Q3 2023 Joann Inc Earnings Call
[music].
Welcome to the Chilean third quarter fiscal 2023 earnings conference call, all participants will be in listen only mode.
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I would now like to turn the conference over to a J J head of Investor Relations. Please go ahead.
Thank you Chad 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 to 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 subsequent events.
Information of our 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 certain non-GAAP financial measures a reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed today with the SEC.
And posted to the Investor Relations section of Joanne for web site at investors got to weigh on Dot com.
On the call today from Joanna Wade Miquelon, President and Chief Executive Officer, and Scott <unk>, Chief Financial Officer.
The answer portion of the call will also be joined by Christian Julio Joanne Executive Vice President and Chief customer Officer.
I will now turn the call over to Wade for his prepared comments.
Thank you AJ good afternoon, and welcome Joanne <unk> third quarter fiscal 2023 earnings call.
Like the first ask those on the call to join me extending a very warm welcome to our new Chief Financial Officer, Scott. So Kelly Scott brings more than 20 years experience in finance for several multinational brands. Most recently, serving as vice president of corporate SG&A.
At under armour.
Its remarkable to me how fast got has hit the ground running and we're very excited to have Scott on board as a senior executive.
<unk> ahead, I look forward to introducing Scott to many of you in the analyst Investor and lender communities.
As we entered the peak of the holiday season, I want to take a minute to thank our more than 21000 hard working team members that Julien for their dedication to our organization success I also want to acknowledge the continued support of our customers and to express my gratitude to all of the well so any craft enthusiasts, who continue to support Joanne despite the unique challenges.
Many are experiencing during this difficult economic climate.
In the third quarter, while the results showed some internal signs of strengthening overall, we were disappointed our sales comparison versus last year was decline of seven 9% versus fiscal year, 'twenty, which was our pre pandemic year, our sales declined by one 1%.
Gross profit dollars on an adjusted basis were down nine 3% versus last year and increased by five 5% versus fiscal year 'twenty.
As stated on the Q2 earnings call our sales comparisons have progressively strengthened through the end of Q2 and as we entered into Q3, however, midway through our third quarter. This trend worse at this slowing was not incompatible with what our blind data illustrate for the specialty retail industry overall.
This slowing was primarily caused by fewer items per basket as opposed to a downturn in customer traffic trends overall.
Further this reduction in items per basket was skewed to both our lower and database customers and our customers not in our database.
During the third quarter, we continue to see strengthening in many large and important parts of our business such as fashion and apparel special occasion needle Arts and fleece categories. In addition, our Halloween seasonal business grew approximately 8% and related categories performed very well however, the fall seasonal decor and floral categories underperformed as customers seem more.
Less inclined to indulge and decorate versus the prior year.
Additionally, consistent with broader industry trends in this category, we experienced a meaningful slowdown in our craft acknowledging business.
Our general belief is that the ongoing inflationary environment has continued to pressure our customers' level of discretionary spending we've talked many times about Joanne as resiliency through recessionary times. However, what I feel is a bit nuance of extreme inflationary factor, which has not been seen in 40 years.
<unk>, we're seeing the consumers are feeling the sting of inflation, but the recent shifts in shopping behavior is skewed much more towards essentials and basics with less emphasis on discretionary purchases. These budget conscious consumers have been under a prolonged period of stress for many months now and they are getting more selective with their purchases.
Fortunately there are some signs that these inflationary trends are beginning some side, even as a potentially head into something more typical of a recessionary environment in the short term.
During the quarter, we continued to advance our key strategies, including enhancing our store experience, which among other things includes our journey to refresh our current and relocate stores.
We had 13 grand openings in the quarter in which all but one was either relocation where were able to increase our square footage or enter into a net new market forced altogether on.
On balance we're very pleased with results of dislocations as we were able to showcase the full breadth of the Joanne brand in a way in which we could not in our previous smaller footprints.
We have four additional stores opening in the fourth quarter to complete this year's projects.
Our second core strategy is to enhance our multichannel proposition.
Our omnichannel efforts yielded an additional bright spot in the quarter with sales representing over 11% penetration of Joanne sales, plus 40 basis points to last year and over 600 basis points to fiscal year 'twenty.
Ami revenue continued to outpace total sales for the quarter was a moderate 4% decline compared to last year backing out the challenge technology business, which penetrates higher online sales were flat for the quarter.
Been able to maintain much of our COVID-19 lift to our online business as Q3 sales increased 126% as compared to fiscal year 'twenty.
Importantly over the past few days, we have worked hard to improve our army profitability.
The past few years, sorry about that our profitability and that trend continues with respect to both our gross and our net omni margin.
To further enable our omni efforts in October we officially began filling orders out of our multipurpose distribution center in West Jefferson, Ohio.
This distribution center will enable us to reduce split shipments improved line fill rates and expand our assortment tail, we're ramping up the production capability as we speak.
And then just back to this holiday season will be nominal however, we anticipate that the impact on value creation will grow substantially and meaningfully over time.
Also related to our online business and online selling competitors shut down near the end of Q3, and we are very encouraged by the sales increases that we're seeing thus far.
Now, let me shift to what we're seeing as we are in and moving through Q4.
We remain cautiously optimistic about our fourth quarter, which the call is our largest and most important quarter due to the seasonality of our business. We typically provide more intra quarter color for the acute for Q4 on this earnings call than we do for other quarters simply given how material. It is to our annual results.
As we are now in the midst of the holiday season, unless it two weeks from Christmas I have a high level of conviction that we have been doing the right things right with respect to what we can control in order to win the day with our customers. Our assortments are relevant are in stocks were strong in our promotional offers our competitiveness based on the voice of the customer and our net promoter scores, our operating metrics, including our.
Service remain at all time high comparison levels at Joanne even despite the labor pressures that Joanna and most service lift companies are experiencing.
November started slower than we anticipated and either seems to have been some cycling of last year's fear of missing out from clog supply chains, leading to an early consumer holiday shopping spree.
Having said that our pace has picked up with our black Friday, and cyber Monday and continued momentum.
Momentum into December we anticipate finishing the fourth quarter with solid sales momentum as we move out of this fiscal year into next.
Now, let me shift to a few of our major focus areas moving forward.
There's no denying the fact, the current inflationary environment has driven massive annual cost increases and has taken a significant toll on both our cash flow as well as our operating earnings.
Fortunately, we are seeing stabilization across our cost structure and deflationary opportunities are in our ryzen based on healing supply chain stabilized commodity prices and the strength of the dollar.
Be successful we are rethinking of taking fresh eyes to all costs and are working to root out anything that is not adding eminent value I can assure you. We will leave no stone unturned in order to strengthen our balance sheet and returned to the company to double digit EBITDA margins as soon as possible, while maintaining our focus on a strong customer experience.
In October we launched a program that we have coined as focus simplify and grow which is targeting approximately $200 million in annual cost reductions to be fully delivered by early fiscal 2025, we anticipate 50% of these savings will be supply chain related 30% will be from Cogs improvements and the balance will be from <unk>.
To overhead costs.
We also expect additional cash savings from other adjustments, we're making to the business in areas such as capital expenditures and working capital.
Of note, we anticipate the majority of supply chain savings to come from reductions in ocean freight costs and the majority of these savings will offset the phase out of the ocean freight adjustment, which we have been making over the past five quarters, and which we anticipate will be fully eliminated in the first half of fiscal year 'twenty four.
We're off to a good start it's still early in the process and therefore will be providing updates on this effort in future quarters.
I also want to comment briefly on our dividend as announced in our earnings release, we made the decision to pause our quarterly cash dividend payments.
As a public company our dividend has been an important part of our capital allocation strategy.
This decision was not made lightly however was it find ourselves in a period of record inflation rapidly rising interest rates and more likely than not recession, no priority can be more important and working to ensure that we can successfully weather any storm, while not compromising on the most critical business investments business investments that are critical to winning with our customers and also.
Creating significant shareholder value long term.
We fundamentally remain committed to returning capital to shareholders and being responsive to the needs of all of our key stakeholders and this pause does not preclude us from resuming our dividend at a later date.
I'd like to close out with some very exciting words regarding two of our blue Ocean initiatives. The first of which is the singer Ditto, Our 50 50 joint venture with singer biking fall.
Ditto as revolutionary products and platform for solace in craft enthusiasts everywhere, we have been working on this initiative for over four years and now nearing launch during New York fashion week in February units are in production and being shipped as we speak and we'll be launching in the United States in mid Q1 of the next fiscal year.
As I've said many times traditional sewing patterns are both the heart of selling projects as well as the most painful part of the process as the format is literally not changed since the 18 hundreds in fact since the days of Abraham Lincoln.
Our patented system will allow customers to turn patterning into the most fun part of the selling process using an AI platform integrated with a digital laser projector system that will enable a multitude of designs and permutations and literally take solace from ideation to selling in minutes versus hours of.
No Ditto received one of the highest ever purchase intent scores by external design partner a partner who has over 1300 commercialized patents there about 30 million households in the U S alone that actively so in a much greater number in the 180 plus countries sooner Viking <unk> and their respective dealers operated well.
We believe that many of these selling households, we'd like to have access to it ditto in fact, ditto hasn't been vetted with expert interesting design students beginner, so listen crafters alike, and acceptance and excitement across the various constant situates is universal.
Coming months I'll be working on a way to bring the best bringing to life. The ditto for all of our stakeholders. So that you can see it in action firsthand and get a better idea as to why this is so revolutionary.
The second Blue Ocean I will briefly mentioned today as our wholesale initiative, which is in the early innings, but exceeding our internal expectations based on revenue contribution we signed up over 200, new customers in the third quarter and we have significant momentum with additional customers as well the commercial web site for a marketplace platform is scheduled to launch over the next few months.
This website will provide greater operating efficiencies with added checkout capabilities for our b to b wholesale customers.
So let me just close by thanking all of you for listening today, while we have faced a series of challenges over the past few years, including section 301 tariffs record inflation and rapidly rising interest rates. We have also have many reasons to be optimistic.
Joanne starting with their stores has a highly relevant and differentiated customer proposition that is very hard to replicate.
Omni business continues to gain momentum as prime for significant profitable growth input.
Input costs, including supply chain cost have reached an inflection point from highly inflationary to deflationary and we are organizing to capitalize on a reversing trend and capture significant value.
Lastly, our blue Ocean growth initiatives are now coming to fruition and holds the promise to create significant value ditto, specifically agile to take an entire selling industry to an entirely new level of technology engagement and funnel. These initiatives combined with our recent business momentum give me optimism that we're on the right path as we transition from fiscal 'twenty 'twenty three.
The fiscal 'twenty, 'twenty, four and with that I'll turn it over to you Scott.
Good afternoon, and thank you very for the introduction and warm welcome.
I'm very excited to join the Julian team and I'm eager to meet many of you joining us on the call today.
Julien leadership position in the sewing and crafting industry is certainly well documented.
Although I joined the organization recently I've been particularly impressed by Julian strong Cultural Foundation, and I look forward to the opportunity to contribute to <unk> continued success.
Yeah.
As an organization Julian has experienced significant external cost pressures over several years, though more recently, we've also seen a noticeable shift in spending patterns by consumers, who are prioritizing consumer staples and essentials over discretionary items.
And what is now an increasingly uncertain economic environment, we were taking the opportunity to reset our cost structure simplify and streamline our operations and refocus our efforts for growth opportunities in areas that will maximize our long term profitability.
We also intend to capitalize on the stronger dollar and our sourcing efforts and take advantage of using supply chain cost to generate greater operational efficiencies.
We firmly believe that recent challenges provide us with a unique opportunity to carefully reassess our existing operations and nothing is off limits.
As we mentioned, we launched our focus simplify and grow initiative and are targeting approximately $200 million of annualized cost savings by the early portion of fiscal 2025.
I am excited to see how the organization has embraced this challenge and tackle that head on these.
These initiatives are intended to combat inflationary pressures, we have experienced and created financial flexibility during these uncertain times.
I would now like to recap our third quarter results and then provide some additional color about our near term outlook as.
As we touched on earlier, we experienced some deceleration in our sales trends during Q3 as the quarter progressed, particularly towards the end of the quarter.
Net sales for the third quarter totaled $562 8 million a decline of seven 9% compared to last year with total comp sales decreasing by 8%.
Relative to pre pandemic levels in the third quarter of fiscal 2020, our total comp sales were slightly negative declining by one 1% over the corresponding period.
Well Halloween was a significant bright spot in Q3, we experienced some pullback in demand for fall seasonal categories as well as continued softness in our craft technology business. Our average ticket increased by 1% in the third quarter over last year, driven by price increases partially offset by fewer items.
Her basket.
Our e-commerce or Omnichannel business declined by four 4% versus last year. Our army business continues to outpace our overall sales performance and has more than doubled relative to pre pandemic levels going forward, our new multipurpose distribution center remains the cornerstone.
Our online strategy and we are focused on bringing it to a full capability.
Over the long term it will drive significant operational efficiencies improved fill rates and reduced split orders.
On a GAAP basis, our gross profit in Q3 was 281 million a decrease of 11, 9% from last year and a decline of 1% from pre pandemic levels in fiscal 2020.
We absorbed $18 5 million of excess import costs during the quarter.
While this figure reflects a $7 2 million increase over last year. The amount was lower than expected as we continued to benefit from improving conditions in the spot market.
After adjusting for excess import freight costs for both corresponding periods. Our gross profit of $299 5 million declined by nine 3% from last year.
Our core merchandising or Pos margin was slightly higher compared to last year in spite of deeper promotional activity that we incurred late in the quarter in relation to fall seasonal and floral categories.
Well close to 5% from last year, our average unit retail metrics moderated slightly in Q3 on a sequential basis due to increased promotional intensity.
Currently our average unit cost increased on a sequential basis. However, these costs were anticipated.
As we communicated in our previous earnings call. We've continued to experience spillover effects from higher inventory costs incurred during the peak period of last year's supply chain headwinds.
Typically takes six months or more for inventory costs to work their way through our P&L.
Once we complete the process of renegotiating our contracts for next year, we expect the outlook for average unit cost to improve in fiscal 2024.
Our gross margin on a GAAP basis was 49, 9% in Q3, a decrease of 230 basis points from last year.
In addition to the impact of excess import costs, we experienced higher domestic freight expense as a result of higher carrier rates and fuel costs.
Since we are now cycling the impact of extremely high Ocean freight cost from the back half of last year the year over year decline in our GAAP gross margin was much more moderate in Q3 compared to the 730 basis point decline in the prior quarter.
After adjusting for excess import freight costs adjusted gross margin of 53, 2% represents a decrease of 80 basis points from last year, driven by the timing of the clearance activity increased carrier fuel rates is well split ships.
On a sequential basis the decline in our adjusted gross margin in Q3 was more moderate compared to the 150 basis point decline in the prior quarter.
As Wade mentioned in his remarks, we are encouraged by the fact that we are finally, reaching an inflection point with regards to supply chain cost and cost of goods inflation.
A particular note excess import freight costs have now effectively transitioned from headwinds to a tailwind and we expect that will be clearly reflected in the fourth quarter from a P&L perspective.
That said, we realized $32 million of cash benefit from lower ocean freight rates through Q3.
The fourth quarter of fiscal 2023 represents the first of what we expect will be several consecutive quarters with P&L benefit from improving ocean freight rates.
In Q4 Ocean freight expenses are expected to be around 15 to 20 million favorable relative to last year from a P&L perspective on.
On a cash basis, we also expect to realize $15 million to $20 million of improvement in the fourth quarter from lower Ocean freight expenses based on favorable comparisons to last year and ongoing improvements in the spot market.
Turning to expenses, our selling general and administrative expenses increased by four 4% from last year.
Although we managed to optimize store labor hours successfully during the quarter. Our operating expenses were negatively impacted by higher pre opening and closing expenses relative to last year and incremental costs for our new multipurpose distribution center in West Jefferson, Ohio.
We also cycled a significant reduction to incentive compensation from last year, resulting in unfavorable year over year comparisons as well as experienced higher stock based compensation expenses from a change in our retirement policy.
Yeah.
Our net loss in Q3 was $17 5 million compared to a net income of $22 8 million over the same period last year.
Adjusted EBITDA in the third quarter was $40 2 million.
Compared to $72 6 million last year.
Moving onto our balance sheet, our cash and cash equivalents were $27 5 million at the end of the quarter as of October 29, we had seven.
$74 5 million of availability on our revolving credit facility.
Our long term debt at the end of Q3 was close to $1 1 billion, reflecting an increase of $209 million from the same period last year.
And our leverage ratio of six six packs as measured by net debt relative to credit facility adjusted EBITDA on a trailing 12 month basis.
The majority of this increase in borrowings was driven by higher import freight costs that we've absorbed on accumulative basis over the past year.
Our inventory at the end of the third quarter was nearly flat year over year and lower than we anticipated on our last earnings call. We continue to manage our inventory receipts in line with current business trends.
The plans that we've previously outlined to lower inventory receipts in the back half remain on track.
You'll recall on last quarter's call, we indicated that during the back half of fiscal 2023, we would generate a significant amount of cash flow.
With a particular emphasis on fourth quarter.
We still expect the fourth quarter to be cash flow generative, but not to the extent we previously expected.
We previously indicated we expected net debt to be in the low to mid 800 million range. We now anticipate around mid 900 million for our year end net debt.
<unk> half of the increase is due to lower sales in the back half while the majority of the remaining increase is related to the timing of inventory receipts.
This timing impact will not positively impact Q1 of fiscal 2024, instead of fiscal 2023 as previously expected.
Okay.
We have also narrowed our capital spending plans to a range of $65 million to $70 million for fiscal year 2023.
The total number of store projects remains unchanged for fiscal 2023 through.
Through the end of the third quarter, we completed 30 projects with another four planned for the fourth quarter.
Consistent with our intense focus on capital allocation, we will continue to assess the macro environment and adjust our capital spending in fiscal 2024 accordingly.
Overall, we remain committed to enhancing the in store experience and our store refresh program remains a key part of this growth strategy.
As Wayne mentioned, we've carefully made a decision to pause our dividend at this time to focus on strengthening the balance sheet and improving liquidity.
I also wanted to clarify that the cash impact from the pause in our dividend is incremental to the $200 million of planned cost reduction.
These steps were taken to streamline our operations are intended to both respond to a rapidly evolving consumer backdrop and to offset the wide range of cost pressures, we have sped up taking shape for several years now.
To recap we are focused on cash generation and are positioning our business for significantly improved cash flow outlook in fiscal 2024.
It's also clear that consumers are being more selective and demanding more value in the current economic environment, which was defined by continued uncertainty and by a noticeable pullback in discretionary spending.
These challenges provide us with a fresh opportunity to reset the bar through cost optimization and to better position ourselves for growth once demand and economic conditions begin to normalize.
With that we'd be happy to take your questions operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And the first question will be from William Reuter with Bank of America. Please go ahead.
Hi.
Good afternoon.
In terms of your savings are the $200 million program that you expect to achieve by early fiscal year 2025, do you have a sense for what you may be able to achieve during fiscal year 'twenty four at this point.
Yes, we are.
Putting out specific numbers, but I would suspect it would be.
You know very substantive I would help you know more of the house I mean, we already have a lot of runway on the supply chain savings as spot rates are normalizing in particular, that's a very very big number but.
But you know as we go forward in future calls, we're going to try to provide a little bit more guidance in terms of the cadence of this but we are actually starting to incur some savings on all the three core work streams.
Some will take longer than others, but I think supply chain is one that can be most immediately realized and also theyre. Just warn you that first we are going to see the cash benefit of these.
And then we're going to see the P&L benefit because some of these things such as ocean freight.
Cogs in particular, those two items worked their way through your inventory. So there can be a six month lag before sometimes with a cash benefit to the times of the P&L benefit.
Scott Yes.
To reiterate what Wade said, there, particularly at the end, but we do expect to see this impact on a cash basis first and more significantly than on an EBITDA basis in fiscal 2024, because with both osha.
Oh sure and those product cost savings, which is a good chunk of it.
That's 200 million, that's going to need to roll through the balance sheet and oftentimes those cost takes six months or more.
From an EBITDA perspective.
Great that makes sense and then just a second question for me it sounds like it's the more discretionary I assume higher ticket items, which may be experiencing greater softness I guess is that the case and are are you seeing divergent trends between arts and crafts versus your core selling products.
Yeah, I'll say, a few things and maybe Christian build on it.
I think it's what we see is one is in kind of the technology sector I think some of what we see there is.
I don't think it is a factor as much of a discretionary spend is the fact that there was just so many so much. So many sales during the pandemic. So you had a bit of saturation on the core products.
That will eventually work its way through but I think where we're seeing kind of the tightening is actually really in our seasonal product not the basics. So much but it's tough you know in particular it was the fall decor.
We have a strong halloween, but to follow the core where people chose not to spend the money to decorate as well as some of the other seasonal floral items that go with that but on the core basics, we're seeing actually pretty strong steady demand.
Yes, I would agree wait in highway and its Chris.
One of the things that we're seeing as our core customer is it's really strong and strengthening especially.
More advanced sewer the more advanced crafter on both sides of the house so.
We're seeing some very good underlying trends in a number of our categories both in craft and selling.
It's just that we're also at the same time dealing with some headwinds from those pandemic boosted categories over the past couple of years and craft technology.
And then more cotton related fabrics, which were the two categories that really have the biggest boost over 2020, 2021 calendar.
As we sit here I read on the U.
As we look at the fall decor appears that people are less inclined to spend money there, but on a holiday sales there I think a bit of that when you're talking about that fear of missing out where they were waiting a little bit longer than last year looking for deals versus last year people were afraid there wouldn't be anything.
To buy because of supply chain and I think thats.
Part of why we're saying that our most recent read here is showing some pretty good signs of traction.
Perfect very helpful. Thank you very much.
The next question will be from Paul <unk> from Barclays. Please go ahead.
Hey, everybody. Thanks for taking my question just a.
A quick clarification on the $200 million of cost savings I think you said some of this is from the excess import freight costs that was already recognized as one is that correct.
So.
So Paul it's Scott, Yes, I mean, a good chunk of the $200 million is gonna be from reduced ocean freight, but we haven't really recognized that we're just going to see the first P&L benefit here in Q4 around $15 million to $20 million. It was ocean freight was still a headwind from a P&L perspective in Q3.
So recall a lot of these savings will eliminate hum.
Eliminate our add back.
Real cash savings that elimination of add back, which we're going to phase out next year.
And then you know how far below what we've called normalized will remain to be seen as we get through it.
Again, we're pretty encouraged by the current spot markets out there.
And some of the other signs but.
Not everything will be in the adjusted EBITDA component.
Okay, Thanks and theirs.
Secondly, can you just comment maybe on the promotional environment, you're seeing has it.
Yeah.
Become deeper following black Friday events, and how is that kind of the rest of the holiday season, and what are you expecting that to look like into next year. Thanks.
Sure Paul its Chris.
The promotional environment in many ways is still very rational environment, though we've talked about I would say the one area being the exception I would say from both us and competitors. Since then some of the seasonal categories.
He referenced so wherever that was you know fall product in Q3 or some holiday product here in Q4.
That's that's been where we've chosen to.
To be competitive and aggressive in ensuring we went in a day, but.
But I would say on the balance of our business, which again most of our business is basic versus being seasonal still pretty rational.
Thanks Best of luck.
Yes, I just would add in our media competitors space last year.
It was hard to get product in one of our competitors was very thin product came in a little bit later.
This year I think everybody has had a lot of product in stock.
And so I think it's been an environment, where you know, there's there's plenty to buy out there.
A lot more than there was a year ago.
Thank you and the next question will come from Laura Champine with loop capital. Please go ahead.
Hey, Thanks for taking my question on the 200 million in cost savings that you've targeted.
How much of that are you expecting to come from you.
From macro things such as the spot rate, improving et cetera, and how much of it do you need to drive internally with your own execution.
I'd, probably if I had to just kind of swag it I'd probably say about.
30% to 40% is kind of macro.
These are those spot markets moving it doesn't mean, it's going to hand, it to you. So there's still a lot of work.
And then you know on the Cogs side right why he's got input costs and other things moving there's a lot of work to do there to open up the bidding sources, but I'd, probably you might have your own math, but I probably would say.
40%, you know kind of macro 60%.
<unk>.
Heavier lifting in that.
There are I would agree with Scott Scott I would agree with the 40%.
A big chunk of this is going to come from the product cost side, which is a lot of individual negotiations and discussions as well as just attacking our cost structure overall.
And is it fair to say that those cost cuts at this point you don't expect those to lead to lower them.
Pricing.
Although we are separating the two I think right now we feel that we've been.
We're pretty competitive out there in terms of our offers and we make adjustments where need be but I don't I don't feel right now that that.
But we feel that we're we're not competitive.
So I really kind of separating them from being we have incurred over the past two years on an annualized basis, you know over $200 million of incremental cost.
If you add it up and now.
At least relative to our business all the kind of core underpinnings, all the input and feedstocks are moving in a deflationary manner and so.
You know we're gonna we're gonna go claw back.
Understood. Thank you.
The next question will come from Cristina Fernandez from Telsey Advisory Group. Please go ahead.
Good afternoon, and thank you for taking my question I wanted to ask on the on the $200 million are there any savings related to stores that the key share plan to open doors or take on.
We modeled projects or any changes in labor as it relates to store base.
Yes, so two things and Scott can go into more detail.
We are going to have a capital and working capital cash savings apart from the 200 over and beyond as well as the dividend over and beyond so the 200 is a component of the total cash that will be driving we are going to adjust the number of.
You know stores and realize we do although we're not in terms of the engine.
In all four.
For example.
I would say as you know there are some we said everything's on the table, but one of the things that is very sacred to us is making sure. They had great in store experience. So we are not going to do anything on our store labor front. It's.
It's been a compromise where we are right now which is kind of actually in some of the rarefied air for that customer service metrics doesn't mean, there might be not be some opportunity there, but that's that's.
That's something that we're going to protect at all costs.
Hi, Christina Scott I would just reiterate a wave point.
Part of our initiatives looking at how do we optimize store labor without sacrificing our in store experience that could be.
Reducing that could also mean increasing to drive incremental top line. So we will be taking a look at all of that.
And then my second question is in relation to the debt balance so.
I understand your point that that well where sales.
They'll be up and the timing of the inventory you won't get to that eight to 850.
<unk> target, but when do you think you can get there and do you have any target you can share as far as reducing debt in the next 12 months.
A few months.
Yes, so we will provide more color on fiscal 2024 on our next call, but like I said, we do plan to end the year around the mid 900 and with the cash generation that we're planning from the focus simplify grow from the working capital initiatives and our capital.
Capital expenditures just to name a few we do expect to pay down debt.
In fiscal 2024, but not ready to give more color on exactly how much but I do expect it to come down in fiscal 2024.
Okay. Thank you and one last one what would it take to reinstate the dividend.
I think part of what Dave is just a little bit more visibility on where the world is going right. When you look at this.
The pace of fed increases of rates about the fastest in 30 or 40 years. When you look at the inflation, which I believe is turning.
As the warmest turn for our inputs. It's also I think turning for the consumer.
I, just think a little bit of time to just make sure we understand where the world is going I mean, we didn't take it lightly but on the other hand.
We actually want to be ahead of it and drive cash.
Leslie.
Just to make sure that we can weather any storm if in fact, there is a storm.
But theres a lot of uncertainty out in the World I actually you have said this many times I'll say it again, the worst thing for our business, the stagflation, which I think relative to our business, that's where we then start to last year.
They get a recession over saturation because.
Our consumer being squeezed and inflation from all angles.
You know it is it is a much tougher picture.
Then having inflation down and have some compression on the growth so.
Not that that's recession as you know.
The fact of certainty either but.
But I think we just want to make sure that we're doing everything possible to strengthen the balance sheet generate as much cash as we can.
Also invest in the core initiatives, we talked a little about the blue oceans.
We've got an incredible opportunity there.
Our omni business is actually very very strong and you know getting the underpinning engine here.
Running is going to open up a lot of opportunity our core customer proposition is pretty strong too and it will be at the first quarter cycling.
What was.
Really tough two year comp so I think we'll start to gain some momentum there too.
But we just want to make sure we don't get put into a position where again with rising rates inflation consumer squeeze everything where we don't have room to invest in the things that are going to make us great longer term as well.
So I don't know if that answered your question, but I think it's just I think it's just over the next year just to see where the macro environment unfolds.
But we're gonna try that makes a lot of the worst and hope for the last year.
Okay. Thank you and good luck this holiday season.
Thank you.
And once again, if you have a question. Please press Star then one.
Next question will be from Zohar asked me with Beach point capital. Please go ahead.
Hi, Thanks for taking my question.
First.
Do you guys have any sense of how your market share is trending versus your peers.
We have several ways, we triangulate as you know this is a very fragmented industries, there's no clear read.
From everything we can gather.
We've held our own across the board.
Kind of everywhere with a few core categories. We think we've actually picked up some meaningful share now kind of comment on what those are but but.
But we're we're pretty certain that we haven't given anything up.
Okay.
And in terms of the inventory.
Do you have a sense for like how do you feel about your current inventory levels do you guys feel that there will be any need to sort of.
Go deeper into promotions to.
Reduce inventory and give us that.
But if you're in the same situation as your competitors back.
Alright, Chris so from an inventory standpoint, we felt we feel good about our quality.
Some of the actions that we took in terms of moving up our black Friday event to start a little bit earlier than it did last year, we're happy with those results and happy with the sell throughs were seeing in our holiday product, which is really that's what's maybe the risk opportunity for the quarter, but we feel good about.
Our current position.
And from a clearance on our basic standpoint, where its clean as we were in Q3 and continue to see that being the case for the Ngos get that level of these quota in Q3 was about 5% of earmarks for that it's about the same now that is pretty much.
You know for this business.
As long as we've ever been so we're in very good stead.
And do you feel like your main competitor there and it's in my position or might they push more on promotion.
I'm, sorry, I think my competitors push more on promotions.
Well I need to clean inventory position or do you think that they might get more aggressive.
Yes, I think that.
We see we see competitors being aggressive in similar categories with us.
And you know some competitors, it's a larger percentage of their business than it is of ours.
So.
I think for US we feel good about the actions, we've taken and the quality of the inventory.
I think again, where we've seen any more of that aggressiveness is a rational place to be whereas last year. There was a lot of scarcity of product. This year Theres a lot more of that seasonal holiday products. So you know everybody wants to move that but again the vast majority of our product the basics of day in day out.
We're not seeing that.
And lastly, any additional color you guys can fight on how like the Christmas season is progressing and how its seasonal and <unk>.
You have trended through black Friday and through now.
Sure.
Hey.
The month I think started hard for a lot of folks in retail you know if I look across the spectrum and you saw a number of companies pull their black Friday events forward.
Starting earlier, we certainly had a competitor do that we did as well.
And we've seen the customer respond to those to those promotions, whether it was a black Friday or cyber Monday, and so far the momentum has been similar in the month of December .
Thank you and our next question will be from David Lance from Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking our questions I was just curious if you could talk through some of the gross margin buckets in the quarter outside of the 145 basis point excess freight headwind.
Yes. So if you if you hi, David Scott If you look at Q3 gross margin on an adjusted basis, we were down 80 bps year over year, if I break that down from a POS standpoint, we were up 10 bps is there AUR was slightly higher than our AUC.
Clearance reserves, though where we are.
Unfavorable 40 bps.
From a domestic freight side, we have increased carrier fuel rates, which were about unfavorable 30 bps and then increase split ships were unfavorable about 15 bps.
Got it that's helpful and then with the cost savings efforts.
Curious, how youre thinking about SG&A in Q4 relative to prior expectations for being kind of flat in the second half.
Yes, I mean, a lot of the focus simplified grow impacts SG&A will be more in fiscal 'twenty for the Q4.
I do I expect Q4 SG&A would be.
A little bit.
In line with how Q3 progressed.
Q3 was up year over year, as we mentioned with.
The new distribution center.
The other pieces, we were lapping some favorable incentive comp and then we haven't changed our stock base.
Compensation due to a change in the retirement policy.
Overall.
Comp to be slightly favorable in Q4 versus year ago, because we are as we lap some of the some of the items there.
Got it thanks.
And our next question is from John Nussbaum with 400 capital. Please go ahead.
Hi, Thanks for taking all the questions with regard to the $200 million in cost savings did you say already what the cost or the expense of achieving the $200 million will be over the 18 month period.
Yeah.
So hi, John It's Scott.
So at this point, we're not planning or anticipating restructuring charges or anything like that there could be some as we get into it but nothing that we've identified at this point, but you know as we've said as we go through the program will keep you updated if we do incur some more well obviously, let you know.
Thank you very much.
Okay.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
I'd just like to thank all of you for your generous listening in dialing in today.
We work hard every day about half of all of our constituents and we'll keep doing it and I think we've got a great opportunity here and it's ours to go get and.
Thereafter, thank you.
And thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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