JOAN - JOANN: Clearance Shopping On This Retailer Ahead Of Earnings

Summary

• The retail industry is in the spotlight this week with key earnings on tap.
• One domestic firm has endured tough times including a dividend cut to zero.
• I see value in the name in the face of many risks.
• Ahead of earnings, I outline key prices levels to watch on the chart.

The domestic inflation picture is mixed. Goods are in deflation while services are hot. Retailers report earnings this week, and there are jitters ahead of some key names' reports.

JOANN reports in a few weeks, and this embattled home goods firm has a patchwork of bearish risks, but I present a bullish contrarian take based on valuation and the charts. With high volatility, I would avoid the options, though.

Good Deflation

According to Bank of America Global Research, JOANN Inc (JOAN) is an omnichannel retailer in the arts & crafts category with approximately 850 stores across the US. Compared to other large arts & crafts chains, JOANN has a significantly broader assortment of fabric and sewing supplies, which make up approximately half of the company's sales.

The Ohio-based $139 million market cap Specialty Retail industry company within the Consumer Discretionary sector does not have positive trailing 12-month GAAP earnings and has put on pause its dividend which was extremely high, according to The Wall Street Journal. Ahead of earnings on March 16, the stock has a high 21% short interest.

Labor costs, weak demand, and a lack of store growth are obvious headwinds for this small retailer enduring troubled times . Amid a very tough 2023 operating year, the firm slashed its dividend to zero, and I don’t expect it to return any time soon.

We really need to see better same store sales trends and signs of management getting a handle on its expenses and the overall quality of its balance sheet. A decline in consumers’ interest in goods relative to services is a macro headwind. Still, with more in-person shopping post-COVID and lower freight costs, there’s some upside potential.

On valuation , analysts at BofA see earnings rising back into the black this year (JOAN’s FY 2024) and accelerating through 2025. The Bloomberg consensus forecast is less sanguine, however. With dividends at zero, reality has set in with the firm’s management team.

What’s intriguing are the exceptionally low earnings multiples looking ahead and a below-market EV/EBITDA ratio. Finally, free cash flow should be there in the coming quarters and JOAN trades just 0.06x sales according to Seeking Alpha, and 1.45x forward cash flow. I think a flier-long play on this value retailer might be worth it.

JOANN: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Thursday, March 16 AMC. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research and Technology Services (ORATS) show a consensus EPS forecast of $0.70, which would be a 40% decline from $1.16 of per-share profits earned in the same quarter a year ago. ORATS notes that implied volatility is high above 120%, so that means the stock is expected to move by a whopping 35% over the next month.

After missing on bottom-line estimates in the last three quarters and with the stock trading lower in three of the past four releases, there are bearish trends here and options are expensive compared to how shares have moved in the last handful of reports. I would rather play the stock than the options.

JOAN: Expensive Options Ahead of Earnings

The Technical Take

Here is where I see a long play unfolding. Notice in the chart below that shares of JOAN are about a buck above all-time lows set at the turn of the year. With the stock still just 50% of its 200-day moving average value, a rally back toward the low $6s is totally in play.

Long here with a stop under $3 is a favorable risk-reward. Near-term support is seen at $3.30, but you want to give the trade a bit of cushion due to high volatility. The downtrend might have turned following a breakout in early February – we are now retesting support.

JOAN: Holding $3.30, Eyeing $6

The Bottom Line

I like JOAN for a contrarian swing long here. The valuation is low considering where profits and free cash flow may be in the coming quarters while the chart offers some hope for the bulls.

For further details see: