Jo-Ann profit sliced in first quarter

Don Hogsett, May 26, 2003

Hit by $4.6 million in costs tied to the repurchase of debt and the way it now accounts for the stock options it gives to managers, first-quarter profits at Jo-Ann Stores Inc. were slashed by more than half, falling by 52.9 percent, to $4.1 million from $8.7 million last year.

Held in check in a sluggish retail environment, sales were virtually flat, edging up by 0.6 percent, to $374.8 million from $372.4 million last year. Same-store sales were off by 2.6 percent, up against a difficult comparison with a 13.5 percent increase a year ago.

Taking a toll on the bottom line was a $3.4 million pre-tax charge pegged to the early retirement of $46 million in long-term debt. Acting as a further drag on profits was a $1.2 million non-cash charge as the company changed the way it accounts for stock options granted to executives.

Even more pressure was placed on profits as margins thinned out under markdown pressure. Average gross margin thinned by 30 basis points, or three-tenths of a percentage point, to 48.2 percent from 48.5 percent. "Lower selling margins, due to more promotional and clearance activity, were partially offset by improvements in store shrink rates," the retailer reported.

Hampered by the falling same-store sales, operating costs climbed higher by 40 basis points, or four-tenths of a percentage point, to 40.8 percent from 40.4 percent the prior year.

Operating profits fell by 20.6 percent, to $16.2 million from $20.4 million last year. Adding an extra layer of pressure, the retailer added on $2.12 million in store pre-opening and closing costs. By the end of the quarter, the company's store base had contracted by 34 units from year-ago levels, to 917 from 951. The retailer shuttered 41 smaller traditional stores while opening seven larger superstores.

Going forward, Jo-Ann said it expects to record a loss of $0.15 to $0.20 during the current quarter, in part due to the added cost of expensing stock options. And for all of this year it lowered its outlook for per-share profits to $2.00 to $2.10 a share from earlier guidance of $2.45 to $2.50.

Jo-Ann Stores Inc.

Qtr. 5/3 (x000) 2003 2002 % change
a-First-quarter 2003 pre-tax results were reduced by $1.2 million in stock-based compensation expense and $3.4 million in debt repurchase expenses.
Sales $374,800 $372,400 0.6
Oper. income (EBIT) 16,200 20,400 -20.6
Net income 4,100a 8,700a -52.9
Per share (diluted) 0.20 0.43 -53.5
Average gross margin 48.2% 48.5%
SG&A expenses 40.8% 40.4%

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