Business context and reporting period
J.Jill, Inc. is a U.S. women’s apparel retailer operating stores, e-commerce and catalog channels. This is its Form 10-K for fiscal 2019, the 52 weeks ended February 1, 2020, with comparisons to fiscal 2018, ended February 2, 2019. Although the request labels the period “2018 Q4,” the filing covers the full fiscal year; it also reports quarterly data.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $691.3 million | $706.3 million |
| Gross profit / margin | $428.6 million / 62.0% | $460.3 million / 65.2% |
| Operating income (loss) | $(112.0) million | $61.2 million |
| Net income (loss) | $(128.6) million | $30.5 million |
| Adjusted EBITDA / margin | $65.5 million / 9.5% | $103.5 million / 14.7% |
| Operating cash flow | $32.7 million | $67.5 million |
| Capital expenditures | $18.2 million | $24.7 million |
| Cash at year-end | $21.5 million | $66.2 million |
Fiscal 2019 gross margin contracted as promotions, markdowns and liquidation actions increased. SG&A rose 2.5% to $409.1 million. The reported operating loss included $131.5 million of goodwill and trade-name impairment charges; the impairment-adjusted EBITDA measure is non-GAAP and should not be viewed as a substitute for GAAP earnings.
At February 1, 2020, term-loan principal was $237.6 million (net debt carrying amount, including current portion, was approximately $234.0 million). No ABL loans were outstanding at year-end, and reported borrowing availability was $38.3 million. Current assets were $123.0 million and current liabilities $122.4 million. Operating lease liabilities totaled $242.7 million; the filing reports $307.2 million of undiscounted operating lease obligations.
Material changes versus prior period
- Sales fell 2.1%; comparable sales declined 3.6%, with lower sales per customer partly offset by 0.4% active-customer growth. Direct sales rose to 43.7% of net sales from 41.6%.
- Gross margin declined 3.2 percentage points, and Adjusted EBITDA fell about 37%.
- Cash from operations declined by $34.9 million. Financing cash outflow included a $50.2 million special dividend paid in April 2019 and $7.8 million of debt repayments.
- Goodwill and indefinite-lived intangible impairments totaled $131.5 million, compared with none in FY2018. The company also recorded $2.3 million of long-lived asset impairment.
- The company adopted lease accounting Topic 842 in FY2019, recognizing operating lease assets and liabilities; prior-year balance-sheet amounts are not presented on the same basis.
Outlook, risks and unusual items
The filing provides no quantified financial guidance. Management describes material uncertainty from COVID-19, which led to temporary store closures beginning March 18, 2020. By the filing date, approximately half of stores had reopened in phases. Management said its base forecast showed sufficient liquidity over the next 12 months but warned that renewed disruption, weak store performance or changed shopping behavior could make available liquidity insufficient.
The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. COVID-19 impacts were expected to cause covenant noncompliance; the going-concern language itself also violated affirmative covenants under the ABL and term-loan agreements. Lenders could accelerate debt and terminate commitments if defaults were not waived. The company said failure to obtain a waiver could lead to a Chapter 11 filing. It borrowed $33.0 million under the ABL in March 2020, leaving $5.3 million of availability, and was seeking an amendment for additional borrowing capacity without assurance of success. It also filed for a $7.7 million tax refund under the CARES Act.
Management described cash-preservation steps including furloughs, leadership pay reductions, deferring vendor and rent payments, eliminating a catalog, limiting e-commerce investment and suspending nearly all capital expenditures. The company expected a material impairment charge in FY2020 Q1 following COVID-related triggering events.
Other investor-relevant issues include NYSE notices for market-capitalization/shareholders’ equity and minimum share-price deficiencies; the NYSE accepted the company’s compliance plan, but continued listing was not assured. Management concluded disclosure controls and internal controls over financial reporting were ineffective due to a material weakness in controls over goodwill and trade-name impairment valuations; remediation was underway. The company also reported an unusual $2.4 million insurance gain related to cargo-vessel inventory and a $1.3 million gain on an inventory-for-media barter transaction.
Important facts for investors to verify
- Current lender waivers, covenant status, amendment negotiations and remaining borrowing availability after the March 2020 ABL draw.
- Store reopening progress, sales and cash burn, and whether liquidity is adequate through the going-concern assessment period.
- FY2020 Q1 impairment amounts and any further changes to inventory, lease assets or goodwill valuations.
- Progress remediating the impairment-accounting control weakness and the status of NYSE listing compliance.
- Debt maturity and refinancing options: the term-loan agreement has a May 2022 maturity, including a substantial principal payment due then.