Q4 2023 Joann Inc Earnings Call

March 23, 2023

Good afternoon, and welcome to the Joanna fourth quarter fiscal 2023 earnings conference call.

All participants will be in listen only mode.

Could you just please signal conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions.

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Please note this event is being recorded.

I'll now like to turn the conference Dan Callahan with ICR. Please go ahead.

Thank you and good afternoon.

I'd like to remind everyone that the comments made today may include forward looking statements, which are subject to significant risks and uncertainties that could cause the companys actual results.

To differ materially from management's current expectations.

Statements speak as of today and the company undertakes no obligation to update or revise any forward looking statements to reflect subsequent events, new information or future circumstances.

Please review the cautionary statements and risk factors contained in the company's earnings press release.

<unk> posted on the company's Investor Relations website.

And our recent filings with the SEC.

During the call today management may refer to certain non-GAAP financial measures.

Conciliation 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 <unk> website at investors Dr. Joanne Dot com.

On the call today from Julien, our Wade Miquelon, President and Chief Executive Officer, and Scott <unk> Chief Financial Officer.

During the question and answer portion of the call will also be joined by Chris. The two yeah, Joanne Executive Vice President and Chief customer Officer, and Rob will Julian Executive Vice President and Chief merchant and.

I will now turn the call over to Wade for his prepared comments.

Thank you good afternoon, and welcome to Julien on fourth quarter and full year fiscal 2023 earnings call.

Fiscal 2023 was a challenging year for Joanne and many other companies around the world and Joanna It's a series of challenges that impacted our fiscal 'twenty, three performance, including comparisons against pandemic and stimulus to comps and uncertain macroeconomic environment unprecedented inflation.

July chain disruptions, which were particularly.

Strongly in terms of increased ocean freight.

However in the face of these challenges we had sequential improvement in our top line fourth quarter results and are making progress with our ongoing efforts to enhance our cash flow reduce multiple sources of cost and implement our strategic blue Ocean initiatives based on these efforts. We believe Joanne is well positioned for fiscal 2024.

Before getting into our specific fiscal year, 2023, and fourth quarter results and a more detailed discussion of how we've set ourselves up for fiscal year 2024, I want to take a moment to recognize our team members, but just how we were able to weather the challenges in fiscal year, 2023% is attributable to the team members who work at Joanne I wanted to send a heartfelt thanks to our entire Joe.

N team, including our store support center, our distribution centers are Amit Goldman Center as well as our 20000 team members and our approximately 830 stores for their unwavering dedication to providing service to our customers in what remains a challenging environment.

Commitment to quality of our team members was recognized by others as well, including Forbes and Newsweek, which named Joanne as one of America's best large employers and greatest workplaces for diversity, respectively. This is a testament to how our team remains flexible and navigate it is very difficult landscape with agility, while staying true to our mission to inspire the creative spirit and each of us every.

One fine they're having in place through superior assortment presentation and service I could not be prouder of all their hard work.

These efforts helped to drive a strong finish to our fourth quarter. After a slow start in the quarter. We saw topline sales pick up post black Friday, leading to a sequential improvement in our sales and a positive January comp for the full fourth quarter. We delivered net sales of $693 million in our fourth quarter. Adjusted EBITDA was $48 6 million or 7% of net sales.

The strengthening we saw in our comparable sales similar to pre pandemic trends strong selling dragon periods gives us confidence as we head into fiscal 2024.

Our category performance in the quarter was mixed but we did see healthy performance in our core selling and craft businesses. We continue to see the craft technology business is our primary headwind to positive comparable sales and while our data indicates that we are outperforming the industry sales pressure was significant in the quarter and we expect it will continue to be a headwind into fiscal 2024.

On the positive side, our core fabric sewing and craft category strengthened throughout the quarter and also continue to show positive momentum into fiscal year 2024.

Our largest selling craft categories come back as critical as it indicates that our core customer is re engaged in this space. After a brief pullback following the increased spending and engagement during the early pandemic stimulus fueled timeframe.

In the month of January every measurable tier known customer database with positive comp, including reactivated customers up over 20%.

We're also seeing the strong engagement with our core enthusiasts and it continues into early fiscal year 2024.

Turning to our full year fiscal 'twenty industry results, we registered net sales of $2 2 billion.

Which was only slightly below our prepaid debit net sales in fiscal 2020 as I mentioned, we faced many challenges in fiscal year 2023, including significant supply chain disruptions inflationary pressure and tariffs, resulting an increase incremental cost of over $200 million.

We saw ocean freight cost pressures began to abate in late fiscal 2023 and anticipate this trend will continue in fiscal 2024, which will be a key driver to our expected significant year over year improvement in cash generation.

Despite the headwinds we faced our full year adjusted gross margin remained at 170 basis points above fiscal 2020, we delivered adjusted EBITDA for the year of $98 5 million or four 4% of net sales.

I was wanted to build on our fourth quarter improvements into fiscal year 'twenty 'twenty. Four we are focused on strengthening our balance sheet and continuing to deliver a great customer experience. This includes taking action to improve cash generation, we've already engaged in multiple activities to enhance our cash position as you likely saw in our press release and form 8-K filing earlier. This month, we successfully secured a 100 million.

First and last out credit agreement, providing increased flexibility and access to capital to drive the business through the continued macro macroeconomic uncertainty. We believe this new credit agreement as a practice tool to keep Joanne and a sound financial position and successfully operate the business and invest in our strategic growth initiatives in fiscal 2024.

Additionally, in fiscal 2023 we launched our focus simplify and grow initiative as part of this initiative, we are targeting approximately $200 million in annual cost savings in three general buckets, including a $100 million in supply chain cost approximately $6 million and our cost of goods sold and another approximate $40 million and SG&A costs and these efforts are well underway.

And we're already seeing cost headwinds become tailwind through our focus simplify and grow initiatives, most notably through supply chain cost savings through decreased international and domestic freight costs.

Also been pulling back inflationary price increases and our cost of goods and these negotiations are ongoing and we believe there'll be very positive feedback from cash flow in 2024 positively impact EBITDA in early fiscal year 2025.

Finally through efforts through our focus simplify and grow initiatives.

To identify savings on SG&A related costs that are underway as well and they are yielding positive results.

Leaving no stone unturned as we move to improve our cost leverage and become a leaner and more agile business with these efforts, we anticipate seeing more of a cash benefit of these cost reductions in fiscal 2024 with full annualized adjusted EBITDA impact in fiscal 2025.

These cash and EBITDA benefits are independent of growth, but we continue to focus on how to stabilize and grow our top line as well, let's start with a focus on our customers and early fiscal 2023 are known database customers increase their engagement throughout the year and represented nearly 70% of our business. During this past year, we reactivated nearly 2 million customers, who haven't shopped over the previous year.

And we added 3 million new customers toward database as well.

We're pleased with the continued momentum we are seeing in our customer file as our base continues to become increasingly digitally active and diverse we're especially encouraged by the traction we're gaining with new younger customers.

We were recently highlighted by AD age as a brand gaining as a brand is gaining popularity of the Genesee conduct a quarterly their pulse surveys U S. Consumer ages 18 to 24 in the fourth quarter Survey showed chileans ranking increased 10 three points over the third quarter and one of only three retailers to make the top 20 list.

We're seeing this translate into our customer base, where the average age of our customer continues to decline from where we were privately pandemic sales to customers under the age of 35, increasing by 19%.

Even with this customer momentum, we recognized consumer and macroeconomic ex macroeconomic environments remain uncertain and many customers given the inflationary pressure to continue to see our managing how frequently and how much. They spend that said, we do see a path to growth in fiscal 'twenty 'twenty four as we begin to realize incremental revenue through our strategic and bluish initiatives as well as seeing growth in our e-commerce.

As a business.

This growth includes <unk>, which we believe has the ability to revolutionize selling industry.

To remind everybody is it 50 50 joint venture with senior banking staff. The business successfully launched during fashion week in New York in early February 2023. This is a truly revolutionary product and platform for selling enthusiasts, which aims to take the most painful part of selling laying out tracing cutting patterns and turn it into the most enjoyable part of the process.

The patented <unk> system uses an AI platform integrated with the precise digital projector system and mobile App.

To enable easy access to multiple design and allows us to easily adjust and customize patents.

Spending hours on the step of the process. So it can literally moved from ideation to selling in minutes.

We believe that it will be a game changer for selling enthusiasts and as I mentioned on our previous call. They don't receive one of the highest purchase intent scores of our external design partner has ever seen and we have seen a very high level of excitement from the public.

Since launching in February is already gaining traction with customers pre sell units start arriving in customers' homes in mid March and we're already seeing reorders from the dealer network. The official Joanne in store launch set for Saturday April one.

Another blue Ocean initiatives, we're working on is our wholesale business and we see tremendous opportunity with this initiative for <unk> to be wholesale customers. In January 2023, we launched the commercial web site for our wholesale business inspiration direct dot com and less than three months, we registered 800 customers on site and started shipping both domestic and international orders, while it's still early we believe.

Our wholesale initiative is another important step with the potential to drive incremental sales.

Additionally, we're excited about our recently announced partnership with the World renowned American designers, Mark Badgley, and James Myszka Badgley Mischka as a brand that isn't Shannon the fashion world for the past two decades with dreamlike beauty and luxury is designed in early April our customers will be able to purchase fabrics trims ribbon and even jewelry captures as quality and <unk>.

At Joanne this partnership adds a new product assortment targeted at our younger customers reserve represents a new way to leverage strategic collaborations.

As we move through fiscal 'twenty 'twenty, four will be rolling out additional partnerships to strengthen our position.

The nation category leader and selling.

We're also very pleased at the performance of our E. Commerce business, we saw increased traffic and recorded our highest net promoter score to date in the fourth quarter as the investments we've made our digital business continue to show results.

Just like the overall business, we saw positive sales growth in our core selling craft categories across the quarter as channel shopping patterns and established a new normal in the post pandemic. Our ecommerce penetration has held steady year over year at 14%. This is despite the headwinds in craft technology, a business that is highly penetrated online.

With all of this in mind, we recognize there's still work to be done and we're still operating in an uncertain economic environment.

<unk> said as we level set where the new post pandemic normalizes I believe the actions we've taken will allow us to build on our fourth quarter results and position us for success moving forward.

And now with that I'll turn it over to our CFO Scott together to give a more detailed rundown of our financial results and afford snapshot into the drivers of our anticipated free cash flow improvement in fiscal 2004 before wrapping up with answering your questions.

Thank you.

As we've discussed in his remarks, we saw positive improvement in our fourth quarter fiscal 2023 results and we see these trends carrying over into the first quarter of fiscal 2024.

When combined with our ongoing efforts to strengthen our balance sheet enhanced cash flow reduce cost and invest in our strategic initiatives. We believe that we are well positioned as we head into fiscal 2024.

Through these efforts, we expect that over the course of the year, we will be able to meaningfully improve cash flow stabilize our top line and begin expanding EBIT towards historical levels.

With that in mind today, I will provide a deeper recap of our fourth quarter results review, our full fiscal year 2023 results and provide some additional color on what we see for fiscal year 2024.

In the fourth quarter net sales totaled $692 8 million a decline of five 8% compared to last year.

Total comparable sales decreasing five 9%.

Sales early in the fourth quarter were slower than we anticipated due to some cycling of last year's spear missing out our comparable sales improved sequentially post Black Friday and as Wayne mentioned, we were pleased with the positive January call.

Relative to pre pandemic levels in the fourth quarter of fiscal 2020, our total sales were largely flat down four tenths of a point.

We saw the topline strengthen throughout the fourth quarter in our core sewing and craft categories signaling that our core consumer who was so important to our business is re engaging in a meaningful way.

On a GAAP basis, our gross profit in the fourth quarter was $303 7 million a decrease of six 4% from last year and a decrease of seven 5% from pre pandemic levels in fiscal year 2020.

We absorbed $16 7 million of excess import freight costs during the quarter. This figure reflects an $18 6 million decrease to the fourth quarter of fiscal year 2022, as we continued to benefit from improving conditions in the spot market.

After adjusting for excess import freight costs, our gross profit was $324 million.

Yes.

Our fourth quarter merchandising margin was down 170 basis points compared to the same period last year.

Our average unit costs improved on a sequential basis and up four 1% to the prior year period.

Average unit retail slightly increased five tenths of a point relative to the same period last year driven by strategic pricing actions that was partially offset by a deeper and earlier promotional marketplace related to the home and seasonal categories.

Our gross margin on a GAAP basis was 43, 8% in the fourth quarter, a decrease of 30 basis points from last year.

In the fourth quarter, we started to benefit from cycling the extremely high ocean freight cost for the back half of last year.

After adjusting for excess import freight costs adjusted gross margin of 46, 2% represents a decrease of 270 basis points from last year, driven by the 170 basis point decline in our merchandising margin.

55 basis points due to the timing and cycling of capitalized domestic freight costs.

35 basis points, resulting from lower vendor allowances due to our strategic inventory receipt reduction to.

The 30 basis points of higher shrink expenses.

These were partially offset by 20 basis points of improvement through the optimization of our E Commerce shipping promotions.

On a sequential basis the decline in our adjusted gross margin in the fourth quarter was higher compared to the 80 basis point decline in the prior quarter, primarily due to the deeper and earlier promotional environment, we experienced in the fourth quarter.

We saw improvement in product costs during the fourth quarter relative to the third quarter as the cost from the peak of last year's supply chain headwinds began to roll off.

Lower costs related to import freight provided a tailwind in the fourth quarter.

During the fourth quarter, we realized $26 3 million of cash benefit from lower ocean freight rates with.

With the renegotiation of freight contracts in fiscal year 2024, along with our cost savings initiatives. We expect the outlook for average unit cost to continue to improve.

Turning to expenses, our SG&A expenses increased by three 1% from last year.

Many companies, we have been adversely impacted by inflationary pressures on wages and other costs across the business.

With that being said, we were pleased with our ability to manage SG&A expenses. Despite these pressures through actions such as the strategic management of labor hours in our stores and our continued optimization of advertising spend as we shift to more digital channels.

Effectively managing these costs allowed us to support incremental spend associated with our recently opened omni fulfillment center and further fuel our strategic initiatives.

Our net loss in the fourth quarter was $91 1 million, which includes a 95 million of noncash pretax impairment compared to a net income of $13 6 million in the same period last year.

Adjusted EBITDA in the fourth quarter was $48 6 million compared to $88 9 million last year.

Turning to our full year fiscal 2023 net sales decreased by eight 3% to $2 2 billion.

Comparable sales declined eight 1%.

For the year, we absorbed $91 2 million year over year of excess ocean freight and related supply chain cost, which was excluded from our adjusted gross margin and adjusted EBITDA non-GAAP measures.

Year over year, our gross margin rate declined by approximately 330 basis points to 46, 9% in fiscal year 2023 compared to fiscal year 2022.

Adjusted for excess Ocean freight and related supply chain cost gross margin declined by 110 basis points from last year to 51%.

Primarily driven by increased domestic carrier and fuel rates higher shrink expenses and lower vendor allowances due to our strategic inventory receipt reduction.

For the full year fiscal 2023, our net loss was $206 million, which includes $95 million of noncash pre tax impairment.

Compared to net income of $56 7 million last year.

For the full year adjusted EBITDA was $98 5 million.

Moving onto our balance sheet, our cash and cash equivalents were $20 2 million at the end of the fourth quarter.

As of January 28, 2023, we had $87 $2 million of availability on our revolving credit facility, but this is now meaningfully improved with our new flashed out credit facility, which I will touch on shortly.

Also consistent with what we indicated on last quarter's call our face value of debt net of cash at the end of the fourth quarter was $974 million.

This reflects an increase of $198 6 million from the same period last year and a leverage ratio of five nine X as measured by net debt and finance lease obligations relative to credit facility adjusted EBITDA on a trailing 12 month basis.

In terms of inventory our inventory at the end of the fourth quarter was down 11% compared to fiscal 2022 just.

This decline was in line with our expectations and consistent with our plans to strategically lower inventory receipts during the back half.

Additionally, we took the necessary actions in our seasonal assortment to exit the year clean and well positioned for fiscal year 2024.

In fact, our clearance inventory continues to represent less than 5% of total.

Our inventory position has never been as clean and this positions us well to capitalize on our innovation initiatives and the evolving consumer demand environment, as we leverage test read and react capabilities.

As we head into fiscal year 2024, we are seeing the stabilization of our top line we.

We expect our e-commerce business and strategic partnerships to play an important role and provide a buffer to the business in light of the challenging and uncertain macroeconomic environment, our customers continue to face.

Also fiscal year 2024 contains a 50 <unk> FISC.

<unk> week worth approximately $35 million to $40 million to the topline.

As Wade mentioned cash generation is a critical focus in fiscal year 2024.

We have already initiated multiple actions that are supporting the enhancement of our free cash flow position throughout fiscal 2024.

This includes our focus simplify and grow cost reduction initiatives.

Launched in fiscal year, 'twenty, three focus simplify and grow is focused on reducing annual cost by approximately $200 million in three broad categories across all areas of our business, including approximately $100 million of supply chain cost approximately $60 million of product costs and another approximately $40 million of SG&A cost.

Yes.

While we are seeing cost reductions across all of these buckets. The most significant current impact is derived from lower supply chain costs driven by reductions in ocean freight.

It was for most of fiscal year 2023, a significant headwind has become a tailwind for us as we continue to see improving conditions in the spot market.

This positive change.

Combined with ongoing efforts to claw back inflationary increases in our product costs and identify and implement SG&A.

Reductions will provide a growing cash bonus that throughout fiscal year 2024.

Due to the timing of inventory sell through should have mostly annualized adjusted EBIT impact in early fiscal year 2025.

To date, we have identified approximately 75% of the targeted $200 million annual savings.

Additionally, we have taken proactive steps to improve our liquidity.

As Wade mentioned and I referenced earlier last week, we announced we entered into a $100 million first in last out credit facility.

This new credit facility has an incremental facility to our existing ABL and will proactively provide the company additional liquidity as we continue to navigate through macroeconomic uncertainty.

On the closing date, we borrowed the full amount available under the new credit facility to be used as cash on hand, repay a portion of the outstanding amounts under the ABL and covered transaction costs.

In conclusion fiscal year 2023 was certainly challenging like many companies around the world Joanne was impacted by a series of factors that impacted our performance such as pandemic and stimulus fueled comps and uncertain macroeconomic environment unprecedented inflation and continued supply chain does.

<unk>.

However, based on the factors we have discussed today such as the positive momentum we saw in the fourth quarter of fiscal 'twenty, three and carryover into early portion of first quarter fiscal 'twenty for the proactive steps, we've taken to reduce costs and improve liquidity.

As well as our continued investment in our strategic initiatives. We are excited for what's ahead and we believe we are well positioned for fiscal year 2024 and beyond.

With that we'd be happy to take your questions operator.

We will now begin the question and answer session.

To ask a question you May press Star then.

When your telephone keypad.

If you're using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question, please but starting to.

At this time, we will pause momentarily to assemble our roster.

Our first question will come from Peter Keith with Piper Sandler You May now go ahead.

Hi, Thanks, everyone. Good afternoon.

I mentioned in the script.

With the positive comp in January that the trend had continued.

I guess I wanted to clarify does that mean that youre still running positive.

For February and March and anything to call out if that's the case.

Theres been more promotions or anything or is it just better demand trends overall.

We're kind of halfway through the quarter quarter to date, what we're seeing is low single digit negative slightly negative.

<unk> got the craft technology, we probably actually be slightly positive so right in that order recall last year, we started quarter too strong and then we had a huge kind of drop off mid quarter and then we rebound at the end of the quarter, but we still feel good about the underlying business is like I said X craft tech of across the board, we had pretty good broad based strength, yes, that's still sequentially.

Improvement from where we were in Q4.

Okay very good and then just.

Lastly on the inventory, yes, Scott I think if I heard you correctly in that in the script right towards the end you talked about.

$279 million of annualized savings from lower freight if I heard correctly.

Maybe just thinking about the inventory levels is there a way to think about where inventory could end up at year end, maybe from an inventory days or inventory turn perspective.

Hey, Peter Scott.

So the savings, we're expecting promotion freighters worth clarifies probably around $100 million.

Sort of level.

As we go forward.

Inventory was down 11% in Q4.

We continue to see reduction in units.

The reduction in cost there and then the other big pieces with some of the supply chain disruption cleared up our in transit is down.

In a large way as well as we go forward, we're going to continue with the strategic inventory receipt reduction so I expect some working capital benefit from that in fiscal 'twenty four.

And continued sort of clean inventory as we move forward.

And any way just to frame that up for us.

Where inventory will ultimately land by year end is there a targeted level.

Yes.

So a little tough to say.

Sure.

I expect to probably be somewhere around.

Close to flat to slightly down.

Okay. That's all from Q4 that you just reported.

Correct.

Okay.

Alright, Thank you very much.

And some of it will be a function too of where we finally landed with R. R.

Our ocean freight rates and how that flows through negotiation has now but those markets are pretty much returned to where they were pre pandemic.

Okay. Thank you very much guys. Good luck.

Yes.

Okay.

Our next question will come from Laura Champine with loop capital you May now go ahead.

Thanks for taking my question can you comment a little bit about.

How quickly you can make the $200 million of cost improvements and on the likelihood that youll need to raise additional debt to shore up the balance sheet. This year.

Sure Scott.

So yes.

We're having great progress as I said, we're we've identified about 75% of the 200 and that also doesn't take into account some of the working capital opportunities that we have so from a cash flow perspective.

We're going to see a good a good amount of that in fiscal 'twenty four from an EBIT perspective. The majority of that is actually going to come in fiscal 'twenty five that's sort of what we have said all along so I kind of think about it into R&D, because we have that add back of whatever $80 million to $90 million in ocean freight that goes away. This year. So so thats also.

Part of that will flow through the P&L on the adjusted basis, correct and then the product cost savings will need to flow through the P&L, but I will get that cash flow impact this year as we buy those goods and ultimately felt them next year.

Got it so in your view does that alleviate the need for you to raise additional capital this year.

Yes, I think the follow as a proactive measure so I'm not anticipating any additional capital raises.

With the <unk> as you know as you become more efficient and inventory management.

And as our in transit goes down and allows us to be even more efficient we can avail as much of our ABL at one time. So the final really fills that gap so even as we work to Delever this year.

And that just gives us availability that debt.

That we wouldn't otherwise have on inventory.

And just lastly can you give us an estimate of what your interest expense.

It is likely to be on the P&L this year.

Yes, yes.

It's definitely going to be up because one you got to follow piece in there and where rates are trending so I, probably expect it to be up in the.

Around $100 million, which was probably up around $40 million or so.

Got it.

That would assume that we've had that recent raise and maybe one more but we aren't assuming any pullback in the back end of the year, but.

We also have we also have fixed for floating swaps will start getting this benefit in the back half of the year we entered into.

Those are more materially impact us in fiscal 'twenty five.

Got it thank you.

Our next question will come from Joe Feldman with Telsey Advisory Group you May now go ahead.

Yes, hi, good afternoon guys.

With regard to I think you made a statement about customer engagement and reactivating.

I heard you right you said two to 3 million customers and I just wanted to dig in there if you could share a little more.

About how you did that and how you got people back in and how you stimulated them to come back to the store and I'll, let our chief customer officer, Chris handle that one here Hi, John Yeah.

Yes.

We're pretty excited about the trends we're seeing.

Seeing customers Reengage in our core selling our core craft categories and I think we'd mentioned in the.

In his comments young sellers in particular, which is which is really exciting for us.

We've been able to use <unk>.

A number of more sophisticated digital marketing tactics to reach these younger customers.

As we've been able to shift our budgets out of traditional print and into into more digital and CRM over time. So we're seeing the benefits of that being able to to reach more people with less spend.

Got it that's helpful. Thanks, and just maybe.

Thank you as well but.

Are you seeing.

Any trade down within category.

Would reflect the environment like maybe people are re engaging but the re engaging at a lower price point.

Opting for lower quality goods.

So.

We're not seeing trade down.

As we measure the performance of our different categories, we're seeing a very consistent average unit retail in a very consistent average ticket.

Of a purchase.

The it impacted our business last year I would say was a brief dip in frequency.

Versus a dip and how much people spend when they come in and.

And we saw that frequency blip.

Blip begin to turn positive for US later in the quarter and early trends this year are encouraging.

It's Rob I'd just add in there.

Our craft technology business that we referenced saw AUR is down 11%, which did have a negative impact on our AUR in the quarter, but as we look at those core businesses that Chris and waited mentioned with sewing and craft.

The balance of the craft business, we're actually seeing a nice uptick in our AUR is as customers are returning to apparel, selling which is inherently a little bit higher per yard retail.

Got it that's helpful. Thanks, guys. Good luck with this current quarter. Thank.

Thank you.

This concludes our question and answer session.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

Yes.

[music].

Good afternoon, and welcome to the Joanna fourth quarter fiscal 2023 earnings conference call.

All participants will be in listen only mode.

So if you needed to switch Pepsico conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions.

To ask a question you can started one your telephone keypad.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

I'd now like to turn the call to Dan Callahan with ICR. Please go ahead.

Thank you and good afternoon, I'd like to remind everyone that the 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.

Statements speak as of today and the company undertakes no obligation to update or revise any forward looking statements to reflect subsequent events, new information or future circumstances.

Please review the cautionary statements and risk factors contained in the company's earnings press release materials posted on the company's Investor Relations website.

And the recent filings with the SEC.

During the call today management may refer to certain non-GAAP financial measures.

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 <unk> website at investors Dr. Joanne Dot com.

On the call today from Joanne, our Wade Miquelon, President and Chief Executive Officer, and Scott <unk> Chief Financial Officer.

During the question and answer portion of the call will also be joined by Chris The Trulia, Joanne Executive Vice President and Chief customer Officer, and Rob well, Julian Executive Vice President and Chief merchant.

I'll now turn the call over to Wade for his prepared comments.

Thank you good afternoon, and welcome to Julians fourth quarter and full year fiscal 2023 earnings call.

Without a doubt in fiscal 2023 was a challenging year for Joanne and many other companies around the world Joanne We made a series of challenges that impacted our fiscal 2023 performance, including comparisons against the pandemic is analytical comps and uncertain macroeconomic environment unprecedented inflation.

Supply chain disruptions, which were particularly felt strongly in terms of increased ocean freight.

Before getting into our specific fiscal year 2023 in the fourth quarter results and a more detailed discussion of how we set ourselves up for fiscal year 'twenty 'twenty four I want take a moment to recognize our team members, which is how we were able to weather the challenges in fiscal year 2023 presented is attributable to the team members, who work at Joanne and I want to set a heartfelt thanks to our entire Joe.

<unk> team, including our store support center, our distribution centers are ominous development Center is 120000 team members and our approximately 830 stores for their unwavering dedication to providing service to our customers in what remains a challenging environment.

Commitment to quality of our team members was recognized by others as well, including forms and Newsweek, which named Joanne as one of America's best large employers and greatest workplaces for diversity, respectively. This is a testament to how our team remained flexible and navigate it is very difficult landscape with agility, while staying true to our mission to inspire the creative spirit and each of us in every.

Fine Theyre, having in place through superior assortment presentation and service I cannot be prouder of all their hard work.

These efforts helped to drive a strong finish to our fourth quarter. After a slow start in the quarter. We saw topline sales pick up post black Friday, leading to a sequential improvement in our sales and a pause in January comp for the full fourth quarter. We delivered net sales of $693 million in our fourth quarter. Adjusted EBITDA was $48 6 million or 7% of net sales.

The strengthening we saw in our comparable sales similar to pre pandemic trends with strong selling during our peak periods gives us confidence as we head into fiscal 2024.

Our category performance in the quarter was mixed but we did see healthy performance in our core selling and craft businesses. We continue to see the craft technology business as our primary headwind and positive comparable sales and while our data indicate that we are outperforming the industry sales pressure was significant in the quarter and we expect it will continue to be a headwind in the fiscal 2024.

On the positive side, our core fabrics selling of craft category strengthened throughout the quarter and also continue to show positive momentum into fiscal year 2024.

Our largest selling craft categories come back as critical as it indicates that our core customer is reengagement space. After a brief pullback following the increased spending and engagement during the early pandemic stimulus fueled timeframe in fact in the month of January every measurable tier known customer database was positive comp, including reactivated customers up over 20.

Percent, we're also seeing strong engagement with our core enthusiasts and it continues into early fiscal year 2024.

Turning to our full year fiscal 'twenty three results, we registered net sales of $2 2 billion, which.

Which was only slightly below our pre pandemic net sales in fiscal 2020 as I mentioned, we faced many challenges in fiscal year 2023, including significant supply chain disruptions inflationary pressure and tariffs, resulting an increase incremental cost of over $200 million.

We saw ocean freight cost pressures begin to abate in late fiscal 2023 and anticipate this trend will continue in fiscal 2024, which will be a key driver to our expected significant year over year improvement in cash generation.

Despite the headwinds we faced our full year adjusted gross margin remained at 170 basis points above fiscal 2020, we delivered adjusted EBITDA for the year of $98 5 million or four 4% of net sales.

As we look to build on our fourth quarter improvements in fiscal year 2020 forward. We are focused on strengthening our balance sheet and continuing to deliver a great customer experience. This includes taking actions to improve cash generation. We are already engaged in multiple activities to enhance our cash position as you likely saw in our press release and form 8-K filing earlier. This month successfully secured 100 million.

Firsthand last out credit agreement, providing increased flexibility and access to capital to drive the business.

Macro macroeconomic uncertainty we believe this new credit agreement is impregnate towards keep Joanne and a sound financial position and successfully operate the business and invest our strategic growth initiatives fiscal 'twenty 'twenty four.

Additionally, in fiscal 'twenty 'twenty traded launch our focus simplify and grow initiative as part of this initiative, we are targeting approximately $200 million of annual cost savings in three general buckets, including a $100 million of supply chain cost approximately $6 million and our cost of goods sold and another approximate $40 million and SG&A costs. These efforts are well underway.

And we're already seeing cost headwinds become tailwind to our focus simplify and grow initiatives, most notably through supply chain cost savings through decreased international and domestic freight costs.

Also been pulling back of inflationary price increases and our cost of goods and these negotiations are ongoing and we believe there'll be the very positive feedback from cash flow in 2024 positively impact EBITDA in early fiscal year 2025.

Finally through efforts through our focus simplify and grow initiatives.

<unk> identified savings on SG&A related costs that are underway as well and they are yielding positive results.

No stone unturned as we move to improve our cost leverage and become a leaner and more agile business through these efforts, we anticipate seeing more of a cash benefit of these cost reductions in fiscal 2024 with the full annualized adjusted EBITDA impact in fiscal 2025.

And we added 3 million new customers to our database as well we're very pleased with continued momentum we are seeing in our customer file as our base continues to become increasingly digitally active and diverse.

We're especially encouraged by the traction we're gaining with new younger customers.

We were recently highlighted by AD age as a brand gaining as a brand is gaining popularity of the Gen Z conducted quarterly their pulse surveys U S. Consumer ages 18 to 24 in the fourth quarter Survey showed chileans ranking increased 10 three points over the third quarter and one of only three retailers to make the top 20 list.

We're seeing this translate into our customer base with the average age of our customer continues to decline from where we were prior to the pandemic sales to customers under the age of 35, increasing by 19%.

Even with this customer momentum, we recognized consumer and macroeconomic ex macroeconomic environments remain uncertain and many customers given the inflationary pressures continue to see our managing how frequently and how much. They spent that said, we do see a path to growth in fiscal 'twenty 'twenty four as we begin to realize incremental revenue through our strategic and bluish initiatives as well as seeing growth in our E comm.

<unk> business.

This growth includes <unk>, which we believe has the ability to revolutionize selling industry denotes remind everybody is a 50 50 joint venture with senior Viking Fab the business successfully launched during fashion week in New York in early February 2023. This is a truly revolutionary product and platform for selling enthusiasm, which aims to take the most painful part of selling laying out tracing cutting pattern.

And turn it into the most enjoyable part of the process. The patented assistant uses an AI platform integrated with the precise digital projector system and mobile app to.

To enable easy access to multiple design and allows us to easily adjust and customize patents.

Spending hours on the step of the process. So it can literally moved from ideation to selling in minutes.

We believe that it will be a game changer for selling enthusiasts as I mentioned on our previous call didn't receive one of the highest purchase intent scores of our external design partner has ever seen and we have seen a very high level of excitement from the public.

Since launching in February is already gaining traction with customers presale units start arriving in customers' homes in mid March and we're already seeing reorders in the dealer network efficient Joanne in store launch new set for Saturday April one.

Another blue Ocean initiatives, we're working on is our wholesale business and we see tremendous opportunity with this initiative for <unk> wholesale customers in January 2023, we launched the commercial web site for our wholesale business inspiration direct dot com and less than three months. We've registered 800 customers on the site and started shipping both domestic and international orders, while still early we believe.

Our wholesale initiatives is another important step with the potential to drive incremental sales.

Additionally, we're excited about our recently announced partnership with the World renowned American designers, Mark Badgley, and James Myszka Badgley, Mischka and a brand that is in Shannon the fashion world for the past two decades with dreamlike beauty and luxurious designs in early April our customers will be able to purchase fabrics trims ribbon and even jewelry that captures as quality.

<unk> at Joanne This partnership adds a new product assortment targeted at our younger customers reserve.

<unk> represents a new way to leverage strategic collaborations is.

As move through fiscal 'twenty 'twenty, four will be rolling out additional partnerships to strengthen our position.

As the nations category leader and selling.

We're also very pleased with performance of our E. Commerce business, we saw increased traffic and recorded our highest net promoter score to date in the fourth quarter as the investments we've made in our digital business continue to show results.

Much like the overall business, we saw positive sales growth in our core selling craft categories across the quarter as channel shopping patterns and established a new normal in the post pandemic. Our ecommerce penetration has held steady year over year at 14% and this is despite the headwinds in craft technology business that is highly penetrated online.

With all of this in mind, we recognize there's still work to be done and we're still operating in an uncertain economic environment that said as we level set where the new post pandemic normalizes I believe the actions we've taken will allow us to build on fourth quarter results and positioned us for success moving forward.

And now with that I'll turn it over to our CFO Scott together to give a more detailed rundown of our financial results and our forward snapshot into the drivers of our anticipated free cash flow improvement in fiscal 'twenty 'twenty, four and before wrapping up with answering your questions.

Thank you.

As we've discussed in his remarks, we saw positive improvement in our fourth quarter fiscal 2023 results and we see these trends carrying over into the first quarter of fiscal 2024.

Through these efforts, we expect that over the course of the year, we will be able to meaningfully improve cash flow stabilize our top line.

Expanding EBIT towards historical levels.

With that in mind today, I'll provide a deeper recap of our fourth quarter results review, our full fiscal year 2023 results and provide some additional color on what we see for fiscal year 2024.

In the fourth quarter net sales totaled $692 8 million a decline of five 8% compared to last year total comparable sales decreasing five 9%.

While sales early in the fourth quarter were slower than we anticipated due to some cycling of last year's fear of missing out our comparable sales improved sequentially post Black Friday and as we mentioned we were pleased with the positive January comp.

Relative to pre pandemic levels of the fourth quarter of fiscal 2020, our total sales were largely flat down four tenths of a point.