JOAN - JOANN Finds Liquidity For Long Road Ahead

2023-03-31 12:51:02 ET

Summary

• JOANN reported its FQ4 and full-year 2023 financial results on March 23, 2023.
• The firm sells sewing and related crafting products through a retail network and online store in the U.S.
• JOAN has experienced revenue contraction and inflationary pressures as the pandemic has waned.
• Management needs to cut costs, generate cash, reduce debt and reignite revenue growth - a tall order.
• I'm on Hold for JOAN in the near term.

A Quick Take On JOANN

JOANN (JOAN) reported its FQ4 2022 financial results on March 23, 2023, beating revenue but missing EPS consensus estimates.

The firm operates a retail network of arts and crafts supply stores and online shopping for consumers in the U.S.

Given JOAN's seasonally falling revenue, increasingly high debt and need for cost cutting, I'm on Hold for the stock in the near term.

JOANN Overview

Ohio-based JOANN was founded to sell a wide selection of sewing and arts and crafts supplies available to consumers via its large retail network of hundreds of stores, with over 95,000 SKUs in stores and 245,000 SKUs via its online website.

Management is headed by president and CEO Wade Miquelon, who has been with the firm since 2016 and was previously CFO and EVP at Walgreens Boots Alliance ( WBA ) and held the same positions at Tyson Foods ( TSN ).

The company's primary offerings include:

• Own-brand portfolio

• Omni-channel fulfillment

• In-store and online education

The firm pursues an omnichannel approach, seeking customers through all manner of online and offline media, advertising, social media, direct mail and in-store promotions, events and instructional classes.

JOANN's Market and Competition

According to a 2022 market research report by Market Research, the U.S. market for craft and sewing supplies was an estimated $4.4 billion in 2021.

This represents a three-year annual growth rate of only 0.3%.

A primary negative factor impacting the industry is a shortening life cycle stage and low barriers to entry. There were nearly 3,000 companies in the industry producing products, though far fewer distributors such as JOANN.

The impact of the COVID-19 pandemic provided a temporary growth spurt as consumers performed more arts and crafts and hobby work in the home [DIY] in response.

Since the waning of the primary phase of the pandemic, consumers have reduced their craft and hobby expenditures, negatively impacting industry revenues.

Management seeks to cast the company as part of the Creative Products industry and cites a much larger market size of $40 billion.

Major competitive or other industry participants include:

• Walmart

• Target

• The Michaels Companies (Blackstone)

• Hobby Lobby

• Fabric.com

JOANN's Recent Financial Results

• Total revenue by quarter has produced the following trajectory:

• Gross profit margin by quarter has trended lower in certain reporting periods, as the chart shows here:

• Selling, G&A expenses as a percentage of total revenue by quarter have increased in recent quarters:

• Operating income by quarter has produced negative results in recent quarters:

• Earnings per share (diluted) have worsened further into negative territory recently:

(All data in the above charts is GAAP)

In the past 12 months, JOAN's stock price has dropped 85.7%, as the chart indicates below:

As to its FQ4 202 financial results, total revenue fell 5.8% year-over-year, but gross profit margin stabilized at 44%.

SG&A expenses as a percentage of total revenue have been rising slightly while operating losses improved, nearing breakeven.

Earnings per share worsened markedly in the quarter as the firm recognized a $95 million non-cash pre-tax impairment expense.

For the balance sheet, the firm ended the quarter with cash and equivalents of $20.2 million and total debt of $983 million.

Over the trailing twelve months, free cash used was $172.1 million, of which capital expenditures accounted for $96.9 million. The company paid $7.3 million in stock-based compensation in the last four quarters.

Subsequent to quarter end, the company added a $100 million credit line.

Valuation And Other Metrics For JOANN

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Future Prospects For JOANN

In its last earnings call (Source - Seeking Alpha), covering FQ4 2023's results, management highlighted getting costs further under control through its "focus, simplify and grow" efforts, and we can see that in its operating income results.

Leadership believes its cost reduction efforts will pay off in fiscal 2024 and beyond.

The firm has also been busy reactivating 2 million customers from its known customer database while adding another 3 million new customers, many of whom are younger demographic customers.

Looking ahead, management did not provide specific forward guidance for fiscal 2024. But leadership is focused on generating cash from cost savings and has identified $150 million out of a total goal of $200 million in cash savings.

The company's financial position is in need of significant improvement, with a 5.9x debt-to-adjusted EBITDA ratio on rising debt and dwindling cash.

Regarding valuation, the market is valuing JOAN at an EV/revenue multiple of around 0.9x, while management believes its topline revenue drop has largely stabilized.

The primary risk to the company's outlook is a worsening macroeconomic outlook in 2023, causing consumers to reduce spending while interest rates stay high.

Given JOAN's dropping revenue, increasingly high debt and need for cost-cutting, I'm on Hold for the stock in the near term.

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