Our next session of the ICR conference. I'm Dana Telsey of Telsey Advisory Group, and thank you also very much for joining us here today. Today I'm very pleased to have with me Claire Spofford, the CEO of J.Jill. She's been there since February of 2021, and knows the brand and lives the brand, and has been there in the past as the Chief Marketing Officer also around 10 years ago. For those of you who don't know J.Jill, it's a women's brand with heritage with around 247 stores and a very robust e-commerce platform. Guess what? It also announced today that its holiday sales and guidance are in line with expectations. Quite a feat for navigating agilely.
On her left, on our left, is Mark Webb, the CFO and COO of J.Jill, who's been there for nearly four years now, having previously been in finance, and we've known him a long time from his days at Gap. Thank you very much for joining us here today. Okay, Claire. You have been CEO now for like two years, and over that time you've improved the operations, you've demonstrated very strong gross margin improvement in a very challenging environment. What's been the biggest driver of the improvement? How are you thinking at 2023 and beyond?
Oh, thanks, Dana, we're very excited to be here and tell our story. We really stood back and took a good look at the business and looked at restoring profitability to the business. We put profitability ahead of top line. I think in the past maybe we had chased top line a little bit at the expense of the middle of the P&L. We remained very focused on maintain margins and gross margin development. We did that through a disciplined approach to inventory management, which we have been very diligent about over the last couple of years, making sure that we are in a healthy position from an inventory standpoint.
That has also allowed us to focus more on full price selling, to tell our full price story because we didn't have a lot of markdown inventory competing with ourselves on that front. That's been a big piece of it. Disciplined approach to inventory management. We used to come out of the gates with new products at 30% off. We'd set the floor and we'd be already at 30% off. We never gave the products the chance to sell at full price.
Hmm.
We don't do that anymore. We flow product regularly. We used to have sort of 12 major floor sets a year supported by a catalog at the outset and then another catalog mid delivery. We now have sort of stepped back from that. We're flowing things more regularly. We're giving the products a chance to sell at full price. Because we're about 50/50 brick and mortar and digital, we can read the business very quickly and we will promote surgically things that aren't turning as quickly in season and move through them quickly so that we can come out of each quarter as clean as we possibly can. That's been sort of the heart of our disciplined approach to running the business over the last couple of years.
When you think about the progress in 2023 and beyond, we talked about margins now. What do you think products, stores, how do you think about the next iterations?
Yeah. We feel like we're positioned well for profitable growth going forward now, and we're gonna take a very cautious approach, especially given where everybody is thinking about 2023. We're gonna earn our way to that growth. We feel like we do have a great runway of opportunity. We have relatively low awareness in our space. We are not over stored. We will have 243 stores as of the end of this fiscal year. We think that there's a store unit growth potential with the right economics. We firmly believe that. There's a whole host of customers right in our sweet spot that don't shop from us yet and don't know about us, quite honestly.
We feel like there's a great runway there.
The customers that do know about you are very loyal. Anything you'd wanna mention about your customer base, what they're like, how they're navigating through this macro landscape?
Yeah. We love our customers. So, typically 45-65 years old, disposable income is her own. Kids are pretty much out of the house. Annual or household income is, you know, around $175 million.
Really?
No, not $175 million. That would be a really special customer. $175,000. She has the wherewithal to shop.
Mm-hmm.
Most places, and so that means we have to do a really good job of providing her the right product and the right experience, but she tends to be incredibly loyal. Average tenure of our customer with us is about 10 years. If we do our job properly, then she sticks with us. She's terrific.
Yep. When you think about the Welcome Everybody campaign which just launched.
Yeah.
What are the learnings from that? What is it providing you? It's an exciting campaign for the inclusivity also.
Yeah. It's a, it's a real complete size inclusivity initiative that we launched in August. The reality is that we've been in this business for a long time. We've had up through size 4 X online for 20 years, but we never really talked about it. We also have a strong petite offering and a tall offering. What we did was we changed the website, so we created one inclusive size run, extra small through 4 X. We made it so that we had parity pricing across all of the size runs, which we think is just the right thing to do for the customer.
We tweaked some things in terms of her web experience and her shopping ability. We added size 2X to our stores, which takes the stores up through the equivalent of size 20, which is the majority of the market. We launched it in August. We saw strong response to it. It has met all of our internal targets in terms of what we were shooting for. This is a long-term growth initiative for us that we've only just begun.
Very exciting.
Yeah.
The other element is catalog.
Yeah.
Catalog's been around a long time.
Mm-hmm.
How do you see evolving your marketing mix?
We are always evolving our marketing mix. We refer to the catalog now not as a catalog, but a catalyst.
Mm-hmm.
It really does still drive traffic to our website. We see customers still come into our stores with pages turned down of products that she wants to buy. It's still an important part of the marketing mix, but the marketing mix has evolved markedly and continues to evolve. Digital marketing, performance marketing, we're working with influencers. We're trying to get the word out because we think we're too well-kept a secret.
Mm-hmm.
We continue to evolve that mix. So.
Mark, a key driver to the gross margin recovery certainly has been the inventory management and definitely the disciplined promotional activity. How are you thinking about inventory, margins, promotions, pricing?
Yeah. Thanks, Dana. I mean, a primary driver of the margin recovery was the inventory positioning. That supply-demand equation is so important. We're gonna continue to manage that very conservatively. We like to lag demand. We will invest into growth, we will do so conservatively. We're not a swing for the fences, invest on the come sort of place right now with our business model. Drivers to that gross margin really are full price selling and selling full price closer to ticket. Lower promos at full price. Higher yield on the full price product, you know, marking stuff down when needed and getting a better yield on the markdown.
We feel great about the recovery of the gross margin, and our intent as we think about that going forward is to manage the puts and takes, and the tailwinds and headwinds. We all know in our industry what those have been. Freight has been a headwind flipping into tailwind, and then as we're now sort of anniversarying that full price promotional cadence, that becomes a neutral to us, and we aim to manage and maintain that margin as much as we can.
Got it. I remember one of the first times we met, you talked about one of the biggest changes when you arrived is that you managed the sequencing of the product flow, so it didn't need to be marked down within a short period of time after it arrived. Is that continuing to evolve and?
Yeah. Again, because of our business, we can read the product assortment very quickly.
Mm-hmm.
And we can take action where we need to. We are hyper-focused on any promotional activity being as shallow as possible, as short-lived as possible, and as narrow as possible. I think with every tick of that, we see improved maintained margins. We stay very focused on that. That said, you know, we used to recall a lot of product back from the stores. When we had too much inventory in the stores. We're doing a lot less of that, and, so we're not handling the product as much. We're also moving through anything that isn't turning as quickly as we want it to in season very proactively so that we can be as clean as possible coming out of each quarter.
When you think of the different product lines, Pure Jill, Wearever, what do you see as the opportunities for each?
It's great. Again, I inherited this set of core brand and sub-brands, and the beauty is that we really do meet a broad variety of her end uses. Wearever is a strong sub-brand for returning to work, for some, for special occasions, for travel. The core assortment can flex and does flex seasonally with her needs for sort of premium casual apparel that's very versatile. The Pure Jill is an even more pure expression of the brand in terms of beautiful fabrications, lovely makes, some artisanal pieces that she has responded really well to.
We had a capsule collection that we launched in September. We have another one now, called Pure Jill Elements, which takes that price point up a little bit more and adds more specialness to the product even, and she's responded very well to that as well.
Good.
We think that it's we've got some great potential there.
Just today with your announcement with holiday, how would you, both of you characterize the holiday? How is it different than whatever it had been in the past? What's the new normal? What did you see?
I don't know if you can ever say a new normal anymore, right?
Mm-hmm. Right.
Just keeps evolving. I think we came into Q4 with our Q3 guidance. I sort of saying there was some caution around the customer.
Mm-hmm.
The competitive environment, and, we were happy to reaffirm our guidance in our press release this morning. It came in, fairly close to what we expected. The thing for the J.Jill business is that we're not terribly Q4 dependent.
Yeah.
We're actually, Q2 and Q3 are our biggest profitability quarters, and Mother's Day is actually bigger for us than this holiday season. We feel happy that we were able to sort of stick to our guidance and deliver against our expectations.
Yeah. The adjusted EBITDA also, you delivered against the expectations with the margin.
Yeah.
Yep.
Yep. I mean, that's part of our strategy going in, was to make sure that we were maintaining our discipline and managing to that. I would refer everyone to the press release today just for the forward-looking statements.
Thank you.
Some of the risk factors out there as well.
Yep. Speaking of the competitive landscape, how do you see the competitive players to your business? What do you see as the path for 2023 on the competitive set that you're watching?
We obviously, we know a lot about our customers. We have a lot of data around our customer, and it helps inform a lot of the decisions that we make. You know, we watch the competition closely. We know with whom we have crossover shopping. Our customer tends to also shop Nordstrom and Macy's and the brands you would expect, Chico's and Talbots to some extent. We really feel like we do best by sticking to our knitting and executing against our initiatives and our product and, you know, we don't stick our head in the sand.
Yep.
Very clear-eyed about it, but.
Mm-hmm.
We're just gonna continue navigating the way we have been.
When you think about the digital competitors or the brick-and-mortar competitors, is there a difference between each? Tell us about your digital business.
Yeah, we're lucky in that our business model is about 50/50.
Mm-hmm.
Brick-and-mortar and digital. We love that because it allows us to service our customer and allow her to shop where and when she wants. It allows us some flexibility in terms of navigating whatever's happening in the environment. Again, we don't feel like we're over-stored. We do feel like there's growth opportunity in both channels. We have the opportunity for store unit expansion. The digital channel has evolved in terms of its role in the business markedly over the last couple of years in the sense that the digital channel is where we really move through most of that markdown, that excess inventory that we used to carry. You know, we've seen a repurposing of that channel to more of a full price business as well.
That's a good thing.
Both channels, super important.
Are there different competitors digitally versus brick-and-mortar?
Not really.
One of the other things about your business is you generate strong free cash flow. How do you think about the priority for that strong free cash flow in terms of repaying or refinancing some of the debt?
Yeah. We are very proud of the cash flow generation of the business. I mean through Q3, we generated $67 million of cash flow year-to-date from operations, had $90 million of cash on the balance sheet. As we think about the priorities, we have talked about strengthening our balance sheet. We've mentioned that we are actively looking at refinancing our priming term loan. And we feel that that's achievable as well as investing in the business, investing in systems. We're investing in a new POS system this year and into next. Then there's cash after that as well. Really important part of the story is the cash flow generation.
Yep. With that, one of the things is over the medium term, you've talked about opening 20 to 25 new stores. As you think about the importance of the stores channel for your customer, where do you want those stores to be? How do you think of the returns, break even, profitability of stores?
Our store fleet is very profitable. We peaked at about 287 stores in 2019, and we're, as Claire mentioned, we've guided to 243 at the end of the year. That reduction really was opportunistic. It was optimizing the fleet. We'll continue to do that. I will stick to that we believe there is store growth opportunity and Claire mentioned it as well, but it has to be at the right economics.
Mm-hmm.
That's a tug and pull process and conversation. We've seen some good traction there. Part of those stores that we closed exited markets that we feel very strongly about, and our customer is there. It was exited for the right reasons, but that goes right onto a void list. There's been some demographic shifts as well post. We're excited about, you know, a measured store growth opportunity in the coming years as well. Maybe I'll let Claire talk about the store environment.
Yeah.
For the customer.
Well, we've talked about this a lot.
Yep.
Dana. The store environment is really warm, super high touch.
Mm-hmm.
Experience for our customers. A lot of our store associates actually used to be customers, and then they wanna become store associates 'cause they want the discount and they wanna be able to shop there, and they love the brand so much. We talk about the fact that sometimes it feels like a party when you're back in the dressing rooms.
Mm-hmm.
The store associates are bringing products for her to try on. They know their customers really well. It is a really important part of our brand, and we think that there is an opportunity to take that special sauce and broaden it with more stores under the right economic circumstances. It's an important part of our business, for sure, and we feel like there's incremental opportunity there.
When you think about store size, how do you think of the structure of it going forward? Locations off mall, on mall, city, street?
Yeah. Today our store fleet is 50/50, whether it's in a lifestyle center or an enclosed mall. We'll evaluate site-specific opportunities. The store size at around 3,000 sq ft , we feel is right-sized, that the business model change has sort of afforded some square footage opportunity within the store as we've tightened down the assortment the last couple of years. Feel really good about the footprint of the stores and the opportunity that presents from a growth perspective. Feel good about the size of the store. Feel good about the economics that we're beginning to see in the store. The existing fleet, by the way, is largely profitable. 97% of the fleet we've said is positive EBITDA.
Yeah.
The reality is that that's at today's economics, and we'll continue to fine-tune those as we go forward and really feel good about that channel.
I think one other point on that front is because we do have such a strong direct-to-consumer business, we know where our existing customers are.
Mm-hmm.
We know a lot about them. We can be pretty surgical about where store opportunities are, and we can also append that data with look-alike customers in high potential locations. We use all of that data to help decide where we're gonna put that next store.
When you think of data, how far are you along in the process of culling the data and using the data to help inform your business?
I think we're fairly far along. Again, we've been a direct-to-consumer business forever.
Ever.
I think we use that data, very deliberately on store locations, on, you know, reading the business. We also do a lot. I know I shouldn't touch my chest when I have the mic on. Very near and dear to my heart is staying super close to the customer, and we do a lot to do that. We do regular check-ins with her basically after every major floor set to understand her purchase intent, how she's feeling about her sense of confidence in terms of this macro environment, what she's looking for from us. We do a lot of primary research with her.
Mm-hmm.
On top of all of the sort of transactional data that we have.
How is she feeling now?
She is feeling. Well, we like to say she is resilient, but not impervious. Obviously, given who our customer is, she was, you know, less affected in the early stages of all of this last summer in terms of the price of gas. That was not as big a deal for her. You know, as she looks at the volatility in the stock market, as she looks at her portfolio, as she looks at impending, you know, inflation going further, I'm sorry, an impending recession. You know, she's gonna be a little bit more cautious, and that's why we're taking the approach that we're taking.
Mm-hmm.
As we go into 2023, and we're gonna earn our way to any growth. We're not gonna get out over our skis.
In addition to store growth, what else do both of you see as the long-term growth opportunities at J.Jill?
We feel like given this business model with this customer broadly, in this space, we have a nice runway for growth with the business. We also feel like this size inclusivity initiative is a great growth vehicle for us in the short and medium term. Then, you know, we do have, the core brand and the sub-brands, but there are always opportunities to meet the you know, further needs of our customer. Then in addition, you know, we feel like there's a whole new cohort of customers coming up into our space that don't know about us.
Mm-hmm.
That's a really strong avenue for growth for us as well.
We believe the cash is sufficient to invest into all those ideas, and then some.
Yep.
Got it. I guess the last thing I would ask about is when you think about the drivers of the business and the long-term operating margin potential, where do you see that going?
Yeah, I think for us, the attainment of the margin structure today is one that we're, I said before, we're very proud of.
Right. Mm-hmm.
It's, a very healthy margin. The margins year-to-date are just a hair under 70%.
Mm-hmm.
It flows through to the EBITDA margin. The first order of business is we maintain the profitability level that we've achieved, then we determine how to invest for growth. The first sort of thought is we're gonna maintain that profitability profile as we grow forward.
Mm-hmm.
That's kind of our current statement around it.
Yep. While continuing to enhance that relationship with your product offering.
Yes.
And the service.
Yep.
Which is always so important. Anything we're missing today that we should be asking about that we haven't?
I think we covered the bases.
We have two minutes. Any one or two questions out there that anyone would like to ask? Okay. We'll give you two minutes of your life back. Thank you very much, everyone.
Thanks.
Thanks, Dana.
Thank you, Claire and Mark.