J.Jill, Inc. — Form 10-Q Summary
Reporting period: The filing reports the 13 and 39 weeks ended November 3, 2018, compared with periods ended October 28, 2017. The filing’s actual period is 2018, notwithstanding the “2017 Q3” request metadata. J.Jill is an omnichannel women’s apparel retailer with 275 stores and e-commerce sales.
Financial performance
| Metric | 13 weeks ended Nov. 3, 2018 | 13 weeks ended Oct. 28, 2017 | 39 weeks ended Nov. 3, 2018 | 39 weeks ended Oct. 28, 2017 |
|---|---|---|---|---|
| Net sales | $174.1 million | $162.0 million | $535.4 million | $509.5 million |
| Gross profit / margin | $115.5 million / 66.3% | $108.5 million / 67.0% | $352.5 million / 65.8% | $346.8 million / 68.1% |
| Operating income / margin | $13.9 million / 8.0% | $13.3 million / 8.2% | $53.2 million / 9.9% | $57.5 million / 11.3% |
| Net income | $6.7 million | $6.0 million | $28.4 million | $26.0 million |
| Diluted EPS | $0.15 | $0.14 | $0.64 | $0.60 |
| Adjusted EBITDA / margin | $24.2 million / 13.9% | $23.0 million / 14.2% | $85.0 million / 15.9% | $89.3 million / 17.5% |
- Quarterly sales rose 7.5%; comparable sales increased 1.0%. Management attributed part of the quarterly sales increase to a calendar shift that moved a high-volume November week into the quarter. Year-to-date sales rose 5.1%, with comparable sales up 1.8%.
- Gross margin declined 0.7 percentage points in the quarter and 2.3 points year to date. Management cited early-quarter clearance markdowns and, year to date, promotions, markdowns, and liquidation activity.
- Quarterly SG&A rose 6.7% to $101.6 million, including higher marketing, compensation and executive recruitment, sales-related, technology, and depreciation costs. Year-to-date SG&A rose 3.4% to $299.2 million.
- Operating cash flow was $50.0 million versus $54.5 million for the comparable 39 weeks. Capital expenditures were $14.0 million versus $22.3 million. Cash increased to $59.9 million from $26.0 million at February 3, 2018. Operating cash flow less capital expenditures was approximately $36.0 million, compared with $32.2 million.
- At November 3, 2018, the Term Loan principal was $246.1 million; its net carrying amount, including current debt, was approximately $240.6 million. The company made $2.1 million of scheduled principal repayments during the 39 weeks. No ABL borrowings were outstanding; additional borrowing capacity was $38.2 million, net of letters of credit.
- Current assets were $171.3 million and current liabilities $101.5 million. Management said available liquidity was expected to fund operations for at least the next 12 months, while noting that future cash generation and borrowing availability are not assured.
Changes, outlook, and risks
- Net income increased year to date despite lower operating income, primarily alongside a lower income-tax provision: $10.4 million versus $16.9 million. The effective tax rate fell to 26.8% from 39.4%, primarily reflecting the Tax Cuts and Jobs Act.
- Management provided no specific sales or earnings guidance. It identified economic conditions and consumer spending, fashion preferences, competition, pricing and markdowns, strategic investment returns, and trade policy or tariffs as factors that could affect results. The company sources most merchandise outside the United States.
- Variable-rate debt exposes the company to interest-rate risk; it reported no interest-rate hedging. Management estimated a 10% change in the current interest rate would affect fiscal 2018 net income by $1.3 million.
- A shareholder class-action lawsuit concerning the March 2017 IPO was pending; the company said it intended to defend the claims and had accrued no material amount. Management reported no other legal proceedings expected to have a material adverse effect.
- The company adopted ASC 606 on February 4, 2018 using the modified retrospective method, reducing opening retained earnings by $0.3 million. It also changed presentation of estimated sales returns. Adoption of the new lease standard was expected in fiscal 2019 and was expected to create significant right-of-use assets and offsetting lease liabilities; amounts had not been quantified.
- Adjusted EBITDA is a non-GAAP measure. Year-to-date 2018 included $1.3 million of other non-recurring expenses, including CEO-transition costs; the prior-year adjustment primarily included IPO and public-company transition costs.
Investor verification priorities
- Check whether comparable-sales growth and the reported quarterly sales increase persisted after the calendar-shift benefit.
- Track gross margin, markdown and liquidation levels, and inventory quality.
- Review operating cash flow, capital spending, debt repayment, and remaining ABL availability.
- Assess the impact of lease-standard adoption and the outcome or developments in the IPO-related lawsuit.
- Compare GAAP operating results with Adjusted EBITDA and scrutinize the nature and recurrence of excluded costs.