J.Jill, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 39 weeks ended November 2, 2019, not 2018 Q3. J.Jill is an omnichannel women’s apparel retailer with more than 280 stores and an e-commerce business.
Financial performance
| Metric | 13 weeks ended Nov. 2, 2019 | Prior-year quarter | 39 weeks ended Nov. 2, 2019 | Prior-year period |
|---|---|---|---|---|
| Net sales | $166.1 million | $174.1 million | $523.3 million | $535.4 million |
| Gross margin | 64.4% | 66.3% | 62.8% | 65.8% |
| Operating income (loss) | $9.0 million | $13.9 million | $(75.0) million | $53.2 million |
| Net income (loss) | $2.4 million | $6.7 million | $(90.0) million | $28.4 million |
| Adjusted EBITDA | $19.6 million | $24.2 million | $53.7 million | $85.0 million |
| Adjusted EBITDA margin | 11.8% | 13.9% | 10.3% | 15.9% |
Quarterly sales declined 4.6%; retail comparable sales fell 7.0%. For the 39-week period, sales declined 2.3% and total-company comparable sales fell 3.8%. Direct sales rose to $71.3 million for the quarter, while retail sales fell to $94.7 million. Management attributed weaker gross margin to promotions, markdowns and liquidation activity. Quarterly SG&A declined 3.6%, but rose 3.0% year to date, including higher sales-related and technology costs.
For the 39 weeks, operating cash flow was $17.7 million, down from $50.0 million; capital expenditures were $13.5 million. Investing cash use was $13.5 million and financing cash use was $53.4 million, primarily reflecting the $50.2 million special dividend paid in April. Cash fell to $17.0 million from $66.2 million at February 2, 2019.
Debt, liquidity and balance sheet
- Term Loan principal was $243.3 million at November 2, 2019; the company reported compliance with all financial covenants.
- No borrowings were outstanding under the ABL Facility; additional borrowing capacity was $38.3 million, with $1.7 million of letters of credit outstanding.
- Adoption of lease accounting resulted in $247.7 million of operating lease liabilities at November 2, 2019. Lease liabilities are separate from reported debt.
- Management said current liquidity sources should fund operations for at least the next 12 months, while cautioning that operating cash generation and future borrowing availability are not assured.
Material changes, outlook and risks
- Year-to-date results include $88.4 million of goodwill impairment and $7.0 million of tradename impairment, following a reduced sales outlook and lower earnings forecast. The company said further impairment could be material after its annual fourth-quarter assessment.
- Other notable items include $2.4 million of insurance gain related to fire-damaged cargo, $1.6 million of restructuring charges, and a $1.3 million gain on a third-quarter inventory-for-media barter transaction. The filing reports $2.0 million of unused media credits at period end.
- A July 2019 restructuring focused on cost reductions and headcount; remaining payments were expected to be completed in the fourth quarter of Fiscal 2020.
- No quantified sales or earnings guidance is provided. Key business risks cited include economic weakness, changing fashion preferences, competition, pricing and markdown pressure, execution of strategic initiatives, and potential credit-rating deterioration. The company noted exposure to variable interest rates and no interest-rate hedging.
- On December 5, 2019, CEO Linda Heasley departed; director James Scully became interim CEO. This was subsequent to the reporting period.
- Management reported effective disclosure controls and no significant change in internal control over financial reporting during the quarter. It did not believe pending ordinary-course legal proceedings would have a material adverse effect.
Key facts for investors to verify
- Whether comparable-sales trends and the shift toward promotions improve, and the resulting effect on gross margin and cash generation.
- The assumptions behind the goodwill and tradename valuations and the outcome of the fourth-quarter impairment review.
- Near-term liquidity and debt-service capacity given $17.0 million of cash, scheduled debt payments, lease commitments and only $38.3 million of reported ABL availability.
- Whether cost reductions and paused technology initiatives deliver savings without impairing operations or growth.
- The implications of the CEO transition and whether future dividends or other capital returns are feasible under debt restrictions and business needs.