JILL - J.Jill: Despite Stock Reaction Q3 Results Were Strong

2023-12-11 20:35:29 ET

Summary

• J.Jill's stock sold off after its FQ3 results, despite its strong margins and results that easily topped expectations.
• The company took a cautious approach with FQ4 guidance, which should have been expected given the current macro environment.
• J.Jill's valuation is low compared to its peers, making it an attractive investment opportunity with strong cash flow and margins.

Back in March , I placed a “Strong Buy” rating on J.Jill ( JILL ), saying the stock was way too cheap to ignore and that it may be the best story in retail. The stock is down about -8% since then. With the company recently reporting earnings, let’s catch up on the name.

Company Profile

As a refresher, JILL is a women’s apparel retailer that sells a variety of items such as sweaters, dresses, tops and bottoms, as well as footwear and other accessories such as jewelry. It caters to more affluent women between 45-65 years old that have an annual household income of approximately $175,000.

The company originally sold its offerings through catalogs, which it still uses as a marketing tool. Most sales, though, are now pretty evenly split between its retail stores and e-commerce platform.

Q3 Results

JILL reported its Q3 results earlier this month , with revenue down -0.1% to $150.1 million. That topped the analyst consensus of $145.8 million.

Total company comparable sales rose 1.9% compared to -1.2% a year ago. Direct to consumer sales were down -0.5%. Store sales were flat and it had -1% less stores.

JILL said it was seeing strength in customers that were new to the brand in the quarter.

The company did not open any new stores in the quarter and it has opened 2 new stores this fiscal year. It ended the quarter with 245 retail locations.

Gross margins increased 190 basis points to 71.8% from 69.9% a year ago. The company credited lower freight costs as well as strong full price selling and lower promotions.

Looking at costs, SG&A rose to $87.5 million, or 57.5% of sales, from $84.9 million, or 56.5% of sales.

Adjusted EPS rose to 78 cents from 77 cents and topped the consensus by 17 cents. Adjusted EBITDA jumped 3% to $28.3 million.

JILL generated $21.1 in operating cash flow in the quarter. Through the first nine months of the fiscal year, it has generated $56.7 million in operating cash flow.

Turning to the balance sheet, JILL ended the quarter with $64.1 million in cash and equivalents and $157.5 million in debt. Inventory was down -5.7% year over year to $56.7 million.

Looking ahead, the company forecast Q4 revenue to be flattish. It is looking for adjusted EBITDA to be between $11.0-13.0 million.

For the full year, it said it expects adjusted EBITDA to be down low single digits. It is projecting to spend around $18 million in CapEx for the year.

The company rolled out a new point of sales ("POS") platform in Q3, which it expects will help with omni-customer fulfillment. It is now beginning work on upgrading its legacy order management system (“OMS”).

The company said it saw some softness towards the end of Q3 into Q4. However, it did see some strengthening over the more promotion period between Black Friday and Cyber Monday.

JILL will look to close two stores in Q4. It is looking to return to store growth in 2024.

Commenting on the current environment on its Q3 earnings call , CEO Claire Spofford said:

“We did say sort of slowdown coming out of Q3, which we attributed to sort of more discernment on the part of the customer. We do every quarter, at least on the pulse survey just to understand kind of where our customer's mind is relative to purchase intent, macro environment has you feeling about out things in general, and we did see that there is there's a level of concern there, which is understandable given the macro uncertainty. So we pay attention to that. And we did see softness coming out of Q3. As we enter Q4, we continued to see that trend. We held our powder on the promotional levels, unlike I think some of the some of the macro or some of the competitive environment where people were initiating their Black Friday level promotions earlier, we did not do that. And we did continue to see some softness coming into Q4 as we moved into the promotional period over the Black Friday, Cyber Monday weekend, we did see her respond to those promotions. So that's just a little bit more color. And then we're obviously continuing to watch her behavior very carefully. And I think that cautiousness is reflected in our guide for the fourth quarter.”

While the investor reaction to JILL’s earnings report might not indicate it, with the stock falling nearly -9% the session after it reported earnings, JILL’s Q3 results were quite good. Flattish sales and positive comps in the current environment is not bad. Not surprisingly, the company took a cautious approach to the holiday season, which shouldn’t be that surprising for an apparel brand and retailer.

At the same time, the company’s gross margins continue to be stellar, with the apparel retailer not getting too promotional and selling more full-price items. Freight cost benefits are likely to subside next year, but it should have a tailwind with lower cotton and other material costs. The biggest bear case on JILL is that its margin gains are not sustainable, but the company has thus far proven that they are.

JILL’s operating cash flow also is very noteworthy, and I like that it is able to funnel some of that into technology investments that should help the company down the line, while also being able to reduce net debt. The company has reduced its debt by about $24 million since I first looked at the stock back in March. That’s a nice combination.

Valuation

JILL currently trades around 4.6x the FY 2024 (ending January) consensus EBITDA of $110.1 million and 4.9x the FY25 consensus for EBITDA of $103 million.

From an EBITDAR perspective, it trades at 3.4x FY24 EBITDAR and 3.6x FY25 EBITDAR.

It trades at a forward PE of 8.9x the FY24 consensus of $2.87 and 8.2x the FY25 consensus of $3.12.

The company is projected to grow revenue 4.1% in FY24 to $635.6 million.

JILL has generated $64.4 million in OCF the past 12 months, which equates to an OCF yield of 23%.

JILL's valuation is by far one of the lowest among specialty apparel retailers, despite its superior margins and strong cash flow. Among the peers below, only Abercrombie ( ANF ) is posting gross margins above 50%.

At 7x FY2025 EBITDA and a 13% OCF yield, JILL would be a $45 stock, which seems appropriate given its cash flow and superior gross margins, but lower revenue growth.

Conclusion

In my view, the market is focusing on the wrong metrics with JILL, more concerned with its flattish sales and lack of store growth. What it is missing is a retail apparel brand with some of the best margins in the space that is generating a ton of cash. Its valuation, meanwhile, is one of the cheapest in the sector by far, despite these strong characteristics. While the company does carry some debt, it should be able to use its strong cash flow to meaningfully pay it off in the next few years.

I continue to rate JILL a “Strong Buy” and would add to positions with the recent sell-off. The biggest risks to the stock would be if the macro environment hurt sales more than expected and if the company was unable to sustain its strong margins and cash flow as a result.

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