JOANN (JOAN) Reports
JOANN (JOAN) reported Q3 fiscal 2022 results after the close yesterday. This quarter was for the period ending on October 30. Revenue missed expectations slightly but adjusted EBITDA and adjusted EPS surpassed expectations. The high-level take away is that supply-chain challenges persist (no surprise there) but JOANN is doing what it can and appears to have the pricing power necessary to maintain a strong underlying business and pursue the growth strategy it has embarked upon to extend its lead in the arts and crafts retail market.
Recall that JOANN’s business has been on a roller coaster ride through the pandemic, with sales in fiscal 2020 down -4% then surging 23% in fiscal 2021 as crafters went crazy making masks for the pandemic. Because of these fluctuations management has stressed looking at things on a two-year basis to try and normalize what’s been an intensely variable couple of years. JOANN is arguably the leading company in the specialized fabric and sewing space within the broader arts and crafts market.
On to the numbers.
Sales were down by 14.4% as compared to Q3 fiscal 2021 but up 8% versus Q3 fiscal 2020. The two-year average growth rate is 7%, which is well above the industry average (i.e., JOANN is grabbing market share).
Adjusted EBITDA of $72.6 million (up 84% versus Q3 2020) was above consensus of $68 million. Adjusted gross margin of 54% was up 1.6% from a year ago and up 4% from two years ago, driving adjusted EPS of $0.73 (nicely above consensus of $0.62). The underlying story here is that JOANN is not discounting items across the board but rather doing strategic promotions, and that’s a good thing.
This profit profile should be maintained, securing dividend payments. With a dividend yield of around 4% and a cheaper-than-dirt valuation (EV/EBITDA multiple near 3.5, seems like it should be closer to 6), JOAN stock is deeply undervalued. Shares have more than double upside potential. In the last quarter JOANN repurchased $10.8 million in stock.
On the supply chain front management says it’s still tricky. The company spent $11.3 million in the quarter on excess ocean freight and related supply chain costs to secure product. This type of spending isn’t expected to continue, though clearly the situation remains fluid.
Beyond the quarterly results JOANN continues to expand its international business and says it is targeting Europe specifically, where there are limited retailers in the space but a market size roughly the same size as in the U.S. A recent strategic partnership announced with Singer has upside potential as crafters increasingly look for digital patterns online.
My best guess is we have a workable low in shares of JOAN and there is enough evidence of business stability/improvement to stabilize the stock and set it up for a recovery. Therefore, I’m keeping at buy. That said, clearly, we are underwater here, and I’ll continue to assess the stock’s recovery potential with the next week being critical. BUY