Q3 2024 JOANN Inc Earnings Call
Hello, and welcome to the Jelly <unk> third quarter fiscal 2024 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions to ask.
Speaker 1: Hello and welcome to the Joanne 3rd quarter, fiscal 2024 earnings conference call. All participants will be in list and only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero. 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. To withdraw from the question queue please press star then two. Please note this event is being recorded.
Question You May Press Star then one on your telephone keypad to withdraw from the question queue. Please press Star then two.
Please note this event is being recorded.
Speaker 1: 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 different materially from management's current expectations.
I would 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.
Speaker 1: 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.
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.
Speaker 1: Please review the cautionary statements and risk factors contained in the company's earnings press release and the recent filings with the SEC.
Please review the cautionary statements and risk factors contained in the company's earnings press release, and the recent filings with the SEC.
Speaker 1: During the call today, management may refer to certain non- GAAP financial measures. A reconciliation between gap and non- GAAP financial measures can be found in the company's earnings press release, which was filed today with the FEC and posted to the Investor Relations section of Gillian's website at investors.jillian.com.
During the call today management may refer to certain non-GAAP financial measures.
Reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed today with the FTC and posted to the Investor Relations section of Joanne website at investors thought Joanne Dot com.
Speaker 1: on the call today from Jolann are the co-leaders of the interim office of the CEO .
On the call today from Joanna are the co leaders of the interim office of the CEO.
Speaker 1: Chris Detullio, Executive Vice President and Chief Customer Officer, and Scott Sakella, 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. I will now turn the call over to Chris for his prepared remarks. Please go ahead.
Christa Julio Executive Vice President and Chief customer Officer, and Scott, So pillar executive Vice President and Chief Financial Officer. During the question and answer portion of the call. We will also be joined by Roswell Executive Vice President and Chief merchant for Joanne I will now turn the call over to Chris for his <unk>.
Prepared remarks. Please go ahead.
Good afternoon, and thank you for joining us today.
Speaker 2: And to start, we are pleased with our third quarter results, and importantly, have increased our top line full year outlook.
We are pleased with our third quarter results and importantly have increased our topline full year outlook.
Speaker 2: Our third quarter paired a focus on operational retail fundamentals with an agile data-driven approach, helping us to win in our core categories, while over-delivering on the implementation and execution of our focus, simplify, and grow cost savings initiatives.
Our third quarter pair to focus on operational retail fundamentals with an agile data driven approach, helping us to win in our core categories, while over delivering on the implementation and execution of our focus simplify and grow cost savings initiative.
Speaker 2: This has enabled us to stabilize the overall business, right size our expense structure, and capitalize on trending growth areas.
This has enabled us to stabilize the overall business right size, our expense structure and capitalize on trend in growth areas with.
Speaker 2: With continued progress in another quarter of strong execution against our strategic priorities, we were able to deliver these results despite what remains the dynamic in challenging consumer and discretionary retail environment.
With continued progress and another quarter of strong execution against our strategic priorities, we were able to deliver these results. Despite what remains a dynamic and challenging consumer and discretionary retail environment.
Speaker 2: we remain focused on controlling what we can control. While maximizing our opportunities in this market and delivering a great customer experience, both in-store and digital.
We remain focused on controlling what we can control while maximizing our opportunities in this market and delivering a great customer experience both in store and digitally.
Speaker 2: Also during quarter, supported by the use of advanced data analytics and in conjunction with our sequentially improving average unit cost.
Also during the quarter supported by the use of advanced data analytics and in conjunction with our sequentially improving average unit costs reaction to strategy to selectively pulse promotions on a close to real time basis to drive shopper conversion and maximize gross profit dollars with this nimble approach we are.
Speaker 2: We action to strategy to selectively pulse promotions on a close to real-time basis.
Speaker 2: to drive shopper conversion and maximize gross profit dollars. With this nibble approach, we are making great progress on delivering the right pricing strategies to drive shopper conversion and have a high degree of confidence that we will continue to further optimize average unit retails as our AUCs are expected to be flat to slightly down in Q4, before fully turning to a tailwind in fiscal 2025.
Making great progress on delivering the right pricing strategies to drive shopper conversion and have a high degree of confidence that we will continue to further optimize average unit retails.
Our auc's are expected to be flat to slightly down in Q4 before turning fully turning to a tailwind in fiscal 2025 and.
Speaker 2: In fact, our average unit costs turn favorable in October and are significantly improved on a new, on our new inventory purchase.
In fact, our average unit cost turned favorable in October and our significantly improved on a new on our new inventory purchases.
Speaker 2: RE Commerce Performance was a quarter standout driving double digit improvement year over year.
Our ecommerce performance was the quarter standout driving double digit improvement year over year.
Speaker 2: anchored on our region react business approach. We identified customer experience and site performance opportunities.
Anchored on our read and react business approach, we identified customer experience and site performance opportunities and swiftly implemented enhancements that resulted in an immediate uptick in shopper conversion.
Speaker 2: swiftly implemented enhancements that resulted in an immediate uptick in shopper conversion.
Speaker 2: We have also made great progress on delivering a better and faster overall online experience, setting the stage for continued growth in this important chance.
We have also made great progress on delivering a better and faster overall online experience setting the stage for continued growth in this important channel.
Speaker 2: As we look to continue to grow our e-commerce business, we are also working on a number of initiatives to drive gross profit dollars, including further work we are doing to optimize operations and utilization of our West Jefferson and Ohio, Omni Channel Filmers.
As we look to continue to grow our E. Commerce business. We are also working on a number of initiatives to drive gross profit dollars, including further work, we are doing to optimize operations and utilization of our west Jefferson, Ohio, Omnichannel fulfillment center the.
Speaker 2: The expanded use of the Omni Channel Facilment Center will not only lower order fulfillment costs, but will also lead to an overall improved customer experience.
The expanded use of the omni channel fulfillment center will not only lower order fulfillment costs, but will also lead to an overall improved customer experience. We are fast tracking these efforts and look forward to updating you on our progress on future calls.
Speaker 2: We are fast tracking these efforts and look forward to updating you on our progress on future calls.
Speaker 2: Finally, we continue to successfully engage with our core customers, registering increases in our customer account.
And finally, we continued to successfully engage with our core customers registering increases in our customer counts. In fact, we saw more of our known customers shop in the quarter versus last year, resulting in positive transaction growth from this customer cohort signaling strength and are enthusiastic base.
Speaker 2: In fact, we saw more of our known customers shop in the quarter versus last year, resulting in positive transaction growth from this customer cohort, signaling strength in our enthusiast base.
<unk>.
While we are pleased with this increased engagement as you have heard from other retailers. We are also experiencing some basket pressure by the way a fewer items per transaction.
Speaker 2: While we are pleased with this increase in engagement, as you have heard from other retailers, we are also experiencing some basket pressure by the way of fewer items per transaction.
Speaker 2: and are seeing customers shopping closer to their project needs versus stocking up and adding to their stash as in years prior.
And our same customers shopping closer to their project needs versus stocking up and adding to their stash as in years prior.
Speaker 2: That said, and importantly, these customers are shopping with us frequently and converting well, validating that the Joanne brand positioning is strong, and our assortments are rest...
That said and importantly, these customers are shopping with us frequently and converting well validating that the Jo Ann brand positioning is strong and our assortments are resonating.
Speaker 2: Although there is much work ahead of us, and we remain cautious due to continued uncertainty in the broader retail environment, the strategic shifts we have implemented this year, combined with our ongoing cost reduction strategies and the strong engagement over Black Friday week, give us confidence to increase our full year top line outlook while maintaining our bottom line outlook. Now, I'll briefly review the highlights of our third quarter performance. Thank you very much.
Though there is much work ahead of us and we remain cautious due to continued uncertainty in the broader retail environment. The strategic shifts we have implemented this year combined with our ongoing cost reduction strategies and the strong engagement over black Friday week give us confidence to increase our full year top line outlook, while maintaining.
Our bottom line outlook now I'll briefly review the highlights of our third quarter performance.
Total sales were $539 8 million down four 1% versus the prior year period, which includes a 70 basis point headwind from the strategic pull forward of our Halloween assortment, we discussed in the second quarter.
Speaker 2: Down 4.1% versus the prior year period, which includes a 70 basis point headwind from the strategic pull forward of our Halloween assortment we discussed in the second quarter, while also providing a margin.
While also providing a margin benefit in the period.
Speaker 2: More importantly, normalized for the Halloween shift. Third quarter total sales were essentially in line with second quarter trend. When you adjust for the category pull forward in both quarters.
Importantly, normalized for the Halloween shift third quarter total sales were essentially in line with second quarter trend when you adjust for the category pull forward in both quarters.
Speaker 2: With that in mind, we see this as a clear signal. The business is stabilized.
With that in mind, we see this as a clear signal the business is stabilizing.
Speaker 2: For the full season, our largely owned brand's Halloween assortment performance was strong, registering double-digit year-over-year growth with higher realized margins.
For the full season are largely owned brands Halloween assortment performance was strong registering double digit year over year growth with higher realized margins.
Speaker 2: validating the success of our Read and React business approved.
Elevating the success of our read and react business approach.
Speaker 2: Notwithstanding the continued strong category performance.
Notwithstanding the continued strong category performance, we see opportunity to grow this business even further next year.
Speaker 2: We see opportunity to grow this business even further next year.
Expanding on our category performance for the quarter, we are winning in our core categories, which have a strong correlation to our broader business. For example, we saw a notable double digit strength across needle arts fleece and selling technology.
Speaker 2: Expanding on our category performance for the quarter, we are winning in our core categories, which have a strong correlation to our broader business. For example, we saw notable double-digit strength across needle arts, fleece, and sewing technology.
Speaker 2: In Needle Arts, we saw broad demand across both our yarn and stitch categories fueled by our strategic decision to balance our best-in-class national brand assortment while also offering a great value with broad selection of our owned private brand.
Needle arts, we saw broad demand across both our yarn and stitch categories fueled by our strategic decision to balance our best in class National brand assortment.
I'll also offering a great value with a broad selection of our own private brands.
Speaker 2: With regards to fleece, our strong performance was buoyed by the social media trend of tie knot blankets, which emerged in Q3, in early Q3. While this is typically one of our highest volume fabric categories in the Fallen Winter months, with our core customer, we are seeing great engagement from new and younger shoppers coming to Joanne for their fleece tie blanket supply.
With regards to fleece are.
Our strong performance was buoyed by the social media trend tie not blankets, which emerged in Q3 and early Q3.
Well. This is typically one of our highest volume fabric categories in the fall and winter months with our core customer, we're seeing great engagement from new and younger shoppers coming to Joanne for their fleece tie blanket supplies.
To capitalize on this trend we went live in November with a new and disruptive social media campaign hashtag getting Naughty K N O T T Y Naughty on tick tock and Instagram.
Speaker 2: hashtag getting naughty KNO TTY naughty on TikTok and
This campaign targets the under 35 demo and focuses on France couples and families gathering together and making tighten up blankets for special occasions in their lives. We are encouraged with our initial results and engagement from our social media followers and are seeing a positive impact both in stores and online.
Speaker 2: In sewing technology, we saw the greatest gains in purchases of sub $500 machines from new cellists entering the market. A strong indication we are attracting younger cellists to join.
And selling technology, we saw the greatest gains and purchases of sub 500 dollar machines from new Cellists entering the market strong indication we are attracting younger so as to Joanne.
Speaker 2: As the category leader in sewing and fabric, we see this positive trend as a great indicator of overall health and strength across all generations of the sewing industry.
As the category leader and selling in fabric. We see this positive trend is a great indicator of overall health and strength across all generations of the sewing industry.
With regards to headwinds in the quarter as expected due to our strategic pullback of non Halloween seasonal merchandise such as traditional autumn and fall related to core and floral we.
We experienced a total seasonal merchandise headwind of approximately 150 basis points in the quarter.
We also continue to experience persistent headwinds in our craft technology business, which for the quarter was worth approximately 100 basis points.
Speaker 2: We also continue to experience persistent headwinds in our craft technology business, which, for the quarter, was worth approximately 100 basis.
Speaker 2: It's important to highlight that as a result of our strategic pullback of non-Halloween seasonal inventory reccees.
It's important to highlight that as a result of our strategic pullback of non Halloween seasonal inventory receipts, we saw exceptionally high sell through rates with meaningfully improved profitability over the prior year.
Speaker 2: saw exceptionally high sell-through rates with meaningfully improved profitability over the prior year, including contributing
Including contributing to reduced clearance inventory.
Speaker 2: As I mentioned earlier, our e-commerce performance was a standout in the quarter. We registered strong e-commerce growth of 11.5% over last year, a significant acceleration from our trend in the second quarter with growth of 3%.
As I mentioned earlier, our E Commerce performance was a standout in the quarter, we registered strong e-commerce growth of 11, 5% over last year, a significant acceleration from our trend in the second quarter with growth of 3%.
Speaker 2: RE-commerce sales accounted for 13.1% of total company sales in the period, reflecting penetration expansion of 180 basis.
Our E Commerce sales accounted for 13, 1% of total company sales in the period, reflecting penetration expansion of 180 basis points.
Speaker 2: More specifically, to change our prior trends, we executed improvements to our site by enhancing our cart and checkout experience.
More specifically to change our prior trends, we executed improvements to our site by enhancing our cart and checkout experience resolving issues that provided the most friction to the customer purchase journey substantially improving performance speed of the site and beginning an intensive focus another of our.
Speaker 2: Resolving issues that provided the most friction to the customer purchase journey, substantially improving performance speed of the site, and beginning an intensive focus and edit of our product assortments, all leading to improvements in experience and shopper conversion.
<unk> Assortments, all leading to improvements in experience and shopper conversion.
Speaker 2: We also saw broad-based improved traffic with more effective marketing spend and SEO benefits from the work we've done on our core site.
We also saw broad based improved traffic with more effective marketing spend N. S. C O benefits from the work we've done on our course a week.
Speaker 2: We continue to prioritize and identify new opportunities to improve the online experience in drive shops.
We continue to prioritize and identify new opportunities to improve the online experience and drive shopper conversion.
Speaker 2: Finally, as I also mentioned, we are over-delivering on the implementation and execution of our focus, Simplify, and grow initiatives, which Scott will go into further detail on.
And finally as I also mentioned we are over delivering on the implementation and execution of our focus simplify and grow initiative, which Scott will go into further detail on.
Speaker 2: Our focus throughout all of this work is to realign our costs to our current revenue base, which has stabilized at pre-pandemic level.
Our focus throughout all of this work is to realign our costs to our current revenue base, which has stabilized at pre pandemic levels.
Speaker 2: As part of this work, during the quarter we made the difficult decision to write size or corporate overhead aligned to that principle. And our confident in how we are allocating resources to both support and drive the business for.
As part of this work during the quarter, we made the difficult decision to rightsize, our corporate overhead aligned to that principle and are confident in how we are allocating resources to both support and drive the business forward. Additionally.
Speaker 2: Additionally, we are pleased with the results from our recently rolled out store labor initiative. Remain focused on operating as effectively and efficiently as possible, including allocating store labor to better serve customers during peak traffic periods, and reducing non-
Additionally, we are pleased with the results from our recently rolled out store labor initiatives remain focused on operating as effectively and efficiently as possible, including allocating store labor to better serve customers during peak traffic periods and reducing non value added tasks. Our store teams are doing a great job of navigating this holiday season.
Speaker 2: Our store teams are doing a great job of navigating the holidays.
Speaker 2: new team structures in ways of working and are delivering the friendly clever ally customer experience we promised.
With new team structures and ways of working and are delivering the friendly clever ally customer experience, we promised to fulfill.
Speaker 2: With that said, I would like to take this opportunity to extend my gratitude and appreciation to our entire Joanne.
With that said I would like to take this opportunity to extend my gratitude and appreciation to our entire Joanne team.
Speaker 2: Throughout a year of great change, they're unwavering dedication to helping every customer find their creative happy place is what makes Joanne truly unique and drives my confidence and excitement in our...
Throughout a year of great change their unwavering dedication to helping every customer find their creative happy place is what makes Joanne truly unique and drives my confidence and excitement and our future.
Yeah.
Speaker 2: Turning on to inventory, we entered the fourth quarter with very clean inventory quality with less than 5% of our total inventory in our clearance box.
Turning on to inventory, we entered the fourth quarter with very clean inventory quality with less than 5% of our total inventory in our clearance bucket.
Speaker 2: Our exposure on fashion in seasonal inventory is relatively low with basic inventory compromised.
Our exposure on fashion and seasonal inventory is relatively low with basic inventory compromising.
Speaker 2: Approximately 60% of our total an increase of 400 basis points to last
Approximately 60% of our total an increase of 400 basis points to last year.
Additionally, with the success of our retail pricing initiative combined with our focus on driving core categories, and our read and react business approach unit sales velocity has accelerated nicely and allowed us to invest back into additional basic inventory to meet the increasing demand.
Speaker 2: Additionally, with the success of our retail pricing initiative, combined with our focus on driving core categories and our read and react business approach, unit sales velocity has accelerated nicely and allowed us to invest back into additional basic inventories to meet the increase.
Speaker 2: To provide a bit of color on the current quarter, although we have many important selling days ahead of us for the holiday season, we are pleased with our trends thus far. As we all know, Black Friday and Cyber Monday are no longer single day events and, like many others in retail, we extended our Black Friday event to a full week and Cyber Monday ran for multiple days.
To provide a bit of color on the current quarter. Although we have many important selling days ahead of us for the holiday season, we are pleased with our trends thus far.
We all know Black Friday, and cyber Monday are no longer single day events and like many others in retail we extended our black Friday event to a full week and cyber Monday ran for multiple days.
Speaker 2: We are pleased with how we competed in this dynamic retail climate. Our customer is increasingly shopping us across both physical and digital channels, and we are seeing mobile shopping increase at higher levels than before.
We are pleased with how we competed in this dynamic retail climate, our customer is increasingly shopping us across both physical and digital channels and we're seeing mobile shopping increase at higher levels than before.
Speaker 2: Our holiday floral and holiday decor assortments are resonating and we are tracking to achieve our plans in these important categories.
Our holiday floral and holiday decor, Assortments are resonating and we are tracking to achieve our plans in these important categories.
Speaker 2: Broadly, the categories we saw success with in Q3 have continued to be strong in the early stages of Q4.
Broadly the categories. We saw success with in Q3 have continued to be strong in the early stages of Q4.
Speaker 2: While we continue to see pressure from the shopper on items per transaction, which does provide a headwind to the total basket, we are pleased with the transaction velocity and traffic we're driving to our stores in Joanna.
While we continue to see pressure from the shopper on items per transaction, which does provide a headwind to the total basket. We are pleased with the transaction velocity and traffic were driving to our stores enjoying dot com.
Speaker 2: Before trying to outlook, I wanted to take a moment to mention our recent corporate responsibility impact report that we published in November , which outlines Joanne's corporate responsibility results for 2023.
Before turning to outlook I wanted to take a moment to mention our recent corporate responsibility impact report that we published in November which outlines Joanne corporate responsibility results for 2023.
Speaker 2: In the report, we highlight our impact across our evergreen strategic pillars.
In the report, we highlight our impact across our evergreen strategic pillars, which we take very seriously and implement across the business every day.
Speaker 2: which we take very seriously and implement across the business every day. These include creating an environment where all team members can be their authentic selves and contribute at the highest level.
These include creating an environment, where all team members can be their authentic selves and contribute at the highest level mint.
Speaker 2: minimizing carbon footprint by taking action throughout Joanne and supplier operations. Powering reusability and customers to tie environmental responsibility to a greater purpose and appealing to inspiring support. Our diverse customer base in
Minimizing carbon footprint by taking action throughout Joanne and supplier operations powering reusability and customers to tie environmental responsibility to a greater purpose and appealing to inspiring supporting our diverse customer base and communities I encourage you to review the report.
Speaker 2: I encourage you to review the report which you can access at investors.jln.com
You can access at investors Dr. Joanne Dotcom.
On to outlook as we look to the final quarter of the year. We are encouraged by the progress we're seeing in the business, which is a direct result of the many strategic actions, we've taken and continue to execute on as I mentioned, we are increasing our full year top line outlook and maintaining our bottom line guidance, which Scott will elaborate on shortly.
Speaker 2: Onto Outlook, as we look to the final quarter of the year, we are encouraged by the progress we're seeing in the business, which is a direct result of the many strategic actions we've taken, and continued exit.
Speaker 2: As I mentioned, we are increasing our full-year top line outlook in maintaining our bottom line guidance, which Scott Low will elaborate on short.
Speaker 2: We remain keenly focused on winning in our core categories. Further utilizing enhanced data-driven, read and react capabilities, and continued implementation and expansion of our focus, simplify and grow cost reduction initiatives.
We remain keenly focused on winning in our core categories further utilizing enhanced data driven read and react capabilities and continued implementation and expansion of our focus simplify and grow cost reduction initiatives.
Speaker 2: In conclusion, I am proud of what we've accomplished over the past few quarters and recognize there is more to do.
In conclusion, I am proud of what we've accomplished over the past few quarters and recognize there is more to do we.
Speaker 2: We have made great progress to right size our expense structure. We have strengthened our already profitable store base with over 95% of our stores generating positive for-wall cash.
We have made great progress to rightsize our expense structure, we have strengthened our already profitable store base with over 95% of our stores generating positive four wall cash flow.
Speaker 2: We have made tremendous strides in our e-commerce business to improve the performance and experience with the results speaking for themselves, and we are attracting and capturing younger customers at an increasing rate through social media and the growth of our sewing technology business while continuing to engage our core.
We have made tremendous strides in our ecommerce business to improve the performance and experience with the results speaking for themselves and we are attracting and capturing younger customers at an increasing rate through social media and the growth of our selling technology business, while continuing to engage our core.
Speaker 2: We will continue to work tirelessly. On the many initiatives we discussed to fuel sales growth, improve profitability, and drive shareholder value.
We will continue to work tirelessly on the many initiatives, we discussed to fuel sales growth improved profitability and drive shareholder value.
Speaker 2: With that, I will hand it over to Scott to review our Q3 results and outlook in more detail.
With that I will hand, it over to Scott to review, our Q3 results and outlook in more detail Scott.
Thanks, Chris as Chris mentioned, we continue to execute our proactive actions to enhance our read and react capabilities in the third quarter.
More specifically, our advanced data analytics and progress of our strategic initiatives continue to drive our results.
As we close out the year, we remain cautious given the continued challenging retail environment. However, our consistent execution of our growth priorities and prudent management of the business gives us confidence to increase our topline full year outlook and maintain our bottom line view.
Now, let me turn to the third quarter results.
In the third quarter net sales totaled $539 8 million a decline of four 1% compared to last year with total comp sales also decreasing by four 1%.
As Chris mentioned, utilizing our read and react business approach the strategic pull forward of our Halloween assortment in the second quarter, which wasn't season success impacted our third quarter sales by approximately 770 basis points.
Speaker 2: A reading reactive approach also allowed us to win in our core categories and capitalize on other marketplace opportunities.
Our read and react approach also allowed us to win in our core categories and capitalize on other marketplace opportunities.
Speaker 3: And as Chris mentioned, from a category perspective, we saw notable strength in the quarter in needle arts, fleece, and sewing techniques.
As Chris mentioned from a category perspective, we saw notable strength in the quarter and needle arts fleece and selling technology.
This performance is a direct result of our data driven approach to make sure we provide the right products prices and choices for our customers and our core customers are continuing to engage in this space in a meaningful way.
Speaker 3: The success of our strategy to selectively pulse promotions on a week-in and week-out basis to best drive shopper conversion and maximize gross profit dollars is another great example of how we are utilizing data analytics to stay close to our consumers as we drive towards improved overall performance.
The success of our strategy to selectively pulse promotions on a weekend and week outpaces, the best drugs shopper conversion and <unk>.
<unk> gross profit dollars is another great example of how we are utilizing data analytics to stay close to our consumers as we drive towards improved overall performance.
Our non Halloween seasonal category was 150 basis point headwind to comp sales in the third quarter due to our strategic inventory reduction.
Speaker 3: Our non-Halloween seasonal category was 150 basis point headwind to comp sales in the third quarter due to our strategic inventory reduction.
Speaker 3: In addition, craft technology continue to underperform and represent the headwind of 100 bass.
In addition, craft technology continued to underperform and represented a headwind of 100 basis points in the quarter.
Our gross profit in the third quarter was $282 1 million an increase of four tenths of a point from the third quarter of last year.
Speaker 3: A gross profit in the third quarter was 282.1 million, an increase of a more intensive appointment from the third quarter of last.
Speaker 3: Your year of year increase was driven largely by continued improvement in import freight costs, which had a 450 basis point positive impact on our growth.
The year over year increase was driven largely by continued improvement and import freight costs, which had a 450 basis point positive impact on our gross margin.
Speaker 3: On a cash basis, in the third quarter, we realized $16.8 million of cash benefit from lower OCD.
On a cash basis in the third quarter, we realized $16 8 million of cash benefit from lower ocean freight rates.
Speaker 3: A gross margin was 52.3% in the third quarter. An increase of 240 basis points from the third quarter of last...
Our gross margin was 52, 3% in the third quarter, an increase of 240 basis points from the third quarter of last year the.
Speaker 3: The year we hear 240 basis point improvement was primarily driven by...
The year over year 240 basis point improvement was primarily driven by the previously described 450 basis point impact from continued improvement and import freight costs.
Speaker 3: Previously described 450 basis point impact from continued improvement in import freight costs.
Speaker 3: 60 basis point favorable product category mix impact driven by momentum in our core sewing category.
The 60 basis point favorable product category mix impact driven by momentum in our core selling categories.
Speaker 3: 55 basis point benefit from improved domestic carrier freight rates and associated search
55 basis points benefit from improved domestic carrier freight rates and associated surcharges.
Speaker 3: And the 40 basis point tailwind due to improved clearance.
A 40 basis point tailwind due to improved clearance activity.
Speaker 3: This was all partially offset by a 210 basis point decline due to the flow-through of inflationary product cost increases.
This was all partially offset by the 210 basis point decline due to the flow through inflationary product cost increases.
Speaker 3: A hundred basis point declines from lower overall pricing driven by actions taken to optimize average unit retail.
<unk> basis point declines to lower overall pricing driven by actions taken to optimize average unit retail levels.
Speaker 3: We had a 40 basis point decline due to increased shipping costs associated with growth in our e-commerce business, and a 15 basis point decline due to increased shipping costs associated with growth in our e-commerce business.
40 basis point decline due to increased shipping costs associated with growth in our E Commerce business.
And a 15 basis point decline from lower vendor allowances.
Speaker 3: Drilling down, our average unit cost were up 2.4% to the third quarter of last year, which is an improvement from what we saw in the second quarter of this year.
Drilling down our average unit costs were up two 4% to the third quarter of last year, which is an improvement from what we saw in the second quarter of this year.
Speaker 3: We continue to anticipate our average unit cost comparisons to sequentially improve throughout the course of the year as we cycle these inflationary increases.
We continue to anticipate our average unit cost comparisons to sequentially improve throughout the course of the year as we cycle. These inflationary increases.
And as Chris also mentioned, we expect Q4 au seems to be flat to slightly down year over year ever.
Average unit retails declined one 2% relative to the same period last year.
Turning to expenses, our third quarter fiscal 2020 for SG&A expenses increased by one 6% from the third quarter of last year.
The primary drivers of the year over year SG&A increase include <unk>.
Severance and other upfront costs to implement our cost reduction initiatives.
Asset impairment and disposal expenses.
Inflationary pressures on labor and other costs.
And we lap the favorable general insurance reserve reduction in the prior year period.
These increases were partially offset by improved operating efficiencies, including savings generated through our new store labor operating model as well as optimize corporate head count phase.
Favorable incentive and stock based compensation activity.
And lower store pre opening and closing costs.
Our net loss in the third quarter was $21 6 million compared to a net loss of $17 5 million in the same period last year.
Our adjusted EBITDA in the third quarter was $37 5 million compared to adjusted EBITDA of $40 2 million in the third quarter of last year.
Moving onto our balance sheet, our cash and cash equivalents were $28 3 million at the end of the third quarter.
October 28, 2023, we had $72 1 million of availability on our revolving credit facility.
Our face value of debt net of cash at the end of the third quarter was 1.14 billion. This reflects an increase of $90 million from the same period last year and a leverage ratio of five seven X as measured by net debt and finance lease obligations relative to credit facility adjusted EBITDA on a trailing.
12 month basis.
Our inventory at the end of the third quarter was down 9% compared to the same period last year due to the optimization of inventory receipts and a reduction in excess import freight costs.
Continued to maintain low clearance inventory of less than 5% of total, leaving us well positioned to leverage our read and react capabilities to further drive the topline.
During the quarter, we continued to execute against our focus simplify and grow cost reduction initiatives.
You are aware, we had previously identified $200 million of cost savings across supply chain product and SG&A expenses.
As we implement these cost savings initiatives, we are driving meaningful cash flow improvement in fiscal year 2024 that will continue beyond this year.
I am pleased to share that based on our execution to date.
We are increasing this 200 million target to $225 million with the majority.
Any of this over delivery coming in SG&A and supply chain.
Drilling down as mentioned last quarter, we finalized new agreements with our ocean freight carriers that have put us in a position to continue to experience tailwind it will.
Have us over deliver on the targeted $100 million of supply chain cost reductions.
We also continued to execute a broad based initiative to reduce product costs across our business.
Significant number 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 deliver the targeted 60 million of product cost reductions.
Additionally, in the third quarter, we made meaningful progress on implementing SG&A reductions and building efficiencies across our organization.
First we are very pleased with the rollout of our store Labor initiative that was implemented at the beginning of Q3.
Similar to what we experienced during the pilot of this initiative. In addition to reduce costs. We are confident we are enhancing the in store selling experience as we've converted more labor hours to customer facing sales activities.
Critically important during the peak holiday selling period, we have right sized labor hours to more effectively staff our stores during the busiest selling hours of the day.
Also as Chris mentioned in the third quarter, we made the difficult decision to right size, our corporate expense structure back to pre pandemic levels now that revenue has returned to pre pandemic levels Cross functionally we continue to focus on deploying our resources in new ways to drive better more efficient.
More effective ways of running the business, while staying true to our strategic priority of providing high quality in store online experiences for our customers.
Finally during the quarter, we closed on the sale leaseback of our corporate facility in Hudson, Ohio for a price of $34 5 billion, we intend to use the proceeds to invest in the business now.
Now, let's turn to our fiscal 2020 for full year outlook.
We are continuing to utilize a read and react capabilities through advanced data analytics to capitalize on new opportunities as they arise and focus on the controllable.
Our inventory position is in great shape, and we remain diligent and prudently managing all expense aspects of the business while over delivering on our focus simplify and grow initiatives.
We're cautiously optimistic for the fourth quarter of the fiscal year and believe our strategic initiatives combined with our third quarter top line performance and the ongoing implementation of our cost reduction initiatives leave us well positioned to deliver on our updated full year fiscal 2020 for outlook.
In terms of our top line based on our year to date performance and line of sight for the remainder of fiscal year 2024, we are increasing our full year outlook and now expect net sales relative to fiscal year 2023 to be down between one and 2% compared to our prior outlook of down.
And between one and 3% as we outlined last quarter. This range is inclusive of a 53rd fiscal week in fiscal year, 2024, which is worth approximately 2%.
Based in large part on the cash benefit of the implementation of our focus simplify and grow cost reduction initiatives and working capital and capital expenditure optimization actions. We believe we will continue to deliver significant year over year improvement in free cash flow. However.
Given our decision to buy into some inventory positions in core categories in Q4.
We now expect that we will see a year over year improvement in free cash flow for fiscal 2024 to be between $115 million and $135 million versus our previous expectations of $150 million and $170 million.
With this we.
And we expect to end the year with inventory down low to mid single digits also our full year outlook for capital expenditures net of landlord contributions still expected to be between $35 million and $40 million.
It is important to remember that much of the work we're doing related to our focus simplify and grow initiatives will result in a significant cash benefit in fiscal 2024.
While we expect that much of the annualized P&L benefit will be realized in fiscal 2025 due to the time it takes for inventory and related costs to cycle through our balance sheet.
That said, we are reiterating our full year outlook for adjusted EBITDA between $85 million and 95 million.
In conclusion, we're pleased with our third quarter performance.
And are ready to deliver the fourth quarter and holiday season with a continued focus on our enhanced data driven read and react capabilities.
Winning in our core categories.
And the continued implementation of our focus simplify and grow cost reduction initiatives.
We're very proud of our team and their continued execution against our strategic initiatives in the quarter, which in turn further strengthens our competitive positioning.
We're confident in our future and believe that we are well positioned to deliver on our outlook for the remainder of this fiscal year and capitalize on any market opportunities for Julien.
With that we'd be happy to take your questions operator.
Certainly.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause momentarily to assemble a roster.
Today's first question comes from Laura Champagne with loop capital. Please go ahead.
Thanks for taking my question now that the the sales guide is just for that effectively for Q4 can you give us more information on what you expect in terms of store count year on year or any changes in the store base sequentially and what kind of a comp range that would imply to hit your full year guide.
Yeah, Hey, Rob it's Scott.
Talk to you in terms of store count.
He has really materially changed.
The last couple of years, we've gone down I think it was 15 last year, it'll probably be somewhat similar to this year.
As we do open new stores and do it all a lot of two for ones and those sorts of things. So there's not a material change to the path we've been on with our store count.
Got it and then on comp what would that imply a sequential improvement in the same store sales trend.
It basically implies a trend we've been on this year is what I would say from from from a comp perspective.
Got it thank you.
Thank you. The next question is from Peter Keith with Piper Sandler. Please go ahead.
Hi, Thanks, good afternoon guys.
You know on the on the comp headwinds that you've been calling out with some of the craft technology and strategic inventory reductions.
Maybe just to give some visibility in the out quarters, but when might we think about lapping those in and no long as you see them as headwinds.
Hey, Peter how are you doing it's Chris.
So what we've really been able to do this year is reset that baseline and a lot of those seasonal businesses. So.
Strategically pulling back earlier in the air on spring and summer to core categories investing in Halloween strategically pulling back in.
Ottoman fall, we really see that resets being the new baseline that we start from so on the seasonal it into 2025, so on the seasonal side I would say.
You know where it will be a lot more comp to opportunistic next year on.
On the crafts technology headwind side.
You know, we will continue to read and react to the business.
You heard us say for the full year before we thought it would be.
You know still a headwind and it was a little more of a headwind than we thought it would be in the third quarter. So.
So we continue to evaluate that and adjust as we can.
We are looking to see how we can.
Reassert if need be if the headwinds persist in certain crafts technology as well.
Okay. That's helpful. Thank you and then I guess too.
With the update to the sales guide and and and then EBITDA Guide holding.
I think what it's implying is quite a bit of gross margin improvement.
Year on year.
Now we've been kind of using as adjusted gross margin. We are stripping out those excess freight costs that you guys had a boxed out in prior quarters. So my thinking is right with what Q4 is there a is there a notable swing factor from Q3 to Q4 in terms of year on year gross margin change in <unk> and if so what are the factors to that.
Yeah, Peter Scott I think the biggest change in Q4 sort of what we called out with the Auc's turning from a headwind to a tailwind we expect them to be flat to slightly down in Q4, and then that trend. We do expect to continue into 2025, what I will say that it does give us some of the fuel.
To really read and react to the pricing for our customers because our approach is really to maximize gross profit dollars and so we're gonna be opportunistic where we see opportunities to win.
And so the the AUC declines or are intriguing and it sounds like something that could actually increases the benefit next year could you help us unpack that a little bit and understand but I guess the.
The mechanism to get the lower cost.
Yeah, a lot of it is coming from our focus simplify and grow initiative, where we've been negotiating all year lower Cogs lower product costs and so keep in mind with our long term you know call. It a nine month on average it takes a while for those units to come in and then start to sell through so we're getting to that infer.
What's important in Q4, and that's what we've been talking about where we're going to see a much bigger P&L benefit next year because of that versus this year.
Very helpful. Thanks, so much guys.
Thanks Peter.
Thank you as a reminder to ask a question you May Press Star then one.
Next question is from Cristina Fernandez with Telsey Advisory Group. Please go ahead.
Hi, good afternoon, and thank you for taking my questions I wanted to follow up on Peter's question around the implied fourth quarter profitability.
So on the EBITDA on the EBITDA margin it looks like it's going to be.
Expand pretty meaningful to to double digit so is it primarily on the gross margin.
What can we expect from the SG&A I guess, how much of a benefit is having the the 53rd week as well.
Yeah, I can I can touch on that I Christina.
In terms of I'll build off the the margin piece. So SG&A will also be.
Providing a bunch of that benefit in Q4 as now we've talked about some of our store labor structure changes that we made we talked about the corporate structure.
Structure changes that we made so those will all be providing benefits in Q4 as we go forward. So we have both the margin benefit we talked about the SG&A tailwind from.
From all of that as well and the 50 <unk> week, well, we haven't disclosed exactly what it is a tailwind for adjusted EBIT in the quarter as well.
And then the second question I had was around the decision to invest in inventory can you give more details about what.
So product lines.
Is it mostly inventory to be sold through.
In the first half of next year.
Hi, Christine it's Rob I'll take that one so we have been talking for a few quarters now about the strength in our textiles business in particular, a certain categories across the fabric business and as we mentioned on this call needle arc, that's where the majority of our incremental spend is making sure that we're in stock. We've also been talking about our <unk>.
Basic business.
As we have seen some strength in those core categories. The basic side of the business that go along with the go on with those projects think selling construction or film and fiber.
We are increasing our in stocks to make sure that we are ready for the full project as our customers come in.
And the last question I had at anything.
I'll take on the competitive environment are you seeing anything do you see anything different in the third quarter into black.
Black Friday period.
Hey, Kristina its Chris.
Say the competitive environment continues to be a really pretty rational overall I mean, it's as we all know the discretionary retail environment is tough and we are being.
Fossil and using our data to find the best retail as we can for our customer that said.
We haven't seen anything.
That gives us pause on the promotional front with competitors.
We're pretty confident in how we're navigating the current period.
Thank you.
Yeah.
Thank you. The next question is from David plans with Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking my questions. So I was just curious if you could talk about the sales trajectory a little bit in a little bit more detail. I think you had mentioned that Q2 Q3 to date trends were tracking in line with Q2, but you know you ended the quarter down $4. One. So I was just curious if you could provide additional color there.
Hey, it's Chris.
Yeah.
Way, we are we looked at the quarter is when you normalize for the Halloween pull forward that we experienced which was a meaningful impact positively to Q2, but the negative result was it took some sales out of Q3. So when you pull that impact out the business was really very consistent.
<unk> Q2 and Q3.
And what we're really seeing is some of the categories that Rob called out in that I talked about in the in the earlier portion of the call. We're seeing really good strength in our in fleece and needle arts and solving technology.
Which gives us a lot of confidence as we head into the fourth quarter.
Got it that's helpful. And then can you provide an update on how youre thinking about interest expense and potential debt pay down in the coming quarters.
Yeah, Hey, David It's Scott.
Right now, we're getting the benefit kicking in of our interest rate swaps. So that that definitely helps but the main thing. We're focused on is getting this business back to the historical profit levels that it's been in and generating cash so that we can.
Handle that debt as it comes due in 2026 and 2028.
Thanks.
Thank you. The next question is from Steven Forbes with Guggenheim. Please go ahead.
Good evening, Chris Scott I wanted to follow up on operating working capital and you gave some nice color then on inventory for the year end.
Payables as a percentage of inventory is fluctuated pretty dramatically over the years here. So any any sort of framework to think about where where payables as a percentage of inventory ended the year.
So if you're really asking about how does that inventory composition breakdown. So you know what I think I said on the call inventories going to be down low to mid single digits. What I would tell you is the unit piece is actually going to be up slightly and the cost will be down.
So that's you know getting back to al Rob gave some color around the categories, we're buying into and seeing that that's that's.
However, the composition is going to work, especially as our AUC has continued to become a tailwind.
And then maybe maybe just a quick follow up on focusing on free cash flow rate given the change in the guidance for the year.
I'm not sure if you can maybe help us frame sort of how you see.
The evolution of free cash flow next year in a particular scenario, whether that's sort of a flat sales scenario just given what's happening with the AUC is there sort of a is there a path to flat or is or is there any sort of framework you can provide us to help think through sort of the free cash flow for the business as these these benefits start flowing through.
Yeah, I mean, we're still working through the exact plans for next year, but you know when you see the momentum that we have with the cost savings and then on the product cost side as well.
I see a path to positive free cash flow next year, not just back to fly that even in a sort of flat sales scenario. So we're really excited about the momentum we have on the cost saving side and none of that is.
Intention on any sort of topline growth.
Thanks for that.
Thank you.
Thanks, Steve.
Thank you. This concludes the question and answer session and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yeah.
[music].
Yeah.
Yes.
[music].