Logo of jester cap with thought bubble.

Image source: The Motley Fool.

J.Jill, Inc. (NYSE:JILL)
Q1 2019 Earnings Call
May 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Shelly, and I will be your conference operator today. At this time, I would like to welcome, everyone, to the J.Jill first-quarter 2019 conference call. On today's call are Linda Heasley, president and CEO of J.Jill Inc., and Mark Webb, executive vice president and CFO and joining us for Q&A portion of the call is Steve Sung, vice president of finance.

All lines have been placed on mute, to prevent any background noise [Operator instructions]. Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J.Jill's SEC filings.

The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. Finally, we may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in our press release issued today. If you do not have a copy of today's press release, you may obtain one by visiting the investor relations page of our website at jjill.com.

I will now turn the call over to Linda.

Linda Heasley -- President and Chief Executive Officer

Thank you, and good morning. We are disappointed with our performance for the first quarter and the resulting adjustment required to our Q2 and full-year outlook. While we experienced the same soft start to the year as many competitors due to an unseasonably cool and wet spring, we also had execution issues, which I will address in more detail. We remain confident in our long-term strategies and believe in the ability to drive consistent and profitable growth, but given our year-to-date performance, we are focused on improving our execution with urgency.

We have made significant additions to the team over the past 12 months, and together with the strong team we have in place have reviewed current performance. I have distilled our opportunities down to three key areas product, marketing and inventory management. First product, product is the most important thing we do and we continue to see opportunities to be more relevant, while giving her the newness she desires. At the same time, we must also remember her appreciation of the tried and true silhouettes and fabrics that engender loyalty with J.Jill.

This quarter we did not deliver. We lapsed color and novelty and missed key programs and layering pieces in tops that she expects from us. In response to our product challenges, we are working to rebalance the assortment for the back half of the year. We have some product initiatives including additional size ranges in stores, design collaboration and investments in subcategories that will offer incremental opportunities to delight our customer going forward.

The impact of product on Q1 is disappointing, but it is also correctable. In the short-term, we will continue to make adjustments where we can. Longer term we look forward to a more streamline development cycle and our new teams efforts will become more impact able as we build into next year. Next marketing, going into the quarter, we plan some shift from direct mail to alternative media options primarily digital.

In hindsight we moved too much too soon. We made adjustments quickly when we saw the results and we were able to add back some direct mail touch point along some changes in digital to better support our promotional activities. That restored traffic to planned levels albeit belatedly. The digital ads we ran drove a significant number of impression, which should boost brand awareness over the longer term.

We will continue to test and optimize the balance between the catalog and alternative media to maximize the effectiveness of our campaigns, our messaging and creative expression and overall efforts to attract customers to J.Jill. We have adjusted our plans for the remainder of the year to make a more measured approach to these changes. Inventory management, after the soft start to the year we did not move fast enough with aggressive actions to address the trend that persisted. Therefore inventory at the end of the quarter was well above planned.

As Mark will discuss, we are taking immediate actions to right size our inventory, which will subsequently pressure Q2 and full year as reflected in our updated guidance. I quickly want to reiterate what I said when I started a year ago. We have before us the opportunity to be more for our loyal customers than we have been to date, while also embracing more women new to the brand, to be truly inclusive. We're committed to our vision and defining what it means to be a business for remarkable women not defined by age, size, demographics or confined by artificial boundaries or expectations of others.

Over the past nine months our leadership team has been significantly strengthened and I am encouraged by the work that Brian Beitler, Shelley Liebsch, and Elliot Staples have already begun in the short term they have been with the company. We have a strong plan in place to focus on the brand and engage more deeply with our customer, while felicitating a more cohesive and seamless shopping experience that better integrates all touch strength and experiences, while delivering high quality relevant product for her. As I had noted previously Shelley and Elliot's impact in the assortment won't be felt until the early part of next year. Brian's efforts to evolve the brand and build awareness are well under way, but they too will require time to deliver expected results.

Today you will hear from Mark Webb, our new chief financial officer and latest add to the executive team. His contributions are eagerly anticipated. In summary, the disappointing slower start to the year and the associated revised guidance notwithstanding we have great opportunity. We continue to focus on harnessing the strength of the brand building a more integrated, seamless and frictionless shopping experience for our customers.

We're closely examining processes and work flows across the organization to improve overall efficiency. This includes work being done by our merchandizing and design teams to shorten our development cycle, while optimizing our design strategies to deliver the relevant and trend right product our customer wants and deserves. In the end it is largely about product and the experience we deliver to her across all touch points. J.Jill is a remarkable brand, serving our remarkable adjustable audience.

I'm confident in our opportunities now and in the future. We have and continue to gather amazing assets to realize the required changes and reinforce our foundations on which we can continue to build and grow. We have plenty of work to do and 2019 continues to be an important year as we lay the groundwork for the long-term profitable growth of J.Jill. As part of that foundation, I am pleased to introduce Mark Webb, our new executive vice president and chief financial officer.

Mark comes to J.Jill with extensive experience in the industry with Gap and more recently, Hudson Bay. I will now turn it over to him to review our results and outlook in more detail. Mark?

Mark Webb -- Executive Vice President and Chief Financial Officer

Thank you, Linda and good morning, everyone. First, on a personal note, I am very excited to join the J.Jill team. Over the last few weeks, I've been getting to know the business. I'm impressed with the underlying core financial strength of the company and excited by the opportunity to continue growing this great brand.

That said it's clearly been a disappointing start to the year, while I would have liked to be sharing better results, I can assure you that the issues we are facing are in my experience very fixable, and the teams are taking the right actions to correct them. Before I share our outlook for the second quarter and the year, I will go through first-quarter financial results in detail. For the quarter, total net sales were $176.5 million, a decline of 2.8% versus last year's $181.5 million. Total company comparable sales decreased 3.3%, driven by our retail store channel.

Total direct sales increased as a percent of total sales by 140 basis points to just under 42% in the quarter. Gross profit was $116.3 million versus $120.3 million last year and gross margin was 65.9% compared to last year's 66.3%. The rate reduction was driven primarily by elevated promotions in response to software sales throughout the quarter. SG&A expenses were $105.4 million versus $100.3 million last year.

The first quarter of fiscal 2018 included one-time expenses of $1.6 million related to the CEO transition last year. As a percentage of total net sales, SG&A expense excluding these nonrecurring and one-time expenses was 59.8% versus 54.4% for the first quarter of 2018. As we stated on our last earnings call, expense associated with the planning and design of our technology initiative was expected to be $5 million to $6 million incurred primarily in the first half of the year. These expenses are on plan to-date and a primary driver of the increase in Q1 SG&A as percentage of sales.

Along with incremental marketing investments made to drive traffic and support the elevated promotional activity mentioned earlier. GAAP operating income was $10.8 million, or 6.1% of sales versus $20 million or 11% of sales last year. Adjusted EBITDA for the quarter was $21.5 million, compared to $31.5 million last year. As a percentage of sales adjusted EBITDA was 12.2% versus 17.4% last year.

A reconciliation of EBITDA to net income is included in our press release. Interest expense for the quarter was $5.0 million versus $4.8 million last year. Tax expense for the quarter was $1.4 million versus $4 million, and the effective tax rate was 24.8%, compared to 26.1% in the first quarter of 2018. GAAP net income for the period was $4.4 million or $0.10 per diluted share and includes $0.06 of investment related to the technology initiative.

This compares to $11.3 million or $0.26 per diluted share last year. Excluding the one-time expenses related to the CEO transition. Adjusted diluted earnings per share for fiscal 2018 was $0.29. Turning to the balance sheet, we ended the quarter with $14.3 million in cash.

Our inventory at the end of the quarter was $85.4 million, compared to $77.5 million at the end of the first quarter in 2018. During the quarter, we closed one and opened two stores bringing store count to 283 stores at quarter end. Finally, capital expenditures were $4.1 billion. Turning now to our outlook for second quarter and the rest of the year, as a result of first-quarter performance, we entered Q2 with inventory levels well above plan.

We must address the root cause of these issues and Linda talked about actions being taken there. Our goal in the second quarter as reflected in our guidance is to take necessary actions now to immediately address this inventory, while balancing the impact on the brand and preserving the customer experience in our stores and on our site. Going forward, we are improving the discipline around fine and the in seasoned management of inventory, and also reviewing the pace of any plans changed to assortment strategies to ensure successful balanced execution. And finally, we are undertaking a deep review of our overall cost structure to bring more flexibility to the P&L.

As a result of these actions, we expect the following for the second quarter. Total comparable sales to decrease between 1 to 3 percentage points, total net sales will be between negative 1% and positive 1%, gross margin will decrease about 750 basis points year over year. Interest expense for the quarter will be approximately flat to last year. Net loss per share is expected to be $0.08 to $0.10, including approximately $0.03 due to our technology investment.

This compares to $0.23 in the second quarter of fiscal 2018. And lastly, we expect to open four stores and to close two, ending the quarter with 285 stores. Turning now to our outlook for the full year, given the revised outlook for first half of the year, we are moderating our view of the second half of the year as well, with the goal to see stabilization in third quarter and measured improvement by the fourth quarter. For the full year we expect total comparable sales to decrease 2% to 4%.

We expect total net sales to be flat to down 2%. We expect gross margin to decrease about 300 basis points year over year. Interest expense will increase approximately $1 million relative to fiscal 2018. The tax rate for the year is expected to be about 27%.

Diluted earnings per share is expected to be in the range of $0.17 to $0.21, which includes a decrease of $0.09 to $0.10 due to the technology investments. This compares to diluted earnings per share of $0.69 in fiscal 2018. Full-year EPS guidance does not include the impact of any additional tariffs, as the situation is still fluid and exact impact unclear. Last year, we began taking steps to lower exposure to China manufacturing, which reduces but doesn't eliminate any impact from the latest round of potential tariffs.

In light of our performance and revised view of 2019, we are reviewing our capital plans for the year focusing on capital maintenance and committed store investments. We have learned a lot in the planning and design phase of our technology initiative and are now pausing to determine the best most efficient path forward. That concludes my prepared remarks. I will now turn the call back to the operator for questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from minus Paul Trussell from Deutsche Bank. Your line is now open.

Paul Trussell -- Deutsche Bank -- Analyst

Good morning. Inventory levels are a bit surprising heading into the second quarter, after being down year over year, the past few periods. Just help me understand how to think about what happened here in 1Q, certainly sales were a bit light. But it certainly seems like the spread, there was some disconnect there maybe on the execution front.

And then just help us understand how to think about the gross margin cadence going forward and how you plan on moving through the product in the stores and getting to cleaner levels. And when we should think about the ability to have more stable margins going forward?

Linda Heasley -- President and Chief Executive Officer

Hi, Paul. I'll start and I'll pass it over to Mark. Relative to the inventory levels year over year, we -- as you recall, we have worked very hard last year to bring inventory levels in line. We have faced similar not to the degree that we are in now situation whereby we were over inventory relative to the sales planned.

This year, we implemented a number of procedures to keep on top of that. And with the missteps we had this quarter in the first quarter in each of the months of the deliveries, we got -- it got ahead of us, which required us to do promotional activities to try to bring that more in line and that was not sufficient. I mean, the customer voted against the product line, in addition to the very cool, unseasonably cool spring weather that we had. So it was a combination of the product not being right, as well as having a more aggressive sales plan, and under selling to that.

And we are taking action now as well to bring those back in line. And we have opportunities in an execution basis and in season reaction to when we see a trend that is not -- that we need to respond to more quickly. That's the sense of urgency and improved execution, that as a team, we must follow and adopt. Mark?

Mark Webb -- Executive Vice President and Chief Financial Officer

Hi, Paul. I would just add to what Linda said, and you alluded to it with respect to the actions we're taking go forward in season. I think during Q1 when the trend started soft, fashions just weren't taken quickly enough to get in front of that move of inventory. So I think the Q1 performance, and the way that we ended with inventory is a reflection on how we've guided to Q2.

It's what we've taken now as an approach that we will act on the inventory. We will dispose of it through a combination through the stores, but also other means in order to protect the customer experience through Q2. But our intent is to start the back half of the year clean. And as it relates to the gross margin, we guided to the hit that that represents in Q2, and implied in the full year guidance, both on the gross margin line as well as our guidance on EPS.

I think you can see that we're still taking conservative approach to gross margin in the back half of the year, related to really two things, the first being that it's likely going to be a promotional environment out there and we need to be reflective of that. And then, we are still in transition period between the teams and while anybody here believes -- that has an opinion that matters on it, believes that the product is better in the back half of the year, we still are making tweaks and we're still in that transition period from team-to-team. So combination of those factors relates to our approach to gross margin for the back half, and really leaning on SG&A a little bit more in our guidance as a more controllable metric for us.

Paul Trussell -- Deutsche Bank -- Analyst

Thank you. And then maybe just touch on the e-commerce business. We've had a lot of investments in technology and the website in the app. Just maybe give us an update on where we are from a platform standpoint? And should we see going forward a more steady drumbeat of growth in that channel?

Linda Heasley -- President and Chief Executive Officer

Yes, we should. Actually, e-commerce is one of the brighter spots this quarter. The investments we made last year and fixing the problems we had with the platform from the year before have paid off. We've also invested heavily in the messaging and the overall site creative to make it more shoppable for her, but also amp up the imagery to make it more relevant to her and be more inclusive.

And she has responded very well to that. The investment we have placed in social and digital marketing has also paid off. We are seeing a new to brand customer that's coming to the site slightly younger, not a significant degree younger. But she tends to be much more engage in the content that we deliver to her, as well as in some of the more fashion-forward items that we have on the site that we've been testing before we put into retail.

So again, I would tell you that e-commerce was one of the brighter spots of the quarter. And there's -- we expect even more growth from it go forward. And we're continuing to invest in it as we speak.

Paul Trussell -- Deutsche Bank -- Analyst

Thank you. Best of luck.

Linda Heasley -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Lorraine Hutchinson from Bank of America. Your line is now open.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning. Just wanted to follow up on the back half inventory. Is the inventory at the levels that you want it to be at this point? And looking at your current sales pace, do you feel comfortable that you'll be able to start to improve the gross margin in the back half?

Mark Webb -- Executive Vice President and Chief Financial Officer

I think, Lorraine, what -- as the modeling -- as we work out the modeling the back half and the full -- the Q2 guidance coupled with the first half gross-margin performance, along with our full-year guidance should show that we're still taking a bit of a conservative approach to gross margin in the back half. Inventories after the actions that we take in Q2 should largely be in line with where we want them to be. The caution, if you will on the margin is related to the two things I just mentioned, the macro environment that just out there, the promotional environment that we need to be cognize enough and respectful and we need to make sure we're not too optimistic on the promotional cadence. And then the second is that we are in -- still in that transition period, where we have new teams, we have some new elements going into the product as Linda had described, and we are still tweaking along the way to fix and address some of the issues that we diagnosed in Q1.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Your next question comes from the line of Oliver Chen from Cowen and Company. Your line is now open.

Ross Collins -- Cowen and Company -- Analyst

Good morning. This is Ross Collins on for Oliver. Thanks for taking our question. Just want to ask a question on the marketing side, the prepared remarks you mentioned that too much too soon in the first quarter, I guess, could you just speak to or clarify I guess a little bit more to what that means? And then secondly, just looking ahead how you scale that back in a measured way that still maintains the connection with your customer.

And then secondly, off of that just does rightsizing the strategy require any incremental investment versus what you've previously communicated on the SG&A line? Thanks.

Linda Heasley -- President and Chief Executive Officer

Thank you for your question. Relative to the market mix we have been trying to right size the role of the catalog in the overall marketing media spend, it's a significant investment for us. And in doing that we've been looking at the bottom of the file relative to the response rate in the catalog addressing drop two relative to the number of pages that we distribute mixing in drop two, messaging to underscore new alternating options, etc. And doing all of that work as we shifted those dollars into social and digital we probably moved a little too much from print into social and digital, although social and digital do seem to be paying off in a very good way.

It's again better appreciating what the rollover catalog does for our customer as she is highly engage and while you might not redeem the coupon on the front of the catalog cover. She is using the catalog for inspiration and that's what we mean by, we moved a little too much too fast and we're looking at remixing that spend to the back part of the year and we've invested more into print touch points for the customer. Relative to right sizing the investment for SG&A, I think that's all being addressed within the guidance that we're providing.

Ross Collins -- Cowen and Company -- Analyst

Great, thank you.

Linda Heasley -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Marni Shapiro from Retail Tracker. Your line is now open.

Marni Shapiro -- The Retail Tracker -- Analyst

Hey, guys. Welcome, Mark, so nice to hear your voice.

Mark Webb -- Executive Vice President and Chief Financial Officer

Thank you.

Marni Shapiro -- The Retail Tracker -- Analyst

So, I guess, Linda, if you could just talk a little bit you mentioned about color and novelty, if you could point to maybe one or two examples color wise in the store that you felt didn't resonate with the customer where you were lacking color? And then, I guess, more importantly going forward how do you and the team thing about that balance, so that a year from now Mark just not talking about a hit to the gross margin because you swung the pendulum too far to the novelty side.

Linda Heasley -- President and Chief Executive Officer

Very good point it's defiantly a boundary book end of that. Relative to color, our February pilot was blue dominant and the vessel fire, which occurred where we were expecting to have additional color choices come in mainly in yellows, tons of yellows didn't happen. So the floor went very blue, March was based on a black and khaki to the pilot. And then on April it became brown and white for the most part.

Our customer loves color and in all of the focus groups we have with her, she expects to see a representation of what we think is trend right, but she also expect to see levels of blue, levels of pinks that's where we failed on the color side, it was way to narrow and tight and did not appeal to her broadly, she appreciated being told that this was black and khaki was important, but she expected options as well. With respect to novelty, for us novelty means embroidery, it's print, it's pattern, it's texture and the floor red berry flat being largely in that base and that's where we missed. In February our top to bottom ratios were too low. So go forward we have added significantly to the color palette particularly going -- the back part of May going into June, July, as well as August and we're seeing nice uptick in sales and appreciation for the product, particularly, as we're moving into this quarter.

So I think that's a lot of what we are addressing right now relative to the go forward with the new team we put in place. We're looking at a seasonal color palette, not a color palette that is dependent on every month drop, which is how color was addressed in the past. The seasonal palette takes into consideration the carryover product that goes from one month into the next. And it's a much more balanced approach and I'm very excited by what I see going into the back part of this year, building into the beginning part of next year relative to what the new team has been able to impact and put into place.

Marni Shapiro -- The Retail Tracker -- Analyst

Yes, the seasonal sounds like the right move. And I'm just curious if I walked into the store today, the pop of orange, which works back to the other elements in that group or the tassels on some the shirts, which I think are beautiful, is that the kind of novelty and the kind of color that we should look to expect it's not going to be a significant shift in the store, more just popped in within the groups that exist?

Linda Heasley -- President and Chief Executive Officer

Exactly.

Marni Shapiro -- The Retail Tracker -- Analyst

OK.

Linda Heasley -- President and Chief Executive Officer

It's exactly what we're talking about. That's what she looks for. We can't ground it all in a neutral basis, she is looking for that pop of color, she is looking for those tassels, we have to be careful with that, because she doesn't want it to be too fussy, but she really appreciate those details. So thank you for noticing.

Marni Shapiro -- The Retail Tracker -- Analyst

That stuff looks great and I see it sells out immediately once it comes in store. Well, best of luck with this, and we'll talk to you offline with the rest. Thank you.

Linda Heasley -- President and Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question comes from the line of Kimberly Greenberger. Sorry, your next question comes from line of Ike Boruchow from Wells Fargo. Your line is open.

Lauren Frasch -- Wells Fargo Securities -- Analyst

Good morning, this is Lauren Frasch on for Ike. I have got another cost question for you. Given your tech investments this year, other than marketing, how are you thinking about opportunities within your expense structure to pull back on other costs? Thank you.

Mark Webb -- Executive Vice President and Chief Financial Officer

Yes, I think we -- look we're going to take a deep dive into the overall cost structure and not ready to talk about specifics about what that would be because honestly we're in the early stages of just taking a review through. But we think there's opportunity to streamline the spends and honestly just invest maybe a bit smarter in certain areas and reinvest in others. I mentioned that we are with respect to the technology initiative, we've completed the initial -- just in the final stages of completing the initial design and planning phases and are now pausing to digest what we've learned through that process, we've learned a lot of very good things. And then taking a look at how best and most sufficiently to invest in the most pressing and desired capabilities next, right.

So that encompasses the IT and the capital spend, as well as the SG&A structure that we mentioned.

Lauren Frasch -- Wells Fargo Securities -- Analyst

Great, that's very helpful. Thank you.

Mark Webb -- Executive Vice President and Chief Financial Officer

Sure.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Linda Heasley -- President and Chief Executive Officer

Mark Webb -- Executive Vice President and Chief Financial Officer

Paul Trussell -- Deutsche Bank -- Analyst

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Ross Collins -- Cowen and Company -- Analyst

Marni Shapiro -- The Retail Tracker -- Analyst

Lauren Frasch -- Wells Fargo Securities -- Analyst

More JILL analysis

All earnings call transcripts