Attached files
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EX-32.1 - EXHIBIT 32.1 - JO-ANN STORES INC | c08653exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - JO-ANN STORES INC | c08653exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - JO-ANN STORES INC | c08653exv31w2.htm |
Table of Contents
United States
Securities and Exchange Commission
Securities and Exchange Commission
WASHINGTON, D.C. 20549
Form
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended October 30, 2010
Commission File No. 1-6695
Jo-Ann
Stores, Inc.
(Exact name of Registrant as specified in its charter)
Ohio (State or other jurisdiction of |
34-0720629 (I.R.S. Employer Identification No.) |
|
incorporation or organization) | ||
5555 Darrow Road, Hudson, Ohio (Address of principal executive offices) |
44236 (Zip Code) |
Registrants telephone number, including area code: (330) 656-2600
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one).
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.): Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: Common Shares, without par value, as of November
27, 2010: 26,332,205.
Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended October 30, 2010
Form 10-Q Index
For the Quarter Ended October 30, 2010
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Jo-Ann Stores, Inc.
Consolidated Balance Sheets
(Unaudited) | ||||||||||||
October 30, | October 31, | January 30, | ||||||||||
2010 | 2009 | 2010 | ||||||||||
(Dollars in millions, except share and per share data) | ||||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 112.4 | $ | 97.7 | $ | 217.1 | ||||||
Inventories |
504.3 | 485.4 | 416.8 | |||||||||
Deferred income taxes |
21.4 | 21.1 | 22.3 | |||||||||
Prepaid expenses and other current assets |
35.5 | 28.1 | 29.9 | |||||||||
Total current assets |
673.6 | 632.3 | 686.1 | |||||||||
Property, equipment and leasehold improvements, net |
296.2 | 297.7 | 293.7 | |||||||||
Goodwill |
11.6 | 11.6 | 11.6 | |||||||||
Other assets |
8.0 | 8.3 | 9.0 | |||||||||
Total assets |
$ | 989.4 | $ | 949.9 | $ | 1,000.4 | ||||||
Liabilities and Shareholders Equity |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 204.1 | $ | 171.3 | $ | 151.1 | ||||||
Accrued expenses |
96.5 | 104.4 | 128.6 | |||||||||
Senior subordinated notes short term |
| | 47.5 | |||||||||
Total current liabilities |
300.6 | 275.7 | 327.2 | |||||||||
Long-term debt |
| 47.5 | | |||||||||
Long-term deferred income taxes |
8.6 | | 2.2 | |||||||||
Lease obligations and other long-term liabilities |
108.9 | 107.2 | 105.4 | |||||||||
Commitments and contingencies (Note 5) |
||||||||||||
Shareholders equity: |
||||||||||||
Preferred stock, no par value, 5,000,000 shares authorized, none issued |
| | | |||||||||
Common stock, stated value $0.05 per share; 150,000,000 authorized;
issued 31,064,964; 29,665,217 and 29,989,966 shares, respectively |
1.6 | 1.5 | 1.5 | |||||||||
Additional paid-in capital |
261.9 | 225.5 | 234.7 | |||||||||
Retained earnings |
429.7 | 339.9 | 377.0 | |||||||||
693.2 | 566.9 | 613.2 | ||||||||||
Treasury stock, at cost; 5,502,903; 3,768,059 and 3,773,890 shares, respectively |
(121.9 | ) | (47.4 | ) | (47.6 | ) | ||||||
Total shareholders equity |
571.3 | 519.5 | 565.6 | |||||||||
Total liabilities and shareholders equity |
$ | 989.4 | $ | 949.9 | $ | 1,000.4 | ||||||
See notes to unaudited consolidated financial statements
1
Table of Contents
Jo-Ann Stores, Inc.
Consolidated Statements of Operations
(Unaudited)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 30, | October 31, | October 30, | October 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in millions, except share and per share data) | ||||||||||||||||
Net sales |
$ | 535.3 | $ | 509.1 | $ | 1,454.9 | $ | 1,388.5 | ||||||||
Cost of sales (exclusive of depreciation and
amortization shown separately below) |
259.1 | 249.3 | 714.6 | 699.2 | ||||||||||||
Gross margin |
276.2 | 259.8 | 740.3 | 689.3 | ||||||||||||
Selling, general and administrative expenses |
209.4 | 202.0 | 599.3 | 585.7 | ||||||||||||
Store pre-opening and closing costs |
3.6 | 2.2 | 8.4 | 8.6 | ||||||||||||
Depreciation and amortization |
14.5 | 14.1 | 43.2 | 42.0 | ||||||||||||
Operating profit |
48.7 | 41.5 | 89.4 | 53.0 | ||||||||||||
Gain on purchase of senior subordinated notes |
| (0.1 | ) | | (1.3 | ) | ||||||||||
Interest expense, net |
0.6 | 1.6 | 2.0 | 4.7 | ||||||||||||
Income before income taxes |
48.1 | 40.0 | 87.4 | 49.6 | ||||||||||||
Income tax provision |
19.0 | 15.9 | 34.7 | 20.1 | ||||||||||||
Net income |
$ | 29.1 | $ | 24.1 | $ | 52.7 | $ | 29.5 | ||||||||
Net income per common share basic |
$ | 1.12 | $ | 0.94 | $ | 2.02 | $ | 1.16 | ||||||||
Net income per common share diluted |
$ | 1.09 | $ | 0.90 | $ | 1.95 | $ | 1.12 | ||||||||
Weighted average shares outstanding (in thousands): |
||||||||||||||||
Basic |
25,888 | 25,737 | 26,146 | 25,518 | ||||||||||||
Diluted |
26,706 | 26,751 | 27,070 | 26,301 | ||||||||||||
See notes to unaudited consolidated financial statements
2
Table of Contents
Jo-Ann Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Thirty-Nine Weeks Ended | ||||||||
October 30, | October 31, | |||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Net cash flows provided by operating activities: |
||||||||
Net income |
$ | 52.7 | $ | 29.5 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation and amortization |
43.2 | 42.0 | ||||||
Deferred income taxes |
7.3 | (0.8 | ) | |||||
Stock-based compensation expense |
6.6 | 6.5 | ||||||
Amortization of deferred financing costs |
0.5 | 0.5 | ||||||
Loss on disposal of fixed assets |
1.1 | 1.1 | ||||||
Gain on purchase of senior subordinated notes |
| (1.3 | ) | |||||
Gross excess tax deficit on stock-based compensation |
| (0.6 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Increase in inventories |
(87.5 | ) | (56.0 | ) | ||||
(Increase) decrease in prepaid expenses and other current assets |
(5.6 | ) | 3.6 | |||||
Increase in accounts payable |
53.0 | 26.2 | ||||||
(Decrease) increase in accrued expenses |
(32.1 | ) | 1.5 | |||||
Increase (decrease) in lease obligations, net |
2.0 | (1.4 | ) | |||||
Increase in other long-term liabilities |
1.5 | 2.4 | ||||||
Other, net |
0.4 | 0.6 | ||||||
Net cash provided by operating activities |
43.1 | 53.8 | ||||||
Cash flows used for investing activities: |
||||||||
Capital expenditures |
(46.7 | ) | (26.1 | ) | ||||
Cash used for investing activities |
(46.7 | ) | (26.1 | ) | ||||
Net cash flows used for financing activities: |
||||||||
Purchase of senior subordinated notes |
(47.5 | ) | (17.0 | ) | ||||
Proceeds from stock-based compensation plans |
12.8 | 7.2 | ||||||
Purchase of Jo-Ann Stores, Inc. common stock |
(74.3 | ) | (1.6 | ) | ||||
Gross excess tax benefit on stock-based compensation |
7.9 | 0.8 | ||||||
Net cash used for financing activities |
(101.1 | ) | (10.6 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(104.7 | ) | 17.1 | |||||
Cash and cash equivalents at beginning of period |
217.1 | 80.6 | ||||||
Cash and cash equivalents at end of period |
$ | 112.4 | $ | 97.7 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 2.9 | $ | 5.5 | ||||
Income taxes, net of refunds |
38.2 | 18.3 |
See notes to unaudited consolidated financial statements
3
Table of Contents
Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc.
Note 1 Basis of Presentation
Jo-Ann Stores, Inc. (the company), an Ohio corporation, is the nations largest specialty
retailer of fabrics and one of the largest specialty retailers of crafts, operating 756 retail
stores in 48 states at October 30, 2010.
The companys fiscal year ends on the Saturday closest to January 31. Fiscal years consist
of 52 weeks, unless noted otherwise. The fiscal year refers to the year in which the period ends
(e.g., fiscal 2011 refers to the year-ended January 29, 2011).
The consolidated interim financial statements include the accounts of the company and its
subsidiaries and have been prepared without audit, pursuant to the rules of the Securities and
Exchange Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States (U.S. GAAP) have been condensed or omitted pursuant to those rules and regulations,
although the company believes that the disclosures herein are adequate to make the information not
misleading. The financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the companys Annual Report on Form 10-K for the fiscal
year ended January 30, 2010.
In the opinion of management, the accompanying balance sheets and related interim statements
of operations and cash flows include all adjustments, consisting only of normal recurring items
necessary for their fair presentation in conformity with U.S. GAAP. The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Since
actual results may differ from those estimates, the company revises its estimates and assumptions
as new information becomes available.
Typical of most retail companies, the companys business is seasonal with the majority of
revenues and operating profits generated in the second half of the fiscal year. Accordingly,
earnings or losses for a particular interim period are not indicative of full-year results. Due
to the seasonal nature of the companys business, a comparable balance sheet as of October 31,
2009 has been provided.
The companys cash and cash equivalents represent the financial assets and liabilities that
were accounted for at fair value on a recurring basis as of October 30, 2010. As required,
financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement. The companys assessment of the
significance of a particular input to the fair value measurement requires judgment, and may affect
the valuation of fair value assets and liabilities and their placement within the fair value
hierarchy levels. The fair value of the companys cash and cash equivalents was $112.4 million,
$97.7 million and $217.1 million at October 30, 2010, October 31, 2009 and January 30, 2010,
respectively. These fair values were determined using quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) in the fair value hierarchy.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is,
the assets and liabilities are not measured at fair value on an ongoing basis but are subject to
fair value adjustments in certain circumstances (e.g., when there is evidence of impairment).
There were no changes in fair value related to these assets during the thirteen or thirty-nine
weeks ended October 30, 2010.
Certain amounts in the October 31, 2009 financial statements have been reclassified to
conform to the current year presentation.
4
Table of Contents
Note 2 Earnings Per Share
Basic earnings per common share are computed by dividing net income by the weighted average
number of shares outstanding during the period. Diluted earnings per common share include the
effect of the assumed exercise of dilutive stock-based awards under the treasury stock method.
The following table presents information necessary to calculate basic and diluted income per
common share (shares in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 30, | October 31, | October 30, | October 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic common shares |
25,888 | 25,737 | 26,146 | 25,518 | ||||||||||||
Incremental shares from assumed
exercise of stock options |
328 | 414 | 384 | 260 | ||||||||||||
Incremental restricted shares |
490 | 600 | 540 | 523 | ||||||||||||
Diluted common shares |
26,706 | 26,751 | 27,070 | 26,301 | ||||||||||||
For the third quarter and year-to-date period of fiscal 2011, the above calculation of
the diluted net income per common share reflects the impact of stock options that had exercise
prices below the average market price of the companys common shares for the quarter and
year-to-date period. An average of 72,345 stock options for the third quarter and 51,445 stock
options for the year-to-date period of fiscal 2011 were not included in the computation of diluted
net income per common share because they would have been anti-dilutive.
For the third quarter and year-to-date period of fiscal 2010, the above calculation of the
diluted net income per common share reflects the impact of stock options that had exercise prices
below the average market price of the companys common shares for the quarter and year-to-date
period. An average of 117,142 stock options for the third quarter and 630,788 stock options for
the year-to-date period were not included in the computation of diluted net income per common
share because they would have been anti-dilutive.
Note 3 Shareholders Equity
Common | Additional | Total | |||||||||||||||||||||||||||
Common | Treasury | Stock Stated | Paid-In | Treasury | Retained | Shareholders | |||||||||||||||||||||||
Shares | Shares | Value | Capital | Stock | Earnings | Equity | |||||||||||||||||||||||
(Shares in thousands) | (Dollars in millions) | ||||||||||||||||||||||||||||
Balance, January 30, 2010 |
26,216 | 3,774 | $ | 1.5 | $ | 234.7 | $ | (47.6 | ) | $ | 377.0 | $ | 565.6 | ||||||||||||||||
Net income |
| | | | | 52.7 | 52.7 | ||||||||||||||||||||||
Exercise of stock options |
604 | | | 11.0 | | | 11.0 | ||||||||||||||||||||||
Excess tax benefits on
stock-based compensation |
| | | 7.9 | | | 7.9 | ||||||||||||||||||||||
Stock-based compensation |
407 | | 0.1 | 6.5 | | | 6.6 | ||||||||||||||||||||||
Purchase of common stock |
(1,729 | ) | 1,729 | | | (74.3 | ) | | (74.3 | ) | |||||||||||||||||||
Associate Stock Ownership Plan |
64 | | | 1.8 | | | 1.8 | ||||||||||||||||||||||
Year-to-date activity |
(654 | ) | 1,729 | 0.1 | 27.2 | (74.3 | ) | 52.7 | 5.7 | ||||||||||||||||||||
Balance, October 30, 2010 |
25,562 | 5,503 | $ | 1.6 | $ | 261.9 | $ | (121.9 | ) | $ | 429.7 | $ | 571.3 | ||||||||||||||||
5
Table of Contents
As of October 30, 2010, the company had 807,160 stock options outstanding and 795,177
restricted stock awards.
Note 4 Financing
During the first quarter of fiscal 2011, the company redeemed its entire remaining outstanding
principal amount of the 7.5 percent senior subordinated notes for approximately $47.5 million at
par.
During the first nine months of fiscal 2010, the company purchased $18.5 million in face value
of the 7.5 percent senior subordinated notes at an average of 92 percent of par. The company
recorded a pre-tax gain of $1.3 million, representing the cash discount received, net of the
related write-off of applicable deferred financing costs. These charges are reflected in the gain
on purchase of senior subordinated notes line item in the statement of operations.
Note 5 Commitments and Contingencies
The company is involved in various litigation matters in the ordinary course of its business.
The company is not currently involved in any litigation that it expects, either individually or in
the aggregate, will have a material adverse effect on its financial condition or results of
operations.
Note 6 Segment Reporting
At October 30, 2010, the company operated 234 large-format stores and 522 small-format stores.
At October 31, 2009, the company operated 228 large-format stores and 530 small-format stores.
The company considers stores that generally average more than approximately 24,000 square feet of
retail space as large-format stores. The companys small-format stores generally average less than
approximately 24,000 square feet. The size of the store is not the only factor in determining its
classification as large-format or small-format. The most important distinction for determining the
classification of a large-format store is whether or not stores in the range have been recently
built or remodeled and contain a broad assortment of craft categories.
The companys reportable segments include large-format stores, small-format stores and other.
The financial results of the companys Joann.com Internet business are included in the other
segment. The small-format stores offer a complete selection of fabric and a convenience assortment
of crafts, artificial floral, finished seasonal and home décor merchandise. The large-format
stores offer an expanded and more comprehensive product assortment than the small-format stores.
The large-format stores also generally offer custom framing and educational programs that most
small-format stores do not. The other category includes unallocated corporate assets and overhead
in addition to the operating results of the Joann.com Internet business. The segments are
evaluated based on revenues and operating profit contribution to the total corporation. All income
and expense items below operating profit are not allocated to the segments and are not disclosed.
Certain information not routinely used in the management of these segments or information that
is impractical to report is not shown. The company does not report assets other than property,
equipment and leasehold improvements by segment because not all assets are allocated to segments
for purposes of measurement by the companys chief operating decision maker.
6
Table of Contents
Large-format | Small-format | |||||||||||||||
(Dollars in millions) | Stores | Stores | Other | Consolidated | ||||||||||||
Thirteen Weeks Ended October 30, 2010 |
||||||||||||||||
Net sales |
$ | 283.4 | $ | 242.3 | $ | 9.6 | $ | 535.3 | ||||||||
Store pre-opening and closing costs |
0.8 | 2.8 | | 3.6 | ||||||||||||
Depreciation and amortization |
7.4 | 3.3 | 3.8 | 14.5 | ||||||||||||
Operating profit (loss) |
41.6 | 38.7 | (31.6 | ) | 48.7 | |||||||||||
Capital expenditures |
3.5 | 9.1 | 1.3 | 13.9 | ||||||||||||
Thirteen Weeks Ended October 31, 2009 |
||||||||||||||||
Net sales |
$ | 273.4 | $ | 227.1 | $ | 8.6 | $ | 509.1 | ||||||||
Store pre-opening and closing costs |
0.9 | 1.3 | | 2.2 | ||||||||||||
Depreciation and amortization |
7.9 | 2.7 | 3.5 | 14.1 | ||||||||||||
Operating profit (loss) |
37.3 | 40.4 | (36.2 | ) | 41.5 | |||||||||||
Capital expenditures |
2.8 | 5.0 | 1.6 | 9.4 | ||||||||||||
Thirty-Nine Weeks Ended October 30,
2010 |
||||||||||||||||
Net sales |
$ | 779.5 | $ | 646.8 | $ | 28.6 | $ | 1,454.9 | ||||||||
Store pre-opening and closing costs |
2.3 | 6.1 | | 8.4 | ||||||||||||
Depreciation and amortization |
22.4 | 9.1 | 11.7 | 43.2 | ||||||||||||
Operating profit (loss) |
91.5 | 92.4 | (94.5 | ) | 89.4 | |||||||||||
Capital expenditures |
8.6 | 25.4 | 12.7 | 46.7 | ||||||||||||
Property, equipment and leasehold
improvements, net |
135.6 | 69.6 | 91.0 | 296.2 | ||||||||||||
Thirty-Nine Weeks Ended October 31,
2009 |
||||||||||||||||
Net sales |
$ | 750.9 | $ | 612.0 | $ | 25.6 | $ | 1,388.5 | ||||||||
Store pre-opening and closing costs |
3.2 | 5.4 | | 8.6 | ||||||||||||
Depreciation and amortization |
23.9 | 7.8 | 10.3 | 42.0 | ||||||||||||
Operating profit (loss) |
73.5 | 83.2 | (103.7 | ) | 53.0 | |||||||||||
Capital expenditures |
7.6 | 10.7 | 7.8 | 26.1 | ||||||||||||
Property, equipment and leasehold
improvements, net |
156.7 | 51.5 | 89.5 | 297.7 |
7
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion is intended to provide the reader with information that will assist in an
overall understanding of our financial statements, changes in certain key indicators in those
financial statements from year to year, the factors that account for those changes and how certain
accounting principles have impacted our financial statements. This discussion should be read in
conjunction with the audited consolidated financial statements and notes to the consolidated
financial statements presented in our fiscal 2010 Annual Report on Form 10-K.
General Overview
We are the nations largest specialty retailer of fabrics and one of the largest specialty
retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home
decorating and other creative endeavors. Our retail stores, operating as Jo-Ann Fabric and Craft
stores and website (www.joann.com), feature a variety of competitively priced merchandise used in
sewing, crafting and home decorating projects, including fabrics, notions, crafts, frames, paper
crafting material, artificial floral, home accents, finished seasonal and home décor merchandise.
As of October 30, 2010, we operated 756 stores in 48 states (234 large-format stores and 522
small-format stores). We consider stores that generally average more than approximately 24,000
square feet of retail space as large-format stores. Our small-format stores generally average less
than approximately 24,000 square feet. The size of the store is not the only factor in determining
its classification as large-format or small-format. The most important distinction for determining
the classification of a large-format store is whether or not stores in the range have been recently
built or remodeled and contain a broad assortment of craft categories.
Our large-format stores offer an expanded and more comprehensive product assortment than our
small-format stores. Our large-format stores also generally offer custom framing and educational
programs that most small-format stores do not. They average approximately 36,500 square feet and
generated average net sales per store of approximately $4.7 million in fiscal 2010. Our
small-format stores offer a complete selection of fabric and a convenience assortment of crafts,
artificial floral, finished seasonal and home décor merchandise. They average approximately
14,700 square feet and generated average net sales per store of approximately $1.7 million in
fiscal 2010.
Executive Overview
During the third quarter of fiscal 2011, we delivered another record quarter for sales and
earnings. Our record third quarter results were attributable to the following improvements over the
third quarter of the prior year:
| same-store sales growth of 4.1 percent; |
| gross margin expansion of 60 basis points; and |
| selling, general and administrative expense (SG&A) improvement of approximately 60 basis points. |
These improvements drove diluted earnings per share to $1.09, which was a 21 percent increase over
the third quarter diluted earnings per share for fiscal 2010.
Our same-store sales growth for the third quarter of fiscal 2011 was achieved by a 3.6 percent
increase in customer transactions, along with a 0.5 percent increase in average ticket.
We experienced solid growth in both our sewing and non-sewing business for the third quarter
of fiscal 2011. Some of our best performing categories included apparel, quilting, food crafting
and kids crafts. We also saw sales improvement in our seasonal business as customers responded
favorably to our fall
and Halloween merchandise. However, customers are still spending cautiously on some discretionary
and high-ticket items, including home décor fabrics and custom framing.
8
Table of Contents
Joann.com sales increased 12 percent for the third quarter of fiscal 2011 as compared to the
third quarter of fiscal 2010. Our enhanced website and expanded product selection continue to
attract more on-line shoppers. Site traffic increased 25 percent during the third quarter of
fiscal 2011 as compared to the third quarter of the prior year.
We continue to be encouraged by the performance of our new stores and remodels. We have
opened 29 of our planned 30 new stores for fiscal 2011, and we expect to open the remaining store
in January of 2011. Collectively, these new stores have exceeded our sales pro-forma by a double
digit percentage. In addition, we expect all of these new stores individually to generate positive
cash flow in their first year of business.
We previously announced that we will accelerate our new store openings for fiscal 2012 to at
least 50 stores. As a result of the performance of our new stores, our balance sheet position and
the favorable leasing environment, we now expect to open between 55 and 60 new stores during fiscal
2012.
The average size of our new stores in fiscal 2012 will be approximately 20,000 square feet.
Approximately half of these new stores will be in new markets; they will not be replacing older
stores. We expect total store square footage to increase by approximately 3.5 percent during
fiscal 2012.
Store remodels also are contributing favorably to our companys performance. The fiscal 2011
remodels are achieving an average same-store sales increase of almost ten percentage points over
the chain average. During the third quarter of fiscal 2011 we completed 11 remodels. We completed
our last three remodels for the fiscal year during the beginning of the fourth quarter of fiscal
2011, bringing our total remodels for the year to 42. As a result of the success of the remodels,
we now expect to complete approximately 60 remodels in fiscal 2012, compared to our previously
announced intent to complete approximately 50 remodels during fiscal 2012. The 60 remodels will be
comprised of approximately 40 small-format projects, ten large-format projects, five small-format
store expansions and five large-format store down-sizes.
As a result of the increase in new store openings and remodels, we will have a significant
increase in pre-opening costs during fiscal 2012. Since we expect to open 60 new stores and
perform 60 remodels during fiscal 2012 as compared to 30 new stores and 42 remodels during fiscal
2011, pre-opening costs will nearly double during fiscal 2012.
Recent Developments and Business Update
Outlook for Fiscal 2011
Inflationary concerns for retailers regarding the rising costs of commodities such as cotton
and oil, as well as wages in China have been a focal point in the media recently. We have
experienced product cost increases during the fiscal year; however, we have noticed that some
commodity costs have retreated from the recent peaks. We believe that we can effectively manage
through this inflationary cycle while protecting our positive sales and gross margin trends.
We expect fourth quarter fiscal 2011 gross margin improvement, however at a rate of
improvement that is less than our third quarter. We do not expect to achieve SG&A improvement in
the fourth quarter of fiscal 2011 compared to the prior year fourth quarter in part due to a
planned shift of our marketing spend into the fourth quarter this year. In addition, included in
SG&A during the fourth quarter of fiscal 2010 was a final settlement of $1.3 million that we
received related to the VISA/MasterCard antitrust litigation.
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Table of Contents
Based upon our third quarter results and operating assumptions for the remainder of the year,
we are increasing our previously announced expectations for fiscal 2011. The key considerations
underlying our outlook for fiscal 2011 include:
| Same-store sales increase of 3.5% to 4.0% for the year versus the previously announced range of 3.0% to 4.0%; |
| Gross margin rate improvement of 90 to 100 basis points for the year versus the previously announced range of 70 to 90 basis points; |
| SG&A, as a percentage of net sales, improvement of 60 to 70 basis points for the year versus the previously announced range of 50 to 70 basis points; |
| Capital expenditures, net of landlord allowances, of approximately $54 million for the full year; |
| Earnings per diluted share of $3.35 to $3.45 for the year versus the previously announced range of $3.20 to $3.35; |
| Free cash flow of $85 to $88 million for the year (free cash flow defined as net income plus depreciation and amortization, stock-based compensation expense and changes in working capital, less capital expenditures, net of landlord allowances) versus the previously announced range of $83 to $88 million; and |
| Weighted-average diluted share count of approximately 26.9 million shares for the year versus the previously announced weighted-average diluted share count of approximately 27.2 million shares. |
Results of Operations
The following table sets forth our results of operations through operating profit, expressed
as a percentage of net sales. The following discussion should be read in conjunction with our
consolidated interim financial statements and related notes thereto.
Percentage of Net Sales | ||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 30, | October 31, | October 30, | October 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross margin |
51.6 | % | 51.0 | % | 50.9 | % | 49.6 | % | ||||||||
Selling, general and administrative
expenses |
39.1 | % | 39.7 | % | 41.2 | % | 42.2 | % | ||||||||
Store pre-opening and closing costs |
0.7 | % | 0.4 | % | 0.6 | % | 0.6 | % | ||||||||
Depreciation and amortization |
2.7 | % | 2.7 | % | 3.0 | % | 3.0 | % | ||||||||
Operating profit |
9.1 | % | 8.2 | % | 6.1 | % | 3.8 | % | ||||||||
Net Sales. Net sales represent retail sales, net of estimated returns and exclude sales
taxes. The following tables summarize the year-over-year comparison of our consolidated net sales
and sales by segment for the periods indicated:
Consolidated Net Sales:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 30, | October 31, | Percentage | October 30, | October 31, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Consolidated net sales |
$ | 535.3 | $ | 509.1 | 5.1 | % | $ | 1,454.9 | $ | 1,388.5 | 4.8 | % | ||||||||||||
Increase from prior year |
$ | 26.2 | $ | 66.4 | ||||||||||||||||||||
Same-store sales
percentage change |
4.1 | % | 4.3 | % | 4.2 | % | 2.5 | % |
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Comparison of the Thirteen Weeks Ended October 30, 2010 to October 31, 2009
Consolidated net sales increased for the third quarter of fiscal 2011. Same-store sales
increased 4.1 percent compared with a same-store sales increase of 4.3 percent for the third
quarter of fiscal 2010. The improvement in same-store sales was driven by a 3.6 percent increase
in customer transactions and a 0.5 percent increase in average ticket as compared to the third
quarter of fiscal 2010. Our total store count of 756 at the end of the third quarter of fiscal
2011 was down two stores compared to the end of the third quarter of fiscal 2010, however, total
store square footage increased from 16.1 million square feet at the end of third quarter fiscal
2010 to 16.2 million square feet at the end of third quarter fiscal 2011. In total, we opened ten
new stores and closed six stores during the third quarter of fiscal 2011, compared to the third
quarter of fiscal 2010 when we opened four new stores and closed four stores.
On a category basis, our sewing businesses represented 54 percent of our fiscal 2011 third
quarter net sales volume and increased approximately 3.3 percent on a same-store sales basis over
the third quarter of the prior year. We continued to experience positive same-store sales in the
majority of our fabric and sewing notions merchandise categories.
Our non-sewing businesses represented 46 percent of our fiscal 2011 third quarter net sales
volume and increased approximately 5.2 percent on a same-store sales basis over the third quarter
of the prior year. Core craft and seasonal categories contributed to the increase.
Comparison of the Thirty-Nine Weeks Ended October 30, 2010 to October 31, 2009
Consolidated net sales increased for the first nine months of fiscal 2011. Same-store sales
increased 4.2 percent compared with a same-store sales increase of 2.5 percent for the first nine
months of fiscal 2010. The improvement in same-store sales was driven by a 3.5 percent increase
in customer transactions combined with a 0.7 percent increase in average ticket as compared to the
first nine months of fiscal 2010. The increase in customer transactions is primarily due to our
remodeling efforts, performance of new products, continued benefits from modifications we made to
our marketing content to deliver a stronger value message, and the benefit of competitive
withdrawals in the sewing business. In total, we opened 24 new stores and closed 14 stores during
the first nine months of fiscal 2011, compared to the first nine months of fiscal 2010 when we
opened 19 new stores and closed 25 stores.
On a category basis, our sewing businesses represented 53 percent of the first nine months of
fiscal 2011 net sales volume and increased 4.5 percent on a same-store sales basis over the first
nine months of the prior year. Similar to our results for previous quarters of fiscal 2011, we
continued to experience positive same-store sales in the majority of our fabric and sewing notions
merchandise categories during the first nine months of fiscal 2011.
Our non-sewing businesses represented 47 percent of our fiscal 2011 first nine months net
sales volume and increased approximately 4.0 percent on a same-store sales basis over the first
nine months of the prior year. Our core craft categories remained strong and sales trends in our
seasonal business continued to remain positive during the first nine months of fiscal 2011.
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Sales by Segment:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 30, | October 31, | Percentage | October 30, | October 31, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Large-format stores |
||||||||||||||||||||||||
Net sales |
$ | 283.4 | $ | 273.4 | 3.7 | % | $ | 779.5 | $ | 750.9 | 3.8 | % | ||||||||||||
Increase from prior year |
$ | 10.0 | $ | 28.6 | ||||||||||||||||||||
Same-store sales
percentage change |
2.5 | % | 2.3 | % | 2.5 | % | 0.7 | % | ||||||||||||||||
Small-format stores |
||||||||||||||||||||||||
Net sales |
$ | 242.3 | $ | 227.1 | 6.7 | % | $ | 646.8 | $ | 612.0 | 5.7 | % | ||||||||||||
Increase from prior year |
$ | 15.2 | $ | 34.8 | ||||||||||||||||||||
Same-store sales
percentage change |
6.0 | % | 6.7 | % | 6.4 | % | 4.7 | % | ||||||||||||||||
Other |
||||||||||||||||||||||||
Net sales |
$ | 9.6 | $ | 8.6 | 11.6 | % | $ | 28.6 | $ | 25.6 | 11.7 | % | ||||||||||||
Increase from prior year |
$ | 1.0 | $ | 3.0 | ||||||||||||||||||||
Comparison of the Thirteen Weeks Ended October 30, 2010 to October 31, 2009
Sales for large-format stores increased for the third quarter of fiscal 2011 due to the
increase in same-store sales and the net increase in the number of new stores. The number of
large-format stores in operation increased to 234 at the end of the third quarter of fiscal 2011
from 228 at the end of the same quarter of fiscal 2010. Large-format stores accounted for
approximately 52.9 percent of total third quarter net sales in fiscal 2011 as compared to 53.7
percent for the same period in the prior year.
Same-store sales for large-format stores increased 2.5 percent for the quarter, versus a
same-store sales increase of 2.3 percent in the third quarter last year. The increase in
same-store sales was due to a
2.6 percent increase in customer transactions during the third quarter of fiscal 2011, as compared
to the same quarter last year. Average ticket decreased 0.1 percent as compared to the third
quarter of fiscal 2010.
Sales for small-format stores increased for the third quarter of fiscal 2011 due to an
increase in same-store sales. The number of small-format stores in operation decreased to 522 at
the end of the third quarter of fiscal 2011 compared with 530 at the end of the same quarter last
year. Small-format stores accounted for approximately 45.3 percent of total third quarter net
sales in fiscal 2011 as compared to 44.6 percent for the same period in the prior year.
Same-store sales performance for small-format stores increased 6.0 percent compared with a
same-store sales increase of 6.7 percent for the third quarter of fiscal 2010. The increase in
same-store sales was due to a 4.7 percent increase in customer transactions, coupled with a 1.3
percent increase in average ticket as compared to the third quarter of fiscal 2010. We continue to
see the ongoing benefit from our store remodels in our small-format stores, resulting in an
increase in both customer transactions and average ticket.
Sales included in our other segment represent sales from Joann.com. Internet sales through
Joann.com accounted for 1.8 percent of third quarter net sales in fiscal 2011 as compared to 1.7
percent for the same period in the prior year.
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Table of Contents
Comparison of the Thirty-Nine Weeks Ended October 30, 2010 to October 31, 2009
Sales for large-format stores increased for the first nine months of fiscal 2011 due to the
increase in same-store sales and net increase in the number of new stores. Large-format stores
accounted for
approximately 53.6 percent of total first nine months net sales in fiscal 2011 as compared to 54.1
percent for the same period in the prior year.
Same-store sales for large-format stores increased 2.5 percent for the first nine months of
fiscal 2011, versus a same-store sales increase of 0.7 percent in the first nine months of last
year. The increase in same-store sales was due to a 2.4 percent increase in customer
transactions, as compared to the first nine months of fiscal 2010. Average ticket increased 0.1
percent as compared to the first nine months of fiscal 2010.
Sales for small-format stores increased for the first nine months of fiscal 2011 due to the
increase in same-store sales. Small-format stores accounted for approximately 44.5 percent of
total first nine months net sales in fiscal 2011 as compared to 44.1 percent for the same period in
the prior year.
Same-store sales performance for small-format stores increased 6.4 percent compared with a
same-store sales increase of 4.7 percent for the first nine months of fiscal 2010. The increase in
same-store sales was primarily due to a 4.5 percent increase in customer transactions, combined
with a 1.9 percent increase in average ticket as compared to the first nine months of fiscal 2010.
We continue to see the ongoing benefit from our store remodels.
Internet sales through Joann.com accounted for 1.9 percent of the first nine months net sales
in fiscal 2011 as compared to 1.8 percent for the same period in the prior year.
Gross Margin. Gross margins may not be comparable to those of our competitors and other
retailers. Some retailers include all of the costs related to their distribution network in cost
of sales, while we exclude the indirect portion from gross margin and include it within SG&A. We
include distribution costs that are directly associated with the acquisition of our merchandise in
cost of sales. These costs are primarily in-bound and out-bound freight. We incur in-bound
freight costs as a result of merchandise shipments from the vendor to our distribution centers or
directly to our stores via drop shipment. In-bound freight and duties related to import
purchases and internal transfer costs are considered to be direct costs of our merchandise and,
accordingly, are recognized as cost of sales when the related merchandise is sold. We incur
out-bound freight costs when we ship the merchandise to our stores from the distribution centers.
Purchasing and receiving costs, warehousing costs and other costs of our distribution network and
store occupancy costs are considered to be period costs not directly attributable to the value of
merchandise and, accordingly, are expensed as incurred as SG&A.
Gross Margin:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 30, | October 31, | Percentage | October 30, | October 31, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Gross margin |
$ | 276.2 | $ | 259.8 | 6.3 | % | $ | 740.3 | $ | 689.3 | 7.4 | % | ||||||||||||
Increase from prior year |
$ | 16.4 | $ | 51.0 | ||||||||||||||||||||
Percentage of
consolidated net sales |
51.6 | % | 51.0 | % | 50.9 | % | 49.6 | % |
As a percent of net sales, gross margin increased 60 basis points to 51.6 percent for the
third quarter of fiscal 2011 compared with 51.0 percent for the same quarter last year. The
improvement in our gross margin rate primarily was driven by global sourcing efforts as well as
improved inventory management, which resulted in fewer markdowns.
As a percent of net sales, gross margin increased 130 basis points to 50.9 percent for the
first nine months of fiscal 2011 compared with 49.6 percent for the same period last year. As
experienced during the third quarter of fiscal 2011, the improvement in the gross margin rate for
the first nine months of fiscal 2011 primarily was due to global sourcing efforts and improved
inventory management as compared to the same period of fiscal 2010.
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Table of Contents
Selling, general and administrative expenses. SG&A expenses include store and administrative
payroll, employee benefits, stock-based compensation, certain distribution costs, store occupancy
costs, advertising and administrative expenses. As mentioned previously, some of our competitors
and other retailers include distribution costs and store occupancy costs in gross margin. The
types of distribution costs that we classify as selling, general and administrative expense include
administrative, occupancy, depreciation, labor and other indirect costs that are incurred to
support the distribution network. These costs are not directly associated with the value of the
merchandise sold in our stores, but rather they relate primarily to the handling of merchandise for
delivery to our stores and are expensed as incurred.
Selling, General and Administrative Expenses:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 30, | October 31, | Percentage | October 30, | October 31, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Selling, general and
administrative expenses |
$ | 209.4 | $ | 202.0 | 3.7 | % | $ | 599.3 | $ | 585.7 | 2.3 | % | ||||||||||||
Increase from prior year |
$ | 7.4 | $ | 13.6 | ||||||||||||||||||||
Percentage of
consolidated net sales |
39.1 | % | 39.7 | % | 41.2 | % | 42.2 | % |
For the third quarter of fiscal 2011, SG&A expense, as a percentage of net sales, improved by
60 basis points to 39.1 percent compared with 39.7 percent in the third quarter last year. Our
improved SG&A leverage reflects our continued focus on controlling costs, which have increased by
3.7 percent during the third quarter of fiscal 2011, while net sales increased by 5.1 percent for
the same period as compared to the third quarter of fiscal 2010.
For the first nine months of fiscal 2011, SG&A expense, as a percentage of net sales, improved
by 100 basis points to 41.2 percent compared with 42.2 percent in the first nine months of last
year. Our improved SG&A leverage reflects our continued focus on controlling costs, which have
increased by 2.3 percent during the first nine months of fiscal 2011, while net sales increased by
4.8 percent for the same period as compared to the first nine months of fiscal 2010. A portion of
the improved leverage is the result of a one-time legal expense as well as additional incentive
expense accruals recorded in the first nine months of fiscal 2010 that did not recur in the current
year.
Distribution costs included within SG&A amounted to $13.5 million and $12.8 million for the
third quarter of fiscal 2011 and 2010, respectively. Store occupancy costs included within SG&A
amounted to $48.4 million and $46.7 million for the third quarter of fiscal 2011 and 2010,
respectively.
Distribution costs included within SG&A amounted to $36.4 million and $36.6 million for the
first nine months of fiscal 2011 and 2010, respectively. Store occupancy costs included within
SG&A amounted to $142.4 million and $139.7 million for the first nine months of fiscal 2011 and
2010, respectively.
Store pre-opening and closing costs. Store pre-opening costs are expensed as incurred. These
costs include lease costs recognized prior to the store opening, hiring and training costs for new
employees and processing of initial merchandise. Store closing costs consist of lease termination
costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for
employees, third-party inventory liquidator costs and other costs incidental to store closings.
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Table of Contents
Store pre-opening and closing costs:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 30, | October 31, | Percentage | October 30, | October 31, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Store pre-opening and
closing costs |
$ | 3.6 | $ | 2.2 | 63.6 | % | $ | 8.4 | $ | 8.6 | (2.3 | )% | ||||||||||||
Increase (decrease)
from prior year |
$ | 1.4 | $ | (0.2 | ) | |||||||||||||||||||
Percentage of
consolidated net sales |
0.7 | % | 0.4 | % | 0.6 | % | 0.6 | % | ||||||||||||||||
Store pre-opening costs |
$ | 2.6 | $ | 1.4 | 85.7 | % | $ | 6.5 | $ | 4.5 | 44.4 | % | ||||||||||||
Increase from prior year |
$ | 1.2 | $ | 2.0 | ||||||||||||||||||||
Stores opened |
10 | 4 | 24 | 19 | ||||||||||||||||||||
Store closing costs |
$ | 1.0 | $ | 0.8 | 25.0 | % | $ | 1.9 | $ | 4.1 | (53.7 | )% | ||||||||||||
Increase (decrease)
from prior year |
$ | 0.2 | $ | (2.2 | ) | |||||||||||||||||||
Stores closed |
6 | 4 | 14 | 25 | ||||||||||||||||||||
During the third quarter of fiscal 2011, we opened one large-format store and nine
small-format stores, whereas in the third quarter of the prior year we opened three large-format
stores and one small-format store. During the third quarter of fiscal 2011, we closed six
small-format stores as compared to the third quarter of fiscal 2010 when we closed one large-format
store and three small-format stores.
During the first nine months of fiscal 2011, we opened five large-format stores and 19
small-format stores, whereas in the first nine months of the prior year we opened 15 large-format
stores and four small-format stores. During the first nine months of fiscal 2011, we closed 14
small-format stores as compared to the first nine months of fiscal 2010 when we closed two
large-format stores and 23 small-format stores.
For the full year of fiscal 2011, we plan to open approximately 30 stores, close approximately
25 stores and remodel 42 stores.
Depreciation and amortization. Depreciation and amortization expense increased $0.4 million
to $14.5 million in the third quarter of fiscal 2011. The increase primarily is due to incremental
depreciation associated with fiscal 2011 and 2010 expenditures on new stores and remodels as well
as spending related to information technology.
Depreciation and amortization expense increased $1.2 million to $43.2 million in the first
nine months of fiscal 2011. The increase primarily is due to incremental depreciation associated
with fiscal 2011 and 2010 expenditures on new stores and remodels as well as spending related to
information technology.
Operating Profit:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 30, | October 31, | Percentage | October 30, | October 31, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Operating profit |
$ | 48.7 | $ | 41.5 | 17.3 | % | $ | 89.4 | $ | 53.0 | 68.7 | % | ||||||||||||
Increase from prior year |
$ | 7.2 | $ | 36.4 | ||||||||||||||||||||
Percentage of
consolidated net sales |
9.1 | % | 8.2 | % | 6.1 | % | 3.8 | % |
Operating profit for the third quarter and first nine months of fiscal 2011 increased
primarily due to the increase in same-store sales, improvement in gross margin and our continued
efforts to control expenses.
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Table of Contents
Operating Profit (Loss) by Segment:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 30, | October 31, | Percentage | October 30, | October 31, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2010 | 2009 | Change | 2010 | 2009 | Change | ||||||||||||||||||
Large-format stores |
||||||||||||||||||||||||
Operating profit |
$ | 41.6 | $ | 37.3 | 11.5 | % | $ | 91.5 | $ | 73.5 | 24.5 | % | ||||||||||||
Increase from prior year |
$ | 4.3 | $ | 18.0 | ||||||||||||||||||||
Small-format stores |
||||||||||||||||||||||||
Operating profit |
$ | 38.7 | $ | 40.4 | (4.2 | )% | $ | 92.4 | $ | 83.2 | 11.1 | % | ||||||||||||
(Decrease) increase
from prior year |
$ | (1.7 | ) | $ | 9.2 | |||||||||||||||||||
Other |
||||||||||||||||||||||||
Operating loss |
$ | (31.6 | ) | $ | (36.2 | ) | 12.7 | % | $ | (94.5 | ) | $ | (103.7 | ) | 8.9 | % | ||||||||
Decrease from prior year |
$ | 4.6 | $ | 9.2 | ||||||||||||||||||||
Comparison of the Thirteen Weeks Ended October 30, 2010 to October 31, 2009
The improvement in large-format store operating profit was driven by the $10.0 million
increase in store sales volume, which was due to a combination of the net increase in the number
of stores and an increase in same-store sales, in addition to the improvement in gross margin and
our continued efforts to control expenses.
The decrease in small-format store operating profit was driven primarily by closing costs
associated with the net decrease in the number of small-format stores, partially offset by the 6.0
percent increase in same-store sales.
The other segment includes unallocated corporate overhead in addition to the operating
results of our Internet business. The decrease in operating loss during the third quarter of
fiscal 2011 of our other segment is due primarily to our continued efforts to control expenses.
Comparison of the Thirty-Nine Weeks Ended October 30, 2010 to October 31, 2009
The improvement in large-format store operating profit was driven primarily by the $28.6
million increase in store sales volume, which was due to a combination of the increase in the
number of stores and an increase in same-store sales, in addition to the improvement in gross
margin and our continued efforts to control expenses.
The improvement in small-format store operating profit was driven primarily by a 6.4 percent
increase in same-store sales, which was due partially to the store remodels, combined with
improvement in gross margin and our continued efforts to control expenses.
The decrease in operating loss during the first nine months of fiscal 2011 of our other
segment is due primarily to our continued efforts to control expenses as well as a one-time legal
expense and additional incentive expense accruals recorded in the first nine months of fiscal 2010
that did not recur in the current year.
Gain on purchase of senior subordinated notes. In the third quarter of fiscal 2010, we
recorded a pre-tax gain of $0.1 million as a result of the purchase of $3.0 million of our 7.5
percent senior subordinated notes at an average of 98 percent of par, net of the related write-off
of applicable deferred financing costs.
In the first nine months of fiscal 2010, we recorded a pre-tax gain of $1.3 million as a
result of the purchase of $18.5 million of our 7.5 percent senior subordinated notes at an average
of 92 percent of par, net of the related write-off of applicable deferred financing costs.
16
Table of Contents
On March 1, 2010, we retired the remaining $47.5 million principal of our 7.5 percent senior
subordinated notes at par value.
Interest expense. Interest expense for the third quarter of fiscal 2011 was $0.6 million, a
decrease of $1.0 million compared to the third quarter of fiscal 2010. The decrease is
attributable to lower average debt levels. We did not have any debt during the third quarter of
fiscal 2011 compared to an average of $49 million in the third quarter of fiscal 2010. The
interest expense for the third quarter of fiscal 2011 represents the costs associated with
maintaining our credit facility.
Interest expense for the first nine months of fiscal 2011 decreased $2.7 million to $2.0
million. The decrease is attributable to lower average debt levels. Our average debt levels were
$4.6 million in the first nine months of fiscal 2011 versus $51.0 million in the same period of
the prior year.
We had no debt outstanding at the end of the third quarter versus $47.5 million at the end of
the third quarter last year.
Income taxes. Our effective income tax rates for the third quarters of fiscal 2011 and fiscal
2010 were approximately 39.5 percent and 39.8 percent, respectively. Our effective income tax
rates for the first nine months of fiscal 2011 and fiscal 2010 were approximately 39.7 percent and
40.5 percent, respectively. Our effective income tax rate is subject to change based on the mix of
income from different state jurisdictions, which tax at different rates, as well as the change in
status of outcome of uncertain tax positions. We evaluate our effective income tax rate on a
quarterly basis and update our estimate of the full-year rate as necessary.
Liquidity and Capital Resources
Our capital requirements are primarily for capital expenditures in connection with new store
openings, store remodels, other infrastructure investments and working capital requirements for
seasonal inventory builds and new store inventory purchases. Working capital requirements
fluctuate during the year and reach their highest levels during the third fiscal quarter as we
increase our inventory in preparation for our peak selling season during the months of September
through December. These requirements can be funded through a combination of internally generated
cash flows from operations, credit extended by suppliers and borrowings under our credit facility.
The following table provides cash flow related information for the first nine months of
fiscal 2011 and fiscal 2010:
Dollars in millions | 2011 | 2010 | ||||||
Net cash provided by operating activities |
$ | 43.1 | $ | 53.8 | ||||
Cash used for investing activities |
(46.7 | ) | (26.1 | ) | ||||
Net cash used for financing activities |
(101.1 | ) | (10.6 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
$ | (104.7 | ) | $ | 17.1 | |||
Ending cash and cash equivalents |
$ | 112.4 | $ | 97.7 | ||||
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Net cash provided by operating activities
Net cash provided by operations decreased by $10.7 million to $43.1 million in the first nine
months of fiscal 2011, compared with $53.8 million in the first nine months of fiscal 2010. The
year-over-year decrease in cash provided by operations primarily was attributable to a $31.5
million increase in inventories and a $33.6 million decrease in accrued liabilities, partially
offset by a $23.2 million increase in net income for the first nine months of fiscal 2011 and a
$26.8 million increase in accounts payable, as compared to the same period last year. The
increase in accounts payable is primarily attributable to the
$18.9 million year-over year increase in inventory at the end of the first nine months of
fiscal year 2011 as compared to the first nine months of fiscal year 2010. We expect our fiscal
2011 year-end inventories to increase slightly as compared to the prior year, considering our
sales growth. The decrease in accrued liabilities is primarily due to a decrease in income tax
payable and accrued incentive compensation. The decrease in income tax payable is primarily due
to differences in the timing of income earned and taxes paid. The decrease in accrued incentive
compensation is due to an expected lower payout for fiscal 2011 as compared to fiscal 2010.
Cash used for investing activities
Cash used for investing activities totaled $46.7 million in the first nine months of fiscal
2011, compared with $26.1 million in the first nine months of fiscal 2010, and consisted entirely
of capital spending for both periods. Capital expenditures consist of cash expenditures and cash
expenditures reimbursed by landlords. Landlord-reimbursed capital expenditures represent the cost
of assets acquired with landlord lease incentives. Capital expenditures are summarized as
follows:
Thirty-Nine Weeks Ended | ||||||||
October 30, | October 31, | |||||||
Dollars in millions | 2010 | 2009 | ||||||
Cash |
$ | 39.8 | $ | 17.0 | ||||
Cash landlord reimbursed |
6.9 | 9.1 | ||||||
Total |
$ | 46.7 | $ | 26.1 | ||||
During the first nine months of fiscal 2011, we opened five large-format stores and 19
small-format stores as compared to the first nine months of the prior year when we opened 15
large-format stores and four small-format stores. We remodeled 39 stores, one of which was transitioned
from a small-format to a large-format layout, in the first nine months
of fiscal 2011, as compared to the first nine months of fiscal 2010 when we remodeled 26 stores,
five of which were transitioned from a small-format to a large-format layout as a result of the remodel. The increase
in capital expenditures is primarily due to the increase in store remodel activity during the
first nine months of fiscal 2011 as compared to the first nine months of fiscal 2010. Investment
in store related expenditures, including store remodels and new store openings, and information
technology projects, represented the majority of the capital spending during the first nine months
of fiscal 2011.
Net cash used for financing activities
Net cash used for financing activities was $101.1 million during the first nine months of
fiscal 2011, compared with $10.6 million during the same period in fiscal 2010. On March 1, 2010,
we repurchased and subsequently retired the remaining $47.5 million principal of our 7.5 percent
senior subordinated notes at par value.
During the third quarter of fiscal 2011, we bought back approximately 913,000 shares of our
common stock at an average price per share of $43.11. Total shares bought back during the first
nine months of fiscal 2011 was approximately 1,729,000 at an average price paid per share of
$42.93. Based on our stock buyback activity during the first nine months of fiscal 2011, we now
expect a full year weighted average share count of approximately 26.9 million.
On August 12, 2010, our board of directors increased the authorization under our existing
common share repurchase program by one million shares. As of the end of October, under the new
authorization, approximately 200,000 common shares remain available for purchase.
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In the third quarter of fiscal 2010, we recorded a pre-tax gain of $0.1 million as a result of
the purchase of $3.0 million of our 7.5 percent senior subordinated notes at an average of 98
percent of par, net of the related write-off of applicable deferred financing costs.
In the first nine months of fiscal 2010, we recorded a pre-tax gain of $1.3 million as a
result of the purchase of $18.5 million of our 7.5 percent senior subordinated notes at an average
of 92 percent of par, net of the related write-off of applicable deferred financing costs.
As of October 30, 2010, we had the ability to borrow $285.7 million under our credit facility,
subject to the borrowing base calculation.
Off-Balance Sheet Transactions
Our liquidity is currently not dependent on the use of off-balance sheet transactions other
than letters of credit and operating leases, which are typical in a retail environment.
Seasonality and Inflation
Our business exhibits seasonality, which is typical for most retail companies. Our net sales
are much stronger in the second half of the year than the first half of the year. Net earnings
are highest during the months of September through December when sales volumes provide significant
operating leverage. Working capital requirements needed to finance our operations fluctuate
during the year and reach their highest levels during the third and fourth fiscal quarters as we
increase our inventory in preparation for our peak selling season.
We believe that inflation has not had a significant effect on net sales or on our earnings
performance. There can be no assurance, however, that our operating results will not be affected
by inflation in the future.
Critical Accounting Policies
Our condensed consolidated interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. Preparation of these
statements requires management to make judgments and estimates. Some accounting policies have a
significant impact on amounts reported in these financial statements. A summary of significant
accounting policies and a description of accounting policies that are considered critical can be
found in our fiscal 2010 Annual Report on Form 10-K in the notes to the consolidated financial
statements and the Critical Accounting Policies and Estimates section of Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Contractual Obligations
There have been no material changes to the table of contractual obligations and commitments
presented on page 38 of our Annual Report on Form 10-K for the fiscal year ended January 30, 2010.
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Cautionary Statement Concerning Forward-Looking Statements
Certain statements contained in this report that are not historical facts are forward-looking
statements within the meaning of that term set forth in the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements, which reflect our current views of future events and
financial performance, involve certain risks and uncertainties. When used herein, the terms
anticipates, plans, estimates, expects, believes, intends, and similar expressions as
they relate to us or future events or conditional verbs such as will, should, would, may,
and could are intended to identify such forward-looking statements. All statements that address
operating performance, events or developments that we expect or
anticipate will occur in the future are forward-looking statements. Our actual results,
performance or achievements may differ materially from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or contribute to such
material differences include, but are not limited to, the items described in Item 1A. Risk
Factors of our fiscal 2010 Annual Report on Form 10-K, as well as changes in general economic
conditions, risks in implementing new marketing initiatives, natural disasters and geo-political
events, changes in customer demand, changes in trends in the fabric and craft industry, changes in
the competitive pricing for products, the impact of competitors store openings and closings, our
dependence on suppliers, seasonality, disruptions to the transportation system or increases in
transportation costs, energy costs, our ability to recruit and retain highly qualified personnel,
our ability to manage our inventory, our ability to effectively manage our distribution network,
disruptions to our information systems, failure to maintain the security of our electronic and
other confidential information, failure to comply with various laws and regulations, failure to
successfully implement the store growth strategy, changes in accounting standards and effective tax
rates, inadequacy of our insurance coverage, cash and cash equivalents held at financial
institutions in excess of federally insured limits, volatility of our stock price, damage to our
reputation, and other factors, including other factors discussed elsewhere in this report. We
caution readers not to place undue reliance on these forward-looking statements. We assume no
obligation to update any of the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk of our financial instruments as of October 30, 2010 has not changed
materially since January 30, 2010. Information regarding our financial instruments and market
risk as of January 30, 2010 is disclosed in our fiscal 2010 Annual Report on Form 10-K.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable
assurance that information required to be disclosed in our reports under the Securities Exchange
Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms, and
that such information is accumulated and communicated to the management of Jo-Ann Stores, Inc.
(the Management), including our Principal Executive Officer and our Principal Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, our Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
In connection with the preparation of this Quarterly Report on Form 10-Q as of October 30,
2010, an evaluation was performed under the supervision and with the participation of our
Management, including the Principal Executive Officer and Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Principal Executive Officer
and Principal Financial Officer have concluded that our disclosure controls and procedures were
effective.
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various litigation matters in the ordinary course of our business. We do
not expect that any of these matters, either individually or in the aggregate, will have a material
adverse effect on our financial condition or results of operations.
Item 1A. Risk Factors
There were no material changes to the risk factors disclosed in our Annual Report on Form 10-K
for our fiscal year ended January 30, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by Jo-Ann Stores, Inc.
Total Number of | Maximum Number | |||||||||||||||
Shares Purchased | of Shares that May | |||||||||||||||
Total Number | Average | as Part of Publicly | Yet Be Purchased | |||||||||||||
of Shares | Price Paid | Announced Plans | Under the Plans or | |||||||||||||
Purchased | per Share | or Programs | Programs | |||||||||||||
August 2 28, 2010 |
4,540 | $ | 41.20 | 2,034,935 | 1,115,065 | |||||||||||
August 29 October 2, 2010 |
907,926 | $ | 43.12 | 2,942,861 | 207,139 | |||||||||||
October 3 30, 2010 |
99 | $ | 42.02 | 2,942,960 | 207,040 | |||||||||||
Total |
912,565 | $ | 43.11 | 2,942,960 | 207,040 | |||||||||||
In the table above, the total number of shares purchased represents shares repurchased
directly from the market, as well as shares repurchased from employees in connection with the
vesting of restricted shares that were provided to us to satisfy minimum statutory tax withholding
requirements.
On August 12, 2010, our board of directors increased the authorization under our existing
common share repurchase program authorized in December 1998 by one million shares. Under the
existing program, 115,165 common shares remained available for purchase by the company as of August
12, 2010. The authorization was therefore increased to an aggregate of 1,115,165 common shares
under the program. Purchases under the program may be made from time-to-time in the open market or
in negotiated transactions and at such prices and upon such other terms as the company determines.
The expanded common share repurchase program has no stated expiration date.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Reserved
Item 5. Other Information
None.
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Item 6. Exhibits
a) Exhibits
No. | Exhibit Description | |||
31.1 | Section 302 Certification By Chief Executive Officer |
|||
31.2 | Section 302 Certification By Chief Financial Officer |
|||
32.1 | Section 906 Certification of Principal Executive Officer and
Principal Financial Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JO-ANN STORES, INC. |
||||
DATE: December 7, 2010 | /s/ Darrell Webb | |||
Darrell Webb, | ||||
Chief Executive Officer | ||||
/s/ James Kerr | ||||
James Kerr, | ||||
Executive Vice President and Chief Financial Officer |
23