Jo-Ann Stores, Inc. (JAS)
Q2, 2009 Earnings Call Transcript
August 27, 2008 4:30 pm ET

Executives

Timothy Ryan - Director of Investor Relations
Darrell Webb - Chairman of the Board, President, Chief Executive Officer
James Kerr - Chief Financial Officer, Executive Vice President

Analysts

Jeffrey S. Stein - Soleil Securities
William Armstrong - C.L. King & Associates.
Michael Corelli - Barry Vogel & Associates
Laura Richardson - BB&T Capital Markets
Klauer Martinson - Deutsche Bank
Joan Storms - Wedbush Morgan Securities
Jeffrey Barman - Barman Capital

Presentation

Operator

Good afternoon. At this time I’d like to welcome everyone to the Jo-Ann Stores fiscal year 2009 second quarter earnings call. (Operator Instructions) During the presentation all participants will be only in a listen-only mode. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question during this time simply press * then the number 1 on your telephone keypad. If you have already done so, please press the pound key now, then press “*1” again to ensure your question is registered and thank you. I would now like to turn the conference over to Mr. Tim Ryan, Director of Investor Relations.

Tim Ryan – Director of Investor Relations

Thank you and welcome everyone to the Jo-Ann Stores fiscal 2009 second 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 second 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 second 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, September 3, by dialing 1-800-642-1687. The conference ID number to access this call is 59755496. 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 - Chairman of the Board, President, Chief Executive Officer

Thanks Tim and good afternoon everyone. Jo-Ann Stores delivered another solid performance in the second quarter with a 3.3% increase in same-store sales on top of a 7% increase last year. This was our sixth consecutive quarter of same-store sales growth. Our sales performance was driven by strength in basic categories including sewing notions, quilting, needle arts, and food crafting. Craft sales grew at a slightly faster rate than our sewing business for the quarter which helped offset weakness in our seasonal category.

Gross margin improved significantly in the quarter due primarily to less clearance activity than last year. We are managing inventory levels carefully and we’re down $35 million or 7% compared to the second quarter last year. Basic in-stocks remain very healthy but we’ve reduced the higher risk fashion and seasonal inventory. We also improved the markdown process for Planogram resets. These actions resulted in less clearance markdown activity for the quarter and led to a 190 basis point improvement in gross margin. We expect to continue expanding gross margin going forward through effective inventory and markdown management as well as global sourcing initiatives, but we don’t expect the same magnitude of improvement that we achieved in the second quarter.

We continue to make progress in reducing SG&A expenses as a percent of sales. SG&A improved by 90 basis points compared to the second quarter last year which we attribute to both sales leverage and continued focus on expense management. As a result of our improvement in sales, gross margin and SG&A, we were able to reduce our loss to $0.47 per share from a loss of $0.76 per share in the second quarter last year. This was our eighth consecutive quarter of year-over-year earnings improvement. To update you on our new point of sale system, we are still on track to complete the rollout in all stores by the end of this third quarter and all applications are performing as expected.

We will incur additional SG&A expenses related to the POS project in the third quarter, but as I’ve said before this investment in systems will deliver a return that exceeds our cost of capital and will help us achieve stronger financial results over the long-term. In addition to investing in systems, another key initiative for the company is revitalizing our store portfolio. In the second quarter, we opened three new large format stores and remodeled 11 stores. Our activity ramps up in the third quarter when we will open 13 new stores and complete most of the work on five additional new stores that will open early in the fourth quarter. This will take our total new store openings for the year to 21 with an average size of 26,000 square feet. This compares to only six new stores last year at an average of 34,000 square feet. We will also complete seven more remodels in the third quarter bringing our total for the year to 29 compared to 26 last year. Plus, we will complete approximately 200 small format store optimization projects during the third quarter. This involves remerchandising stores which are too small or have shorter lease horizons and therefore would not qualify for a full remodel.

The optimization projects will allow us to better utilize the existing square footage in these stores, add a number of new fixtures, and expand our craft assortment. All of these store initiatives, opening new large format stores, remodeling small format stores, and the store optimization project, allow us to expand our craft assortments in more markets. This will help us continue to capture additional market share in the craft business. At the same time our initiatives to improve the quality and selection of fabrics along with Wal-Mart’s decision to remove fabric from many stores are allowing us to capture additional market share in the sewing business as well.

In summary, I’m proud of our team’s performance in this tough operating environment. We’ve managed to deliver positive sales and earnings growth in spite of the weak economy and our balance sheet continues to get stronger each quarter. While the economy and consumer spending environment remains challenging in the near-term, I’m confident that we will deliver improved financial results this year while enhancing our market share and competitive position for the long-term.

At this point I’ll turn the call over to Jim Kerr.