Joann Inc (JOAN) 2022 Q2 法說會逐字稿

Welcome to the Fiscal Year 2022 Second Quarter Earnings Call. My name is Darryl, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Ajay Jain. Ajay, you may begin.

Thank you, Darryl, and good afternoon. I would like to remind everyone that 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 recent filings with the SEC.

During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed with the SEC today and posted to the Investor Relations section of JOANN's website at investors.joann.com. On the call today from JOANN are Wade Miquelon, President and Chief Executive Officer; and Matt Susz, Chief Financial Officer.

I will now turn the call over to Wade.

Thank you, Ajay. Good afternoon, and thanks to everyone on the call today for your interest in JOANN. This is an especially exciting time in our organization as we continue to roll out a wide range of new growth initiatives as the nation's leading sewing and crafts retailer. Our second quarter results reflect the combined efforts and dedication of all our team members. Some of the factors underpinning our continued momentum include our excellent merchandising and store operations execution and our robust omni-channel capabilities resulting in record Net Promoter Scores.

Through the strength of our brand, our unique product offerings and truly one-of-a-kind omni-channel shopping experience, we are driving significant growth in customer engagement from our most loyal customers and also from our newest JOANN sellers and crafters. Matt will cover our financials in more detail, but I also wanted to take the opportunity to highlight the continued strength of our financial performance.

Our adjusted EBITDA for Q2 was $23.5 million, an increase of $27.8 million compared to the second quarter of fiscal 2020. JOANN also reported the highest gross margin percentages in our company's operating history during the latest quarter, reflecting a 460 basis point improvement on a 2-year stack. As a result, we reported a 17.8% increase in gross profit dollar growth on a 2-year stack during Q2, which is an acceleration from our 13.5% growth in the first quarter of this fiscal year. JOANN remains ahead of our internal plan for adjusted EBITDA for the first half operating results and financial performance, which positions us well to deliver on our planned earnings for the full year.

In Q2, we had meaningful steps to further strengthen our balance sheet with a new term loan that offers extended debt maturity and improved pricing terms. We also completed a sale leaseback of our distribution center in Opelika, Alabama. The net proceeds from this transaction were used to pay down our existing bank debt. These measures and the strength of our business will allow us to continue to invest in our growth initiatives and also support our new dividend policy, which we recently announced.

We are especially excited by the initial results from the launch of our international e-commerce platform through which, in a matter of weeks, we were already shipping to 29 countries and across every major product category. Though we are very early stages of expanding our geographic presence, increased global reach will provide JOANN with margin enhancement and growth opportunities going forward. We expect to shift to additional countries later this fall with the next phase of our international e-commerce rollout. Outside of the U.S., there is simply no other company that offers what JOANN can in terms of breadth of assortment and our related value proposition, in particular, across the sewing space, and we intend to leverage our offerings accordingly.

Historically, the second quarter is JOANN's lowest quarter in terms of sales and earnings contribution due to the inherent seasonality of our business. For perspective, Q2 typically represents 10% or less of our annual adjusted EBITDA. Last year was, of course, an exception as we had an unprecedented sales growth due to peak levels of spending on PPE by consumers as well as a temporary closure by one of our major competitors across all of their store locations. As a result, our total comparable sales increased by 54% in Q2 of last year. While Q2 was by far our most anomalous quarter last year, we do expect year-over-year comparisons to fully normalize into the beginning of the fiscal year ending January 2023. For the balance of the current fiscal year, we continue to believe that the 2-year comparisons are the most appropriate framework from which to evaluate our performance.

We've had some large sewing categories mainly impacted by the COVID Delta variant. We continue to see solid overall sales trends on a 2-year basis. We reported 8.1% total comparable sales growth versus the second quarter of fiscal year 2020. While this was below our expectations, the revenue shortfall was largely offset by our stronger-than-planned margin performance.

Customers also continue to respond favorably to our omni-channel capabilities. Omni-channel sales grew by 115% on a 2-year stack and reached $53.5 million in the second quarter, representing 11% of our sales in Q2 compared to 5% over the same period in fiscal 2020. Our BOPIS penetration now accounts for around 1/3 of our total omni-channel revenue and our curbside pickup is now ranked as a best-in-class service.

Importantly, in Q2, customer retention and acquisition metrics ran ahead of pre-COVID levels. From our top 3 million and newly acquired customers, our sales trends were up double digits on a 2-year basis at or above our expectations. On a sequential basis, we experienced a sharp increase in the number of new customers, doubling their growth in the first quarter. Also during Q2, we did experience a pullback with noncore customers, who tend to be more seasonal in nature in their shopping habits. Our data indicates that these noncore customers were more engaged in other leisure time, interest and services during the quarter such as outdoor activities and summer travel given the post-vaccination reopening environment.

As I mentioned earlier, I'm especially proud of the continued progress in customer satisfaction at JOANN. Our Net Promoter Scores have consistently improved in each consecutive month throughout this year and achieved record highs within the quarter. I would like to acknowledge these results, especially in light of all of our team members' efforts in following appropriate COVID protocols with the goal of keeping our customers safe.

We're also pleased with the sales and financial returns to date from our recent store remodels, which are exceeding their pro forma targets and are transforming the sewing, arts and crafts customer experience. While we're still in the very early stages of our multiyear store refresh initiative, our Net Promoter Scores at newly refreshed stores are meaningfully outperforming our store fleet overall.

Looking forward, we will continue to carefully monitor and identify ways to mitigate inflation. To date, we have been effective in managing overall inflationary pressure despite the well-documented pressures on feedstocks, labor and logistics. In that vein, the most critical shorter-term issue we are currently facing is the overall highly stressed supply chain. At the epicenter of which is ocean freight availability and related costs. For perspective, we are currently required to pay as much as 10x our historic average container rate to secure overseas shipments. Nevertheless, we have done what is required to ensure that we will be in a strong in-stock position for the all-important back half of our year.

And while we face these issues in the short term, we're managing through it by striking the right balance between driving top line growth and gross margin improvement. Ultimately, we expect these near-term supply chain headwinds will prove to be transient and will ultimately become tailwinds. Until then, we'll continue to drive smart enterprise choices to keep our customers engaged and also create value for JOANN.

And finally, I'd like to express our concern for all JOANN team members and others who have been impacted by Hurricane Ida. Please note that you are in our thoughts, and we continue to be ready to help you in any way that we can.

With that, I'd like to turn the call over to Matt to discuss our second quarter financial results in more detail.

Thank you, Wade. I would like to reaffirm Wade's comments and compliment all team members across our entire organization on their dedication and support of our customers and all our key constituents here at JOANN.

I'll first cover key highlights of our second quarter performance in fiscal 2022. We reported net income of $5.2 million in the second quarter with diluted earnings per share of $0.12. Adjusted EBITDA was $23.5 million versus $93.1 million in our most impacted quarter last year from the pandemic. On a 2-year basis, our adjusted EBITDA improved by $27.8 million. As Wade mentioned, we had record gross margin performance in the second quarter at 53.7% of sales, an improvement of 100 basis points compared to the first quarter of fiscal 2022. On a 2-year stack, gross profit dollars increased 17.8% to $266.8 million, which is an acceleration from our 13.5% growth in the first quarter of this fiscal year.

Other key developments in the latest quarter included the relaunch of our store refresh program that was previously slowed due to the COVID-19 pandemic. We completed 7 projects in the past 3 months, and we'll complete 7 additional projects in the third quarter as we build towards a full schedule of approximately 60 projects next year.

We also refinanced our term loan with a new covenant light $675 million credit facility, extending our maturity to 2028 and lowering our interest rate. Additionally, we completed the sale-leaseback transaction for our Opelika, Alabama distribution center, which generated $48 million of net proceeds that we used to reduce borrowings on our revolving credit facility. The $24.5 million gain related to this transaction was recorded as a onetime item in our income statement.

Finally, we paid our first quarterly dividend as a public company of $0.10 per share. Our dividend of the same amount for this quarter was just announced.

I will now provide more detailed color on our quarterly results. Net sales decreased by 29.8% compared to the same period last year to $496.9 million, with total comparable sales decreasing by 29.9%. As a reminder, sales in the second quarter last year benefited from unusually high spending on materials to produce facial masks and other PPE by our customers as well as high numbers of competitor store closures, driving total comparable sales growth last year in the second quarter of 54%.

On a 2-year stack, total comparable sales increased by 8.1% from the second quarter of fiscal 2020. This growth was broad-based as all product divisions, geographic regions and both channels grew on a 2-year basis. As Wade mentioned, our e-commerce business was a particularly strong contributor to our 2-year trend, growing at 115% on a 2-year basis and comprising 11% of total company sales for the quarter.

We accelerated gross margin expansion during the quarter as our rate to sales grew by 410 basis points compared to the same period last year and by 460 basis points over 2 years ago. As a result, we grew gross profit dollars by 17.8% on a 2-year basis. We continue to optimize promotion, reduce shrink and effectively manage clearance inventory to drive these results.

We expect the factors that are currently driving our gross margin expansion to continue into our peak fall and holiday season, which will work to offset significant cost challenges introduced by unprecedented supply chain constraints driven by the COVID-19 pandemic. We remain committed to providing robust and exciting basic assortments as well as fashion and seasonal merchandise for our customer with most of those products being imported from overseas.

Despite challenges, we have successfully obtained bookings for ocean freight on over 90% of merchandise we will need for our peak third and fourth quarter selling season. To accomplish this in the current environment, we are having to absorb rates for ocean freight, in some cases, up to 10x higher than historical levels as well as incur additional costs to move product through congested ports and temporarily shut down rail networks. All of this effort will allow us to move product through to our distribution centers and stores ahead of key sales events.

While these incremental costs are beginning to impact the value of our inventory and our balance sheet, impact on gross margin was muted in the second quarter. Starting in the third quarter, these costs will be much more pronounced as we expect to see onetime negative impact on gross margin of approximately $30 million in the back half with our peak fourth quarter holiday seasonal business most heavily affected. We plan to isolate the onetime impact of these incremental supply chain costs as a reconciling item for adjusted EBITDA in our upcoming quarterly reporting until these costs normalize.

Our second quarter selling, general and administrative expenses decreased by 13% compared to the same quarter last year. Reduction in expenses was driven by lower sales compared to the second quarter last year but also through enhanced store operating and other cost-saving initiatives and the fact that we are no longer incurring what were significant pandemic-related costs last year.

We feel very good about our ability to manage inflation over the longer term. We have held expenses to an increase of 3.4% over the second quarter 2 years ago after normalizing for incentive comp and depreciation, while total comparable sales grew 8.1% over that same time period. The majority of our modest growth in expenses has been to increase wage rates in our stores and distribution centers to allow us to be more competitive in those key labor pools, which has allowed us to maintain healthy employment levels and deliver strong customer service.

Depreciation and amortization increased by 2% over last year to $20.1 million driven by ongoing investments in stores, technology platforms and our new multipurpose fulfillment center in West Jefferson, Ohio. That new facility is already supporting key seasonal product flow to our stores and is on track to also support direct-to-consumer and international e-commerce fulfillment next spring.

Store preopening and closing costs increased by $700,000 versus last year to $2.8 million for the quarter as we have restarted our store refresh initiatives. Interest expense for the quarter decreased by $3.5 million versus the same quarter last year to $14.8 million. The decline in interest expense reflects our lower average debt levels compared to last year as well as a lower average interest rate due to the cumulative effect of our recent refinancing activities.

We continue to maintain a strong balance sheet that provides us with the flexibility to fund our strategic objectives and provide a return to shareholders, all while absorbing the nonrecurring supply chain costs I described earlier. Our long-term debt was $771.2 million as of July 31, 2021, a decrease of $133.8 million from August 1, 2020. During our latest quarter, we completed a significant refinancing of our prior first lien term loan facility, which was due 2023. Our new $675 million term loan was leverage neutral to our balance sheet as the proceeds were used to repay borrowings on our prior first lien term loan and the balance to partially pay down our current asset base line of credit. Our new term loan facility comes with an extended maturity to July 7, 2028, with more flexible business terms and favorable pricing of 50 basis points on the interest rate compared to our prior term loan.

As of the end of the second quarter, the trailing 12-month adjusted EBITDA as reported under our credit facilities was $295.8 million, resulting in a reported leverage ratio for net debt less cash to adjusted EBITDA of 2.7x. As we have shared earlier, we generated a substantial portion of our free cash flow during our fourth quarter, and we'll have capacity to reduce debt leverage further by the end of our fiscal year.

We continue to execute on our initiatives to drive working capital efficiency. We ended the second quarter with inventory 15% below the same quarter 2 years ago despite absorbing nearly $11 million in additional landed costs within our inventory related to the COVID-driven supply chain issues. Merchandise inventory turns also improved by 2.1x as of July 31, 2021, versus 1.9x a year ago.

Capital expenditures were $28.6 million through the second quarter driven by investments in our new distribution center and information technology. We still expect total capital expenditures in the range of $65 million to $70 million for the full year as we work to complete our new distribution center project, roll out a new store point-of-sale system and ramp up our store refresh initiative to what will be full speed by early next year.

Our first quarter dividend of $0.10 per share was paid on June 25, 2021, to shareholders of record on June 11, 2021. Our Board of Directors recently declared a cash dividend of $0.10 per share for the second quarter payable on September 24, 2021, to shareholders of record at the close of business on September 10, 2021.

While we are not providing formal guidance on revenue or earnings at this time, we did want to provide our updated expectations for our full fiscal year 2022 on some specific items that may be useful to those modeling our business. For capital expenditures, we expect a range of $65 million to $70 million for the current fiscal year. Preopening and closing expenses are expected to be in the range of $9 million to $11 million. Depreciation and amortization is expected to be between $80 million and $82 million. We estimate annual interest expense of $50 million to $52 million, an effective income tax rate of 22.5% to 23.5% for the full year. Weighted average basic and fully diluted shares for the third and fourth quarter are projected to be approximately 42.2 million and 43.8 million, respectively; and weighted average basic and fully diluted shares for the full year are expected to be 41.2 million and 42.8 million, respectively.

In summary, we are pleased with our financial performance through the first half of fiscal 2022. We remain focused on preparing our business for a successful fall and holiday selling season to what are unprecedented global supply chain challenges.

With that, we'd be happy to take your questions.

(Operator Instructions) And our first question is from Liz Suzuki from Bank of America.

Great. Were there specific categories or products where you were unable to procure enough supply to meet demand? And if so, how much do you think that may have cost you in sales that would have been left on the table?

I would say for Q2, I mean, we've been in pretty good shape. We've been investing to do that. What I would say, there's nowhere -- if you look at like last year, we had kind of a lot of benefits from COVID. I would say that right now we're in a position where we are seeing really kind of the negatives. And as the Delta variant wanes, we think that we're going to be in an even stronger position.

So for example, fashion apparel, special occasion related notions, about 20% of our categories are coming back. We're coming back very fast, for example, in the Southeast or the other Southeast for example. So it would be like Q2, Southeast was up, #1 performing region, high teens. And those businesses were rebounding because they're really tied to things like cosplay events, proms, weddings and the like. And now that's pulled back very far in that region.

So I would say that we're in actually very good stock. We're fueling product. We expect to be in good stock to the balance of the year. But those businesses are the ones that are really dependent upon people being able to again have proms and weddings and those kinds of events.

I think specifically on your question about inventory position, we've been able to maintain basic in stocks ranging between 93% and 95%, which, given our speed, kind of is actually pretty good and where we normally kind of like to be.

Where we probably had some impact on the quarter is, again, we mentioned we've done, I think, a really good job of getting bookings for our back half seasonal programs. We did have some of that for fall and Halloween arrive a bit late. We don't get a ton of sales in the second quarter on those, but we do get some. So there was a little bit of hurt there.

And the other thing I would say is when we're seeing that product arrive, our sell-through has been really strong, so it gives us a lot of encouragement for the back half in those programs. But we did get a little bit of a later start on being able to sell those items that we normally do.

I mean as you know, the global supply chains are disrupted beyond belief. I think that's been part of our decision to really go after margin versus being more aggressive on sales. There's really no point in promoting any more than we have to just end up having an out of stock or a hole for product in the back half. So I feel like we struck a pretty good balance on that and pretty pragmatic, again, given just the entire nature of the supply chain.

Great. And that actually leads me right into a follow-up, which is on just the early read on quarter-to-date in Halloween and fall decor demand, how you're thinking about customer-related materials given that last Halloween was probably a bit more locked down than this year's is likely to be. And then just any thoughts about the promotional environment for holiday versus 2 years ago and whether you think it's still likely to be a little bit lower, a little tighter promotions?

Yes. I'll kind of start with the back half of that first. This is probably the best promotional environment we've been in, and I don't really see it changing. I think it's just a very rational environment as people probably keep one eye on potential inflation; and again, we've been able to, I think, manage it broadly outside of ocean freight very, very well.

The early reads that we have on Halloween, for example, are extremely strong. And again, I mean, last year, there wasn't really a Halloween, but we're feeling good. It's still early days. Importantly, again, we're going to be very well positioned with our merchandise. I'm also optimistic that people are ready to be together and do events, which don't fall -- bleed into the fall as well as into Christmas. So as we look at it here, we're feeling pretty good.

And our next question comes from Lavesh Hemnani from Credit Suisse.

So firstly, on the second quarter results, I mean, can you provide some more color on the specific categories that were doing really strong last year? How did those perform considering the customers purchasing multiple machines last year? And related, in terms of Q3 in the [earlier reads] that you are seeing, anything specific to comment on those categories as well?

Yes. All of our divisions were up on a 2-year stack basis and our channels were up. And again, our top 3 million customers and our new customers were up very meaningfully. So that's a good picture.

On the -- the arts and crafts and seasonal businesses was up meaningfully more than the sewing business because the sewing business, while it was up on a 2-year stack basis, it's really -- if you look at where the issues are, it really is related to those big events. It's really -- it's what we call our special occasion, our fashion apparel and related notions. And those businesses are lagging where they need to be. Again, those are really based on events.

As I said before, as the Southeast was opening up, if you looked at Q1, those businesses were roaring back. And now that COVID hit that area maybe harder than most areas, you're seeing those curb again. So we're optimistic on those businesses because, again, there will eventually be events. Again, our early reads on Halloween are pretty exciting. We see people potentially evolving into their next project. So we're feeling good about that.

And as we go forward, I think we're feeling that the picture probably is -- again, we're set up very well for the back half. Early reads are pretty positive. This is the day kind of where everything starts to turn actually as we go into the holiday weekend here; and we see actually historically -- and Matt can tell you. He's been here 25 years -- those noncore customers, when you're competing with summer activities and summer camp and vacation and travel, they drive out. But now is when those noncore customers actually start coming back as kids go back to school and the weather starts to wane. So...

Yes. I think another key piece to your question is just the customers that bought -- a record number of customers that bought crafting and sewing technology the past year, we're continuing to see their follow-on purchases of supplies and materials be quite strong. I would say what we have seen is the sale of some of those machines, particularly on the craft side, still be very strong on a 2-year basis, so well above pre-pandemic levels but certainly not as kind of as hot as they were last year.

Got it. As a follow-up, just on the margin piece. So I mean, 460 basis points up on a 2-year basis, can you sort of unpack some of the key items within that? And what should be embedded for the back half?

Sure. About 1/3 of that growth, there's kind of some of the non-pricing pieces of that. So our shrink is improving substantially, and we're much cleaner in terms of clearing, so kind of markdown impact in clearing, discard impact on margin, about 1/3 of that improvement's from there.

Really, the balance of it is what Wade spoke to earlier. We're kind of in an unprecedentedly favorable promotional environment. I think we're also -- we've done a lot of work over the past 2 years to put ourselves in a much better position to take advantage of that and really understand promotional elasticity around a lot of our key categories. So that's really driving kind of the other 2/3 of that growth.

So I think to Wade's point, that promotional environment piece and our ability to leverage that, super confident and we can continue to drive that into the back half. We continue to be favorable in terms of our inventory cleanliness and our ability to drive down strength, so we feel good about those. Again, we'll talk -- we talked a little bit about this and assume we'll probably take a few questions here. That important freight piece that everybody is dealing with is going to be meaningful. We've kind of scoped what that looks like, but roughly around 200 bps of margin headwind for the back half will be kind of offsetting those tailwinds.

Matt said it, but I think it can't be overstated. Our inventory is -- at least not in any recent memory, have been cleaner. And that's really important because not only is it less discard. It also means that we're able to have strong pricing power and don't need to move goods with other fashion and seasonal goods coming behind it. So that's just a great place to be, and I think we're going to be able to stay in this position for a long time.

And our next question comes from Paul Kearney from Barclays.

If we just look at the 2-year stack on sales, there seems to suggest a deceleration from Q1 into Q2. And I'm just curious whether maybe you can provide a monthly cadence of how that played out and whether you view this -- the main driver of that is the Delta variant? Or is it people pursuing other activities as things reopen?

I think it's a little bit of both. You can tie just kind of the core businesses I talked about, the Delta variant suppressing a couple of hundred basis points of growth. Where they were starting to move, now they're kind of going sideways a little bit of that, but they will come back.

Again, that noncore customers, that other piece, I mean that's about 25% or so of our customers. Again, our -- if you look at our top 3 million and our new to JOANN, the new actives that came in, that they were up meaningfully in the teens and beyond. So that's very strong, but that group is a group that kind of fades a little bit. And again, I think being cooped up for a year and then being able to travel and do other activities is kind of natural. We do feel that group will come back because they historically do. But it's really split between those 2 things.

Okay. And then just curious on kind of the quarter-to-date trends. Are there any kind of categories you're seeing particular strength in, especially as kind of back to school and just back to work? Or anything that you're seeing quarter-to-date that kind of gives confidence in the outlook?

Like I said, all the arts and crafts and seasonal businesses are really doing very, very well, and we think that has continued for a long time. And sewing, if you take away those categories that are really driven by those big events, sewing is doing well. So we're feeling pretty good.

And really in the back half, the main event for us is being able to stand strong in our product for the seasons and have that inventory. That's where we do a huge and proportionate amount of our business and our EBITDA, and we have made sure we've moved heaven and earth to make sure that we're standing tall. We feel that in many areas, we're gaining share. We don't feel that we're losing share anywhere, and we don't want to lose that momentum.

Yes. I think in terms of looking at the third quarter, August really performs much more like our second quarter. It's typically kind of in that slower time period for us. Our business accelerates significantly kind of starting this weekend.

Today.

Labor Day weekend. Through the balance of the year, it starts looking much more like our fall and holiday traffic, which again accelerate significantly from what we see over the summer.

And our next question comes from Zach Fadem from Wells Fargo.

This is [David Lance] on for Zach. Through the early days of the international e-commerce launch, can you provide additional details around kind of what you've seen in terms of customer purchasing patterns and how those vary versus U.S. customers?

Yes. I mean it's early days, but we're seeing a really exciting ramp here. What I would say is probably a couple of different patterns we're seeing is the English-speaking countries are clearly disproportionate, including countries where people speak dual language like Israel, surprisingly, and Germany and others. But I think that's one thing, which gives rise to the fact that there is global demand for what we do, especially in sewing, but that's easier.

The other thing is we're seeing really big order size, and that's in part because we're able to discount the freight for the large orders and make it a win-win for everybody. But the order size is meaningfully larger than what we do domestically. But again, it's exciting. We are seeing -- again, as we said, across all of our categories, we have seen purchases, which is also, I think, kind of exciting for us.

That's great. And then just a follow-up also. So we're getting to SG&A per store growth down in the mid-single-digit range in Q2. I was wondering if you could provide some additional color on how you're thinking about that over the next few quarters.

So just to make sure I'm following the question, just our trend on a 2-year basis for SG&A growth and how we see that persisting?

Exactly, yes.

Okay. Yes. So I think, again, continuing to kind of ensure we're competitive for labor, so I think that's always something we need to stay on top of and if required, we would lean into there. But absent of that, we don't really see anything meaningful that would derail us from the trend we've been on recently.

What I would say is we feel -- I'm sure you're hearing lots of stories about how hard it is to get labor, and that is true. They're out there. I do feel that, over the last couple of years, we have made pretty good strides in our wage rates with our store employees and our DCs, big step-ups there versus what's been kind of an average, again, last year, just paying the premium to hourly employees, not furloughing anyone, they were with us and they supported us. But I think that's also -- it's been, I suppose, probably more difficult if you furlough or lay people off to get people back than it is if you continue to keep them. So I think we feel in a pretty good position in terms of both the progress we've made in terms of trying to increase wages systemically as well as the ability to retain good people.

And our next question comes from Cristina Fernández from the Telsey Advisory Group.

I wanted to follow up on sales. And in the past, I think last quarter, you talked about achieving mid-teens comp on a 2-year basis, the next couple of quarters for the back half. In light of how the second quarter unfolded in August to date, do you still think that sort of like mid-teens component on a 2-year stack is doable for the third and fourth quarters?

I think how we see the back half is we're probably going to be in that -- where we're targeting that kind of mid-teens gross profit dollar increase, which is about kind of what we did in the last 2 quarters. So we see that maintaining. That's kind of how we see it now. To what extent there's a sales trade-off versus the margin, I think we'll see.

Again, our bias right now is to lean a little bit heavier into margin than sales just because of these supply chains. And we don't want to be selling something below where we have to and not have any product behind it. But I think that's the way we're modeling it. It's on a 2-year stack basis. We kind of see the dust settling this year. As we've always said, it's kind of the quarter is pretty consistently somewhere in that kind of mid-teen gross profit dollar versus 2-year stack.

Yes. So I think to say it another way...

Excluding that freight anomaly, right? But other than that...

Yes, correct. So yes, I think excluding the kind of nonrecurring freight cost we dimensionalized, it's probably seeing where we expected several months ago, I think sales a bit slower and we would expect to maybe be relative to what we expected then, sales a bit slower. But certainly, we've been able to accelerate gross margin expansion at a much more rapid pace than we thought at that time as well.

What we are calling kind of the normal ocean freight, for what it's worth, is more than double of what we've seen over the last decade. So I hope that's conservative. But we're assuming that it ultimately isn't going to settle where it was, but -- and that's what we're building into that base.

Okay. That's helpful. And on the ocean freight, can you remind us, I don't know if you shared this before, how much of your capacity is contracted versus purchased more in the spot market and subject to fluctuations? I'm just thinking it's -- sort of the increase you're seeing for the fourth quarter, is that something that we should expect as we would go into 2022.

Yes. I think that's really the $64 million question, I think. So to kind of break this down, we typically, even through our peak time, would be contracted for well above 50% of our needs. The issue you're having right now is that capacity is not there. So we're, in some weeks, fortunate if we can be at 20% or 25% of capacity under contract. So therefore, you're into these brokered markets, which those costs are just astronomical right now; but we're having to pay them to ensure we get product in countries that we desperately need.

I think that is exactly how this is going to normalize, is we're going to be able to get back on a majority of our products being able to be procured on contract rates and shift on contract rates. Those rates, as Wade mentioned, have actually doubled this year, and we're treating that as kind of normal way cost. But again, we need to be able to get the capacity we contract for to -- for those costs to normalize; and certainly, right now, we're not anywhere close to that.

Yes. I'm sure you're hearing this from others as well in terms of which carriers may or may not be compliant with the contractual obligations, which is probably another discussion for another day. But again, in the meantime, we're just making sure we're doing what we're doing to be in strong stock as we really think the customer is going to be there and we're going to be there for the customer.

And our next question comes from Steven Forbes from Guggenheim.

So Wade, maybe taking a step back, right, if we think about the growth algo of the business that you laid out at the -- during the road show and the whole IPO process, the 200 to 400 basis points of long-term secular growth, the building blocks within addressable market growth, price and promotion optimization, et cetera, has there been sort of any changes of late that would impact how you think about those various growth factors? Or is that 200 to 400 basis points still the right long-term algo for the business as you currently see it?

No, I think we still believe it. And if we look at just what we think the underlying growth is, the place where we can still take share, what we're seeing in terms of the lift on our store refreshes, all of that makes us feel pretty confident about that.

And I -- like I said before, I mean, last year, I mean, obviously, COVID was a tailwind for us, is you had PPE and more people getting into our space and the like. I think we're at that wonky space right here. I don't think it's getting worse, but we're actually getting only headwinds from it, again, from select closures, people being a little bit -- we see curbside spiking a little bit, have anxiety about going out. And again, these businesses -- 20% our businesses actually blossom when the world opens up. So all that said, no, we're feeling very good about that algorithm.

And then just a follow-up on import freight costs. I appreciate the quantification of the headwind for the back half. But any sort of initial thoughts on the time line behind the anticipated normalization, given some of the concerns around the Chinese New Year and potential port labor negotiations right in the ports for next year? I mean, is this a 6 month, 12 month, 18 month -- how long do you sort of expect it to last for?

I mean I could tell you my point of view, but I don't know if it's worth much. I mean everybody probably has a point of view. I do think, if you just look at the whole thing and the fact that 25% to 30% of the capacity came out of the system, you didn't have planes flying, you had containers that were derailed and then you have, at some point, 30% more demand, products were bulky, the market has been really crisscross this year. And then you add in the Suez Canal and L.A. port jam, like you couldn't ask for anything worse.

In that $30 million Matt had, actually about $8 million of it is what we call transloading because the Chicago rail system and Cleveland and other rail systems have been basically shut down, and it's $8 million to just take it off of 1 container and put it on another, on a truck, which has never been done before. But if you want the product, in some cases, that's what you have to do.

So what I would say is once we get to kind of late October, November, for us, the main event is over. We don't ship a lot then for many months. And so you're going to be coming out where there's more capacity coming on, not only our demand but other demand is going to start to fall, and so this thing will start to reset. I don't know that, that means it's going to be 100% geared in January and February next year, but I got to believe it will be much better, and we're already taking steps in doing things to get ahead of this for the next year. But as Matt said, what we're building in our base right now and what we're building on our forecast is more of 2x of what we've ever paid.

Will it ever go back to where it was? I don't know. That might take a few years. As I understand, in a few years, there's a lot of capacity coming online. But I think it's kind of surfing away. But again, the good news for us is that, once we get through the next 60 days or so, whatever, 80 days, 90 days, where we've already booked 90% of it, we really don't have a lot of volume that flows after that for quite a while.

Yes. I think fair way -- yes, that's -- definitely the capacity normalizing to demand is really what's going to drive these costs back down though. So I think if you're kind of following this, going forward, that's what you want to be looking for in terms of when retailers are going to be able to be on more normal contractor rates again.

Just to give you some numbers, I mean, this is kind of -- just to give you a round [kind of] math, but let's just say historically, rates, both broker and contract where it's, call it, 3,000 container, depending where you are bouncing around that for most people. For the last several months and through the next several months, you're paying at least in the mid-teens, but it can be as high as $25,000, $30,000, and you may have to transload on top of that. And air, last I checked, was between $120,000 and $140,000.

So it's wonky situation, but again, the decision we made is we feel we've got a lot of momentum with the customer. We've got some share we can take, and what we didn't want to do is we don't want to lose that by not spending the money to not be in our best position with the customer.

And our next question comes from Daniel Hofkin from William Blair.

Just if I could ask maybe just a little bit of clarification in the -- maybe amplify. The sales were substantially different than expected in the second quarter. Could you just maybe just rank order and if possible, put some numbers around the biggest factors altogether? I know you said fashion was a part of it but not a big part. And to what degree was it all demand related? Or was it partly supply constraints?

The part also that just wasn't quite clear was it sounded like you said people going out and doing other activities was a negative, which is understandable. But then it sounded like you were saying the Delta variant is also a negative, and it might seem like it would work the opposite way. So that would be my first question.

Yes. I mean, again, this is rough math, but I think of kind of that 300 to 400 basis points where we probably gain below our expectation on it, you can kind of split it down the middle of these businesses. Again, about 20% of our business -- our big businesses like fashion apparel, like special occasion and related notions and other, these are business that are driven, again, by weddings, by large events, by cosplay conventions. A lot of that, I think you can kind of blame -- you can blame it on COVID and kind of on the Delta variant, where things kept getting delayed and stopped and delayed.

So I think that's about how we math about half of it. The other half of it, I think, is just, again, these noncore customers who always kind of drop out this time in the summertime. They dropped out a little bit deeper now. But again, I think it stands to reason that if you haven't been able to go outside or travel for a year and now you can, that's going to take a higher priority than some of the things that we do. But we feel pretty confident that they'll come back, kind of starting now when kids are in school, when the fall season hits and everyone's gearing up for seasonal and other events.

So I guess the other piece is, again, I think where we feel very good, honestly, is sequentially, again, we went from what was a great quarter last quarter, 14% gross profit dollars on a 2-year stack to 18%. I mean if we normalize it and put that money back, could we have driven some sales? Yes, at a lower margin, but I don't think it would have been necessarily paid out. And also, again, I think we're at a point here where SKU by SKU, business by business, we're making sure that we're being smart about how we [go out and sell], so that we actually have inventory behind it. So Matt, do you want to?

Yes. I think one of the things you mentioned, I'd like to kind of address is, I think, very intuitively you assumed, hey, maybe the Delta variant spiking is actually helping our business because we had some pandemic benefit last year. That's really just the nature of what's going on now. It is not the case anymore. We're...

We don't have PPE.

Yes. We don't have customers coming in and, by and large, making PPE. You can buy finished masks everywhere. I don't think people are anticipating they're going to be wearing them for extended periods of time like they might have assumed last year. So we're really not seeing the -- there's very specific category that spike when that's happening, and we're not seeing lifts in those at all.

If anything, right, we are a fully discretionary business, right? So again, if people have anxiety or anxious about going out, additional fear about COVID or Delta variant, I'd say, in general, that's more negative than a positive for our customer.

But it sounds like you think that there is likelihood of some reacceleration as we get away from the summer into more kind of typical period going forward.

Yes. And what I would say, I think where we're ecstatic is, honestly -- for us, the very most important is that top 3 million customers and then those new customers to JOANN that came in last year that are actually active engaging, spending more than a typical customer. Those 2 segments are well into the teens and the higher teens, so that's good. I -- if I had to pick 2 of the 3 to be very healthy right now, those are the 2 I'd pick.

Well, the other piece I would say is we -- our acquisition of new customers actually continues to accelerate. We've trended in terms of that addition of new customers to where what we would typically do pre-pandemic in the first half. We're up 15%. A lot of those customers, again, are arts and -- like share growth customers for us. They're in arts and crafts and a lot of seasonal categories. So continue to be excited about that. So yes, I think we've got some signs that if that more casual customer in our industry strengthens again in the back half, I think there's some positive indications for us.

Okay. And then my other question just relates to the remodels and refreshes. I know that's supposed to accelerate more starting next year. But can you -- any updated thoughts there on what they might contribute sales and profitability standpoint relative to kind of status quo?

Yes. So I think, as Wade said, we're kind of early in kind of our relaunch of that. Pleased, again, very early on what we're seeing from the projects we've done. So nothing to indicate. We shouldn't see the strong high single-digit lifts in our kind of lower tier projects that we'll do, up to well above double-digit lifts for stores we relocate.

We have no indication that we won't see that. We're well into our planning for the 60 projects we intend to do next year, identified most of those already. And the pro forma expectations we have with those are in line with those types of lifts.

And our next question comes from Jordan Fine at Anchorage Capital.

I guess relative to the first quarter, G&A was kind of flat despite the decline in sales. And I guess I was wondering if you could maybe provide some clarification as to why that might have been and if it was because you were -- had more employees than you expected due to the sales miss or whether it was wage inflation related.

Yes. Nothing really in terms of inflation and cost. We -- one thing I would say is our average weekly sales don't fluctuate that much quarter-to-quarter. And there is a base of G&A it takes to operate our chain, operate our stores, operate our DCs. The other thing that does occur particularly in our store operations is we do a lot of projects in the slower sales time to get ready for that back half. We reset a lot of planograms. We take care of a lot of the other projects that we like to avoid doing in the back half because we want our teams focused primarily on driving sales. So there is a limited amount of leveraging we can do in sales dip in that quarter because if we were to cut too deeply, you're kind of putting our readiness for the back half at risk, and we don't want to do that at all cost.

And a lot of costs like our occupancy and stuff are...

They're fixed.

They're fixed, so...

Got it. Okay. And then in terms of the cohort of people that made machine purchases last year and the follow-up demand that you expected from reusables, how do those cohorts kind of compare to what your expectations were?

We keep running that. And it compares pretty favorably. We've had a little bit lower in the last few months. But the 2 quarters prior were on par with our algorithm, and I think in the last month or 2, it was a little bit below. But there were so many machine sales last year that it would have to be well below what we're seeing to not be a substantial benefit going forward.

And the chunk of those machines were bought by these customers we described there a little bit, less engaged on average than our core customers. So we did see that dip with that customer. Again, would expect that, that, as it usually does for us, will pick back up in the back half.

But there's really -- and I've seen a few studies on it, too. There's nothing that tells us that both selling in the arts and crafts space aren't alive and well with more enthusiasts than it had going into this pandemic. And so we're -- again, we continue to feel pretty good about -- if we can play our A game, it's going to be good for us.

Okay. Got it. And then I guess the last one for me was just how you kind of viewed your performance relative to kind of the rest of the industry just because it seemed like the expectations for some of your peers were a little higher than where you guys shook out for the quarter.

Well, we definitely know we gained share in several areas. I don't know any area where we feel like we lost share in particular. And we have our methods, you probably have your methods to try to figure that out. So -- and again, when we look at our different businesses in our different segments, we try to benchmark against apples-to-apples segments, but I think we're feeling pretty good about that.

I would say also, there's one -- we have one very good competitor who's really having a seasonal decor, and they've also had a very good run of it. But as we kind of look at their business, they're -- been really a great benefactor of one of the closures of a seasonal decor player. So I think you have to parse the market between the different segments to be able to understand sewing versus our arts and crafts versus seasonal versus decor versus whatever. But again, I think, like I said, we feel pretty good that we've held our own or gained share pretty much across the board.

And we have no more questions at this time. I'd like to turn it back to management for closing remarks.

Well, look, I just want to thank everybody for being on the call. We remain very optimistic about the future here. A lot of good things happening, and it takes 27,000 people to pull it off. So for all of our employees, too, not only do we feel we have a lot of momentum with our customer, it does show up in those results where we keep gaining strength on that Net Promoter and all the indicators under it. And at the end of the day, if we do our job and make those customers happy, we think we're going to have a really strong ride. So I appreciate it and look forward to talking more later. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.