Linda Heasley - CEO Dave Biese - EVP, CFO and COO.

Lorraine Hutchinson - Bank of America Randy Konik - Jefferies Oliver Chen - Cowen & Company.

Good morning. My name is Lisa and I’ll be your conference operator today. At this time, I would like to welcome everyone to the J. Jill First Quarter 2018 Conference Call. On today’s call are Linda Heasley, CEO of J. Jill Inc.; and Dave Biese, Executive Vice President and Chief Financial and Operating Officer.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J. Jill’s SECs filing.

The forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update our forward-looking statements. Finally, we may refer to certain adjusted or non-GAAP financial measures on this call.

A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in our press release issued today. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of our website at jjill.com. I will now turn the call over to Linda..

Thank you and good morning everyone. I’m honored to be on this call today and to provide my initial insight since joining J. Jill eight weeks ago.

Dave will walk you through the quarter and our outlook in a moment, but as this is my first time speaking with you I wanted to provide a little context as to who I am and why I am excited to be here to bring J. Jill to its next phase of growth. I have long admired the J. Jill brand as a fellow retailer, as a woman, a Board member and as a customer.

I thank Paula Bennett for her dedication to the brand over the past decade and the foundation she has built here. Because I have been a member of the J. Jill Board of Directors, I have an understanding of the company’s strength and of its opportunities.

I also have a deep understanding of the retail and consumer business, having previously served as CEO of The Honey Baked Ham Company and prior to that in women’s’ retail apparel as CEO of Lane Bryant, Ascena’s tough segment and The Limited, and before that I held leadership positions at L. Bryant and CVS. I know why J.

Jill has been successful and I know where we can improve. I think there is tremendous opportunity for growth in the coming years. The first quarter results are indicative of where we find ourselves, we saw continued strength from our retail stores and improved results from our e-commerce channels.

We are also seeing momentum in the growth of our customer file this quarter, which speaks to the loyalty of our existing customers as well as our ability to attract and retain new customers to the brand. We have more work to do, to get us to a level of performance that we know we should be delivering.

As I mentioned, this week marks my eight week at J. Jill. As you would expect, I have been spending significant time with our teams. We have a deep connection with our customer that is unique and admirable and while it’s necessary and important to have a solid base, it alone is not sufficient.

There is opportunity for us to be more for our customers than we have been today, to embrace more women while concurrently strengthening the connection we have with our existing customer base. I’m currently accessing every aspect of our business and I’m looking across our platforms to find the areas in which we can unlock our potential.

We have some changes in investments to make to accelerate our growth. I am excited by what lies ahead. Now I will turn it over to Dave to review our first quarter results and outlook.

Dave?.

Thank you Linda. As expected, our first quarter sales trend decelerated from the fourth quarter, but not to the degree we originally anticipated. The deceleration was largely driven by our weaker February performance, as our January promotions in the fourth quarter pulled demand forward from February.

Our trends improved as we moved through the quarter and we had a stronger than expected finish for the period. Our star performance continues to drive our sales results, yet both channels exceeded expectations. During the quarter, our teams implemented e-commerce upgrades that improved the shopping experience in the channel.

We will continue to rollout further development to our website in to the fall including enhanced my account and fitting features as well as offering alternative payment options. Further, we made positive progress to clear inventory and are on track to meet our objective to better align the level and mix of inventory to customer demand by the fall.

I will now review our financial results in more detail, first some housekeeping. As a reminder, 2018 is back to a 52 week year and we do experience an impact from the related calendar shift.

As it relates to reporting comparable sales, we use the NRF’s restated 2017 calendar to calculate our comparable sales growth, providing a more apples-to-apples view of our performance.

Unlike others, we have adopted the new revenue recognition accounting standard, however this does not have a material impact on our result and as such, we are not adjusting our historical reporting of results. For the quarter, total net sales were $181.5 million, an increase of 9.3% versus last years’ $166.1 million.

Total company comparable sales increased 2.3%, driven by our stores and better than expected selling of sales product in the quarter. As a result of the calendar shift I noted earlier, our first quarter sales benefitted from a low volume week in February being replaced by a much larger volume week from May.

This was contemplated in our first quarter guidance. Excluding this shift, the spread between total company comparable sales and total net sales would have been more in line with our historical results. Gross profit was $120.3 million versus $115.6 million last year, and gross margin was 66.3% compared to last year’s 69.6%.

The rate reduction was slightly more than our prior guidance, given the better-than-expected selling of sale products. SG&A expenses were $98.7 million versus $93.4 million last year, excluding non-recurring and certain one-time expenses of $1.6 million and $3.6 million respectively.

Non-recurring cost this year are related to our CEO transition, while last year they were related to the IPO in March 2017. As a percentage of total net sales, SG&A expense excluding non-recurring and one-time expenses was 54.4% versus 56.3% for the first quarter of 2017.

The SG&A leverage was driven by the sales impact of the calendar shift as well as our comparable sales growth. GAAP operating income was $20 million or 11% of sales. Operating income excluding non-recurring expenses was $21.6 million or 11.9% of sales versus $22.2 million or 13.3% of sales last year.

Adjusted EBITDA for the quarter was $31.5 million as compared to $31 million last year. As a percentage of sales, adjusted EBITDA was 17.4% versus 18.7% last year. A reconciliation of EBITDA-to-net income is included in our press release.

Interest expense for the quarter was $4.8 million versus $4.9 million last year, reflecting the voluntary pre-payments made in fiscal 2017 and this benefit was partially offset by higher interest rates this year.

Tax expense for the quarter was $4 million versus $5.6 million and the effective tax rate was 26.1% compared to 41.1% in the first quarter of 2017. And as noted in our last call, the US Tax Cuts and Jobs Act significantly reduced our federal income tax rate.

GAAP net income for the period was $11.3 million or $0.26 per diluted share, versus $8 million or $0.18 per diluted share last year. The first quarter included a $0.03 benefit from the calendar shift and a $0.05 benefit from the lower 2018 tax rate.

Finally, adjusted net income which excludes non-recurring expenses was $12.4 million or $0.29 per diluted share versus $10.3 million or $0.24 per diluted share last year. Adjusted diluted earnings per share uses 26% and 40% tax rate assumptions in fiscal 2018 and 2017 respectively.

Turning to the balance sheet, we ended the quarter with $28.7 million in cash and $38.4 million in availability under our revolving credit facility. Our inventory at the end of the quarter was $77.5 million compared to $73.6 million at the end of the first quarter in 2017.

During the quarter, we closed three stores and ended the quarter with 273 stores. Finally, capital expenditures were $2.2 million.

Turning now to our outlook; as noted in our previous call, we are providing guidance one quarter out, giving us the flexibility to continue to diagnose our trends and make adjustments to the business as the year progresses. For the second quarter of 2018, we expect total comparable sales to be flat to positive 2%.

We expect total net sales to decrease low single-digits as a result of the shifted 2018 calendar. The benefit we had to sales in the first quarter due to the calendar shift is a headwind in the second quarter.

Our inventory clearance efforts will continue in the second quarter and as a result we expect gross margin to decline approximately 200 basis points year-over-year. These continued clearance efforts coupled with our reduction and receipts for the second half puts us on track to better align inventory with customer demand in the fall season.

We expect SG&A as a percentage of sales to deleverage approximately 150 basis points primarily due to the sales headwind as a result of the calendar shift. Interest for the quarter will be approximately flat to last year, as the benefit from last year’s prepayments is offset by higher rates.

Diluted earnings per share expected to be in the range of $0.22 to $0.24, including a $0.04 benefit from a lower tax rate and a $0.03 negative impact related to the calendar shift. This compares to $0.28 in the second quarter of fiscal 2017.

Adjusted diluted earnings per share for the second quarter of 2017 were $0.29, which excluded a negative $0.01 impact from non-recurring expenses related to the company’s IPO. Also for the second quarter, we expect to open three stores and to close two and end the quarter with 274 stores.

For the full year of 2018, we now expect to open 13 new stores and continue to expect to close seven to eight stores. And finally, we expect capital expenditures for the year to be in the range of $30 million to $32 million. And with that, I will turn the call back to the operator to take questions. .

[Operator Instructions] And our first question comes from the line of Lorraine Hutchinson from Bank of America. Your line is open. .

I was just hoping for an update on the e-commerce, on the website re-platforming, where are you in terms of capabilities and when do you think you will have the complete offering as you want it throughout the year?.

Hi, Lorraine it’s Dave. So, if you backtrack a little bit to the history of it, we implemented a new site more or less at the beginning of this fiscal year. We discussed then where we saw opportunities I’d say to improve something that was more foundational to the site in terms of the experience.

We also talked about the impact that some of the inventory position that we had particularly the mix of inventory and some of the challenges that presented to this site. And then there was just more or less a general adoption. So as we sit here right now, I feel like we’ve made some good progress against all of that.

You would expect over time that the customer becomes more acclimated; we think that we’ll continue to go for some period of time, but anecdotally we’d say that improves.

In terms of the inventory, I think we’ve made good progress against clearing out not just the overall level, but also cleaning up the mix of inventory such that we can merchandize the site a little bit better, but at the same time there is still opportunity to improve there.

On the fixed front, if you want to call it that, some of the things more foundational, I feel like we’ve made good progress against that.

We’re going to continue to do some of that, but I would say some of the stuff that falls into that foundational category becomes less significant in terms of the experience, because we’re making progress against it, and then we’re going to this fall at some point which we noted my account features, fit, some additional payment options that will be completed this fall.

I don’t have an exact spot on that other than say obviously well in advance holiday. So I would say that by the time we go in to holiday this year, we’re going to feeling good about our website. We feel good about it right now.

I would say from there though, we look forward to really making progress and leveraging it in a more fulsome way across the business and really using it in a more a digital platform basis as we look to the future.

So we’re excited about the real upside, we’ve made progress, but this fall we feel like we will have gotten to a place where it’s more readily, it’s been adopted and we put something that we’re feeling good about in front of the customer. .

Our next question comes from the line of Randy Konik from Jefferies. Your line is open. .

I just wonder if you could some of your - just expand of time your initial impressions on your areas of improvement. Are there any one or two particular areas where you want to see additional improvement and what about those areas do you see needing to be switched around or changing process for procedures or something like that, just curious. .

Thank you Randy, it’s great to be here.

Spent the eight weeks since I’ve been here learning as much about the brand and its people as I can, and as you can imagine I’ve been spending a lot of time with the teams, I’ve been in a lot of meetings, I’ve been in a lot of one-on-one sessions, I’ve had the privilege of getting to meet most of our leadership, our field leadership team, spending time in stores, and I’m still assessing.

So it will be my intent in the short and in the very near future to be able to come back with an articulated framework around my assessment as well as some of the decisions to move forward.

There’s a lot more right than wrong I will tell you which has been very exciting, but I’m still neck deep learning as much about the brand and its people as I can. Thank you. .

And then Dave the inventory seems like it’s in a decent position, just curious on the clearing process, did you change the clearing procedures with the inventory in the last reported quarter in a sense of – I think in the past we do most of the clearing through the website versus the stores.

Give us some perspective on the clearing procedures, have they changed if any, and how they will change or not change going forward? And then just if you can give us like a timeline of when do you think e-com can sort of act like the stores channel or stores channel like e-com together? Is it two quarters out, is it three quarters out, just trying to get some perspective on when you think we get more to a normalization period back in the business..

Well, generally as it relates to inventory, I’ll use your word, decent shape, right now. We’re certainly on track for our plans, which was again to get the mix and the absolute level more right size to demand and more appealing to the customer by this fall. So we feel good about that.

We are on a shift adjusted basis we came out of last year about plus 8% on inventory year-over-year. We just finished a quarter about plus 5. So we’re making progress and we will be better than that as we go into the fall. So I’m feeling good about that.

As far as the process that we use, at this point, I would say it is the same process and will continue to be the same process going forward for the foreseeable future. We are talking about some things that we think could improve some of the channels we use, but that is more, I would say for the future.

But for the foreseeable future, it’s going to be the same model which we think works pretty well except that right now, we are relying too heavily on the direct business to clear product in a more price promotional way which as you know now from our conversations which is a large part of what it is we’re trying to correct.

As far as getting e-com and retail operating in the same way, frankly, I don’t have a point of view on that yet. One of the reasons we’re guiding one quarter out is precisely for that reason so that we can continue to understand our business very well, make those adjustments and have a better view of the future.

So, what I would say about that is, we continue to appreciate your patience on that, we’re one quarter out, we do look very much forward though to the future and being able to talk more fulsome about all of that. .

And one more little follow-up, that’s really helpful. Just in terms of how you’re thinking about financial visibility and variability in the business right now versus let’s say a quarter or a couple of quarters ago, does it feel like that’s starting to return and you’re getting a little bit more visibility and stability in the business, just curious.

.

With some passage of time now, I would say, yes.

When I reflect back on the first quarter, how much business got pulled forward from February because of our January promotion and hindsight now I would say, that was kind of a learning there, because obviously and as we’ve communicated the business improved from there and I would say is operating in a more stable basis at this point, and that is also what reflects on our guidance as well in terms of really trying to be more contemplative of what else our run rate is now.

What I will reinforce though is, given our inventories and given the way we continue to promote through the second quarter, we will not hit that run rate state until at least the third quarter, so there’s a lot to learn yet. .

Our next question comes from the line of Paul Trussell from Deutsche Bank. Your line is open. .

This is Christina Katayan for Paul Trussell.

I was wondering if you could begin a little bit further around the trends that you were seeing in the store channel versus the direct? And on the store side were the comps during the quarter driven by both transactions and AURs, and maybe if you could just talk about some of the actions that you took to get back to positive comp growth, like what will you work during the quarter and what are some of the learnings?.

I would say for the quarter what we saw is obviously a nice improvement and frankly outside of our expectations as we move through late March and in to April, so some positive results and in both channels. Both traffic and conversion for both channels were positive as we ended the quarter.

And I think a lot of that, its reflective of different things one of it is simply we do believe that the receptivity to product has improved and as far as the offer and the stories and how our merchandizing has improved and we feel like that is something that provided a benefit.

As it relates to the stores, I would say, the stores have been pretty solid for a while. So we feel some strength there as oppose to having I’ll say really focused on something that we had felt like we needed to turn in a dramatic way. We feel like that’s a foundational strength right now.

Direct for all of the reasons we talked about what’s more of a focus and again gaining some confidence there and they also had positive traffic and conversion in the first quarter. But retail obviously if you’re doing the math based on the percentage of businesses that the two channels represented was very strong in the quarter. .

And just a follow-up would be on the expectations for gross margin and 2Q is still to be down meaningfully.

So just wondering, how much of the inventory is carryover from 1Q versus fresh 2Q inventory?.

I don’t have a prospective necessarily or a number to share on exactly how much, it’s the nature of how our business operates and flows. You always have some product that carries over and it’s a lot to do with just how we architect the assortment and the likes. So there isn’t a precise answer to that.

In terms of the off-price inventory in that bucket of inventory that we really felt like we had to move on, we’ve made good progress there.

The fact that we sold through on that better than we expected in the first quarter that influenced the margin down in the first quarter, but it’s also the reason that sequentially and year-over-year the decline in margin is less.

We’ve left ourselves an allowance in margin though to see that we absolutely have the [fodder] we need to have our inventory in a good place by the second half..

Our next question comes from the line of Ike Boruchow from Wells Fargo. Your line is open. .

This is [Nancy] on for Ike. Could you just actually give us a little bit more detail obviously Q1 ended a lot stronger than you started off.

Can you just talk about maybe the quarterly cadence that you saw like throughout the quarter and how you think about getting in to Q2 where that quarter-to-date is looking?.

Yes. So backtracking a little bit to what you know, but just to set the stage is, February was a challenge and we talked about that when we guided the first quarter. March improved nicely, it was really as we moved through the middle and end of March and then ultimately April was very strong.

Because of the Easter shift, if you take the two months together of March and April, together they were much better than we had expected. So we’re very pleased with that strength. But I would say April and particularly in our stores was the thing that really drove the beast. So we just finished a quarter at 2.3% comp.

We’ve guided 0% to 2% obviously the quarterly results and where we stand after May has a lot of influence on that.

As we see it here in May, we haven’t necessarily seen a deceleration in the business by any means, but we are again, I’ll say cautious yet in terms of having that run rate in a period of time where we’ve been operating in a more of a steady state before, I think we’re going to be ultimately again confident in terms of talking further out.

But right now so far in May, I would say, we have not seen a deceleration and obviously informed our guidance. .

And then just as a follow-up, could you just tell us are there any other calendar shifts that we should consider, obviously Q2 is sort of an offset to Q1, but anything in Q3? And then are there any SG&A expenses shifting or is that just from the 53rd weekend to Q2?.

Well we will have a similar shift of business from the fourth quarter to the third quarter, given the calendar shift and it’s going to be a lot like what we’re seeing here now in the second to the first quarter.

And as far as SG&A is concerned, I don’t see that as – there’s going to be an influence on the SG&A rate because of that shift, again third and fourth quarters, but it’s not going to necessarily change or shift a great deal of expense from one quarter to another, we don’t see that necessarily. .

Our next question comes from the line of Oliver Chen from Cowen & Company. Your line is open. .

From an e-commerce perspective what factors do you continue to monitor and are you feeling like the my account and the sitting options are options that you’ve tested and thought about in terms of the consumer reception of the process and how the navigation will work.

And then secondly, we’re just curious about the broader question of profession and product risk and your thoughts around ensuring that you have guard rails and procedures and how that looks on a longer term basis just to maintain a certain degree of customer’s interest in balancing the art and science of merchandise and planning. .

To be honest what do we monitor, it’s a little bit tricky because we watch everything. And given where we’ve been, I would say we’ve been even more keen to monitor a great deal of information that really reflects every point in the purchase model.

That’s the only way I can really describe simply as to say, literally monitoring that purchase path all the way from the top of the funnel when she has joined us on the site, where is she landing, what pages is she navigating, how is she interacting with the product on those pages all the way through to the checkout and looking for those friction point.

And that’s probably a good way to describe just the things we continue to work on fine tune in terms of putting improvements on to the site and continuing to do those implementations.

So, beyond that it’s a great deal of other things too just in terms of really understanding the merchandising and the like and really what’s her experience there, what is she responding to when you merchandize in a certain way. So it is fulsome in that sense. As far as the capabilities are concerned, I’ll talk the fit first.

Fit is something we hear about regularly from our customer, and her ability to really understand fit on the website, in fact we’ve done a great deal of, I’ll call them usability of work lately and confirm that. So we see opportunities to do more of those.

So really that fit feature that I am talking about is absolutely pointed at giving her a better way to understand how fit works for her and we also feel like we have ways to potentially improve the fit too in certain size ranges that will help that cause. So we are excited about that.

On my account, I would say in that case, it is going to be more information for our customer in terms of where’s she been, what she’s purchased in the past in the light and that its going to be a more service oriented thing in that sense. So we feel strongly about that too.

As opposed to a test, we’re going to obviously test all of that before we introduce it. But I think from a standpoint of, it’s a good service feature as opposed to something that we think introduces an element of risk. But we test everything all the time, so to speak.

And as far as the fashion and the like, I’ll go ahead and have you jump in on that Lin..

I’m going to take that one Oliver. I know we want to be cautious in terms of positioning as of overly as a fashion business, but we are in the apparel business, and we are going to have some misses.

So I think one way to guard against that and to downsize the risk around fashion misses is to continue to test new silhouettes and ideas for our customers.

I think we tatted a little too safe as I look at the brand in the past two years, and I think one of the thing we’ve done is we know our customers so well and wanted to invite her, we actually repeated some silhouettes too much and we didn’t give her anything new and we need to be giving her a reason to come back on a regular basis.

So your question really about the guard rail is a great one.

I think we can leverage the website more to test new silhouettes and get a quick read on what’s working and what’s not working and we can attach it very quickly to a specific demographic size etcetera which is sometimes harder to do in the bricks and mortar channel, even though we have these wonderful sales associates who give us a lot of feedback on fit and what’s working and what’s not working.

I think again, I think there’s a lot of opportunities in test and learn relative to new silhouettes. I think we have to make certain that we are always giving her a reason to come back and we’re showing her a relevant and current offering that will make her always feel appropriate wherever she might be going.

I am saying very close to design and merchandising and the product teams to better understand the process. And I’m really excited about the things we were able to influence this year, but you’re going to see more influence and what we can change in the next 12 months to 18 months. So I’m going to look for that question again in the near future.

Did I answer your question right?.

Thank you, it’s very helpful. And our last question is just about the online experience with customers who did experience the friction points in the past.

Dave what are your thoughts about those customers and the opportunity to reengage them and the analysis that you have related to the friction points that they experienced in kind of that customer lifestyle value. Would love any thoughts there? Thank you. .

What I would say generally is, we were pleased with the file as we exited the first quarter. So I characterize it this way, she’s out there, she hasn’t left us. To your point we do need to put it on outflow to listen more and better, and offer her a better experience and the like.

We are very pleased with our file as it relates to retail, but bringing it back to directly where you are, we still continue to draw our file on both channels. And again she is with us, we have a very not just a great coming from a demographic standpoint, but she is incredibly loyal.

So we’re excited about that, and to your point we need to see that we re-engage and give her every reason in the world to come back to us regularly where our conversions improved, that’s very exciting. Now we need to get the engagement back with our customer and more from that standpoint.

In fact I’ll just throw that, and as my final point, we were pleased with our new-to-brand growth in the first quarter. So there’s a lot of strength here to grow this brand and as we said e-commerce is the priority and we think we continue to have a strong platform there, we need to execute better. .

There are no further questions at this time. I will now turn the call back over to Linda for some closing comments. .

Thank you. I’m excited about the opportunities that we have in front of us, and I hope you’ve got that from our comments today. We have a number of strengths, most notably a significant customer base and very loyal and who really loves us. And stores that continue to perform well by engaging our customers each and every day.

While we have incredible assets at our core, we have a lot of work to do before we can unlock our true potential, and we know we can so much more to her. I look forward to sharing our evolution with you and thank you for your interest in J. Jill. .

This concludes today’s conference call. You may now disconnect..