Q1 2023 J.Jill Inc. Earnings Call
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Good morning, My name is jail and that will be your conference operator today at this time I would like to welcome everyone to the J Jill first quarter 2023 earnings conference call on today's call are Claire Spofford, President and Chief Executive Officer, and Mark <unk> Executive Vice President Chief Financial Officer, and Chief operating Officer.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star followed by the number one on your telephone keypad.
We would like to withdraw your question again press Star one.
Before we begin I need to remind you that certain comments made during these remarks may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those risks and uncertainties are described in the press release and J Joseph SEC filings.
Forward looking statements made on this recording or as of June seven 2023 N. J Jill does not undertake any obligation to update these forward looking statements.
Finally, J Jill may refer to certain adjusted or non-GAAP financial measures. During these remarks, a reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in the press release issued on June seven 2023.
If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of the website at J Jill Dot Com I will now turn the call.
Please go ahead.
Thank you operator, and Hello, everyone. Thank you for joining us this morning.
I will begin our discussion by reviewing highlights from our first quarter performance will then provide an update on a few of our strategic initiatives before turning the call over to Mark to review, our financial performance and outlook in more detail.
In the first quarter, we delivered sales in line with our expectation as we anniversary the strong comparison to last year, and we exceeded our outlook for profitability, reflecting our ongoing execution of our disciplined operating model, which generate healthy cash flow from operations.
In addition, we successfully completed the refinancing of our term loan and ABL facility that's great.
We believe through the disciplines, we now have in place along with our enhanced financial flexibility with the completion of our debt refinancing we are well positioned to navigate the current environment and remain focused on positioning J Jill for long term success.
During the quarter, we continued to stay close to our customer and remain agile to react and respond to her evolving spending behavior amidst the current environment include.
Including adjusting our marketing and promotional plans to deliver the sales and inventory results.
Our latest customer insight study revealed that concerns around inflationary pressures remain high we saw that play out in Q1 and her spending behavior in terms of both units per transaction and frequency.
We continue to see strength in the newness, we delivered any.
In categories like dresses and within our peer gel and wherever sub brands, but we did see some softening within certain categories, particularly in our basics business.
With respect to our channel performance, we continued to see relative strength in stores, while both channels, our customer become more discerning with their purchases. The impact was felt more broadly within direct where we also experienced the higher level of return.
While our return rate is higher than our historical average it is relatively in line with the industry and to be expected given the strength we have seen in categories such as dresses were return rates are typically higher.
As part of our commitment to responding in season to manage our inventory balances. It took select actions where appropriate and maintained a controlled approach to the breadth and depth of promotion.
We were pleased to end the period with a well positioned inventory balance in line with our strategy as the freight headwinds, we expected offset the surgical markdown actions taken.
Turning now to the progress, we're making against our strategic initiatives.
First with respect to our focus on customer growth and the modernization of our brand and value proposition.
While our topline performance was impacted by the factors I. Just reviewed we were encouraged to see continued results in Q1 from our size Inclusivity initiative with productive growth in this segment across both channels.
In addition, while our size Inclusivity initiative continues to be a pathway to growth with that customer. We were also pleased to see that our wherever sub brand is resonating with younger new to brand customers, who are looking for clothing to wear to work.
As we look ahead, we will continue to leverage our portfolio of sub brands to lean into areas that are resonating with both new and existing customers.
Moving next to our focus on expanding our store base.
During Q1 following the success of our Granger, Indiana opening in Q4, we opened two new stores in South Windsor, Connecticut and match the Massachusetts.
We've been thrilled with the initial response to these opening especially as we welcome back many prior customers to J Jill.
Approximately half of the customers we have seen in the initial weeks at our South Windsor Nasty stores are reactivated customers.
As we look forward, we're excited to continue to explore opportunities to expand our footprint over time as the economics makes sense.
Finally, with respect to strengthening our omnichannel capabilities.
With our store openings underway is even more important that we continue to enhance our systems and leverage our capabilities across our channels.
We have just begun the rollout of our new Pos system, which we plan to complete by the end of fiscal 2023.
We will be implementing the system into our stores through a phased approach throughout the year, helping to ensure a smooth transition for both our associates and customers.
As a reminder, one of the benefits we expect to see from our new Pos system is the improvement in more seamless transactions across channels and positions us to further enhance our omnichannel capabilities over time.
In summary, we're pleased with how we've continued to execute against our model and our strategic initiatives, particularly in light of the evolving consumer backdrop.
We remain focused on operating the business with the same disciplines around inventory and expense management and have supported our progress to date.
Our updated guidance for fiscal 2023, which mark will discuss in more detail in a moment reflects a more cautious view on the consumer as well as a wider range of scenarios with respect to our promotional activity should the environment warrants it.
We're committed to taking actions in season to maintain clean inventory balances, but we remain focused on optimizing our profitability and we'll be as narrow and shallow with promotions as appropriate.
Now I will turn the call over to Mark to discuss our financial performance in more detail.
Thank you Claire and good morning, everyone.
Overall, we delivered a better than expected first quarter. Despite what proved to be a more challenging price sensitive customer as the strength of our operating model delivered solid adjusted EBITDA and generated strong cash from operations.
In addition, as disclosed in April we successfully refinanced our funded debt during the quarter, reducing principal outstanding by approximately $50 million and extending maturity out to may of 2028, both Moody's and S&P ratings agencies recognize this accomplishment and issued upgrades on both the corporate rating of <unk>.
Joe on the term loan itself and lastly, as announced last month, we successfully extended our asset backed lending facility aligning its maturity with the term loan in 2028 now.
Now for an overview of results for the first quarter total company comparable sales for the first quarter decreased 3% compared to last year's very strong recovery, driven plus 24% comps.
Total company sales for the quarter were $149 million down.
Down 5% compared to Q1 2022.
As Claire mentioned in her remarks, we did see some evidence during the quarter of macroeconomic impacts on the consumer across our channels.
Store sales for Q1 were down 2% versus Q1, 2022 on 2% fewer stores in.
In stores customers responded to full price, which drove a higher average unit retail, but was offset by lower units sold per transaction, primarily driven by markdown units.
Correct sales as a percentage of total sales were 45% in the quarter compared to the first quarter of fiscal 2022 direct sales were down 8%, primarily due to an increase in markdown sales penetration and higher online returns driven in part by strong sales in higher returning categories such as dresses.
Q1 total company gross profit was $108 million down $1 $9 million compared to Q1 2022 Q.
Q1, gross margin was 72% up 230 basis points over Q1 2022.
The elevated freight costs have now abated, resulting in a gross margin rate benefit of approximately 250 basis points compared to last year.
SG&A expenses were $82 million compared to $86 million last year investments in selling costs and marketing were more than offset by lower depreciation and amortization and management incentive accruals.
Adjusted EBITDA was $32 million in the quarter up 2% compared to $31 million in Q1 2022.
Please refer to today's press release for a reconciliation of adjusted EBITDA.
As I mentioned during the quarter, we successfully refinanced our funded debt as a result of the extinguishment of both the prime and term loan and subordinated Pik loan in place in September of 2020, we incurred a $12 $7 million loss on a financing which impacted our reported net income for the period.
Turning to cash flow, we generated $8 million of cash from operations in Q1 and following the successful refinancing of the term loan ended the quarter with $28 million in cash and zero borrowings against the ABL.
We continue to focus on tight inventory management and as mentioned last quarter. The supply chain disruption that began in the back half of 2021 is now behind us and shipments. This year are largely on time versus being late or delayed last year.
Inventories at the end of Q1 are down 15% compared to the end of Q1 2022 with higher on hand units being offset by lower units in transit due to those delayed and longer shipping times last year.
Capital expenditures in the quarter were about $3 million compared to about $700000 last year. We continued to make good progress with our POS initiatives just begun rollout and will be completed later in the year and we opened two stores in the first quarter, resulting in 245 stores to end the quarter.
Turning to our outlook.
As <unk> discussed we are updating our full year outlook to reflect a more cautious view of the consumer based on current trends as well as a wider range of scenarios with respect to our promotional cadence given the ongoing uncertainty around the macroeconomic environment moving forward and our commitment to managing in season inventory balancing our goals to drive profit.
And fiscal periods clean with minimal excess carryforward given this we now expect adjusted EBITDA to be down in the mid single digits as a percent compared to last year, including an approximate $2 million benefit from the 50 <unk> week.
Our updated outlook for the year reflects first quarter results as well as an updated expectation for the remainder of the year for the second quarter, we expect sales to be down versus Q2 2022 in the mid single digits and adjusted EBITDA to be in the range of 26 and $31 million.
With respect to the second half of the year, we are maintaining a prudent outlook and expect similar top line year over year trends to continue into third quarter.
Given this along with our expectation that the tailwind from great favorability will decline considerably as well as our ongoing commitment to managing any season inventories, we expect profitability to be most pressured in the third quarter with expected improvement in fourth quarter, given the easier comparisons to last year on both the <unk>.
Sales and profitability perspective, as well as the benefit of the 50 <unk> week.
Regarding store count, we still expect flat store count to end 2023, with any openings offset by closures.
With respect to full year capital, we expect to spend about $18 million with investments focused on technology stores capital and the completion of the POS project late in 2023.
Thank you and I will now hand, it back to the operator for questions.
Thank you and again if you have a question press star one on your telephone keypad. Your first question comes from the line of Dana Telsey of Telsey Advisory Group. Please go ahead.
Hi, Good morning, everyone can you expand a little bit on the more discerning consumer did the cadence of the quarter did you become more discerning was it both in stores and online and then can you talk a little bit about the new systems that are being put in place when do we begin to see the full effect of that.
And then with the new refinancing that you have how are you thinking about interest expense in the go forward on the balance sheet. Thank you.
Sure. Thanks Dana.
I'll take the first one and let Mark address the second two.
You know more discerning consumer as you know we stay in close contact with our consumer.
Speaking to a regularly about her consumer confidence in her purchase intent and we have seen continued.
Continued wariness honestly.
As a reflection of the news that's out there and the general sentiment about the around the macro environment. So we are being what we feel is appropriately cautious given that and as Mark said in his remarks.
Have sort of contemplated continued pressure on that front as we.
Uh huh.
Our guidance for Q2 and for the remainder of the year. So it's not that we're seeing a big change, but we are seeing continued.
Sentiment around caution in spending.
Thanks.
Dana will will handle that Pos as well as the.
That question the interest question.
POS system as Clare mentioned in her remarks is phasing now into the store fleet.
We're starting it.
And a very prudent fashion and we will ramp it through.
The summer and early Q3 time period that we're currently in about seven or eight stores as of this week and that will continue to ramp and we're excited about the opportunities both from the operational aspect as Clare mentioned in her remarks, but the store.
Stores environment to store employees are very excited to get new technology as well so it's going well we're in the process of beginning to ramp that up for benefits I would say late in 'twenty three really 2024, as we really start to operate with the new system in place.
The new finance very excited to have been able to refinance the debt and what has been a pretty challenging market out. There. We think it's a testament to the strength of the company that we were able to do so we had a good process. We were very diligent we had a good group of lenders that came together and we're very pleased to put that.
New piece of paper in place with respect to the interest on a P&L basis.
The fact that we reduce the quantum of funded debt by about $50 million, but did see the rate go up.
Call It 300 bps.
Just kind of trade out of where the current interest rate.
Environment is basically flat on the new debt versus versus the existing node.
Listing notes that we replaced.
Hopefully that helps answer that question.
Yeah.
Thank you. Your next question comes from the line of Janet Kloppenburg of J J K Research. Please go ahead.
Yeah.
Okay.
Go ahead, Janet perhaps your line's on mute.
Forgive me I was on mute I apologize.
Hmm.
Did you say clear what the cadence of the business.
It does not look like in the first quarter and did you start to see it slow in March.
Through April the way most in the industry did.
And if you could talk just about the categories.
It's been.
Where there was strength and where there was weakness and I may have missed that I got on about five minutes late so I apologize. Thank you.
Thanks, Janet sure of course, so we felt relatively flat.
Sort.
Sort of.
Consumer sentiment over the course of the quarter, we didn't see we didn't see a lot of up and down.
It was more of a general conservatism that we started to see impacting the business overall, we did see that in the sense that you know.
The consumer.
Indirect was with opting more into the markdown inventory a little bit.
And Mark spoke to the returns that we've been seeing we think that that's a reflection of that consumer sentiment as well that said to your question about the category.
Ours were up in both channels.
And the dollars per customer continued to be very strong.
She pulled back on frequency as you pulled back on <unk>, a little bit and so we don't think that it's.
It's an art anything kind of thing she was being discerning and she was also choosing to spend in categories, where there was more uniqueness more fashion more differentiation. So dresses continued to be very strong jackets were strong as I mentioned in my remarks are wherever sub brand was very strong we are seeing nice traction there.
With a younger new to brand customer who is buying wherever for work. We think that's a really interesting dynamic that we continue to lean into where we saw softness within the less differentiated categories. So knit basic some of our bottoms programs.
Where she decided she didn't need to refresh there to the extent that we would like to see her so it was mixed.
But she continue to vote with their dollars on the things that were unique and special and.
The absolute price point wasn't necessarily the indicator it was more of a mix.
Okay, Okay, and when you think about the categories that are doing well the ones you just articulated.
How does the inventory content look.
Is it balanced and aligned to those categories or others adjust.
Adjustments to make and.
And do you think that AUR can continue to improve.
Sure. Thanks, Shannon I think we feel like we're well balanced and the inventory we started to see the softness in basics trends in the back half of last year and so coming into this year, we have made adjustments to rebalance we have.
Leaned into those more fashion categories like dresses that continue to have strength. So we feel good coming into Q2 about the balance in the inventory and AR.
I think with regard to AUR, it's at a pretty high level and dollars per customer at a very high level. So we're expecting more of a plateau, there, but but very healthy on that front.
Yeah.
Thank you there are no further questions at this time. This concludes today's conference call you may now disconnect.
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