Q3 2023 JJill Inc Earnings Call

Participants

Claire Spofford; President, Chief Executive Officer, Director; JJill Inc

Mark Webb; EVP, Chief Financial and Operating Officer; JJill Inc

Jeff Lick; Analyst; B. Riley Financial

Ryan Meyers; Analyst; Lake Street Capital Markets, LLC

Dana Telsey; Analyst; Telsey Advisory Group

Presentation

Operator

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the J. Jill Third Quarter 2023 earnings conference call. On today's call are Claire Spofford, President and Chief Executive Officer; and Mark Webb, Executive Vice President, Chief Financial Officer, and Chief Operating Officer. (Operator Instructions)
Before we begin, I need to remind you that certain comments made today made during These remarks may constitute forward looking statement and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J. Jill's SEC filings.
The forward looking statements made on this press release on this recording are as of December fifth, 2023, and just to update these forward looking statements. Finally, J. Jill may refer to certain adjusted or non-GAAP financial measures during today's remarks are reconciled creation schedule showing GAAP versus non-GAAP financial measures is available in the press release issued December fifth, 2023. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of the website at J. Jill.com. I will now turn the call over to Claire.

Claire Spofford

Thank you, operator, and hello, everyone. Thank you for joining us this morning. I will begin our discussion by reviewing highlights from our third-quarter performance and will then provide an update on a few of our strategic initiatives before turning the call over to Mark to review our financial performance and outlook in more detail.
We're pleased with our third quarter performance and our continued strong execution of our disciplined operating model, which enabled us to deliver sales and adjusted EBITDA above our expectations. We saw particular strength earlier in the quarter, supported by solid customer reception to our transitional product as we entered the fall season throughout the quarter, we continued to deliver collections that were versatile, modern and that appeal to our loyal customer base.
This product flow drove nice growth in our core assortment in the third quarter, highlighted by particular strength in sweaters as well as wovens. As a result with a full price performed well across both our retail and direct channels. We were pleased with the sequential top-line improvement we delivered within direct compared to the prior quarter.
As we have discussed on prior calls, we're leveraging aspects of our assortment to not only celebrate the totality of women everywhere and fuel their journey with join and ease, but to build strength and momentum across our customer file.
In Q3, we continued to see growth in new-to-brand customers across both channels, with particular strength in direct. Our size and productivity initiatives and wherever sub-brand are continuing to support our acquisition of new-to-brand customers for younger than our average customer, but consistent with our target demographic.
During the third quarter, we successfully anniversaried the launch of our size inclusivity initiative from last year and delivered growth across all extended sizes. Despite the tougher comparison, we were also pleased or wherever works capsule collection, which lunch right after Labor Day and highlighted versatile pieces that customers could wear to work and the way carry them throughout their day. As we look ahead, we will continue to periodically launch capsules lean into opportunities, both from a top-line growth perspective as well as providing an avenue for broadening our brand awareness and fueling the health of our customer file.
Throughout the quarter, we successfully leveraged our digital and influencer strategies and are pleased with the efficiencies these tactics have driven as well as giving exposure to new customer audiences. These marketing efforts, along with the benefit from the enhancements we made to the online customer experience earlier this summer help support the sequential improvement in our direct channel this quarter compared to Q2.
Well, we're seeing an impact again from elevated return rates as the customer has become more discerning with their spend, particularly in certain categories. We believe through the actions we've taken with our updated fit guide and shop the model features, we've been able to partially mitigate the impact by ensuring that our customer understands and can find the right fit for her.
While we cannot control all external factors, we continue to operate with discipline in order to effectively manage all elements within our control. And we are investing in both channels in order to drive balanced growth. As mentioned previously, we implemented a new POS system this year, which is already yielding a more efficient and positive customer experience in stores. We are also embarking on an OMS project that we expect will enable more productive omnichannel capabilities. We look forward to updating you on this important initiative in the future.
In summary, we continue to operate with discipline, which has yielded better than expected results this quarter and supported our strong cash flow generation. We have a great brand with a wonderful loyal customer, and we are continuing to invest across our channels to enhance their experience wherever and whenever she chooses to shop with us.
We've continued to say that our customers resilient, but not impervious to macro uncertainty. And as I mentioned, we did see some pullback in spend later in the third quarter, which continued into the start of the fourth quarter with some strengthening over the promotional Black Friday, Cyber Monday period.
As a reminder, the fourth quarter is historically our smallest period from a sales and profitability perspective, positioning us differently for many of our retail appears. And while we are maintaining a prudent outlook for the remainder of the year. Given the current trends and the recent customer survey work, we believe we remain well positioned to achieve our objectives for this year.
I will now turn the call over to Mark to review our results and outlook in more detail. Mark?

Mark Webb

Thank you, Claire, and good morning, everyone. Our results again show the strength of the J.Jill brand and the benefits of our disciplined purposeful operating model, especially in this dynamic macro environment. Sales and adjusted EBITDA, both actualized above guided levels as customers responded well to new floor sets, particularly early in the quarter. In addition, cash flow was once again strong in the quarter and disciplined inventory management resulted in clean end-of-quarter inventory levels.
Total company comparable sales for the third quarter increased 1.9% compared to last year's negative 1.2% comp. Total company sales for the quarter were $150 million, flat compared to Q3 2022. Store sales for Q3 were flat versus Q3 2022 on about 1% fewer stores. Higher average retails in the channel were offset by lower units sold per transaction, driven primarily by fewer mark down in units sold.
Direct sales as a percentage of total sales were 45% in the quarter. Compared to the third quarter of fiscal 2022, direct sales were down 0.5%, representing a sequential improvement compared to Q2. Q3 total company gross profit was $108 million, up $2.8 million compared to Q3 2022. Q3 gross margin was 71.8%, up 190 basis points versus Q3 2022, as favorability in freight costs and underlying first cost AUCs, strong full price selling, and lower promotions all contributed.
SG&A expenses were $85.7 million compared to $84.9 million last year as increases in selling costs and general overhead, primarily due to wage inflation, were partially offset by lower depreciation and amortization. Adjusted EBITDA was $28.3 million in the quarter, up 3% compared to $27.5 million in Q3 2022. Please refer to today's press release for reconciliation of adjusted EBITDA.
Turning to cash flow. Third quarter marked another strong quarter, generating $21 million of cash from operations and ending with $64 million in cash and zero borrowings against the [ABL]. Inventories at end of Q3 were down 6% compared to the end of Q3 2022. As mentioned last quarter, we have now anniversaried the supply chain disruption experienced in the first half of 2022. And as a result, our year-over-year comparisons are more normalized.
As we look forward to the end of the year, we expect the 53rd week to impact reported inventory levels as we ship spring goods that week, resulting in higher in-transit inventories at the end of the year. As a result of this impact, we expect total reported inventory at the end of Q4 to be up compared to last year.
Capital expenditures in the quarter were about $4 million compared to about $3 million last year. We neither closed or opened stores and ended the quarter was 245 stores. We are pleased to have completed the rollout of our new POS system during the third quarter. The new system will improve the efficiency of transactions and store at mobile line busting capabilities and is the first step in a broader plan to enhance enterprise on the omnicustomer fulfillment opportunities.
The next step in that plan is kicking off now with a project to replace and upgrade our legacy order management system or OMS. We continue to train our staff on the capabilities of the new POS and are excited to begin work on OMS. I want to take a moment and congratulate and thank the incredible the team that executed the POS replacement. They worked hard with professional pride and dedication to make this project a success. So to the IS, corporate and store teams, thank you and congratulations.
Turning now to our outlook. We continue to operate in a dynamic environment. As Claire mentioned, we saw softness at the end of the third quarter that carried into the start of the fourth quarter before strengthening somewhat on Black Friday Cyber Monday, albeit at elevated levels of promotion. Given this, we believe it prudent to take a cautious approach with respect to our outlook for the remainder of the year.
For fourth quarter, we expect sales be approximately flat versus Q4 2022 and adjusted EBITDA to be in the range of $11 million to $13 million. And for the full year, we are maintaining our outlook for adjusted EBITDA to be down in the low single digits compared to last year. As a reminder, fourth quarter and the full year include an approximate $2 million adjusted EBITDA benefit from the 53rd week.
Regarding store count, we still expect to close two stores in the fourth quarter to end 2023 store count flat to last year. And with respect to full-year capital, we expect to spend about $18 million with investments focused on technology, stores and facilities capital, and the POS and OMS projects.
In summary, we continue to operate a very disciplined operating model and remain on track to deliver another strong year of cash flow generation, positioning us well to continue investing in the business and evaluating opportunities to drive profitable growth and total shareholder returns.
Thank you, and I will now hand it back to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) Jeff Lick, B. Riley Financial.

Jeff Lick

Good morning, Claire and Mark. Congrats on a nice quarter. I was wondering if you could just you referenced the third quarter we ended the quarter weakness and then obviously into the fourth quarter, but the Black Friday pickup. I wonder if you could unpack that a little bit. And then also you referenced the customer survey work to maybe you could wrap what you've learned there with the observation you're seeing at the end of the third quarter into the fourth quarter and the Black Friday kind of promotional period.

Claire Spofford

Sure. Thanks, Jeff. We did say sort of slowdown coming out of Q3, which we attributed to sort of more discernment on the part of the customer. We do every quarter, at least on the pulse survey just to understand kind of where our customer's mind is relative to purchase intent, macro environment has you feeling about out things in general, and we did see that there is there's a level of concern there, which is understandable given the macro uncertainty.
So we pay attention to that. And we did see softness coming out of Q3. As we enter Q4, we continued to see that trend. We held our powder on the promotional levels, unlike I think some of the some of the macro or some of the competitive environment where people were initiating their Black Friday level promotions earlier, we did not do that. And we did continue to see some softness coming into Q4 as we moved into the promotional period over the Black Friday, Cyber Monday weekend, we did see her respond to those promotions.
So that's just a little bit more color. And then we're obviously continuing to watch her behavior very carefully. And I think that cautiousness is reflected in our guide for the fourth quarter.

Jeff Lick

And then the one for Mark, what the gross Q3 gross margins continued to show. And especially if you're looking at it relative to two or three years ago, your guidance would imply -- your 4Q guidance would imply you will have some room there for the promotional environment that we just talked about. I was wondering if you could comment on the then also just wrap in anything with the POS that's now in place and the OMS that's getting in place to where there might be some benefits from the P&L for that.

Mark Webb

Sure, Jeff. Thanks. I think the drivers of the gross margin in Q3, and it continues to be another hallmark of the operating model, just the strength in the gross margin, and we are pleased with it in Q3. The drivers were afraid that we've indicated gets freight is a diminishing benefit throughout this year. So that will continue to be less of a benefit -- a small benefit, less of a benefit into Q4. We cited underlying First Class AUCs that's really targeting, which we've talked a bit about, but on the price growth on cotton late last year, and we're starting to see that benefit come in that is going to be a tailwind for us as we go forward.
The the other two drivers, really a function of the operating environment with full price selling and a little more promotional environment. Again, happy with how that played out over the course of Q3, though, obviously, as Clair just mentioned in response to your question, the end was a bit softer then start. But that AUC benefit does create the opportunity for us as we go forward to continue to deploy some of it if needed into promotions.
And I think as we mentioned in the guide and the cautious approach, we're expecting it to be a promotional environment. It certainly has started to be with Black Friday, Cyber Monday, and this is the time of year for promotions. So we stand ready to do that.
And then you mentioned POS, LMS -- sorry, you want to follow-up.

Jeff Lick

You've got the go-ahead no is going to have, but then also you would be great if maybe you could just compare and contrast some of the lessons you add in your previous life of the gap was done all this because, you know, I think maybe what you're doing here is underappreciated.

Mark Webb

Well, let me -- So POS, LMS. Super happy to have gotten the full fleet deployed in Q3. When you roll out a new system, it is a great saying that the store staff, the customers have noticed the new technology. We are still learning a new technology also that's going to continue. We're excited for the to really take an existing customer experience and enhance it and improve it, drive conversion by really making it a more seamless transaction within the store with respect to returns, with respect to exchanges. And then initially with POS with respect to store purchase of an online good and in-store purchase of an item from on our website.
So that's that is all enhanced with the new POS rollout. Excited to get OMS underway. OMS sort of completes the rest of the enterprise inventory picture and does enable us to be more efficient in the operations just because the technology that we're replacing is aged and getting the technology in will help streamline some of the technology handoffs. And then it also enables omnicapabilities with respect to shipping from store and buying online, picking up in store, all of those things that are out in the marketplace that we feel we are as a fast follower on and a good place for us to be and looking forward to getting those benefits in the years to come.

Jeff Lick

Awesome. Thank you very much and congrats on a great quarter.

Operator

Ryan Meyers, Lake Street Capital Markets.

Ryan Meyers

Good morning, guys. Thanks for taking my question. First one for me. Obviously another quarter of really strong cash flow generation. I'm just wondering if you guys can provide us with some detail on what your capital allocation strategy is going forward.

Mark Webb

Sure, Ryan. We've been pretty consistent. We were super pleased to be able to refinance our debt earlier this year. Tough market to do so. But feel like we've got a good piece of paper in place with tenor and a lower quantum and feel like that was a good result for us. As we continue to execute our operating model that cash flow generation is a big part of the story. And we feel like that cash creates the opportunity for us to invest in the business and drive profitable growth.
Claire mentioned several examples about in her remarks and has spoken before about it. And it allows us to enhance the foundational systems of the company, which we're doing with POS and OMS. And then there's still cash leftover. So what we've said before, and we continue to evaluate is how best to deploy that cash to obtain the ultimate objective of driving total shareholder returns.
More to come on that as time progresses, I would imagine, but nothing more to say at this point on that, other than that is our objective.

Ryan Meyers

Okay. That makes sense. And then obviously, you're going to talk about that for Q4 margin, a lot of that's going to be coming from the promotional environment. Obviously, we had one month here of this running promotions in this environment. And what have you seen some increased spending from the customers on the blends and these promotions? Or how has the normal course of this more promotional environment in Q4? How do you think customers responded to that so far?

Claire Spofford

Yeah. Thanks, Ryan. We, as we mentioned before, reflected in our guidance the room to promote appropriately in order to achieve our objectives of driving sales, moving through our inventory and coming out of the year in the position we want to from an inventory perspective. Obviously, we are a brand and the business that tries to not promote more than we have to. And so we tried to total line as much as we can, but recognize that the fourth quarter is a very promotional quarter.
As I mentioned in my remarks, it is also our smallest quarter from a top line and EBITDA standpoint. So we're navigating, we're staying close, and we're pulling the levers that we need to pull to achieve those objectives of the sales and clean inventory position while maintaining our margin profile to the extent possible. Then all that is rolled into our guide for the fourth quarter. And we, as always, feel great about our brand, feel great about our product, and feel great about our customer. And we're just navigating but consistent with what we've been managing the business all year.

Ryan Meyers

Okay. Thank you for taking my questions.

Operator

Dana Telsey, Telsey Group.

Dana Telsey

Hi. Good morning, everyone, and nice to see the progress. As you think about on the gross margin side, the AUC opportunity going forward, where are we in that path of AUC and how does how does that work? And then you mentioned, Claire, about some of the categories. Anything you saw on the pure Jill or wherever collection is compared to the core categories and what you saw the customer responding to or how the return rates deflating by category? And lastly, you've talked about capturing the younger customer. Anything that you saw this quarter from the customer and they're buying preferences compared to the core? Thank you.

Claire Spofford

Sure. I'll answer the latter two, Dana, and I now hand it over to Mark to address the AUC question. So from a category standpoint, in Q3, we really saw a nice strength in our core assortment. We saw growth there. I think a couple of things in particular, we had a robust them refresh in August, which performed very well. And we had a really nice transition into fall and some nice response to our transitional product, which we feel like we've got right from a from a silhouette standpoint, from a color palette change standpoint, and some nice response to all of that.
In the core assortment in particular, we saw strength in sweaters and wovens, particularly woven tops where print and pattern were very strong and we saw some strength in denim as well. From a sub-brand standpoint, this was a quarter where wherever was really the shining star from a sub brands standpoint. As you know, we've been leaning into wherever for the work usage occasion for our customers. And we've been seeing nice traction there in attracting new younger -- as a younger, but still consistent with our target demographic customers.
Post Labor Day, we had a capsule called wherever works, which was kind of the ultimate expression of that. I'm slightly higher price points, a little bit more kind of waste interest and a little bit more sophistication and refinement, which we really aimed at the wear to work usage occasion. And we saw a really nice response to that as well. So that's a that's a concept and a capital that we will continue to lean into over the course of the coming months and quarters.
And that workwear at it as well as our size inclusivity initiative were both continued to be a great avenue for us in terms of new-to-brand customer acquisition and new-to-brand customers that were a little bit on the younger side of our target and also from a size inclusivity initiatives that we lapped in Q3 versus the launch last year. And we continue to see the acquisition of really valuable customers onto the file.
So all of that, we felt some nice traction in Q3 and forward.

Mark Webb

And Dana, with AUCs, as I mentioned previously, it's really the go forward tailwind that I would point to is related to raw materials and cotton. And I would expect that tailwind to continue. It started a little bit last quarter. So probably continue forward for maybe through the first half of next year, where are some on the horizon pressures coming from other crops that are out there, flax and women, et cetera. So we're always watching the crop reports that can have tugs and pulls on AUC for us. But overall, expect that cotton based benefit to continue.
We've said before at the margin rates that we're achieving are very healthy for us as a business. We don't necessarily need to expand them anymore for our business model. And so view those tailwinds why it's good to have them as an opportunity for us to deal within our disk from an operating model, comfortable making the investments that we've talked about, which inherently do carry in their inception a little bit more risk and allow us to go into those with a bit more comfort.
So that's how we're thinking about the underlying AUCs right now.

Dana Telsey

Got it. But any thoughts or breaking down by channel stores and online, what the drivers were this quarter? And lastly, any thoughts on store openings for next year as you are beginning to dip your toe in the world a little bit? Thank you .

Mark Webb

Sure. We've said, Dana, that we expect next year that to be a year where we would return to some level of store growth. That's, of course, dependent upon successful negotiations with our landlords and getting the right deals. But we work through much of the fleet and feel like we're at a place where we can start to think about returning to some that in some net store growth.
As far as in the quarter channels that the channels and the drivers, we were pleased to see direct improve sequentially. Channel has had some investments Claire mentioned in her remarks that have helped to drive that channel. And it's one that that we feel good about. The stores, there wasn't a lot of geographical difference in the drivers through the quarter. The lifestyle centers continue to perform better from a truck perspective than malls. And I know we'll differentials on a on a large scale across the rest of the geographies.

Operator

Thank you. You may have no further questions in queue at this time. And with that, that concludes today's conference call. Thank you for your participation, and you may now disconnect.