Q2 2024 JOANN Inc Earnings Call

August 28, 2023

Good afternoon, and welcome to the Joanne second quarter 'twenty 'twenty four earnings conference call.

All participants will be in listen only mode.

You need assistance. Please signal a 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 May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Jason Wood, Vice President of strategy and corporate responsibility. Please go ahead.

Thank you 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, new information or 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 to 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.

Joanne website at investors Dr. Joanne Dotcom.

On the call today from Julien are the co leaders of the interim office of the CEO Christopher lay out exactly <unk> executive Vice President and Chief customer Officer, Scott <unk> Executive Vice President and Chief Financial Officer. During the question and answer portion of the call. We will also be joined by Rob will executive Vice President and Chief merchants for Joanne I will now.

Turn the call over to Chris for his prepared comments.

Thank you Jason.

For those of you joining us today, good afternoon, and welcome to Joanna second quarter fiscal 2024 earnings call.

What remains a dynamic consumer environment, we were pleased with our second quarter results highlighted by continued progress and strong execution against our strategic priorities, which enabled us to deliver sequential top line improvement gross margin improvement and register solid operating performance.

Although we remain cautious due to continued uncertainty in the broader retail environment. The strategic shifts we implemented in the second quarter combined with our ongoing cost reduction strategies give us confidence we are on track to deliver on our full year outlook.

These strategic shifts we're focused on building a new foundation for how we operate to better deliver short term wins mitigate potential risks and setup Joanne for long term growth.

This foundational approach is anchored on our read and react system for the business to respond quickly and accident opportunities or challenges as they evolve using advanced data analytics to shape and support our decision making process.

This coincided with a return to operational retail fundamentals our continued focus on winning in our core categories, while leveraging and capitalizing on the unique opportunities for Joanna in the consumer marketplace.

In the second quarter. These opportunities translated into improved results through the deliberate pull forward of our Halloween seasonal product offering the strategic execution of our maker am campaign and continued investment in our assortment breadth and depth, particularly in our textiles related categories.

Through these strategic actions, we delivered innovative assortments and more targeted promotions that resonated with a broad range of consumers. These efforts coupled with our focus on delivering a great experience for our customers, whether they shop in our stores or online and identifying ways to operate our business effectively and efficiently.

Possible sets the stage for continued progress.

We saw signs of this progress in the second quarter with continued sequential improvement not only on top line sales, but also in our gross margin.

Importantly, our comparable sales performance during the quarter ended on a high note with July representing our strongest monthly comparable sales result in over two years.

While we remain cautious and monitor the ever evolving consumer environment. We believe this momentum and the ongoing implementation of our strategic actions leave us in a good position to seize on opportunities and adapt to challenges moving forward.

As an example of how we are already leveraging this approach we utilized our data driven read and react capabilities to deliberately pull forward our seasonal Halloween seasonal product assortment. This pull forward was enabled by our strategic approach to optimize our seasonal assortments through directing <unk>.

<unk> into the seasons, where we win across a number of our product categories. Halloween is the season, where few in retail can offer a more complete solution.

From decorating the inside and outside of your home crafts for kids and the materials needed to make custom costumes and seasonably seemed textile projects, we appeal to customers of all ages and interest.

As we plan for this year, we were at the market trends on Halloween and strategically invested in pulled it forward in a way that was disruptive.

This meant pulling back on spring and summer seasonal buys which allowed our inventory position to be cleaner and in.

Labeled us to free up the space and get more Halloween product most of which comes from our own brands in stores and on the selling floor up to four weeks earlier.

Customers responded immediately to the shifts and are making purchases with less promotional activity and in a variety of price points, including our eight foot animated skeleton with a manufacturer's suggested retail price at $499.

Resulting in higher margin sell through for the entire category.

Additionally, as we look to leverage the unique opportunities that show in house, we distorted our inventory and merchandising presentation to capitalize on the changing consumer marketplace and launched our maker on campaign.

<unk> is our uniquely curated collection of many of the products students need to decorate their dorm room or apartment as they return to college.

Our make from campaign was a valuable strategic play for multiple reasons.

First it allowed us to market.

Broad assortment of our basic products, including textiles, and a new way and without deep discounts.

Creating a low risk high reward touch point that appeal to current and new customers alike.

Additionally, make room leaned into social media trends, where students across the country found creative ways to design their own physical happy place as they head back to campus and then post and share their creativity with their followers by leaning into these trends we were able to establish Joanne as the desk.

The nation for these important products expose them to a broader assortment of our offerings and increase the relevance of Joanna to younger customers.

We are excited by the success of this event as we saw unit lifts across multiple categories basic products included in our maker upset.

Moving forward to our E Commerce business, we continue to see growth and an increase in profitability from our digital channels in the quarter ecommerce sales outpaced store walk in sales and the company overall growing at a rate of 3% compared to last year accounting for 12, 1%.

Revenue in the second quarter, a 60 basis point increase in the penetration rate over the same period last year.

This growth is being fueled by multiple factors first we continue to refine and expand our online product offerings and are particularly encouraged by the growth in our textiles related online businesses.

Through data analytics, we updated our paid media allocation strategy and increased our investment approach, which drove additional traffic to our digital channels with corresponding increased site conversion.

Lastly, we made technology improvements to our website and mobile shopping experience, which produced immediate benefits.

As we go into the back half of the year, we will continue to emphasize a shop your way soon.

And engaging digital experience focusing efforts on improving the customer journey and driving additional growth.

To conclude we are encouraged by the top line sales results gross margin improvement and the progress on the ongoing implementation of our focus simplify and grow initiative, which Scott will discuss in detail momentarily.

Based on the dynamics consumer retail environment, we remain laser focused on continuing to use the strategic foundation, we are building to capitalize on growth opportunities and mitigate risk.

This includes continuing to use our read and react capabilities to drive quick business decisions leveraging advanced data analytics getting back to running the business using sound fundamental practices and focusing on winning in our core business categories, while capitalizing on the unique opportunities Joanne house in the bra.

Competitive marketplace.

As I wrap up I would like to take a moment to recognize our team members.

The positive results, we delivered in the second quarter, including the forward shift of Halloween the development and implementation of our maker in Nevada, and the ongoing execution of our strategic priorities would not have been possible without their hard work with.

With these new initiatives and strategic priorities, we challenged our team members, who work in our stores distribution centers omni fulfillment center and across our corporate offices to deliver new approaches to drive value and position the company for long term growth.

They responded with creativity commitment and agility that our team members are known for and I could not be prouder of the dedicated professionals who work across this company.

As we look to build on the positive results and weather any challenges presented by the uncertain retail environment. We face we will need them to continue to step up and I have absolute confidence they will.

With that I will turn it over to our Chief Financial Officer, Scott Keller to give a more detailed rundown of our second quarter financial results and our year to date performance before wrapping up with answering your questions.

Thank you Chris as Chris discussed in his remarks during the second quarter, we proactively took actions to drive both near term and long term success by enhancing our read and react capabilities through advanced data analytics with a renewed focus on operational retail fundamentals, we were able to deliver it.

<unk> performance in the second quarter, including building momentum in the top line sales and gross margin.

However, while we remain cautious about the back half of the year. We believe this momentum combined with leveraging our read and react approach and our focus on operational excellence leaves us well positioned to deliver on our full year outlook with that let me turn to the second quarter results.

In the second quarter net sales totaled $453 8 million a decline of two 1% compared to last year with total comparable sales decreasing by 2%.

This represents our third consecutive quarter of sequential improvement in comparable sales and our best quarterly year over year performance since the first quarter of fiscal year 2022.

Within the quarter sales improved sequentially as well.

Some softness from the first quarter persisted into the beginning of the second quarter. We saw a month over month improvement in June and July .

As we reached the back half of the second quarter, we saw positive comp sales and five of the last six weeks in July comp sales were positive representing our best month of comp sales and 28 months.

This improvement was due as Chris mentioned in large parts of our utilization of advanced data analytics to drive a read and react approach, which fueled our ability to win in our core textile related categories and capitalize on some marketplace opportunities that were unique to Joanne.

The positive impact from this approach was acutely apparent and the strategic pull forward of our Halloween assortment, which had a 90 basis point positive impact on comparable sales in the quarter.

In addition to the top line sales momentum, we continue to see healthy consumer engagement in our core textiles related sewing and craft businesses. This strikes includes positive performance in our selling technology category, which serves as a leading and underlying indicator for other core categories moving forward.

This performance is a direct result of our data driven approach to make sure we provide the right products and choices for our customers and our core customers are continuing to reengage in this space in a meaningful way.

As expected our non Halloween seasonal category was a significant 180 basis point headwind to comparable sales in the second quarter due to our strategic inventory reduction.

Additionally, we continue to see craft technology as a headwind to comparable sales, but we have been strategically managing this risk and performance is down across the marketplace craft technology continued to account for a decline in comp sales of 140 basis points in the second quarter of fiscal 2024, and we anticipate.

We will continue to serve as a dissipating headwind as we move deeper into the fiscal year.

Yeah.

On a GAAP basis, our gross profit in the second quarter was 232 million an increase of 8% from the second quarter of last year.

This year over year increase was driven largely by continuing improvement and import freight costs, which had a 580 basis point positive impact on our gross margin.

We recognized $300000 of excess import freight costs in the second quarter, a decrease of $26 8 million compared to the same period last year.

Excess import freight costs have now fully cycled out of our inventory and will not continue going forward.

On a cash basis in the second quarter, we realized $28 9 million of cash benefit from lower ocean freight rates.

Our gross margin on a GAAP basis was 51, 1% in the second quarter, an increase of 470 basis points from the second quarter of last year.

This represents the fourth consecutive quarter of sequential improvement in GAAP basis gross margin comparisons.

The year over year 470 basis point improvement was driven by the previously described 580 basis points continuing improvement in ocean freight.

And a 50 basis point increase due to improved domestic carrier freight rates and associated surcharges, partially offset by the timing of cycling those capitalized domestic freight costs.

This was all partially offset by a 95 basis point decline in our merchandising margin and.

A 65 basis point decline due to the timing of clearance activity.

To provide additional color on our second quarter merchandising margin the decline of 95 basis points compared to the same period last year can be attributed to the continued lapping of some of the inflationary cost increases we experienced during the prior year.

Our average unit costs were up two 6% to the second quarter of last year, which is an improvement from what we saw in the first quarter of this year.

As we mentioned on our first quarter call, we anticipate our average unit cost comparisons to sequentially improve throughout the course of the year as we cycle. These inflationary increases.

Average unit retail increased five tenths of a point relative to the same period last year.

Turning to expenses, our second quarter fiscal 2020 for SG&A expenses increased by four 4% from the second quarter of last year.

The primary drivers of the year over year SG&A increases include severance and other upfront costs to implement our cost reduction initiatives.

The re institution of our incentive compensation programs and general insurance and asset impairment expenses. These increases were partially offset by improved operating efficiencies, including the strategic management of labor hours in our stores, which more than offset inflationary pressures on labor, particularly at our store.

<unk> and other costs.

<unk> optimization of advertising spend.

And lower store pre opening and closing costs.

Our net loss in the second quarter was $73 3 million compared to a net loss of $56 9 million in the same period last year.

Our loss in adjusted EBITDA in the second quarter was 21 9 million compared to a loss of $8 9 million in the second quarter of last year.

Moving onto our balance sheet, our cash and cash equivalents were $19 1 million at the end of the second quarter.

As of July 29, 2023, we had $58 4 million of availability on our revolving credit facility, which is tied to a lower borrowing base due to our inventory optimization efforts, including cycling higher excess import freight costs.

And our actions to strategically lower inventory receipts.

Our face value of debt net of cash at the end of the fourth quarter was 1.096 billion.

This reflects an increase of $90 million from the same period last year and a leverage ratio of 5.0 X as measured by net debt and finance lease obligations relative to the credit facility adjusted EBITDA on a trailing 12 month basis.

Our inventory at the end of the second quarter was down 14, 4% compared to the same period last year due to the optimization of inventory receipts and the reduction in excess important freight costs.

We continue to maintain a low clearance inventory of less than 6% of total, leaving us well positioned to leverage our read and react capabilities to further drive growth.

In conjunction with all of this work we continue to drive our focus simplify and grow cost reduction initiative.

On our last call. We shared that we had fully identified the targeted $200 million of cost savings across supply chain product and SG&A expenses.

We are actively executing on these identified savings to drive meaningful cash flow improvement in fiscal year 2024 and beyond.

With the success of this initiative, we have challenged ourselves toward deeper and we can now share that we have line of sight to over deliver on the original $200 million target.

As part of these annualized cost savings, we have now finalized new agreements with our ocean freight vendors that will put us in a strong position to over deliver on the targeted $100 million of supply chain cost reductions.

Additionally, we initiated a broad based initiative to reduce product costs across our business.

This effort will yield significant product cost savings a wide assortment of our domestic and import vendors have already agreed to price concessions and we continue to expand this work and so all of our product categories, given you're now giving us confidence we can over deliver the targeted $60 million of product cost reduction.

Also in the second quarter, we saw significant positive movement and the implementation of our SG&A reductions, including costs related to store labor and information technology.

Savings are focused on finding new ways to work that represent a better more efficient and more effective way to deploy our resources, while staying true to our strategic priority.

Providing a high quality in store and online experience to our customers.

To this end during the second quarter, we rolled out a pilot program designed to align our in store labor pattern to better support where and how our customers shopping with us.

Through our evaluation of the results we saw that not only did the pilot reduce costs. It also enhance the in store selling experience by converting more labor hours to customer facing sales activities and right sizing. These labor hours to more effectively staff stores during the busiest selling hours.

At the beginning of the third quarter, we expanded this pilot to the entire fleet and are already generating meaningful savings.

In addition to these enhancements to our in store labor pattern, we created new ways of working from an information technology standpoint in the second quarter.

This included taking action to execute on savings to reduce organizational third party labor expenses eliminate redundant systems and processes and improve infrastructure performance.

We believe these new ways of working will help us likely exceed our $40 million SG&A cost reduction target.

Across the entirety of our focus simplify and grow initiative, we continue to leave no stone unturned as we looked for additional potential savings and as mentioned earlier, we now have line of sight to over delivering on the initial $200 million target.

Now, let's turn to our fiscal 2020 for full year outlook.

While we were pleased with our second quarter performance, we are approaching the back half of fiscal 2024 cautiously because of the continued inflationary pressures and persistent uncertainty in the broader retail environment.

We are using our read and react capabilities to control, what we can control and capitalize on new opportunities as they arise. We believe that this approach combined with our second quarter top line performance and the ongoing implementation of our cost reduction initiatives leave us in a position to deliver on our full fiscal year.

2020 for outlook.

In terms of our topline performance based on our year to date performance and line of sight for the remainder of fiscal year 2024, we are updating our full year outlook to be more precise and anticipating that net sales relative to fiscal year 2023 will be down between one and 3% instead of down.

One between one and 4% as we outlined in the first quarter.

This range is inclusive of a 50 <unk> fiscal week in fiscal year, 2024, which is worth approximately 2%.

Driving meaningful cash improvement remains one of our key focuses for fiscal year 2024.

Based in large part on the cash benefit of the implementation of our focus simplify and grow cost reduction initiative.

Working capital and capital expenditure optimization actions.

We believe we will deliver a significant year over year improvement in free cash flow and are reiterating our outlook.

That over the full fiscal year 2024, we will see a year over year improvement in free cash flow between $150 million and $170 million.

To support this we are lowering our full year outlook for capital expenditures net of landlord contributions by $5 million to be between $35 million and $40 million.

As described earlier the cash benefit of our focus simplify and grow initiatives will be felt heavily in fiscal year 2024.

Mostly annualized P&L benefit will not be realized until fiscal year 2025, due to the time it takes for inventory and related costs to cycle through our balance sheet with that being said, we are reiterating our full year outlook for adjusted EBITDA between 85 million and $95 million.

Note that the fiscal 2024 includes a headwind from re instituting our incentive compensation program, which was partially offset by the benefit of the 50 <unk> fiscal week.

In conclusion, we remain focused on delivering value for our shareholders.

As we move through fiscal year 2024, we are focused on strengthening our topline and an uncertain consumer environment and delivering significant cash flow improvements by emphasizing the fundamentals that have historically driven our success.

Based on the factors, we have discussed today, including our enhanced data driven read and react capabilities.

Continuing focus of winning in our core categories and leveraging the market opportunities that we are uniquely positioned to address.

The continued implementation of our focus simplify and grow cost reduction initiatives and the dedicated team members working in our stores distribution centers and corporate offices. We believe we are well positioned to deliver value to our shareholders and hit our full fiscal year 2020 for outlook.

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 one on your telephone keypad.

If you are 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.

Our first question is from David Lance with Wells Fargo. Please go ahead.

Hey, guys. Thanks for taking our question so the fiscal 'twenty four outlook Embeds, a pretty sharp improvement in adjusted EBITDA in the second half. So curious if you can talk about how you're thinking about the moving pieces in Q3 and Q4 as well as just at the gross margin and SG&A lines.

Yeah, Hey, David It's Scott I can take that one so yeah, I mean traditionally keep in mind our profit.

At its peak in the back half of Q3 and in Q4, so with where the way we see the top line stabilizing in the back half as well as more importantly, our cost reduction initiatives really starting to take hold.

That's what gives us confidence that we're going to be able to hit the EBITDA outlook.

Given where we are year to date.

Got it that's helpful. And then just on the commentary around comps and collecting positive being positive in July curious how things are trending quarter to date is I'm just trying to square that versus you know now that top line being down three to down one for the rest of the year.

Hi, David its Chris.

As we entered excuse me as we entered the third quarter I.

I would say here in August we're seeing the trends really comparable to the second quarter overall.

<unk> talked on the in the script about Halloween kind of pulling forward and that did help July .

By I think.

90 basis points. So we know that we had some of that pull forward in July but in the second quarter, we're seeing pretty in the third quarter, we're seeing consistent performance to the second.

Thanks, guys.

The next question is from Laura Champagne with loop capital. Please go ahead.

Thanks for taking your question can you just remind us on the balance sheet management I heard you call out to at least 58 million in liquidity, but is there a cleanup provision and that.

That would impact you. If you don't have the fourth quarter that you expect and then it looked like you were careful to control our accounts payable is that likely to be a source of cash as we move through the year along with inventories.

Unknown Executive: Good afternoon, and welcome to the Joann 2nd quarter 2024 earnings conference call. All participants will be in listen only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero.

Hey, Laurence Scott if I can I can tackle that so keep in mind as we move into our peak season, now and I've touched on how our availability is tied to the borrowing base, which is tied to inventory.

Unknown Executive: After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on your telephone keypad. Could we draw your question please press star then two. Please note this event is being recorded.

We move into the peak season, we'll have the full amount of our ABL available to us so that will increase through the balance of the year through the balance of the calendar year. So that will continue to increase our availability as we go and Theres nothing really tied to if we hit this EBITDA level.

Jason Wood: I would now like to turn the conference over to Jason Wood, Vice President of Strategy and Corporate Responsibility. Please go ahead. Thank you and good afternoon. I'd like to remind everyone that comments may 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 if today and the company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information, or future circumstances.

Jason Wood: I would now like to turn the conference over to Jason Wood, Vice President of Strategy and Corporate Responsibility. Please go ahead. Thank you and good afternoon.

Jason Wood: Please review the cautionary statements and risk factors contained in the company's earnings press release and the recent violence with the SBC. During the call today management may refer to certain non-gap financial measures. A reconciliation between gap and non-gap 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 from Joanne's website at investors.joanne.com.

Jason Wood: I'd like to remind everyone that comments may 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 if 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 and the recent violence with the SBC. During the call today management may refer to certain non-gap financial measures.

In terms of the working capital working capital has been a significant tailwind for us year to date I anticipate that it'll be a little bit worse in the back half, but we will still for the full year have where our working capital.

Aylwin, but it will dissipate from this point on is we've got a lot as we start to lap our strategic inventory reductions that started to occur in the back half of last year.

And and we've already realized a lot of that in the beginning part of this year.

Hi.

Jason Wood: A reconciliation between gap and non-gap 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 from Joanne's website at investors.joanne.com.

Yes.

Again, if you have a question. Please press Star then one.

The next question is from Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Jason Wood: On the call today from Joanne are the co-leaders of the interim office of the CEO, Christa Tulio, Executive Vice President and Chief Customer Officer, and Scott Fakella, Executive Vice President and Chief Financial Officer. During the question and answer portion of the call we will also be joined by Rob Will, Executive Vice President and Chief Merchant for Joanne.

Hi, Good afternoon, I wanted to see if you can provide more color on the SG&A outlook for the back half them. This.

This quarter at least.

I can nation with some of the one time item SG&A expenses were still up so should we think about the back half improvement being primarily gross margin.

Christa Tulio: I will now turn the call over to Chris for his prepared comments. Thank you Jason.

Uh huh.

It's sort of me being sort of languish smart we want to be here.

Christa Tulio: To those of you joining us today, good afternoon and welcome to Joanne's second quarter fiscal 2024 earnings call. In what remains the dynamic consumer environment, we were pleased with our second quarter results highlighted by continued progress and strong execution against our strategic priorities which enabled us to deliver sequential top line improvement, gross margin improvement and register solid operating performance. Although we remain cautious due to continued uncertainty in the broader retail environment, the strategic shifts we implemented in the second quarter combined with our ongoing cost reduction strategies give us confidence we are on track to deliver on our full year outlook.

Yeah.

Yeah, Hey, Christina Scott I can tackle that.

SG&A as we go.

A lot of our cost reduction efforts as I've mentioned are being implemented now and will continue to get in.

Executed through the balance of the year. So I just I do anticipate SG&A to start to improve there are some items that we have called out like our incentive compensation program that will continue to be.

A headwind to.

To the extent that we continue to deliver because there was no incentive compensation last year and this year, it's pretty steady so we won't get the benefit of that will still have the ongoing sort of headwind from the incentive compensation program.

Christa Tulio: These strategic shifts were focused on building a new foundation for how we operate to better deliver short term wins, mitigate potential risks and set up Joanne for long term growth. This foundational approach is anchored on a read and react system for the business to respond quickly and action opportunities or challenges as they evolve using advanced data analytics to shape and support our decision making process. This coincided with a return to operational retail fundamentals are continued focus on winning in our core categories while leveraging and capitalizing on the unique opportunities for Joanne in the consumer marketplace.

And then I wanted to understand better the.

Yeah.

And all it seems like you're taking some sort.

Targeted investments as you mentioned Halloween I guess, how are you thinking about the back half.

Our holiday assortment in particular are you leaning into that this year.

And what should we expect inventory to India.

Sure.

Hi, it's Rob Yeah. So we talked on our last quarter call about spring and summer and the fact that we had pulled back in that opened up room for Halloween, which as Chris had mentioned is a great differentiator for US. We also love how we because we drive incremental footsteps into the box we will be pulling.

Christa Tulio: Chris. In the second quarter, these opportunities translated into improved results through the deliberate pull forward of our Halloween seasonal product offering, the strategic execution of our makeroom campaign, and continued investment in our assortment, breath, and depth, particularly in our textiles-related categories. Through these strategic actions, we delivered innovative assortments and more targeted promotions that resonated with a broad range of consumers. These efforts coupled with our focus on delivering a great experience for our customers, whether they shop in our stores or our mine, and identifying ways to operate our business as effectively and efficiently as possible sets the stage for continued progress ahead.

Forward, our holiday sets as well this year to again capitalize on that traffic, we see the back half across our seasonal businesses.

We expect to be slightly positive year over year as we get into the holiday season, again focused more on decorating and creating craftable projects for the holiday season, which is a differentiator for us.

Christina Scott to follow up on your inventory piece.

As I noted we were down 14% in Q2.

As we leverage our read and react capabilities, we do see some additional inventory purchases coming in in the categories, where we're winning so I still expect inventory to be down year over year at year end, but to a lesser degree probably in the mid single digit range.

Christa Tulio: We saw signs of this progress in the second quarter with continued sequential improvement, not only on top line sales but also in our gross margin. Importantly, our comparable sales performance during the fourth quarter ended on a high note, with July representing our strongest monthly comparable sales result in over two years. While we remain cautious and monitor the ever-evolving consumer environment, we believe this momentum and the ongoing implementation of our strategic actions, leave us in a good position to seize on opportunities and adapt to challenges moving forward.

Thank you and good luck this quarter.

This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.

Yeah.

[music].

Christa Tulio: As an example of how we are already leveraging this approach, we utilized our data-driven read and react capabilities to deliberately pull forward our seasonal Halloween seasonal product assortment. This pull forward was enabled by our strategic approach to optimize our seasonal assortments through directing investment into the seasons where we win across a number of our product categories. Halloween is a season where few in retail can offer a more complete solution. From decorating the inside and outside of your home, crafts for kids, in the materials needed to make custom costumes and seasonally-seemed textile projects, we had appealed to customers of all ages and interests.

Christa Tulio: Halloween is a season where few in retail can offer a more complete solution. From decorating the inside and outside of your home, crafts for kids, in the materials needed to make custom costumes and seasonally-seemed textile projects, we had appealed to customers of all ages and interests. As we planned for this year, we read the market trends on Halloween and strategically invested and pulled it forward in a way that was disruptive. This meant pulling back on spring and summer seasonal buys which allowed our inventory position to be cleaner and enabled us to free up the space and get more Halloween product, most of which comes from our own brands, in stores and on the selling floor, up to four weeks earlier.

Christa Tulio: As we planned for this year, we read the market trends on Halloween and strategically invested and pulled it forward in a way that was disruptive. This meant pulling back on spring and summer seasonal buys which allowed our inventory position to be cleaner and enabled us to free up the space and get more Halloween product, most of which comes from our own brands, in stores and on the selling floor, up to four weeks earlier.

Christa Tulio: Customers responded immediately to the shift in our making purchases with less promotional activity and at a variety of price points, including our eight-foot animated skeleton with a manufacturer's adjusted retail price at $499, resulting in higher margin self-root for the entire category. Additionally, as we look to leverage the unique opportunities that Joanne has, we distorted our inventory and merchandising presentation to capitalize on the changing consumer marketplace and launched our Makeroom campaign.

Christa Tulio: Additionally, as we look to leverage the unique opportunities that Joanne has, we distorted our inventory and merchandising presentation to capitalize on the changing consumer marketplace and launched our Makeroom campaign. Makeroom is our uniquely curated collection of many of the products students need to decorate their dorm room or apartment as they return to college. Our Makeroom campaign was a valuable strategic play for multiple reasons. First, it allowed us to market a broad assortment of our basic products, including textiles in a new way and without deep discounts, creating a low-risk, high-reward touchpoint that appeal to current and new customers alike.

Okay.

[music].

Christa Tulio: Makeroom is our uniquely curated collection of many of the products students need to decorate their dorm room or apartment as they return to college. Our Makeroom campaign was a valuable strategic play for multiple reasons. First, it allowed us to market a broad assortment of our basic products, including textiles in a new way and without deep discounts, creating a low-risk, high-reward touchpoint that appeal to current and new customers alike. Additionally, make room leaned into social media trends where students across the country found creative ways to design their own physical happy place as they head back to campus, and then post and share their creativity with their followers.

Christa Tulio: Additionally, make room leaned into social media trends where students across the country found creative ways to design their own physical happy place as they head back to campus, and then post and share their creativity with their followers. By leaning into these trends, we were able to establish Joann as a destination for these important products, expose them to a broader assortment of our offerings and increase the relevance of Joann to younger customers. We are excited by the success of this event as we saw unit lifts across multiple categories of basic products included in our make room set.

Christa Tulio: By leaning into these trends, we were able to establish Joann as a destination for these important products, expose them to a broader assortment of our offerings and increase the relevance of Joann to younger customers. We are excited by the success of this event as we saw unit lifts across multiple categories of basic products included in our make room set.

Yeah.

Okay.

[music].

Yeah.

Okay.

Christa Tulio: Moving forward to our e-commerce business, we continue to see growth and an increase in profitability from our digital channels. In the quarter, e-commerce sales outpaced store-walking sales and the company overall, growing at a rate of 3% compared to last year, accounting for 12.1% of revenue in the second quarter, a 60 basis point increase in penetration rate over the same period last year. This growth is being fueled by multiple factors. First, we continue to refine and expand our online product offerings and are particularly encouraged by the growth and our text sales related online businesses.

Christa Tulio: Second, through data analytics, we updated our paid media allocation strategy and increased our investment approach which drove additional traffic to our digital channels with corresponding increased site conversion. Lastly, we made technology improvements to our website in mobile shopping experience which produced immediate benefits. As we go into the back half of the year, we will continue to emphasize a shop your way seamless and engaging digital experience, focusing efforts on improving the customer journey and driving additional growth.

Christa Tulio: As we go into the back half of the year, we will continue to emphasize a shop your way seamless and engaging digital experience, focusing efforts on improving the customer journey and driving additional growth. To conclude, we are encouraged by the top-line sales results. Gross margin improvement and the progress on the ongoing implementation of our focus, simplify and grow initiative, which Scott will discuss in detail momentarily. Based on the dynamic consumer retail environment, we remain laser focused on continuing to use the strategic foundation we are building to capitalize on growth opportunities and mitigate risk.

Christa Tulio: To conclude, we are encouraged by the top-line sales results. Gross margin improvement and the progress on the ongoing implementation of our focus, simplify and grow initiative, which Scott will discuss in detail momentarily. Based on the dynamic consumer retail environment, we remain laser focused on continuing to use the strategic foundation we are building to capitalize on growth opportunities and mitigate risk. This includes continuing to use our read and react capabilities to drive quick business decisions, leveraging advanced data analytics, getting back to running the business using sound fundamental practices and focusing on winning in our core business categories while capitalizing on the unique opportunities Joanne has in the broader competitive marketplace.

Christa Tulio: This includes continuing to use our read and react capabilities to drive quick business decisions, leveraging advanced data analytics, getting back to running the business using sound fundamental practices and focusing on winning in our core business categories while capitalizing on the unique opportunities Joanne has in the broader competitive marketplace.

Christa Tulio: As I wrap up, I would like to take a moment to recognize our team members. The positive results we delivered in the second quarter, including the forward shift of Halloween, the development and implementation of our make-room event and the ongoing execution of our strategic priorities would not have been possible without their hard work, with these new initiatives and strategic priorities, we challenged our team members who work on our stores, distribution centers, Omni fulfillment center, and across our corporate offices to deliver new approaches to drive value and position the company for long-term growth.

Christa Tulio: They responded with creativity, commitment, and agility that our team members are known for, and I could not be prouder of the dedicated professionals who work across this company. As we look to build on the positive results and whether any challenges presented by the uncertain retail environment we face, we will need them to continue to step up and have absolute confidence, they will.

Scott Sekella: With that, I will turn it over to our chief financial officer, Scott Sekella, to give a more detailed rundown of our second quarter financial results in our year-to-date performance, before wrapping up with answering your questions. Thank you, Chris. As Chris discussed in his remarks, during the second quarter, we proactively took action to drive both near-term and long-term success by enhancing our read and react capabilities through advanced data analytics. With the renewed focus on operational retail fundamentals, we were able to deliver improved performance in the second quarter, including building momentum in both top-line sales and gross margin.

Scott Sekella: While we remained cautious about the back half of the year, we believe this momentum combined with leveraging our read and react approach and our focus on operational excellence leaves us well positioned to deliver on our full-year outlook. With that, let me turn to the second quarter results. In the second quarter, net sales totaled 453.8 million, a decline of 2.1 percent compared to last year, with total comparable sales decreasing by 2 percent.

Scott Sekella: With that, let me turn to the second quarter results. In the second quarter, net sales totaled 453.8 million, a decline of 2.1 percent compared to last year, with total comparable sales decreasing by 2 percent. This represents our third consecutive quarter of sequential improvement in comparable sales, and our best quarterly year-to-year performance since the first quarter of fiscal year 2022. Within the quarter, sales improved sequentially as well. With some softness from the first quarter persisted into the beginning of the second quarter, we saw month-over-month improvement in June and July.

Scott Sekella: This represents our third consecutive quarter of sequential improvement in comparable sales, and our best quarterly year-to-year performance since the first quarter of fiscal year 2022. Within the quarter, sales improved sequentially as well. With some softness from the first quarter persisted into the beginning of the second quarter, we saw month-over-month improvement in June and July. As we reached the back half of the second quarter, we saw positive comp sales in five to the last six weeks, and July comp sales were positive, representing our best month of comp sales in 28 months.

Scott Sekella: As we reached the back half of the second quarter, we saw positive comp sales in five to the last six weeks, and July comp sales were positive, representing our best month of comp sales in 28 months. This improvement was due, as Chris mentioned, in large parts of our utilization of advanced data analytics to drive a read and react approach, which fueled our ability to win in our core textile-related categories, and capitalized on some marketplace opportunities that were unique to Joanne.

Scott Sekella: This improvement was due, as Chris mentioned, in large parts of our utilization of advanced data analytics to drive a read and react approach, which fueled our ability to win in our core textile-related categories, and capitalized on some marketplace opportunities that were unique to Joanne. The positive impact from this approach was acutely apparent in the strategic pool forward of our Halloween assortment, which had a 90 basis point positive impact on comparable sales in the quarter.

Scott Sekella: The positive impact from this approach was acutely apparent in the strategic pool forward of our Halloween assortment, which had a 90 basis point positive impact on comparable sales in the quarter. In addition to the top-line sales momentum, we continue to see healthy consumer engagement in our core textiles-related sewing and craft businesses. This strength includes positive performance in our sewing technology category, which serves as a leading and underlying indicator for other core categories moving forward.

Scott Sekella: In addition to the top-line sales momentum, we continue to see healthy consumer engagement in our core textiles-related sewing and craft businesses. This strength includes positive performance in our sewing technology category, which serves as a leading and underlying indicator for other core categories moving forward. This performance is a direct result of our data-driven approach to make sure we provide the right products and choices for our customers, and our core customers are continuing to re-engage in this space in a meaningful way.

Scott Sekella: This performance is a direct result of our data-driven approach to make sure we provide the right products and choices for our customers, and our core customers are continuing to re-engage in this space in a meaningful way. As expected, our non-Halloween seasonal category was a significant 180 basis point headwind to comparable sales in the second quarter due to our strategic inventory reduction. Additionally, we continue to see craft technology as a headwind to comparable sales, but we have been strategically managing this risk and performances down across the marketplace.

Scott Sekella: As expected, our non-Halloween seasonal category was a significant 180 basis point headwind to comparable sales in the second quarter due to our strategic inventory reduction. Additionally, we continue to see craft technology as a headwind to comparable sales, but we have been strategically managing this risk and performances down across the marketplace. Craft technology continued to account for decline in comp sales of 140 basis points in the second quarter of fiscal 2024, and we anticipated we'll continue to serve as a dissipating headwind as we move deeper into the fiscal year.

Scott Sekella: Craft technology continued to account for decline in comp sales of 140 basis points in the second quarter of fiscal 2024, and we anticipated we'll continue to serve as a dissipating headwind as we move deeper into the fiscal year.

Scott Sekella: On a gap basis, our gross profit in the second quarter was 232 million, an increase of 8% from the second quarter of last year. This year over your increase was driven largely by continuing improvement in import freight costs, which had a 580 basis point positive impact on our gross margin. We recognized $300,000 of excess import freight costs in the second quarter as decrease of 26.8 million compared to the same period last year.

Scott Sekella: These excess import freight costs have now fully cycled out of our inventory and will not continue going forward. On a cash basis, in the second quarter, we realized 28.9 million of cash benefit from lower ocean freight rates. Our gross margin on a gap basis was 51.1% in the second quarter, an increase of 470 basis points from the second quarter of last year. This represents the fourth consecutive quarter of sequential improvement in gap basis gross margin comparisons.

Scott Sekella: The year over year 470 basis point improvement was driven by the previously described 580 basis point continuing improvement in ocean freight, and a 50 basis point increased due to improved domestic carrier freight rates, and associated surge charges partially offset by the timing of cycling of capitalized domestic freight costs. This was all partially offset by a 95 basis point decline in our merchandising margin, and a 65 basis point decline due to the timing of clearance activity.

Scott Sekella: To provide additional color on our second quarter merchandising margin, the decline of 95 basis points compared to the same period last year can be attributed to the continued blapping of some of the inflationary cost increases we experienced during the prior year. Our average unit costs were up 2.6% to the second quarter of last year, which is an improvement from what we saw in the first quarter of this year. As we mentioned on our first quarter call, we anticipate our average unit cost comparisons to sequentially improve throughout the course of the year as we cycle these inflationary increases.

Scott Sekella: Average unit retail increased 5 tensable point relative to the same period last year. Turning to expenses, our second quarter fiscal 2024 SGNA expenses increased by 4.4% from the second quarter of last year. The primary drivers of the year-of-year SG&A increases include severance and other upfront cost to implement our cost reduction initiatives, the re-institution of our incentive compensation programs, and general insurance and asset impairment expenses. These increases were partially offset by improved operating efficiencies, including the strategic management of labor hours in our stores, which more than offset inflationary pressures on labor, particularly at our store locations and other costs.

Scott Sekella: Turning to expenses, our second quarter fiscal 2024 SGNA expenses increased by 4.4% from the second quarter of last year. The primary drivers of the year-of-year SG&A increases include severance and other upfront cost to implement our cost reduction initiatives, the re-institution of our incentive compensation programs, and general insurance and asset impairment expenses. These increases were partially offset by improved operating efficiencies, including the strategic management of labor hours in our stores, which more than offset inflationary pressures on labor, particularly at our store locations and other costs. We continued optimization of advertising spend, and lower store pre-opening and closing costs.

Scott Sekella: We continued optimization of advertising spend, and lower store pre-opening and closing costs. Our net loss in the second quarter was 73.3 million compared to a net loss of 56.9 million in the same period last year. Our loss and adjusted EBITDA in the second quarter was 21.9 million compared to a loss of 8.9 million in the second quarter of last year. Moving on to our balance sheet, our cash and cash equivalents were 19.1 million at the end of the second quarter.

Scott Sekella: Our net loss in the second quarter was 73.3 million compared to a net loss of 56.9 million in the same period last year. Our loss and adjusted EBITDA in the second quarter was 21.9 million compared to a loss of 8.9 million in the second quarter of last year.

Scott Sekella: Moving on to our balance sheet, our cash and cash equivalents were 19.1 million at the end of the second quarter. As of July 29, 2023, we had 58.4 million of availability on our revolving credit facility, which is tied to a lower borrowing base due to our inventory optimization efforts, including cycling higher excess import freight costs, and our actions to strategically lower inventory receipts. Our face value of debt net of cash at the end of the fourth quarter was 1.096 billion.

Scott Sekella: As of July 29, 2023, we had 58.4 million of availability on our revolving credit facility, which is tied to a lower borrowing base due to our inventory optimization efforts, including cycling higher excess import freight costs, and our actions to strategically lower inventory receipts. Our face value of debt net of cash at the end of the fourth quarter was 1.096 billion. This reflects an increase of 90 million from the same period last year and a leverage ratio of 5.0X as measured by net debt and finance lease obligations relative to the credit facility adjusted EBITDA on a trailing 12 month basis.

Scott Sekella: This reflects an increase of 90 million from the same period last year and a leverage ratio of 5.0X as measured by net debt and finance lease obligations relative to the credit facility adjusted EBITDA on a trailing 12 month basis. Our inventory at the end of the second quarter was down 14.4% compared to the same period last year due to the optimization of inventory receipts and the reduction in excess import freight costs. We continue to maintain a low clearance inventory of less than 6% of total, leaving us well positioned to leverage our read and react capabilities to further drive growth.

Scott Sekella: Our inventory at the end of the second quarter was down 14.4% compared to the same period last year due to the optimization of inventory receipts and the reduction in excess import freight costs. We continue to maintain a low clearance inventory of less than 6% of total, leaving us well positioned to leverage our read and react capabilities to further drive growth. In conjunction with all of this work, we continue to drive our focus, simplify, and grow cost reduction initiative.

Scott Sekella: In conjunction with all of this work, we continue to drive our focus, simplify, and grow cost reduction initiative. On our last call, we shared that we had fully identified the targeted 200 million of cost savings across supply chain, product, and SGNA expenses. We are actively executing on these identified savings to drive meaningful cash flow improvement in fiscal year 2024 and beyond. With the success of this initiative, we have challenged ourselves to look deeper and we can now share that we have line of sites over-deliver on the original 200 million dollar target.

Scott Sekella: On our last call, we shared that we had fully identified the targeted 200 million of cost savings across supply chain, product, and SGNA expenses. We are actively executing on these identified savings to drive meaningful cash flow improvement in fiscal year 2024 and beyond. With the success of this initiative, we have challenged ourselves to look deeper and we can now share that we have line of sites over-deliver on the original 200 million dollar target.

Scott Sekella: As part of these annualized cost savings, we have now finalized new agreements with our ocean freight vendors that will put us in a strong position to over-deliver on the targeted 100 million of supply chain cost reductions. Additionally, we initiated a broad-based initiative to reduce product costs across our business. This effort will yield significant product cost savings. A wide assortment of our domestic and import vendors have already agreed to price concessions and we continue to expand this work into all of our product categories, giving us confidence we can over-deliver the targeted 60 million dollars of product cost reduction, also in the second quarter we saw significant positive movement in the implementation of our S.G.N.A, reductions including cost-related to store labor and information technology.

Scott Sekella: These savings are focused on finding new ways to work that represent a better, more efficient and more effective way to deploy our resources while staying true to our strategic priority of providing a high quality in-store and online experience to our company. To this end, during the second quarter we rolled out a pilot program designed to align our in-store labor pattern to better support where and how our customers are shopping with us.

Scott Sekella: Through our evaluation of the results we saw that not only did the pilot reduce costs, it also enhanced the in-store selling experience by converting more labor hours to customer facing sales activities and right-sizing these labor hours to more effectively staff stores during the busiest selling hours. At the beginning of the third quarter we expanded this pilot to the entire fleet and are already generating meaningful savings. In addition to these enhancements to our in-store labor pattern we created new ways of working from an information technology standpoint in the second quarter.

Scott Sekella: This included taking action to execute on savings to reduce organizational third-party labor expenses, eliminate redundant systems and processes and improve infrastructure performance. We believe these new ways of working will help us likely exceed our $40 million SG&A cost reduction target. Across the entirety of our focus simplifying grow initiative, we continue to leave no stone unturned as we look for additional potential savings and, as mentioned earlier, we now have line of sites over-delivering on the initial $200 million target.

Scott Sekella: Now let's turn to our fiscal 2024 full-year outlook. While we were pleased with our second quarter performance we are approaching the back half of fiscal 2024 cautiously because of the continued inflationary pressures and persistent uncertainty in the broader retail environment. We are using our read and react capabilities to control what we can control and capitalize on new opportunities as they arise. We believe that this approach, combined with our second quarter top-line performance, and the ongoing implementation of our cost reduction initiatives, we've seen a position to deliver on our full fiscal year 2024 outlook.

Scott Sekella: In terms of our top-line performance based on our year-to-date performance in line of site for the remainder of fiscal year 2024, we are updating our full-year outlook to be more precise in anticipating that net sales relative to fiscal year 2024. This fiscal year 2023 will be down between 1 and 3 percent instead of down between 1 and 4 percent as we outlined in the first quarter. This range is inclusive of a 53rd fiscal week in fiscal year 2024, which is worth approximately 2 percent.

Scott Sekella: Driving meaningful cash improvement remains one of our key focuses for fiscal year 2024. Based in large part on the cash benefit of the implementation of our focus simplifying road cost reduction initiative in working capital and capital expenditure optimization actions, we believe we will deliver a significant year-over-year improvement in free cash flow and are reiterating our outlook that over the full fiscal year 2024, we will see a year-over-year improvement in free cash flow between 150 million and 170 million.

Scott Sekella: To support this, we are lowering our full-year outlook for capital expenditures, net of landlord contributions by 5 million to be between 35 million and 40 million. As described earlier, the cash benefit of our focus simplifying road initiatives will be felt heavily in fiscal year 2024 and the mostly annualized P&L benefit will not be realized until fiscal year 2025 due to the time it takes for inventory and related costs to cycle through our balance sheet.

Scott Sekella: With that being said, we are reiterating our full-year outlook for adjusted EBITDA between 85 million and 95 million. Note that the fiscal 2024 includes a headwind from reinstituting our incentive compensation program, which is partially offset by the benefit of the 53rd fiscal week.

Scott Sekella: In conclusion, we remain focused on delivering value for shareholders. As we move through fiscal year 2024, we are focused on strengthening our top line in an uncertain consumer environment and delivering significant cash flow improvements by emphasizing the fundamentals that have historically driven our success. Based on the factors we have discussed today, including, our enhanced data-driven, read-and-react capabilities, the continuing focus of winning in our core categories and leveraging the market opportunities that we are uniquely positioned to address, the continued implementation of our focus simplifying road cost reduction initiatives, and the dedicated team members working in our stores, distribution centers, and corporate offices. We believe we are well-positioned to deliver value to our shareholders and hit our full fiscal year 2024 outlook. With that, we'd be happy to take your questions.

Unknown Executive: Operator?

Unknown Executive: With that, we'd be happy to take your questions.

Unknown Executive: Operator?

Unknown Executive: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

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

David Lantz: Our first question is from David Lance with Wells Fargo. Please go ahead. Hey guys, thanks for taking our question. So the fiscal 24 outlook embeds a pretty sharp improvement in adjustity with on the second half.

Scott Sekella: So curious if you can talk about how you're thinking about the moving pieces in Q3 and Q4, as well as just at the gross margin and SGNA lines. Yeah, hey David, it's God, I can take that one. So yeah, I mean, traditionally keep in mind our profit is at its peak in the back half of Q3 and in Q4. So with the way we see the top line stabilizing in the back half, as well as more importantly, our cost reduction initiatives really starting to take hold.

Scott Sekella: So curious if you can talk about how you're thinking about the moving pieces in Q3 and Q4, as well as just at the gross margin and SGNA lines.

Scott Sekella: Yeah, hey David, it's God, I can take that one. So yeah, I mean, traditionally keep in mind our profit is at its peak in the back half of Q3 and in Q4. So with the way we see the top line stabilizing in the back half, as well as more importantly, our cost reduction initiatives really starting to take hold. That's what gives us confidence that we're going to be able to hit a little bit of outlook given where we are here today. David. Got it. That's helpful.

Scott Sekella: That's what gives us confidence that we're going to be able to hit a little bit of outlook given where we are here today. David. Got it. That's helpful. And then just on the commentary around comps and selecting positive, you know, being positive in July, curious how things are trending quarter to date, as I'm just trying to square that versus, you know, now that top line being down, three to down, one for the rest of the year.

Christa Tulio: And then just on the commentary around comps and selecting positive, you know, being positive in July, curious how things are trending quarter to date, as I'm just trying to square that versus, you know, now that top line being down, three to down, one for the rest of the year. Hi, David.

Christa Tulio: Hi, David. It's Chris. Yeah, you know, as we enter, excuse me, as we enter the third quarter, I would say here in August, we're seeing the trends really comparable to the second quarter overall.

Christa Tulio: It's Chris. Yeah, you know, as we enter, excuse me, as we enter the third quarter, I would say here in August, we're seeing the trends really comparable to the second quarter overall. You know, we talked on in the script about Halloween kind of pulling forward. And that did help July by, I think, 90 basis points. So we know that we had some of that pull forward in July, but in the second quarter, we're seeing pretty in the third quarter, we're seeing consistent performance to the second.

Unknown Executive: Thanks, guys.

Christa Tulio: You know, we talked on in the script about Halloween kind of pulling forward. And that did help July by, I think, 90 basis points. So we know that we had some of that pull forward in July, but in the second quarter, we're seeing pretty in the third quarter, we're seeing consistent performance to the second. Thanks, guys.

Scott Sekella: The next question is from Laura Champagne with Loop Capital. Please go ahead. Thanks for taking our question. Can you just remind us on the balance sheet management? I heard you'd call out that there's 58 million in liquidity, but is there a clean up provision that would impact you if you don't have the fourth quarter that you expect? And then it looks like you were careful to control accounts payable. Is that likely to be a source of cash as we move through the year along with inventories?

Laura Champine: The next question is from Laura Champagne with Loop Capital. Please go ahead. Thanks for taking our question. Can you just remind us on the balance sheet management? I heard you'd call out that there's 58 million in liquidity, but is there a clean up provision that would impact you if you don't have the fourth quarter that you expect? And then it looks like you were careful to control accounts payable. Is that likely to be a source of cash as we move through the year along with inventories? Hey, Lord Scott.

Scott Sekella: Hey, Lord Scott. I can I can tackle that. So keep in mind as we move into our peak season now, and you know, I touched on how our availability is tied to the borrowing base, which is tied to inventory. We move into the peak season. We'll have the full amount of our ABL available to us. So that will increase through the balance of the year through the balance of the calendar year.

Scott Sekella: I can I can tackle that. So keep in mind as we move into our peak season now, and you know, I touched on how our availability is tied to the borrowing base, which is tied to inventory. We move into the peak season. We'll have the full amount of our ABL available to us. So that will increase through the balance of the year through the balance of the calendar year. So that will continue to increase our availability as we go.

Scott Sekella: So that will continue to increase our availability as we go. And there's nothing really tied to if we hit this EBITL level. In terms of the working capital, working capital has been a significant tailwind for us a year to date.

Scott Sekella: And there's nothing really tied to if we hit this EBITL level. In terms of the working capital, working capital has been a significant tailwind for us a year to date. I anticipate that will be a little bit worse in the back half, but we will still for the full year have a working capital tailwind, but it will dissipate from this point on as we've got a lot, as we start to lap our strategic inventory reductions that started occur in the back half last year, and we've already realized a lot of that in the beginning part of the year. Again, if you have a question, please press star, then one.

Scott Sekella: I anticipate that will be a little bit worse in the back half, but we will still for the full year have a working capital tailwind, but it will dissipate from this point on as we've got a lot, as we start to lap our strategic inventory reductions that started occur in the back half last year, and we've already realized a lot of that in the beginning part of the year. Again, if you have a question, please press star, then one.

Scott Sekella: The next question is from Christine Fernandez with Kelsey Advisory Group. Please go ahead. Hi, good afternoon. I wanted to see if you can provide more color on the S&A. I'll look for the back half. This quarterly based on my calculation without some of the one-time items, S&A expenses were still up. So should we think about the back half improvement being primarily worse margin, or will S&A be up sort of be a sort of leverage as well as we move to the year?

Christine Fernandez: The next question is from Christine Fernandez with Kelsey Advisory Group. Please go ahead. Hi, good afternoon. I wanted to see if you can provide more color on the S&A. I'll look for the back half. This quarterly based on my calculation without some of the one-time items, S&A expenses were still up. So should we think about the back half improvement being primarily worse margin, or will S&A be up sort of be a sort of leverage as well as we move to the year?

Scott Sekella: Hey, Christine, it's Scott. I can tackle that. You know, S&A is we go a lot of our cost reduction efforts, as I mentioned, are being implemented now, and we'll continue to get executed through the balance of the year. So I do anticipate S&A to start to improve. There are some items that we have called out like our incentive compensation program that will continue to be a headwind to the extent that we continue to deliver because there was no incentive compensation last year, and this year it's pretty steady. So we won't get the benefit of that. We'll still have the ongoing sort of headwind from the incentive compensation program.

Christine Fernandez: Hey, Christine, it's Scott. I can tackle that. You know, S&A is we go a lot of our cost reduction efforts, as I mentioned, are being implemented now, and we'll continue to get executed through the balance of the year. So I do anticipate S&A to start to improve. There are some items that we have called out like our incentive compensation program that will continue to be a headwind to the extent that we continue to deliver because there was no incentive compensation last year, and this year it's pretty steady. So we won't get the benefit of that. We'll still have the ongoing sort of headwind from the incentive compensation program.

Rob Will: And then I wanted to understand better your approach to seasonal, it seems like you're taking some sort of targeted investments as you mentioned in Halloween.

Robert Will: And then I wanted to understand better your approach to seasonal, it seems like you're taking some sort of targeted investments as you mentioned in Halloween.

Rob Will: I guess, how are you thinking about the back half, the holiday assortment in particular, are you leaning into that this year and where should we expect inventory to end the year?

Scott Sekella: Hi, it's Rob. Yes, so, you know, we talked on the last quarter call about spring and summer and the fact that we had pulled back in that opened up room for Halloween, which is Chris had mentioned is a great differentiator for us. We also love Halloween because we drive incremental footsteps into the box. We will be pulling forward our holiday assets as well this year to again capitalize on that traffic. We see the back half across our seasonal businesses.

Rob Will: Hi, it's Rob. Yes, so, you know, we talked on the last quarter call about spring and summer and the fact that we had pulled back in that opened up room for Halloween, which is Chris had mentioned is a great differentiator for us. We also love Halloween because we drive incremental footsteps into the box. We will be pulling forward our holiday assets as well this year to again capitalize on that traffic. We see the back half across our seasonal businesses. We expect to be slightly positive year over year as we get into the holiday season again focused more on decorating and creating craftable projects for the holiday season, which is a differentiator for us.

Scott Sekella: We expect to be slightly positive year over year as we get into the holiday season again focused more on decorating and creating craftable projects for the holiday season, which is a differentiator for us. Christine, it's got to follow up on your inventory piece. As I know, we were down 14% in Q2. As we leverage our read and rack capabilities, we do see some additional inventory purchases coming in the categories where we're winning. So, I still expect inventory to be down year over year end, but to a lesser degree, probably in the mid-single digit range. Thank you and amongst this quarter.

Scott Sekella: Christine, it's got to follow up on your inventory piece. As I know, we were down 14% in Q2. As we leverage our read and rack capabilities, we do see some additional inventory purchases coming in the categories where we're winning. So, I still expect inventory to be down year over year end, but to a lesser degree, probably in the mid-single digit range.

Unknown Executive: Thank you and amongst this quarter.

Unknown Executive: This concludes our question and answer session and the conference has also now concluded. Thank you for attending today's presentation. You may[inaudible]

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