JOANN, Inc.

Say, ladies and gentlemen, thank you for standing by. Welcome to Joanne's fourth quarter and full year fiscal 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and zero. I would now like to hand the conference over to your speaker, Mr. A.J. James, Head of Investor Relations. Please go ahead, A.J.

Thank you, Sherry, and good afternoon. I'd like to remind everyone that comments made today may include poor-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today, and the company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information, or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release and the recent filings with the SEC. During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed today with the SEC and posted to the investor relations section of Joanne's website. at investors.geland.com. On the call today from Julian are Wade Michelon, President and Chief Executive Officer, and Matt Sues, a Financial Officer. I will now turn the call over to Wade Michelon.

Good afternoon. Before I begin my prepared remarks, I wanted to personally acknowledge the horrifying situation in the Ukraine and the related devastating human toll. As an organization, we extend our deepest sympathies to the individuals and families who are affected by the tragic developments in the Ukraine. To that end, Joanne has partnered with the Red Cross to provide direct assistance during the ongoing humanitarian crisis. Through this program, we will match all contributions by our team members dollar for dollar. We'll continue to monitor the situation on behalf of our leadership team. We offer our financial and moral support. Today, I thought I'd take a minute to reflect on our first year as a public company and highlight some key milestones that we have achieved at Joanne. Despite unprecedented and persistent supply chain and inflationary headwinds, and challenging pandemic-related sales comparisons from fiscal 2021, underlying growth in our core operations remained strong over the past year. During fiscal 2022, Joanne delivered high single-digit sales growth on a two-year stack with double-digit gross profit dollar growth. We continued the expansion of our omni-channel business, which has more than doubled based on a two-year comparison, including the launch of new payment methods with Karna and Apple Pay, making it easier for customers to purchase with us. We enjoyed a successful first year of our store refresh initiative. We completed 15 products the past year and are on track to ramp up that activity to about 40 locations next year. We delivered record customer service scores across all channels despite historic supply chain headwinds and labor shortages to include an industry best performance in curbside pickup where we consistently deliver to the customer in just two minutes. We've successfully rolled out our new POS system to more than 300 locations modernizing our checking experience and setting us up for future innovation, and expect that process will be completed across our store fleet in the current fiscal year. Also, I'd like to highlight the opening of our multi-purpose distribution center in Columbus, Ohio. This fulfillment center is truly unique. We've completed the first phase of the project, and when completed later this year, the center will allow us to expand our omnichannel fulfillment capabilities while also handling the seasonal flow of merchandising to our stores. In addition, we believe that the opportunity to improve line fill rates and reduce split shipments is a significant opportunity for Joanne to improve our costs and omni-channel profitability once fully operational. We expanded our Doing Good While Doing Good charitable giving platform, raising over $3 million for our key partners, Susan G. Komen, Nationwide Children's Hospital, and St. Jude, and we're on the way to record fundraising for 4-H in early fiscal year 23. We took steps to improve our balance sheet through the sale-lease back of our Opelika, Alabama distribution facility, and we refinanced both our long-term and revolving credit facility at more favorable pricing terms. We've also made several strategic announcements that should open new paths for value creation in the future. Notably, we ended the year announcing a 50-50 global joint venture with SVP, or Singer Viking Faf. This new partnership will bring exciting products and services as it revolutionizes the pattern access, design, and the cutting processes for sewers everywhere. Turning the number one SOAS pain point into the most fun part of the process is just the beginning of this journey. The Ditto launch remains on target for later this year, and we'll have more to share as we get closer to that launch. And during fiscal year 2022, we successfully launched our international e-commerce platform, shipping now to over 50 countries in just six months into the launch. We continue to add new customers to Joann at a high rate. Through the end of fiscal year 2022, our known customer database grew by 42% over the three years, and it's now in excess of 77 million. Our customer profile continues to evolve with these new additions, becoming younger, more diverse in demographics, and in crafting and selling interests, and also more digitally native. In fact, 85% of the new customers acquired in fiscal year 2022 were acquired through a digital channel. We believe this sets us up for future growth. Another highlight of this past fiscal year was the performance of our top customer segments, those who are true category enthusiasts. We were able to grow sales with these customers by over 2x versus our average, the strongest two-year comp and also positive comp on a one-year basis as well. We are particularly excited about our ability to grow both sales and share with these customers, along with increasing gross margins at a higher rate than those in our base as well. We see them purchasing at the same rate, but now with higher average unit retails due to pullbacks we've executed with promotions. These category enthusiasts recognize and appreciate our breadth of assortments, quality, value, and most of all, the knowledgeable service we provide in our stores and continue to participate at a very high rate. I now want to touch on our fourth quarter operating performance. After a slow start to the quarter, we had an acceleration in our sales trends during Black Friday, and this momentum continued over the holiday period through the end of December. However, we did experience some incremental softness in January, resulting primarily from a pullback in customer traffic as the Omnicron variant spread. We did see a greater shift to online during the month of January, from shift to home demand to customers choosing more curbside pickup versus coming in-store for their online order, but that was not enough to offset the retail traffic dip. We estimate that the combined impact of Omnicron, along with some significant weather storms resulting in incremental store closures, was between 100 and 200 basis points on our fourth quarter sales performance. Recently, we've also experienced some additional pullback from the consumer following the recent geopolitical developments. and the related sharply higher fuel costs, and we'll expand on more of that later. Finally, as it relates to our fourth quarter, I want to highlight the impact of excess ocean freight costs. As I mentioned, we were very pleased with our sales performance during the holiday period, which was a result of our proactive merchandise flow planning earlier in the year. We were clearly in a better in-stock position on holiday versus some competitors, enabling us to take market share. However, delivering that seasonal inventory on time clearly came at a cost to our operating and financial results in Q4. While we previously anticipated that excess freight costs in Q4 would be approximately two times higher compared to Q3, the impact was around three times higher on a sequential basis. Contributing factors to higher than expected freight costs in Q4 include significantly higher container rates, transloading fees, and additional expenses including retention and demerge fees needed to free up stranded containers that was prolonged congestion at the west and east coast ports. Any retailer would be remiss if they did not acknowledge the uncertainty and stress in the current operating environment, and JOANN is no different. Over the past few weeks, we have seen a shift in behavior among our non-core customers at JOANN as the war has exacerbated inflationary pressures and clearly created anxiety for all regarding the state of the world at large. Our internal and third-party data indicate discretionary spending in aggregate is under pressure due to elevated fuel prices, higher energy costs, and higher inflation across the board. We are evaluating these macro forces We'll make relevant adjustments to our business as needed. Heading into fiscal 2023, we have always anticipated that sales comparisons will be unfavorable in Q1 due to our 15% comp last year. We have also expected comps would resume positive year-over-year growth beginning in our second quarter of fiscal 2023. Going forward, our outlook in Q1 is incredibly cautious, incrementally cautious as we continue to monitor macro factors and related consumer behavior on a near daily basis. We are seeing accelerated growth in some critical reopening categories, such as special occasion for weddings, proms, and parties, but again, this is weighed against other categories that are under pressure from the macro forces outlined. Having said that, we continue to believe that we are broadly holding, or in some cases, building market share, and this is the key metric we are focused on to ensure our actions are balanced for the long term. Overall, I'm proud of the combined efforts of our teams in navigating through unprecedented supply chain challenges during the back half of fiscal 2022. Even after absorbing nearly $60 million for higher year-over-year logistical costs, it should be noted that our gross profit dollars measured on a GAAP basis still grew by approximately 10% in fiscal year 2022 on a two-year stack. While we believe that these costs have reached an inflection point following our fourth quarter, at this time we still lack complete visibility on the financial impact for fiscal year 23, in part because we have still not completed our annual ocean freight negotiations. While we expect spillover effects from supply chain disruptions to impact us in the current fiscal year, longer term we believe that most of these costs will prove to be transitory and that margin comparisons will significantly improve as these eventually normalize, creating a multi-year tailwind. I previously mentioned that we have more to share in the months ahead in relation to other Blue Ocean initiatives at JOANN. Today I'm excited to announce that we have forged strategic partnership with JDM Growth Group, the premier wholesale and e-commerce consulting company. The leadership at JDM includes members of the Catan family, who have extensive backgrounds in the arts and crafts industry. This partnership will forge new avenues for Joanne in the B2B wholesale channel, ranging from single sellers all the way to multi-chain retailers. In addition, the team will continue to pursue other channels to showcase our in-house private brands launched as soon as next month. Following our press release last week, I'm also excited to highlight our recent acquisition of WeaveUp. And for those not familiar, WeaveUp is a leader in innovation in digital textile printing and related solutions. Our strategic partnership with WeaveUp began in 2018. This relationship expanded further following a subsequent round of financing led by Joanne. Since that time, we've tightened our proposition to create value, and by coming fully together, we believe we can accelerate that journey. WeaveUp is led by Flint Davis and is truly a unique software company that empowers digital textile solutions for the consumer, commercial applications, and hospitality markets. This will allow us to create the highest quality of a spoke consumer and designer fabric and other offerings, streamline our product development and sourcing processes, enable both digital and rotary mills to be more efficient. The evolution of our relationship with WEVA is a great example of how we've only scratched the surface with our Blue Ocean growth initiatives, and there'll be more to share on other initiatives as the year unfolds. There have been some recent developments regarding the class action litigation of which we are a part regarding the legality of Section 301 tariffs with China that went into effect in 2018. A three-judge panel has heard the case and has the ability to either dismiss the case, overturn the tariffs, which could include back tariff refunds and penalties, or move the case to a trial. We understand that the decision should be forthcoming in the coming weeks or months. Further, the Administration is conducting a required review of U.S. trade policy related to Section 301 tariffs. The current tariffs are set to expire four years after they were initially implemented unless the Administration makes the case for their necessity moving forward. Our forecasts and projections continue to assume that 301 tariffs will continue into the foreseeable future. With that said, we would welcome any incremental tariff relief. In closing, we've enjoyed a number of successes in our first year back as a public company. We've dealt with unplanned and unprecedented business disruptions head-on. From over 20,000 store team members to our distribution members to those at our store support center, I want to thank you for your support for our ongoing efforts to keep our customers at the front and center of everything we do. We remain focused and committed to being a friendly, clever ally to our customers and to each other, and I am very excited about the journey ahead. with more to come in fiscal 23 and beyond. And with that, I will turn the call over to Matt for a more detailed review of our financials. Matt. Thank you, Wade.