{"id":59238,"date":"2024-01-18T06:00:58","date_gmt":"2024-01-18T11:00:58","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=59238"},"modified":"2024-01-19T13:49:45","modified_gmt":"2024-01-19T18:49:45","slug":"joann-stores-on-the-brink-is-it-time-to-unload-joan-stock","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2024\/01\/joann-stores-on-the-brink-is-it-time-to-unload-joan-stock\/","title":{"rendered":"Joann Stores on the Brink: Is it Time to Unload JOAN Stock?"},"content":{"rendered":"

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.<\/span><\/p>\n

Due to these closures, online retailers received a boost in sales as customers looked for alternative ways to shop.<\/span><\/p>\n

JOANN, Inc. (JOAN)<\/span><\/a>, a specialty retailer of crafts and fabrics, should have been a pandemic winner, but it<\/span> stands on the verge of collapse<\/span><\/a>, and the company prospects appear weak, as per Creditsafe Head of Brand Ragini Bhalla.<\/span><\/p>\n

In theory, JOAN should have benefitted from people staying at home during the pandemic, as sewing enthusiasts and other hobbyists make up the retailer\u2019s customer base. Even when Joann stores were opened, customers could\u2019ve opted to purchase their supplies online.<\/span><\/p>\n

The ease of shopping online has changed customer behavior drastically, and that could have shifted some of Joann\u2019s regular customers to e-commerce giant<\/span> Amazon.com, Inc. (AMZN)<\/span><\/a>. Another possibility could be that some of the company\u2019s fanbase died or changed their hobbies during the pandemic.<\/span><\/p>\n

No matter what the reason is, Ragini Bhalla thinks that JOAN\u2019s situation is critical.<\/span><\/p>\n

\u201cGiven 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,\u201d he told TheStreet via email.<\/span><\/p>\n

Bhalla further stated that JOAN has been lagging in paying its bills, something which often foreshadows a bankruptcy filing.<\/span><\/p>\n

\u201cCreditsafe 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),\u201d he added.<\/span><\/p>\n

Despite management\u2019s positive comments during the<\/span> third-quarter 2024 earnings call<\/span><\/a>, Bhalla sees the company\u2019s risk of bankruptcy rising.<\/span><\/p>\n

\u201cJoann is rated as a high risk: Based on Creditsafe\u2019s 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,\u201d he added.\u00a0<\/span><\/p>\n

Now, let\u2019s discuss some of the factors that contribute to Joann\u2019s precarious financial situation and could impact the stock\u2019s performance in the near term:<\/span><\/p>\n

Broader Challenges Faced by the Retail Industry<\/b><\/p>\n

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.<\/span><\/p>\n

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.<\/span><\/p>\n

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<\/span> 60% year-over-year<\/span><\/a>, according to the report by Axios, citing research by S&P Global Market Intelligence. In 2022, only a few retail companies went under.<\/span><\/p>\n

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<\/span> 82 bankruptcies filed<\/span><\/a> by consumer discretionary companies amid a tighter financing market and higher borrowing costs.<\/span><\/p>\n

Home goods and furniture retailer Bed Bath & Beyond<\/span> filed for bankruptcy<\/span><\/a> in April 2023. During the pandemic, the retailer\u2019s 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.<\/span><\/p>\n

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.<\/span><\/p>\n

During the third quarter of 2023, the share of e-commerce in total U.S. sales<\/span> amounted to 15.6%<\/span><\/a>, 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.<\/span><\/p>\n

Deteriorating Last Reported Financials<\/b><\/p>\n

For the fiscal 2024 third quarter that ended October 28, 2023, JOAN reported net sales of $539.80 million, beating analysts\u2019 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.<\/span><\/p>\n

The company\u2019s operating loss widened by 24.4% from the prior year\u2019s 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\u2019s period.<\/span><\/p>\n

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.<\/span><\/p>\n

Furthermore, for the nine months ended October 28, 2023, the company\u2019s free cash flow decreased 26.4% year-over-year to $187 million. JOAN\u2019s 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.<\/span><\/p>\n

Full Year 2024 Outlook<\/b><\/p>\n

Despite deteriorating financial health, Joann\u2019s interim leaders tried to paint a positive picture.<\/span><\/p>\n

Commenting on the third-quarter performance, Scott Sekella, <\/span>JOANN\u2019s Chief Financial Officer and co-lead of the Interim Office of the CEO,<\/span> said<\/span><\/a>, \u201cDuring 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.\u201d<\/span><\/p>\n

\u201cWith 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,\u201d Sekella added.<\/span><\/p>\n

These management\u2019s comments sound nice, but with only $28.30 million in cash and cash equivalents as of October 28, 2023, and <\/span>its net l<\/span>ong-term debt standing at $1.15 billion, the company has to make choices more carefully moving forward.<\/span><\/p>\n

Unfavorable Consensus Earnings Expectations<\/b><\/p>\n

Street expects JOAN\u2019s revenue for the fiscal year (ending January 2024) to decrease 1.7% year-over-year to $2.18 billion. The company\u2019s 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.<\/span><\/p>\n

For the fiscal year 2025, the retailer\u2019s 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.<\/span><\/p>\n

Declining Profitability<\/b><\/p>\n

JOAN\u2019s 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\u2019s trailing-12-month levered FCF margin of negative 1.68% compared to the 5.40% industry average.<\/span><\/p>\n

In addition, the stock\u2019s 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.<\/span><\/p>\n

JOAN\u2019s FRISK Rating Lowered<\/b><\/p>\n

Joann has been identified as at an increased risk of bankruptcy within the next 12 months by a<\/span> retail industry analysis reported by RetailDive<\/span><\/a>. In October 2023, JOAN got its CreditRiskMonitor FRISK Score updated, which generally has a 96% accuracy in predicting bankruptcies for public U.S. companies.<\/span><\/p>\n

\u00a0In 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.<\/span><\/p>\n

Experts Hinting at Significant Bankruptcy Risk<\/b><\/p>\n

\u201cJoann is in a financial mess. Not only does it have a huge debt pile and associated interest, it is not profitable at operating level,\u201d GlobalData Managing Director Neil Saunders<\/span> posted on Retailwire<\/span><\/a>.<\/span><\/p>\n

According to Aptos\u2019 Vice President, JOAN needs to<\/span> make changes quickly<\/span><\/a> to save itself and can look at a key competitor for ideas.<\/span><\/p>\n

\u201cMichael\u2019s recently invested in revamping stores, streamlining checkout, upping their loyalty game,\u201d she stated. \u201cJoann would definitely benefit, and potentially quickly, by taking a look at their promotional strategy. It\u2019s 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 \u2013 at the same time.\u201d<\/span><\/p>\n

Further, CEO of Vector Textiles, Mark Self, said, \u201cA specialty store specializing in crafts and sewing whose customer base is dwindling, no CEO and $1B in debt...sounds like liquidation time to me.\u201d<\/span><\/p>\n

Bottom Line<\/b><\/p>\n

JOAN\u2019s 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\u2019s financial performance over the past year. Also, Joann has been slow to adopt e-commerce.<\/span><\/p>\n

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\u2019s growing losses, massive debt and limited available cash tell a different story.<\/span><\/p>\n

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\u2019s earnings call mainly focused on positive aspects.<\/span><\/p>\n

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.<\/span><\/p>\n

With these factors in mind, it could be wise for investors to avoid JOAN\u2019s shares now.\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

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 […]<\/p>\n","protected":false},"author":41,"featured_media":58928,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[33426,33425,32089,33423,33424,32090,33430,33429,33420,33421,33422,32433,33428,33427],"class_list":["post-59238","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-60-year-over-year","tag-82-bankruptcies-filed","tag-amazon-com","tag-amounted-to-15-6","tag-filed-for-bankruptcy","tag-inc-amzn","tag-inc-joan","tag-joann","tag-make-changes-quickly","tag-posted-on-retailwire","tag-retail-industry-analysis-reported-by-retaildive","tag-said","tag-stands-on-the-verge-of-collapse","tag-third-quarter-2024-earnings-call"],"yoast_head":"\nJoann Stores on the Brink: Is it Time to Unload JOAN Stock? - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"JOANN (JOAN) seems to head toward Chapter 11 bankruptcy as the craft and fabric retailer grapples with declining sales, mounting losses, debt burden, and limited cash. 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