J.Jill, Inc. — Form 10-Q summary
Period clarification: Although the request identifies 2018 Q2, this filing covers the 13 and 26 weeks ended August 3, 2019, with comparisons to periods ended August 4, 2018.
Business context and reporting period
J.Jill is an omnichannel women’s apparel retailer with more than 280 stores and an e-commerce business. It operated 286 stores at August 3, 2019, versus 273 a year earlier. The filing describes the interim results as unaudited and cautions they are not necessarily indicative of full-year results.
Financial performance
- Second quarter: Net sales were $180.7 million, up 0.6%. Gross profit was $105.3 million and gross margin was 58.3%, down from $116.7 million and 64.9%. Net loss was $96.7 million, or $2.21 per diluted share, versus net income of $10.5 million, or $0.23 per diluted share.
- First half: Net sales were $357.2 million, down 1.1%; comparable sales declined 2.2%. Gross profit was $221.6 million and gross margin was 62.0%, versus $237.0 million and 65.6%. Net loss was $92.4 million, or $2.12 per diluted share, versus net income of $21.7 million, or $0.49 per diluted share.
- Operating costs and adjusted EBITDA: First-half SG&A was $210.1 million, up 6.3%, and equaled 58.8% of sales versus 54.7%. Adjusted EBITDA was $12.6 million for the quarter (7.0% margin), versus $29.3 million (16.3%); first-half Adjusted EBITDA was $34.1 million (9.5%), versus $60.8 million (16.8%). Adjusted EBITDA is a non-GAAP measure.
- Cash flow: First-half operating cash flow was $23.5 million, down from $43.1 million. Capital expenditures were $7.9 million, versus $5.7 million. Financing cash outflow was $52.7 million, primarily reflecting the $50.2 million special dividend. Cash fell to $29.1 million from $66.2 million at fiscal year-end.
- Debt and liquidity: Term Loan principal was $244.0 million; the balance-sheet carrying amount of long-term debt, including discount and excluding current portion, was $236.8 million. No borrowings were outstanding under the ABL Facility; availability was $38.2 million, with $1.8 million of letters of credit. The company reported compliance with financial covenants and said current liquidity sources should suffice for at least 12 months, while noting there is no assurance of future operating cash flow or borrowing availability.
- Leases and balance sheet: At August 3, operating lease assets were $216.3 million and lease liabilities totaled $245.6 million. Current assets were $131.7 million versus current liabilities of $135.6 million. Shareholders’ equity was $72.6 million, down from $213.8 million at February 2, 2019.
Material changes and unusual items
- The quarter included $88.4 million of goodwill impairment and $7.0 million of tradename impairment. Management attributed the test to a reduced comparable-sales outlook and lower full-year earnings forecast, together with a decline in the share price. These noncash charges drove the reported loss and reduced goodwill from $197.0 million to $108.6 million.
- Gross margin weakened amid increased promotions, markdowns, and liquidation of merchandise. In the first half, retail revenue declined to $206.3 million from $214.2 million, while direct revenue increased to $150.9 million from $147.0 million.
- SG&A included $2.1 million of long-lived asset impairment associated with vacating and subleasing one floor of the Quincy headquarters, and $1.6 million of restructuring costs from a July plan involving headcount reductions. Payments for the restructuring were expected to be completed in the third quarter of Fiscal Year 2020.
- A cargo-vessel fire insurance claim was settled for $3.3 million; the company recorded a $2.4 million gain in SG&A.
- The company paid a special dividend of $1.15 per share, totaling $50.2 million, on April 1, 2019. It stated future dividends are at the board’s discretion and subject to financial, legal, and debt-agreement constraints.
- J.Jill adopted lease accounting Topic 842 on February 3, 2019, recording lease assets and liabilities of approximately $223.3 million and $250.5 million, respectively, at adoption. Comparative periods remain under prior lease accounting rules.
Outlook, commentary, and risks
No quantified revenue, earnings, or comparable-sales guidance is provided in the filing. Management cited consumer and economic conditions, fashion preferences, competition, merchandise pricing and mix, technology and e-commerce initiatives, and potential trade, tariff, and tax changes as factors that could affect results. The majority of merchandise is sourced from outside the United States. The company also noted variable-rate exposure on its Term Loan and ABL Facility, no interest-rate hedging, and estimated that a 10% change in current interest rates would affect Fiscal Year 2019 net income by $1.3 million. Management reported effective disclosure controls and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether markdowns and liquidation activity persist, and whether gross margin and comparable sales stabilize.
- The assumptions and valuation sensitivities behind the $95.4 million goodwill and tradename impairment, and the potential for further impairment.
- Cash generation, liquidity, ABL availability, and covenant headroom after the special dividend and in light of the company’s debt and lease commitments.
- Whether technology and cost-reduction initiatives deliver benefits sufficient to offset higher SG&A and restructuring expenses.
- The comparability of reported balance-sheet and lease figures, given adoption of Topic 842 and the prior-period accounting basis.