerce projects begun in 2021, and make strategic investments into stores, including new locations and the scoping and development of a new.
Omni enhancing point of sale solution.
Thank you and I will now hand, it back to the operator for questions.
Thank you if you'd like to ask a question. Please press Star then one on your telephone keypad.
First question is from Janet Kloppenburg with J J K Research Associates. Your line is open.
Good morning, everyone and congratulations on a nice quarter.
Thanks Shannon.
I wanted to talk a lot.
Little bit about the.
Inventory levels.
Clay on understand if you feel like that constrained the topline in the fourth quarter, and then kind of constrained if it could constrain the opportunity here in the first quarter and.
I also wanted to understand when the clearance levels would be apples to apples in both the stores and the digital channel.
Which may support.
Top line acceleration, because you won't be up against that comparison of clearance.
Half of this year.
Okay.
Sure.
Jeff will add you may start clearing them okay great.
First with respect to inventory levels overall, and we reported that at the end of the year.
We were down three 5% with a much healthier mix full price versus markdown, which as we've been discussing was has really been part of the operating model strategy, all along to sort of work our way out of the markdown level of inventory as well as the full price promotions that historically, we had been.
Conducting so.
Did we constrained sales I think we talked about the fact that having.
The direct channel historically be the channel that cleared markdown goods.
Is a negative drag on sales in that channel and it showed again in Q4 so.
Think thats, probably we view that as necessary to enacting changes within the operating model.
As we end the year and we start to anniversary the significant actions in 2021 to two that incident to the operating model and.
We will start to lap.
Really in Q2 later in Q2, the reduction in sort of the right carrying level in our view of markdown inventory.
No.
We would say pleased with the quarter has been the strategy to drive the recovery through gross profit, resulting in EBITDA and now as we go forward, we feel like the inventory levels from a unit perspective are in good shape theyre mixed well to full price if anything will start to invest a bit in full price receipts.
But we will still be lapping for the next quarter quarter, and a half or so last year's.
Mark down the tail end of that markdown cleanup.
One thing I would say is that inventory levels. This year, given a lot of the supply chain sort of mitigating strategies that us and many others in the industry are taking inventory levels reported at quarter end are going to start to maybe look atypical as we start to take earlier shipped.
<unk> of goods in some cases and have elongated shipping windows. The in transit numbers at the end of quarters that precede some of our larger sales quarters.
<unk>.
Potentially start to look a little bit atypical right. So at the end of Q1 the end of Q3.
Would probably be most impacted by these higher levels of carrying in transit inventories and they would have perhaps historically.
Okay.
And.
Couple more questions.
Where are you guys still have productivity levels versus peak.
Is there a goal to get back to that.
Where are you in the price increase.
Spectrum.
Is there more to come.
I know you haven't closed 10 stores and we're looking at some new stores.
Is the opportunity to open stores this year or is that something you just.
Researching right now.
Okay.
There's a lot of narrow weather night, why don't I start.
I'll start with the price increases and a general view on the store opportunity and then maybe mark can speak a little bit more specifically to <unk>.
To your question about store productivity tenant.
With regard to price increases.
I think we talked about this last quarter as well we have as a result of the increases that we're seeing in component costs and.
Some of the freight we have taken.
Our strategic approach to looking at all of our retail tickets and you know.
Adjusted some prices for this year as we.
As we manage through that I think the approach that we took was to really step back look at the whole assortment understand the relative value and where the customer will be willing to pay a little bit more for something thats truly special and that she can't find somewhere else and so we have taken those price increases.
Alright.
Are beginning to be in place in this quarter and will be in place throughout the rest of the year.
But again not a peanut butter approach to just increasing prices, taking a really hard look strategically.
Strategically at where we can increase them and it will make sense for the consumer with regard to the store opportunity that stores are a really important part of our business with the way, we engage with our consumer and.
We think.
That there is.
A significant opportunity for store openings going forward we have.
Targeted looking at three or four stores in the back half of this year, probably Q4, we we can update you more on the details of that when we get on our next.
Quarterly call, but that's sort of the order of magnitude for this year, we think that there are opportunities.
<unk>, where we may have closed stores due to our desire to.
Get a better economic model for those markets and the stores.
But.
Those closures, where we're purely a sort of economic exercise and we still feel like theres a lot of potential there. So we're looking at those markets. We're looking at new markets. There have been some shifts certainly in where controls have migrated to over the last couple of years and so we'll be looking at all of that as we develop our targeted store opening plan.
And then just with respect to store productivity I would say store productivity is still below.
Peak.
But that really is mostly driven by the markdown sales reduction in the stores on a like for like basis full prices maybe.
Maybe slightly below and we feel like it has.
As the sort.
Sort of store assortment continues to migrate to more full price selling there is opportunity there to continue driving a very very healthy store sales and store gross profit.
Back to those levels.
Thank you.
Sure.
The next question is from Dana Telsey with Telsey Group. Your line is open.
Good morning, everyone and nice to see the progress.
A couple of things as you think about freight expense I think it was 300 basis points of an impact this quarter 200 basis points last quarter. How are you planning freight expense going forward.
Thing is are you seeing the pick up an occasion, where what are you seeing on the product side as you continue to balance core and newness with you for a different kind of categories and then just a few follow ups from there. Thank you.
Why don't I know freights first and then let <unk> talk about the exciting stuff around product.
Yes, so so Dana we are.
In our sort of guidance that we provided we are expecting the run rate from the back half of last year. So the numbers that you quoted and really that Q4 number is probably a more holistic quarter view given that we started our efforts in Q3 and freight attaches to the cost.
Units sold right. So even though you start your efforts you don't sell all your units that you received in the quarter in that quarter. So Q4 is probably the reference point, which we would say we expect to continue.
Essentially continue through at least the first half of the year and then we are starting to see some level of <unk>.
Pricing on a per unit basis.
Some small breaks there, which we're encouraged by though.
Who knows there is a lot of moving parts in the world right now.
But we would assume some level of improvement on those that run rate in the back half of the year still assuming some amount of elevated freight which is included in the guidance.
Yeah.
General guidance, we provided on the full year.
Yes.
And thank you Dana with regard to your question on product.
Hi.
Yeah, I think the question was framed around sort of what we're currently seeing.
Hey.
So yes, we are seeing we're seeing real strength in categories like dresses.
We're hearing from the store teams that people are coming in and reward drove <unk> to some extent getting ready for certainly we're starting to hear back to work.
We're also hearing that people are excited to get out and travel again, and we're seeing people buying outfits and.
And products for that and then occasions as you mentioned I think.
And mothers day, or a big impact for US, we'll look forward to seeing how business does.
With regard to both of those but in general people are getting out and about attending gatherings seeing their friends for dinner and.
And buying clothes for all of those things. So certainly the categories you would expect to see strengthen with regard to all of those things some of our knits for travel easy Packable things, we're seeing as I said strength in dresses.
And again, the novelties continue to do very very well our prints embroidery.
Our special things that you can't find anywhere else and then from a sub brand standpoint.
I think we talked all last year about the strength of peer gel we continue to see opportunity there she continues to respond.
We feel great about the potential of that brand and you'll hear more about that as we work through the year and then peer gel fit I mean, sorry, J Jill fit has also been very strong.
And.
And we continue to see strength and see potential there, but honestly and I love being able to say that we continue to see strength across the assortment our latest drop of wherever has been turning really nicely.
And you know our core programs denim is very strong and as I said our net.
Basics.
Our strong, but we expect to see increased strength as we move forward into the season. So.
Got it. Thank you and then on Capex I think it steps up from the $6 million in 'twenty, one to $15 million to $18 million in 'twenty. Two just any unpacking of that and then on the raw material side, how big is cotton and just following up on John's question have you taken price increases.
Do they scaled throughout the year and then what range are you a mid single digit range or something like that and then any update on the digital journey and what youre seeing in terms of capturing new customers anything one repeat customers in terms of what you're seeing thank you.
Dana I'll take the capital question.
Then Clare and I will handle go into cotton and then.
Fully turn it over to Claire for digital journey.
We're on that.
Capital the step up in capital expenses really related first and foremost to technology investments.
We are completing.
Have completed in the quarter the migration of our web site to the latest version of our new platform.
We are investing in some sort of business process support technology to help.
Primarily in the merch planning areas in marketing areas that a lot of the work that we've done around the operating model is has been a bit roll up your sleeves grew for us we're going to provide some technological and system support for many of those.
Those efforts and then really.
We're excited to begin the journey of evaluating a new Pos for the stores our existing Pos has been in store for quite a while and as we've mentioned many times. The store is a very important part of our customers.
Habits in our very important channel and so looking at our new Pos system omni enhancing bringing that really current in the store fleet as part of the Big step up and then of course, we are opening new stores, some maintenance some visual projects as well and then some catch up maintenance around the <unk>.
Q completes that sort of step up in capital spend for the year still still feel like the business as we've seen with the cash generation in 'twenty, one very strong cash generation and even with a step up in capital still will produce significant free cash flow when managed with discipline.
Great.
With regard to the digital journey.
Absolutely, we're starting we constantly look at and test into new digital channels for customer acquisition and for marketing our customer is.
Relatively sophisticated and she's enjoying all the social media channels.
Certainly very active on Instagram and Facebook still.
We're doing a lot there and we think that we're going to be able to introduce a lot of new potential customers to the brand as we lean into creating a larger voice for our brand out there introducing new people through those social and digital channels increasingly one of the good things.
What sort of ancillary benefits of shifting some of our customer acquisition efforts, even more heavily toward digital as that does tend to bring on a slightly younger customer for five years younger she has acquired digitally than through print and so we're actively.
Developing those programs and partnering the brand.
The bigger brand presence with a very disciplined approach to performance marketing so that will help drive not only customer acquisition, but retention of those core customers that are so valuable to us we continue to enjoy a very high retention rate of those customers.
Year over year in season after season. So those are some of that.
Some of that.
We'll be talking a lot more about on the quarters to come but.
And if that answers your question yes.
Yes.
And then carton yes.
Yes, hi crush.
I'll frame it up Dana as cotton for US cotton is a very important fabrication within the assortment.
And one that we're committed to and and.
<unk>.
Not only cotton, but.
Better end of Cottons of Pima cotton is very important so as clear had mentioned the pricing increases are strategic.
And targeted and not peanut butter approach.
Clearly you can go into more detail on that Dana would like but I would say that the sort.
Sort of guidance that we provided we're not expecting the pricing increases to fully offset the inflation related to cotton, we feel like it's.
An opportunity to help offset.
A big part of that but then we have the opportunity around the markdown business as we continue to cycle out of that as well as some continued opportunity around full price promos to help us deliver the guidance that we had provided for the margin for the full year.
Got it thank you.
The next question.
Daniel Lupo with Jefferies. Your line is open.
Hey, Thank you very much for hosting the call.
Yeah, I just wanted to kind of ask you guys, what youre seeing in terms of employee turnover, maybe excess open positions, whether it's a corporate do you see your kind of store level and how you've managed through the tight labor market.
Sure.
Great question. So certainly it is a tight labor market and I think everybody is experiencing the challenges that that presents in terms of human talent I will tell you that we have been.
Actually pleased with our ability to attract the talent that we wanted to attract in the past few months and and.
And so there is definitely a headwind, but we're working hard against that and really pleased with the caliber of folks that we've been able to bring on board as a result in the stores.
We have spoken in the past about.
The connection that our store associates have with our customers and with the brand and you know again very challenging environment not just.
From a scarcity of talent.
Potential talent standpoint, but also just people, making decisions about how they want to live their lives and whether they want to work, but but we continue to see.
<unk>.
Our strong level of engagement, a lower level of turnover than I think is a general out there and.
So we're relatively pleased with our ability to manage in the stores and in corporate and then Mark I don't know if you want to talk about the D. C. At all I would say a similar a similar statement around the DC, we have a very loyal engaged workforce in the DC.
And a lot of the operating model changes that we've been making actually.
Help efficiency et cetera, and in that part of the world and have helped us focus.
That employee workforce on fulfilling orders and shipping goods that our sale of goods versus <unk>.
Sales related goods versus processing markdowns and things of that nature. So similar across the board I think it's something we're watching and we indicated in our.
Soft guidance for the year that we are expecting.
Pressures and investments in talent that we're making to help us drive continue.
Continue to drive the business forward, but also inflation around wage inflation and merit et cetera that comes into the system in Q1 and through the rest of the year.
That's helpful. I appreciate that and then you know I'm I'm.
Just I know this is probably kind of a tough question to answer, but how do you kind of view the health of your consumer given the heavy inflationary environment, whether it's in food gas et cetera.
Are you seeing any hesitancy kind of amongst your consumer base, just kind of your general thoughts would be helpful. Thank you.
Sure.
We are.
We're very lucky in terms of our consumer sheet is relatively affluent she is pretty established and she is therefore less susceptible to some of those.
Marginal increases in things.
<unk>.
People always talk are also talk about the impact of the stimulus on our business last year and how.
How are we thinking about lapping that that honestly, we don't believe had much of an impact last year. So therefore, not an issue for us in terms of lapping it this year and so far we have not seen.
And impact to the business.
Due to the inflationary environment, we tend to.
See our customer she really wants something like something than she is.
Willing to pay for it so.
We haven't seen an impact.
Okay.
And then just last one from me you kind of mentioned free cash flow. This year in a pretty healthy cash position. How do you think about kind of excess cash in the balance sheet. If you can maybe thought of prepaying debt or.
What are your kind of plans for that excess cash.
Good question look I think.
We've mentioned it I think along the way, but we were very pleased to get the deal in 2020 that we were able to strike with our lenders.
The result of it is that we have a term loan with a pretty good rate on it.
Pretty good term on it that said.
With the cash generation of the business I think we are certainly interested in continuing to improve the capital structure of the business.
In our minds that ultimately means less that we can get there so as we're looking at.
The business and where the markets are et cetera, we are opportunistically thinking about options and nothing to report on at that point, but definitely definitely on the radar and part of our objectives is to continue to improve the health of the balance sheet.
Okay. That's great I appreciate your time today. Thank you. Thank you very much. Thank you.
We have no further questions at this time I will turn the call over to Claire for any closing remarks.
Thank you operator, and thank you for everyone who participated in this call and listened in.
We're happy to tell our story and we look forward to sharing our results with you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].