Jo-Ann Stores Looking Threadbare

While it was somewhat refreshing to hear Jo-Ann Stores' (NYSE: JAS  ) management refuse to blame a disappointing quarter on hurricanes or higher gas prices, it did little to soften the blow of the losses recorded, or the bleak outlook for next year.

This fabric and crafts retailer swung to a $1.7 million operating loss for the quarter, compared to a $14.7 million profit during the year-ago period, as same-store sales increased 0.7% compared to a 0.9% decline last year. Year-to-date comps barely budged 0.3%, in contrast to the 2.7% jump last year.

With fewer customers in its stores, Jo-Ann inventories bloated, forcing the company to slash prices and offer coupons and other promotions to move product. It didn't seem to work. As a result, the company has around $35 million in excess inventory that it probably won't be rid of until next year. It was particularly telling that management noted it had to discount Halloween items 70% some 10 days before the holiday. That may have worked a little, since comps for October leapt 3.4%. They fell off again in the first two weeks of November, and management is concerned for the rest of the year.

Jo-Ann Stores began the year with an ambitious growth strategy. The company planned to open 100 new superstores and bulked up its inventory to meet anticipated demand. The entire crafts industry then hit a soft patch, with competitors Michaels Stores (NYSE: MIK  ) and A.C. Moore (Nasdaq: ACMR  ) also posting disappointing results. While those companies chose to lay much of the blame for their lackluster performance on fickle weather patterns, Jo-Ann Stores refused to take that route, instead admitting that its own decisions hurt performance.

Rather than the 100 new supercenters it intended to open, Jo-Ann has opened only 40 to date and will open even fewer next year, in an attempt to hold the line on costs. The footprint of the average store has increased 2.7% to 16 million square feet, and it will probably reach 16.2 million square feet by year's end. That still leaves a lot of corners to pile up the inventory, but it also portends lower gross margins; promotions will have to rule the day to clear out the stock.

Equally troubling, perhaps, has been the defection of senior management at the company. Jo-Ann Stores was already looking for a head merchandiser, a CFO, and a new general counsel, but along with the earnings report, the company announced that it will also be looking for a new top human resources person. The company isn't close to filling any of the positions anytime soon. Sagging sales, a fumbled operations plan, and defecting management is hardly the stuff to build investor confidence.

The company's shares have fallen by more than 50% over the past year. They're now barely above their 52-week lows. Despite a P/E of 8 and a price-to-sales ratio of just 0.19, this stock is not yet too cheap to buy. It has some serious problems, with no guarantee that it can work them out anytime soon. Investors would be wise to stick to their knitting and avoid this threadbare company for now.

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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.

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