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Supply Chain Woes and Delta Variant Virus Make Jo-Ann's Second Quarter Results Challenging

Jo-Ann, a leading U.S. craft retail chain, said Thursday that second-quarter net sales fell 29.8% year-over-year to $496.9 million, but were up 8.1% from 2019. Jo-Ann currently operates 853 Jo-Ann stores in 49 U.S. states.

Matt Susz, chief financial officer of Jo-Ann, told analysts that gross margin expanded 410 basis points year-over-year and grew 460 basis points over two years. Net income declined 96.5% to $5.2 million, but increased $173 million compared to 2019.

The new crown pneumonia outbreak proved to be a mixed blessing for Jo-Ann.

Jo-Ann benefited from people being stuck at home looking for things to do, and sales grew further as the outbreak began to subside and consumers returned to shopping in stores.

Jo-Ann CEO Wade Miquelon said last week that typically, second-quarter sales and earnings are the lowest they've been all year at Jo-Ann, usually accounting for only 10 percent or less of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).

"Last year, of course, was an exception as we experienced unprecedented sales growth due to peak levels of consumer spending on personal protective items and the temporary closure of one of our major competitors in all of our stores. As a result, our total comparable sales were up 54 percent in the second quarter of last year."

But Mikron also said the mutation of the new coronavirus did not repeat the "stay-at-home crafting" trend, but rather had a negative impact on the craft industry. "The delta variant virus is inhibiting growth by hundreds of basis points," he said.

As with other retailers, supply chain disruptions and freight costs are taking their toll on Jo-Ann, forcing it to develop an inventory strategy.

The supply chain is so disrupted it's unbelievable," Mikron said. I think that's definitely the main reason we're focusing our operations on the profit side rather than the sales side. The price cut promotion doesn't make much sense right now and will just expose us to more stock-outs in the second half of the year."

Still, he added, last year's craft boom won Jo-Ann new customers.

In addition, some of the company's new initiatives have the potential to offset the performance challenges it currently faces, at least to some extent.

Jo-Ann, for example, has expanded internationally through e-commerce and now ships to 29 countries.

Recent Jo-Ann store remodels have been impressive, exceeding the company's intended financial goals, and the promotional scores for these remodeled stores are "significantly better than our store averages," Mikron said.

Wells Fargo analyst Zachary Fadem said that, overall, Jo-Ann is able to weather the current tough times thanks to these initiatives.

"While we will not embellish our disappointment with Jo-Ann for this reason, we can still see the long-term value of Jo-Ann's stable and continuously improving product categories, company initiatives (digitalization, internationalization, uptake rates, etc.)".

Mikron said, "As a newly public company, Jo-Ann achieved a number of important milestones this quarter. We continue to accelerate gross and net profit growth on a two-year basis in our lowest fiscal year in our history.

We are well positioned for the upcoming peak fall and winter holiday season.

Despite many supply chain challenges, we remain on track to launch a broad and exciting range of fashion and seasonal products in time for the peak sales season, and we are achieving record levels of customer engagement and satisfaction.

In addition, our team members continue to deliver an outstanding customer experience, and I am proud of the work they do every day as uncertainty continues to grow due to the new crown pneumonia outbreak.

We look forward to continuing to delight our customers and delivering strong results through the year."

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