J.Jill, Inc. (JILL) Earnings Call Transcript & Summary

Good afternoon, and welcome to another session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel accessories and branded discretionary goods here at Goldman Research. And I'm thrilled to introduce our next session with J.Jill. Here today with me, I have Claire Spofford, CEO and President; and Mark Webb, EVP, CFO and COO. Welcome, Claire. Welcome, Mark. Thanks for joining us today.

Thank you, Brooke.

Claire, would you like to kick it off with some opening remarks?

Sure. First of all, we may be speaking about some forward-looking statements. So I would like to refer you to our website for our latest press release and information. But I'd love to just start, especially for those of you who are less familiar with our story, I see some definite familiar faces here, but I know there's probably some new people as well. Just a little bit about J.Jill, who we are, kind of the profile of our business, why we love the business and feel like it's a really good story. The first is our consumer. We've got a great consumer. She is relatively affluent, household income like $150,000 plus, well educated, 45 to 65, so not leading-edge from an expectation on fashion or technology, but very loyal when we do a good job of providing the right product for her and the right experience. She just is very loyal with us. The average tenure of our customer with our brand in 10 years. So we work very hard to give her what she's looking for. We are a balanced business model. We're about 50-50 direct-to-consumer and brick-and-mortar, which we feel is a really good place to be. We are not overly seasonal. We are not a fourth quarter driven business. In fact, we talk about our holiday season being kind of the Mother's Day, May, June time frame. And we have a really balanced assortment as well. One of the other things that I think is a really strong hallmark of our business is the predictability of our assortments and the ability to deliver consistently against what our customer is looking for. And that means that we have core franchises in our business, things like our linen programs and our cotton gauze programs in spring, our pima T-shirts and pima knit programs, some of our core bottom programs like denim, ponte, corduroy. Those are all foundational for our business and what our customer looks to us for and comes back to us for season after season and year after year. But then on top of it, we have a great product team who really understands how to translate trend for our customer and adds the fashion element to our business, which keeps her engaged and keeps her coming back on a frequent basis. So all of those things are things that we feel really happy about in terms of our business model and who our customer is. And when we're running our business with the discipline that we've been running it with over the last few years, very disciplined inventory management, great product means we can promote less, we've seen nice expansion in our gross margin profile, our business at about where we are $600 million-ish of top line with strong maintained margins in the high 60s, yields EBITDA margins in the high teens, and that model generates a lot of cash. So we are very focused and disciplined in the way we manage our business. We think that there are great opportunities for profitable growth for the business going forward. And that's kind of where we are.

That was a great introduction. Thank you so much for sharing that I was hoping that you could speak a little bit to the significant change that J.Jill has gone through over the course of the past few years since you both joined the company. I guess what's the most important structural changes that are long-lasting that you've executed on? And then as you look ahead, what are your near-term priorities?

Sure. I'll take the first part and then maybe Mark can speak particularly to sort of capital allocation and things like that in terms of priorities. But I mentioned the fact that we're very focused on the maintained margins in the business. So strong product assortments -- I think the way the business was in 2019, things were promoted right out of the gate. New assortments would be set and they would be at a 30% of global promotion rate. We don't do that anymore. We give the customer the chance to pay for the product at full price. And then we read the business very quickly and we make surgical changes to our promotional cadence if something is a little slower-moving than we wanted to -- than we expected coming in. But that focus on disciplined inventory management, tighter promotional activity, in fact, as little promotional activity as possible in our space, and a really relentless focus on who our customer is and what she's looking for, has yielded this new model of the strong margin performance in the business. I think that took -- it took discipline to not promote out of the gate, and it was a cultural shift for the teams and the business, but we have seen really strong results from it. So that's, I think, kind of the biggest change. Then structurally, again, we continue to be balanced from a direct-to-consumer and retail standpoint. We like that balance. We believe that there are growth opportunities in both channels as we look forward. We have been, in the last few years, in kind of a net store closure mode, not because the stores are unprofitable. They're very profitable. 97% of the fleet is 4-wall positive contributions. But because Mark and his team at lease negotiation came up -- have been very disciplined in making sure that we have the right economics in our lease agreements. And so we've been in that mode. We now are looking forward to unit store growth opportunities, some of which will be back into the markets that we've exited over the last few years. But we've said up to 20 to 25 stores net unit growth over the next 3 years-ish.

And then market the priorities as you look ahead?

Sure. And I would say that kind of wrapped into what Claire said was, from that structural perspective, is just -- sort of rebasing of the business on to a stronger foundation and a lot of that relates to the priorities, but the priorities with our -- the cash generation that the company delivers is, first and foremost, investing in the business. And that includes reengaging in store growth and also investing in core foundational systems that will help provide capabilities that we think continue to help us optimize operations, but also fuel and support profitable growth. So investing in the business is first. Paying down debt has been our second priority. We've made a great deal of progress in doing that. And we'll continue to have that as a priority. We think that in the near term we can get to a net cash position as a company and still have cash available to invest in the next priority, which is total shareholder return, driving the strategies, of which we initiated a dividend earlier this year. On the table would be all available options for reasons associated with the flow of the stock and liquidity. Share buybacks have not been the top priority, but they are on the table and eventually can become a priority for us as well.

That's really helpful color. Claire, you spoke -- you started out the conversation talking about your customer and the product that she loves from you. Maybe we can speak for a moment about your approach to newness and innovation. How are you surprising her with something new? What is J.Jill's approach here?

Yes. As I mentioned, I think our teams do a really good job of translating trend for our customer. We are not at the bleeding-edge of fashion. We are -- and again, love the fact that we have these fairly predictable, what I call annuity franchises in the business. But she still wants to feel relevant, she still wants to have trends translated for her, whether those be trends in color palette or silhouette or techniques and details. And so the team does a really good job of that. We don't innovate for innovation's sake, we really listen to our customer. We have a lot of ways that we speak to her on a regular basis. Danny is sitting here. Danny is always in our stores. He always reports back to me. But we listen hard to our customers in our stores. Our store associates are virtually friends with their best customers. We have a new assortment. Our new first floor set for fall has dropped today. So what will happen in the stores when that happens is our store associates will reach out to the best customers say, "Hey, we've got this great new assortment. Would you like an appointment? Come on in." They help them outfit. They help them put things together, which our customer really appreciates. That helps drive a nice AOV and a really strong high-touch experience in the store. So it's really building on what she's looking for, what she wants from us, and listening to her heart, and then being aware of trends and what's going on in the marketplace, making sure that we're translating that effectively for her.

It's really helpful color. Thank you. Marketing has been a bigger focus of your organization and for the brand. What investments are you making to drive that consumer awareness? How does that show up in marketing spend? And then, Mark, maybe you could also weigh in here and speak about the run rate percent of sales that you think is appropriate on this initiative as you exit the year, and what that could look like longer term?

Sure. So one of the things I talked about a lot is the fact that we have relatively low brand awareness compared to some of our closest competitors. Part of that is due to the fact that we have virtually less than -- fewer -- sorry, fewer is the right word, fewer than half -- half the number of stores, right? We have 244 stores. We have an opportunity, as I mentioned, to increase the store fleet. And a lot of our close-in competitors have more than doubled that. So that is an awareness factor. Stores are really important in terms of driving that brand awareness, acquiring new customers. So we think that that's an important piece. That said, we've done a lot of work with the brand over the last few years to sort of renovate it, bring it more into the 21st century, I would say, making sure that it's especially relevant not only for our core customer but for that customer at the lower end of our target demographic and bringing her in. So that means constant evolution, monitoring, paying attention to what's working from a channel standpoint. We've definitely evolved from the old catalog model that we were 25 years ago. We now have a full complement and mix of marketing channels -- performance marketing channels that we monitor and test and learn and constantly -- digital, other digital channels and social channels as well. So different channels work for different segments of the customer base, but it's the concert of all of it that really is effective in terms of bringing new customers in and also speaking to the really important existing customers.

And this is one of those strategic investment areas that we feel is important to support profitable growth over the medium and longer term. So marketing is one of those areas where we would expect to nominally -- ideally, leverage everything that you invest in, but we will be stepping into the investment. We've been in the 6% of sales range. We disclose it in the 10-K. And maybe that ticks up a little bit as we build into the strategies that Claire was mentioning that are around awareness and the customer file, et cetera.

You've mentioned new store openings a couple of times now. So let's pivot to that. As you move from a store closure posture to a posture of store opening, what criteria are you using to select your locations? How should investors think about the cadencing of that potential store growth? And what would cause you to choose to accelerate your store opening plan?

Sure. Great question. So we have always been a direct-to-consumer business, and we started adding stores in the 90s. The reason I bring up the direct-to-consumer business is we know who our customers are. We know a lot about where they are. We know a lot about the markets in which they live. And we use that data to help understand where the highest potential store location is for us. I think the other thing that is sort of a very near-term opportunity based on the fact that we have been negotiating leases fairly aggressively and have exited some locations that are good locations for us but we just didn't have the economic deal that we wanted, we can go back into those locations. When we do that, and we've had several in the last year, the ramp-up for the store and its productivity is even faster, and we get that omnichannel dynamic going even more quickly in those markets. So we have those opportunities in front of us as well as new market opportunities, which will be even that much more additive in terms of awareness and driving new customer acquisition.

On those reentry markets that you spoke about, what have you learned as you reopen a store and making sure that, that store opens more efficiently and more productively? Are you marketing to your customer in a different way when you come back to that market? Talk to us about that strategy.

Yes. I mean, obviously, from a messaging standpoint, it's like, "Hey, we're back." Some of them are relocations. We have a store, it's actually one of my local stores where I live that was closed in a lifestyle mall and is just moving to a different location. So again, that customer is still there. We know who she is. We speak directly to her to say, "Hey, your store is back." And as I mentioned, as a result, that store tends to ramp very quickly back to kind of the run rate sales level that it had before. So those opportunities are great. They're right in front of us. And then we do have opportunities in new markets as well to build that. And then as I know you guys hear from everybody, that omnichannel customer is very valuable, 3x more valuable than a single-channel customer. And we'll also say that we rolled out a new POS system last year to the whole fleet. The rollout was complete about a year ago. And the new POS system enables and gives the store teams the tools to do a lot more omnichannel purchasing for that customer in store when she's there. So there are direct-only products that she has access to or if we happen to be out of her size in the store, store says you can also get that from the direct inventory. So that's been actually a nice avenue -- sort of growth of omnichannel stores that we've seen this year.

You mentioned POS systems, but you also have an OMS system that you're also rolling out, and both of these have unlocks for your business. Can you speak to what opportunities you see across both of those with the technology initiatives that you have underway? And then speak to the timing and cadence that we should expect for seeing those benefits.

Mark, do you want to take that one?

Sure. So the POS system, which as Claire mentioned went in last year, and we're very pleased that there was no news around it because that's the sign of a good POS system implementation. It replaced a very old system. And as Claire mentioned, it really has added a streamlined checkout. It's mobile, line busting, all the stuff that's everywhere today, it brought us into that mode, which is really an efficiency support metric. It should help conversion, which helps to drive comps. It also, as Claire mentioned, is sort of one side of omni and that it opens up the visibility of the inventory from the direct channel to the store shopper. We had that in place before. We called it concierge. It was just a very clunky manual process that involved a couple of different transactions and a testament to our customer's patience that she took us up on it quite often. Now it's a much more fluid, efficient, real-time, single-transaction, transactions. So that's POS. And the other side of omni capabilities is OMS, which is really the answer to enterprise-wide inventory, both from ability to allocate a fulfillment order from any point of distribution, as well as to offer visibility into inventory pockets depending on how you want to deploy it. So ship-from-store is an opportunity for us. Know-before-you-go is an opportunity for us. That project is a large project that's underway right now. We're making great progress. The implementation will be in 2025. And then the benefits that come are both from a sales driving perspective because you can fulfill an order that may not have been fulfillable because you were out of stock in a certain location. And then it also has some efficiency opportunities around relieving stranded inventory and identifying a store -- an online sale at full price that might be able to be fulfilled from a destined-for-markdown store inventory. So very excited about that. It brings the modern -- architecture of the systems of the company into the modern age. And all the hard work we've been doing in advance in a manual way to get ourselves ready for it, is, in our view, the best way to get prepared to take advantage of new technology. Because you're not hoping that new technology solves all of these issues you don't know about. You're just hoping it makes all the manual work you're doing today easier and you know what the benefits can be. So very excited to get that implemented next year, and the teams that are working on it are keeping a really great sense of momentum around it and are every day more excited about the potential that it's going to bring them.

Great to see those technology initiatives get rolled out to the stores and to help your customer. Maybe just to wrap up the store discussion for now. Mark, can you tell us about the profitability of your store base today? What do you expect regarding 4-wall margins of some of the new stores that you'll open relative to your current fleet and the bell curve that you have of those today? And what does the cadence of maturation of stores that you expect?

Yes. It's a great question because it's somewhat different for us. And the beauty of our store fleet is the fact that it's not over-stored, as Claire mentioned. It is not oversized in the average store. We're about 3,000 square feet -- 3,000 to 4,000 square feet in average footprint. It is a really critical part of the customer experience. And we hear and we see and we witness the really great community environment that it brings to our brand when -- and to the customer that shops in that environment, a very good full price experience. So the store itself is about $1.2 million, $1.3 million in annual revenue. It cost us net about $1 million to build it and it pays back in a very attractive time frame at very high levels of return at a fair -- I have to say fair because we believe it's a fair economic rental agreement in the store, and at a very manageable pace for that store to reach its maturity, which is in all honesty, in reopening markets, as Claire mentioned, it almost opens back at its run rate sales of $1.2 million to $1.3 million. And in a new store environment, it starts pretty healthily. Again, we're using data that's based on our direct business in markets that are new markets. We're looking at competitor sets that are in market. We're leveraging our store and field teams to assess markets, and then our real estate teams. So we're fairly confident there's a customer there. And when we open them, they open pretty healthily and ramp very quickly.

Before we switch to margins, let's touch base on a topic that's been top of mind for a lot of investors, which is the health of the consumer. How would you describe the health of the J.Jill customer today? Are you seeing any changes in how she behaves, whether that's traffic conversion or ticket as you've entered the early fall season?

Yes. So we are literally entering the fall season today with our new fall assortment. But as any of you who listened to our earnings call yesterday would have heard, we characterize our customer, who I talked about at the top of this fireside chat, as fairly resilient but not impervious. That's the phrase that we've landed on. She is relatively affluent, she isn't overly influenced by a $2 increase in the price of gas. But when she is concerned about the macro environment more profoundly or she's concerned about her portfolio, that certainly will impact her behavior. We came off of a strong Q1 into the heart of our Q2 season with a really strong May and June. And then we did see a pullback in July and into August, and we talked about that yesterday. I think we tried to get at what were the changes, what was going on, and we tried to sort of turn over every stone to understand it. As I said, we talk to our customer in a variety of ways. We field primary research with our customer base on a statistically significant basis at least once a quarter. And we check in with her on purchase intent, how she's feeling about the macro environment, how she's feeling about our current assortment, how she's feeling about competitive brands and where she's shopping, and generally just try to take her temperature. And the research that we fielded in early August definitely had a couple of interesting things pop up. Now I'm not going to say that this is the only driver of the change in trajectory in July and August. There were some other things, self-inflicted things certainly that we look at with a clear-eyed view and say we're not -- we're going to improve that going forward. But we did hear her more concerned about her portfolio. We definitely heard her distracted by the election and distracted by other things going on in the world. So again, we don't hang our hat on that, but it's good for us to understand where she is coming from and what she's thinking about. So that was part of it. In the latter part of August, we were up against a really difficult comp. August is the smallest month of our Q3, but we needed to pay attention to the way she was behaving. We had a difficult trend coming into August and we had a very difficult comparable assortment last year in August. And so it was a little bit of a challenge. And we talked about that very openly yesterday. We tried to prudently think about all of these things as well as our knowledge that the team is doing a great job of developing the right product. The experience is wonderful. Our customers, who she is. And that all was embedded into our guide for Q3 and the remainder of the year.

Brooke, I would just add that the strength that Claire mentioned, the May and June are the heart of our season. So to be -- see positive sales growth, May and June, very strong response at full price, then to enter July and that reverse to where the -- on a year-over-year basis, sales are down, and that's 1 year to 2 years, it's all the stacks that we look at over time to make sure we're not overreacting to 1 data point, that is why we then shifted our business model into actioning inventory, making sure that we're staying on top of the current actioning of price and markdowns, et cetera, so that we end quarters clean, and start afresh in a new quarter as clean as we can be. And we feel good about how we ended Q2. But that profile of July and then through August leads us to a new guide for the year that has to take into account a scenario that has that trend continuing. And that would indicate a more promotional environment that we would react to in the back half of the year, and that's embedded in the guidance that we provided.

But I will say also, absolutely, we are in a healthy inventory position, so we're not way over-inventory coming into the quarter with this trend. We also have been really judicious with promotions as we talked about over the last few years. So when we talk about slightly more promotional activity, it's surgical, it's just addressing the things that need to be addressed in the quarter. And with the guide that we have for the remainder of the year, we're still in that sweet spot that I talked about at the very beginning of this, which is a healthy business with margins in the high 60s and EBITDA margins in the high teens that throws off a lot of cash. So that is the hallmark of our business and the way we manage our business, and we feel really good about that.

Can you talk a little bit more about consumer preferences within your business? We have heard a lot of discussion around category shifts. And what consumers are engaging with, and why -- curious to see what you're seeing between your different sub-brands and product categories in your store. Maybe specifically address denim and maybe other -- some of the other wallet share shift categories like active.

Yes. So we commented and I mentioned on our call yesterday, dresses has been on kind of a -- has been very important over the last couple of years. We did see her sort of moving away from dresses a little bit and more into separate dressing, which we have incorporated into our assortments as we moved forward. As we move off of this summer period into fall, categories like dresses become a lot less important for us. What becomes more important are bottoms, denim being part of that, our corduroy programs, our ponte programs. We have a fun new product marketing initiative called J.Jill Iconics, which take -- the first one is our ponte pant, and it takes it and shows a variety of ways to outfit it and just builds on those heritage products that our customer really knows us for. So bottoms becomes more important. Sweaters become important and those have also been trending positively. So we feel good about those category trends coming into the fall season. And active is a really small part of our business, and it's very light active. So we see that actually kind of wax and wane with whether we really hit it with the prints and the color palette that we use in any given assortment. So again, it's a tiny piece of the business.

That's really helpful. We're asking all companies who attend our conference a couple of questions. And so perhaps now is the time to get a couple of these out of the way given that we're on topic. First is on the outlook. What are your expectations in the second half of '24 relative to your recent results? Do you expect things to be same, better or worse?

You want to take that?

In the second half?

Yes.

The outlook that we just provided, the range of outcomes, the middle of that range assumes that it is a continuation of trends we saw in July and August. So that would be slightly worse.

And from a value-seeking perspective, it's been another trend that we've heard from other retailers, that this consumer is seeking value. Do you think that this -- A, are you seeing the trend? And B, do you believe that this is a function of a cyclical or a secular trend?

So this is where it's challenging for us because, in May and June, so that was not that long ago, we saw really strong full price selling and very little price resistance in the assortment. That behavior in July changes by definition because of the sale period and she did definitely shift more into markdown in sale in July. Some of that we would just expect because that's the time of the year where we do that. And then August is a transition month for us, and it's, again, very much the smallest month of the third quarter. Transition as far as -- and I've been in this business a long time. August is always a really tricky month. And so I don't believe that for our customer, there is a profound change in value or a major trade down. We actually look at that in terms of who she's cross-shopping and we haven't seen a major change there. She's still cross-shopping the people she was shopping before. So it's not like all of a sudden she's buying our apparel at Walmart. That's not what we're seeing with our customers. So those are all the things that we build into our thinking as we think about the business going forward.

Another question that we're asking all companies is on promotions. You mentioned a small step-up in surgical promotions. But how do you see -- how are you planning promotional breadth and depth this year for the holiday relative to last year? And does that differ relative to the industry?

So again one of the things that we love about our business is that we are not overly fourth quarter dependent. And the fourth quarter in the space just operates a little differently because it's more promotional, right? You have the big promotional time periods. We try to strike the right balance of staying true to our full price operating model, but not sticking our head in the sand with regard to the fact that everyone else will be promoting over Black -- whatever the Black -- 2 weeks before Black Friday are now, Black Friday, Cyber Monday and that holiday season. So we will plan according to our business model, but balanced with what we know will be happening in the competitive environment at that time of the year. But again, happy that we're not overly dependent on that. And then the other thing that we're doing is there's the different time frame between Christmas and -- between -- sorry, Thanksgiving and Christmas. That again is we're paying close attention to that. We're going to try to drive as much full-price business going into the holiday as we can. And then our winter assortment, which comes right before Christmas, we actually moved up a week into it because it's a new full price assortment, and we saw a nice response to that last year, so.

It's really helpful color. Related to promotions is how quickly you're turning your inventory. You spoke a little bit about this earlier, but let's put a finer point on it. Is there more room for inventory turn improvement ahead? And how should we be thinking about the cadence of inventory turn expansion from here?

Yes. We have -- I kind of think about it in 2 buckets, right? There's the inventory planning, the assortment planning that can support inventory turns. A lot of heavy lifting earlier that Claire mentioned around rightsizing inventory buys has helped our turns, dramatically helped our efficiencies and resulted in margin. The future opportunities are supported by systems enhancements. I mentioned the OMS potential around ship from store, knowing before you go. That can all help drive nominally more efficient inventory sold at full price, which helps turns.

That's really helpful. And as we think about your margin structure today, can you talk us through some of the puts and takes of the gross margins that you're expecting? What is your outlook for costs as we move into next year? Do you think that the cost pressures might be better, the same or worse?

I hesitate to ever comment on this because I jinx whatever I say. Our expectation right now is that the puts and takes should be offsetting each other in the cost input to the product. There are certain fabrications that are sitting today at near all-time highs, linen as an example. There are some green shoots on the horizon where at some point that will normalize and come back and create an opportunity. Cotton has been -- it peaked and was at all-time highs a couple of years ago. It's been coming down. The puts and takes all are at this point, looking like they're neutralizing themselves out.

And then as you think about putting that together, with all the different initiatives that you have, you have a high-teens EBITDA margin, what does that look like over the course of the next few years? Is there room for additional expansion? Or do you think that reinvesting in the business to drive top line growth is a more appropriate way to think about?

We talked at the beginning about kind of the model of our business right now. And we feel like we've got very healthy EBITDA margins. We have opportunity for growth, and we'll be investing in that growth. So I think, as Mark said, the priorities for cash are to invest in the business. We have a great customer, we have profitable stores, we have rooms for investing to drive profitable growth. And that's sort of our job 1, and then continuing to address the balance sheet, and then looking at total shareholder returns beyond that, are all on the table.

Excellent. We're about out of time. Any closing remarks or things that we haven't touched upon that you think you'd like to share with the audience?

No, we're just happy to be here. We love introducing -- we love this story. We love this brand and this business. We love introducing it to new people, so welcome the opportunity to come and talk to you all and thank you for having us.

Great. Thank you so much, Claire, thank you, Mark, and thank you for all of those in the audience for tuning in.