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Proprietary Data Insights Financial Pros Specialty Retailer Searches in the Last Month
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Consumer Discretionary |
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Avoid This Stock Despite Its Correction |
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Stocks are on sale again, and financial pros are looking for bargains. One company with a significant spike in search volume is JOANN (JOAN). You can see our proprietary Trackstar data below. After a disappointing earnings release, JOANN stock has fallen 42% over the last month. But does the massive drop in share price warrant a buy? We dug in to find out. JOANN’s Business JOANN is a specialty retail store that sells fabrics, sewing materials, and arts and crafts supplies. It has been in business since 1943, operating approximately 850 stores in 49 states. After going private more than a decade ago, the company IPO’d on the Nasdaq in March 2021. JOANN generates about half its revenues from arts and crafts and home decor. The other half is from sewing supplies. But like many retailers this year, the company has faced supply chain issues that added high costs to its procurement of imports. Its net sales declined 7.9% as of its latest quarterly results. A huge portion of its supplies come from China and are subject to tariffs that the U.S. has yet to lift. But the company is targeting $200 million of annualized savings from lower supply chain costs, product costs, and other operating expenses in the next 1.5 years to maximize cash generation and liquidity. Financials Source: Stock Analysis JOAN’s revenues have stagnated for the last five years. In 2017, the firm generated $2.3 billion in revenues. Over the last 12 months, it came in just shy of that at $2.25 billion. Moreover, its operating income has gone from $997 million to -$839 million (negative!) over the last 12 months. But that’s not the worst of it. The company has $28.5 million in cash and $1.97 billion total debt. The majority of its debt is long-term. But net income is now negative, at -$95.9 million over the last 12 months. As we touched on, JOAN set forth a plan to deliver approximately $200 million in annualized cost savings over the next 18 months. Additionally, the company paused its quarterly dividend to strengthen its liquidity and balance sheet. Near-term financials appear stable, with a current ratio of 1.52x. Valuation Source: Seeking Alpha JOAN trades at an attractive price-to-sales ratio of 0.06x, notably lower than specialty retailers GameStop (GME) at 1.06x and Build-A-Bear Workshop (BBW) at 0.85x, but not as low as Bed Bath & Beyond (BBY) at 0.04x and Party City (PRTY) at 0.02x. JOAN isn’t profitable and therefore doesn’t have a P/E GAAP ratio. The same is true for other specialty retailers like GME, BBBY, and PRTY. On the other hand, BBW is profitable and has a P/E GAAP ratio of 7.63x. Profitability Source: Seeking Alpha JOAN had a gross profit of $281 million on a GAAP basis last quarter, a drop of 11.9% compared to Q3 2022. Net sales fell 7.9% during Q3 2023. Compared to other specialty retailers, JOAN has a strong gross profit margin at 46.9%. For example, GME is at 21%, BBBY is at 29.4%, and PRTY is at 14.4%. Meanwhile, BBW has a gross profit margin of 52%. It’s a tough time for JOAN. Its net income margin is -4.24%. Many of its peers have negative income margins as well, with GME at -8.5%, BBBY at -16.9%, and PRTY at -11.9%. On the other hand, BBW is at 11.4%. The biggest problem is the negative cash flow from operations. With so much debt on the books, JOAN’s cost to service its debt will only increase. That becomes impossible to pay off without positive cash flow. Growth Source: Seeking Alpha If the economy goes into recession, it will negatively impact consumers and discretionary spending. Higher inflation doesn’t help JOANN’s business, either. But some specialty retailers have found a way to grow revenue YoY. For example, GME increased it by 1.29%, PRTY by 1.89%, and BBW by 20.67%. In contrast, JOAN’s declined 10.45% and BBBY’s 25.5%.
Our Opinion 2/10 Shares of JOAN are down 67.7% YTD. While it may seem tempting to buy at these levels, it’s better to wait to see if management can execute its cost-savings plan. The current economic environment is awful for JOAN, as we expect discretionary spending to stay under pressure with high interest rates and elevated inflation. |
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