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Author: StuyvesantGrad70 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 43  
Subject: Conference Call Summary Nov 17 2003 Date: 11/29/2003 11:04 PM
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JoAnn Stores (JAS) Conference Call Summary
Nov 17, 2003 (3Q FY 2004)

Alan Rosskamm, President and CEO:

Net Income for 3Q $0.54 vs $0.40 3Q last year.
This fell short of our own expectation. Softening industry demand and higher than expected cost to improve our flow of merchandise to stores dampened our results. Improved gross margins by reducing our level of commercial pricing and clearance markdowns.
Revenues for 3Q $447M vs $430M 3Q last year.
SSS up 4.2% vs 6.5% last year.
SSS aided by our 60th anniversary promotions in August.

Achieved our goal of stopping a trend of 4 sequential quarters of declining gross margins.
Strategy of avoiding mark-downs and a refined promotional strategy is working. Will continue to improve gross margins over the next several quarters. Our investment in technology and logistics management resulted in a better flow of merchandise to the stores in a more timely manner that helped increase our margin. Cost of temporary storage of seasonal goods in our distribution centers was higher than planned. Working with vendors to improve flow of merchandise to our distribution centers next year.

Concerned with under-performance of our finished seasonal category. We have taken action to be less promotional. When this business slowed last year, we took aggressive mark-downs which adversely affected our margins. This year we reduced purchases and plan to be less promotional in pricing. In 3Q sales were down substantially, but gross margin dollars were positive compared to last year. Concerned with waning consumer demand in this category and increased competition from discount retailers, home improvement centers. Overall sales trends in our industry softened in recent months. As a result we lowered our sales projections for 4Q and assumed less improvement in gross margins.

Four initiatives underway:
1) We can improve on the current process for opening super stores and closing traditional stores. Will accelerate openings next year. New smaller prototype.
2) Additional gross margin improvement through better sourcing, more selective price promotions and further improvements in merchandise flow.
3) Additional emphasis on core merchandise categories: fabric, floral and scrap booking. Seasonal merchandise is still important, but we will focus on improving the profitability of the seasonal category and choosing product within the seasonal category that differentiates Jo-Ann's offering.
4) Focus on obtaining cost efficiency as we plan same store sales growth more conservatively.
Company reclassified dual class stock into one voting class.

Brian Carney, CFO:

In 3Q we opened 3 super stores and one large traditional store. Converted 2 large traditional stores to super store format. Closed 11 stores. Year to date we opened 12 super stores and converted 4 traditional stores to super stores. Year to date closed 32 traditional stores. During 4Q we will open 4 super stores before Thanksgiving, and one larger traditional store. Will close ten additional stores before year-end. 15,429,000 square feet at end of 3Q, down 1.8% from last year. Total store count down 39 units or 4.1% from last year's 3Q. Number of super stores increased from 71 to 87.

Gross margins improved 150 basis points during 3Q.

Same store sales in finished seasonal category was down 11% for 3Q, but with a 670 basis point improvement in gross margin rates. As a result, gross margin dollars in this category increased 4% year over year. The seasonal category was the only category that experienced a decline in SSS during 3Q.

SSS for traditional stores increased 4.1% in 3Q vs 6.2% in last year's 3Q, due to increased average ticket, with slight decrease in customer traffic in traditional stores. SSS for super stores increased 4.5% in 3Q vs 7.6% in last year's 3Q. Three-quarters of increase driven by an increase in traffic and one-quarter due to increase in average ticket.

Our 87 super stores accounted for 29% of total revenues in 3Q. Total revenues year to date increased 2.2% to $1.18B from $1.16B last year.

SSS increased 3.1% for first 3 Quarters vs 9% for first 3 Quarters last year.

Gross profit in 3Q 48.1% of sales vs 45.9% last year.
SG&A increased to 39.6% of sales vs 38.5% last year (not counting depreciation and amortization and other expense items reported separately).

Store pre-opening and closing costs increased from $4m to $7M year to date.

Began expensing cost of stock options this year. $4.1M impact year to date, will be $5.6M or $0.16 per share for the year. Our competitors are not yet expensing the cost of stock options.

Interest expense in 3Q was $4.7M vs $7.1M last year's 3Q. $13.9M year to date vs $20.1M last year. Average debt $178M for first 9 months vs $250M last year.

Stock based compensation due to share reclassification and store pre-opening costs totaled $3.7M for 3Q and lowered reported earnings by $0.10 per share.

Year to date net income $0.63 per share vs $0.91 last year. Approximately $10.8M or $0.30 per share of non-comparable expenses are included in these results, including:
Stock based compensation expense of $4.1M, Share reclassification of $1.2M. Store pre-opening cost of $4M. Debt buy-back of $1.5M. Total $10.8M pre-tax year to date.

$520M inventories at end of 3Q vs $483M last year's 3Q, an 8% increase. Increase is in our distribution centers with 80% of that increase in our core fabric and scrap booking business.

$237M in debt, a decrease of $39M from last year. $77M remaining outstanding on our 10 3/8 subordinated notes. Projecting year end debt of $110 to $120M, down from $163M last year. Last year we had $40M in cash. Called a portion of subordinated debt in 1Q this year. Net of cash, debt reduction this year of between $5 and $10M from last year. CAPEX for 9 months $31M. Total for year estimated at $50M.

Outlook:
Lowered our full year outlook by $0.30 a share. Estimate $1.70 to $1.80 for the year.
Estimate for 4Q between $1.05 and $1.15.
Full year outlook includes expensing stock options of $0.16 per share and cost of debt buyback and stock reclassification of $0.13 per share.
Lowered our guidance for two reasons:
1) Lowered SSS gains to 2 to 3% from 4 to 5% growth in 4Q. Compared to 6.9% last year.
2) Lowered improvement levels in gross margins in 4Q.
Expect 4Q operating margin comparable to last year.

Outlook for next year (FY2005):
8 to 10% earnings growth, based on 3% SSS increase for the year.

Alan Rosskamm, President and CEO:

Disappointed with a projected flat to slightly down performance for this year.
Softening industry demand and increased competition in our finished seasonal business.
The first year of store transformation from traditional stores to super stores is almost complete as we have added 16 super stores to date with another 4 opening by Thanksgiving.
Redesigned our super stores into smaller 35,000 square foot format.
New store design enables us to display our full super store assortment effectively in an exciting shop within a shop layout, with real merchandise dominance in each of our core product categories.
We are the leader in the fabric business.
One of the top players in the floral and craft business.
Our super stores are unique by offering all these products under one roof.
We have the opportunity to improve operating efficiencies in the company.
Strong brand.
Intense customer loyalty.
Improved balance sheet.

Questions:

Q: Super stores?
A: We are refining the super store format, a smaller box, a new design, going over the dollars invested and the profit and loss of the stores. The stores we opened are hitting their pro forma's and we continue to be optimistic. We have softness in one portion of our mix, and we will build the other categories.

Q: As you lower the guidance, will you slow the store growth for the super stores?
A: We've been saying 30 to 40 stores. Many of those commitments are already made, and leases signed. We'll probably be at the lower range.

Q: $4.3M accrual last year?
A: A non-recurring adjustment last year. Improving shrink trends. Shrink task force.

Q: When you talk about the slow down in the industry, I've only seen it on the fabric side with one competitor.
A: The competitor guided 4 to 6% comps in their 4th quarter vs flat a year ago. Over a 2 year period we are at 4 ½%. 2% for 4Q vs 7% for 4Q last year.

Q: Comments on cost of opening new stores and their performance, sales and cost expectations?
A: It's so early, but we're hitting our projections. We will know more after 4Q.

Q: Seasonal merchandise? Will you change buyers again or change the space allocation in the stores?
A: Competition in seasonal from discount stores, home improvement centers, Big Lots. We're no longer unique and we have to work harder to be unique. When the business softened a year ago, we owned the inventory. We took very aggressive promotions before Halloween and Christmas. Sold at ridiculous margins. We have to buy it appropriate to the demand.

Q: Seasonal merchandise weight in 4Q?
A: Finished seasonal, even in the 4Q when it is at its highest, is 15% or less of sales, substantially higher than at other times of the year.

Q: What do you mean by finished seasonal?
A: Every one of our businesses has a seasonal component. Christmas fabric, Christmas crafts. Christmas floral. Our disappointment is in the finished pieces you could buy at Target, Wal-Mart, Home Depot. They're not in the component businesses, where people are still making their own holiday items.

Q: Capital spending for 30 new stores?
A: $70 to $75M including $10M for point of sale registers.

Q: Would you still have excess cash flow?
A: A modest amount.
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