Over the past years, the retail sector has been shaken by renowned names going under and a couple of others just barely surviving. In most cases, the financial damage was caused by the COVID-19 pandemic, which forced many retail businesses to shut down for months due to mandated stay-at-home orders.
Due to these closures, online retailers received a boost in sales as customers looked for alternative ways to shop.
JOANN, Inc. (JOAN), a specialty retailer of crafts and fabrics, should have been a pandemic winner, but it stands on the verge of collapse, and the company prospects appear weak, as per Creditsafe Head of Brand Ragini Bhalla.
In theory, JOAN should have benefitted from people staying at home during the pandemic, as sewing enthusiasts and other hobbyists make up the retailer’s customer base. Even when Joann stores were opened, customers could’ve opted to purchase their supplies online.
The ease of shopping online has changed customer behavior drastically, and that could have shifted some of Joann’s regular customers to e-commerce giant Amazon.com, Inc. (AMZN). Another possibility could be that some of the company’s fanbase died or changed their hobbies during the pandemic.
No matter what the reason is, Ragini Bhalla thinks that JOAN’s situation is critical.
“Given the struggles JoAnn has had with cash flow, its inability to stay current with many of its bills, its declining sales in FY 2023, and its $1 billion debt load, our Creditsafe algorithm has classified the company as a high risk of becoming seriously delinquent on payments and could be headed for bankruptcy very soon. Without strong leadership (still no permanent CEO), it could be hard to right the ship,” he told TheStreet via email.
Bhalla further stated that JOAN has been lagging in paying its bills, something which often foreshadows a bankruptcy filing.
“Creditsafe data shows that Joann struggled to make on-time payments in the second half of 2023. For most of that time, about 20% to 31% of its bills were paid late (1-30 days), while about 1% to 8% of its bills were paid late (31-60 days),” he added.
Despite management’s positive comments during the third-quarter 2024 earnings call, Bhalla sees the company’s risk of bankruptcy rising.
“Joann is rated as a high risk: Based on Creditsafe’s risk algorithm which takes into account both trade payment data and financial results, JoAnn is deemed to be a high risk (D), meaning it could be at risk of bankruptcy. Its risk score dropped from C to D in July 2023 and has stayed there since,” he added.
Now, let’s discuss some of the factors that contribute to Joann’s precarious financial situation and could impact the stock’s performance in the near term:
Broader Challenges Faced by the Retail Industry
Over the past few years, several retailers have been grappling with struggling physical storefronts, massive debt, and inefficient operations, among other challenges. The COVID-19 pandemic initially compounded these issues and advanced the downfall of various retailers, which had faced declining sales and increasing debt in the years prior as consumer preferences changed.
Shopping centers witnessed decreasing foot traffic even before the pandemic, but stay-at-home orders further shifted consumers to online shopping and spending cash on essential goods instead.
After 2020, the retail industry experienced a major rebound as consumers returned to physical stores. While there were 52 retail bankruptcies in 2020, 2021 witnessed just 21, a decline of 60% year-over-year, according to the report by Axios, citing research by S&P Global Market Intelligence. In 2022, only a few retail companies went under.
However, last year, retail bankruptcies flared up again due to persistently high inflation and a significant pullback in consumer spending. According to Axios, there were about 82 bankruptcies filed by consumer discretionary companies amid a tighter financing market and higher borrowing costs.
Home goods and furniture retailer Bed Bath & Beyond filed for bankruptcy in April 2023. During the pandemic, the retailer’s merchandise was non-essential. A failure to take online shopping seriously harmed the company, and then product missteps and misguided financial maneuvers fastened its decline.
A popular Ohio-based fabric and craft retailer, JOAN, has been recently identified as having an elevated risk of filing for bankruptcy. It faces enhanced financial uncertainty after dwindling sales and massive debt. Also, the company seems to miss out on the e-commerce boom.
During the third quarter of 2023, the share of e-commerce in total U.S. sales amounted to 15.6%, an increase from the prior quarter. From July to September last year, retail e-commerce sales in the U.S. reached nearly $284 billion, the highest quarterly revenue in history.
Deteriorating Last Reported Financials
For the fiscal 2024 third quarter that ended October 28, 2023, JOAN reported net sales of $539.80 million, beating analysts’ estimate of $547.20 million. That compared to the revenue of $562.80 million in the same quarter of 2022. Its net interest expense increased 56.9% from the year-ago value to $28.40 million. Its adjusted gross profit was $282.10 million, down 5.8% year-over-year.
The company’s operating loss widened by 24.4% from the prior year’s quarter to $15.40 million. Its adjusted EBITDA declined 6.7% year-over-year to $37.50 million. Its adjusted net loss came in at $8.80 million, compared to an adjusted net income of $2.30 million in the previous year’s period.
Joann posted third-quarter adjusted loss per share of $0.21, compared to adjusted income per share of $0.06 in the same quarter of 2022.
Furthermore, for the nine months ended October 28, 2023, the company’s free cash flow decreased 26.4% year-over-year to $187 million. JOAN’s current assets were $790.30 million as of October 28, 2023, compared to $854.10 million as of October 29, 2022. Its net long-term debt stood at $1.15 billion versus $1.06 billion as of October 29, 2022.
Full Year 2024 Outlook
Despite deteriorating financial health, Joann’s interim leaders tried to paint a positive picture.
Commenting on the third-quarter performance, Scott Sekella, JOANN’s Chief Financial Officer and co-lead of the Interim Office of the CEO, said, “During the quarter, we continued to execute against our Focus, Simplify and Grow cost reduction initiative in which we had previously identified $200 million of targeted annual cost savings across supply chain, product, and SG&A expenses. As we implement these cost savings initiatives, we are driving meaningful cash flow improvements that we expect will continue for the remainder of this fiscal year and beyond.”
“With the strategic shifts we have implemented this year, combined with our ongoing cost reduction strategies, we are pleased to increase the top-line and reaffirm the bottom line full-year outlook,” Sekella added.
These management’s comments sound nice, but with only $28.30 million in cash and cash equivalents as of October 28, 2023, and its net long-term debt standing at $1.15 billion, the company has to make choices more carefully moving forward.
Unfavorable Consensus Earnings Expectations
Street expects JOAN’s revenue for the fiscal year (ending January 2024) to decrease 1.7% year-over-year to $2.18 billion. The company’s loss per share for the ongoing year is expected to widen by 149.4% year-over-year to $2.12. In addition, the company has missed the consensus EPS estimates in three of the trailing four quarters.
For the fiscal year 2025, the retailer’s revenue is estimated to decline 1.4% year-over-year to $2.15 billion. Analysts expect Joann to report a loss per share of $1.39 for the following year.
Declining Profitability
JOAN’s trailing-12-month EBITDA margin and net income margin of negative 1.51% and negative 11.10% compared to the respective industry averages of 11.04% and 4.56%. The stock’s trailing-12-month levered FCF margin of negative 1.68% compared to the 5.40% industry average.
In addition, the stock’s trailing-12-month ROTC and ROTA of negative 3.52% and negative 10.64% compared unfavorably to industry averages of 6.17% and 4.01%, respectively. Its trailing-12-month CAPEX/Sales of 2.43% is 19.6% lower than the 3.02% industry average.
JOAN’s FRISK Rating Lowered
Joann has been identified as at an increased risk of bankruptcy within the next 12 months by a retail industry analysis reported by RetailDive. In October 2023, JOAN got its CreditRiskMonitor FRISK Score updated, which generally has a 96% accuracy in predicting bankruptcies for public U.S. companies.
In the report, Joann has been given a score of 1, which is the worst possible score. This indicates a probability between 9.99% and 50% of bankruptcy within the next 12 months.
Experts Hinting at Significant Bankruptcy Risk
“Joann is in a financial mess. Not only does it have a huge debt pile and associated interest, it is not profitable at operating level,” GlobalData Managing Director Neil Saunders posted on Retailwire.
According to Aptos’ Vice President, JOAN needs to make changes quickly to save itself and can look at a key competitor for ideas.
“Michael’s recently invested in revamping stores, streamlining checkout, upping their loyalty game,” she stated. “Joann would definitely benefit, and potentially quickly, by taking a look at their promotional strategy. It’s very confusing and there is a lot of over-promoting and overlapping promotions. Barring anything else, getting smart and streamlined and simple about the offer to customers could help both top and bottom line – at the same time.”
Further, CEO of Vector Textiles, Mark Self, said, “A specialty store specializing in crafts and sewing whose customer base is dwindling, no CEO and $1B in debt...sounds like liquidation time to me.”
Bottom Line
JOAN’s financial struggles continue as the retailer reported a sales decline and mounting losses in the third quarter of the fiscal year 2024. Stubborn inflation, continued supply chain disruption, a pullback in consumer spending, and macroeconomic uncertainty have impacted the company’s financial performance over the past year. Also, Joann has been slow to adopt e-commerce.
The craft and fabric company, which is still operating without a permanent CEO, tried to paint a positive picture about its growth prospects; however, Joann’s growing losses, massive debt and limited available cash tell a different story.
Companies rarely come out and tell investors that they are teetering on the edge of disaster until they are left with no choice. For instance, J.C. Penney, which spiraled toward bankruptcy, a fall that took years, the company’s earnings call mainly focused on positive aspects.
Given its deteriorating financials and other challenges, JOAN has its CreditRiskMonitor FRISK Score lowered to 1. Based on the history, companies that receive a 1 have between a 9.99% and 50% chance of filing for bankruptcy. Several experts further hinted that the company was facing significant bankruptcy risk.
With these factors in mind, it could be wise for investors to avoid JOAN’s shares now.
