J.Jill, Inc. (NYSE:JILL) Q4 2023 Earnings Call Transcript

J.Jill, Inc. (NYSE:JILL) Q4 2023 Earnings Call Transcript March 20, 2024

J.Jill, Inc. beats earnings expectations. Reported EPS is $0.23, expectations were $0.005. JILL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the J.Jill Inc. Q4 2023 Earnings Call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. I will now turn the call over to Claire Spofford, Chief Executive Officer and President. Please go ahead.

Claire Spofford: Thank you. Operator, and hello, everyone. Thank you for joining us this morning. We are pleased with our strong end to 2023, capping off another year of great progress for J.Jill as a result of disciplined execution of our operating model. For the fourth quarter, we delivered adjusted EBITDA above the prior year, supported by strong gross margin performance. As we discussed on our third quarter call, we started to see our customer become somewhat more discerning with their spend, and we had prepared for a slightly higher promotional holiday period, which didn’t play out. However, through strong execution, solid customer reception for our winter assortment and spring preview in the latter half of the quarter, as well as tightly managed expenses, we delivered Q4 results above our expectations.

Our performance throughout the year, including during the fourth quarter, is a testament to our team effectively leveraging our loyal customer base and to their ongoing focus on consistently delivering against our objectives amidst a volatile consumer environment. For the year, we delivered sales of $605 million and an adjusted EBITDA margin of 18.6%, while generating $46 million in free cash flow, in line with our recent annual trends. During the year, we make great progress on strengthening our financial and operational foundation while planting the seeds for future growth. We successfully refinanced our debt, enhanced our omnichannel capabilities with the rollout of our POS system and refinements to our website, delivered our first net new store opening year in over three years, and continued to identify and test new concepts within our assortment with capsules, including Pure Jill elements and Wearever Works.

We also effectively managed our customer acquisition strategies and costs to support our customer file. Our customer file remained healthy, and we saw nice growth from our best customer segment for the year, which partially offset the impact we had from our more cost-conscious cohort, given the dynamic macro environment she was navigating. Average customer spend increased versus the prior year, supported by growth in frequency and full price penetration, and we continue to benefit from our ongoing customer insight work. As a result, we’ve been able to not only strengthen our relationships with new and existing customers, but also identify areas of opportunities for enhanced focus and growth, as seen with our inclusive sizing offering and capsule launches, including the Wearever Works collection.

Through offering quality fabrications and an assortment that celebrates the totality of who she is, we were able to deliver the experience our customer expects from J.Jill. With this stronger foundation in place, we believe we are well positioned to continue to deliver on our financial objectives while supporting our growth initiatives. While we are maintaining a cautious view on the macro backdrop as we move into 2024, we plan to continue to execute and leverage our proven disciplined operating model while further supporting our plans to drive mid and long-term profitable growth. In 2024, we plan to continue to invest in our omnichannel foundation. Building off of the completion of the POS rollout in 2023, we have launched our OMS project.

Through the new POS and OMS systems, we will have greater omni capabilities ramping in 2025, which we believe will further enhance our customers’ shopping experience and enable us to benefit even further from our balanced operating model. In addition, we expect to open up to five net new stores in 2024. As we’ve discussed previously, with only 244 stores, we have significant opportunity for further store growth, but plan to take a very measured and fiscally responsible approach to our openings in the near and medium term. Finally, we plan to continue to strengthen our customer file through new marketing strategies, including an upcoming summer campaign that we believe will help to increase brand awareness and drive new customer acquisitions.

As I have said before, we have a great loyal customer with tremendous opportunity to increase our brand awareness and to welcome new customers to J.Jill through the strength of our brand equity, our assortment, and overall customer experience. Before I close, I also wanted to highlight our upcoming impact report that we will be publishing later this spring. We continue to build upon our history of empowering women, prioritizing responsible environmental stewardship, and contributing to the communities in which we operate, and we look forward to sharing this progress in our report. We are very proud of the work we have done to date with the Compassion Fund, which has donated over $24 million in grants and in-kind donations over the last 20 years, and continues to focus on empowering and supporting underserved women and helping them establish a better life for themselves, their children, and their families.

In summary, fiscal 2023 marked another year of great progress for J.Jill as we continue to strengthen our foundation and position the brand for long-term profitable growth. As we enter 2024, we plan to build on this progress by executing and leveraging our model, while investing in enhanced omni capabilities, store growth, and marketing to drive further brand awareness and customer acquisition. I want to thank our teams and stakeholders for their support and dedication to J.Jill. We believe we are just scratching the surface of the tremendous opportunity that lies ahead for our brand, and we look forward to driving even more value in delivering on our objectives in both the near and long term. With that, I will now turn the call over to Mark to discuss our results and outlook in more detail.

Mark Webb: Thank you, Claire, and good morning, everyone. As Claire discussed, we were pleased to have delivered a strong end of the year, resulting in Q4 and full-year adjusted EBITDA ahead of our expectations. Our disciplined approach to operating the business, highlighted by tight inventory management, supporting a strong gross margin profile and healthy free cash flow generation, continued to deliver solid results. Before I review our results in detail, as a reminder, fourth quarter and full-year 2023 included a 14th and 53rd week, respectively, which represented approximately $8 million in sales and $2 million in adjusted EBITDA. All results reported today are inclusive of this 53rd week impact, with the exception of our comp sales metric, which is reported on a like for like 13- and 52-week calendar.

Now, more detail on results for the quarter. Total company comparable sales for the fourth quarter decreased 3.6%, driven by the retail channel. While we saw positive reception to our holiday promotions, the slow start to the quarter impacted both channels, and adverse weather in January disproportionately impacted traffic in stores at the end of the quarter, contributing to the negative comp. Total company sales for the quarter were $149 million, up 1% compared to Q4 2022. This performance was driven by full price mix, improved markdown AUR in January, and the 53rd week actualizing as expected. Store sales for Q4 were down 1.5% versus Q4 2022, as traffic was challenging, especially in January. Direct sales as a percentage of total sales were 51% in the quarter.

Compared to the fourth quarter of fiscal 2022, direct sales were up 4%, driven by the 53rd week. Return levels improved in the fourth quarter, returning to more normalized levels on a year-over-year basis. Q4 total company gross profit was $101 million, up $6 million compared to Q4 2022. Q4 gross margin was 67.3%, up 290 basis points over Q4 2022, driven by a stronger mix of full price sales, benefit from freight, a better markdown gross margin, and first cost AUC benefit, partially offset by a higher promotional environment in the quarter. SG&A expenses for the quarter were $90 million compared to $87 million last year. The increase was driven primarily by variable expenses on sales in the 53rd week, as well as incremental expense associated with the OMS project.

Adjusted EBITDA was $18 million in the quarter, compared to $15 million in Q4 2022. For the full-year, we delivered total net sales of $605 million, down 1.7% versus fiscal 2022. Adjusted EBITDA was $112.2 million, compared to $109.4 million in fiscal full-year 2022. Excluding the impact of the 53rd week, we were pleased to have delivered adjusted EBITDA above prior year for both Q4 and the full-year, despite the challenging consumer environment that persisted throughout the year. Please refer to today’s press release for a reconciliation of adjusted EBITDA to net income, the most comparable GAAP financial measure. Turning to cashflow, for the quarter, we generated $7 million of cash from operations, resulting in ending cash of $62 million, with zero borrowings against the ABL For fiscal 2023, we generated approximately $63 million of cash from operations and $46 million of free cash flow, defined as cash from operations, less capital expenditures.

As a reminder, we used cash on hand to reduce total outstanding debt by approximately $50 million in the first quarter of 2023. As required in the term loan agreement, and based on our fiscal 2023 performance, we anticipate making a mandatory excess cash flow payment in the second quarter of 2024 of $26.6 million, which is now included in short-term debt on the year-end balance sheet. Looking at inventory, total inventories were up 5% at the end of the fourth quarter compared to the end of fourth quarter last year. As messaged on our Q3 2023 earnings call, the 53rd week this year impacted reported inventory levels due to one additional week of goods shipping from vendors, which resulted in higher in-transit levels compared to prior year. Excluding this impact from the 53rd week, total inventories were about flat to last year.

Capital expenditures for the quarter were about $6 million. Total capital expenditures for full-year were about $17 million, compared to about $15 million last year. Full-year 2023 capital spend was below prior guidance, primarily due to the timing of smaller store refresh capital projects that moved into early 2024. Throughout the year, we made significant progress on our strategic technology roadmap, completing the first step, which was upgrading to a new modern POS platform in the stores, and kicking off the next step with the project to upgrade and replace our order management system. With respect to store count, we closed one store in the fourth quarter. For full-year 2023, we opened two new stores and closed one, resulting in end of year store count of 244 stores.

Turning to our outlook for fiscal 2024. As we have demonstrated over the past two years, with our disciplined operating model, we are able to deliver a healthy margin profile and strong cash flow generation, while navigating a dynamic macro environment. While there is some improvement in economic indicators, the macro outlook for 2024 remains somewhat uncertain, and we are planning the business accordingly. We expect to continue to build on the progress we made in 2023, maintaining a disciplined approach to inventory management while navigating ongoing inflationary pressures and beginning to invest both capital and SG&A to support profitable sales growth, including approximately $3 million in expenses related to our OMS project. For the 52-week fiscal 2024 year, we expect total revenue to be flat to up in the low single digits, and adjusted EBITDA to be down in the mid-single digits compared to the 53-week fiscal 2023.

This guidance reflects the negative impact from the loss of the 53rd week of about $8 million in sales and $2 million in adjusted EBITDA. With respect to gross margin, we are currently experiencing some impact from the disruption in the Red Sea in the form of delayed deliveries, higher ocean container costs and select use of air freight. We expect this impact to be concentrated in the second quarter, but expect lower cotton prices to help minimize any impact to gross margin on a full-year basis. For full-year 2024, we expect gross margin to be relatively flat to fiscal full-year 2023. Finally, we anticipate timing shifts associated with the 53rd week to impact reported quarterly results. Specifically, we expect the calendar shift to benefit results in Q1 and Q3, and negatively impact results in Q2 and Q4 when compared to reported 2023 actuals.

The first and third quarters are expected to benefit as smaller weeks at the beginning of each quarter are replaced by relatively larger weeks pulled into the end of the quarter. This impact will be largest in Q1. Conversely, Q2 and Q4 are expected to be negatively impacted as larger weeks at beginning of quarter are replaced with relatively smaller weeks at quarter end. In addition to this impact, the fourth quarter comparisons to prior year will also be negatively impacted by the loss of the 53rd week. For the first quarter of fiscal 2024, we expect sales to be up in the low to mid-single digits and adjusted EBITDA to be in the range of $29 million to $33 million. Regarding store count, we expect to grow net store count by up to five stores by the end of fiscal 2024.

We expect openings will be weighted to the back half of the year, and we believe it is likely that we will close up to five stores in the first half of the year, leading to a decline in mid-year store count. We continue to believe in the opportunity to grow our retail channel by about 20 to 25 net new stores over the near to medium-term. With respect to total capital expenditures, we expect to spend about $26 million in fiscal 2024, with investments focused on new stores and the OMS project, plus the projects that carried over from the end of fiscal year 2023. Our expectations for fiscal 2024 are in line with the financial model that we’ve delivered the past two years, and we believe will enable another year of strong free cash flow generation, which continues to create optionality as we aim to drive further shareholder value.

Thank you. I will now hand it back to the operator for questions.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Ryan Meyers with Lake Street Capital Markets. Your line is open.

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Q&A Session

Ryan Meyers: Hey, good morning, guys. Thank you for taking my questions. First one for me, so obviously you’ve guided sales of flat to up low single digits, but EBITDA down mid-single digits. Just wondering if you can walk us through where that difference is there. It sounds like you’re going to be investing a little bit more in SG&A, so I think that makes sense, but is there anything else to call out where there’s that kind of delta between the revenue and EBITDA guide?

Mark Webb: Ryan, I’ll take that. Thanks for the question. Yes, we’ve tried – just given there’s so much noise with the calendar shifts and everything else, we’ve tried to be a bit more, I hope helpful, in the guidance that we’ve provided. The sales guide, the margins about flat, do indicate that we are investing, as we said in the remarks, in SG&A, in CapEx, in support of both sort of the rolling forward inflationary impacts that began this year, to some extent rolling into next, and then more proactively investing in strategic initiatives, particularly marketing to support our profitable sales growth as we go forward. And then we have the OMS project, which we are in the middle of, and this is going to be a year of another significant step on our technology roadmap with the OMS project that does carry with it project-related expense, and we called out that that’s $3 million worth of SG&A as well.

Ryan Meyers: Got it. That’s helpful. And then you guys had commented that it sounded like traffic in January was a little soft. Can you maybe talk a little bit about what you’ve seen as far as traffic levels go as we’ve progressed here through Q1?

Claire Spofford: Sure. Thanks Ryan. I’ll take that one. We did see traffic impacted, particularly in the retail channel in January, and we continue to see some bumpiness coming into February, but are hopeful that things sort of calm down as we go further into the quarter and head into kind of the heart of our season in March and April.

Ryan Meyers: Got it. Thank you for taking my questions.

Operator: Your next question comes from the line of Jeff Lick with B. Riley Financial. Your line is open.

Jeff Lick: Good morning, guys. Congrats on a great Q4. So, just elaborating on the POS, OMS as we enter 2024, I was curious if you could just maybe talk about what capabilities and how it manifests itself into the financial results do you have going into this year that you didn’t have last year? And then one on the debt, Mark. I was just curious, could you pay off more than the 26 as we go through the year? And if – you don’t really typically guide interest expense, but I’m guessing that interest will be down this year from 2023.

Mark Webb: Hey, Jeff, it’s Mark. I’ll take both of those. I’ll start with the second one. We outlined earlier this year our sort of priorities for cash investing, right? And the primary was paying down the debt. So, we have this mandatory excess cash flow payment in the agreement with the term loan. We then continue to have amortization to pay down the debt, and as we’ve said previously, the cash flow generation of the company still provides additional cash to consider along those priority lists. So, nothing to announce at this point, but the answer is, there could be, and there are other options as well that we continue to evaluate as a management team for deploying cash and driving shareholder value. The first question around POS and OMS, these really are strategic foundational systems to really shore up the operational capabilities of the company first.

And they do provide the platform to take advantage of current and future because the technology becomes more less stuck in the past and you can adjust it and take new technologies with it in the future. But the benefits that we look at, first of all with POS as the first step, it’s really about a better customer experience within the store, less friction in some of the existing omni capabilities that we have with respect to the concierge, which is the ability for a customer to order from the website, from within the store, the facilitation of a transaction that includes an online return in the store. So, a lot less friction within the store. We would look at the benefits to that to come in the form of conversion first and transactions, which would be a support of unit growth within the stores.

And then OMS is a complimentary system. It’s really the order management, order orchestration system for the e-commerce platform, but then really enterprise-wide omni capabilities that then creates the opportunity for additional inventory optimization, additional sales fulfillment opportunities that really would come once that system is in and hardened within the system, within the business, within the processes. That’s likely a 2025 launch. And so, in 2024, our guidance that we provided has both the expense associated with the projects, and we’ve implied some of the benefits coming from the POS system.

Jeff Lick: Okay. Just a clarification question, and this might fall into that bucket of your – details you were elaborating for the calendar ships, but given the low single-digit sales guidance for Q1, that has the implication that things actually might have picked up a little bit in the first quarter, because it is a little bit of an acceleration from Q4. I was just curious if you could elaborate on the innards there.