JOAN - JOANN: Still A Sell Following Q1 Earnings

2023-06-05 22:06:20 ET

Summary

• Back in December, we overtly called this stock a sell and ran tactical shorts, and the stock is down 59% in that time.
• Q1 earnings show sales are still declining, and the company is losing money hand-over-fist.
• Cost savings plans are underway and the gross margin is improving, but the long-term viability of the company remains in question.

JOANN Inc. (JOAN) is a specialty retailer that we have traded in the past, both long and short. Back in December we overtly called this stock a sell. Traders took a cue at our service and ran tactical shorts, and the stock is now down 59% since that call. Now in dollar stock territory at $1.60 per share, we have to question whether the company will survive or if it is heading toward bankruptcy. JOANN still faces a lot of headwinds that it is trying to work through and the retail space as a whole has been a bit tough in the last few weeks. We believe the economy is heading toward recession, and with that, the consumer will weaken. A weakening consumer is the last thing a retailer needs. Although this is a retailer, it was really one of the companies that did well during COVID-19 as people stayed home and focused on sewing and clothing repair. Many people also were fixing up and decorating their homes, and so JOANN benefitted in its arts and crafts category. Those tailwinds are long-term growth paths that have turned into one of decline. The company has worked diligently to try and improve margins and slash costs, but it is losing money badly. In this column, we check in on the struggling retailer and discuss the just-reported earnings.

The stock got a bit of a pop following the earnings report, but we think this will be short-lived. We believe momentum is still to the downside and the company is likely to continue to struggle in this tough macro environment. That said, the company missed consensus estimates on the top and bottom line. Earnings were significantly lower than expected overall.

The topline revenue figure in the Q1 report showed declines from last year. However, management thinks the story is turning around here. The company is focused on margins and cash flows. Management summed up nicely:

In fiscal year 2023, we launched Focus, Simplify and Grow with an eye toward reducing annual costs by approximately $200 million by early fiscal year 2025. We have identified the full amount of our targeted cost savings and will continue to implement these initiatives. With these strategic cost reductions identified and the proactive steps we took to strengthen our balance sheet, we are already seeing a significant increase of $89 million in our free cash flow on a year over year basis

Sales came in at $478.1 million and dropped 4.0%. Total comparable sales are a key indicator we watch for retailers, and those fell off 4.0% compared to last year. As we mentioned the company has been focused on margins. That said, gross profit increased from last year. Gross profit was $249.0 million, rising 3.4% from a year ago. Gross margin was up nicely, rising 380 basis points from last year. The cost savings plans are starting to work out, so it seems. However, losses widened from a year ago and that is unacceptable. The company saw adjusted EBITDA fall to $3.5 million from $18.6 million a year ago, while EPS was a loss of $0.93, over 4 times the loss of $0.22 a year ago. This is just ugly. But the future may be brighter. It is not enough to lift our sell rating, but things are getting better. Another few quarters of improvement could lead to an upgrade from Quad 7 Capital and BAD BEAT Investing but for now, we maintain a sell.

We still think that the company is not going bankrupt, but it is on watch in our opinion. Sales are down. Inflation is weighing. Cash is just $19 million while long-term debt is $1.04 billion. That said, management forecasts their actions will result in $200 million of annualized cost savings over the next year. That is welcomed. But if we look ahead, the company sees fiscal year 2024 still worsening from 2023. It is just a painful place to be. The company sees sales down 1-4% from a year ago, and that factors in an extra week of business too. Adjusted EBITA will be $85 to $95 billion, but the company is likely to still lose $2.00 per share. The company is trying to get the situation back to break even, but we are many quarters away from clarity on that possibility.

The most positive news out of this report is that cash flow will improve in fiscal 2024 from 2023. Management sees cash flow improving $150 to $170 million over 2023, and that is a result of the cost savings plans. Chris DiTullio , JOANN’s Chief Customer Officer and co-lead of the Interim Office of the CEO commented:

“Our focus in fiscal year 2024 is to deliver significant cash flow improvement and emphasize the fundamentals that have made JOANN the nation’s leading fabric and sewing retailer and a strong competitor in the arts and crafts space. This includes leaning in on our strategic priorities of winning in our core sewing and craft categories, creating a high-quality in-store and online customer experience, and operating with high efficiency to help us reinvest to drive long-term growth.”

The company and management are doing what they can to right the ship, but it is a tall order. We would love to see the company get through this, and would love to take a tactical long here, but the situation is still very precarious especially with the tough macro backdrop.

While the easy money has been made shorting, we reiterate a sell here.

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