Click, click, click. What's that sound? It's Jo-Ann Stores (NYSE:JAS), busily knitting away over there in the corner. What's she making -- will it be a sweater for Dad? A nifty scarf for Sue? Or an earnings report for the rest of us? (Hint: unless you're looking for the latter, you're on the wrong website.) Jo-Ann reports its Q4 and full-year 2005 numbers on Monday after the closing bell.

Wall Street Wisdom:

  • General consensus. Arts and crafts aren't as popular as they were back in the '50s, it seems. Only five analysts follow Jo-Ann, and two of them think you should sell the stock. The other three rate it a hold.
  • Revenues. Wall Street is looking for Jo-Ann to post flat revenues against the year-ago quarter tomorrow. $586.6 million is the target.
  • Earnings. Profits, in contrast, are unraveling fast. Analysts expect to see a 78% year-over-year decline to just $0.31 per share.

Margin watch:
Staying with today's arts-and-crafts theme, I'd describe Jo-Ann's margins as a (model) train wreck. Sales may be flat, but the average profit that Jo-Ann has netted on those sales has declined by 40% over the past 18 months. Sure, on the surface, it looks like only a 1-percentage-point fall from 2.5% to 1.5% -- but proportionally, 40% of the company's profitability is gone -- and this has been getting worse all year long.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

47.2

47.1

47.6

47.5

47.3

46.8

Op.

5.9

5.3

6

5.4

4.8

3.6

Net

2.5

2.3

2.5

2.4

2.1

1.5
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
Looking closer at Jo-Ann's income statement, we can see where the problems lie. Sales growth hasn't been all that bad over the past two quarters, up 4% and 6% in July and October, respectively. But the cost of sales has outpaced that at 5% and 10%; and selling, general, and administrative expenses are totally out of hand, rising 10% and 12%. When a company lets its costs run rampant like this, it's bound to hurt margins.

Meanwhile, on the balance sheet, Jo-Ann has let its inventories get similarly out of control. They rose 13% year-over-year in July, and 23% in October.

Is there any good news to be found? Yes. Early last month, Jo-Ann released its fourth-quarter sales numbers, proving the analysts wrong on their sales projections, at least. Sales actually rose 2.2%. That won't be enough to offset the terrible margin and inventory trends, but it's a start.

Fool contributorRich Smithdoes not own shares of Jo-Ann Stores.