Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our Consolidated Financial Statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information included in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Forward-Looking Statements,” “Summary Risk Factors” and “Risk Factors” sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
We report on the basis of a 52- or 53-week fiscal year, which ends on the Saturday closest to the last day of January. Accordingly, references herein to “fiscal 2021” relate to the 52 weeks ended January 30, 2021, references herein to “fiscal 2022” relate to the 52 weeks ended January 29, 2022 and references herein to “fiscal 2023” relate to the 52 weeks ended January 28, 2023.
JOANN Overview
JOANN is the nation’s category leader in Sewing with one of the largest assortments of arts and crafts products. As a well-established and trusted brand for nearly 80 years, we believe we have a deep understanding of our customers, what inspires their creativity and what fuels their incredibly diverse projects. T o best serve our customers, JOANN has transformed itself into a fully-integrated, digitally-connected omni-channel retailer, that provides Creative Products to our customers whenever and however they want.
As the nation’s category leader in Sewing with approximately one-third market share, based on our internal research estimates of market share of the Creative Products industry that primarily consist of a survey of Creative Product consumers as of July 30, 2022, we believe we offer the broadest selection of products while being committed to providing the most inspiration, helpful service and education to our customers. While we are the clear market share leader in a growing Sewing industry, which represented 46% of our total net sales in fiscal 2023, we also have significant share opportunity in the growing arts and crafts industry as we allocate additional space to these categories in our store refresh, remodel and relocation projects. We are well-positioned in the marketplace and have multiple competitive advantages, including our broad assortment, established omni-channel platform, multi-faceted digital interface with customers and skilled and knowledgeable team members. We offer an extensive assortment, which at its seasonal peak, averages more than 80,000 SKUs in store locations and over 200,000 SKUs online, across Creative Product categories. Approximately 50% of our in-store net sales cannot be directly comparison-shopped because of our strong and growing own-brand portfolio, including our copyrighted or proprietary fabric patterns and designs and factory direct relationships. We have expanded access to this broad assortment through e-commerce and digital capabilities that complement our physical network, drive customer engagement and deliver an exceptional customer experience while supporting consistently strong gross margins. Through our omni-channel platform, we serve our customers in a differentiated manner by offering several convenient fulfillment options, including BOPIS, curbside pick-up and ship-to-home offerings. Our omni-channel platform operates at a large scale, having generated approximately $271 million, $299 million and $511 million in net sales in fiscal 2023, 2022 and 2021, respectively. Our data-driven digital capabilities further reinforce our relationship with our customers. Customers can interact with our brand whenever and however they want. Customers connect with us through our mobile-first website, joann.com , both domestically and internationally, as well as our widely-used mobile application with more than 15 million downloads. As of the end of fiscal 2023, we had approximately 81 million addressable customers in our vast database and approximately 20 million customers in our email database. These points of differentiation are reinforced by our knowledgeable, friendly and trusted team members, a significant number of whom are sewing and craft enthusiasts, who offer a service-oriented experience for our customers that we believe cannot be replicated by mass retailers or pure online players.
At JOANN, we continuously strive to improve the in-store and digital customer experience. We refine our assortment by conducting thorough reviews of focused categories at a product-level and store location layout-level in order to optimize sales and gross margin. We have an expansive data-driven digital footprint, which includes our extensive digital marketing assets, CRM system, social media platforms and e-commerce capabilities. We better understand our customers through our centralized database that brings together how each customer interacts in our physical and digital properties and provides a holistic view of their behavior. We are able to utilize this data to drive engagement with our brand, create loyalty and inspire, educate and ensure we are increasing our share of customer spend through timely and relevant marketing. By using data and digital contact channels, including email and SMS digital display, and leveraging our mobile application, we are able to contact customers with personalized content and provide the convenience to shop wherever and however they choose. We believe that these core initiatives and transformational investments have driven our performance and increased customer engagement over the last several years and strategically position us to create long-term value.
Factors Affecting Our Business
Overall economic trends. The overall economic environment and related changes in consumer behavior have a significant impact on our business. Spending by customers on our products and services is primarily discretionary, and as a result, generally positive economic conditions create increased discretionary household income that promotes higher levels of spending across our business. However, the creative activities we support tend to be lower cost than other leisure activities, which could protect us to a certain degree from economic downturns. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, availability of consumer credit, interest rates, tax rates, inflation and fuel and energy costs. Macroeconomic factors, notably inflation, can also affect our input and labor costs, as our financial results and ability to invest in the business are directly impacted by increases or decreases in the cost of goods and services required in our operations and initiatives. In addition to inflation, our input and labor costs are impacted by mandated costs such as minimum wages and trade policies, most significantly tariffs and duties on our products imported from foreign countries. The implementation of incremental U.S. tariffs on Chinese imports in particular has had an impact on our cost of sales, product demand and sourcing strategies.
Management of inventory and our supply chain. We offer an extensive assortment, which at its seasonal peak, averages more than 80,000 SKUs in store locations and over 200,000 SKUs through our e-commerce platforms, across Creative Product categories. The high number of SKUs required to support our business as well as the need to introduce new products and manage seasonality create complexity in our operations. We also sometimes experience long lead times for manufacture and delivery of our products, particularly those that we source directly from foreign suppliers, which further increases inventory carrying costs. The ability to effectively forecast product demand, maintain a high number of vendor relationships and order volume, replenish and allocate product and manage distribution and logistics are all critical to our success. Issues with any of these processes could result in lost sales or excess inventories which would have a negative impact on our results of operations.
Shipping and freight costs . A significant portion of our products are sourced from suppliers overseas. During fiscal 2023, we experienced higher than expected import and domestic freight costs largely due to inflationary pressures, transportation shortages, labor shortages and port congestion. While these costs have a negative impact on our results of operations, we are currently taking measures to mitigate, and expect to continue to take measures to mitigate, the impact of these additional costs through strategic purchasing, efficiency gains and pursuing various supply chain alternatives. However, we expect that there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost inflation is incurred.
Consumer demand for our products and services. Our industry supports activities that are discretionary in nature and can be highly influenced by consumer trends. Our ability to achieve our desired results, including attracting new customers and growing share of spend with existing customers, depends on our ability to develop compelling product assortments and services delivered within a convenient and engaging shopping experience. Moreover, due to the nature of our business, we purchase much of our inventory well in advance of each selling season. If we misjudge consumer preferences and demand for certain products, we could be faced with excess inventories that would impact our net sales and profits.
Size and loyalty of our customer database. Our ability to effectively market to our customers is a critical component of our business success. We tier our customers based on total sales volume and frequency of purchase. For fiscal 2023, 44% of our net sales were generated by Returning Customers.
Competition. The Creative Products industry includes specialty retailers and mass merchandisers that provide assortments in many of our categories, albeit typically with more limited breadth, local shops that tend to feature select categories (e.g., quilting and yarn shops) and pure e-commerce players. We compete with all of these providers for customer attention, shopping visits, exclusive vendor relationships, leadership talent and, in some cases, front line team members and store locations. Our ability to be effective across all of those points of competition has a significant effect on our results of operations.
Effective development and sourcing of products. Our business success requires that we provide relevant and innovative products to our customers at competitive prices. Development of those products is dependent on effective relationships with key suppliers and, in many cases, internal development of new products or application of current consumer trends to existing product lines. Our ability to develop, promote and apply our exclusive brands to new products is a critical component of building competitive assortments that drive our sales. Our ability to effectively source products, including through factory direct relationships, allows us to offer assortments at competitive prices while maintaining profitable product margins.
Investments in our store locations, technology, infrastructure, team members and new business opportunities. We have made, and will continue to make, significant investments in our business and operations. We believe these investments have laid the foundation for our results of operations and continued profitable growth. Refreshing our store locations, enhancing our omni-channel and other customer-facing and supporting technologies, strengthening our core business processes, adding talent while developing our current
team and making investments in ventures that augment our current business are critical to sustaining a vibrant enterprise that will drive strong financial results.
Seasonality in quarterly results. Historically, our net sales and operating profits have been materially higher in our third and fourth fiscal quarters, particularly in the months of September through December, coinciding with fall and holiday selling seasons. We incur significantly higher expenses and working capital needs in April through August in order to procure inventory to support higher levels of sales activity later in the year. Our ability to generate cash flow or otherwise finance increased costs in the earlier portion of our fiscal year is critical to achieving strong net sales and operating profit in our historically busier fall and holiday seasons.
How We Assess the Performance of Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key accounting principles generally accepted in the United States of America (“GAAP”) measures include net sales, cost of sales, selling, general and administrative ("SG&A") expenses and operating profit. In addition, we also review other important non-GAAP metrics such as Adjusted EBITDA and other performance indicators such as total comparable sales.
Net Sales
Net sales are derived from direct retail sales to customers in our store locations and online, net of merchandise returns, discounts and coupons, and excluding sales tax. Growth in net sales is impacted by total comparable sales, new store location openings, store location refreshes and closures.
Total Comparable Sales
Total comparable sales are an important measure throughout the retail industry. This measure allows us to evaluate how our store location base and e-commerce business are performing by measuring the change in period-over-period net sales in store locations that have been open for the applicable period. We define total comparable sales as net sales for store locations that have been open for at least 13 months as well as net sales for store locations that have not been relocated, expanded or downsized in the last 13 months. In addition, total comparable sales include our e-commerce sales generated via joann.com (online sales for all products) and creativebug.com (online sales of digital videos for crafting projects). There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this Annual Report on Form 10-K regarding our total comparable sales may not be comparable to similar data made available by other retailers.
Gross Profit
Gross profit is calculated as net sales less cost of sales. Cost of sales consists primarily of the direct cost of merchandise sold at our store locations and through our e-commerce platforms, along with several other costs including freight expense, vendor allowances and cash discounts, inventory shrink and clearance activity. We define gross margin as gross profit divided by net sales.
Our calculations of gross profit may not be directly comparable to those of our competitors. Some retailers include all of the costs related to their distribution network in cost of sales, while we exclude the indirect portion from gross profit and include it within SG&A expenses. We include distribution costs that are directly associated with the acquisition of our merchandise and delivery to our store locations in cost of sales. These costs are primarily freight incurred when we receive merchandise shipments from the vendor to our distribution centers or directly to our store locations and also when we ship merchandise from our distribution centers to our store locations. Freight incurred to ship e-commerce orders to our customers is also included in our cost of sales. These freight costs as well as duties, including tariffs, related to import purchases and internal transfer costs are considered to be direct costs of our merchandise and, accordingly, are recognized as cost of sales when the related merchandise is sold.
Purchasing, receiving, warehousing, fulfillment of e-commerce orders (excluding shipping costs) and other costs of our distribution network (including depreciation) and store location occupancy costs are considered to be period costs not directly attributable to the value of merchandise and, accordingly, are expensed as incurred as SG&A expenses.
SG&A Expenses
SG&A expenses consist of various costs related to supporting and facilitating the sale of merchandise in our store locations and via our e-commerce platforms. These costs include, but are not limited to, store location, distribution center and administrative payroll, team member benefits, stock-based compensation, occupancy, facility and operating costs for our store locations, distribution centers and corporate offices, advertising expenses, payment card acceptance and interchange fees, store location and distribution center pre-opening and closing costs and other administrative expenses.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated. The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. Discussion of the 52 weeks ended January 29, 2022 compared with the 52 weeks ended January 30, 2021 is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended January 29, 2022.
Statement of Consolidated Income Data :
Fiscal Year Ended
(In millions)
January 28,
January 29,
January 30,
Net sales
Gross profit
SG&A expenses
Operating profit (loss)
Net income (loss)
Other Operational Data:
Fiscal Year Ended
(Dollars in millions)
January 28,
January 29,
January 30,
Increase (decrease) in comparable sales vs. prior year
Gross margin
SG&A expenses as a % of net sales
Operating profit (loss) as a % of net sales
Adjusted EBITDA (1)
Adjusted EBITDA as a % of net sales
Total store location count at end of period
See “Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income (loss).
Comparison of the 52 Weeks Ended January 28, 2023 and January 29, 2022
Net Sales
Net sales were $2,216.9 million for fiscal 2023, a decrease of $200.7 million or 8.3% compared to fiscal 2022. Total comparable sales decreased 8.1% for fiscal 2023 compared to a 12.4% total comparable sales decrease for the prior year. The total comparable sales decrease resulted from a decrease in transaction volume partially offset by a slight increase in average ticket. On a category basis, declines in sales were more pronounced in our Craft Technology business, which was unusually strong last year driven by new product launches. In addition, higher customer discretionary spending driven by government stimulus payments as well as more customer leisure time resulting from the COVID-19 pandemic had a favorable impact on net sales in fiscal 2022.
Gross Profit
Gross profit was $1,040.3 million for fiscal 2023, a decrease of $172.4 million or 14.2% compared to fiscal 2022. That decrease was primarily driven by lower net sales. Gross margin was 46.9% for fiscal 2023, a decrease of 330 basis points compared to fiscal 2022. The decrease in gross margin was primarily driven by increased supply chain costs, which resulted primarily from excess import freight. We believe the increase in excess import freight, including ocean freight and related port congestion costs, is transitory in nature. In addition, we experienced increases in domestic freight expense due to rising carrier rates and fuel costs, higher shrink costs associated with the start-up of our new omni-channel fulfillment center and lower vendor allowances due to our strategic inventory receipt reduction.
SG&A Expenses
SG&A expenses were $1,073.5 million for fiscal 2023, an increase of $40.6 million or 3.9% compared to fiscal 2022. This increase was driven by inflationary pressures on labor costs, particularly at our store locations, in addition to energy and commodity costs, which
have been partially offset by improved operating efficiencies. In addition, we incurred incremental operating costs for our new omni-channel fulfillment center located in West Jefferson, Ohio and increases in spending on strategic initiatives including pre-opening costs associated with our new and remodeled store locations as well as costs incurred to support several emerging businesses, which we are referring to as our "Blue Ocean" initiatives.
As a percentage of net sales, SG&A expenses for fiscal 2023 were 48.4%, an increase of 570 basis points compared to fiscal 2022. This increase was primarily due to our 8.1% total comparable sales decline in fiscal 2023.
Depreciation and Amortization
Depreciation and amortization expense was $80.4 million in fiscal 2023, an increase of $0.3 million compared to fiscal 2022. This increase was driven primarily by investments in our omni-channel fulfillment center as well as store location refresh and technology projects in fiscal 2022 and fiscal 2023, partially offset by decreased depreciation resulting from the sale and leaseback of our distribution center in Opelika, Alabama in the second quarter of fiscal 2022.
Trade Name Impairment
During fiscal 2023, as a result of the quantitative impairment analysis performed, we recorded impairment charges on the JOANN trade name totaling $95.0 million. There were no such charges recorded in fiscal 2022. See Note 8—Goodwill and Other Intangible Assets to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further details.
Interest Expense
Interest expense for fiscal 2023 was $64.0 million, an increase of $12.8 million compared to fiscal 2022. This increase was due to higher interest rates and higher average borrowings. The average debt level in fiscal 2023 was $994.1 million compared to $811.6 million in fiscal 2022. The weighted average interest rate was 6.07% and 5.29% for fiscal 2023 and fiscal 2022, respectively.
We had $990.6 million of debt outstanding (face value) as of January 28, 2023 versus $794.3 million as of January 29, 2022.
Debt Related Loss (Gain)
See Note 2—Financing to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further details.
(Gain) on Sale Leaseback
See Note 15—Gain on Sale and Leaseback of Distribution Center to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further details.
Income Taxes
Our effective income tax rate for fiscal 2023 was 27.0%, an income tax benefit on a pre-tax book loss, compared to the rate for fiscal 2022, which was 18.7%, an income tax provision on pre-tax book income. The effective tax rate increased from fiscal 2022 to fiscal 2023 because there was a pre-tax loss in fiscal 2023 and pre-tax income in fiscal 2022. The Company's favorable permanent book-tax differences decrease the effective tax rate when applied to pre-tax income, while these favorable permanent book-tax differences increase the effective tax rate when there is a pre-tax loss.
Net Income (Loss)
We recognized a net loss of $200.6 million during fiscal 2023, compared to net income of $56.7 million during fiscal 2022. The decrease was driven by the factors described above.
Adjusted EBITDA
Adjusted EBITDA decreased 59.4% to $98.5 million, or 4.4% of net sales, for fiscal 2023 compared to $242.5 million, or 10.0% of net sales, for fiscal 2022. Our decrease in Adjusted EBITDA of $144.0 million and decline of Adjusted EBITDA as a percentage of net sales of 560 basis points was driven primarily by lower total comparable sales and higher SG&A expenses as a percentage of net sales.
Non-GAAP Financial Measures
We present Adjusted EBITDA, which is not a recognized financial measure under GAAP. We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation, supplementing GAAP measures of performance in the evaluation of the effectiveness of our business strategies, making budgeting decisions and comparing our performance against that of other peer companies using similar measures.
We define Adjusted EBITDA as net income (loss) plus income tax provision (benefit), interest expense, net and depreciation and amortization, further adjusted to eliminate the impact of certain non-cash items and other items that we do not consider indicative of our ongoing operating performance, including other amortization, debt related gains and losses, investment remeasurements, sale leaseback gains, excess import freight and other COVID-19 costs, costs related to strategic initiatives, technology development expenses, stock-based compensation expense, gains and losses on disposal and impairment of fixed and operating lease assets, intangible asset impairment, income and losses from equity method investments, and other one-time costs. Our adjustments for COVID-19 related costs include, as a separate line item, excess import freight costs. The excess import freight costs are directly attributable to surging market demand for shipping capacity as economies recovered from the COVID-19 pandemic, as well as actions taken by government and industry leaders designed to protect against further spread of the virus, which disrupted the efficient operation of domestic and international supply chains. These COVID-19 related conditions produced an imbalance of ocean freight capacity and related demand, as well as port congestion and other supply chain disruptions that added significant cost to our procurement of imported merchandise. These excess import freight costs included significantly higher rates paid per container to ocean carriers, as well as fees paid due to congested ports that we did not normally incur. In a normative operating environment, we would procure 70% to 80% of our needs for ocean freight under negotiated contract rates, with the balance procured in a brokered market, typically at no more than a 10% - 15% premium to our contract rates. Accordingly, we established a baseline cost (“standard cost”) assuming those contract capacities, established rates and typical premium in the brokered market for peak volume needs not covered under our contracts. The amount of excess import freight costs included as an adjustment to arrive at Adjusted EBITDA is calculated by subtracting, from our actual import freight costs, our standard cost for the applicable period. Negotiation of our current contract rates was finalized in the second quarter of fiscal 2023. We have started to see a decline in overall ocean freight rates and a reduction in other fees associated with port congestion, which has positively impacted our cash payments. We are identifying these COVID-19 related excess import freight costs as a separate line item in the table below due to their magnitude and to distinguish them from other COVID-19 related costs we have previously excluded in calculating Adjusted EBITDA.
Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;
Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;
Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;
Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term incentive compensation;
Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and
Adjusted EBITDA may be calculated differently by other companies in our industry, such that, its usefulness may be limited as a comparative measure.
We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information.
The following is a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented:
Fiscal Year Ended
(In millions)
January 28,
January 29,
January 30,
Net income (loss)
Income tax provision (benefit)
Interest expense, net
Depreciation and amortization
Other amortization (1)
Debt related loss (gain) (2)
Investment remeasurement (3)
(Gain) on sale leaseback (4)
Excess import freight costs (5)
Other COVID-19 costs (6)
Strategic initiatives (7)
Technology development expense (8)
Stock-based compensation expense
Loss on disposal and impairment of fixed and operating lease assets
Trade name impairment (9)
Loss from equity method investments
Other (10)
Adjusted EBITDA
“Other amortization” represents amortization of content and capitalized cloud-based system implementation costs.
“Debt related loss (gain)” represents net losses and gains associated with debt repurchases and the write off of unamortized fees and original issue discount associated with debt refinancings.
"Investment remeasurement" represents net gains and losses associated with our equity investments without readily determinable fair values.
“(Gain) on sale leaseback” represents the gain attributable to the sale and leaseback of our distribution center in Opelika, Alabama.
As discussed in greater detail above, "Excess import freight costs" represents excess inbound freight costs (compared to our standard costs based on recently negotiated carrier rates) due to increased freight rates, in particular the significant transitory impact of constrained ocean freight capacity and incremental domestic transportation costs incurred due to unprecedented congestion in U.S. ports arising from surging market demand for shipping capacity as economies recovered from the COVID-19 pandemic.
“Other COVID-19 costs” represents costs incurred for store location cleaning and capacity management labor, store location cleaning supplies and deep clean services.
“Strategic initiatives” represents costs, such as third-party consulting costs and one-time start-up costs, that are not part of our ongoing operations and are incurred to execute differentiated, project-based strategic initiatives.
“Technology development expense” represents IT project management and implementation expenses, such as temporary labor costs, third-party consulting fees and user fees incurred during the development period of a new software application, that are not part of our ongoing operations and are typically redundant during the initial implementation of software applications or other technology systems across different functional operations of our business before they are in productive use.
“Trade name impairment” represents impairment charges recorded on the JOANN trade name, which resulted from the quantitative impairment analysis completed during fiscal 2023.
“Other” represents the one-time impact of severance, sponsor management fees, certain legal matters, employee recruitment, employee transition and business transition activities.
Liquidity and Capital Resources
We have three principal sources of liquidity: cash and cash equivalents on hand, cash from operations and available borrowings under our ABL Facility. In addition, we believe that we have the ability to obtain alternative sources of financing, if necessary. We believe that our cash and cash equivalents on hand, cash from operations and availability under our ABL Facility will be sufficient to cover our working capital, capital expenditure and debt service requirement needs as well as dividend payments and share repurchases, if any, for the next twelve months, as well as the foreseeable future. Subject to market conditions, we may from time to time, repurchase our outstanding debt. In order to increase liquidity and overall flexibility in response to near-term economic uncertainty, the Company paused its quarterly dividend during the third quarter of fiscal 2023. Please refer to Note 2—Financing to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a description of the material terms of our ABL Facility and our First Lien Facility. As of January 28, 2023 and January 29, 2022, we were in compliance with all covenants under our ABL Facility and our First Lien Facility.
As of January 28, 2023, our ratio of consolidated net debt to Credit Facility Adjusted EBITDA, which is calculated in accordance with our Credit Facilities, was 5.9 to 1.0, and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA was
5.9 to 1.0. We reference our ratio of consolidated net debt to Credit Facility Adjusted EBITDA and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA because such ratios are calculated in accordance with our Credit Facilities and used to determine our compliance with certain covenants in our Credit Facilities, tested each quarter on the basis of the preceding four quarters. For example, we are permitted to prepay debt and make distributions on account of equity up to a certain amount under our Term Loan due 2028 if our ratio of consolidated net debt to Credit Facility Adjusted EBITDA for the prior four quarters as of the quarterly test is not greater than 4.90 to 1.0 and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA for such period is not greater than 3.60 to 1.0. Additionally, our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA is measured once per year following the completion of our annual Consolidated Financial Statements and determines what percentage of our excess cash flow (as defined in our Term Loan due 2028) we are required to apply for the repayment of principal on our Term Loan due 2028, ranging from 50% of excess cash flow for ratios in excess of 2.50x to 0% of excess cash flow for ratios of less than 2.00x. Accordingly, we believe that our ratio of consolidated net debt to Credit Facility Adjusted EBITDA and our ratio of consolidated senior secured net debt to Credit Facility Adjusted EBITDA are material to an investor’s understanding of our financial condition and liquidity.
On March 10, 2023 (the “Closing Date”), the Company entered into the Third Amendment (the “Third Amendment”) to the ABL Facility. The Third Amendment, among other things, adds a series of first-in last-out loans (the “FILO Loans”) in an aggregate amount of $100.0 million, the full amount of which was drawn on the Closing Date and a portion of which proceeds were used, among other things, to refinance a portion of the revolving loans drawn and outstanding under the ABL Facility immediately prior to the Closing Date. See Note 16—Subsequent Events to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further details.
Our capital requirements are primarily for capital expenditures in connection with new store location openings, store location remodels, investments in information technology, other infrastructure investments and working capital requirements for seasonal inventory build. These requirements fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season during the months of September through December and complete most of our capital spending projects.
The following table provides a summary of our cash provided by (used for) operating, investing and financing activities:
Fiscal Year Ended
(In millions)
January 28,
January 29,
January 30,
Net cash provided by (used for) operating activities
Net cash (used for) investing activities
Net cash provided by (used for) financing activities
Net increase (decrease) in cash and cash equivalents
Comparison of the 52 Weeks Ended January 28, 2023 and January 29, 2022
Net cash provided by (used for) operating activities
Net cash used for operating activities was $75.2 million in fiscal 2023 compared with $23.6 million of net cash used for operating activities in fiscal 2022. The increase in net cash used for operating activities was primarily due to our total comparable sales decline, as well as increased import freight costs in fiscal 2023. These factors were partially offset by changes in inventory due to higher balances in fiscal 2022 and strategic inventory receipt reductions executed in fiscal 2023, as well as higher deferred rent payments made during fiscal 2022 resulting from the COVID-19 pandemic.
Net cash (used for) investing activities
Cash used for investing activities in fiscal 2023 and fiscal 2022 consisted primarily of capital expenditures, the majority of which were focused on strategic initiatives including: new store location and distribution center openings, store location remodels and refreshes and information technology investments, particularly those supporting our omni-channel platforms and other customer facing systems. We also incurred capital outlays for equipment and facility management in our distribution centers, store locations and corporate offices. In fiscal 2022, these uses of cash were partially offset by cash provided by the completion of the sale and leaseback of our Opelika, Alabama distribution center.
Investment for each store location refresh project is tailored to each store location’s needs and unit economics. We have four general levels of investment and project scope tailored to what would benefit each store location, with future investment expected to range from $150,000 for lightest-touch refreshes to $3 million for the relatively few but most-extensive refreshes. Over 80% of our existing store
locations are refresh project targets over the next seven to ten years, and we expect investments in relation to these future refresh projects to remain consistent with our capital expenditures in connection with completed refresh projects.
Historical capital expenditures are summarized as follows:
Fiscal Year Ended
(In millions)
January 28,
January 29,
January 30,
Store locations
Distribution centers
Information technology
Other
Total capital expenditures
Landlord contributions
Total capital expenditures, net of landlord contributions
The increase in capital expenditures for store locations was primarily driven by an increase in new store location and refresh projects in fiscal 2023 compared to fiscal 2022. In fiscal 2023, we completed 33 store location projects, as compared to 15 store location projects in fiscal 2022.
Net cash provided by (used for) financing activities
Net cash provided by financing activities was $174.1 million in fiscal 2023 compared with $31.9 million of net cash provided by financing activities in fiscal 2022.
Net cash provided by financing activities for fiscal 2023 was the result of net borrowings from the ABL Facility. This inflow of cash was partially offset by cash used to pay down debt and finance lease obligations, as well as to pay dividends totaling $13.4 million. As of January 28, 2023, we had the ability to borrow an additional $87.2 million under the ABL Facility, subject to the facility’s borrowing base calculation.
Net cash provided by financing activities for fiscal 2022 was the result of net proceeds received from our initial public offering and borrowings from the ABL Facility, which were used to repay all of the outstanding borrowings and accrued interest under the Term Loan due 2024 totaling $72.7 million. In addition, we refinanced our Term Loan due 2023 with a $675 million Term Loan due 2028, with excess proceeds used to reduce amounts borrowed under our ABL Facility and fund working capital needs. We used cash for financing activities to repurchase $20.0 million of common stock as part of our share repurchase program and to pay dividends totaling $12.6 million during fiscal 2022.
Off-Balance Sheet Transactions
Our liquidity is currently not dependent on the use of off-balance sheet transactions other than letters of credit, which are typical in a retail environment.
Contractual Obligations and Commitments
The following table summarizes our future cash outflows resulting from contractual obligations and commitments as of January 28, 2023:
Payments Due by Fiscal Year
(In millions)
Total
Thereafter
Standby letters of credit
Purchase commitments (1)
Operating leases (2)
Finance leases
ABL Facility (3)
ABL Facility interest (3)
First Lien Facility (4)
First Lien Facility interest (4)
Total contractual cash obligations
Purchase commitments include agreements for technology and other purchases, in which minimum guaranteed payments are required.
Operating leases include legally binding minimum lease payments of approximately $20.8 million for leases entered in to but not yet commenced.
We had $324.0 million in outstanding borrowings under our ABL Facility at January 28, 2023. Under our ABL Facility, we are required to pay a commitment fee of 0.20% per year on unutilized commitments. The amounts included in ABL Facility interest were based on these annual commitment fees.
The First Lien Facility, which matures July 7, 2028 is with a syndicate of lenders and is secured by substantially all of our assets excluding the ABL Facility collateral and has a second priority security interest in the ABL Facility collateral. The First Lien Facility provides for mandatory quarterly repayments of $1.7 million on the last business day of each January, April, July and October. Interest payments are due either monthly or quarterly on approximately the 26th day of the month depending on the underlying LIBOR and are subject to variable interest rates. The amounts included in the First Lien Facility interest were based on the interest rate effective as of January 28, 2023.
Seasonality
Our business exhibits seasonality, which is typical for most retail companies. Our net sales are stronger in the second half of the year than the first half of the year. Net income is highest during the months of September through December when sales volumes provide significant operating leverage. Working capital needed to finance our operations fluctuates during the year and reaches its highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season.
Critical Accounting Policies and Estimates
We strive to report our financial results in a clear and understandable manner. We follow GAAP in preparing our Consolidated Financial Statements. These principles require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions and/or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment change. The use of estimates is pervasive throughout our financial statements. The accounting policies that involve estimates or assumptions that are material due to levels of subjectivity and judgment necessary to account for highly uncertain matters or are susceptible to change and we consider most critical are as follows:
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value with cost determined on a weighted-average basis. Inventory valuation methods require certain management estimates and judgments, the most significant of which involves estimates of net realizable value on product designated for clearance, which affects the ending inventory valuation at cost, as well as the cost of sales reported for the year.
We estimate our reserve for clearance product based on a number of factors, including, but not limited to, quantities of slow-moving or carryover seasonal merchandise on hand, historical recovery statistics and future merchandising plans. The accuracy of our estimates can be affected by many factors, some of which are beyond our control, including changes in economic conditions and consumer buying trends. The corresponding adjustment to cost of sales is recorded in the period the decision is made. We do not believe that the assumptions used in our estimate will change significantly based on prior experience.
Our accrual for inventory shrink is estimated as a percent of sales. The percent used in the determination of the accrual is based on actual historical inventory shrink results of our store locations. This estimated percent is applied to sales of our store locations for the periods following each store location’s most recent physical inventory. In addition, we analyze our accrual using actual results as physical inventory counts are taken and reconciled to the general ledger. Substantially all of our store location physical inventory counts are taken in the first three quarters of each year. A vast majority of store locations that have been open one year or longer are physically inventoried once a year.
See Note 1—Significant Accounting Policies to our audited financial statements—Inventories included elsewhere in this Annual Report on Form 10-K for further details.
Impairment of Long-Lived and Operating Lease Assets
We evaluate recoverability of long-lived and operating lease assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable (for example, when a store location’s performance falls below minimum company standards). In the fourth quarter of each fiscal year or earlier if indicators of impairment exist, we review the performance of individual store locations. Underperforming store locations are selected for further evaluation of the recoverability of the store location’s net asset values. If the evaluation, done on an undiscounted cash flow basis, indicates that a store location’s net asset value may not be recoverable, the potential impairment is measured as the excess of carrying value over the fair value of the impaired asset. We estimate fair value based on a projected discounted cash flow method using a discount rate that is considered to be commensurate with the risk inherent in our current business model. Additional factors are taken into consideration, such as local market conditions and operating environment.
See Note 1—Significant Accounting Policies to our audited financial statements—Impairment of Long-Lived and Operating Lease Assets included elsewhere in this Annual Report on Form 10-K for further details.
Goodwill and Other Indefinite Lived Intangible Assets
Goodwill and other intangible assets with indefinite useful lives (i.e., JOANN trade name and joann.com domain name) are not amortized. Instead, annually, as of the first day of the fourth quarter, and more frequently if circumstances indicate potential impairment may exist, the Company assesses qualitative factors to determine if it is more-likely-than-not that the fair value is less than their respective carrying values. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations and our overall financial performance. If it is determined that it is more-likely-than-not that the fair value is less than the carrying value, a quantitative assessment is performed. A quantitative assessment for impairment requires management to use significant judgment and estimates, including estimates of future revenue, net available cash flows, as well as a discount rate and a terminal growth rate.
We perform our goodwill impairment analysis at the reporting unit level. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. As discussed in Note 12 – Segments and Disaggregated Revenue to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, the Company has one operating segment and one reportable segment.
Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results are materially lower than originally estimated, it could result in a material impact to our consolidated financial statements in future periods. Under the quantitative goodwill impairment test, if our reporting unit’s carrying amount exceeds its fair value, we will record an impairment charge based on that difference. To determine reporting unit fair value, we used a blended approach between the income and market approach, each being weighted equally. The key assumptions for the goodwill impairment analysis include, but are not limited to, forecasted revenues, EBITDA growth rates and discount rate. Under the income approach, we project our future cash flows and discount those cash flows to reflect their relative risk. The cash flows used are consistent with those we use in our internal planning and reflect actual business trends experienced as well as our long-term business strategy for the reporting unit. Under the market approach, a group of publicly traded companies are identified that are comparable financially, operationally and from a size standpoint to the entity being valued. The pricing multiples of the selected public companies are then used to derive the market value of the invested capital.
The Company determined the estimated fair value of the intangible assets based upon the relief from royalty method. The key assumptions for the intangible asset impairment analysis include, but are not limited to, revenue growth rates, royalty rate and discount rate.
We performed a quantitative assessment over the reporting unit’s goodwill and indefinite-lived intangible assets as of October 30, 2022. To perform the analysis, we updated projected cash flows based on current information and market assumptions and applied a discount rate based on current market participant assumptions, which included a company specific risk premium. In conjunction with
and prior to concluding on the impairment assessment for goodwill, management performed a quantitative assessment for the indefinite-lived intangible assets not subject to amortization (JOANN trade name and joann.com domain name) to determine if the carrying amount exceeded their fair value for each intangible asset. The results of the impairment test indicated an impairment of the JOANN trade name of $95.0 million, which was considered in the carrying value of the reporting unit when completing the annual goodwill assessment. The October 30, 2022 quantitative analysis for goodwill indicated that the fair value of the reporting unit exceeded its carrying value by approximately $103.0 million or 10.1%; therefore, no goodwill impairment was necessary.
Given the inherent uncertainties resulting from global macroeconomic conditions, actual results may differ from management’s current estimates and could have an adverse impact on one or more of the assumptions used in our quantitative model prepared for the reporting unit, which could result in impairment charges in subsequent periods, particularly since the quantitative assessment estimated that the fair value of the reporting unit exceeded the carrying value by approximately $103.0 million, or 10.1%. Additionally, a mutually exclusive increase in the assumed discount rate by approximately 120 basis points, or a decrease in gross margin by approximately 50 basis points, or a 50 basis point increase in selling, general, and administrative as a percentage of revenue could require us to record impairment charges to goodwill. Management intends to continue to assess triggering events that may necessitate additional qualitative or quantitative analyses in future periods. If we were to have impairment, it could have a material adverse effect on our consolidated statements of operations and balance sheets in the reporting period of the charge.
See Note 8—Goodwill and Other Intangible Assets to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further details.
Income Taxes
Income taxes are estimated for federal and each state jurisdiction in which we operate. This approach involves assessing the current tax exposure together with temporary differences, which result from differing treatment of items for tax and book purposes. Deferred tax assets and liabilities are established based on these assessments. Deferred tax assets are evaluated for recoverability based on future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. To the extent that recovery is deemed unlikely, a valuation allowance is recorded. Our valuation allowances were $3.7 million and $3.9 million as of January 28, 2023 and January 29, 2022, respectively. The valuation allowances primarily relate to state net operating losses and credits that the Company is unlikely to use in the future. Many years of data have been incorporated into the determination of tax reserves and our estimates have historically proven to be reasonable.
Stock-Based Compensation
The fair value of stock-based awards is recognized as compensation expense on a straight-line basis over the requisite service period of the awards. The fair value of stock options is determined using the Black-Scholes option pricing model. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise and the associated volatility. The absence of an active market for our common stock prior to our public offering also required our board of directors to determine the fair value of our common stock for purposes of granting stock options. Following the listing of our common stock on Nasdaq , it is not necessary to determine the fair value of our common stock, as our shares are traded in the public market.
Expected stock price volatility is estimated using the historical volatility for industry peers based on daily price observations over a period equivalent to the expected term of the awards. The risk-free interest rate is determined using an interest rate based on U.S. Treasury zero-coupon notes with terms consistent with the expected term. The expected term is determined using a simplified approach, calculated as the mid-point between the graded vesting period and the contractual term of the award. The Company determines the dividend yield by dividing the expected annual dividend on the Company's stock by the option exercise price. The Company accounts for forfeiture of non-vested options as they occur. Changes in assumptions can materially affect the estimate of fair value of stock-based awards and consequently, the related amount of expense recognized in the Consolidated Statements of Comprehensive Income (Loss) included elsewhere in this Annual Report on Form 10-K.
See Note 10—Stock-Based Compensation to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further details.
Recent Accounting Pronouncements
See Note 1—Significant Accounting Policies included elsewhere in this Annual Report on Form 10-K for information regarding recently issued and adopted accounting pronouncements.
Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk
We are indirectly exposed to foreign currency fluctuations on merchandise that is sourced internationally and directly exposed to the impact of interest rate changes on our outstanding borrowings under our First Lien Facility and ABL Facility.
Foreign Currency Exchange Risk
We believe foreign currency exchange rate fluctuations do not contain significant market risk due to the nature of our relationships with our international vendors. All merchandise contracts are denominated in U.S. dollars and are subject to negotiation prior to our commitment for purchases. As a result, there is not a direct correlation between merchandise prices and fluctuations in the exchange rate. We sourced 44% of our purchases internationally in fiscal 2023. Given our increase in foreign sourcing from prior years, a weakening of the U.S. dollar could result in significantly higher product costs. Our international purchases are concentrated in China and other Asian countries. Any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows.
Interest Rate Risk
In the normal course of business, we employ established policies and procedures to manage our exposure to changes in interest rates. We utilize derivative financial instruments to reduce our exposure to market risks from increases in interest rates on our variable rate indebtedness. We currently have hedging arrangements in the form of two separate interest rate swap agreements to mitigate the impact of future higher interest rates. As of January 28, 2023, the two interest rate swap agreements hedged $200.0 million and $250.0 million, respectively, of principal under our First Lien Facility. A hypothetical 1% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
Item 8. Financial Statemen ts and Supplementary Data
INDEX TO CONSOLI DATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 )
Consolidated Financial Statements
Consolidated Balance Sheets as of January 28, 2023 and January 29, 2022
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended January 28, 2023, January 29, 2022 and January 30, 2021
Consolidated Statements of Cash Flows for the fiscal years ended January 28, 2023, January 29, 2022 and January 30, 2021
Consolidated Statements of Shareholders’ Equity (Deficit) for the fiscal years ended January 28, 2023, January 29, 2022 and January 30, 2021
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of JOANN Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of JOANN Inc. (the “Company”) as of January 28, 2023 and January 29, 2022, the related consolidated statements of comprehensive income (loss), shareholders’ equity (deficit) and cash flows for the years ended January 28, 2023, January 29, 2022 and January 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 28, 2023 and January 29, 2022, and the results of its operations and its cash flows for each of the years ended January 28, 2023, January 29, 2022 and January 30, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 28, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 4, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of goodwill and indefinite-lived trade name intangible asset
Description of the Matter
At January 28, 2023, the Company had a carrying value of goodwill of $162.0 million and an indefinite-lived intangible asset related to the JOANN trade name with a carrying value of $230.0 million. As explained in Note 1 to the consolidated financial statements, these assets are assessed for impairment on an annual basis or more frequently if indicators of potential impairment exist. If the fair value of the reporting unit (for goodwill) or the indefinite-lived intangible asset (for trade name) is less than its respective carrying value, an impairment loss is recognized in an amount equal to the difference.
The Company estimates the fair value of the reporting unit using a combination of valuation techniques, including a discounted cash flow methodology and a market comparable method. Determining the fair value of a reporting unit is highly judgmental and requires the use of estimates and key assumptions, particularly for the discount rate and projections of future operating results, such as forecasted revenues and EBITDA margins. Changes in these
assumptions could have a significant impact on either the fair value, the amount of the goodwill impairment charge, or both. During fiscal 2023, goodwill was not impaired.
The Company utilizes a relief from royalty rate method to value the indefinite-lived trade name, which involves a significant amount of judgment in determining the assumptions underlying the approach used to determine the fair value, including the revenue growth rate, royalty rate and discount rate. Changes in these assumptions could have a significant impact on either the fair value, the amount of the trade name impairment charge, or both. During fiscal 2023, the Company recognized a $95.0 million trade name impairment charge because the fair value of the indefinite-lived trade name was less than the carrying value.
Auditing the reasonableness of management’s significant judgments used to estimate the fair values of the reporting unit and the indefinite-lived trade name required a high degree of auditor judgment and an increased audit effort, including the need to involve our valuation specialists. In particular, the fair value estimate for the reporting unit was sensitive to significant assumptions including EBITDA margin and discount rate. In addition, the fair value estimate of the JOANN trade name was sensitive to the assumptions for the royalty rate and discount rate.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested controls over the Company's measurement of the fair value of the reporting unit and its indefinite-lived trade name. This included evaluating controls over the valuation models, significant assumptions and completeness and accuracy of the data used in the measurements.
To test the fair value of the reporting unit and indefinite-lived trade name, our audit procedures included, among others, assessing the methodologies used and testing the significant assumptions discussed above as well as evaluating the completeness and accuracy of the underlying data used by the Company. For example, we compared the significant assumptions used to determine the fair market values to current industry, market and economic trends, to the Company's historical results and those of other guideline companies. We also performed a sensitivity analysis of the significant assumptions, including revenues, EBITDA margins, and discount rate for the reporting unit, to assess how much these assumptions could change for there to be material change to the fair value of the reporting unit. The evaluation of the Company’s methodology and significant assumptions was performed with the assistance of our valuation specialists.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Cleveland, Ohio
April 4, 2023
JOANN Inc.
Consolidated B alance Sheets
January 28,
January 29,
(In millions)
Assets
Current assets:
Cash and cash equivalents
Inventories
Prepaid expenses and other current assets
Total current assets
Property, equipment and leasehold improvements, net
Operating lease assets
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and shareholders’ equity (deficit)
Current liabilities:
Accounts payable
Accrued expenses
Current portion of operating lease liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt, net
Long-term operating lease liabilities
Deferred income taxes
Other long-term liabilities
Shareholders’ equity (deficit):
Common stock, par value $ 0.01 per share; 200.0 authorized; issued 44.1 million shares at January 28, 2023 and January 29, 2022
Additional paid-in capital
Retained (deficit)
Accumulated other comprehensive income
Treasury stock at cost; 3.0 million shares at January 28, 2023 and 3.5 million shares at January 29, 2022
Total shareholders’ equity (deficit)
Total liabilities and shareholders’ equity (deficit)
See notes to consolidated financial statements.
JOANN Inc.
Consolidated Statements of C omprehensive Income (Loss)
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions except per share data)
Net sales
Cost of sales
Selling, general and administrative expenses
Depreciation and amortization
Trade name impairment
Operating profit (loss)
Interest expense, net
Debt related loss (gain)
Investment remeasurement
(Gain) on sale leaseback
Income (loss) before income taxes
Income tax provision (benefit)
Loss from equity method investments
Net income (loss)
Other comprehensive income:
Unrealized gain on cash flow hedges
Income tax provision on cash flow hedges
Foreign currency translation
Other comprehensive income
Comprehensive income (loss)
Earnings (loss) per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
See notes to consolidated financial statements.
JOANN Inc.
Consolidated Stateme nts of Cash Flows
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Net cash provided by (used for) operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Non-cash operating lease expense
Depreciation and amortization
Deferred income taxes
Stock-based compensation expense
Amortization of deferred financing costs and original issue discount
Debt related loss (gain)
Investment remeasurement
(Gain) on sale leaseback
Loss on disposal and impairment of fixed assets
Trade name impairment
Loss from equity method investments
Changes in operating assets and liabilities:
Decrease (increase) in inventories
Decrease (increase) in prepaid expenses and other current assets
Increase (decrease) in accounts payable
Increase (decrease) in accrued expenses
(Decrease) in operating lease liabilities
Increase (decrease) in other long-term liabilities
Other, net
Net cash provided by (used for) operating activities
Net cash provided by (used for) investing activities:
Capital expenditures
Proceeds from sale leaseback
Other investing activities
Net cash (used for) investing activities
Net cash provided by (used for) financing activities:
Term loan proceeds, net of original issue discount
Term loan payments
Borrowings on ABL Facility
Payments on ABL Facility
Purchase and retirement of debt
Principal payments on finance lease obligations
Issuance of common stock, net of underwriting commissions and offering costs
Purchase of common stock
Proceeds from employee stock purchase plan and exercise of stock options
Payments of taxes related to the net issuance of team member stock awards
Dividends paid
Financing fees paid
Other, net
Net cash provided by (used for) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash paid during the period for:
Interest
Income taxes, net of (refunds)
See notes to consolidated financial statements.
JOANN Inc.
Consolidated Statements of Sha reholders’ Equity (Deficit)
Net
Common
Shares
Treasury
Shares
Common
Stock
Stated
Value
Additional
Paid-In
Capital
Treasury
Stock
Retained
(Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
(Deficit)
(In millions)
Balance, February 1, 2020
Net income
Other comprehensive income
Stock-based compensation
Balance, January 30, 2021
Net income
Other comprehensive income
Issuance of common stock
Dividends - $ 0.30 per share
Stock-based compensation
Purchase of common stock
Exercise of stock options
Balance, January 29, 2022
Net (loss)
Other comprehensive income
Dividends - $ 0.33 per share
Stock-based compensation
Exercise of stock options
Vesting of restricted stock units
Employee stock purchase plan purchases
Balance, January 28, 2023
See notes to consolidated financial statements.
JOANN Inc.
Notes to Consolidated Financial Statements
Note 1—Significant A ccounting Policies
Nature of Operations
JOANN was founded in 1943 as a single retail store location. Today, JOANN is the nation’s leading fabric and craft specialty retailer. The Company's store locations and website feature a variety of competitively priced merchandise used in sewing, crafting and home decorating projects, including fabric, notions, crafts, frames, paper crafting supplies, artificial floral, finished seasonal and home décor items. As of January 28, 2023, the Company operated 833 store locations in 49 states.
The significant accounting policies applied in preparing the accompanying Consolidated Financial Statements of the Company are summarized below.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Holding Company, Needle Holdings and JOANN. All of the entities referenced in the prior sentence hereinafter will be referred to collectively as the “Company” and are all controlled by affiliates of LGP. All intercompany accounts and transactions have been eliminated upon consolidation.
The Holding Company has no operating activities and is limited to the issuance of shares of common stock and stock-based awards, the repurchase of common shares, the issuance and repurchase of debt, the receipt and payment of dividends or distributions and the payment of interest expense. The authorized, issued and outstanding common shares and treasury shares shown on the Consolidated Balance Sheets are of the Holding Company. Likewise, Needle Holdings has no operating activities and is limited to the issuance of initial shares of common stock and stock-based awards and the payment of dividends or distributions.
Initial Public Offering
On March 11, 2021, the Company’s registration statement on Form S-1 (File No. 333-253121) relating to its initial public offering was declared effective by the SEC. The Company’s shares of common stock began trading on the Nasdaq Global Market on March 12, 2021. The public offering price of the shares sold in the initial public offering was $ 12.00 per share. The initial public offering closed on March 11, 2021 and included 5,468,750 shares of common stock. As part of the Company’s initial public offering, the underwriters were provided with an option to purchase 1,640,625 additional shares at the initial public offering price. This option was exercised on April 13, 2021. In aggregate, the shares issued in the offering, including the exercise of the underwriters’ option, generated $ 76.9 million in net proceeds, which is net of $ 5.7 million in underwriters’ discount and commissions and $ 2.7 million in offering costs incurred.
On March 19, 2021, in connection with the closing of the initial public offering, the Company used all net proceeds received from the initial public offering and borrowings from the ABL Facility (as defined below) to repay all of the outstanding borrowings and accrued interest under the Term Loan due 2024 (as defined below) totaling $ 72.7 million. Following such repayment, all obligations under the Term Loan due 2024 were terminated.
Stock Split
On March 3, 2021, the Company’s board of directors approved and effected an 85.8808880756715 -for-1.0 unit split of its common stock. All share and per share data included in these Consolidated Financial Statements give effect to the stock split and have been retroactively adjusted for all periods .
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31 and refers to the year in which the period ends (e.g., fiscal 2023 refers to the year ended January 28, 2023 ). Fiscal years consist of 52 weeks unless noted otherwise.
Recently Adopted Accounting Guidance
In December 2022, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2022-06—Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. ASU 2022-06 defers the sunset date of Topic 848 (ASU 2020-04) from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. Topic 848 was issued to provide entities certain optional expedients and exceptions when accounting for contracts and certain hedging relationships and other transactions affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements and for calculating price alignment interest in connection with reference rate reforms. These amendments were effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2024. The Company intends to apply this guidance when modifications of contracts that include LIBOR occur, which is not expected to have a material impact on its Consolidated Financial Statements.
Cash and Cash Equivalents
Cash equivalents are all highly liquid investments with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost determined on a weighted-average basis. Inventory valuation methods require certain management estimates and judgments, which affect the ending inventory valuation at cost, as well as the cost of sales reported for the year. These valuation methods include estimates of net realizable value on product designated for clearance and estimates of shrink between periods when the Company conducts distribution center inventory cycle counts and store location physical inventories to substantiate inventory balances.
The Company’s accrual for shrink is based on the actual historical shrink results of recent distribution center inventory cycle counts and store location physical inventories. These estimates are compared to actual results as physical inventory counts are taken and reconciled to the general ledger. The majority of the Company’s store location physical inventory counts are taken in the first three quarters of each year and the shrink accrual recorded at January 28, 2023 is based on shrink results of these prior physical inventory counts. Store locations that have been open one year or longer are physically inventoried at least once over an 18-month cycle, with store locations exhibiting a higher rate of shrink to sales inventoried at least once per year. The Company continually monitors and adjusts the shrink rate estimates based on the results of store location physical inventory counts and shrink trends.
Inventory reserves for clearance product are estimated based on a number of factors, including, but not limited to, quantities of slow moving or carryover seasonal merchandise on hand, historical recovery statistics and future merchandising plans. The accuracy of the Company’s estimates can be affected by many factors, some of which are outside of the Company’s control, including changes in economic conditions and consumer buying trends.
Consignment inventory is not reflected in the Company’s Consolidated Financial Statements. Consignment inventory consists of patterns, magazines, books, calendars, DVDs, ribbons and seeds. Consignment inventory can be returned to the vendor at any time. At the time consigned inventory is sold, the Company records the purchase liability in accounts payable and the related cost of merchandise in cost of sales.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and impairment. Depreciation is recorded over the estimated useful life of the assets principally by the straight-line method. The major classes of assets and ranges of estimated useful lives are: buildings and building/land improvements from 10 to 40 years; furniture and fixtures from five to 10 years; purchased software and computer equipment from three to five years; leasehold improvements for the lesser of 10 years or over the remaining term of the lease; and finance lease assets for the term of the underlying lease. Maintenance and repair expenditures are charged to expense as incurred and improvements and major renewals are capitalized.
Software Development
The Company capitalized $ 6.8 million in fiscal 2023 , $ 4.7 million in fiscal 2022 and $ 4.1 million in fiscal 2021 for internal use software acquired from third parties. The capitalized amounts are included in property, equipment and leasehold improvements, net. The Company amortizes internal use software on a straight-line basis over periods ranging from three to five years beginning at the time the software becomes operational. Amortization expense was $ 6.4 million in fiscal 2023 , $ 6.5 million in fiscal 2022 and $ 7.3 million in fiscal 2021. The unamortized balance for internal use software was $ 17.0 million as of January 28, 2023 and $ 16.6 million as of January 29, 2022 .
Goodwill and Other Intangible Assets
The Company assesses impairment of goodwill at the reporting unit level. A reporting unit is the operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. As discussed in Note 12 – Segments and Disaggregated Revenue to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, the Company has one operating segment and one reportable segment.
Annually, as of the first day of the fourth quarter, and more frequently if circumstances indicate impairment may exist, the Company assesses qualitative factors to determine if it is more-likely-than-not that the fair value of its single reporting unit is below its carrying value. If it is determined that this is more-likely-than-not, a quantitative assessment is performed. The quantitative assessment compares the fair value of a reporting unit to its current carrying value. The Company determines the estimated fair value of the reporting unit based on valuation techniques including discounted cash flows as well as a market comparable method. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not considered impaired.
Annually, as of the first day of the fourth quarter, and more frequently if circumstances indicate impairment may exist, the Company assesses qualitative factors to determine if it is more-likely-than-not that the fair values of the indefinite-lived intangible assets not subject to amortization (JOANN trade name and joann.com Domain Name) are below their respective carrying values. If it is determined that this is more-likely-than-not, a quantitative assessment is performed. The quantitative assessment compares the fair value of an intangible assets to its respective current carrying value. The Company determines the estimated fair value of an intangible asset based upon the relief from royalty method.
See Notes to Consolidated Financial Statements, Note 8—Goodwill and Other Intangible Assets for further details.
Impairment of Long-Lived and Operating Lease Assets
The Company evaluates long-lived and operating lease assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Factors considered that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant changes in the manner of use of the assets or the Company’s overall business strategies. Potential impairment exists if the estimated undiscounted cash flow expected to result from the use of the asset is less than the carrying value of the asset. The amount of the impairment loss represents the excess of the carrying value of the asset over its fair value. Management estimates fair value based on a projected discounted cash flow method using a discount rate that is considered to be commensurate with the risk inherent in the Company’s current business model. Additional factors are taken into consideration, such as local market conditions, operating environment and other trends.
Based on management’s ongoing review of the performance of its store locations, utilization of assets and other facilities, no material impairment losses were recognized in fiscal 2023, fiscal 2022 or fiscal 2021 .
Store Location Pre-Opening and Closing Costs
Store location pre-opening costs are expensed as incurred and included in SG&A expenses on the accompanying Consolidated Statements of Comprehensive Income (Loss). These costs are incurred prior to a new store location or remodeled store location opening and include the hiring and training costs for new team members, processing costs of initial merchandise and rental expense for the period prior to the store location opening for business.
The Company recognizes costs associated with exit or disposal activities at the time the obligation is incurred. In addition, any liabilities that arise from exit or disposal activities are initially measured and recorded at fair value.
Store location pre-opening and closing costs were as follows:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Store location pre-opening costs
Store location closing costs
Total
Accrued Expenses
The Company estimates certain material expenses in an effort to record those expenses in the period incurred. The Company’s most material estimates relate to compensation, taxes and insurance-related expenses, significant portions of which are self-insured. The Company is self-insured for certain losses relating to general liability, workers’ compensation and team member medical benefit claims. The ultimate cost of the Company’s workers’ compensation and general liability insurance accruals are recorded based on actuarial valuations and historical claims experience. The Company’s team member medical insurance accruals are recorded based on its medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. The Company maintains stop-loss coverage to limit the exposure to certain insurance-related risks. Management believes that the various assumptions developed and actuarial methods used to determine its self-insurance reserves are reasonable. Differences in estimates and assumptions could result in an accrual requirement materially different from the calculated accrual. Historically, such differences have not been significant.
See Notes to Consolidated Financial Statements, Note 6—Accrued Expenses and Other Long-Term Liabilities for discussion regarding the Company’s accrued expenses.
Financial Instruments
A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of the Company’s cash and cash equivalents, accounts payable and borrowings on the Company’s ABL Facility are considered to be representative of fair value due to the short maturity of these instruments.
See Notes to Consolidated Financial Statements, Note 4—Fair Value Measurement for discussion regarding the fair value of the Company’s derivative instruments and term loan debt instruments.
Income Taxes
The Company does business in various jurisdictions that impose income taxes. The aggregate amount of income tax expense to accrue and the amount currently payable are based upon the tax statutes of each jurisdiction, pursuant to the asset and liability method. This process involves adjusting book income for items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities are reflected on the balance sheet for temporary differences that will reverse in subsequent years. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are estimated to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period during which the change is enacted. The Company considers indefinite-lived intangibles as a potential future source of taxable income when considering the realizability of indefinite-lived deferred tax assets.
The current tax provision can be affected by the mix of income and identification or resolution of uncertain tax positions. Because income from different state jurisdictions may be taxed at different rates, the shift in mix between states during a year or over years can cause the effective tax rate to change. The rate is based on the best estimate of an annual effective rate, and those estimates are updated quarterly. The Company also regularly evaluates the status and likely outcomes of uncertain tax positions. Uncertain tax positions are provided for potential exposures when it is considered more-likely-than-not that a taxing authority may take a sustainable position on a matter contrary to the Company’s position. The Company evaluates these uncertain tax positions, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events, including audit settlements, that may impact the ultimate payment for such exposure.
As a matter of course, the Company is regularly audited by federal, state and local tax authorities. For federal purposes, effective fiscal 2015, the Company is part of the Compliance Assurance Process (“CAP”) program, pursuant to which it works collaboratively
with the IRS in order to address issues prior to its filing of the return. CAP allows for the IRS to achieve an acceptable level of assurance regarding the accuracy of filed tax returns while substantially shortening the length of post-filing examinations.
Share Repurchase Program and Treasury Stock
Treasury stock consists of the Company’s common stock that has been issued, but subsequently reacquired. The Company accounts for treasury stock on the trade date under the cost method. Treasury stock is recorded as a reduction to shareholders’ equity, as the Company does not currently intend to retire the treasury stock held. When shares are reissued, the Company uses an average cost method to determine cost.
Revenue Recognition
Revenue is primarily associated with sales of merchandise to customers within the Company’s store locations and customers utilizing its e-commerce channels. Retail sales, net of estimated returns and point-of-sale coupons and discounts, are recorded at the point-of-sale when customers take control of the merchandise in store locations. E-commerce sales include shipping revenue and are recorded upon delivery to the customer. Shipping and handling fees charged to customers are recorded as sales with related costs recorded as cost of sales. Sales taxes are not included in sales, as the Company acts as a conduit for collecting and remitting sales taxes to the appropriate governmental authorities. Payment is typically due at the point-of-sale, thus the Company does not have material customer receivables.
The Company allows for merchandise to be returned under most circumstances. The current policy allows for customers to receive an even exchange or full refund based upon the original method of payment when the returned purchase is accompanied with a receipt. Historic customer return activity is used to estimate the returns reserve, which historically has not been material to the Company’s Consolidated Financial Statements. The Company presents the gross sales returns reserve in accounts payable and the estimated value of the merchandise expected to be returned in prepaid expenses and other current assets within the accompanying Consolidated Balance Sheets.
Proceeds from the sale of JOANN gift cards are recorded as a liability and recognized as net sales when redeemed by the holder. Gift card breakage represents the remaining balance of the Company’s liability for gift cards for which the likelihood of redemption by the customer is remote. Gift card breakage is recognized as net sales in proportion to the pattern of rights exercised by the customer and is determined based on historical redemption patterns. The Company generally is not required by law to escheat the value of unredeemed gift cards to the states in which it operates.
Activity related to the Company’s gift card liabilities was as follows:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Balance at beginning of period
Issuance of gift cards
Revenue recognized (1)
Gift card breakage
Balance at end of period
Revenue recognized from the beginning liability during fiscal 2023, fiscal 2022 and fiscal 2021 totaled $ 11.5 million , $ 9.3 million and $ 8.3 million , respectively.
Cost of Sales
Inbound freight and duties, including tariffs, related to import purchases and internal transfer costs are considered to be direct costs of the Company’s merchandise and, accordingly, are recognized when the related merchandise is sold as cost of sales. Cost of sales does not include depreciation and amortization. Purchasing and receiving costs, warehousing costs and other costs of the Company’s distribution network are considered to be period costs not directly attributable to the value of merchandise and, accordingly, are expensed as incurred as SG&A expenses.
The Company receives vendor support, including cash discounts, volume discounts, allowances and markdown support. The Company has agreements in place with each vendor setting forth the specific conditions for each allowance or payment. Depending on
the arrangement, the Company either recognizes the allowance as a reduction of current costs or defers the payment over the period the related merchandise is sold through cost of sales.
Operating Leases
The Company records right-of-use lease assets and lease liabilities on its Consolidated Balance Sheets. Lease liabilities are recorded at a discount based upon the Company’s estimated incremental borrowing rate. Factors incorporated into the calculation of lease discount rates include the valuations and yields of the Company’s term loan facilities, their credit spread over comparable U.S. Treasury rates and an index of the credit spreads for U.S. Retail Company debt yields.
The Company records lease cost on a straight-line basis over the base, non-cancelable lease term commencing on the date that the Company takes physical possession of the property from the landlord, which may include a period prior to the opening of a store location or other facility to make any necessary leasehold improvements and install fixtures. Any tenant allowances received are recorded as a reduction of lease payments when calculating the lease liability and the associated asset. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets and lease expense for such leases is recognized on a straight-line basis over the lease term. The Company combines lease and non-lease components. Many leases include one or more options to renew, and the exercise of lease renewal options is at the Company’s sole discretion. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Related Party Transactions
During fiscal 2023 and fiscal 2022, the Company paid dividends of $ 9.2 million and $ 8.3 million, respectively, to LGP as part of the Company's dividend payments.
Advertising Costs
The Company expenses production costs of advertising the first time the advertising takes place. Advertising expense, net of co-operative advertising agreements, was $ 55.8 million for fiscal 2023, $ 59.4 million for fiscal 2022 and $ 60.6 million for fiscal 2021. Included in prepaid expenses and other current assets was $ 1.9 million and $ 1.6 million at the end of fiscal 2023 and fiscal 2022 , respectively, relating to prepayments of production costs for advertising.
Stock-Based Compensation
The fair value of stock-based awards is recognized as compensation expense on a straight-line basis over the requisite service period of the awards within SG&A expenses on the accompanying Consolidated Statements of Comprehensive Income (Loss). The fair value of stock options is determined using the Black-Scholes option pricing model. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise and the associated volatility. Additionally, while not historically, currently or expected to be applicable to the Company, in the event that the Company is issuing share-based awards prior to the release of material nonpublic information, the Company will consider whether observable market prices need to be adjusted in determining the current price input for the awards. Prior to the Company’s initial public offering, the absence of an active market for the Company’s common stock required the Company’s board of directors to determine the fair value of its common stock for purposes of granting stock options. The Company obtained contemporaneous third-party valuations to assist the board of directors in determining the fair value of the Company’s common stock. Following the listing of the Company’s common stock on Nasdaq, it is not necessary to determine the fair value of its common stock, as its shares are traded in the public market. See Notes to Consolidated Financial Statements, Note 10—Stock-Based Compensation for further details.
Note 2—Financing
Long-term debt, net consisted of the following:
January 28,
January 29,
(In millions)
ABL Facility
Term Loan due 2028
Total debt
Less unamortized discount and debt costs
Total debt, net
Less current portion of debt
Long-term debt, net
ABL Facility
On October 21, 2016 , the Company entered into the ABL Facility, which originally provided for senior secured financing of up to $ 400.0 million, subject to a borrowing base, maturing on October 20, 2021 . On November 25, 2020, the Company entered into an agreement to amend various terms of the ABL Facility (as amended, the “First Amended ABL Facility”), which provided for senior secured financing of up to $ 500.0 million, subject to a borrowing base, maturing on November 25, 2025 .
On December 22, 2021, the Company entered into an agreement to amend various terms of the First Amended ABL Facility (as amended, the “Second Amended ABL Facility”), which provides for senior secured financing of up to $ 500.0 million, subject to a borrowing base, maturing on December 22, 2026 . No changes were made to the borrowing base formula. The Second Amended ABL Facility is secured by a first priority security interest in JOANN’s inventory, accounts receivable and related assets with a second priority interest in all other assets, excluding real estate. It also continues to be guaranteed by existing and future wholly-owned subsidiaries of JOANN, subject to certain exceptions.
Under the Second Amended ABL Facility, the base rate loans bear an additional margin of 0.50 % when average historical excess capacity is less than 40.00 % of the maximum credit and 0.25 % when average historical excess capacity is greater than or equal to 40.00 % of the maximum credit. Eurodollar rate loans bear an additional margin of 1.50 % when average historical excess capacity is less than 40.00 % of the maximum credit and 1.25 % when average historical excess capacity is greater than or equal to 40.00 % of the maximum credit. Unused commitment fees on the Second Amended ABL Facility are calculated based on a rate of 0.20 % per annum. In the event LIBOR ceases to be available during the term of the facility, the facility provides procedures to determine a “LIBOR Successor Rate.” The Company has the option to request an increase in the size of the Second Amended ABL Facility up to $ 150.0 million (for a total facility of $ 650.0 million) in increments of not less than $ 20.0 million, provided that no default exists or would arise from the increase. However, the lenders under the Second Amended ABL Facility are under no obligation to provide any such additional amounts.
As of January 28, 2023, there were $ 324.0 million of borrowings on the ABL Facility and the Company’s outstanding letters of credit obligation was $ 16.5 million . As of January 28, 2023, the Company’s excess availability on the facility was $ 87.2 million . During fiscal 2023 , the weighted average interest rate for borrowings under the ABL Facility was 3.82 % compared to 2.75 % for fiscal 2022. As of January 29, 2022, there were $ 121.0 million of borrowings on the ABL Facility and the Company’s outstanding letters of credit obligation was $ 18.1 million . As of January 29, 2022, the Company’s excess availability on the facility was $ 239.6 million .
Term Loan due 2023
On October 21, 2016, the Company entered into a $ 725.0 million senior secured term loan facility (the “Term Loan due 2023”) which was issued at 98.0 % of face value. The Term Loan due 2023 was with a syndicate of lenders and was secured by substantially all the assets of JOANN, excluding the ABL Facility collateral, and had a second priority security interest in the ABL Facility collateral. It was guaranteed by existing and future wholly-owned subsidiaries of JOANN, subject to certain exceptions.
The Term Loan due 2023 was refinanced on July 7, 2021 pursuant to Amendment No. 2 to the Company’s Credit Agreement (see Term Loan Due 2028 below). A write-off of the deferred charges and original issue discount, totaling $ 3.1 million, associated with the original debt issuance was recognized in debt related loss (gain) within the accompanying Consolidated Statements of Comprehensive Income (Loss) in the second quarter of fiscal 2022 as a result of the refinancing.
Term Loan due 2024
On May 21, 2018, the Company entered into a $ 225.0 million term loan facility (the “Term Loan due 2024”), which was issued at 98.5 % of face value. The Term Loan due 2024 was with a syndicate of lenders. The Term Loan due 2024 was secured by a second priority security interest in all the assets of JOANN, excluding the ABL Facility collateral, and had a third priority security interest in the ABL Facility collateral. It was guaranteed by existing and future wholly-owned subsidiaries of JOANN, subject to certain exceptions.
On March 19, 2021, in connection with the closing of the initial public offering, the Company used all net proceeds received from the initial public offering and borrowings from the ABL Facility to repay all of the outstanding borrowings and accrued interest under the Term Loan due 2024 totaling $ 72.7 million. Following such repayment, all obligations under the Term Loan due 2024 were terminated in the first quarter of fiscal 2022. A write-off of the deferred charges and original issue discount, totaling $ 0.9 million, associated with the original debt issuance was recognized in debt related loss (gain) within the accompanying Consolidated Statements of Comprehensive Income (Loss) in the first quarter of fiscal 2022 as a result of the repayment.
Term Loan Due 2028
On July 7, 2021, the Company entered into the Amendment No. 2 (“Amendment No. 2”) to the Credit Agreement, dated as of October 21, 2016. Amendment No. 2, among other things, provided for a new $ 675 million incremental first-lien term loan credit facility with a maturity date of July 7, 2028 (the “Term Loan due 2028” and, together with the Term Loan due 2023 and Term Loan due 2024, the “Term Loans”). The Term Loan due 2028 was issued at 99.5 % of face value and was used to refinance the Company’s outstanding Term Loan due 2023, as well as reduce amounts borrowed under the ABL Facility and pay related fees and expenses. Amendment No. 2 reduced the applicable interest rates for Eurodollar rate loans and base rate loans from 5.00 % and 4.00 % to 4.75 % and 3.75 %, respectively, and reduced the LIBOR floor from 1.00 % to 0.75 %. Other than the changes described above, all other material provisions of the Credit Agreement remain unchanged. During fiscal 2023, the weighted average interest rate for borrowings under the Term Loan due 2028 wa s 7.16 % compared to 5.58 % during fiscal 2022.
The Term Loan due 2028 was issued at a $ 3.4 million discount. A portion of the discount in the amount of $ 3.1 million was recorded as a reduction of debt and set up to amortize over the life of the Term Loan due 2028 and $ 0.3 million of the discount was charged to earnings. The total fees and expenses associated with the Term Loan due 2028 were $ 6.8 million, which fees represent banking, legal and other professional services. The Company capitalized $ 3.8 million of these fees as a reduction of debt and the remaining fees were charged to earnings.
Covenants
The covenants contained in the credit agreements restrict JOANN’s ability to pay dividends or make other distributions; accordingly, any dividends may only be made in accordance with such covenants. Among other restrictions, the credit agreements permit the public parent company to pay dividends on its common stock in amounts not to exceed the greater of 6 % per annum of the net proceeds received by or contributed to Jo-Ann Stores, LLC from any such public offering of common stock of Jo-Ann Stores, LLC or its direct or indirect parent company, or 7 % of Market Capitalization (as defined in the credit agreements). So long as there is no event of default, the credit agreements also allow dividends in amounts up to $ 100 million, which amount can increase if certain other conditions are satisfied, including if JOANN’s leverage does not exceed certain thresholds. Additionally, the ABL Facility allows for unlimited dividends, so long as there is no event of default and the Company’s excess availability after giving pro forma effect for the thirty-day period immediately preceding such payment shall be greater than (a) the greater of 12.5 % of the maximum credit and $ 40 million and the consolidated fixed charge coverage ratio shall be greater than or equal to 1.0 to 1.0 or (b) 17.5 % of the maximum credit calculated. At January 28, 2023, the Company was in compliance with all covenants under its credit agreements.
At January 28, 2023, the Company’s fixed minimum debt principal maturities were as follows:
Fiscal Year
Revolving
Credit
Facility
Term Loan
due 2028
Total
(In millions)
Thereafter
Note 3—Derivative Instruments
The Company is exposed to certain market risks during the normal course of its business arising from adverse changes in interest rates. The Company’s exposure to interest rate risk results primarily from its variable-rate borrowings. The Company may selectively use derivative financial instruments to manage the risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks. Consequently, these fluctuations could have a significant effect on the Company’s financial results.
Interest Rate Swaps
In August 2021, the Company entered into an interest rate swap agreement with U.S. Bank N.A., which has a $ 200 million notional value with an effective date of October 26, 2023 and a maturity date of October 26, 2025 . Beginning in January 2024, the Company receives 1-month, 3-month or 6-month LIBOR, at the Company's election, subject to a 0.75 % floor, and pays a fixed rate of interest of 1.44 % per annum on a quarterly basis. In connection with the execution of the interest rate swap agreement, no cash was exchanged between the Company and the counterparty. The fair value of the interest rate swap as of January 28, 2023 was $ 8.5 million.
In May 2022, the Company entered into a second interest rate swap agreement with U.S. Bank N.A., which has a $ 250 million notional value with an effective date of July 26, 2023 and a maturity date of January 26, 2026 . Beginning in October 2023, the Company receives 1-month, 3-month or 6-month LIBOR, at the Company's election, subject to a 0.75 % floor, and pays a fixed rate of interest of 3.37 % per annum on a quarterly basis. In connection with the execution of the interest rate swap agreement, no cash was exchanged between the Company and the counterparty. The fair value of the interest rate swap as of January 28, 2023 was $ 2.6 million .
All of the Company's derivative financial instruments are eligible for netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's Consolidated Balance Sheet on a net basis. As of January 28, 2023, none of the netting arrangements involved collateral. The net fair value of the interest rate swaps as of January 28, 2023 was $ 11.1 million.
The Company designated its interest rate swaps as cash flow hedges and structured them to be highly effective. Unrealized gains and losses related to the fair value of the interest rate swaps are recorded to accumulated other comprehensive income (loss), net of tax. In the event of early termination of the interest rate swaps, the Company will receive from or pay to the counterparty the fair value of the interest rate swap agreements, and the unrealized gains or losses outstanding will be recognized in earnings.
Interest Rate Cap
In July 2018, the Company purchased, for $ 2.2 million, a forward starting interest rate cap based on 3-month LIBOR effective October 23, 2018 through October 23, 2021 . The objective of the hedging instrument was to offset the variability of cash flows in term loan debt interest payments attributable to fluctuations in LIBOR beyond 3.5 %.
The interest rate cap expired in October 2021. At the time of expiration, the interest rate cap had an amortized notional amount of $ 681.4 million. The time value of the interest rate cap was excluded from the assessment of effectiveness and was amortized to interest expense over the life of the hedge.
The impacts of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income (Loss) for fiscal 2023, fiscal 2022 and fiscal 2021 are presented in the table below:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Interest rate swap - $200M notional amount
Interest rate swap - $250M notional amount
Interest rate cap - $681M notional amount
Gain recognized in other comprehensive income (loss), gross of income taxes
Note 4—Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and
Level 3 – Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.
The valuations of the Company's interest rate derivatives are measured as the present value of all expected future cash flows based on LIBOR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement. The fair value of the Company’s interest rate derivatives were as follows:
Instrument
Balance Sheet
Location
January 28,
January 29,
(In millions)
Interest rate swap - current
Prepaid expenses and other current assets
Interest rate swap - long term
Other assets
The fair values of cash and cash equivalents, accounts payable and borrowings on the Company’s ABL Facility approximated their carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy.
Long-term debt is presented at carrying value in the Company’s Consolidated Balance Sheets. The fair value of the Company’s term loans was determined based on quoted market prices or recent trades of these debt instruments in less active markets. If the Company’s long-term debt was recorded at fair value, it would be classified as Level 2 in the fair value hierarchy. The following provides the carrying and fair values of the Company’s term loans as of January 28, 2023 and January 29, 2022:
January 28, 2023
January 29, 2022
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(In millions)
Term Loan due 2028 (1)
Net of deferred financing costs and original issue discount .
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). The fair values are determined based on either a market approach, an income approach, in which the Company utilizes internal cash flow projections over the life of the underlying assets discounted using a discount rate that is considered to be commensurate with the risk inherent in the Company’s current business model, or a combination of both. These measures of fair value and related inputs are considered a Level 3 approach under the fair value hierarchy.
The Company uses the end of the period when determining the timing of transfers between levels. There were no transfers between levels during the periods presented.
Note 5—Leases
With the exception of one store location, all of the Company’s store locations operate out of leased facilities. The Company’s store location leases generally have initial terms of 10 years with renewal options for up to 25 years . The Company leases distribution centers located in Opelika, Alabama and Visalia, California and an omni-channel fulfillment center located in West Jefferson, Ohio. The initial term of the Opelika, Alabama lease expires in June 2041 , and the Company has renewal options for up to an additional 20 years . The Visalia distribution center consists of two facilities with separate leases. The initial term of the first lease expires in October 2026 , and
the Company has renewal options for up to an additional 40 years . The second lease expires in May 2024 and has no renewal options. The initial term of the West Jefferson, Ohio lease expires in June 2028 , and the Company has renewal options for up to an additional 18 years . The Company also leases certain computer and store location equipment, with lease terms that are generally five years or less. The Company generally has lease arrangements that have minimum lease payments. Certain of the Company’s leased store locations have variable payments based upon actual costs of common area maintenance, real estate taxes and property and liability insurance. In addition, some of the Company’s leased store locations have provisions for variable payments based upon a specified percentage of defined sales volume or dependent on an existing index or rate, such as the consumer price index or the prime interest rate. Also, some of the Company’s leases contain escalation clauses and provide for contingent rents based on a percent of sales in excess of defined minimums.
As most of the Company’s leases include one or more options to renew and extend the lease term, the exercise of lease renewal options is at the Company’s sole discretion. Generally, a renewal option is not deemed to be reasonably certain to be exercised until such option is legally executed. The Company’s store location leases do not include purchase options or residual value guarantees on the leased property. The depreciable life of leasehold improvements are limited by the expected lease term.
Due to the large number of temporary store location closures as a result of the COVID-19 pandemic during fiscal 2021, the Company negotiated with landlords for rent concessions, either in the form of rent abatement (meaning no rent due for select months) or rent deferral (meaning rent payments are delayed until a future period). The majority of the delayed rent payments were made during fiscal 2022. As a result of these rent concessions, the Company has adjusted its operating lease liabilities on the accompanying Consolidated Balance Sheets.
A majority of the Company’s leases are classified as operating leases and the associated assets and liabilities are presented as separate lines on the Consolidated Balance Sheets. Operating lease assets and operating lease liabilities are recognized at the date the leased property is delivered to the Company based on the present value of the remaining future minimum lease payments. Additional information related to the Company’s operating leases is as follows:
Fiscal year ended
January 28,
January 29,
(In millions)
Cash paid for amounts included in the measurement of operating lease liabilities (1)
Operating lease assets obtained in exchange for new operating lease liabilities
Operating lease cost (2)
Variable lease cost (2)
Weighted-average remaining lease term
6.12 years
6.11 years
Weighted-average discount rate
Reflected as operating cash outflows in the accompanying Consolidated Statements of Cash Flows.
Reflected as SG&A expenses in the accompanying Consolidated Statements of Comprehensive Income (Loss)
The Company has a small number of leases classified as finance leases. Financing leases and financing lease liabilities are recognized at the date the leased asset is delivered to the Company based on the present value of the remaining future minimum lease payments. Additional information related to the Company's financing leases is as follows:
Fiscal year ended
January 28,
January 29,
(In millions)
Cash paid for amounts included in the measurement of financing lease liabilities (1)
Financing lease assets obtained in exchange for new financing lease liabilities
Financing lease cost (2)
Weighted-average remaining lease term
2.71 years
1.81 years
Weighted-average discount rate
Reflected as operating or financing cash outflows in the accompanying Consolidated Statements of Cash Flows.
Reflected as depreciation and amortization or interest expense, net in the accompanying Consolidated Statements of Comprehensive Income (Loss)
Finance leases are presented in the Consolidated Balance Sheets as follows:
Classification
January 28,
January 29,
(In millions)
Assets:
Finance lease assets, net
Property, equipment and leasehold improvements, net
Liabilities:
Current portion of finance lease liabilities
Accrued expenses
Long-term portion of finance lease liabilities
Other long-term liabilities
In fiscal 2023 and fiscal 2022, the Company incurred $ 10.5 million and $ 8.8 million, respectively, of finance lease amortization expense which is presented as depreciation and amortization within the accompanying Consolidated Statements of Comprehensive Income (Loss). In fiscal 2023 and fiscal 2022, the Company incurred $ 0.9 million and $ 0.7 million, respectively, of finance lease interest expense which is presented as interest expense, net within the accompanying Consolidated Statements of Comprehensive Income (Loss).
The following is a schedule of future minimum rental payments under non-cancelable operating and financing leases as of January 28, 2023:
Future Minimum Rental
Payments
Fiscal Year:
Operating
Leases (1)
Finance
Leases (2)
Total
(In millions)
Thereafter
Total lease payments
Less: imputed interest
Present value of lease liabilities
Operating lease payments do not include leases entered in to but not commenced during fiscal 2023. We committed to approximately five leases to commence in fiscal year 2024 with average terms of 10 years and future minimum lease payments of approximately $ 20.8 million.
Finance lease payments do not include leases entered in to but not commenced during fiscal year 2023. We committed to no new leases to commence in fiscal year 2024.
Note 6—Accrued Expenses and Other Long-Term Liabilities
Accrued expenses consisted of the following:
January 28,
January 29,
(In millions)
Accrued taxes
Accrued compensation and payroll taxes
Accrued interest
Workers’ compensation and general liability insurance
Occupancy and rent-related liabilities
Customer gift cards
Capital expenditures payable
Finance lease obligations
Other
Total accrued expenses
Other long-term liabilities consisted of the following:
January 28,
January 29,
(In millions)
Workers’ compensation and general liability insurance
Finance lease obligations
Other
Total other long-term liabilities
Total discounted insurance liabilities for fiscal 2023 were $ 19.0 million, reflecting a 3.8 % discount rate, and for fiscal 2022 were $ 25.7 million, reflecting a 0.4 % discount rate. The long-term portion of certain workers’ compensation and general liability accruals are discounted to their net present value based on expected loss payment patterns determined by independent actuaries using actual historical payments.
The following table represents a five year schedule for estimated future long term insurance liabilities:
Fiscal Year-Ended
Liability
(In millions)
Thereafter
Total long-term workers’ compensation and general liability insurance
Note 7—Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements consisted of the following:
January 28,
January 29,
(In millions)
Land and buildings
Furniture, fixtures and equipment
Purchased software and computer equipment
Leasehold improvements
Construction in progress
Finance lease assets
Less accumulated depreciation and amortization
Property, equipment and leasehold improvements, net
Depreciation expense was $ 71.9 million in fiscal 2023, $ 73.2 million in fiscal 2022 and $ 73.1 million in fiscal 2021 .
Note 8— Goodwill and Other Intangible Assets
The Company acquired certain intangible assets and recognized goodwill based on the excess of purchase price over the fair value of assets acquired and liabilities assumed.
As of October 30, 2022, the Company performed a quantitative impairment analysis of the indefinite lived intangible assets including the JOANN trade name and joann.com domain name. The Company compared the fair value of the intangible assets to the carrying value utilizing a relief from royalty approach. We considered a Level 3 measurement approach to assess the fair value of these assets and included a weighted average cost of capital of 14.7 % in our assessment. Based on the analysis performed, the carrying value of the JOANN trade name exceeded the fair value; therefore, the Company recorded a non-cash pre-tax impairment charge of $ 95.0 million. This charge was recorded as trade name impairment within the accompanying Consolidated Statements of Comprehensive Income (Loss) during the fourth quarter of fiscal 2023. The analysis performed did not indicate that the carrying value of the joann.com
domain name exceeded the fair value; therefore, no impairment charge was recorded. If the Company's operating results deteriorate further, an impairment charge could be recognized in future periods.
The carrying amount and accumulated amortization of identifiable intangible assets was:
January 28, 2023
January 29, 2022
Estimated
Life in
Years
Gross
Carrying
Amount
Accumulated Amortization
Gross
Carrying
Amount
Accumulated Amortization
(In millions)
Indefinite-lived intangible assets:
JOANN trade name (1)
joann.com domain name
Intangible assets subject to amortization:
Creativebug trade name
Technology
Customer relationships
Total intangible assets
The gross carrying value of the JOANN trade name is reflected net of $ 100.0 million of accumulated impairment charges as of January 28, 2023.
For fiscal 2023, fiscal 2022 and fiscal 2021, intangible asset amortization expense of $ 8.5 million , $ 6.9 million and $ 6.9 million , respectively, was recognized by the Company. The weighted average remaining amortization period of finite-lived intangible assets as of January 28, 2023 and January 29, 2022 approximated 3.9 years and 5 .1 years , respectively.
The remaining amortization of intangible assets with definitive lives by year is as follows (in millions):
Fiscal Year
Amortization
Thereafter
Total
On March 4, 2022, the Company purchased the remaining equity interest in WeaveUp, Inc. ("WeaveUp") for $ 4.3 million. Acquisition-related costs of $ 0.1 million were recognized in SG&A expenses within the accompanying Consolidated Statements of Comprehensive Income (Loss). Prior to the closing of the acquisition, the Company recorded its 12.3 % equity investment in WeaveUp at cost and adjusted for observable transactions for same or similar investments in WeaveUp, as applicable. Upon acquisition of the remaining equity interest in WeaveUp, the Company decreased the value of its previously held investment to its fair value of $ 1.0 million, which resulted in a loss of $ 1.0 million. The fair value of the previously held investment was determined using Level 3 valuation techniques. The loss was recorded as investment remeasurement within the Consolidated Statements of Comprehensive Income (Loss) in the first quarter of fiscal 2023.
An intangible asset for WeaveUp’s developed technology with a value of $ 5.3 million was recorded as a result of the acquisition. The intangible asset will be amortized over its estimated useful life of 3 years. The other assets and liabilities acquired in the purchase of WeaveUp were not material.
Also as of October 30, 2022, the Company performed a quantitative impairment analysis of goodwill related to the JOANN reporting unit. The implied fair value of our reporting unit is determined based on significant unobservable inputs and these inputs fall within Level 3 of the fair value hierarchy. The Company performed a discounted cash flow analysis and a market multiple analysis and used the resulting average as the reporting unit's fair value. The estimated fair value of the reporting unit exceeded the carrying value (expressed as a percentage of carrying value) by approximately 10 %, resulting in no goodwill impairment for the reporting unit. If the reporting unit's operating results deteriorate further, an impairment charge could be recognized in future periods.
Changes in the carrying value of goodwill were as follows:
Fiscal Year Ended
January 28,
January 29,
(In millions)
Goodwill, gross
Accumulated impairment
Goodwill, net
Note 9—Income Taxes
The significant components of the income tax provision (benefit) were as follows:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Current:
Federal
State and local
Deferred:
Federal
State and local
Income tax provision (benefit)
The reconciliation of the income tax provision (benefit) at the statutory rate to the income tax provision (benefit) was as follows:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Federal income tax provision (benefit) at the statutory rate
Effect of:
Changes in valuation allowances
State and local taxes, net of federal benefit
Revaluation of federal NOL carryback
Officers’ life insurance
Uncertain tax positions (inclusive of penalties and interest)
Federal general business credits
Revaluation of deferred tax liability due to state tax law changes
Other, net
Income tax provision (benefit)
The Company’s effective income tax rate for fiscal 2023 was 27.0 % , an income tax benefit on a pre-tax book loss, compared to the rate for fiscal 2022, which was 18.7 % , an income tax provision on pre-tax book income. The effective tax rate increased from fiscal 2022 to fiscal 2023 because there was a pre-tax loss in fiscal 2023 and pre-tax income in fiscal 2022. The Company's favorable permanent book-tax differences decrease the effective tax rate when applied to pre-tax income, while these favorable permanent book-tax differences increase the effective tax rate when there is a pre-tax loss.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law by the President on March 27, 2020. Among other things, it provides economic relief to individuals and businesses. Tax law changes in the CARES Act impacted the Company in a number of different ways, including enhanced interest expense deductibility for fiscal 2020 and fiscal 2021 resulting from changes to the computation of the related limitation, carrying back net operating losses for fiscal 2020 and fiscal 2021 to the five prior
years, including tax years with a 35 % corporate income tax rate, and full depreciation qualified improvement property in the year the property is placed in service, starting with fiscal 2020 and fiscal 2021, because of a technical correction to the Tax Cuts and Jobs Act of 2017.
The Company recorded additional valuation allowances during fiscal 2020 to reflect that the deferred tax assets relating to the federal interest expense deduction, the federal charitable contribution deduction and state income/franchise tax credits were determined to be not realizable based on the available sources of income. However, during fiscal 2021, the Company released the valuation allowances relating to the federal interest expense deduction and the federal charitable contribution deduction because there was an increase in pre-tax income and changes to the associated tax law through the CARES Act, which resulted in sufficient taxable income in the current fiscal year to fully utilize the related carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities were as follows:
January 28,
January 29,
(In millions)
Deferred tax assets:
Lease obligations
Federal net operating loss carryforwards
Interest expense carryforward
Inventory items
Team member benefits
State net operating loss carryforwards
State credits
Other
Subtotal
Valuation allowances
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Identified intangibles
Operating lease assets
Total deferred tax liabilities
Net deferred taxes
Income taxes are estimated for federal and each state jurisdiction in which the Company operates. This approach involves assessing the current tax exposure together with temporary differences which result from differing treatment of items for tax and book purposes. Deferred tax assets and liabilities are established based on these assessments. Deferred tax assets are evaluated for recoverability based on future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. To the extent that recovery is deemed unlikely, a valuation allowance is recorded. The Company’s valuation allowances were $ 3.7 million and $ 3.9 million as of January 28, 2023 and January 29, 2022, respectively. The valuation allowances decreased due to the utilization of the related state tax credits on state tax returns filed during fiscal 2023. Many years of data have been incorporated into the determination of tax reserves, and the Company’s estimates have historically proven to be reasonable.
The Company has approximately $ 127.1 million of gross federal net operating loss (“NOL”) carryforwards, of which $ 122.3 million can be carried forward indefinitely. The Company also has approximately $ 128.3 million of gross state NOL carryforwards, of which $ 24.9 million can be carried forward indefinitely. The NOL carryforwards that cannot be carried forward indefinitely will expire beginning in fiscal 2024 through fiscal 2043. The Company has net state tax credits of $ 1.9 million, with a full valuation allowance of $ 1.9 million related to state tax credits.
The Company files income tax returns in various jurisdictions, including the U.S., China and certain states, counties and municipalities, in accordance with applicable nexus requirements. For U.S. federal, state and local purposes, the Company is no longer subject to income tax examinations by taxing authorities for fiscal years prior to fiscal 2017, with some exceptions for state and local purposes due to longer statutes of limitations or the extensions of statutes of limitations.
A reconciliation of the beginning and ending amounts of uncertain tax positions for the past three fiscal years is as follows:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Balance at beginning of fiscal year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Settlements
Lapse of statute of limitations
Balance at end of fiscal year
At the end of fiscal 2023, the Company’s uncertain tax positions were $ 1.0 million, of which $ 0.8 million would affect the effective tax rate, if recognized. Within the next 12 months, it is reasonably possible that uncertain tax positions could be reduced by approximately $ 0.1 million resulting from resolution or closure of tax exa minations. Any increase in the amount of uncertain tax positions within the next 12 months is expected to be insignificant.
The Company records interest and penalties on uncertain tax positions as a component of the income tax provision. The total amount of interest and penalties accrued as of the end of fiscal 2023 and fiscal 2022 was $ 0.1 million for both periods.
During fiscal 2021, the Company settled a dispute with the IRS relating to the fiscal 2015 to 2018 tax years. Prior to the settlement, the Company had an unrecognized income tax benefit of $ 8.7 million relating to these tax years.
Note 10—Stock-Based Compensation
Equity Incentive Plans
In March 2011, the 2011 Stock Option Plan of Needle Holdings was adopted, authorizing Needle Holdings to provide certain team members with options to purchase Needle Holdings common shares. In October 2012, as part of the formation of the Holding Company, the Stock Option Plan, dated October 16, 2012 (the “2012 Plan”), formerly known as the 2011 Stock Option Plan of Needle Holdings, was assumed by the Holding Company. With the approval of the JOANN Inc. 2021 Equity Incentive Plan, as discussed below, no additional grants will be made under the 2012 Plan.
In connection with its initial public offering, the Company adopted the JOANN Inc. 2021 Equity Incentive Plan (“2021 Plan”). The 2021 Plan provides for the grant of stock options, restricted stock units and other stock-based awards to team members and non-employee directors. The maximum number of shares of the Company's common stock available for issuance under the 2021 Plan is equal to 2,000,000 shares of the Company's common stock subject to an annual automatic increase equal to 4 % of the total number of shares outstanding on the last day of the immediately preceding fiscal year or a lesser number as determined by the Company’s board of directors. As of January 28, 2023 , there were 2,780,563 awards available to be issued under the 2021 Plan.
Retirement Provision Modification to Stock Option and Equity Incentive Plans
On August 17, 2022, the Board of Directors approved an amendment to both the 2012 Plan and the 2021 Plan, which allows for the continued vesting of a participant’s awards upon retirement from the Company, provided they meet certain eligibility requirements. In the event an employee retires and does not meet these requirements, the award is forfeited. As a result of these plan modifications, the Company recognized $ 2.5 million in accelerated stock-based compensation expense within the Consolidated Statements of Comprehensive Income (Loss) during fiscal 2023.
Stock Options
Stock options expire ten years after the date of grant. The options vest and become exercisable based on continued service to the Company. Stock options granted under the 2012 Plan vest over five years at 40 % after the first two years and 20 % each year thereafter. Stock options granted under the 2021 Plan have a graded vesting period of four years whereby one-fourth of the awards vest on each of the anniversaries of the grant date.
The following is a summary of stock option activity for fiscal 2023:
Number of Options
Weighted-Average Exercise Price Per Option
Weighted-Average Remaining Contractual Term
Aggregate Intrinsic Value (in millions)
Outstanding at beginning of fiscal 2023
Granted
Exercised
Cancelled
Outstanding at end of fiscal 2023
Exercisable at end of fiscal 2023
The total intrinsic value of stock options exercised w as less than $ 0.1 million and $ 3.0 million in fiscal 2023 and fiscal 2022 , respectively. There were no stock options exercised in fiscal 2021 and, as such, there was no intrinsic value to be calculated and no cash proceeds received. Cash proceeds from the exercise of stock option awards were $ 0.4 million and $ 1.8 million in fis cal 2023 and fiscal 2022, respectively.
The weighted-average fair value of options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
Fiscal Year Ended
January 28,
January 29,
January 30,
Weighted-average fair value per option
Expected volatility rate
Risk free interest rate
Expected term of options
6.3 years
6.3 years
7.0 years
Expected dividend yield
Expected stock price volatility was estimated using the historical volatility for industry peers based on daily price observations over a period equivalent to the expected term of the awards. The risk-free interest rate was determined using an interest rate based on U.S. Treasury zero-coupon notes with terms consistent with the expected term. Due to a lack of statistically significant historical data, related to the options issued under the 2021 Plan and corresponding exercises, the expected term was determined using a simplified approach, calculated as the mid-point between the graded vesting period and the contractual life of the award. The Company determined the dividend yield by dividing the expected annual dividend on the Company's stock by the option exercise price. The Company accounts for forfeiture of non-vested options as they occur.
Restricted Stock Units
The Company issued restricted stock units to certain team members, which have a vesting period of three years whereby one-third of the awards vest on each of the three anniversaries of the grant date. The Company also issued restricted stock units to non-employee members of its board of directors, all of which vest on the first anniversary of the grant date. The fair value for restricted stock units is calculated based on the stock price on the date of grant.
The following is a summary of restricted stock unit activity for fiscal 2023:
Number of Restricted Stock Units
Weighted-Average Grant Date Fair Value
Unvested at beginning of fiscal 2023
Granted
Released
Forfeited
Unvested at end of fiscal 2023
The total fair value of shares that vested during fiscal 2023 was $ 1.2 million. There were no such vestings during fiscal 2022 or fiscal 2021.
ESPP
The Company's ESPP allows eligible team members to purchase shares of the Company's common stock at a discount through payroll deductions. The ESPP consists of six-month offering periods, with a new offering period commencing on the first trading day on or after January 1 and July 1 of each year. Team members may purchase shares in each offering period at 85 % of the market value of the Company's common stock at either the beginning of the offering period or the end of the offering period, whichever price is lower. The maximum number of shares of the Company's common stock available for issuance under the ESPP is equal to 400,000 shares subject to an annual automatic increase equal to the lesser of 1% of the total number of shares outstanding on the last day of the immediately preceding calendar year, 400,000 shares or a lesser number as determined by the Company’s board of directors.
The weighted-average fair value of shares issued under the ESPP was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
Fiscal Year Ended
January 28,
Weighted-average fair value per share issued
Expected volatility rate
Risk free interest rate
Expected term
0.5 years
Expected dividend yield
Expected stock price volatility was estimated using the historical volatility for the Company based on daily price observations over a period equivalent to the expected term. The risk-free interest rate was determined using an interest rate based on U.S. Treasury zero-coupon notes with terms consistent with the expected term. The expected term was determined using the time period between the beginning of the offering period and the end of the offering period. The Company determined the dividend yield by dividing the expected annual dividend on the Company's stock by the share price on the date of grant. The Company accounts for forfeitures as they occur.
During fiscal 2023, the Company issued 350,834 shares of common stock under the ESPP at an average price of $ 3.64 , resulting in proceeds of $ 1.3 million and a recorded loss upon reissuance of $ 1.8 million within additional paid in capital, which resulted from the plan's discount on purchase. There were no such issuances during fiscal 2022. As of January 28, 2023 , the Company had 849,166 shares of common stock available for issuance under the ESPP.
Stock-based Compensation Expense
The following table shows the expense recognized by the Company for stock-based compensation:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Stock-based compensation expense
As of January 28, 2023, there was $ 5.9 million of unrecognized stock-based compensation expense which is expected to be recognized over a weighted-average period of 1.9 years. Stock-based compensation expense is recorded in Selling, general and administrative expenses within the accompanying Consolidated Statements of Comprehensive Income (Loss).
Note 11—Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings per share is computed based upon the weighted-average number of common shares outstanding plus the dilutive effect of common share equivalents calculated using the treasury stock method. Treasury stock is excluded from the denominator in calculating both basic and diluted earnings per share. In periods in which a net loss has occurred, as is the case for fiscal 2023, the dilutive effect of equity-based awards is not recognized and thus not utilized in the calculation of diluted loss per share, because the effect of their inclusion would have been anti-dilutive.
The following table sets forth the reconciliation of the numerator and the denominator of basic and diluted income (loss) per share for fiscal 2023, fiscal 2022 and fiscal 2021:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions except per share data)
Net income (loss)
Weighted-average common shares outstanding – basic
Effect of dilutive stock-based awards
Weighted-average common shares outstanding – diluted
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Antidilutive stock-based awards excluded from diluted calculation
Note 12—Segments and Disaggregated Revenue
The Company conducts its business activities and reports financial results as one operating segment and one reportable segment, which includes the Company’s store locations and integrated omni-channel operations. Due to its integrated omni-channel strategy, the Company views omni-channel sales as an extension of its physical store locations. The presentation of financial results as one reportable segment is consistent with the way the Company operates its business and is consistent with the manner in which the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage costs on a consolidated basis, consistent with the integrated nature of its operations.
The following table shows revenue by product category:
Fiscal Year Ended
January 28,
January 29,
January 30,
(In millions)
Sewing
Arts and Crafts and Home Décor
Other
Total
Substantially all of the Company’s identifiable assets are located in the United States. The Company does not have significant sales outside the United States, nor does any customer represent more than 10% of total revenues for any period presented.
Note 13—Commitments and Contingencies
The Company is involved in various litigation matters in the ordinary course of its business. The Company is not currently involved in any litigation that it expects, either individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.
The Company has various purchase commitments related to agreements for technology and other purchases, in which minimum guaranteed payments are required. These payments total $ 17.8 million and are required to be paid over the next three fiscal years.
Note 14—Savings Plan Retirement and Postretirement Benefits
The Company sponsors the 401(k) Plan, which is a tax deferred savings plan whereby eligible team members may elect to contribute up to 50 % of annual compensation on a pre-tax basis. The Company makes a 50 % matching contribution up to six percent of the team member’s annual compensation. The Company match is made in cash and is participant-directed. The amount of the Company’s matching contribution was $ 2.6 million in fiscal 2023, $ 2.9 million in fiscal 2022 and $ 2.6 million in fiscal 2021 . The Company does not provide post-retirement health care benefits for its team members.
Note 15—Gain on Sale and Leaseback of Distribution Center
During the second quarter of fiscal 2022, the Company completed a sale and leaseback transaction for its distribution center located in Opelika, Alabama for a sale price of $ 48.1 million. The transaction qualifies for sales recognition under the sale leaseback accounting requirements, and the Company recorded a gain of $ 24.5 million. Net after tax proceeds from the sale were primarily used to repay borrowings under the Term Loan due 2023 and ABL Facility.
The lease related to this transaction has an initial term of 20 years and two 10-year extension options . At commencement of the lease, the Company recorded operating lease liabilities of $ 37.5 million and operating lease assets of $ 37.5 million. The discount rate for the lease was 6.28 %.
Note 16—Subsequent Events
The Company entered into the Third Amendment to the ABL Facility on the Closing Date.
The Third Amendment, among other things, adds a series of FILO Loans in an aggregate amount of $ 100.0 million, the full amount of which was drawn on the Closing Date and a portion of which proceeds were used, among other things, to refinance a portion of the revolving loans drawn and outstanding under the ABL Facility immediately prior to the Closing Date. The FILO Loans mature at the same time as the commitments under the ABL Facility on December 22, 2026 . The FILO Loans will not amortize. The FILO Loans are secured overnight financing rate ("SOFR") loans, that bear monthly interest at an annual rate of 9.75 % with one 100 basis point stepdown based on minimum Consolidated EBITDA (as defined in the Third Amendment) and are subject to a SOFR floor of 1.50 %.
The Third Amendment also amends the ABL Facility to (i) include certain trade receivables in the borrowing base, (ii) provide that loans drawn pursuant to the Revolving Commitments (as defined in the Third Amendment) may be made at the Company's election as base rate loans or SOFR loans and (iii) increases the applicable margin for SOFR loans to 2.00 % with two twenty-five basis point step-downs based on excess availability. Revolving Loans (as defined in the Third Amendment) made in SOFR are subject to a credit spread adjustment of 0.10 % and a floor of 0.00 %.
Other than the changes described above, all other material provisions of the ABL Facility remain unchanged and as previously disclosed.
