J.Jill, Inc. — Form 10-Q Summary
Period clarification: The filing covers the thirteen weeks ended May 2, 2020 (first quarter of fiscal 2020), not 2019 Q1. It was filed July 28, 2020, after a COVID-19-related delay.
Business context and reporting period
J.Jill is an omnichannel women’s apparel retailer with more than 280 stores and an e-commerce business. COVID-19 store closures beginning March 18 materially affected the quarter. The company began reopening stores May 15; essentially all stores were open by the filing date, subject to local guidelines.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $91.0 million | $176.5 million |
| Gross profit / margin | $50.2 million / 55.1% | $116.3 million / 65.9% |
| Operating income (loss) | $(89.7) million | $10.8 million |
| Net income (loss) | $(70.3) million | $4.4 million |
| Adjusted EBITDA / margin | $(25.8) million / (28.4)% | $21.5 million / 12.2% |
| Operating cash flow | $3.0 million | $4.3 million |
| Capital expenditures | $1.8 million | $4.1 million |
Revenue declined 48.4% year over year. Retail revenue was $35.1 million versus $102.6 million; direct revenue was $55.9 million versus $73.9 million. Direct sales rose to 61.4% of revenue from 41.9%. Gross margin fell amid promotions, markdowns and liquidation activity, including a $5.2 million accrual for potential vendor liabilities related to canceled orders. SG&A fell 16.6% to $87.9 million, but rose to 96.6% of sales as store closures reduced revenue.
Net loss included $52.0 million of impairment charges: $27.5 million for long-lived assets, $17.9 million for goodwill and $6.6 million for other intangible assets. The company recorded a $24.1 million income tax benefit, partly reflecting CARES Act provisions; it reported an estimated $7.3 million tax refund claim.
Cash was $54.8 million at May 2, versus $21.5 million at February 1. Operating activities provided $3.0 million; investing used $1.8 million; financing provided $32.2 million, primarily from a $33.0 million ABL draw. The company attributed operating cash support in part to extended vendor payment terms and approximately $12.0 million of withheld store rent. Total debt included a $236.9 million term loan and $33.0 million of ABL borrowings. Only $5.3 million of additional ABL capacity remained, with $1.7 million of letters of credit outstanding. The term loan was classified as current because of covenant defaults and uncertainty about waivers. Shareholders’ equity was negative $31.2 million.
Material changes, outlook and risks
- COVID-19 caused a sharp sales decline, store closures, lower cash generation and covenant noncompliance under both the ABL facility and term loan. Management stated that these conditions raised substantial doubt about the company’s ability to continue as a going concern within one year after issuance.
- Lenders agreed to forbear from exercising remedies under agreements entered June 15, 2020; the filing reports extensions through July 30, 2020. Without further lender relief, debt could be accelerated and commitments terminated, potentially leading to a Chapter 11 filing. The company was seeking additional ABL borrowing capacity; no assurance was given it would be obtained.
- Management said its base forecast projected sufficient liquidity for the coming 12 months, but warned that store performance, consumer resilience and renewed COVID-19 disruption could make available liquidity insufficient. The filing gives no specific financial guidance.
- Cost and cash-preservation steps included furloughs, salary and other expense reductions, extended vendor terms, rent withholding, reduced marketing and investment, catalog elimination and suspension of nearly all capital spending. No significant landlord concessions had been confirmed.
- Further inventory, goodwill, intangible and long-lived asset impairments were possible. Goodwill and tradename valuations had little or no cushion; a 1% change in the discount rate could cause an additional $5.0 million goodwill impairment.
- Disclosure controls were deemed ineffective because of a previously identified material weakness in controls over goodwill and tradename impairment accounting. Management was implementing remediation, but the weakness was not yet considered remediated.
Important facts for investors to verify
- Current status and terms of lender forbearance, covenant waivers, ABL amendment negotiations, borrowing availability and any debt acceleration risk.
- Actual liquidity and cash burn after quarter-end, including whether the $7.3 million tax refund was received and the extent of rent and vendor payment deferrals.
- Store sales, e-commerce performance, reopening conditions and whether further closures or impairments occurred.
- Progress toward remediating the impairment-accounting control weakness and the results of subsequent impairment testing.