Thinning Margins Hurt Jo-Ann

Don Hogsett, May 23, 2005

Hudson, Ohio —With its same-store sales held in check, margins thinning and costs climbing, Jo-Ann Stores Inc. said first quarter profits tumbled 37.3 percent, to $4.2 million from $5.7 million last year.

Sales at the fabric and crafts retailer rose 3.9 percent, to $420.7 million from $404.9 million, helped by new store openings. But same-store sales were virtually flat, edging up just 0.6 percent, compared with a year-before increase of 6.6 percent.

Taking a big bite out of the bottom line was $1.7 million in incremental expenses related to store pre-opening and closing costs, the company said, “due to the increased level of real estate activity in the quarter.”

With a more promotional selling environment layering on markdown pressure, average gross margin narrowed 40 basis points, or four-tenths of a percentage point, to 48.7 percent from 49.1 percent a year ago.

Adding even more pressure to the bottom line, costs jumped 160 basis points, or 1.6 percentage points, to 42.3 percent of sales from 40.7 percent the preceding year. Measured in absolute dollars, costs climbed 7.9 percent, to $177.9 million from $164.8 million, stemming from an increase in advertising costs.

Alan Rosskamm, chairman and CEO, said, “”While we anticipated a down first quarter relative to last year, due to the increased level of store pre-opening costs, we were disappointed with our overall performance. Sales in the first nine weeks of the quarter did not meet our expectations. On a positive note, our superstore openings are on track and the stores opened during the first quarter are off to a good start. Our superstores, which now account for almost 40 percent of total company revenues, outperformed traditional stores in the first quarter, with same-store sales in superstores increasing 2.8 percent.”

Jo-Ann Stores Inc.

Qtr. 4/30 (x000) 2005 2004a % change
a. 2004 results have been restated to reflect the necessary adjustments to revise the company's accounting for leases.
b. Results in the year-ago first quarter included $4.2 million in debt repurchase expense.
Sales $420,700 $404,900 3.9
Oper. Income (EBIT) 8,800 18,700 -52.9
Net income 4,200 6,700b -37.3
Per share (diluted) 0.18 0.30 -40.0
Average gross margin 48.7% 49.1%
SG&A expenses 42.3% 40.7%

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