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Jo-Ann Stores Ups Guidance

Posted: Sep 04, 2008 08:25 AM by Eric Fox

Tickers in this Article: JAS, ACMR, TJX

Jo-Ann Stores (NYSE:JAS) reported a much smaller than expected loss for the second quarter and increased its earnings guidance for the fiscal year - joining a small list of retailers that have made investors happy in the current difficult macro environment of slowing consumer spending. (Find out more about this predictive number in Using Consumer Spending As A Market Indicator.)

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Jo-Ann Stores also reported a 3.3% increase in same-store sales for the quarter ending August 2 - its sixth consecutive quarter of positive same-store sales growth.

Net Loss Less Than Expected
The company reported a net loss for the quarter of $11.7 million, or minus 47 cents per share, on sales of $403 million. Analysts were expecting a loss of 66 cents per share. Guidance was raised for the full fiscal year 2009 to a range of 95 cents to $1.05 per share versus the previous range of 75 to 85 cents.

The smaller-than-expected loss was due to better management of inventory levels, healthy sales of basic in-stock items, reduced high-risk fashion and seasonal inventory, and an improved markdown management system. The company also cut costs, leading to a 90 basis point reduction in selling, general and administrative expenses (SG&A). The guidance is based on same-store sales growth of 2%-3.5%.

Less-Promotional Environment
Management noted that the less-promotional environment was industry wide.

"If you look at the number of pages of advertising that were run in the second quarter, depending on the competitor, it was down between 25% and 40%," said Darrell Webb, company chairman, president and CEO, during an August 27 conference call. "Each of the major craft competitors ran one fewer week of inserts during the second quarter."

New Guidance May Be Conservative
Analysts seemed to think the new guidance was conservative and may lead to further upside surprises for the year. They noted that the guidance assumes a second half of 2008 earnings performance that is down from the second half of last year. This would be difficult to reconcile with an improving gross margin and a positive same-store sales environment. (To learn more about investing in this sector, read Analyzing Retail Stocks.)

Management responded that the sale of seasonal merchandise was volatile. "The weight of our seasonal business does concern us a little bit since that's been a soft area for us in terms of sales, Webb said. "We're just really counting on the consumer-spending environment to dictate what the second half looks like."

Competitors Also Faring Well
Competitor A.C. Moore Arts & Crafts (Nasdaq:ACMR) also reported a loss in mid-August. However, same-store sales decreased by 4.8%. President and CEO Rick Lepley confirmed the less-promotional environment that Jo-Ann Stores alluded to in a conference call.

"Last holiday season was pretty rough because we had ordered so heavily, and we do expect that we should do a lot better marking down products and closing out products at the end of this seasonal period," Lepley said.

Another retailer that has thrived in the current environment is TJX Companies (NYSE:TJX), which also reported a strong Q2 and raised guidance for its Q3 and full year. TJX's Q2 results were helped by Americans trading down to lower-cost shopping venues during the quarter.

Bottom Line
Jo-Ann Stores is one of a select few retailers to make investors happy in the difficult environment that is currently impacting the retail sector.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator. Mr. Fox also publishes a paid investment newsletter. Please visit The Unknown Stock Report for more details.

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