J.Jill, Inc. Q3 FY2023 Earnings Call

Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the J.Jill Third Quarter 2023 Earnings Conference Call. On today's call are Claire Spofford, President and Chief Executive Officer; and Mark Webb, Executive Vice President, Chief Financial Officer and Chief Operating Officer. After the speakers’ remarks there will be a question-and-answer session. Before we begin, I need to remind you that certain comments made during these remarks may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J.Jill's SEC filings. The forward-looking statements made on this press release on this recording are as of December 5, 2023, and J.Jill does not undertake any obligation to update these forward-looking statements. Finally, J.Jill may refer to certain adjusted or non-GAAP financial measures during these remarks. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in the press release issued December 5, 2023. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of the website at jjill.com. I will now turn the call over to Claire.

Thank you, operator, and hello, everyone. Thank you for joining us this morning. I will begin our discussion by reviewing highlights from our third quarter performance and will then provide an update on a few of our strategic initiatives before turning the call over to Mark to review our financial performance and outlook in more detail. We are pleased with our third quarter performance and our continued strong execution of our disciplined operating model, which enabled us to deliver sales and adjusted EBITDA above our expectations. We saw particular strength earlier in the quarter, supported by solid customer reception to our transitional product as we entered the fall season. Throughout the quarter, we continued to deliver collections that were versatile, modern, and appealed to our loyal customer base. This product flow drove nice growth in our core assortment in the third quarter, highlighted by particular strengths in sweaters as well as wovens. As a result, we saw full price perform well across both our retail and direct channels. We were pleased with the sequential top line improvement we delivered within direct, compared to the prior quarter. As we have discussed on prior calls, we're leveraging aspects of our assortment to not only celebrate the totality of women everywhere and fuel their journey with joy and ease, but to build strength and momentum across our customer file. In Q3, we continued to see growth in new-to-brand customers across both channels with particular strengths in direct. Our size inclusivity initiative and Wherever sub-brand are continuing to support our acquisition of new-to-brand customers, who are younger than our average customer, but consistent with our target demographic. During the third quarter, we successfully anniversaried the launch of our size inclusivity initiative from last year and delivered growth across all extended sizes, despite the tougher comparison. We were also pleased with our Wherever Works capsule collection, which launched right after Labor Day and highlighted versatile pieces that customers could wear to work and that would carry them throughout their day. As we look ahead, we will continue to periodically launch capsules to lean into opportunities both from a top-line growth perspective, as well as providing an avenue for broadening our brand awareness and fueling the health of our customer file. Throughout the quarter, we successfully leveraged our digital and influencer strategies and are pleased with the efficiencies these tactics have driven, as well as giving exposure to new customer audiences. These marketing efforts, along with the benefits from the enhancements we made to the online customer experience earlier this summer, help support the sequential improvement in our direct channel this quarter, compared to Q2. While we're seeing an impact again from elevated return rates as customers have become more discerning with their spending, particularly in certain categories. We believe through the actions we have taken with our updated fit guide and shop the model features, we have been able partially to mitigate the impact by ensuring that our customer understands and can find the right fit for her. While we cannot control all external factors, we continue to operate with discipline in order to effectively manage all elements within our control, and we are investing in both channels in order to drive balanced growth. As mentioned previously, we implemented a new POS system this year, which is already yielding a more efficient and positive customer experience in stores. We are also embarking on an OMS project that we expect will enable more productive omni-channel capabilities. We look forward to updating you on this important initiative in the future. In summary, we continue to operate with discipline, which has yielded better-than-expected results this quarter and supported our strong cash flow generation. We have a great brand with a wonderful loyal customer, and we are continuing to invest across our channels to enhance her experience wherever and whenever she chooses to shop with us. We've continued to say that our customer is resilient, but not impervious to macro uncertainty. And as I mentioned, we did see her pull back on spending later in the third quarter, which continued into the start of the fourth quarter with some strengthening over the promotional Black Friday, Cyber Monday period. As a reminder, the fourth quarter is historically our smallest period from a sales and profitability perspective, positioning us differently from many of our retail peers. And while we are maintaining a prudent outlook for the remainder of the year, given the current trends and our recent customer survey work, we believe we remain well positioned to achieve our objectives for this year. I will now turn the call over to Mark to review our results and outlook in more detail.

Thank you, Claire, and good morning everyone. Our results again show the strength of the J.Jill brand and the benefits of our disciplined, purposeful operating model, especially amidst a dynamic macro environment. Sales and adjusted EBITDA both actualized above guided levels as customers responded well to new floor sets, particularly early in the quarter. In addition, cash flow was once again strong in the quarter and disciplined inventory management resulted in clean end of quarter inventory levels. Total company comparable sales for the third quarter increased 1.9%, compared to last year's negative 1.2% comp. Total company sales for the quarter were $150 million flat, compared to Q3 2022. Store sales for Q3 were flat versus Q3 2022 on about 1% fewer stores. Higher average unit retails in the channel were offset by lower units sold per transaction, driven primarily by fewer markdown units sold. Direct sales as a percentage of total sales were 45% in the quarter. Compared to the third quarter of fiscal 2022, direct sales were down 0.5%, representing a sequential improvement, compared to Q2. Q3 total company gross profit was $108 million, up $2.8 million, compared to Q3 2022. Q3 gross margin was 71.8%, up 190 basis points versus Q3 2022, as favorably affected by lower freight costs and strong full price selling along with lower promotions. SG&A expenses were $85.7 million, compared to $84.9 million last year as increases in selling costs and general overhead primarily due to wage inflation were partially offset by lower depreciation and amortization. Adjusted EBITDA was $28.3 million in the quarter, up 3%, compared to $27.5 million in Q3 2022. Please refer to today's press release for a reconciliation of adjusted EBITDA. Turning to cash flow, the third quarter marked another strong quarter generating $21 million of cash from operations and ending with $64 million in cash and zero borrowings against the ABL. Inventories at the end of Q3 were down 6% compared to the end of Q3 2022. As mentioned last quarter, we have now anniversary the supply chain disruption experienced in the first half of 2022, and as a result, our year-over-year comparisons are more normalized. That said, as we look forward to the end of the year, we expect the 53rd week to impact reported inventory levels as we ship spring goods that week, resulting in higher in-transit inventories at the end of the year. As a result of this impact, we expect total reported inventory at the end of Q4 to be up compared to last year. Capital expenditures in the quarter were about $4 million, compared to about $3 million last year. We neither closed nor opened stores and ended the quarter with 245 stores. We are pleased to have completed the rollout of our new POS system during the third quarter. The new system will improve the efficiency of transactions in store, add mobile line-busting capabilities, and is the first step in a broader plan to enhance enterprise omni customer fulfillment opportunities. The next step in that plan is kicking off now with a project to replace and upgrade our legacy order management system or OMS. We continue to train our staff on the capabilities of the new POS and are excited to begin work on OMS. I want to take a moment and congratulate and thank the incredible team that executed the POS replacement. They worked hard with professional pride and dedication to make this project a success. So to the IS, corporate, and store teams, thank you and congratulations. Turning now to our outlook. We continue to operate in a dynamic environment. As Claire mentioned, we saw softness at the end of the third quarter that carried into the start of the fourth quarter before strengthening somewhat on Black Friday, Cyber Monday, albeit at elevated levels of promotion. Given this, we believe that it is prudent to take a cautious approach with respect to our outlook for the remainder of the year. For the fourth quarter, we expect sales to be approximately flat versus Q4 2022 and adjusted EBITDA to be in the range of $11 million to $13 million. And for the full year, we are maintaining our outlook for adjusted EBITDA to be down in the low single digits compared to last year. As a reminder, the fourth quarter and the full year include an approximate $2 million adjusted EBITDA benefit from the 53rd week. Regarding store count, we still expect to close two stores in the fourth quarter to end 2023 with a store count flat to last year. And with respect to full-year capital, we expect to spend about $18 million, with investments focused on technology, stores, and facilities capital, and the POS and OMS projects. In summary, we continue to operate a very disciplined operating model and remain on track to deliver another strong year of cash flow generation, positioning us well to continue investing in the business and evaluating opportunities to drive profitable growth and total shareholder returns. Thank you, and I will now hand it back to the operator for questions.

Thank you. Your first question comes from Jeff Lick from B. Riley Financial. Please go ahead.

Good morning, Claire and Mark. Congratulations on a nice quarter. Guys, I was wondering if you could just, you know, you referenced the third quarter, you know, the end of third quarter weakness and then obviously into the fourth quarter, but the Black Friday pickup. I wonder if you could unpack that a little bit and then also you referenced the customer survey work. Maybe you could wrap what you've learned there with the observations you're seeing at the end of the third quarter, into the fourth quarter, and then the Black Friday promotional period?

Sure. Thanks, Jeff. We did see a sort of slowdown coming out of Q3, which we attributed to more discernment on the part of the customer. We conduct a pulse survey every quarter to understand where our customers' minds are relative to purchase intent and the macro environment, and how they are feeling about things in general. There was a level of concern there, which is understandable given the macro uncertainty. So, you know, we pay attention to that. And we did see softness coming out of Q3. As we entered Q4, we continued to see that trend. We held our ground on the promotional levels, unlike some competitors who initiated their Black Friday promotions earlier. We did not do that, and we continued to see some softness coming into Q4 as we moved into the Black Friday, Cyber Monday weekend. However, we did see customers respond to those promotions. So that gives you a little more detail, and I think that cautiousness is reflected in our guidance for the fourth quarter.

And then one for Mark, with the Q3 gross margins continuing to shine, especially if you look at it relative to two and three years ago, your guidance would imply you've left some room there for the promotional environment that we just talked about. I was wondering if you could comment on that? And then also just wrap anything with the POS that's now in place and the OMS that's getting in place and where there might be some benefits in the P&L for that?

Sure, Jeff. Thanks. Yes, I think the drivers of the gross margin in Q3, and it continues to be another hallmark of the operating model, just the strength in the gross margin, and we were pleased with it in Q3. The drivers were freight, though we've indicated that freight is a diminishing benefit throughout this year, so that'll continue to be less of a benefit, albeit a small benefit, moving into Q4. We cited underlying first cost AUCs, particularly cotton, which we've talked a bit about, but the price broke on cotton late last year, and we're starting to see that benefit come in. That will be a tailwind for us moving forward. The other two drivers were a function of the operating environment, with full price selling and a lower promotional environment. Again, we were happy with how that played out over the course of Q3, though obviously, as Claire just mentioned, the end was a bit softer than the start. But that AUC benefit does create the opportunity for us to continue to deploy some of it into promotions, if needed. And as we mentioned in the guidance, we have a cautious approach; we're expecting a promotional environment. This is the time of year for promotions, so we stand ready to do that. And you mentioned POS and OMS, I'd be happy to elaborate on that.

Yes, no, go ahead. I was going to ask about that. It'd be great if maybe you could just compare and contrast some of the lessons you had in your previous experiences?

Well, let me say that rolling out a new POS system is a great thing. The store staff and customers have noticed the new technology. We are still learning the new system, and that will continue. We're excited about the opportunities that it presents to enhance customer experience, drive conversion by making transactions more seamless, including returns and exchanges. The new POS also improves our capabilities with respect to online purchases made in-store. So all of this is enhanced with the new POS rollout. We're also eager to get the OMS project underway—this will provide a comprehensive picture of our enterprise inventory and improve operational efficiency. We're looking forward to seeing the benefits in the years ahead.

Awesome. Thank you very much, and congrats on the great quarter.

Thanks, Jeff.

Thanks, Jeff.

Your next question comes from Ryan Meyers from Lake Street Capital Markets. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. My first one for me, obviously another quarter of really strong cash flow generation. Just wondering if you can provide us with some detail on what your capital allocation strategy is going forward?

Sure, Ryan. You know, we've been pretty consistent. We were super pleased to refinance our debt earlier this year in a tough market, but feel like we got strong terms in place. As we continue to execute our operating model, the cash flow generation plays a big part of our story. This cash gives us the opportunity to invest back into the business and drive profitable growth. Claire provided several examples of this in her remarks. It allows us to enhance foundational systems, which we are doing with POS and OMS. There's still cash left over, and we evaluate how best to deploy that cash to drive total shareholder returns.

Okay, that makes sense. And then obviously you kind of talked about that for Q4 margin, a lot of that is going to be coming from the promotional environment. Have you seen increased spend from the customers as you've run some of these promotions, or how has this more promotional environment affected Q4 so far?

Yes, thanks, Ryan. As we mentioned, reflected in our guidance is the room to promote appropriately to achieve our goals of driving sales, moving through inventory, and coming out of the year in a good position from an inventory perspective. We are a brand that tries not to promote more than necessary. The fourth quarter is very promotional, and as I mentioned, it is also our smallest quarter from a top-line and EBITDA standpoint. We are navigating this carefully, we stay close, and we pull the necessary levers to achieve our sales and inventory goals while maintaining our margin profile to the extent possible. All of this is accounted for in our guidance for the fourth quarter, and we feel good about our brand, our product, and our customer.

Okay, great. Thank you for taking my questions.

Thanks Ryan.

Thank you.

Your next question comes from the line of Dana Telsey from Telsey Group. Please go ahead.

Hi. Good morning, everyone, and nice to see the progress. As you think about the gross margin side, the AUC opportunity going forward, where are we in that path of AUC and how does that look? And then you mentioned, Claire, about some of the categories. Anything you saw on the Pure Jill or Wherever collection as compared to the core categories and how the customer responded? Any insights on return rates differing by category? Lastly, you talked about capturing the younger customer; did you see anything this quarter from the younger customer and their buying preferences compared to the core?

Sure, I'll answer the latter two, Dana, and then I'll hand it over to Mark for the AUC question. From a category standpoint in Q3, we saw nice strength in our core assortment, we saw growth there. We had a robust refresh in August, which performed very well. We had a really nice transition into fall and saw positive response to our transitional product, which we feel like we got right in terms of silhouette, color palette, and overall reception. In particular, we saw strength in sweaters, woven tops—especially print and pattern pieces—and some strength in denim as well. From a sub-brand standpoint, Wherever was a standout this quarter. We’ve been focusing on Wherever for work usage occasions, and we’ve attracted new, younger customers that align with our target demographic. Post-Labor Day, we had a capsule called Wherever Works, which was well received, offering versatile pieces that emphasize sophistication and refinement suitable for the work setting.

Dana, regarding AUCs, as I mentioned previously, the go-forward tailwind is linked to raw materials and cotton. I expect this tailwind to persist, starting last quarter and moving forward, likely through the first half of next year. We are monitoring reports on crops like flax and linen that can affect AUCs as well. However, expect the cotton-based benefit to remain, and it’s worth noting our margin rates are healthy, so we don’t necessarily need to expand them further. This allows us comfort in making investments that may carry more risk, which supports our disciplined operating model.

Got it. Any thoughts on the breakdown by channel, stores and online? What were the drivers this quarter? And lastly, any thoughts on store openings for next year now that you're beginning to explore that option?

Sure. We expect next year to be a year where we would return to some level of store growth, pending successful negotiations with landlords and securing the right deals. As far as the channels this quarter, we were pleased to see direct improve sequentially. This channel has benefitted from investments we made, which Claire mentioned earlier, and we remain optimistic about it. Store performance showed no significant geographical differences in drivers. Traffic at lifestyle centers continued to outperform compared to malls, but overall, there were no large discrepancies across geographies.

Thank you.

And we have no further questions in our queue at this time. And with that, that concludes today's conference call. Thank you for your participation, and you may now disconnect.