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Joann (JOAN)
Q1 2024 Earnings Call
Jun 05, 2023, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the JOANN's first quarter fiscal 2024 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jason Wood, vice president, strategy and corporate responsibility. Please go ahead.

Jason Wood -- Vice President, Strategy and Corporate Responsibility

Thank you and good afternoon. I'd like to remind everyone that the comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today, and the company undertakes no obligation to update or revise any forward-looking statements to reflect subsequent events, new information, or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release and the recent filings with the SEC.

During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed today with the SEC and posted to our investor relations section of JOANN's website at investors.joann.com. On the call today from JOANN are the co-leaders of the interim office of the CEO, Chris DiTullio, executive vice president and chief customer officer; and Scott Sekella, executive vice president and chief financial officer. During the question-and-answer portion of the call, we will also be joined by Rob Will, executive vice president and chief merchant for JOANN.

I will now turn the call over to Chris for his prepared comments.

Chris DiTullio -- Executive Vice President, Chief Customer Officer

Thank you, Jason. Good afternoon, and welcome to JOANN's first quarter fiscal 2024 earnings call. I want to start today by acknowledging the recent retirement of Wade Miquelon as JOANN's president and chief executive officer. Wade spent seven years at JOANN, serving as CFO before becoming president and chief executive officer in 2019.

During his time as CEO, Wade helped JOANN navigate periods of growth and challenge, including our initial public offering and our response to the COVID-19 pandemic. On behalf of JOANN, I would like to thank Wade for his leadership during his time here and wish him the best as he moves on to his next chapter. Our board of directors has commenced a search to find a permanent replacement, and that effort is well underway. While that search is ongoing, Scott Sekella, our chief financial officer, and I have been appointed to lead the interim office of the chief executive officer.

In our role leading this office, we remain focused on delivering value for our shareholders. To do this, our focus in fiscal year 2024 is to deliver significant cash flow improvement and strengthen our top line by emphasizing the fundamentals that have made JOANN the nation's category leader in fabric and sewing and a strong competitor in the arts and crafts space. This approach represents a back-to-basics mindset in which we are strengthening our focus on winning in our core sewing and crafting categories, delivering a high-quality in-store and online experience, with emphasis on driving operational excellence and efficiency. To support this approach, we are leaning in on delivering innovative assortments, with a strategic mix of owned, national, and partner brands.

A significant piece of this strategy is a continued investment in our owned brands. By building our portfolio of owned brands, we can customize our product assortment using a customer-first lens, improve margins through direct sourcing and value engineering, all while exercising greater control over product quality and supply chain efficiency. Our investment over the past few years in owned brands such as Place & Time, Big Twist, Top Notch, and POP! is already delivering value. Owned brand sales, which represent nearly half of our total, outperformed the total company sales in the first quarter by nearly 500 basis points, with gross margin impact between 400 basis points to 600 basis points higher than the balance of our products.

Owned brand penetration also increased 2% in the first quarter, and we expect this trend to build in the back half of fiscal year 2024. As we move forward, we believe our continued investment in owned brands, combined with strategic national brand partnerships, will enhance our innovative assortment of products and strengthen our position in both our core sewing and craft categories. As we look next at how we provide a differentiated in-store experience, we are focused on developing creative approaches to drive in-store productivity. This involves a holistic look at our stores to identify opportunities where a new or relocated location makes sense or where a store refresh can help improve brand and customer experience, including better utilizing space for our core sewing and craft categories.

That said, we recognize that physical space is only one part of a great in-store experience. As a result, we continue to look for ways to make it easier for our team members to deliver great service and truly be friendly clever allies to everyone who shops in our stores. This includes looking at ways to optimize our store labor hours to the key selling periods, delivering training support, and simplifying the execution of our visual merchandising tactics so that our team members are ready and available to engage with our customers and drive sales. Recognizing that the way people shop our assortments also continues to evolve, our broader strategic priorities in fiscal 2024 also include working to make the JOANN brand ubiquitous through seamless and engaging digital touchpoints and compelling omnichannel offerings.

We are committed to reducing friction across all customer touchpoints, which includes working to optimize customer fulfillment by leveraging our network of stores and distribution centers more efficiently to maximize our e-commerce fill rates and accelerate delivery time to customer. Additionally, our customer continues to love our buy online and pick up in store or curbside options as we enable the shop-your-way service model. Our customer is responding, as evidenced by increasing engagement and shopping through our mobile app, which has over 15 million downloads and provides a fully omnichannel experience. Underlying this strategic focus is our continued effort to operate as effectively and efficiently as possible.

This starts with our Focus, Simplify, and Grow initiative. Launched in the back half of fiscal year 2023, this initiative is a critical tool as we look to reduce costs and drive cash flow improvements. When combined with other ongoing operational efficiency efforts such as our continued emphasis on and utilization of a data-driven decision-making infrastructure, Focus, Simplify, and Grow is an important driver of our ability to build for the future by reinvesting in our core strengths and growth strategies. Our Focus, Simplify, and Grow initiative targets, as a reminder, approximately $200 million of annualized cost savings in three general buckets, including approximately 100 million in supply chain costs, 60 million in our cost of goods sold, and another 40 million in SG&A costs.

Initially, we had planned for the identification of these cost savings to be completed by early fiscal year 2025. While Scott will speak to the specifics in greater detail, we have begun capturing significant supply chain cost savings through decreased domestic and international freight and, through our vendor negotiations, have clawed back some inflationary increases in our cost of goods, with more to come. Additionally, our investment in owned brands continues to help reduce product costs as well. Through this work and our ongoing efforts to reduce SG&A expenses, we now have full line of sight to the 200 million total and are leaving no stone unturned as we look for further cost reductions.

As anticipated, these cost savings have supported significant improvement of $89 million in year-over-year free cash flow improvement in the first quarter of fiscal 2024 and will help move our adjusted EBITDA back toward historical levels in fiscal year 2025. We believe that by delivering on these foundational strategic priorities, creating a differentiated in-store experience, making the JOANN brand ubiquitous across customer channels, and continuing to drive operational efficiency and effectiveness, JOANN will be well positioned to create value in the near term and reinvest in the things that will drive long-term growth. Before getting into more detail about our first quarter performance, I do want to take a moment to recognize our team members. I could not be prouder of the dedicated professionals who work across all aspects of our company.

The team members in our stores, distribution centers, omni fulfillment center, and across our corporate offices truly are our greatest asset. As we move forward through fiscal year 2024, implementing our strategic priorities will require our more than 20,000 team members to display the passion, commitment, and flexibility they are known for as we work to inspire creativity in our customers and ourselves and help everyone find their happy place with JOANN. With this approach as the foundation, I will now provide some highlights from our first quarter fiscal year 2024 performance. For the first quarter, we delivered net sales of 478.1 million, a decline of 4% compared to the same period last year.

Gross margin on a GAAP basis was 52.1%, an increase of 380 basis points compared to the first quarter of fiscal 2023. Top-line sales started strong in the quarter in February and early March. However, like many other retailers, we saw a decrease as we moved into and through April. This deceleration coincided with a decline in consumer confidence, driven by continuing inflationary pressures, rising interest rates, and the accompanying concerns over a potential recession.

We will obviously continue to monitor consumer sentiment and the pressure it is putting on the discretionary portion of the economy, and we will strategically adjust as necessary. That said, we remain optimistic we will be able to deliver on our full year outlook, which Scott will walk through in a few minutes, due to healthy customer engagement in our core sewing and craft categories and our strategic focus on baseline cost reductions. Our merchandise category performance across the quarter was mixed. On the positive side, our core sewing and craft businesses performed well during the first quarter.

We are seeing strength in our textiles-related sewing and craft businesses, along with the supplies that support those activities. This is critically important as it illustrates the effectiveness of our strategic focus on winning in our core categories and demonstrates that our core customer is also reengaged in the space. It was also supported by the launch of Ditto in the first quarter. Ditto, to remind everyone, is our 50-50 joint venture with SINGER, Viking, and PFAFF.

This innovative product, which brings the pattern of business into the digital age, is in its early stages of rollout at both JOANN and SINGER Viking gallery locations and is gaining attention with sewing enthusiasts across the country. On the merchandise headwind side, we do continue to see craft technology as our primary challenge to positive comparable sales. While our data indicates we are outperforming the industry, sales pressure from craft technology was significant in the quarter, accounting for a decline in comparable sales of 150 basis points. We expect this headwind to continue as we move deeper into fiscal year 2024.

Additionally, we have also made strategic pullbacks in higher-risk seasonal categories. And while currently a headwind to the top line, it's supporting higher overall gross margin and company profitability. We also continue to see strength in our e-commerce business. In terms of performance in the first quarter, our year-over-year change in e-commerce sales outpaced store walk-in sales and the company overall, declining at a more moderate rate of 1% compared to last year.

Overall, e-commerce sales accounted for 11.8% of revenue in the first quarter, a 30-basis-point increase in the penetration rate over the same period last year. Much like the overall business, we saw positive sales growth in our core sewing and craft categories across the quarter. While craft technology, a business that is highly penetrated online, was our primary headwind, accounting for 390-basis-point decline in comparable e-commerce sales. With all of this in mind, we recognize there is work to be done.

While we can't control macroeconomic uncertainty, we will remain focused on driving value for our shareholders. We're executing on the strategic priorities I've outlined today, including the execution of our Focus, Simplify, and Grow initiative, along with our first quarter performance, gives us clear line of sight to not only delivering significant full year-over-year cash flow improvement, but also to hitting our fiscal year 2024 outlook. With the great capabilities, commitment, and passion of our team members, I'm confident we can build on our first quarter results and position JOANN for long-term success moving forward. With that, I will turn it over to our CFO, Scott Sekella, to give a more detailed rundown of our first quarter financial results and a forward look at fiscal 2024 before we wrap up with answering your questions.

Scott Sekella -- Executive Vice President, Chief Financial Officer

Thank you, Chris. As Chris discussed in his remarks, our strategic priorities in fiscal year 2024 remain centered on winning in our core sewing and craft categories, providing a great customer experience in our stores and online, and continuing to find new ways to operate as efficiently as possible. By emphasizing these fundamentals, which helped make JOANN the nation's category leader in sewing, we believe that over the course of fiscal 2024, we will be able to meaningfully improve cash flow, strengthen our top line, and begin expanding adjusted EBITDA toward more historical levels. With that in mind, today, I'll provide a deeper recap of our first quarter results and provide details about our full year outlook for fiscal 2024.

In the first quarter, net sales totaled 478.1 million, a decline of 4% compared to last year, with total comparable sales also decreasing by 4%. Through the quarter, sales were strong in February and March, but decelerated in April. While this coincided with declining consumer confidence, we remain optimistic about our fiscal 2024 sales outlook due to healthy customer engagement in our core sewing and crafting businesses, our increased emphasis on our strategic priorities, which Chris discussed, and the ability to optimize our promotional cadence to meet customer demand in the face of an uncertain macroeconomic environment. On a GAAP basis, our gross profit in the first quarter was $249 million, an increase of 3.4% from the first quarter of last year.

This year-over-year increase was driven largely by continuing improvement in import freight costs, which had a 500-basis-point positive impact on our gross margin. We recognized 3.9 million of excess import freight costs during the first quarter. This figure reflects a $25 million decrease to the same period last year as we continue to benefit from the improving conditions in the spot market. On a cash basis, in Q1, we realized 21.7 million of cash benefit from lower ocean freight rates.

This was one of the drivers of our $89 million year-over-year free cash flow improvement in the quarter. On a year-over-year basis, for the full fiscal year 2024, we anticipate excess import freight costs, which are treated as an add-back for non-GAAP measures, to be approximately $90 million less than last year and fully cycle out by the end of the second quarter. Our gross margin on a GAAP basis was 52.1% in the first quarter, an increase of 380 basis points from the first quarter of last year. This continued the trend of sequential improvement in our year-over-year GAAP basis gross margin comparisons.

As described a moment ago, we continue to benefit from cycling the extremely high ocean freight costs that we faced last year. The year-over-year 380-basis-point improvement was driven by the 500-basis-point increase from continuing improvement in ocean freight costs and a 40-basis-point increase from improved clearance activity. These increases were partially offset by a 100-basis-point decline in our merchandising margin; a 40-basis-point decline due to the timing and cycling of capitalized domestic freight costs, partially offset by improved carrier rates; and a 20 basis points of higher shrink, primarily in our stores, which has sequentially improved from the previous quarter. To provide additional color on our first quarter merchandising margin, the decline of 100 basis points compared to the same period last year can be attributed to the continued lapping of some of the inflationary cost increases we experienced during the prior year.

Our average unit costs were up 5.1% compared to the prior-year period. We do expect our average unit cost comparisons to sequentially improve throughout the course of the year as we cycle these inflationary increases and begin to reap the benefits of the reduction in cost of goods sold negotiated with our vendors as part of the Focus, Simplify, and Grow initiative. Average unit retail increased 2.7% relative to the same period last year. Turning to expenses.

Our first quarter fiscal 2024 SG&A expenses increased by 1.5% from the first quarter of last year. This increase was driven by incremental costs related to incentive and stock-based compensation, as well as inflationary pressures on labor, particularly at our store locations, and other costs. With that being said, we were pleased with our ability to manage SG&A expenses despite these pressures through actions such as the strategic management of labor hours in our stores and our continued optimization of advertising spend as we shift to more digital channels, as well as lower medical benefit costs. We continue to assess for opportunities to optimize our SG&A expenses as part of our Focus, Simplify, And Grow cost reduction initiative, and I will give more color on that shortly.

Our net loss in the first quarter was 54.2 million, compared to a net loss of 35.1 million in the same period last year. Adjusted EBITDA in the first quarter was 3.5 million, compared to 18.6 million in the first quarter of last year. Moving on to our balance sheet. Our cash and cash equivalents were 19.7 million at the end of the first quarter.

As of April 29, 2023, we had 61.3 million of availability on our revolving credit facility, which is tied to a lower borrowing base due to our inventory optimization efforts, including cycling higher excess import freight costs and our actions to strategically lower inventory receipts. Our face value of debt net of cash at the end of the fourth quarter was 1.033 billion. This reflects an increase of 109.4 million from the same period last year and a leverage ratio of 4.8x as measured by net debt and finance lease obligations relative to credit facility adjusted EBITDA on a trailing 12-month basis. Our inventory at the end of the first quarter was down 13% compared to the same period last year.

This decline was driven by a 32.3 million year-over-year reduction in capitalized excess import freight costs, as well as our plan to strategically lower inventory receipts. This approach allowed us to de-risk in the right areas, primarily our seasonal categories so that we could lean in on receipts to support our emphasis on winning in our core sewing and crafting businesses. Fueled, in part, by this strategic inventory receipt reduction, we continue to maintain a low clearance inventory of less than 5% of total. Our inventory position remains clean, leaving us well-positioned to capitalize on the evolving consumer demand environment as we leverage test, read, and react capabilities.

In conjunction with all this work, we remain laser-focused on meaningful cash improvement in fiscal year 2024. We have initiated multiple actions to support this focus, and these efforts have supported a significant $89 million year-over-year improvement in our first quarter free cash flow. This includes our Focus, Simplify, and Grow cost reduction initiative, which, as Chris mentioned, targets 200 million of annual cost reductions in three broad categories across all areas of our business, including approximately 100 million of supply chain costs, approximately 60 million of product costs, and another approximately 40 million of SG&A. Since launching this effort late in fiscal year 2023, we have worked diligently to identify cost reductions in all three buckets.

We can safely say that we have identified the full targeted 200 million of annual cost reductions, and we are now focusing on implementing and executing these initiatives. This implementation includes taking proactive steps to solidify and, if possible, build on the significant positive impact of reduced ocean freight costs. We are finalizing new agreements with our ocean freight vendors that include favorable contract rates, putting us in a strong position to continue to benefit from these savings and potentially overdeliver our $100 million supply chain cost target. Additionally, we continue to identify product cost savings.

Many of our RFPs are still in process, but we are confident about our ability to claw back the inflationary increases we saw last year. In terms of SG&A, we are identifying ways to more efficiently deploy our resources to support value creation and drive top-line activity. This includes optimizing store labor through four-wall work simplifications, optimizing our labor mix, and reducing administrative hours, as well as driving greater efficiency in our information technology spend. As we take this approach, we are staying grounded in our strategic priority of delivering a differentiated in-store experience by looking at identifying efficiency gains that not only lower costs but make it easier for our in-store team members to deliver the quality service our customers expect.

While we have already identified the targeted $200 million of annual cost reductions and are now implementing these initiatives, as Chris said, we are leaving no stone unturned as we look for additional potential savings. These identified cost reductions, the significant first quarter year-over-year improvement in free cash flow, and the operational results we saw in the first quarter, we believe we have a clear line of sight to delivering on our full fiscal year 2024 outlook. In terms of our top-line performance, we anticipate that net sales relative to fiscal year 2023 will be down between 1% and 4%. This range is inclusive of a 53rd fiscal week in fiscal year 2024, which is worth approximately 2%.

We believe the healthy customer engagement we are seeing in our core sewing and craft categories will aid in providing a buffer to our top line in light of the challenging and uncertain macroeconomic environment our customers continue to face. As we previously mentioned, driving meaningful cash improvement is one of our key focuses for fiscal year 2024. In the first quarter, we delivered a significant year-over-year improvement in free cash flow, and we anticipate additional improvement as we move through the full fiscal year. We are projecting that over the full fiscal year 2024, we will see a year-over-year improvement in free cash flow between 150 million and 170 million.

The significant drivers of this forecasted improvement include the continued implementation of our Focus, Simplify, and Grow cost reduction initiative, as well as working capital and capital expenditure optimization actions. For fiscal year 2024, we are projecting capital expenditures net of landlord contributions between 40 million and 45 million. While the cash benefit of Focus, Simplify, and Grow initiative will be felt heavily in fiscal year 2024, the mostly annualized P&L benefit will not be realized until fiscal year 2025 due to the time it takes for inventory and related costs to cycle through our balance sheet. With that being said, we do anticipate adjusted EBITDA between 85 million and 95 million.

Note that fiscal 2024 includes a headwind from reinstituting our incentive compensation program, which is partially offset by the benefit of the 53rd fiscal week. In conclusion, we remain focused on delivering value for our shareholders. As we move through fiscal year 2024, we are focused on delivering significant cash flow improvements and strengthening our top line by emphasizing the fundamentals that have made JOANN the nation's category leader in fabric and sewing, with one of the largest assortments of arts and crafts products. While still facing an uncertain macroeconomic environment, we are executing on a series of strategic priorities that will help us deliver that value.

Based on the factors we have discussed today, including the significant year-over-year improvement in our free cash flow, the continued implementation of our Focus, Simplify, and Grow cost reduction initiative, and our operational performance in the first quarter, we believe we have a clear line of sight to delivering on our full fiscal year 2024 outlook. With that, we'd be happy to take your questions. Operator.

Questions & Answers:


Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] [Audio gap] OK. I believe David's line is muted.

I still can't hear him. Can I move on to the next question?

Scott Sekella -- Executive Vice President, Chief Financial Officer

Yes, please.

Operator

OK. Our next question comes from John Heinbockel with Guggenheim. Please go ahead.

Rene Marin -- Guggenheim Partners -- Analyst

Good afternoon. This is Rene Marin on for Steve Forbes. I wanted to focus on the 2 million reactivated customers during 2022. Curious if you can discuss any incremental learnings from this cohort year to date.

What strategies are in place to keep this consumer engaged for the remainder of the year?

Chris DiTullio -- Executive Vice President, Chief Customer Officer

Hi. This is Chris. I can take that answer. We're seeing really good engagement across our known customer database, including those reactivated last year, but also those that have been year over year.

That -- our known customer database is the strongest portion of what -- of the response we're seeing right now. Transactions, sales, and customer accounts are up across the board within our various known customer database segments.

Rene Marin -- Guggenheim Partners -- Analyst

Great. And for my follow-up, I wanted to touch on the Ditto launch. Can you provide some additional color on the feedback you are getting from your dealer network and customers? We understand this is early in the stages, but perhaps you can discuss how this initiative is performing versus internal expectations. Are new customers engaging with Ditto as much as your core customer? Any additional color would be helpful.

Thank you.

Rob Will -- Executive Vice President, Chief Merchandising Officer

Hi. This is Rob. I want to be careful a little bit as this is a joint venture with SINGER, but I'm happy to report that in the early days, we've now launched Ditto in just over 300 of our JOANN stores, including 180 Viking galleries that are lease owned within our stores by SINGER. We have been very happy with the results so far.

On the customer engagement, we're seeing really great results, with downloads of individual patterns, as well as the subscription service, and we're averaging about 4.5 to 4.8 stars on our reviews of the Ditto across both sites. The dealer network is starting to pick up. We have about 100 dealers that have picked up Ditto as well. But again, this just launched in stores about a month and a half ago.

Rene Marin -- Guggenheim Partners -- Analyst

Great. Thank you.

Operator

Our next question comes from Peter Keith with Piper Sandler. Please go ahead.

Peter Keith -- Piper Sandler -- Analyst

Hey. Thanks. Good afternoon, everyone. Appreciate you guys putting out some context for guidance, so I was going to ask a question around that.

I guess, just thinking about the rest of the year, it looks like being sort of implied, same-store sales is kind of somewhat in line, maybe a little bit worse than Q1. But at least in our model, to get to the midpoint of the EBITDA guidance, you really need to start seeing that EBITDA margin run kind of even year on year, even up year on year. So, I was hoping you could just kind of shape that dynamic for us as the year progresses and help us understand the key drivers to the improvement. I think it's going to be freight and the merchandise margin, but we want to make sure we're catching everything.

Scott Sekella -- Executive Vice President, Chief Financial Officer

Yeah. Hey, Peter. It's Scott. Yeah, I think it's coming from a number of places.

One, a little bit on the top line is where, you know, we saw a sequential improvement in Q1, and we're confident that it's going to continue there, potentially be a little bit better as we go forward. But on top of that, to your point, you know, freight is going to continue to be a tailwind. I do think merchandising margin is going to get a little bit better as the year goes. But then the real big piece is -- that I'm excited about is on the SG&A side that, as you know, as we touched on with the Focus, Simplify, and Grow initiative, that's where, in the back half, we're really going to start to see some of the SG&A savings as we implement these ideas.

And it's also the biggest area in the last 90 days from when we talked to you before that we've gotten the most traction on some of those initiatives. So, really excited with what that's going to deliver our full year adjusted EBITDA outlook.

Peter Keith -- Piper Sandler -- Analyst

OK. Thank you. And then just looking at that dynamic of cost inflation versus I guess it's the -- I think you said a little over 2% in average unit retail, 2.7% to be specific. So, your costs have been up about 5, but you've only taken up the prices by about 2.7.

And I guess your point is as the year progresses, the cost will kind of smooth out and that will no longer be a headwind.

Scott Sekella -- Executive Vice President, Chief Financial Officer

Yeah. So, keep in mind, you know, when the costs first started increasing with our vendor base, we took the price up. So, you saw the average unit retail increased first last year. Now, we're cycling through those increases.

We sell the product now at the higher cost that we started absorbing last year. But as the year goes, this is going to get sequentially better as we start lapping that, so our average unit cost increases will be a lot less in the back half than what we just saw in Q1.

Peter Keith -- Piper Sandler -- Analyst

OK. Great. Then maybe just lastly on that, so at what point does your AUR, in effect, sort of smooth out from the inflationary pressures during the year?

Scott Sekella -- Executive Vice President, Chief Financial Officer

I think you're going to continue to see it smooth out through the balance of the year. So, you know, there's -- there haven't been really any new AUR sort of price increases. It's a little bit of just mix movements. So, you'll start to see it smooth out for the balance of the year.

Peter Keith -- Piper Sandler -- Analyst

OK. Very good. Thank you very much.

Operator

Our next question comes from Laura Champine with Loop Capital. Please go ahead.

Laura Champine -- Loop Capital Markets -- Analyst

Thanks for taking my question. If we look at the guide for comp to be down this year or sales to be down this year, are the factors more macro? Is it category related? Is it competition like at this stage, you know, kind of three years into the decline? So, what's driving that this year?

Chris DiTullio -- Executive Vice President, Chief Customer Officer

Hey, Laura. It's Chris. You know, we're really seeing that the craft tech component of our business is the primary headwind right now. We -- I think we talked about that in the last quarter as well.

And so, that's going to continue to be a headwind. It was 150 basis points in the first quarter. We believe it will be upwards of 100 basis points for the balance of the year. So, that's one factor.

And then, you know, we are seeing great strength and improving strength in our core sewing and craft categories. So, that's really, you know, driving us to lean in there, which are the categories that we know the best and have the best history in. So, that's really what we're seeing in the market competitively. Really pretty rational environment, I would say, but really driving to our core customer and our core sewing and craft businesses.

Laura Champine -- Loop Capital Markets -- Analyst

Got it. So, to -- it doesn't seem as if there's a deterioration in the macro, and I think that's -- is that fair to say given the sequential improvement that you called out?

Chris DiTullio -- Executive Vice President, Chief Customer Officer

Yeah. I would say that's right.

Laura Champine -- Loop Capital Markets -- Analyst

Got it. Thank you.

Operator

Our next question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Hi. Good afternoon. So, I wanted to follow up on Laura's question. I mean, you mentioned that the core categories are strong, and it seems like they were positive.

And then the negative 150 basis points is from consumer tech, so there's still, you know, a gap. Is that just a seasonal being down, or I guess what else are you seeing? Like what else is the bigger source of the headwind on the reported comp?

Chris DiTullio -- Executive Vice President, Chief Customer Officer

Yes. The seasonal business, we strategically pulled back our purchases there because that is inventory that has the most risk historically to margin and sell-through. So, we did strategically pull back. That is a current headwind, but we believe it's one that won't be as significant later in this fiscal year.

The good news is, is with those receipt reductions that we've made in seasonal, we now have the ability to be -- you know, play more offense in terms of those core sewing and craft categories that are working well for us.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

That makes sense. And then a second question is on the -- with the consumer seemingly being more value-oriented, how are you thinking about pricing for your goods? Do you feel you're competitive, and is there an opportunity to lower prices as the year goes on?

Rob Will -- Executive Vice President, Chief Merchandising Officer

Sure. It's Rob. I'll take that one. So, as we had mentioned, we're continuing to see success across our owned or private brands, and that is part of the work that we've been doing on COGS with our Focus, Simplify, and Grow initiative as well.

So, we are seeing the costs of those products coming down, which will allow us to price some of that in as much of the assortment is focused on the good and better side of what we bring to market in those core categories.

Chris DiTullio -- Executive Vice President, Chief Customer Officer

The one other thing I would just add in is, bear in mind, that our average unit retail is roughly $5 as well. So, we really do believe that we provide a very competitive option in the retail environment for customers, regardless of the, you know, the income tier or where they stand within the economy.

Scott Sekella -- Executive Vice President, Chief Financial Officer

Cristina, it's Scott. I would just add, we've set up some processes here internally to really be able to read and react how the consumer's behaving and so that we can meet them, you know, where they're looking for at the right price point. So, we're trying to stay very nimble in this environment to be able to read and react.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Thanks. And then last question is, I appreciate the financial guidance for this year. Any comment on where you expect to end the year as far as your debt balance and if the -- it's the interest rate -- or the interest expense assumption of the 100 million that you gave on the last call still a good number for this year?

Scott Sekella -- Executive Vice President, Chief Financial Officer

Yeah. From an interest expense standpoint, that's, you know, right around where we are. You know, we kind of still think interest rates are going to tick up, and that takes that into account, and then maybe start to hopefully come back a little later in the year. In terms of net debt, not really giving any guidance, but I don't really see a meaningful change this year as we work to really improve our year-over-year cash flow and then really start to get positive cash flow in the out years.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Thank you and best of luck this quarter.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jason Wood -- Vice President, Strategy and Corporate Responsibility

Chris DiTullio -- Executive Vice President, Chief Customer Officer

Scott Sekella -- Executive Vice President, Chief Financial Officer

Rene Marin -- Guggenheim Partners -- Analyst

Rob Will -- Executive Vice President, Chief Merchandising Officer

Peter Keith -- Piper Sandler -- Analyst

Laura Champine -- Loop Capital Markets -- Analyst

Cristina Fernandez -- Telsey Advisory Group -- Analyst

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