Q1 2022 JJill Inc Earnings Call

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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 first quarter 2022 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.

Yeah.

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.

And if you'd like to withdraw your question. Please press star one again.

Before we begin I need to remind you that certain comments made during these remarks may constitute forward looking statements.

Made pursuant to and within the meaning of the 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 of June 8th 2022 and change oldest not undertake any obligation to update these forward looking statements.

Finally, J Jill may refer to certain adjusted or non-GAAP financial measures. During these remarks.

A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in the press release issued June eight 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 <unk> Dot com.

I'll now turn the call over to Claire.

Thank you operator, and Hello, everyone. Thank you for your interest in J Jill.

For today's call I'll review highlights of our first quarter performance and provide an update on our strategy focused on driving profitable growth before turning the call over to Mark to review, our financial performance and outlook in more detail.

We anticipated a strong Q1 this year compared to last year. However, our results were better than expected I'm demonstrated strength throughout the quarter.

Net sales were up 22% to $157 million compared to $129 million for the prior year quarter and adjusted EBITDA for the first quarter of fiscal 2022 was $31 million compared to $17 million in the first quarter of fiscal 2021.

Our performance was the result of our ability to execute against our disciplined operating model focus on inventory management full price selling and closing it.

Our loyal and engaged customer base responded well to our Assortments and acquisition is more relevant than ever as consumers continue to trend toward a premium casual lifestyle.

While we are encouraged by our results and our customer response, we know inflationary pressures are increasingly driving consumer behavior.

However, our customer tends to be more resilient to economic pressures than your average consumer.

Our data shows that she has an average household income of $150000 plus and for many of our customers are discretionary dollars Arthur I wanted to spend with children out of them.

We like all retailers continue to navigate a dynamic and uncertain macro environment.

I'm proud of how our teams continue to be nimble and responsive while remaining focused on our commitment to our operating model and our customers.

During the quarter, we continued to see great response from our customers to our product assortment.

Extremely receptive dramatically slowed regularly we continued to purchase of coal price.

Woven tops and dresses worth the two standout categories that she responded best U S. He began to travel attend occasion and shop for work again.

These novelty fashion categories also had the highest AUR increases in the quarter, but saw no price resistance.

She thought something she likes she bought it for.

Our responsiveness is a testament to the quality of our fabrications and our compelling product mix.

Now let me talk to you about some of the things I mentioned on our last earnings call related to our growth strategy and the early progress we're making.

We are focused on driving growth in high potential sub brands and categories.

Our portfolio of sub brands core peer gel wherever and fits all demonstrate different design ethos and offer her a mix of casual and refined apparel based on her needs.

We leverage our portfolio to flex and adapt penetration based on consumer need and shift in trend.

This allows us to grow organically and meet the evolving needs of our customers are within the premium casual space.

Whether she's buying versatile work comfortable travel a premium casual clothes for attending occasions for meeting with friends. We offer her a variety for all of her different usage occasions, we have a fabric first approach to design leveraging premium fabrications across our balanced assortment of key franchises.

We also have coverage of extended sizes, allowing us to meet the needs of a broad sector of customers.

This breadth and diversity of assortment and provide a lot of opportunity for organic growth across many usage occasions.

With regards to our customer.

We are also encouraged by the health of our customer file and the trends, we're seeing in our file growth and value with a 7% increase over Q1 2021.

We've talked in the past about the loyalty of our customer base for average tenure with US as a brand is 10 years, we have segment leading retention rates.

The growth we saw in our customer file with augmented by an increase in spend per customer, reflecting the values, you're perceiving in the product and delivering increased profitability per customer.

As I mentioned on the last call, we see an opportunity to modernize the J&J brand and value proposition to increase relevance for our current customers and position J Jill for the next cohort of customers with a focus on growing our share of the market for women 45, plus.

This leads me to another growth opportunity, we see with focused strategic brand and performance marketing programs.

We've conducted a thorough customer insight plan, including primary research with thousands of existing and prospective customers.

<unk> developed from this work are guiding the brand strategy evolution and value proposition refinement.

As we move forward, we will enhance brand social and digital performance marketing efforts, we have an opportunity to tell our story more broadly and strategically to introduce the next generation of customers to a relevant value proposition and our compelling product assortment.

We will build on the success, we've seen in video commerce on channels like Facebook and Instagram engage influencers, who reflect a variety of consumers to drive deeper engagement.

We're also building brand activation that illustrate our brand message and products and generate content that we will share through paid owned and earned media.

Turning to our channels, we believe we have growth opportunities in both the direct to consumer channel and in brick and mortar.

Our customer likes the very personal relationship she has with our brand and are welcoming and friendly community is core to our experience with us.

Historically this is most probably been felt in our stores as customers engage with our associates and with each other.

The work we've done to optimize our economics in our stores has yielded opportunities for replacement and new store openings in key markets.

The team is already working to identify the top potential locations for new store unit growth over the next three years and we feel there's an opportunity to open its doors in 'twenty to 'twenty five locations in the near to midterm.

We are also working to optimize our online experience and belief that we have growth potential there.

For example, this quarter, we launched our fabric guide online to illustrate the quality and features of our fabrics Foundation of our design philosophy.

It's like this are proven to deepen engagement with our customers. We will continue to build on these and other initiatives throughout the year.

We are focused on driving our growth strategy, while we continue to navigate this variable environment, but we felt really good about the results we are delivering 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.

We are very pleased with performance in the first quarter of 2022, our original guide for Q1 reflected an easier year over year comparison, but even so results came in above expectations on both the top and bottom line driven by strong customer response to full price product and a better than expected improvement in store.

Traffic.

Additionally, the strong business performance in Q1, we further strengthened the balance sheet and we're pleased to have received a ratings upgrade from Moody's during the quarter, we extended the maturity of our ABL by one year to May 2024, and subsequent to quarter end paid off a maturing $5 million existing term loan.

Further reducing our funded debt balance.

As noted in our release today, we are also planning to explore a refinancing of our outstanding term loan credit facilities with the objective to decrease the total size of our facilities and extend our debt maturities.

Now I will review financial results for the first quarter.

Total company sales for the quarter were $157 million up 22% versus Q1 2021.

Total company comp sales were up 24% in first quarter driven by the stores channel.

<unk> sales for Q1 were up over 53% versus Q1 2021, driven by higher unit sales associated with continued recovery in both lifestyle Center and mall traffic and full price average unit retails, resulting primarily from a lower promotional rate in the quarter.

Direct sales as a percentage of total sales were 46% in the quarter compared to first quarter last year direct sales were down 2% driven by lower markdown sales as a reminder, historically direct was used to clear markdowns for both channels. Our updated operating model resulted in a significant.

Option in this clearance activity, which negatively impact sales comparisons in the channel while improving overall profitability.

Looking at the rest of the P&L gross profit was $109 million up $22 million compared to Q1 2021 Q.

Q1 gross margin was 69, 7% up 170 basis points over Q1, 2021, driven by better full price selling and reduced promotions more than offsetting product cost inflation and approximately 250 basis points of incremental freight charges.

Okay.

SG&A expenses were $86 million compared to $79 million last year with increases in selling costs from higher store operating hours and shipping costs investments in marketing and higher management incentive partially offset by savings in G&A overhead.

SG&A as a percentage of sales leveraged significantly down 650 basis points compared to the prior year.

Adjusted EBITDA was $31 million or 20% of sales for the first quarter of 2022 compared to $17 million or 13% of sales in Q1 2021. Please.

Please refer to today's press release for a reconciliation of adjusted EBITDA.

Turning to cash flow for the quarter, we generated $7 million of cash from operations, resulting in end of quarter cash of $41 million and zero borrowings against the ABL we.

We ended the quarter with inventory levels up 7% compared to the end of first quarter of 2021.

The increase reflects the impact of average unit cost inflation as well as elevated levels of goods in transit.

The increase in in transit goods resulted from some delays to planned end of quarter receipts as well as the strategic decision to shift summer collections, one to two weeks earlier than normal to help offset longer transit times.

Average unit cost inflation is expected to persist at least through the end of this year, while second and third quarter reported inventories will also be impacted by in transit associated with earlier shipping dates.

Overall, we remain very comfortable with the level of inventory in the business.

Capital expenditures in the quarter were about $700000 and were primarily related to the completion of our website platform migration, which was successfully completed in March of this year.

Capital spend will ramp up each quarter as we progressed with our POS project and plan for store investments later in the year.

With regard to store count we closed four stores in the quarter ending with 249 stores.

With respect to our future outlook for fiscal 2022.

Second quarter of fiscal 2022, we expect sales to be up 1% to 3% versus Q2, 2021, and adjusted EBITDA to be between 31 and $33 million.

Included in this outlook is our expectation for gross margin to be relatively flat to last year, given the more challenging year over year comparison as we begin to anniversary the significant recovery experienced during Q2 and Q3 last year.

For full year, we still expect annual sales to grow modestly compared to prior year. We now expect gross margins to be flat to up slightly compared to 2021.

And with respect to EBITDA, we now expect annual adjusted EBITDA dollars to be up compared to 2021 with growth outpacing the expected modest increase in annual sales.

Second growth in adjusted EBITDA is driven by gains in sales and margin, partially offset by expected pressure from expense inflation and the investments we are making in talent store operations and marketing.

Our updated outlook reflects our strong start to the year as well as increased conservatism for the back half of the year given the current uncertainty related to the macro environment.

For the second half of fiscal 2022, we expect sales growth to be up slightly and for adjusted EBITDA dollars to be down slightly compared to the prior year period also taking into account the challenging year over year comparisons for Q3 as I previously mentioned.

Regarding store count, we still plan to close approximately 10 stores in fiscal 2022 and continue to review store opening opportunities with a plan to open up to four new stores, most likely in fourth quarter.

And finally, we still expect capital expenditures of about $15 million to $18 million.

And I will now hand, it back over to the operator for questions.

Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.

First question. This morning is from Janet Joseph Kloppenburg with JK Research Associates. Your line is open.

Good morning, everyone.

Congratulations on a great quarter.

Thanks, Shannon Thank you Janet.

I just wanted to ask on the inventory up 7%. If the content was where you wanted to wanted it to be.

Clearly in other words wasn't geared towards the tops in the dresses that will draw in the woven that we're driving I think the.

The.

Beth momentum categories.

And if you felt good about the allocation of your inventory and.

Mark if you thought that the inventories.

Wood.

Would continue to be up as we go through the rest of the year.

What we should expect there and then on the second half I know you are a little bit more conservative on your outlook.

And I was just wondering.

If you are optimistic that the trends youre seeing in buying related to more social activity travel et cetera would continue.

That.

There is some opportunity there for continued momentum thank you.

Sure I'll start Janet and then I'll, let mark address the second part of your inventory question. We'll go from there. So yes, we feel good about the mix in the inventory I think we feel balance across the portfolio.

Sure and sub brands, we feel balanced across the category certainly.

Happy to see the strength in the categories that we mentioned continuing and we feel well positioned for that so I feel like we're in a good place there and also feel good about the allocation I think.

We talked in prior quarters about how the team has just done an incredible job navigating what has just been unprecedented in terms of supply chain and challenges and we feel like we've been able to for the most part have the assortments that we wanted in front of our customers in both channel and at the right time.

So we certainly see some impact from disruption and delays but.

I feel like we are navigating as well as possible.

Brian and Janet I would add.

Overall, ending the quarter with inventories plus seven with the sales performance in the comp up 24, we feel really good about the overall level of inventory and.

Belief that it's in the spirit and reflective of our disciplined approach to inventory management and the new operating model and the things that we've been speaking about.

The mix of that inventory is much healthier at full price versus markdown and thats been a trend now for a couple of quarters and again reflective of the <unk>.

Strategic approach.

The driver of the plus seven was in transit and I mentioned that some of that to a couple of.

Small delays related to end of quarter inventories costs being into Q2. So they went into in transit and then this strategic decision, which I know many out there are taking to ship earlier due to the extended lead times and in some cases, some some slight move.

<unk> floor set dates but that as we look forward. The overall disciplined approach doesn't change that impact earlier transit times, we mentioned would impact.

Likely the end of quarter, Q2, and Q3 inventory levels and by the end of the year. We expect that current thinking expect that to start to normalize against kind of where we were at the end of last year, but for right now.

Q2, Q3, we expect that to still be a factor in the report that we put out and overall the approach to the inventory isn't changing.

At all as we go forward.

And then I had a couple of months.

Sorry go ahead, yes with regard to outlook and then I have a couple of follow ons.

Sure.

Yes, I hope our customer continues to plan on traveling and getting together with friends I certainly am and.

She.

That she is very cheap.

Thank you very much wants to refresh your wardrobe seasonally and we see those customers coming back we're here.

Here and listen carefully to what they say to us in our stores and and that's certainly been a theme. So I would expect that to continue going forward and.

But who knows what the world.

Over the course of the remainder of the year and certainly been tumultuous last couple of years.

Yes.

And <unk>.

Maybe you will talk to the price increase opportunity how much you've done how much opportunity. There is there and also clear we've heard from others that the lounge and active categories might be slowing down a little bit maybe and maybe you could talk to that and how you're managing through that and.

Sure.

And.

If those categories could be growth categories again next year.

Yeah sure so.

So I'll take the last one first if I may and then.

And then I'll go to pricing.

Uh huh.

We've talked about fit that's sort of our most.

Activewear category and Thats, a very small part of our.

Business in assortment. So we have seen nice growth as we've talked about but it's on a small base and so we feel like it's managed appropriately within that penetration of that core brand in the sub brands.

Our brands run a little bit of a gamut all within the premium casual space that we're able to.

Drive penetration deeper where it sort of wax and wane the sub brands based on what we're seeing in trend from a consumer standpoint, so we feel good about.

The way that's all balanced.

And so not wasn't a huge piece of our business, but but we'll certainly be.

Paying attention to it and and leaning into it if we see the opportunity for more growth there.

Pricing standpoint, as we talked about on the last quarter, we took a strategic approach to price increases. So we really sat back and looked at where we thought there was value in the product from a consumer standpoint that we could.

That we could realize in terms of taking tickets up until we did that I had mentioned in the script that the two categories, where <unk> were up the most in the first quarter, we are addressing here.

Logan tops and we didn't see any price resistance. There. So that's the approach we've taken for the remainder of the year in terms of being really surgical and trying to be consumer oriented in terms of the way we approached it not just raising prices across the board and it's so far seems to be working well.

And Janet I would I would also add.

One question is it clear.

Im sorry, Im hogging, the phone line, but clear does that mean that you have.

Done with price increasing for the year or do you think theres some opportunity as we go forward.

So our approach for the remainder of their is very similar to the approach. We took in Q1, we haven't seen any reason to need to change that further, but obviously monitor it.

And the other piece is just the promotional the promotional lever, where we were able to pull back on that even further than we had anticipated in Q1.

We started with him up in Q2, and Q3 against a cleaner promotional.

Cadence.

On a year over year named so.

Yes.

Apologies for interrupting you.

No problem, Jeff that was the point I was going to make.

Alright, thanks, so much thank.

Thank you. Thank you.

Our next question is from Dana Telsey with Telsey Group. Your line is open.

Thank you good morning, and congratulations on the nice results as you think about right. It looks like incremental freight was around 250 basis points this quarter compared to 300 basis points last quarter. What are you seeing there and how do you. How are you planning for it going forward and then Claire just following up on what John .

And it said anything that we should be watching for with any new categories or pricing.

Category merchandising assortment initiatives as we go through the balance of the year.

And then just a question on stores also the traffic seems like it was terrific what was the difference with with traffic indirect versus stores and it sounds like with the opening in off mall and in mall that youre seeing strength in all areas.

Great I'll, let Marc maybe address freight in store traffic and then I'll jump in on the.

On the category.

Dana the way that we're looking at freight is at this point, we're not anticipating the freight.

<unk> freight costs to materially improve through the rest of the year. So that's sort of embedded in our forecast, we do start to anniversary that freight into the back half of the year and the only thing I would state on the basis points is.

Freight often comes as a.

Right of units and Q4's revenue relative to Q1's revenue the basis points equate to a fairly consistent.

Cost.

If you calculate it out so I think thats as we think about it at some point, we expect freight costs and lead times et cetera to improve right now, we're seeing it's sort of where it improves and one lever it sort of deteriorates and another in overall, it's kind of stable and were anticipating that that continues.

At least through the end of the year.

Great.

And with regard to category, we talk a lot about the portfolio of core and the sub brands Dana and I think that portfolio gives us the opportunity to lean in on things that are trending.

And.

We feel again good about the balance we have there and how we're planning the balance based on seasonal differences and and consumer trends and then we also have good coverage of <unk>.

Inclusive sizing are on our website and somewhat in our stores and to the extent that we see shifts in consumer.

<unk> as it relates to size sizing.

I appreciate your flex there too so we feel good with the portfolio that we have.

We're not entering <unk>.

New categories like footwear or anything like that we don't have any big news on that front, but feel really good about the organic growth opportunities that we have within our business.

And lastly, Dana with respect to store traffic, we are seeing traffic improve across the footprint. So both lifestyles in malls were better throughout the quarter than we had anticipated.

Come back out of Q4.

Stronger, which was very encouraging to see there is still opportunity to get there.

Average store foot steps back closer to where they were pre COVID-19 in 2019, but encouraged to see that continue and also encouraged at the opportunity. It presents to continue to drive that back to those pre COVID-19 levels. The lifestyle centers continue to perform better than malls, though the gap.

Between the two has narrowed a bit and hopeful that that continues to be the case as we move forward.

And then I would say with direct direct is still.

Being impacted to some extent by the lower Mark down volumes in the channel.

And that relationship starts to normalize through the rest of this year, but that.

Historically, the channel was clearing the majority of the markdowns for the business and with the new operating model, we've sort of moved away from that model and it's a more profitable.

For the business overall, and it does impact those revenues and to some extent the traffic in that channel as well as we as we execute on that strategy, but it should start to normalize through the rest of the year.

Got it and then marketing expense and just marketing in general what should we be looking for there.

Yeah.

So we you know I think.

We have as I mentioned in my in my.

Remarks, we have the opportunity to introduce more new customers to this brand and I think amplify the voices of the brand out there a little bit so watch for that Youll see a lot more in terms of social engagement influencers things that are that are very much top of funnel exposing new people to the brand is.

As well as continually leaning in on our performance marketing efforts to continue to drive.

The size and value in the file so.

Watch for us on social.

Got it.

And then just the gross margin expectation for flat in Q2 does that assume is that the supply chain headwinds and does it assume clearance remains at these low levels or reduction in clearance.

It assumes that the clearance remains at low levels Dana if anything the we called out in Q1.

Full price the margin expansion was driven in large part by the lower promotional cadence in the business and the strong response to full price product that Ellen.

Element of our strategy really started to gain traction in during Q2 and Q3 of last year. So that is sort of the.

The lever that we look at as we start to anniversary the very healthy levels of promo in the business through Q2 and Q3 in particular.

Thank you.

Okay. Thank you. Please press Star then one if you'd like to ask a question. Our next question is from Daniel Lupo with Jefferies. Your line is open.

Hey, Thank you very much for hosting the call today and very nice quarter.

Just just going back to kind of that G&A investment you mentioned in your prepared remarks, Mark how do you kind of think about that kind of an additional investment in talent stores and marketing, maybe I guess using kind of a baseball analogy what kind of what inning are we in in terms of that investment is that kind of the middle of its investment or kind of more in the beginning of its overall.

Investment.

Yeah, Danielle I always shy away from baseball references.

Right.

I understand the question.

We are coming through.

Recovery of the business into 2021, we see the opportunity as.

Business model strengthened through 'twenty, one and enter into 2022 to start to build some strategic investments to support profitable future growth. So much of that that we're talking about outside of inflation because inflation is sort of.

Just embedded in the P&L and we're going to live with it for a while.

Investments in marketing some of the talent investments are really meant to seed.

As well as some of the capital investments, we've talked about to build a foundational strength off of which we can grow profitably. So I would say it's at this point.

Beginning to step into that level of investment profile and really with the expectation that it drives profitable growth as we continue on that path.

Okay No that's helpful.

And then last question for me.

Going off of the debt refinancing comments I guess, maybe how far along are you in the process is that kind of just kicked off or.

Is that something that's been going on for a while and then just given kind of how volatile the debt markets are right now how do you kind of think about that refinancing.

For you know relative to a more kind of clubby kind of transaction relative to a more broadly syndicated type of deal.

Yes, Daniel.

I would characterize it as we just want to be ready and I said in my remarks, Opportunistically look to refinance the debt.

And fully acknowledging the markets and where they are at but but our view is and it's been consistent.

Post the recovery, where we're at now with the with the cash generation profile of the business strengthening the balance sheet as an objective and this is key on that on that strategy. So we want to be ready, we're going to be ready and how and what form and at all of that is is TBD, but.

But we feel like we're sort of moving into a position of strength to be able to tackle what's been an objective and our stated objective for us for a while so more to come on that.

Hard to say at this time.

Okay I appreciate that.

That's all I had for today. So thank you again for your time and very nice quarter.

Thanks Daniel.

This concludes our Q&A session and also conclude today's conference call. Thank you everyone for participating and you may now disconnect.

Okay.

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