Jo-Ann Stores, Inc. (JAS
Q3 2009 Earnings Call Transcript
December 3, 2008 4:30 p.m. ET
Tim Ryan - Director of Investor Relations
Darrell Webb – President and Chief Executive Officer
James Kerr - Chief Financial Officer
Jeffrey Stein - Soleil-Stein Research
William Armstrong - C.L. King & Associates
Karru Martinson – CIBC World Markets
Michael Corelli - Barry Vogel & Associates
Good afternoon. My name is Stephanie and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Jo-Ann Stores fiscal year 2009 third quarter earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question during that time simply press * then the number 1 on your telephone keypad. If you’d like to withdraw your question you may press the pound key and at this time I’d like to turn the call over to your chair person Mr. Tim Ryan. Sir, you may begin the call.
Tim Ryan – Director of Investor Relations
Thank you and welcome everyone to the Jo-Ann Stores fiscal 2009 third quarter conference call. In just a minute Darrell Webb, our Chairman, President and Chief Executive Officer, and Jim Kerr, our Chief Financial Officer, will review the third quarter results and discuss our guidance for the full year fiscal 2009. They will then respond to your questions. After the market closed this afternoon we issued our third quarter earnings release. If you have not received it, you may obtain a copy from the Investor Relations section of our website at www.joann.com. This conference call is being taped and is available through Wednesday, December 10, by dialing 1-800-642-1687. The conference ID number to access this call is 69142549. In addition, this call is being webcast over the Internet and can be accessed through the website mentioned earlier by selecting Investor Relations at the bottom of the website. For those with access, it is also available through www.streetevents.com. A replay will be available shortly after the call. The replay may be accessed at www.joann.com and at www.streetevents.com. Before we begin I would like to remind you that any forward-looking comments made during this call are subject to certain risks and uncertainties which may cause results to differ materially from our current expectations.
The risks and uncertainties that are most likely to cause our results to differ materially from our current expectations are included in the press release issued this afternoon and also in our periodic filings with the SEC.
Now I’ll turn the call over to Darrell.
Darrell Webb – President & Chief Executive Officer
Thanks Tim. Good afternoon everyone. I would like to begin by acknowledging the outstanding efforts of our entire Jo-Ann team during this challenging economic environment. Our stores have been performing better than many retailers but we are not immune to the current market conditions. So we have focused intensely on the internal operating variables that we can control. This approach allowed us to achieve earnings growth over last year for the third quarter while continuing to strengthen our balance sheet. Sales trends clearly began to soften in the third quarter. Our same store sales decrease of 1.5% was a sharp contrast to the 3.9% increase we delivered through the first half of this year. A slight drop in store traffic accounts for most of that decrease. Sales in our core sewing and craft categories were actually holding up quite well. Quilting, fleece, and sportswear fabric sales were very strong during the quarter while apparel crafts and food crafting remain strong on the non-sewing side of our business.
However, seasonal merchandise and higher ticket items, including custom framing and home decorating fabrics were very soft. This had a negative impact on average ticket and had a disproportionate affect on sales in large-format stores which have more space and more inventory-dedicated to those categories. In spite of the sales trends, we continue to improve our inventory position. We delivered year-over-year improvement in gross margin and we achieved higher earnings for the quarter. Total inventory was down $48.6 million, or 8.5%, compared to last year’s third quarter, while total sales were flat. Basic in-stocks are at record levels, while we continue to reduce the higher risk fashion and seasonal inventories.
Gross margin increased by 100 basis points in the quarter due to less clearance activities than last year and lower costs from global sourcing initiatives, particularly on fabrics. SG&A expenses were up 10 basis points in the quarter as initiatives to tightly manage our operating costs were offset by the deleveraging of sales and training costs related to our new point-of-sale system. The roll out of our new POS system was successfully completed in the quarter as planned. Our solid operating performance resulted in earnings of $0.40 per share for the third quarter, an improvement of $0.08 over last year, or $0.03 better than last year if you excluded the gain from our debt buyback. Our strong balance sheet allowed us to take advantage of favorable terms and retire $20.4 million of senior subordinated notes during the quarter.
Turning to store activity, we opened 12 new stores in the third quarter and opened six more early in this fourth quarter. This takes our total number of new store openings to 21 for the year.
We also made progress in revitalizing our existing store base by finishing six more remodels in the quarter. We have now completed 28 small-format remodels this year. These stores continue to deliver strong results with sales growth typically exceeding our small-format average by 10% in the first year. Even the stores we remodeled two years ago are still enjoying sales trends almost 3% above the company average. We completed 217 small-format store optimization projects during the third quarter. This involved remerchandising stores that were too small to justify a full remodel. It is a bit early to quantify the benefit from this effort but we expect to see a modest incremental sales lift from these stores going forward. Looking ahead to the remainder of our fiscal year, we believe the negative trends for customer traffic and average ticket will continue. In addition, seasonal merchandise represents a larger percent of our sales during the fourth quarter so the weakness in those categories will create additional pressure on overall sales trends.
There is no question that it will be a difficult fourth quarter, which is why we were compelled to adjust our full year guidance. Fiscal year 2010 begins in just two months for Jo-Ann Stores. Our guidance for next year will be provided with our fourth quarter earnings release, as we have done historically. In general, though, I can tell you that we will continue to focus on controlling inventories and SG&A expenses while managing our balance sheet and capital spending very conservatively. At this point we expect to reduce capital spending by roughly $25.0 million next year, to approximately $35.0 million. We remain committed to our strategic plan, which calls for revitalizing our store base by opening new large-format stores and remodeling small-format stores. We currently expect store activities to be about the same as this year, with roughly 20 new stores and 30 remodels. Capital spending on information technology will be significantly lower next year.
I don’t need to dwell on the economic challenges we are all seeing across the country and around the world. We are feeling it here at Jo-Ann stores and we are disappointed to have our sales trend turn negative after six consecutive positive quarters but I believe we are managing through this situation very effectively. Sales in our core sewing and craft categories are healthy. Our balance sheet is stronger than it has been in years, and we continue to invest for future growth. So we are well positioned to take advantage and potentially gain market share in both sewing and crafts going forward. And we may have an opportunity to capture share at a faster rate if competitors fail to adapt to this environment as well as our team is doing.