Q3 2022 JJill Inc Earnings Call
Speaker 1: Q3 were down about 2.2% versus Q3 2021 on 5% fewer stores as higher average unit retails partially offset lower traffic from fewer stores. Direct sales as a percentage of total sales were 46% in the quarter. Direct sales were up 0.4% compared to third quarter last year. Looking at the rest of the P&L, reflecting our continued focus on driving profitability, gross profit was $105 million up $500,000 compared to Q3 2021. Q3 gross margin was 69.9% up 100 basis points over Q3 2021 driven by moderating break costs. We also benefited from the impact of strategic price increases which offset product cost inflation. SG&A expenses were $85 million compared to $86 million last year as increases in selling costs from store operating hours and shipping and strategic investments in marketing were offset by savings in occupancy costs and management incentive. SG&A was essentially flat as a percentage of sales compared to the prior year. The adjusted EBITDA was $27.5 million or 18.3% of sales for the third quarter of 2022 compared to $27 million or 17.8% of sales in Q3 2021. Please refer to today's press release for a reconciliation of adjusted EBITDA. Turning to cash flow, results continue to demonstrate the strong cash generation of the business. Cash flow from operations was $31 million in third quarter and $67 million year to date.
Speaker 2: End of third quarter cash was just over $90 million. As will be noted in the 10Q expected to be filed later today, we received an $8 million payment from the IRS late in the third quarter that was subsequently identified as an error. Following quarter end, that payment was repaid to the IRS.
Speaker 3: Separately, in November , we received the expected remaining $9.2 million tax refund from the IRS associated with our fiscal 2020 tax filing.
Speaker 4: As noted in our press release today, we continue to explore options to refinance our remaining outstanding term loan credit facilities and stand ready to execute when the market is supportive.
Speaker 5: We ended the quarter with inventory up 5.7% compared to the end of third quarter 2021. This increase is driven by the timing of holiday floor set receipts, which we shipped and received earlier than last year to ensure on-time delivery of this important floor set.
Speaker 6: As we enter the fourth quarter, we are cautious on the consumer and stand ready to take promotional pricing action as necessary over the holiday period to ensure a clean end-of-year inventory position.
Speaker 7: Capital expenditures in the quarter were approximately $3 million and were primarily related to the POS project as well as repairs and investments in the store environment.
Speaker 8: Capital spend will continue to ramp in the fourth quarter as we progress with the POS project and new stored investments.
Speaker 9: With regard to store count, we did not close or open any stores in the quarter, ending with 247 stores.
Speaker 10: With respect to our future outlook for fiscal 2022, for the fourth quarter of fiscal 2022, we are projecting sales to be flat to down 3% versus Q4 2021, and adjusted EBITDA to be between $9 and $11 million. Included in this outlook is an expectation that gross margins will be about flat to last year.
Speaker 11: points versus prior year and adjusted EVA-DOT will be between $103 and $105 million compared to $92 million last year.
Speaker 12: Regarding store count, we will close net four stores in the fourth quarter of fiscal 2022, including the opening of one new store late in the fourth quarter, ending the year with 243 stores. And finally, we now expect capital expenditures of about $13 million for the year.
Speaker 13: Thank you, and I will now hand it back to the operator for questions.
Speaker 14: At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad. Your first question comes from a line of Dana Telsey from Telsey Advisory Group. Your line is open.
Speaker 15: Good morning everyone and congratulations on the night's progress.
Speaker 16: Can you expand just on the top line what you saw as you went through the quarter? Any given that you had mentioned the slowing down in the second half of the second quarter, anything that you saw during Black Friday and when you think about your buckets of product categories, Claire?
Speaker 17: anything to note in terms of acceptance given the Welcome Everybody campaign. And then Mark, the moderating freight expenses, what magnitude of moderating freight are you thinking about as we move through 2023? And I think the capex reduction is that the liaisons in any stores or anything to note of getting sub- Juvenile paying up
Speaker 18: resistance in terms of sort of basic categories. As you know, we stay close to the customer and we have a tracker that we put in the field and to really get an understanding of how she's feeling, her consumer confidence, her purchase intent.
Speaker 19: and how she's feeling kind of about the macro environment as well as how she's feeling about our brand and our products. And we did see an increase in sort of her hesitancy and her awareness and some caution around the macroeconomic environment. That said, we continued to see very little price resistance for-
Speaker 20: products with a lot of make in them, beautiful fabrics, artisanal details, we had a nice response to that and very little price resistance. So it really was a combination and as I said some ups and downs over the quarter.
Speaker 21: With regard to Black Friday, obviously that's this quarter. We are sticking to our strategies and our intent. And while we are certainly paying a lot of attention to what's happening in the macro environment and the competitive environment from a promotional cadence and level standpoint.
Speaker 22: We continue to try to minimize our promotions in full recognition of the fact that Q4 is just a little bit of a different animal. But we anniversaried the same promo level over that weekend as we did last year.
Speaker 23: And that's the product piece is really what I said, you know, the special piece is the unique piece is the newness.
Speaker 24: stand out categories like dresses, wherever was strong in the quarter as well.
Speaker 25: Those are really the big call outs.
Speaker 26: Great, and Dana, I'll take maybe the second question first related to CapEx. Yes, you're right, it's a couple of delays in new store openings that did move into the first quarter of next year, so pushed out.
Speaker 27: And then I would just call it a couple of other delays. The supply chain for our particular part of the industry is much improved, and I'll talk about freight in a second. But with respect to procuring some technology assets, etc., there's a slight delay still there.
Speaker 28: Nothing other than mostly shifting of expense or capital related to projects that are underway.
Speaker 29: That with respect to freight that we mentioned that there was about a hundred bits of benefit in the q3 margin Related to freight costs moderating and that really is to two factors right now remember last year when
Speaker 30: things started to get complicated in the freight world and the supply chain world. We made the decision to air goods in and we're no longer really airing at elevated levels. And then we also were seeing ocean rates. But with the favor,
Speaker 31: increase fairly dramatically late last year, which carried over into this year. We are seeing those ocean rates moderate, but we're not back to pre levels yet. I think there's still room to go as we roll forward with ocean rates continuing to come down..
Speaker 32: And we will continue to use air freight as we sort of normally like to use it, which is more strategically for getting goods in, a little bit of chase, etc. Versus just securing goods on time. The on time deliveries, the reliability of the shipping lanes has improved dramatically.
For your next question, press star one on your telephone keypad. Your next question comes from the line of Daniel Lupo from Jefferies. Your line is open.
Hey, thanks for taking the questions a nice quarter. Just kind of diving in further to the store comps, can you break out how we should think about price versus traffic mix?
So, Daniel, with respect to what's driving the revenue, pricing, we've taken strategic price increases. We've spoken a little bit about it the last several quarters. Those strategic price increases are sort of in the system now.
We also are still experiencing raw material first cost inflation in our goods. And we indicated on the third quarter that those strategic price increases essentially offset the inflationary pressures in our first cost. Our primary driver of inflation is cotton.
The other factor we've had year to date, and it's worth noting, that our business model really has been to become much more focused on the full price promotional line. And that has been contributing on a year-over-year basis, AUR or positive increases in AUR above and beyond the ticket price increases.
And Q3, we mentioned on the call that it was the most difficult comparison. And that's because last year was really the first quarter Q3 that we obtained a really low, healthy level of full price promos where we want to be.
So, that year-over-year gain kind of went away, but now we're a ticket, full-price mix, etc., as we continue to move forward that will continue to drive the AUR.
Got it, that's helpful. And then just looking at the cash balance quarter over quarter, can you maybe talk about some of the puts and takes outside of the margin benefits that you saw year over year? Were there any kind of abnormalities in working capital? And maybe how you think about uses for cash and maybe do you think that there's...
potential you could use that for further de-levering to help effectuate a refinancing? I think on the second front we would say yes as one of the potential uses for cash is addressing the balance sheet as well as fueling growth initiatives, etc. With respect to the quarter I would say it's primarily gross margin driven.
We subsequently identified that that was an error, which we then repaid. And then received immediately, almost simultaneously, received the actual refund, which is slightly more. It's about a million dollars more than we had sitting in cash at the end of the quarter. beat
In those, the balance sheet that you see, you'll have the cash that reflected that payment. Again, then you'd have a receivable that was for the entire amount, the $9.2 million amount. And then you'd have a payable that reflected the payable obligation to repay that $8 million up in cash.
So it's more noisy than it needs to be. At the end of the day, net a million dollars better, but just timing cusp through the quarter, which is why we called it out in my script.
Got it, that's helpful. And then last question for me here, looking at the fourth quarter guidance, you know on the top line flat to down 3%, you said gross margins expected to be flat year over year, still looks like there's you know pretty significant kind of EBITDA margin compression. Given kind of the outperformance in third quarter, can you maybe talk about the puts and takes into the 4Q margin guide?
fourth quarter we have holiday operating hours for stores which does add pressure to SG&A in the fourth quarter relative to where we've been. We also have our strategic investments in marketing that we continue to make. And those really are in our view intended to address current business but also.
to build the file and support future growth. So those continue. What we mentioned on the Q4 guide behind the margin and the sales is that we are taking a cautious view of the consumer, just given the macro uncertainty and noise, inflation, etc.
and indicated that the gross margin will be flat even though tailwinds are expected from freight. And those tailwinds in the fourth quarter we've indicated will offset any additional promotional activity that arises as a result of the holiday promotional time period.
Thank you for your time today and taking all the questions.
Thank you.
And there are no further questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.
from such statements. Those risks and uncertainties are described in the press release and J-JILL's SEC filings. The forward-looking statements made on this recording are as of December 6, 2022, and J-JILL 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 these remarks. A reconciliation schedule showing the GAAP versus non-GAAP press release issued December 6, 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 jjill.com. I will 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 third quarter performance and before turning the call over to Mark to review our financial performance and outlook