JOANN, Inc.

Welcome to the first quarter of fiscal 2022 earnings call for Joann Incorporated. My name is Adrienne and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note this conference is being recorded. I'll now turn the call over to Ajay Jain, Director of Investor Relations. You may begin.

Thank you, operator, and good afternoon. 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. These statements speak as of today, and the company undertakes no obligation to update or revise any forward-looking statement 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 recent filings with the SEC. During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed with the SEC today and posted to the Investor Relations section of Joanne's website at investors.joanne.com. On the call today from Joanne is Wade Nielsen. Mickelon, President and Chief Executive Officer, and Matt Sues, Chief Financial Officer. I will now turn the call over to Wade Mickelon. Wade?

Good afternoon, and thank you for joining us today. I would be remiss if I didn't start by welcoming A.J. Jane to the Joann team. A.J. will be leading our investor relations efforts and is an extremely talented leader with an extensive background in the financial markets. I know you will really enjoy getting to know him as we share the Joann story to current and potential stakeholders. Relatedly, it's truly gratifying to be part of Joanne's return to the public equity markets. Many of you may already be familiar with our company's history going back more than 75 years from its humble origins in a single location shop in Cleveland to what has become the nation's largest fabric and crafts retailer. For those who are new to our story, at Joanne, our mission is to inspire the great spirit in each of us with a strong legacy as the nation's category leader in sewing. We are also one of the fastest growing retailers in the arts and crafts category with a robust omnichannel platform. Our vision is to be the inspirational leader that helps everyone find their happy place through superior assortments, strong merchandising execution, and a relentless focus on customer service and experience. Our first full quarter as a public company was a successful one and exceeded our internal expectations. Our sales trends remained strong, growing at 15% over last year's first quarter, with that strength spread broadly across our merchandise categories, customer segments, channels, and geographies. We also drove gross margin expansion and controlled expenses to increase net income to $15.1 million and expand adjusted EBITDA margins by 570 basis points to 10% of sales, resulting in a $35.8 million or 165% increase in adjusted EBITDA versus last year's first quarter. While Matt will provide more detail on our financial performance, I want to also briefly highlight our momentum in debt reduction over the past year. Driven by our many balance sheet initiatives and $77 million in net proceeds from our recent IPO, we've reduced our long-term net debt by $570 million from the same period last year to $760 million at the end of our latest quarter. And we anticipate further debt reduction to a level of $600 to $650 million by the end of fiscal 2022. Over the past several years, we've been on a journey to truly transform Joanne and define a differentiated customer experience. that will lead to sustainable growth and value creation. While the pandemic dealt all retailers, including Joann, many challenges, over the past several years, we've been laying the foundation to elevate the Joann experience across several key initiatives. For us, the pandemic crisis was the intersection of opportunity, meaning preparation, and this in turn has made us one of the fastest growing store and online retailers over the past year. Our initiative to refresh our store base continues to show enormous promise as we are literally stepping out of the traditional sewing arts and crafts space into one that is future relevant and far more experiential. We believe the impressive top line and bottom line lifts we are experiencing in large part is because for our many customers, we truly are their Disneyland, the place they go to be inspired to connect and to create. We believe that our extremely strong net promoter scores further validate our success in driving repeat visits and attracting new customers. When we get it right, we expand share of wallet with traditional customers and attract new customers as well. As it relates to our real estate initiatives, we are now beyond the pilot phase of our store renovation program and are ramping to the execution phase. In this new phase, we will be significantly enhancing our assortments and improving our customer experience across the vast majority of Joann stores over the next 7 to 10 years. and are targeting a four-year overall payback on total capital and project expenses invested. It's part of our store refresh program. We'll also do a significant number of relocations as part of the overall real estate strategy. We further reinforce our relationship with our customers through our data-driven digital capabilities. Customers can interact with our brand whenever and however they want. Customers connect with us through our newly redesigned mobile-first website, joann.com, and our widely used mobile application that has generated more than 12 million downloads to date. These points of differentiation are reinforced by our knowledgeable, friendly, and trusted team members, a significant number of whom are sewing and craft enthusiasts, who offer a service-oriented experience for our customers that we believe cannot be replicated by mass retailers or pure play online retailers. We have invested heavily in our Omni capabilities over the past several years, and this too has not gone unnoticed by our customers. In fact, Joanne was recently recognized as the number one fastest growing e-commerce retailer among a field of 1,000 by Digital Commerce 360 for the year 2021. And while we greatly value our 855 stores with nearly 100% of our stores cash flow positive, we continue to robustly invest in our rapidly growing, best-in-class, omni-channel business in which we serve our customers in a differentiated manner by offering several convenient fulfillment options, including BOPIS, curbside pickup, and ship-to-home offerings. Essentially, we never want to give our customers a reason to leave Joanne's ecosystem. Our omnichannel platform has now achieved significant scale with over a half a billion sales in the past fiscal year, with 70% of sales fulfilled directly by the physical store location and roughly 40% either picked up in-store or at curbside. In the latest quarter, omnichannel contributed approximately 13% of our net revenue compared to 4% in the same period last year. Importantly, our Omni platform is highly profitable and leverages central and third-party capabilities, as well as our efficient in-store fulfillment network. We are currently investing in additional fulfillment capability that will support both Omni growth and our overall supply chain network. We expect this additional fulfillment capability to ramp up throughout the fiscal year and be fully complete by spring of 2022. Our ability to effectively market to our customers is another critical component of our business success. We've leveraged our robust CRM data to segment and target customers, allowing us to be relevant and further drive customer engagement. We tier our customers based on total sales volume and frequency of purchase. In the latest quarter, roughly one-third of comparable store sales were generated by our top 3 million customers. These best customers shop at a high frequency and contribute strongly to our positive gross margin trends. Our recent success is also being driven by new customers. We also shop at a high frequency and generate strong average ticket size. Based on our customer segmentation, newer customers account for the second highest rate of sales growth and sales contribution across our customer tiers. Why have we seen this broad-based customer success? Well, we believe it's because we appeal to all skill levels. Whether you're a novice or an expert, we have an unparalleled overall assortment, most of which cannot be directly cross-shopped. And our team members serve as true, friendly, clever allies. including offering a variety of classes and services that help our customers on their sewing or crafting journey. We feel that the competitive backdrop remains favorable to Joanne, as evidenced by her continued market share gains and strong gross margin trends in the latest quarter. We are the leader in the vibrant sewing category with a 33% market share, and we are rapidly growing in the other half of our business, which includes arts and crafts, seasonal, and decor. Underlying this momentum is the fact that approximately 25% of our customers make to including on platforms such as Etsy, Shopify, and eBay, and those market exchanges continue to grow. These customers depend on us to provide the supplies that they need at the right price so they can operate their own successful and profitable businesses. Encouragingly, related favorable trends, including Joanne's sales of both sewing and crafting machines, which have also been growing, and even more so in the past year. These machine sales provide a good foundation for the business moving forward as the follow-on sales for these customers is significant. With sewing now reaching an entirely new, younger customer demographic, and based on the ongoing technical innovation across the craft category, we believe that the rise of technology combined with the coolness factor, when one can customize, personalize, share, or even sell, will be a major driver in our industry and our company for many years to come. We also have a series of several exciting growth initiatives in process, which we believe will allow us to tap into new and lucrative markets domestically and abroad. And I'll be sharing more about these over time during subsequent calls. While there are many things to feel great about, we remain vigilant on potential risks and ways to mitigate. Inflation is certainly a risk, but within that, the largest issue that we are encountering are in the area of general supply chain disruptions and increases in costs, particularly ocean freight. That said, for Q1, we delivered ahead of our internal plan for the fiscal 22, and for fiscal 22, we believe we should be able to deliver on the plan for the balance of the year. where these additional supply chain costs should be able to be offset by the continued robust product margin expansion. In summary, our strong first quarter results should set the foundation for exciting year ahead as a newly public company. Our team members remain true to our mission and vision to inspire creativity in ourselves and our customers, and to help our customers find their happy place. The Joann leadership team has never been more enthusiastic about our future. Thank you for all of your support along our journey. And with that, I'd like to turn the call over to Matt to discuss our first quarter results in more detail.

Thank you, Wade. I, too, am truly grateful for the efforts of our entire organization. Collectively, our field, distribution center, and corporate teams' unwavering focus on serving our customers and communities resulted in strong first quarter results for Joanne. Now let me share highlights of our first quarter fiscal 22 performance which exceeds our internal plans on top line sales performance, operating margins, and bottom line profit. Net income was $15.1 million in the first quarter of fiscal year 2022 compared to a loss of $23.6 million last year. Diluted earnings per share was $0.38 compared to a loss of $0.68 in the same period last year. Adjusted diluted earnings per share was $0.46 compared to an adjusted loss per share of 31 cents in the first quarter of last year. As Wade mentioned, adjusted EBITDA increased 165% to $57.5 million compared to the same quarter last year. Debt growth was driven by the sustained momentum in sales and customer engagement we experienced last year. Adjusted EBITDA as a percent of sales expanded by 570 basis points to 10%, driven by strong growth and gross margin and our ability to manage growth and expenses well below our increase in net sales. I will now provide more detailed color on our quarterly results. Net sales for the quarter increased 15% to $574.4 million compared to the same period last year, with total comparable sales also increasing by 15%, driven primarily by an increase in customer transactions. Our omnichannel also remained a strong and important part of our business, reaching $76 million for the quarter, representing 13% of total sales. As the economy rebounded and COVID-19 restrictions have lessened throughout the country, we saw broad-based sales growth across all geographic regions. Gross margin expansion was a key driver of our significant improvement in earnings for the quarter. Gross margin dollars increased 23.1% compared to the same period last year to $302.7 million. Reflecting a gross margin rate of 52.7% compared to 49.2% in last year's first quarter, a 350 basis point improvement. This was driven by several factors including reduction average cost per unit driven by our ongoing strategic sourcing efforts, more optimal levels of promotional discounting, and improvements in our inventory quality that have had a direct impact on reducing shrink and clearance markdowns. These gross margin gains were partially offset by higher import freight costs that have impacted a variety of US retailers. First quarter SG&A expenses increased by 3.2% to $249.9 million primarily due to slightly higher selling costs given the first quarter's strong 15% sales growth, as well as from higher incentive compensation accruals. Growth in expenses was partially offset by a reduction in costs incurred in the first quarter last year relating to our response to the COVID-19 pandemic that did not fully recur this year. As a percentage of net sales, SG&A expenses for the first quarter were 43.5%. an improvement of 500 basis points compared to last year's first quarter as we have leveraged fixed costs against our sales growth and continue to identify and implement operating efficiencies. Depreciation and amortization expense was $20.4 million for the first quarter of fiscal 2022, an increase of $600,000 compared to the first quarter last year, driven primarily by investments in information technology. Store pre-opening and closing expenses totaled $1.8 million for the quarter, consistent with the prior year. Interest expense for the first quarter was $13.2 million, a $9.5 million or a 42% decrease compared to the first quarter of last year. This decline in interest expense was primarily driven by a 38% decrease in average debt levels versus last year's first quarter. Our blended interest rate also declined as we utilized IPO proceeds to pay off our highest interest tranche of term debt in March. I will now highlight a few selected balance sheet items. Our long-term debt was $760.4 million as of May 1, 2021, a decrease of $569.5 million from May 2, 2020, and a further decrease from the $786.3 million as of January 30th, 2021. Our $77 million in net proceeds from our initial public offering were used to retire debt, primarily our term loan due in 2024, which has been repaid in full. Merchandise inventory decreased by $75.1 million or 12.2% in the first quarter of fiscal 2022 compared to last year. We've continued to improve inventory turn and quality of our overall inventory, which has generated strong year-over-year improvements in shrink reduction and a lower penetration of clearance inventory and markdowns. We continue to be pleased with our ability to maintain healthy and stock positions in our store locations and online at this lower overall inventory investment. Cash and cash equivalents were 22.7 million as of May 1, 2021, down from $147 million at the end of the first quarter last year. The figure from last year reflected additional cash the company carried on the balance sheet from a drawdown on her asset-based revolving credit facility, which was repaid during the second quarter of last year. As of the end of the first quarter, the trailing 12-month adjusted EBITDA reported under our credit facilities was $363.6 million, resulting in a reported leverage ratio for net debt less cash to adjusted EBITDA of 2.1 times. On May 21, 2021, our Board of Directors declared a quarterly dividend of $0.10 per common share. The dividend is payable June 25, 2021 to shareholders of record as a close of business June 11, 2021. The first quarter dividend will be the company's first since we listed on NASDAQ's on March 12th of this year. In summary, we are very pleased with our strong financial performance this quarter, driven by sustained growth in our top-line sales trends and gross margin improvement. This momentum was broad-based across our retailing operations and reflects continued improvement in consumer sentiment. As Wayne mentioned in his prepared remarks, while we expect to incur higher supply chain costs based on the current operating environment, We are very comfortable in our ability to contain these near-term headwinds through a variety of margin-enhancing initiatives. With that, we'd be happy to take your questions.

Thank you. We'll now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. There'll be a delay before the first question is announced. If you're using a speakerphone, You may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone. And our first question comes from Liz Suzuki from Bank of America. Your line is open.

Great, thank you. Can you just walk us through the biggest drivers of that gross margin this quarter, or either quantify or rank order the impact of the strategic sourcing efforts, the promotion activity, and shrink, or any other good guys to gross margin?

Sure, Elizabeth. This is Matt. Happy to do that. Yeah, primarily driven by what we would quantify internally as product margins. So I would say the primary driver of that being our ability to optimize discounting relative to what we were able to do a year ago. I would say pretty closely followed by what's been ongoing success of our direct sourcing wins in terms of being able to go direct to factory in many cases or negotiate better terms with existing vendors. After that, I would say definitely the shrink initiative has been a big win for us. Again, just the lower all. overall inventory carrying values is helpful there but we've also implemented a number of controls in our stores over the last 12 to 18 months that are starting to really bear fruit. And then one I would put shortly after that but I think longer term is something that we're quite excited about is just the overall lower penetration of clearance to our total inventory. If you look at sales of markdown goods to our total it's down about 100 basis points We actually feel for the coming quarters that's actually going to be one of the nicer tailwinds for us going forward.

Great. It seems like a lot of those benefits would theoretically continue in the subsequent quarters. Is there anything of a one-time or temporary nature that we should think about, or are a lot of these benefits likely to continue?

Matt, jump in here. I think these benefits will likely continue. The one thing we're seeing now is really primarily these massive ocean freight increases. The bad news is they're probably unprecedented in their nature, but the good news is they're not sustainable. At some point they're going to fade and we'll go back to normalcy.

Yeah, I think the rest of the tailwinds I talked to, we do feel they're sustainable. Certainly the promotional environment could change. I think that's a portion of the benefit we're seeing. But I would also attribute much of that to just our own analytics and really reading of the unprecedented number of new customers we have coming in to the space and really understanding their sensitivity to promotions and our ability to leverage our high-low model against that. We do feel most of that's sustainable.

Great. Thanks very much.

Thank you.

And our next question comes from Paul Carney from Barclays. Your line is open.

Hi, everyone. Thanks for taking my question, and congrats on a first good quarter out of the gate. Thank you. Can you talk a little bit about what categories drove some of the sales growth and where you're seeing continued momentum?

Yeah, I mean, you know, our results are very broad-based. Really, all of our core divisions were up and growing. You know, nicely, especially on the stronger side was really our arts and crafts and seasonal was a bit stronger than balance, but very broad-based. You know, sewing wasn't as strong, but one of the things, even though sewing is up nicely and nicely on a two-year stack, but what we're pretty optimistic about is some of our biggest businesses in sewing are actually still somewhat shut down. So, you know, our things like our fashion apparel, our special occasion, you know, and then there's obviously sales that come with that in terms of what we call sewing construction. You know, these businesses have largely been shut down because there haven't been, you know, weddings, cosplay events, quinceañeras, there hasn't been, you know, proms, those kinds of things. And as we see different geographies and zip codes open up, you know, we're seeing those businesses now start to blossom. But we see that that's going to be actually a nice little tailwind for us, too, as we get back to the new normal.

Great. Thanks. And just a quick follow-up. Maybe on the storefront, on the refresh plan, if maybe you can just remind us, how many projects do you plan for this year? What would be the expected timing? And just broadly, what kind of returns do you see on a store refresh program in terms of comp lift and profitability? Thank you.

Great question. So this is Matt. We'll have a fairly modest number of of projects this year, somewhere between 10 to 15 that we complete. As we've talked earlier, a bit of an impairment in our ability to plan those projects this year just given the pandemic and the ability to have construction crews in our stores in many markets. We've just completed a thorough review of our pull chain in terms of our strategy for those refreshed projects and are well on our way to ramping up to full rollout mode starting really at the end of this fiscal year and moving into early next. That will result in about 60 to 70 projects per year. We endeavor to have a blended return on those projects of about four years payback on the initial investment into those projects. Some of them will blend a bit longer than that. A lot of them more quickly where we're getting pretty healthy lifts on those projects for relatively modest investments.

Thank you very much.

And our next question comes from Stephen Forbes from Guggenheim. Your line is open.

Good evening. Wade, maybe a follow-up for you. You mentioned machine sales right during the prepared remarks here, but just curious if you could provide some color on the quarterly performance. Any updated thoughts on how you expect machine sales to trend this year versus last year holistically, and then any sort of change in those year one or year two spending trends to call out or relatively consistent to what we talked about before?

Machine sales across the board have been very strong. I think around plus 200% or so versus on a two-year stack basis, and they continue to be strong. The days of sewing for mask making are long gone. I mean, that kind of stopped in September, October, so On that side of the house, we feel very, very good, and we're still seeing a lot of young consumers come in and learning the art and evolving, and we're seeing experienced consumers continue to trade up. On the other side of the house, the craft machine house is very strong, very good pipeline of innovation still coming, and customers are engaging, and we're seeing very good follow-on sales. We're running the metrics now to see if it's the same as historic. Selling, again, I think is a little bit distorted because a lot of these major events that do a lot of selling are not happening yet, but they're starting to, and so we're seeing good life where that is happening. But we're pretty optimistic that these trends are here to stay and that we're not going to see a big drop-off on these.

We're still seeing, we did some tracking of our newer customers recently. We're still seeing their frequency of visit at about twice what our average customer is and their average ticket about 15% to 20% higher. So, yeah, we're still seeing very good follow-on activities of those customers that bought their first machine last year.

And then maybe just a quick follow-up on the expense side of the P&L. Any sort of update on how you're tracking relative to those indirect spending saving targets that you laid out? Because it did seem like you sort of beat on expenses here relative to the internal plan. So was that something specific to call out? or just broad-based achievement against those goals?

Yeah, that's a great question. It's a little of both. I would say we definitely have seen some good traction on bids and projects that we've run this year. I would also say we're seeing nice ability to be more efficient on our lower inventory carry. That provides some nice labor efficiencies for us in our distribution centers as well as our stores. We've done, I think, a pretty good job I think that's also a bit of a potential tailwind for us as we continue to be able to manage pretty well on that lower inventory investment.

Thank you. Thank you.

Thanks, Steve.

And our next question comes from Peter Keith from Piper Stadler. Your line is open.

Hi. Good afternoon. My congratulations on the first quarter out as well. Maybe just to follow up on Matt, some of your most recent comments off of Steve's question with new customers. I know in the past we've talked about the 2020 cohort of customers that bought either a sewing machine or a Cricut machine and thought that the sales view for 2021 was based on retaining about 65% of those customers and that those customers on average would see about a 66% increase in spend from year one to year two. all aligned with historical measures. Is that something now as we're getting into Q2 and we're lapping these compares that you guys are still continuing to see hold true?

Yeah, I think definitely, as I mentioned earlier, the frequency and the basket value from that customer is at least as strong as we've seen historically and what we've hoped. I would say on the retention piece, I was also talking with our chief customer officer a bit on this earlier in the week. Probably a little bit early to tell if we're going to be kind of in that mid-60s to 70% retention rate, just because some of these customers were added in the fourth quarter last year. But certainly, we're on trend for that and expect to be able to achieve that.

Okay. All right. And I guess there's no formal guidance for the second quarter, but at least where the consensus number sits, would have your sales growing on a two-year basis at about 15%. And that's coming off of Q1 where sales on a two-year basis grew 11%. So is there anything nuanced with Q2 where on a two-year basis we could see some acceleration, or conversely, do you think maybe the two-year trend will hold steady or decline coming off of Q1?

So what I would say about the two-year trend for second quarter is the thing you probably need to think about with that and what we look at is the year or two years ago, that second quarter was a pretty weak quarter for us. And actually our first quarter that year was by far our strongest quarter. So some of this is really the trends in that two years ago time period. We actually feel like our kind of quarter-to-quarter trends in terms of sales are going to somewhat normalize this year. I think maybe the one piece that would go against that is, as Wade mentioned, we do still have some businesses that have been shut down due to COVID, things like our celebration categories, special occasions, and so on. We are hopeful those will pick up some steam as we move through the year.

Okay, great. Maybe one last question, just thinking forward as well. I believe we were looking for some ongoing gross margin expansion year on year through the rest of the year. You are highlighting now freight costs as a headwind, and you expect to offset those. Does that imply you think gross margin will probably run more flat-ish year on year, or do you still expect to see year-on-year gains in the coming quarters?

Yeah, so we're really speaking to being able to offset relative to our expectations. So we had expectations to grow margins. We still have expectations to grow margins. What we're really saying is we had some tailwinds that maybe would have had us even more optimistic. Those are going to be softened a bit by the supply chain costs.

For perspective on the ocean freight, what we're seeing now on some of the brokered containers that we're getting is as high as 10 times as what was historically paid. Again, that's going to ultimately subside. I know others are seeing similar issues. But that's probably the one anomaly, and that didn't hit us very much in the first quarter. That really is the thing that hits us throughout the balance of year, and then ultimately we will return to normal.

So we grew gross margins by 350 basis points in the first quarter. We don't expect to give all of that back, but certainly not be that strong on a year-over-year basis for the balance of the year.

Okay, very helpful. Thanks so much.

And the next question comes from Zach Faden from Wells Fargo. Your line is open.

Hey, good afternoon. So again, on the tougher comparing Q2, is there any color on your main trends you could talk about? And then on the SG&A side, could you walk us through the deleveraging impact on your model and to what extent you're able to flex down any of the SG&A costs to better manage the profitability?

Yeah, I mean, just for someone who might be newer to the company, the Q2, you know, compares last year had not only this kind of huge PPE surge, which has been long gone, it also had, you know, one of our largest, you know, competitors in our space that shut their stores down for a while. So that's part of that, you know, really anomalous Q2 that we're up against. But, you know, for May, you know, we feel good. I mean, May always is kind of a lull in the middle of the month, but we finished, you know, really strong. And there's nothing that makes us feel that these underlying trends that we've been able to enjoy in these incremental customers are fading.

Yeah, I think on the de-levering point, on the SG&A side, Q2 is historically our slower quarter. We do tend to try and control costs even absent the unusual trend we're up against from last year. The one thing I would say is we... We also make a lot of our earnings in the back half of the year and a lot of what we need to do to prepare for that occurs in the second quarter. So while we're going to be able to manage at or below our internal expectations and what we may have shared earlier around SG&A, we are also not going to put the back half at risk by trying to cut costs that are allowing us to be ready to do the stronger business in the back end.

I guess one thing I would say, too, is we've really spared no expense to make sure that we're standing strong in our in-stock positions and our seasonal and being able to really run through the year. So we feel good about that versus the opposite of trying to save costs and not being able to be as relevant or as strong to our customers. So it's a choice we've made, and we think it's going to serve us well.

Got it. That makes sense. And then... on the e-com mix taking a little bit of a step down in the quarter, I assume that that has to do with customers returning to stores. Maybe you could talk about whether there was any mix impact to gross margin compared to your plan. And then as we move through the year, whether you expect that e-com mix to step back up and should we expect any offsetting gross margin give back as a result?

On the e-com, the thing to remember is as we got into April last year and then as we moved forward, we had many of our stores that were shut down completely to visitors entering. So the only way we could serve them was online. But now we're at a point, this quarter is much more of a normalized quarter, if you will, I'm not one of our hires for Econ, but the numbers you see now, I mean, all of our stores are fully open. The customers are coming back. So I think you're getting a good view of what normal looks like as we grow from here.

Yeah, so we think that 12% to 15% penetration on an annualized basis is a healthy place for us to be. We certainly have some initiatives where that may grow in the future. But it is seasonal, so we do typically, even with a normalized pandemic environment and and economy, we would typically have a bit higher penetration from e-commerce in the back half of the year relative to what we see in the early part of the year. There's a little bit primarily related to freight, direct consumer freight, that it has on our margins, but I would say it's relative to the other things we've talked about, it's pretty minor.

But our e-com business is now very profitable, and we've got a couple of very big levers that we can make it even more so. from a cost perspective as well as a top line now that we're kind of, you know, at the new kind of normal moving forward.

So we're quite encouraged by that. Got it. That all makes sense. Appreciate the time tonight. Okay.

And just as a reminder to enter the queue, please press star then 1 on your touch-tone phone. And your next question comes from Christina Fernandez from Telus Advisory Group. Your line is open.

Hi, good afternoon, and congratulations on a good quarter. You didn't mention the government stimulus during your prepared remarks. Do you think it had a benefit during the quarter, and perhaps could you quantify any benefit from that?

I would probably never say that we didn't have any benefit, right? But if we did, it's very hard to measure. For a purchase that's under $30, and the kinds of customers that we have, it's, you know, it's very different than I'd say automotive, you know, appliances and the like. So, you know, there's nothing there that we think distorts the quarter versus a normalized one in any meaningful way.

I think also for this quarter specifically, those occurred in what was already expected by us to be the strongest part of the quarter. It's when we are on a year-over-year basis. It's when we're up against the kind of the worst of store COVID shutdowns. Last year, we also had in earlier Easter this year, which is beneficial to our business. So again, I think that's a wage point that makes it even a little muddier for us to really kind of sort out how much of that strong period of the quarter was due to the stimulus.

Okay, that's helpful. And then I had a follow-up question on promotions. Can you comment on what you're seeing across the industry? This industry traditionally has been promotional. So to the extent that some of your competitors bring back promotions, would you feel compelled to follow them? Or do you think with your data and sort of differentiation in your product, you can stay at a lower level versus your historical pattern? Thanks.

Yeah, maybe I'll throw in my opinion and Matt can throw in his, but I think we're seeing a pretty rational environment out there and we still promote, we're always going to promote, but I think we're getting smarter and smarter of how and when and why we promote. Our customers seem to be with us and both our historic customers with us, but I think importantly, we do give great value even when we promote the way we promote now and a lot of the new customers that maybe haven't been with us for a long time, they're you know, very accepting of our value proposition. We think it's still very robust. So I don't see that personally, you know, changing. I mean, I'd never say never, but I think right now it's a good environment, and I anticipate it to be so for some time.

Totally agree.

And we have no further questions. I'll turn the call back over to Mr. Wade Milikwan for any closing remarks.

Look, I just want to thank all of you. I'm sure for all of you and your families, it's been a crazy year, but here we are, and hopefully we're all moving forward to brighter times. A lot of the good results we're seeing, we really feel, is really because of this transformational journey we started several years ago here, raising our game in all aspects of assortments, our store experience, our omni digital market, our capabilities, talent. You know, we've got our 27,000 and change employees who work very hard every day, and it takes every single one doing their part, and I'm grateful for all of them as well. And for those of you that are stakeholders and will possibly be, I just want you to know that we're working as hard as we can every day on your behalf. We think we've got a great company here, and we're really committed to take it to even higher heights.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.