Q1 2022 Joann Inc Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by and welcome to the <unk> first quarter fiscal 2023 earnings call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker, Mr. A J Jane.

Mr Relations. Please go ahead.

Thank you operator, and good afternoon, I'd 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 could 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 statements to reflect subs.

When events, new information or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release, and our recent filings with the SEC during the call today management may refer to certain non-GAAP financial measures a reconciliation between GAAP and non-GAAP financial measures can be found in the companys.

Earnings Press release, which was filed today with the SEC and posted to the Investor Relations section of Julians website at investors Dr. Joanne Dot com on the call today from Julien our weight Miquelon, President and Chief Executive Officer, and Matthews, Chief Financial Officer, I will now turn the call over to Wade.

I'd like to thank everyone for their interest in Joanna and joining us on the call today. After we transitioned to a public company last year, we had a very good start to fiscal 2022 on the back of a record setting pandemic fiscal year 2021 since.

Since that time, we experienced unprecedented supply chain disruptions and more recently, we have also been impacted by geopolitical events and significant inflationary pressures affecting our customers' Joanne is obviously not immune to the same near term challenges that are currently impact a variety of other retailers that you've heard from during this earnings season.

These factors also mean that the economic backdrop for consumers is increasingly challenging and to that end, we expect the operating environment to remain challenging through at least the next few quarters.

Youll recall that we provided some commentary regarding the recent shift in consumer behavior on our last earnings call in March.

On that call, we had reasonable them until the outbreak of the war in Ukraine, After which we saw significant drop off in customer traffic.

Since late March things have steadily improved week to week, but are not at the rate we would like yet despite the recent sales softness our adjusted gross margin rate and gross profit dollars remains strong, especially relative to pre pandemic levels.

In light of the near term macroeconomic uncertainty, we are managing our cash position and balance sheet very carefully.

Until the inflationary backdrop and supply chains began to normalize we will continue to manage our business cautiously with the assumption that the economic environment will remain challenging any normalization will be a bonus for us.

As an organization, we have successfully navigated through many different economic cycles throughout our operating history.

While some expect a soft landing as a likely scenario.

I view continues to be the entering recession as highly probable and in fact, maybe the most likely scenario.

What would that mean for Joanne from experience, we typically see strong resilience in our customer base with a recession occurs as our consumers tend to forego high ticket goods and services and double down on selling crafting and other hobbies or generate peace of mind and recall that our average customer basket size is roughly $30.

Recessionary environment would also help to curb inflation, including feedstocks encouraging more labor participation and heal broken and overburden supply chains based on our extensive history through a variety of economic cycles. We believe that we can manage through an economic downturn more quickly compared to many other discretionary retailers as long as we adjust our cash cost and pricing choices.

Got it.

For perspective during the last major economic downturn 15 years ago. After initial same stores decline of about 6% with comp positively during each of the following four consecutive years.

The more concerning economic environment will be that is entering a period of sustained state inflation that is not our base case scenario, but one that all companies should hold out as a possible risk scenario to manage and mitigate.

During Q1, we experienced sales declines across our customer segments with sales down by 13, 3% relative to last year and minus 12, 9% on a total comparison basis.

This decline was in line with industry trends and importantly, we're very confident that the recent softness does not reflect any incremental competitive pressures or any loss of market share.

Recall that we cycled a 50% positive comp in Q1 and fiscal 2022.

After adjusting for $28 9 million of excess ocean freight and related supply chain costs gross profit declined by 11% from last year and increased versus pre pandemic comparisons.

We're pleased that our adjusted gross margins Hasnt continued to improve our.

Our gross margin performance should further benefit from strategic pricing actions that we've taken to offset higher input costs.

To provide some context on intra quarter trends for Q2, we know our may comp was better than Q1, and we look forward.

For further sequential improvement in sales and gross margin performance as we move forward. We're also experiencing very strong momentum in our online business with double digit increases in traffic in the current quarter. So will this acceleration can be attributed to the recent surge in COVID-19 cases, which according to many reports are vastly underreported due to a variety of factors.

Youll recall, the last year, a significant drag on our operating performance was the impact of the delayed reopening on a special event driven business event driven categories have been a significant bright spot for us in fiscal 2023, thus far.

On the other and does the spectrum, we are experienced significant year on year softness in higher ticket discretionary purchases within our technology based categories.

We have previously been optimistic about the prospect of returned to positive one year sales comparisons beginning in Q2. However, we currently do not expect to return to positive same store sales growth in this current quarter.

I have mentioned the recent rise in Covid cases is also development that we are monitoring closely in relation to our store traffic.

Overall, we're currently trending at a high single digit sales decline for Q2, and while I anticipate that that trend should continue to improve throughout the year I would caveat. This by saying that there are still many impressive variables, we're managing through and these are only consumer demand related.

For example on the supply side side, we still have the war in Ukraine and related commodity inflation.

The China, Covid shutdown and the La Porte negotiations.

All of which the team is currently managing through extremely well, but are very hard to label as business as usual.

Well, we like the visibility on the timing for a positive inflection point in sales growth, we're very confident the currency challenges in the business will be prove to be temporary and cyclical nature. We recognize we must adapt and control the things that we can control such as our cost capitalizations, while preserving the rarified air customer experience levels that we've been achieving.

Relatedly net promoter scores have remained at all time record highs throughout fiscal 2023.

To commence field on the record customer satisfaction. Despite the labor challenges that are plaguing, the retail and service sectors.

Our recent proprietary survey work confirms that our core customers and customers across the creative products industry is very specific concerns about inflation the economy in general and the ongoing situation in Ukraine.

Encouragingly. However, the same customers also see that the anticipate to spend more dollars in selling and crafting in this upcoming year not less.

We're confident that we currently have a very good handle on all the issues that are within our control in relation to supply chain disruptions the impact of excess ocean freight cost was in line with our expectations for the most recent quarter.

Following a recent negotiations for new freight contracts, we expect to have more operating flexibility through a wider range of ocean freight carriers compared to fiscal 2022, the increased capacity should allow for more timely delivery of products and ensure a strong in stock position ahead of our all important fall and holiday season.

We're also encouraged by the recent developments in the spot market relation to ocean freight costs. However, we expect the ocean freight markets remain extremely volatile through the balance of the year.

Obviously continue to monitor the situation in China, and the potential for a work stoppage based on current contract negotiations between unionized workers in a port authorities in southern California.

So far the recent COVID-19 shutdowns in Shanghai have not materially impacted our flow of goods or product availability.

Based on the current uncertainty in the current retail environment, we are taking steps to manage our balance sheet with a near term focus on cash we're not contemplating any major long term changes in our capital allocation plans, but we will continue to be optimistic.

Opportunistic in this area moving forward.

Our store refresh program remains the biggest long term focus of our capital allocation priorities, we still expect to relocate or remodel the vast majority of our fleet through this multi year initiatives that said, we think it's appropriate to defer some capital projects based on the current market conditions and Matt will cover this topic in more detail in his comments.

Our multipurpose distribution center in West Jefferson, Ohio is set to go live later this fall we remained very excited about our various blue Ocean gross initiatives as well as a reminder, current projects under the Blue Ocean framework that we've already announced include but are not limited to <unk>, which is our joint venture with singer, which we believe will be a major source of innovation for the selling industry our wholesale initially.

The partnership with JDM, which will provide shadow AUM with extra variety of B to b growth channels and our recent acquisition of wave up which will streamline our production digital fabric printing and related finished products.

On several of our bluish initiatives, we've already announced the revenue opportunities are especially compelling we'll have more to share with the investor community. As these initiatives begin to have a more material impact on our financial results.

Regarding section 301 tariffs, we don't have any material updates on the ongoing litigation potential exploration of existing tariffs or the prospect of a more substantive policy reform.

Any incremental tariff relief would be very beneficial to our perspective very welcomed.

There are a lot of moving parts of the economy in the world right now, but having said that we've got winning strategies, we have customers, who love our brand and we've got team members, who are passionate beyond comprehension I have no doubt that we will seize the moment in time to come out of it as an even stronger and better organization as we always have before and with that I'll turn the call over to Matt for more detailed review.

Half of our financial performance.

Thank you Wade.

Agree with the sentiments weighed shared regarding the challenging economic environment for our consumer and our key input costs, which have impacted our recent results I will provide more specific detail around those first quarter results as well as insights into how we expect to manage through those impact for the balance of this fiscal year and the next.

Net sales for our first quarter totaled $498 million, reflecting a total comparable sales decline of 12, 9%, which compares to 15% total comparable sales growth for the same quarter last year.

We saw much stronger performance in several of our event driven selling categories that had been impacted by pandemic related restrictions. However, those tailwind for more than offset by softer customer traffic and challenging overall industry trends and our technology related categories.

While higher ticket technology items were down against very strong results last year, they were still up by 32% on the quarter versus pre pandemic levels.

Our sales trends were weakest in March tracking closely to the start of the war in Ukraine and cycle and cycling of stimulus spending last year.

Sales trends steadily improved over the final five weeks of the quarter.

As expected gross margins were challenged by excess ocean freight costs as our spring season goods had some of the largest impacts of higher carrier rates and ancillary costs of port congestion on a per unit basis.

These excess costs totaled $28 9 million for an impact on GAAP basis gross margin of 580 basis points in the quarter.

GAAP basis gross margin was 48, 3% a decrease of 440 basis points from the same quarter last year.

After adjusting for excess ocean freight costs gross margin improved by 140 basis points to 54, 1% we.

We have been pleased with our ability to manage product cost in the face of inflationary pressures and to execute our planned strategic pricing actions on targeted assortments.

Our selling general and administrative expenses totaled $259 1 million, an increase of three 7% compared to the same period last year.

While below the level of general inflation that increase is larger than the one five to two 5%. We have historically managed to you in terms of growth.

Increases were primarily driven by costs associated with our store refresh initiative.

Increases in labor rates and distribution cost to handle later, arriving spring inventory.

The totality of those factors resulted in a net loss of $35 1 million and diluted loss per share of <unk> 86.

For the first quarter on a GAAP basis.

Our adjusted diluted loss per share was <unk> <unk>.

During the quarter.

Adjusted EBITDA in the quarter was $18 $6 million.

Compared to $57 5 million last year.

Moving to the balance sheet and debt leverage metrics cash and cash equivalents were $22 3 million and net long term debt was $931 million as of April 32022 up from $764 million at the same time last year.

At the end of quarter, one our trailing 12 months credit facility adjusted EBITDA with $214 3 million for a net leverage ratio of four four times at the end of the quarter.

A key driver of the increase in net debt was inventory cost.

We ended the quarter with merchandize inventory of $674 5 million, an increase of 25% over the prior year.

The quality of our inventory remains very high with clearance merchandise representing less than 5% of our total inventory mix.

On hand units in our stores and distribution centers that are only up 2% year over year, despite slower than expected consumer demand in the quarter.

The increase in inventory Pos was primarily driven by higher international and domestic logistics, which were $40 million above the same time last year.

We also made a conscious choice to bring in our peak inventory build earlier this year to mitigate the risk of supply chain disruptions.

As a result at the end of the quarter, we had 23 million more in in transit inventory on its way to our distribution centers that at the same point last year.

The balance of the increase was driven by some shift in mix.

It's a higher price point assortments and cost increases we have taken from suppliers, particularly for items exposed, but just to petroleum and other higher cost feedstocks to produce.

Driven by delays in the supply chain the amount of our inventory covered by open payables was unusually low at the end of the quarter at 29%, which compares to 38% at the end of the same quarter last year, we expect our inventory covered by open payable to normalize to approximately $40.

<unk> over the balance of this year, which will support improved operating cash flow versus our position at the end of quarter one.

We have taken a variety of actions so far this year in order to reduce the impact of excess international logistics costs on a year over year basis, as well as reduce inventory receipts in the back half of the year.

We expect inventories to be reduced on a year over year basis by the end of our fourth quarter and working capital to be a source of cash for the full fiscal year.

While we are not providing formal guidance on revenue or income metrics. We did want to provide insight into our business trends for the second quarter to date, our perspective on what that could indicate for our near to midterm financial metrics and how we plan to manage the business for the coming 18 to 24 months.

Our total comparable sales trends for the quarter has steadily improved relative to quarter. One as we are now running at a high single digit negative year over year trend.

While we see some category trends that point towards more rapid improvement we are taking steps to ensure a strong positive free cash flow over the next 18 to 24 months, assuming our comparable sales could continue to run mid to high single digit declines for the next two to three quarters before we begin to see more stable or growing year over year.

Year trends.

Those efforts will include but are not limited to reductions to our planned inventory receipts.

Cost structures and capital investments.

Gross margins will continue to be pressured, particularly in the second quarter by higher product and supply chain cost, most notably international logistics.

However, our preparation for this year's peak inventory flow low levels of clearance inventory as well as pricing and promotional actions. We have taken are expected to drive gross margin rate expansion over the back half of this fiscal year.

We remain committed to our longer term debt leverage goal of two times adjusted EBITDA, We will focused cash generated through our broad based cost containment efforts toward debt reduction modest investment in our blue Ocean growth initiatives completion of our store technology upgrades.

Maintenance of our store assortment and service standards and protection of our quarterly dividend.

We will also continue to execute on our store refresh initiative, but with the lower number of annual projects focused on relocation opportunities, which have the highest top line expansion.

We have narrowed our current year project count to 36 locations nine of which are already complete and will target 20% to 25 projects for next fiscal year, most of which have already been identified.

On the cost front, we have wrapped up annual negotiations with our ocean freight carriers, expanding our capacity under contract, which will reduce our exposure to the very volatile stock market and allow us to better control costs for our peak third and fourth quarter seasonal flow compared to what we experienced last year.

Yeah.

Also on the supply chain.

We are on track to launch our e-commerce fulfillment from our new West Jefferson, Ohio, Multipurpose distribution center in the third quarter.

This capability will reduce what had been over reliant on our store network, which will control costly split shipments and create efficiencies and overall fulfillment costs.

We are working a number of short and longer term plans to offset other inflationary pressures in our product costs as well as SG&A expenses with a focus on limiting spend on items that are not essential we're aligned with the objectives I shared earlier.

We are confident that our strong and experienced team will effectively lead through this tough environment to drive a strong focused and cash generative business.

With that we look forward to taking your questions.

Yeah.

Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You made then return to the queue to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Liz Suzuki with Bank of America. Please go ahead.

Great. Thank you.

So I guess first question is you mentioned there are no current plans to change the long term capital allocation priorities, but what would be the most likely cash outflows that would either be quite or reduced if cash flow does remain negative I mean, it sounded like the store refresh enlink relocation program could get pushed out of it but can you help us frame things like maintenance Capex.

Where the dividend stands on your list of priorities.

Yes, I mean, I will say, a few things and Mac, yet we're going to run a pullback the next whatever period on the number of store refreshes.

That frees up a lot of cash flow as well as the justice working on working capital in particular inventory, but on the refresh size.

Side, it's actually.

The pragmatic thing to do now a lot of our fixtures and other items are not only inflated, but some of them are being delayed as much as six months contractors in some cases, we're trying to charge, 40% premiums. So we're going to prioritize the ones that makes sense now, but we're not going to.

Rush head first into what we think in those cases will be temporal inflation, yes, so kind of put some context around that.

The numbers I was sharing that we're targeting for projects on the store refresh initiatives over about for next year about a third of what our initial strategy was and I think for the reasons we gave.

Thats prudent.

Just really given the inflationary environment.

And.

The cost of doing those projects under that environment, which we think will normalize over time.

Really it's a lot of there's a lot of other.

Projects, we have that have an idea that have solid rois.

Just tightening the belt on some of those as we kind of ride through the next several quarters.

Gotcha, and then I mean it.

How should we think about maintenance capex. So outside of where you already have planned. If you are a scale back the store refresh program entirely and just like you do the bare minimum of expense on your stores that shake out to.

Yes, we have some cost to run out.

Kind of the technology refresh of our stores just a modernized networks back office systems, and our point of sale.

Some of those are lease costs, so that will run out.

Probably around $15 million per year over the next few years to wrap those up and then on top of that.

Very modest our maintenance capital on top of that might be somewhere around $10 million a year I would say that last weekend, we launched seven refreshes over the holiday weekend.

All of those are literally.

Smashing start ahead of our pro forma so we're no less optimistic about it but like I said there is.

Paying 40% contractor premium is having.

Premiums on fixtures delays on the fixtures and alike.

We also need to be smart about how we spend our money and our time.

Yes that makes sense and then just.

How about the dividend like where does that stack in your list of priorities.

Yeah, obviously, we're going to.

<unk> managed the maintenance capital and other things required to operate the business.

And also.

We are serious about our goal of Delevering over time down to two times EBITDA.

I would say, though.

Appropriately right after that would be the dividend, but we feel we can drive a lot of cash in the back half of the year and we can step up our level of cash flow generation next year. So.

Again, I think that it is a priority for us but I.

I do think this company can drive a lot of cash pretty quickly when we make the right choices here. So.

Great. Thank you very much.

Thank you. Our next question will come from Daniel Hopkins with William Blair. Please go ahead.

Hi, good afternoon.

I'm just curious what you talked about expectations for kind of similar sales declines for the balance of this year it sounds like.

If that trend were to continue or even potentially worse in a recession next year.

What would be some of the things that you can do from a cost standpoint.

I heard your answer just now to the first southern questions but.

What could you do from a cost standpoint, you, presumably you would have some reduction in freight costs and other things.

Partly offset that but are.

Are there other things that you can do.

From a store level standpoint.

Youre all distribution expenses.

Just internally.

My other shop your expenses that happened.

Yes, I guess, let me take the first part of the question was actually our comps have been steadily improving.

Since the quarter.

And since the worst part of the quarter dramatically improving as you probably know theyre trying to high single digits, but getting kind of better period by period, we anticipate that that will in general continue just at what pace, we will see.

We have also seen in the past few weeks, the biotech setting across all retail, which actually across all retailers worsened dramatically in the past few weeks, where ironically, we've actually continued to strengthen.

Scratching unit versus again, all retail so.

So we think that will play out but to the extent that things were to get you know.

Worse than plan.

We certainly have a lot of levers we can pull in terms of pricing in terms of further cost that we can do in terms of how we manage our inventory.

We're not seeing that at this moment, but I think in this environment that we're in this world and all these kind of things that are getting thrown at everybody kind of surfing the wave week by week.

Yes, I would echo that I mean, certainly we're always looking to be more efficient with inventory and improve our turns but.

For shorter periods of time it could be.

You could tighten a little harder there and then obviously.

Corporate overhead we have in our.

We're focused on maintaining solid store standards, but.

There will be some room over the short term.

Belt tightening in those areas as well.

If you take that math I gave you and look to kind of a pre pandemic, which as you know.

One of the only less normal years, we have.

We would expect to kind of through balance of year view comping positive on that was gross margins significantly up on that.

From the price promotion or other activities that we've taken and that's why we've been current inflation.

But it's sort of a.

It's one of the years that we're recasting back too just because it's more of a normalized consumer pattern.

So I think a lot of people are but that's just how we're trying to piece it together.

Yeah.

Thank you.

Thank you. Our next question will come from Zach <unk> with Wells Fargo. Please go ahead.

Hey, guys. This is David lands on <unk>, thanks for taking our questions.

First one from me can you walk through the puts and takes the gross margin outside of the 580 basis points of excess freight.

Yes, so if you back that out we're actually up about 140 basis points actually most of our.

Impacts outside of product costing and promotional efficiency are pretty.

On a year over year basis for the quarter. So most of that 140 basis point improvement on adjusted basis is some cost savings on product, but most of it take some pricing actions.

Got it that's helpful and then for the quarter to what extent did inflation contribute to comps.

And are you passing all of those elevated costs on to consumers.

And then also how do you expect inflation that.

Kind of trend over the next few quarters.

Yes.

Yes, so we had some pricing in the quarter year on year.

And we had some cost increases as we go through the year in a row through are causing our price increases are going to continue to outrun.

Inflation.

So thats kind of how we're seeing that the big.

As we think about like what's normal and not normal you know in terms of our base inflation really petroleum is a key driver right. So those petroleum goes some of the items that we buy that goes up you know we're paying more that goes down that will be a pullback, but I think on the Cogs side petroleum is the number one indicator for what gets passed through.

It is safe to say on ocean freight.

<unk>.

Yes.

Certainly get peak.

I think it can only get better from here, but at what rate it heals itself through spot market and contract renewals remains to be seen but I think in almost any circumstance that will go the other way.

Overtime again tariff relief, we'll see about that and then kind of the other big wildcard out there is diesel while we've seen a reduction in freight rates in terms of the actual rates. We also have to pay for diesel so that right now is pretty much offsetting the gains we would otherwise get.

Matt anything else, you want to say to that pretty fair.

Thanks.

Thank you. Our next question will come from Laura Champine with loop capital. Please go ahead.

Thanks for taking my question and I appreciate that that working capital should be a benefit by the time, we get to the end of the year, but we're in a pretty deep free cash flow hole with a negative 142 or so for the quarter, where do you think we end the year in terms of free cash flow roughly.

Yes, I think.

We'll be slightly generative I think we're working on.

Some some efforts to even improve that further.

Then the following year, we're already looking at rolling forward out another year.

Regardless of where sales remain a little bit tough taking significant.

Enough actions to allow us to be more than our historical level.

Free cash flow, which is approaching $100 million on annual basis.

Got it thank you.

Thank you. Our next question will come from Peter Keith with Hydro <unk>. Sir. Please go ahead.

Hey, Thanks, good afternoon.

So curious on that Ocean freight contracts you said you have finalized.

The pricing in more capacity I think in another response, you said your costs.

Costs are down so could you just could we tell that together how should we just think about that.

The normalized contract costs on a year on year basis looking forward.

Yes for this coming year.

If you look at where we were contracted last year.

Which again, we were very rarely getting those <unk>.

Rice's because we.

We are typically getting denied service under those contracts, which threw us into the spot market and we are paying for it. We've said this before 456 times.

What are what our contracted rates would have been.

So are we more broadly contracted this year, which will give us more stability those rates compared to our prior contract are going to be about 80% to 90% higher but they are going to be well below what we were paying in the spot market last year. So elevated were very much versus where we've been historically.

But particularly for the back half of the year.

Should be again as long as they are being honored.

We've taken a lot of.

Efforts to ensure we have a broader base of carriers to do business with.

That will be well below what we were actually paying.

In the third and fourth quarter of last year.

Okay, and so to follow up on that I guess, because we and the street had been stripping out the spot market cost out of cost of goods.

I think it was $29 million this past quarter.

Now youre going to have less exposure to spot contract rates up year on year. So now we use what you have.

<unk> gross margin pressure on an adjusted gross margin basis looking forward through the rest of the year.

A bit versus last year, but.

The other thing is as those blend in.

And a lot of the costs, we incurred last year were also a lot of these port congestion.

Demurrage and detention technically what they're called.

We also see those be being less.

On a year over year basis, So I think on a GAAP basis definitely in the back half we see.

We should expect improvement versus where we were last year.

On an adjusted basis, I think you'll be more.

Flattish, we've been steadily improving but I think.

We will be comparable year over year, but on a GAAP basis definitely starting to see improvements.

In the third and fourth quarter.

Part of it is going to see most retailers are doing now is trying to figure out contingency plans to avoid Los Angeles in case of a shutdown.

And so.

It's very expensive to go to other ports.

But on the other hand.

I think everyone is doing at least.

The reasonable set of that because it's a real wildcard.

Okay and.

I wanted to ask then about that the promotional.

Promotional environment.

It does seem like promotions are starting to pick up across retail there is.

Yes, I think youre comfortable with your inventory level, but other retailers are not.

What are you seeing out there across the different categories that you sell into.

Is there some elevated promotions that are starting to pick up maybe more couponing by some of your competitors just curious whats happening out there.

Well I think it's still a good promotional environment.

Still hitting some key demand drivers.

But in general we also did lots of holdouts.

Right now you can buy.

A lot of business in most of the categories may be more aggressive and letting managing for margins the way to go, especially the supply chain costs.

So expensive to get it here as Matt said, our inventories are very clean so even though the dollars look high right now actually when you look at the units and the fact that we pulled ahead to be a better shape to be able to sell through our fall season earlier.

We feel very good about that aspect of the business.

No.

But I think that's a good choice to because if we had pushed us a little bit later, if something happens in L. A in Shanghai in China, where it would be complicated et cetera. Then you end up spending a fortune to try to expedite and push it through.

Clear because you're late in the season, so I actually think from that point of view.

In pretty good shape.

Okay. It sounds good thank you very much.

Thank you. Our next question will come from Cristina Fernandez with Telsey Advisory group.

Hey, good afternoon. Thanks for taking my question I wanted to follow up on the comment on inventory and pulling some of it forward.

Can you can you kind of give us some guidance of how we think the inventory flow through the year, we'll pick it into Q1 will still be a sequel pattern, peaking in the third quarter.

Yeah. So.

We definitely feel we will see our inventory peak.

The third quarter because of a lot of what we sell through we do sell through quite a bit in the third quarter, but a lot of that is really for the fourth quarter I would say youre just seeing a shift in a percentage of our seats, mostly seasonal product in some fashion product.

Move up a couple of months.

A little bit earlier, so our second.

And of this event.

It was obviously higher than.

It's been for that reason youll see that again in the second quarter, and then more it'll more normalized on a year over year basis, as we move through third and fourth quarter.

Thank you that's helpful. And then my follow up is can you comment on how that business has.

A form going past recession I mean.

Has it been down or.

Maybe some comments there just to kind of work.

Kitchen.

We have better.

The arts and crafts in your category your product and particularly.

In that scenario.

Yes, so as we've gone back through history in general we performed very well through recessions and I think it's two parts what I think is people.

Start to forgo expensive travel trips, maybe a new car, but then they double down on the things that we do I think you all saw the pandemic where people were traveling as much. So they were looking for things to do at home for their spare time.

One of the reasons why we struggle always in the summertime as we're just less relevant because people are gardening. Their kids are out of school. So maybe they are traveling with them. So I think we feel good about that I do think that we are seeing kind of week to week, the strengthening a bit.

<unk> said in the past few weeks the aggregated retailers as far as we can tell that the necessity retailers are actually starting to weaken a bit versus prior trends, we'll see if that continues but.

I do think at the end of the $30 basket, it's something that gets people peace of mind and something that they enjoy to do and so.

Again, if they have to forgo a larger purchaser of larger travel item.

There's still going to be able to to be able to enjoy their lifestyle.

Thank you. Our next question will come from Paul <unk> with Barclays. Please go ahead.

Hi, everybody. Thanks for taking my question I was hoping you can provide just a reminder of capacity under the revolver revolver to draw down what are your expectations or whether you'll need to draw down additional debt throughout the year.

Yes, so we.

We.

Refinance that last year.

An increase the base capacity up to five.

<unk> $500 million.

It also can accordion above that by.

In $25 million increments. So we could go another I think it's actually another $100 million above that.

Not that we're planning to do that but that's available to us if needed.

Okay.

And then on the term loan can you also just remind us.

When that is out until.

It's a 2028.

2028, Okay, and lastly, sorry, if I missed it but did you provide an update on what.

You expect freight cost to be for the remainder of the year.

We haven't I would say.

To give some context I think.

Obviously, we didn't have these in the second quarter last year, so that's going to be incremental year over year.

For the quarter, we're in we.

We do expect those to decrease a bit from first quarter, but probably be fairly comparable.

That would be probably comparable on a year over year basis for third quarter.

Would be down.

Down significantly in the fourth quarter versus what we saw last year.

Alright perfect. Thanks.

That's it for me.

Thank you as a reminder, ladies and gentlemen, if you have a question at this time. Please press the Star then one.

Our next question comes from Joe Here, Anthony with Beach point capital. Please go ahead.

Hi, Thanks for taking my question would.

Would you guys mind talking about how comp sales varied across the categories between selling.

And art congrats into court.

Yes, I mean real loosely I mean, we kind of break it into two categories.

I would say that in the selling side, we saw strengths in categories, which are event driven so.

Special occasion and the like.

We saw the arts and crafts side, and selling that altogether to different aggregates, but in the arts and crafts side. Like we said is we had a very big.

Year on year reduction in what we call technology Bolton craft in selling technology. Those categories are very strong on a pre pandemic basis, but the year before they were really.

To the mood.

The good news is we're starting to cycle out of that as that start to normalize at about this time last year.

And then on seasonal actually that's part of the arts and crafts category, but we saw some strength in there as well so.

And I guess excluding.

Boeing and technology part, perhaps what you've already called out as being weak I guess, how is the rest of that segment.

And how will the non events portion of selling I think I'll just frame roughly I believe the kind of the technology component was maybe around the 300 point basis point drag.

Year on year, but again those businesses are.

I think if you look over the longer period are still very strong over the broader trajectory. It's just that they were you know.

Really really strong the year prior.

And partner initiatives that too as well, but.

And then.

As a follow up in terms of the arts and Crafts space do you have a sense of how your market share has trended versus your peers.

And this quarter, we do that in the arts and crafts, we feel that over the past several years on an aggregate we've been gaining some share I think that's partially a function of that historically, we were under shared I think they've also play a pretty good game there but.

For sure as we do our.

Scraping of data externally because we get all of our analysis, we have credit card scrapers and others. We believe were in aggregate at least holding around there.

That's right.

I don't think that.

The results that we're seeing I would have to guess that across our industry are pretty similar.

I think it is.

Same kind of behavior.

<unk>.

And we do some work to validate that but I don't think it's I think it's more of a study.

An industry game.

And speakers I'm showing no further questions in the queue. At this time I would now like to turn the call back over to management for any closing remarks.

Well look I appreciate all your time today I'm you know it was a tough quarter I think we have a lot of reason to feel that we have optimism that moving in the right direction, but I also think theres just a lot of moving parts of the world right now.

And we just got to be very very agile in terms of understanding how we navigate through inflation and supply chains a lot of what we're seeing right. Now I think is that peak worse point. The question now is how fast do supply chain appeal.

Some of these feedstocks and other things, but we've navigated through it before I think we can come out stronger and we'll do whatever we have to do to make sure that we do so.

<unk>.

Thank you for your time I appreciate it.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

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