JOANN, Inc.

Welcome to the JoAnn third quarter fiscal 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to AJ Jang, Head of Investor Relations. Please go ahead.

AJ JANG Thank you, Chad, and good afternoon. I'd like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today, and the company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information, or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release and the recent filings of 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.joanne.com. On the call today from Joanne are Wade Michelon, President and Chief Executive Officer, and Scott Sikella, Chief Financial Officer. During the question and answer portion of the call, we'll also be joined by Chris DiTullio, Joanne's Executive Vice President and Chief Customer Officer. I will now turn the call over to Wade for his prepared comments.

Thank you, AJ. Good afternoon, and welcome to Joanne's third quarter fiscal 2023 earnings call. I'd like to first ask those on the call to join me in extending a very warm welcome to our new Chief Financial Officer, Scott Sikella. Scott brings more than 20 years of experience in finance for several multinational brands, most recently serving as Vice President Corporate FP&A head at Under Armour. It's remarkable to me how fast Scott has hit the ground running, and we're very excited to have Scott on board as a senior executive. In the days ahead, I look forward to introducing Scott to many of you in the analyst, investor, and lender communities. As we enter the peak of our holiday season, I want to take a minute to thank our more than 21,000 hardworking team members at Joann for their dedication to our organization's success. I also want to acknowledge the continued support of our customers and to express my gratitude to all the loyal sewing and crafting enthusiasts who continue to support Joann despite unique challenges many are experiencing during this difficult economic climate. In the third quarter, while the results showed some internal signs of strengthening, overall we were disappointed. Our sales comparison versus last year was a decline of 7.9% and versus fiscal year 20, which was our pre-pandemic year, our sales declined by 1.1%. Gross profit dollars on an adjusted basis were down 9.3% versus last year and increased by 5.5% versus fiscal year 20. As stated on the Q2 earnings call, our sales comparison had progressively strengthened through the end of Q2 and as we entered into Q3. However, midway through our third quarter, this trend worsened. This slowing was not incompatible with what our blind data illustrates for the specialty retail industry overall. This slowing was primarily caused by fewer items per basket as opposed to a downturn in customer traffic trends overall. Further, this reduction in items per basket was skewed to both our lower-end database customers and our customers not in our database. During the third quarter, we continued to see strengthening in many large and important parts of our business, such as fashion apparel, special occasion, needle arts, and fleece categories. In addition, our Halloween seasonal business grew approximately 8%, and related categories performed very well. However, the fall seasonal decor and floral categories underperformed, as customers seemed much less inclined to indulge and decorate versus the prior year. Additionally, consistent with broader industry trends in this category, we experienced a meaningful slowdown in our craft technology business. Our general belief is that the ongoing inflationary environment has continued to pressure our customers' level of discretionary spending. We've talked many times about Joanne's resiliency through recessionary times. However, what I feel is a bit nuanced is the extreme inflationary factor, which has not been seen in 40 years. Increasingly, we're seeing that consumers are feeling the sting of inflation. but the recent shift in shopping behavior has skewed much more towards essentials and basics with less emphasis on discretionary purchases. These budget-conscious consumers have been under a prolonged period of stress for many months now, and they are getting more selective with their purchases. Fortunately, there are some signs that these inflationary trends are beginning to subside, even as we potentially head into something more typical of a recessionary environment in the short term. During the quarter, we continue to advance our key strategies, including enhancing our store experience, which among other things includes our journey to refresh our current and relocate stores. We had 13 grand openings in the quarter in which all but one was either relocation where we were able to increase our square footage or enter into a net new market force altogether. On balance, we're very pleased with the results of these locations as we were able to showcase the full breadth of the Joann brand in a way which we could not in our previous smaller footprints. We have four additional stores opening in the fourth quarter to complete this year's projects. Our second core strategy is to enhance our multi-channel proposition. Our omni-channel efforts yielded an additional bright spot in the quarter with sales representing over 11% penetration of Joann sales, plus 40 basis points to last year and over 600 basis points to fiscal year 20. Omni revenue continued to outpace total sales for the quarter with a moderate 4% decline compared to last year. Backing out the challenge technology business, which penetrates higher online, sales were flat for the quarter. We've been able to maintain much of our COVID lift to our online business as Q3 sales increased 126% as compared to fiscal year 20. Importantly, over the past few days, we have worked hard to improve our Omni profitability. The past few years, sorry about that, our profitability, and that trend continues with respect to both our gross and our net Omni margins. To further enable our AMI efforts, in October, we officially began filling orders out of our multi-purpose distribution center in West Jefferson, Ohio. This distribution center will enable us to reduce split shipments, improve line fill rates, and expand our assortment tail. We are ramping up the production capability as we speak, and the impact of this holiday season will be nominal. However, we anticipate that the impact on value creation will grow substantially and meaningfully over time. Also related to our online business, an online sewing competitor shut down near the end of Q3, and we are very encouraged by the sales increases that we are seeing thus far. Now let me shift to what we're seeing as we are in and moving through Q4. We remain cautiously optimistic about our fourth quarter, which recall is our largest and most important quarter due to the seasonality of our business. We typically provide more inter-quarter color for Q4 on this earnings call than we do for other quarters, simply given how material it is to our annual results. As we are now in the midst of the holiday season and less than two weeks from Christmas, I have a high level of conviction that we have been doing the right things right with respect to what we can control in order to win the day with our customers. Our assortments are relevant, our in-stocks are strong, and our promotional offers are competitive. Based on the voice of the customer and our net promoter scores, our operating metrics, including our customer service, remain at all-time high comparison levels at Joann, even despite the labor pressures that Joann and most service-led companies are experiencing. November started slower than we anticipated and indeed there seems to have been some cycling of last year's fear of missing out from clogged supply chains leading to an early consumer holiday shopping spree. Having said that, our pace has picked up with our Black Friday and Cyber Monday events and continued momentum into December. We anticipate finishing the fourth quarter with solid sales momentum as we move out of this fiscal year into next. Now let me shift to a few of our major focus areas moving forward. There's no denying the fact that the current inflationary environment has driven massive annual cost increases and has taken a significant toll on both our cash flow as well as our operating earnings. Fortunately, we are seeing stabilization across our cost structure, and deflationary opportunities are now arising based on healing supply chains, stabilized commodity prices, and the strength of the dollar. To be successful, we are rethinking and taking fresh eyes to all costs. and are working to root out anything that is not adding imminent value. I can assure you we will leave no stone unturned in order to strengthen our balance sheet and return to the company to double-digit EBITDA margins as soon as possible, while maintaining our focus on a strong customer experience. In that vein, in October we launched a program that we have coined as Focus, Simplify, and Grow, which is targeting approximately $200 million in annual cost reductions to be fully delivered by early fiscal 2025. We anticipate that 50% of these savings will be supply chain related, 30% will be from COGS improvements, and the balance will be from reductions to overhead costs. We also expect additional cash savings from other adjustments we are making to the business in areas such as capital expenditures and working capital. Of note, we anticipate the majority of supply chain savings to come from reductions in ocean freight costs, and the majority of these savings will offset the phase-out of the ocean freight adjustment which we have been making over the past five quarters and which we anticipate will be fully eliminated in the first half of fiscal year 24. While we're off to a good start, it's still early in the process and therefore we'll be providing updates on this effort in future quarters. I also want to comment briefly on our dividend. As announced in our earnings release, we've made the decision to pause our quarterly cash dividend payments. As a public company, our dividend has been an important part of our capital allocation strategy. This decision was not made lightly. However, we find ourselves in a period of record inflation, rapidly rising interest rates, and a more likely than not recession. No priority can be more important than working to ensure that we can successfully weather any storm while not compromising on the most critical business investments. Business investments that are critical to winning with our customers and also creating significant shareholder value long term. We fundamentally remain committed to returning capital to shareholders and being responsive to the needs of all of our key stakeholders And this pause does not preclude us from resuming our dividend at a later date. I would like to close out with some very exciting words regarding two of our Blue Ocean initiatives, the first of which is the Singer Ditto, our 50-50 joint venture with Singer Viking Faf. Ditto is a revolutionary product and platform for sewists and craft enthusiasts everywhere. We have been working on this initiative for over four years and now nearing launch during New York's Fashion Week in February. Units are in production and being shipped as we speak and will be launching in the United States in mid-Q1 of the next fiscal year. As I've said many times, traditional sewing patterns are both the heart of sewing projects as well as the most painful part of the process, as the format has literally not changed since the 1800s, in fact, since the days of Abraham Lincoln. Our patented Ditto system will allow customers to turn patterning into the most fun part of the sewing process, using an AI platform integrated with a digital laser projector system that will enable a multitude of designs and permutations and literally take sewists from ideation to sewing in minutes versus hours. Of note, Ditto receives one of the highest ever purchase intent scores by our external design partner, a partner who has over 1,300 commercialized patents. There are about 30 million households in the U.S. alone that actively sew, and a much greater number in the 180-plus countries Singer Viking FOSS and their respective dealers operating. We believe that many of these sewing households would like to have access to a Ditto. In fact, Ditto has been vetted with expert seamstresses, design students, and beginner sewers and crafters alike, and acceptance and excitement across the various constituents is universal. In the coming months, we'll be working on a way to bring the best brain to life, the Ditto, for all of our stakeholders so that you can see it in action firsthand. and get a better idea as to why this is so revolutionary. The second blue ocean, I will briefly mention today, is our wholesale initiative, which is in the early innings, but exceeding our internal expectations based on revenue contribution. We signed up over 200 new B2B customers in the third quarter, and we have significant momentum with additional customers as well. The commercial website for our marketplace platform is scheduled to launch over the next two months. This website will provide greater operating efficiencies with added checkout capabilities for our B2B wholesale customers. So let me just close by thanking all of you for listening today. While we have faced a series of challenges over the past few years, including Section 301 tariffs, record inflation, and rapidly rising interest rates, we also have many reasons to be optimistic. Joanne, starting with our stores, has a highly resonant and differentiated customer proposition that is very hard to replicate. Our Omni business continues to gain momentum and is primed for significant profitable growth. Input costs, including supply chain costs, have reached an inflection point from highly inflationary to deflationary, and we are organizing to capitalize on the reversing trend and capture significant value. And lastly, our Blue Ocean growth initiatives are now coming to fruition and hold the promise to create significant value. Ditto specifically has potential to take an entire sewing industry to an entirely new level of technology, engagement, and fun. These initiatives, combined with our recent business momentum, give me optimism that we're on the right path as we transition from fiscal 2023 into fiscal 2024. And with that, I'll turn it over to you, Scott.