J.Jill(JILL) - 2024 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents J.Jill, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, shareholders' equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets (Unaudited) Condensed Consolidated Balance Sheet Highlights (in thousands): | Metric | July 29, 2023 | January 28, 2023 | Change (YoY) | | :-------------------------------- | :------------ | :--------------- | :----------- | | Cash and cash equivalents | $48,903 | $87,053 | $(38,150) | | Inventories, net | $45,689 | $50,585 | $(4,896) | | Total current assets | $116,172 | $160,820 | $(44,648) | | Total assets | $416,760 | $466,417 | $(49,657) | | Total current liabilities | $118,129 | $126,987 | $(8,858) | | Long-term debt, net of discount and current portion | $150,296 | $195,517 | $(45,221) | | Total liabilities | $397,647 | $466,636 | $(68,989) | | Total shareholders' equity (deficit) | $19,113 | $(219) | $19,332 | Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data): | Metric | 13 Weeks Ended July 29, 2023 | 13 Weeks Ended July 30, 2022 | Change (YoY) | 26 Weeks Ended July 29, 2023 | 26 Weeks Ended July 30, 2022 | Change (YoY) | | :-------------------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Net sales | $155,669 | $160,343 | (2.9%) | $305,089 | $317,412 | (3.9%) | | Gross profit | $111,409 | $112,474 | (0.9%) | $218,949 | $221,937 | (1.3%) | | Operating income | $28,044 | $28,193 | (0.5%) | $53,438 | $52,078 | 2.6% | | Loss on debt refinancing | — | — | N/A | $12,702 | — | N/A | | Interest expense, net | $6,157 | $3,547 | 73.6% | $11,214 | $7,205 | 55.6% | | Net income | $15,222 | $17,805 | (14.5%) | $19,818 | $32,220 | (38.5%) | | Diluted EPS | $1.06 | $1.25 | (15.2%) | $1.38 | $2.27 | (39.2%) | Condensed Consolidated Statements of Shareholders' Equity (Deficit) (Unaudited) Condensed Consolidated Statements of Shareholders' Equity (Deficit) Highlights (in thousands): | Metric | January 28, 2023 | April 29, 2023 | July 29, 2023 | | :-------------------------------- | :--------------- | :------------- | :------------ | | Total Shareholders' Equity (Deficit) | $(219) | $3,325 | $19,113 | | Net income (for period) | N/A | $4,596 | $15,222 | | Equity-based compensation (for period) | N/A | $878 | $937 | Key Changes: * Shareholders' equity significantly improved from a deficit of $(219)k at January 28, 2023, to a positive $19,113k at July 29, 2023 * Net income contributed $15,222k to equity during the quarter ended July 29, 2023 Condensed Consolidated Statements of Cash Flows (Unaudited) Condensed Consolidated Statements of Cash Flows Highlights (in thousands): | Metric | 26 Weeks Ended July 29, 2023 | 26 Weeks Ended July 30, 2022 | Change (YoY) | | :-------------------------------- | :--------------------------- | :--------------------------- | :----------- | | Net cash provided by operating activities | $35,615 | $35,457 | $158 | | Net cash used in investing activities | $(7,105) | $(2,161) | $(4,944) | | Net cash used in financing activities | $(66,660) | $(7,397) | $(59,263) | | Net change in cash and cash equivalents | $(38,150) | $25,899 | $(64,049) | | Cash and cash equivalents, End of Period | $48,903 | $61,856 | $(12,953) | Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Description of Business - J.Jill, Inc. is a national lifestyle brand offering apparel, footwear, and accessories for women, operating through over 200 stores nationwide and a robust e-commerce platform[20] Note 2. Summary of Significant Accounting Policies - The interim condensed consolidated financial statements are unaudited and prepared in accordance with GAAP, consistently applying policies from the 2022 Annual Report[21] - The fiscal year ending February 3, 2024, is comprised of 53 weeks[22] - Cost of goods sold includes direct merchandise costs, inventory shrinkage, and adjustments, but excludes distribution center and indirect costs[24] - Selling, general and administrative expenses cover payroll, occupancy, information systems, marketing, warehousing, distribution, customer service, and professional services[25] Note 3. Revenues Disaggregated Net Sales (in thousands): | Channel | 13 Weeks Ended July 29, 2023 | 13 Weeks Ended July 30, 2022 | 26 Weeks Ended July 29, 2023 | 26 Weeks Ended July 30, 2022 | | :------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Retail | $86,110 | $87,081 | $168,314 | $171,293 | | Direct | $69,559 | $73,262 | $136,775 | $146,119 | | Net sales | $155,669 | $160,343 | $305,089 | $317,412 | Key Insights: * Net sales decreased by 2.9% for the thirteen weeks and 3.9% for the twenty-six weeks ended July 29, 2023, compared to the prior year[26] * Contract liabilities (signing bonus and unredeemed gift cards) decreased from $7,213k at January 28, 2023, to $5,520k at July 29, 2023[27] - Revenue recognized from gift card redemptions and breakage was approximately $2.6 million for the thirteen weeks and $5.5 million for the twenty-six weeks ended July 29, 2023[28] Note 4. Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets (in thousands): | Asset Type | July 29, 2023 Carrying Amount | January 28, 2023 Carrying Amount | | :-------------------- | :------------------------------ | :------------------------------- | | Goodwill | $59,697 | $59,697 | | Trade name | $34,000 | $34,000 | | Customer relationships | $35,717 | $39,188 | | Total intangible assets | $69,717 | $73,188 | Key Insights: * Goodwill balance remained stable at $59.7 million, with accumulated impairment losses of $137.3 million[31] * Total amortization expense for amortizable intangible assets was $3.5 million for the twenty-six weeks ended July 29, 2023, a decrease from $3.8 million in the prior year[33] * No impairment events were identified during the twenty-six weeks ended July 29, 2023 Note 5. Debt - On April 5, 2023, the Company entered into a new Term Loan Credit Agreement for $175.0 million, maturing May 8, 2028, which was used to repay the outstanding $225.4 million under the Priming Term Loan and Subordinated Term Loan Credit Agreements[35][39] - A loss on debt refinancing of $12.7 million was recorded for the twenty-six weeks ended July 29, 2023, primarily related to the repayment of the Subordinated Credit Agreement[40] - The ABL Credit Agreement maturity date was extended from May 8, 2024, to May 10, 2028, and the Company was in compliance with all debt covenants as of July 29, 2023[38][43][44] Outstanding Long-Term Debt (in thousands): | Debt Type | July 29, 2023 Balance Sheet | January 28, 2023 Balance Sheet | | :------------------------------------ | :-------------------------- | :--------------------------- | | Term Loan due 2028 (net) | $150,296 | — | | Priming Term Loan due 2024 (net) | — | $198,941 | | Subordinated Term Loan due 2024 (net) | — | $9,719 | | Net long-term debt | $150,296 | $205,236 | Note 6. Fair Value Measurements - The company's debt instruments are classified as Level 2 fair value measurements, with a carrying value of $159,046k and a fair value of $166,968k as of July 29, 2023, based on observable market prices for similar instruments[49] - Other financial instruments like cash, accounts receivable, and accounts payable approximate their fair value due to their short-term maturities[50] Note 7. Income Taxes Income Tax Provision and Effective Tax Rates: | Metric | 13 Weeks Ended July 29, 2023 | 13 Weeks Ended July 30, 2022 | 26 Weeks Ended July 29, 2023 | 26 Weeks Ended July 30, 2022 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Income tax provision | $6,665 | $5,912 | $8,630 | $10,922 | | Effective tax rate | 30.5% | 24.9% | 30.3% | 25.3% | Key Insights: * The effective tax rates for both periods in 2023 were higher than the federal statutory rate of 21% primarily due to state and local income taxes, executive compensation limitations, and non-deductible expenses[53][54] * A $1.4 million valuation allowance against state deferred tax assets was maintained as of July 29, 2023[55] Note 8. Net Income Per Share Net Income Per Common Share (EPS): | Metric | 13 Weeks Ended July 29, 2023 | 13 Weeks Ended July 30, 2022 | 26 Weeks Ended July 29, 2023 | 26 Weeks Ended July 30, 2022 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic EPS | $1.08 | $1.28 | $1.40 | $2.32 | | Diluted EPS | $1.06 | $1.25 | $1.38 | $2.27 | Key Insights: * Both basic and diluted EPS decreased for the thirteen and twenty-six weeks ended July 29, 2023, compared to the prior year[56] * Warrants issued to Subordinated Credit Agreement holders are included in EPS calculations due to their near-certain exercise[57] Note 9. Equity-Based Compensation - The J.Jill, Inc. Omnibus Equity Incentive Plan (A&R Plan) has 2,043,453 shares reserved, with 1,117,373 shares remaining for future issuance as of July 29, 2023[59] - Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) were granted[60] - RSUs vest in 1-3 annual installments, while PSUs are based on Adjusted EBITDA and annualized absolute total shareholder return (TSR) goals, with potential payouts ranging from 0% to 200% of target shares[62][63] Equity-Based Compensation Expense (in thousands): | Period | 2023 | 2022 | | :-------------------- | :----- | :----- | | 13 Weeks Ended July | $937 | $976 | | 26 Weeks Ended July | $1,815 | $1,718 | Key Insights: * As of July 29, 2023, there was $5.4 million of unrecognized compensation expense for RSUs (weighted-average service period of 1.9 years) and $1.7 million for PSUs (weighted-average service period of 2.5 years)[66][67] Note 10. Related Party Transactions - TowerBrook Capital Partners, LP controls a majority of J.Jill's voting stock, making it a controlled company[68] - The Subordinated Credit Agreement with related parties was repaid in full on April 5, 2023[69] Interest Expense, Net - Related Party (in thousands): | Period | 2023 | 2022 | | :-------------------- | :----- | :----- | | 13 Weeks Ended July | $0 | $929 | | 26 Weeks Ended July | $1,074 | $1,731 | Note 11. Commitments and Contingencies - The Company is subject to various legal proceedings in the ordinary course of business but does not believe their resolution would have a material adverse effect on its financial condition or operations[72] - Reserves are established for probable and estimable losses Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes J.Jill's financial condition and operating results, covering business overview, performance metrics, Adjusted EBITDA reconciliation, and liquidity analysis Overview - J.Jill is a national lifestyle brand offering apparel, footwear, and accessories designed for women, operating through over 200 stores nationwide and a robust e-commerce platform, headquartered outside Boston[76] Factors Affecting Our Operating Results - Operating results are influenced by overall economic trends (consumer confidence, inflation), consumer preferences and fashion trends, intense retail competition, the implementation of strategic initiatives (e-commerce, information systems upgrades), pricing strategies, merchandise mix, supply chain issues, and potential changes in tax laws and regulations[77][78][79][80][81][82] How We Assess the Performance of Our Business - Key performance metrics include net sales (impacted by customer base, product assortment, marketing, and omnichannel migration), total company comparable sales (performance of existing stores and Direct channel), number of stores, gross profit/margin, costs of goods sold (COGS), selling, general and administrative (SG&A) expenses, and non-GAAP Adjusted EBITDA and Adjusted EBITDA Margin[83][84][85][87][88][90][92] - COGS variability is driven by raw materials, transportation, freight costs, energy prices, currency fluctuations, and commodity prices[89] - SG&A expenses generally do not vary proportionately with net sales, leading to higher percentages in lower-volume periods[91] Reconciliation of Net Income to Adjusted EBITDA and Calculation of Adjusted EBITDA Margin Adjusted EBITDA and Margin (in thousands): | Metric | 13 Weeks Ended July 29, 2023 | 13 Weeks Ended July 30, 2022 | Change (YoY) | 26 Weeks Ended July 29, 2023 | 26 Weeks Ended July 30, 2022 | Change (YoY) | | :-------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Net income | $15,222 | $17,805 | (14.5%) | $19,818 | $32,220 | (38.5%) | | Adjusted EBITDA | $34,545 | $35,572 | (2.9%) | $66,408 | $66,869 | (0.7%) | | Adjusted EBITDA margin | 22.2% | 22.2% | 0.0 ppt | 21.8% | 21.1% | 0.7 ppt | Key Insights: * Adjusted EBITDA for the thirteen weeks decreased slightly by 2.9%, while the margin remained stable at 22.2%[95] * For the twenty-six weeks, Adjusted EBITDA decreased by 0.7%, but the margin improved by 0.7 percentage points to 21.8%[95] * The 2023 twenty-six-week period includes a $12.7 million loss on debt refinancing as a significant adjustment[95] Results of Operations Thirteen weeks ended July 29, 2023 Compared to Thirteen weeks ended July 30, 2022 Financial Performance (13 Weeks Ended July): | Metric | July 29, 2023 | July 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :------------ | :--------- | :--------- | | Net sales | $155,669 | $160,343 | $(4,674) | (2.9%) | | Costs of goods sold | $44,260 | $47,869 | $(3,609) | (7.5%) | | Gross profit | $111,409 | $112,474 | $(1,065) | (0.9%) | | Gross margin | 71.6% | 70.1% | 1.5 ppt | N/A | | SG&A expenses | $83,365 | $84,281 | $(916) | (1.1%) | | Operating income | $28,044 | $28,193 | $(149) | (0.5%) | | Interest expense, net | $6,157 | $3,547 | $2,610 | 73.6% | | Net income | $15,222 | $17,805 | $(2,583) | (14.5%) | Key Insights: * The decrease in net sales was primarily driven by a 1.3% decrease in total company comparable sales[96] * Gross margin improved due to lower freight costs[97] * SG&A expenses decreased mainly due to lower depreciation and amortization[99][100] * Net income declined due to increased interest expense and a higher effective tax rate (30.5% vs 24.9%)[102][103] Twenty-six weeks ended July 29, 2023 Compared to Twenty-six weeks ended July 30, 2022 Financial Performance (26 Weeks Ended July): | Metric | July 29, 2023 | July 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :------------ | :--------- | :--------- | | Net sales | $305,089 | $317,412 | $(12,323) | (3.9%) | | Costs of goods sold | $86,140 | $95,475 | $(9,335) | (9.8%) | | Gross profit | $218,949 | $221,937 | $(2,988) | (1.3%) | | Gross margin | 71.8% | 69.9% | 1.9 ppt | N/A | | SG&A expenses | $165,511 | $169,859 | $(4,348) | (2.6%) | | Operating income | $53,438 | $52,078 | $1,360 | 2.6% | | Loss on debt refinancing | $12,702 | — | $12,702 | N/A | | Interest expense, net | $11,214 | $7,205 | $4,009 | 55.6% | | Net income | $19,818 | $32,220 | $(12,402) | (38.5%) | Key Insights: * Net sales decreased by 3.9%, driven by a 2.0% decrease in total company comparable sales[104][105] * Gross margin improved due to lower freight costs[107] * Operating income increased by 2.6%, but net income significantly decreased by 38.5% primarily due to the $12.7 million loss on debt refinancing and higher interest expense[110][111][112] * SG&A expenses decreased due to lower compensation and depreciation/amortization[108] Liquidity and Capital Resources General - Primary liquidity sources are cash from operating activities and availability under the ABL facility[113] - As of July 29, 2023, the Company had $48.9 million in cash and $34.2 million of total availability under its ABL Facility[113] - On April 5, 2023, J.Jill entered into a new $175.0 million Term Loan Credit Agreement, maturing May 8, 2028, to fully repay previous Priming and Subordinated Credit Agreements[114][117] - The ABL Credit Agreement maturity was also extended to May 10, 2028[117] - The Company was in compliance with all covenants under the Term Loan Credit Agreement as of July 29, 2023[116] Cash Flow Analysis Cash Flow Summary (26 Weeks Ended July, in thousands): | Activity | July 29, 2023 | July 30, 2022 | | :-------------------------------- | :------------ | :------------ | | Net cash provided by operating activities | $35,615 | $35,457 | | Net cash used in investing activities | $(7,105) | $(2,161) | | Net cash used in financing activities | $(66,660) | $(7,397) | - Net cash provided by operating activities increased slightly by $0.2 million, driven by improved operating performance (excluding debt refinancing loss) and a $1.0 million decrease in cash used for working capital[120] - Net cash used in investing activities increased to $7.1 million due to higher purchases of property and equipment and capitalized software[123] - Net cash used in financing activities significantly increased to $66.7 million, primarily due to the repayment of the previously existing Priming and Subordinated Credit Agreements, partially offset by proceeds from the new Term Loan[124] Dividends - Future cash dividends are at the discretion of the board of directors, dependent on earnings, capital requirements, legal restrictions, financial condition, and debt agreement restrictions[125] - As a holding company, J.Jill's ability to pay dividends relies on cash received from its operating subsidiaries[125] Credit Facilities - As of July 29, 2023, there were no short-term borrowings outstanding under the ABL Facility[126] - The Company had $34.2 million in additional borrowing capacity and $5.8 million in outstanding letters of credit, which reduced availability[126] Contractual Obligations - The Company's contractual obligations primarily consist of debt obligations, interest payments, operating leases, and purchase orders for merchandise inventory, which impact its short-term and long-term liquidity and capital resource needs[127] Contingencies - J.Jill is subject to various legal proceedings in the ordinary course of business, but management does not believe their resolution would have a material adverse effect[128] - Reserves are established for probable and estimable losses Off-Balance Sheet Arrangements - The Company is not a party to any off-balance sheet arrangements[129] Critical Accounting Policies and Significant Estimates - Significant accounting estimates involve revenue recognition (gift card breakage, merchandise returns), inventory valuation, and impairment assessments for goodwill, other indefinite-lived intangible assets, and long-lived assets[130] - No significant changes to these policies or estimates have occurred since the 2022 Annual Report[131] Special Note Regarding Forward-Looking Statements - This Quarterly Report contains forward-looking statements that involve known and unknown risks, uncertainties, and other important factors that may cause actual results to differ materially[132] - Readers are cautioned not to place undue reliance on these statements, which reflect views only as of the report date, and the Company undertakes no obligation to update them[133][134] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states no material changes in market risk exposure during Q2 FY2023, referring to the 2022 Annual Report for details - No material changes in the Company's exposure to market risk occurred during the second quarter of Fiscal Year 2023[135] - Further details are available in the 2022 Annual Report[135] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of July 29, 2023, with no material changes in internal control over financial reporting during Q2 FY2023 - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of July 29, 2023[136] - There have been no material changes in the Company's internal control over financial reporting during the second quarter of Fiscal Year 2023[137] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 11 for legal proceedings, expecting no material adverse effects from current cases - Information regarding legal proceedings is provided in Note 11 to the condensed consolidated financial statements[139] - Management does not believe current legal proceedings will have a material adverse effect[139] Item 1A. Risk Factors This section reports no material changes to previously disclosed risk factors, acknowledging potential for new or currently immaterial risks - No material changes to the risk factors previously disclosed in the 2022 Annual Report have occurred[140] - However, additional risk factors not presently known or deemed immaterial may impair the business[140] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[141] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[142] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[143] Item 5. Other Information The company reported no other information to disclose under this item - None[144] Item 6. Exhibits This section lists the exhibits filed or furnished as part of this Quarterly Report, including corporate governance documents, certifications by executive officers, and Inline XBRL data files - Exhibits include the Certificate of Incorporation, Bylaws, and certifications from the Principal Executive Officer and Principal Financial Officer as required by the Securities Exchange Act of 1934 and Sarbanes-Oxley Act of 2002[147] - The report also includes Inline XBRL documents for the instance, taxonomy extension schema, calculation, definition, label, and presentation linkbase documents, along with the Cover Page Interactive Data File[150] SIGNATURES - The report was duly signed on August 31, 2023, by Claire Spofford, Chief Executive Officer, President and Director, and Mark Webb, Executive Vice President, Chief Financial and Operating Officer, on behalf of J.Jill, Inc[152][154]