Jo-Ann Stores, Inc. F1Q09 (Quarter End 05/03/2008) Earnings Call Transcript

May.28.08 | About: Jo-Ann Stores, (JAS)

Jo-Anne Stores, Inc. (NYSE:JAS)

F1Q09 Earnings Call

May 28, 2008 4:30 pm ET

Executives

Tim Ryan – Director of Investor Relations

Darrell Webb – Chairman of the Board, President and Chief Financial Officer

James Kerr – Chief Financial Officer and Executive Vice President

Analysts

Jeffrey S. Stein – Soleil Group

Laura Richardson – BB&T Capital Markets

Robert Rodriguez – First Pacific Advisors

Michael Corelli

Karu Martinson

Doug Pardon

Jeffrey S. Stein - CFA Soleil Group

Joan Storms - Wedbush Morgan Securities

William Armstrong - C. L. King & Associates Inc.

Operator

Welcome everyone to the Jo-Ann Stores’ fiscal year 2009 first quarter earnings call. (Operator Instructions) I would now like to turn the conference over to Mr. Ryan, Director of Investor Relations.

Tim Ryan

Welcome everyone to the Jo-Ann Stores’ fiscal 2009 first quarter conference call. In just a minute, Darrell Webb, our Chairman, President and Chief Executive Officer and Jim Kerr, our Chief Financial Officer will review the first quarter results and discuss our guidance for the full year fiscal 2009. They will then respond to your questions.

After the market closed this afternoon, we issued our first quarter earnings release. If you have not received it you may obtain a copy from the investor relations section of our website at www.Joann.com. This conference call is being taped and is available through Wednesday, June 4 by dialing 1-800-642-1687. The conference ID to access this call is 45979672.

In addition, this call is being webcast over the Internet and can be accessed through the website mentioned earlier by selecting investor relations at the bottom of the website. For those with access, it is also available through StreetEvents.com. A replay will be available shortly after the call. The replay may be accessed at Joanne.com and at StreetEvents.com.

Before we begin I would like to remind you that any forward-looking comments made during this call are subject to certain risks and uncertainties which may cause the results to differ materially from our current expectations. The risk and uncertainties that are most likely to cause our results to differ materially from our current expectations are included in the press release issued this afternoon and also in our periodic filings with the SEC.

Now, I’ll turn the call over to Darrell.

Darrell Webb

Jo-Ann Stores is off to a strong start this year with a 4.5% same store sales increase in the first quarter. This was our fifth consecutive quarter of positive same store sales. Basic categories include sewing notions, quilting, craft textiles and food crafting drove our sales growth. Our custom framing business was also stronger in the quarter with a high single digit sales increase at a very high average ticket. Our ability to deliver positive same store sales in the current economic environment is due to successfully executing our strategic plan. We began implementing this plan over a year ago and the initiatives are now making a significant difference in our performance and financial results.

The first area of focus under our plan is improving the customer shopping experience in our stores. By implementing a series of initiatives towards this objective, we’ve been able to show continuous improvement in the overall appearance and condition of stores and customers have clearly expressed how much they appreciate the changes. Basic in stocks also continue to improve versus prior years. In stock not only contribute to a positive shopping experience but also help to increase our conversion rates and average transaction size. Enhancing our marketing and merchandising programs is the second area of focus in our plan. One important change in marketing for this year is that we’re now running Sunday newspaper advertising for 16 stores that we previously classified as mini superstores. Collectively these 16 stores are averaging double digit sales increases.

In merchandising we’ve made meaningful progress in the level of taste and quality of our product assortments which I believe is the key to our longer term sales performance. We are now operating with a lean inventory position which enables us to buy and feature a constant stream of compelling new items for our shoppers. We’re also enjoying strong sales from several new programs introduced last year including American Greetings, Singer Sewing Machines and Debbie Mumm designs.

The third area of focus under our strategic plan is refining our new store development program while revitalizing the existing store portfolio. Remodeling small format stores is one initiative under this umbrella. We completed 20 small format remodels in fiscal 2008 and 11 more in the first quarter of fiscal 2009. These 31 stores are averaging double digit sales increase since the remodels were completed.

Moving on to our financial performance in the quarter, gross margin was negatively impacted by selling Christmas carryover through the month of February and also by the mix of sales from our Joann.com business which carries a lower margin than our retail stores. Savings from our global sourcing effort partially offset these margin pressures. Going forward, we expect gross margin to improve year-over-year in each of the remaining quarters and on a full year basis for fiscal year 2009. We’re pleased with our ongoing improvement in SG&A expense which is coming both from sales leverage and through disciplined controls by our team.

Our new executive vice president of store operations Ken Haverkost, has identified a number of ways to save labor expense at store level without impacting customer service. During the first quarter Ken’s team introduced enhancements to our forecasting methodology for weekly sales and the labor hours needed to operate each store as well as changes in our process for handling back stock and store shelf replenishment and efficiencies related to our physical inventory process. All of these efforts helped contribute to our first quarter earnings of $0.12 per share. This was our seventh consecutive quarter of earnings improvement versus the prior year.

In terms of major projects currently underway, we now have 19 stores operating on the new point-of-sale systems. We are fine tuning the roll out process based on our learning from these pilot stores before ramping up the deployment. We will complete the conversion of all stores to the new systems in the third quarter. Ultimately, we believe these systems will help us achieve even stronger sales and margin results as well as better inventory and expense controls.

Overall, I’m pleased with our performance thus far in fiscal 2009. It’s encouraging to see so many initiatives from our strategic plan coming together and having a positive impact on the business. While the economic environment remains uncertain, we’ll continue to focus on executing our plan and taking advantage of our strengthening market position. By doing so, we’re confident we’ll be able to deliver improved financial results for the year.

At this point, I’ll turn the call over to Jim Kerr.

James Kerr

First I’ll go through the first quarter financial results. Then, I’ll wrap up with an update on our outlook for fiscal 2009. Net earnings for the first quarter were $3 million or $0.12 per share versus a net loss of $1.7 million or $0.07 for the same period last year. Total net sales for the first quarter were $446.1 million, up 5.2% compared to the prior year. Same store sales increased 4.5% versus an increase of 1.8% for the same period last year. The improvement in same store sales was primarily driven by higher average ticket. Customer transactions were up due to an improvement in our conversion rate even though traffic was down slightly.

Large format stores accounted for 51.6% of total first quarter sales and small format stores accounted for 46.6%. Internet sales through Joann.com accounted for the remaining 1.8% of sales. Same store sales for large format stores increased 3.3% for the quarter, compared to an increase of 3% for the same period last year. Same store sales in small format stores increased 5.8% for the first quarter versus an increase of .8% for the same period last year. We continue to see the ongoing benefit from competitive changes in the sewing business in our small format stores.

Our sewing business represented 52% of first quarter sales volume an increase by more than 8% on a same stores sales basis. We continued to experience positive same store sales in the majority of our fabric and sewing notions merchandise categories. Our non-sewing business represented 48% of our first quarter sales volume and was flat on a same store sales basis. Gains in basics craft, seasonal craft and party categories were offset by declines in spring and summer seasonal businesses.

First quarter gross margins were up $6.2 million over the prior year. However, our gross margin rate declined compared to last year’s first quarter due to the carryover of Christmas seasonal product which we continued to sell through the month of February. Additionally, our gross margin rate was impacted by the inclusion of our Joann.com business which was acquired last November and has a lower gross margin rate than our retail stores. For the balance of the year, we expect to realize year, over year improvements in gross margin driven by the benefit of lower clearance levels compared to the prior year as well as our global sourcing efforts.

As a percentage of net sales, SG&A expense for the first quarter improved by approximately 230 basis points to 41.4% due to expense leverage from the increase in sales as well as our continued efforts to control expenses. While we would continue to place a diligent focus on managing our costs for the balance of the year we do not expect the same level of SG&A improvement that we saw in the first quarter as we begin to cycle through last year’s expense reductions as well as incur incremental expenses related to our store systems roll out. Our store pre-opening and closing costs were $1.8 million for the quarter down $0.6 million versus the prior year due to a lower amount of store activity. During the first quarter of fiscal 2009 we had no openings and closed two stores compared to last year when we opened three stores and closed 10 stores.

Interest expense in the first quarter decreased by approximately $0.3 million primarily due to a lower average debt level. For the first quarter our debt levels improved from an average of $120 million outstanding in fiscal 2008 to an average of $100 million in fiscal 2009. We ended the quarter at $427 million in inventory an $8 million decrease versus a year ago. Store inventories are relatively flat versus the first quarter last year with most of the reductions coming out of our distribution center inventory. We continue to see high distribution center service levels and good in stocks.

Total borrowings were $100 million versus $117.8 million at the end of the first quarter last year. We currently have approximately $220 million of excess availability under our senior bank credit facility. In addition we have $57.9 million in cash on hand versus $19.9 million at the end of the first quarter last year. Capital expenditures for the quarter were $12.7 million net of landlord allowances of $0.6 million. Investment in IT and store related expenditures including store remodels and new store openings represented the majority of the capital spending.

We are pleased with our progress thus far into fiscal 2009 and have raised the lower end of our original earnings guidance. We now expect full year earnings per diluted share in the range of $0.75 to $0.85. Although we had better than expected results in the first quarter given the ongoing challenges in the economic environment and the fact that the majority of our earnings and leverage is derived from the third and particularly the fourth quarters we are keeping the high end of our guidance intact. You can find key considerations related to our outlook in the earnings release issued earlier today.

At this time, Darrell and I would be happy to address any questions that you may have.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from William Armstrong - C. L. King & Associates Inc.

William Armstrong - C. L. King & Associates Inc.

You mentioned real estate opportunities and you’re increasing the number of stores you’re going to open this year. Could you elaborate a little bit on what types of real estate opportunities you’re seeing out there? And also I noticed that despite a higher store opening schedule you haven’t changed your cap ex budget.

James Kerr

In terms of the cap ex we haven’t changed the overall range. We think we’ll operate towards the higher end of that range given the increased number of store openings. We’ll continue to monitor that and if we think it needs to go up we’ll address that as part of our Q2 guidance. In terms of the opportunities right now is the market is pretty good if you’re out there looking to open stores. Our real estate team has been in the field and has identified some opportunities that we think are compelling and we took our store count up because of that.

William Armstrong - C. L. King & Associates Inc.

Are there particular types of shopping centers or malls that you’re finding these opportunities or particular areas of the country?

James Kerr

Nothing specific at this point that we’d want to get into.

William Armstrong - C. L. King & Associates Inc.

I missed a little bit about the store labor cost savings that you mentioned in your opening comments. I was wondering if you could elaborate a little bit on that also?

Darrell Webb

Several things that Ken Haverkost and his team have been working on, one has to do with how we project weekly sales and then allocate store labor based on those sales projections. We had a tendency to be a little optimistic in the past on some of those forecasts so we put some new methodology in place to make sure we’re more accurate and therefore don’t waste labor hours.

Secondly, some major changes in the way we handle back stock inventory at store level. Instead of reserving that inventory on high shelves and needing ladders to get up and down to pull down that stock and replenish the shelves, we’re converting to a process where we keep that on rolling racks in the back room and we can more readily refill the shelves. Then thirdly, just on changes in the way we allocate hours for physical inventory preparation. Historically, we allocated a significant number of hours to clean up the stores and prepare for physical inventories and the way we’re running our stores on a day-to-day basis now that was wasted labor hours that we didn’t need to allocate so we’ve taken that out.

Operator

Your next question comes from Jeffrey S. Stein – Soleil Group.

Jeffrey S. Stein – Soleil Group

Darrell, I know that Jim mentioned that you don’t expect the SG&A benefit to continue but it sounds to me like several of these initiatives that your store ops people have implemented are relatively new, they weren’t in place last year and that you should continue to derive benefits over the balance of the year. Would that be correct?

Darrell Webb

Yes, I think Jim’s point was that the magnitude of SG&A benefits that you saw in the first quarter would not be expected to continue so we do expect that some of these changes that I mentioned will be ongoing. However, we do have the incremental expense associated with the roll out of our new POS system that will occur in the second and third quarters.

Jeffrey S. Stein – Soleil Group

Jim could you talk a little about maybe delayering of the gross margin. If you could just isolate for us the impact that the dot com business had on the gross margin in the first quarter.

James Kerr

In terms of our 90 basis point year-over-year decrease, I’d probably attribute about half of it to dot com and the other half to the seasonal carryover that we spoke to. Given that, we are comfortable with the balance of the year being able to overcome the dot com impact given where we stand on clearance and given some of our sourcing initiatives.

Jeffrey S. Stein – Soleil Group

If you can talk a little bit about the impact perhaps that you might be seeing from further Wal-Mart exits from the market place. Do you have an estimated store count in terms of the number of stores where they’ve shut down departments that overlap your locations?

Darrell Webb

I don’t know if I have the specific number of overlap stores but I know that based on our field tracking, there are about 150 Wal-Mart stores that have withdrawn from the fabric business so far this year. And in general, we overlap with about 50% of their locations so using that logic about 75 stores will be seeing the benefit.

Jeffrey S. Stein – Soleil Group

Darrell, last year in the second quarter you did see some benefit from a change in promotional cadence which boosted your comps and I’m wondering as you look to the second quarter this year it would seem that perhaps the model might change a little bit, you might see perhaps a better gross margin and perhaps not as strong a comp as we saw the first quarter, would that make sense?

Darrell Webb

Jeff, we don’t comment on guidance on a quarterly basis. As Jim said in his recap of the outlook, our sales and earnings in the first quarter were somewhat better than we expected and I would just say that so far in the second quarter we have not seen any evidence in a change of trend.

James Kerr

In terms of last year’s second quarter, if you remember the big change was we went from three newspaper inserts to 13, that drove the comp. The margin pressure in last year’s Q2 wasn’t necessarily related to the increase in the newspaper inserts, it was clearance related. When we accelerated the movement of our clearance product and, if you remember, we got the benefit of that back in Q3 and Q4.

Jeffrey S. Stein – Soleil Group

So it should be more normalized this year I presume? And you are indicating you think there’s a margin opportunity over the balance of the year?

James Kerr

Yes, we said over the balance of the year our overall guidance which we put out at the beginning of the year which is we’d have an improvement year-over-year even though we had the decline in Q1, we still expect to have a year-over-year improvement for the full year.

Jeffrey S. Stein – Soleil Group

So Jim, what factors would be contributing in your view to the improved year-over-year margin outlook over the balance of the year?

Darrell Webb

As you mentioned the clearance that we had as a drag in Q2 last year will normalize for us and then some of the sourcing initiatives we’ve talked about in the past, those would be the main drivers at this point.

Jeffrey S. Stein - CFA Soleil Group

Final question, back to SG&A for a moment, the SG&A dollars were actually down and I presume you‘re looking for them to be up and just wondering how much will the system’s implementation boost SG&A on a year-over-year basis?

Darrell Webb

In terms of SG&A, we are starting to cycle some of the things we put in last year. If you look back at last year’s first quarter I think we had a 90 basis point improvement and then for the balance of the year we had over a 160 basis point improvement. So we are going to start cycling tougher comparisons as we get into Q2 through Q4. In the first quarter, we gained leverage not only by having additional expense cuts but also due to the leverage we gained on sales. I would say going forward more the leverage will come from the sales increase and therefore will be more dependent on the comp than actual true expense reductions. We’re still going to be very disciplined on our expenses and we’ll continue to try to find ways to reduce it, but at this point I think most of the leverage would come from the sales increase.

Operator

Your next question comes from Laura Richardson – BB&T Capital Markets.

Laura Richardson – BB&T Capital Markets

I have to ask a few questions about the new stores. By quarter or by half of the year when should be seeing these stores and I don’t think you answered the question before, but I need to ask again, are they large stores? How big? SG&A and closing expense you expect from these stores and pre-opening expense? More color on all that stuff would be helpful.

Darrell Webb

First of all we don’t have completed deals on all these stores, Laura, so I can’t speak to the specific square footage. In general we’ve commented in the past that we’ll be opening slightly smaller stores on average going forward, so I think you can anticipate that.

Laura Richardson – BB&T Capital Markets

Like 30,000, Darrell?

Darrell Webb

Call it 20,000 to 30,000. We would expect most of these to be opened by the third quarter, some of them might run late third quarter. As Jim commented earlier, the entire real estate market has really opened up with the nature of the economy and we just saw some opportunities that were too good to pass up and again we haven’t completed signed deals on all of them, those are in the works.

James Kerr

In terms of the impact on some of the previous guidance we would have given on the pre-opening and close I think at year end we talked about a 40% increase year-over-year. It’s probably 50% or a little bit more than that factoring into the additional real estate activity. Capital, we talked about earlier. Some of that will depend on what size these stores are but we’re going to try to manage within the capital guidance we’ve given although there is a chance we could take that up very slightly. So, overall net impact for the year we should make operating profit on these stores that should offset the majority of that increase in pre-opening and closing costs. It should be pretty much a wash for this.

Laura Richardson – BB&T Capital Markets

Is it a factor also in your thinking on SG&A guidance, Jim, that that’s another pressure you’re going to start incurring?

James Kerr

Given the timing we’re going to open those stores it shouldn’t be too much of a drag on SG&A. Bottom line, we think it’s a fairly neutral impact for the year.

Laura Richardson – BB&T Capital Markets

I know you’ve studied a lot of things that went wrong in the last phase of Jo-Ann expansion. What have you learned from the wave of superstores that opened in 2005, 2006 that you’re going to do differently besides Darrell said the stores are smaller?

Darrell Webb

We’ve talked about this on a number of past calls that there were several key learnings from that assessment, certainly some demographic markers that we have to sure that we meet in terms of number of households, average income, issues about proximity to the nearest existing Jo-Ann’s stores, proximity to competitors. So there are a host of things that we make sure that these sites qualify for before approving the deals.

Laura Richardson – BB&T Capital Markets

How about in terms of the opening process? Any thoughts on how you might do that differently?

Darrell Webb

We have carved out a pretty significant portion of our pre-opening expenses, I don’t remember the exact dollars off the top, but it’s tens of thousands of dollars that we’ve taken out of that pre-opening process.

James Kerr

The opening process itself has always been fairly smooth.

Laura Richardson – BB&T Capital Markets

I’m thinking also in terms of grand opening and advertising, all those things that are going to bring in customers quicker.

Darrell Webb

Travis and his team have certainly done a nice job of enhancing our grand opening process. We just opened a store last week and had a tremendous opening in Augusta, Georgia. We’re very comfortable with the marketing plan we have in place for grand openings.

Operator

Your next question comes from Robert Rodriguez – First Pacific Advisors.

Robert Rodriguez – First Pacific Advisors

I just really wanted to get clarification in your comp store sales beyond just the large versus small was there any geographic differences in the comp stores or is it pretty much similar across all areas?

Darrell Webb

Not a dramatic difference, I think if you look at the housing market across America and said where are the toughest markets for housing, there would be some correlation with our business results, but in general not dramatic differences.

Robert Rodriguez – First Pacific Advisors

Have you done anything let’s say to try and ascertain whether you’re getting some type of a trade down customer?

Darrell Webb

No, we haven’t. We just did receive a round of consumer research back that I know the team is still working through. I’m not sure if that information will be contained in that or not.

Robert Rodriguez – First Pacific Advisors

I know that’s something that Wal-Mart has been starting to see.

Darrell Webb

So the question would be if somebody is coming to our store that maybe used to shop a specialty quilting store, for example?

Robert Rodriguez – First Pacific Advisors

Or some other types and they decide with more people, shall we say, staying at home a little bit longer now with the cost of gasoline?

Darrell Webb

I hope we answered that.

Robert Rodriguez – First Pacific Advisors

On your MIS you mentioned that you were doing the POS system on 19 stores and then you’re going to do a full implementation completed by the third quarter. That’s a fairly quick process and I would assume that the 19 that you’re doing is pretty much a fully contained set and it’s been pretty much vented so that’s why you can talk about a fairly rapid implementation?

Darrell Webb

Right, certainly the reason we do pilots is to understand what’s working, what’s not and like any major roll out of this magnitude we’ve had a few hiccups but we’ve learned from those and we’ve incorporated that into our roll out plan. You’re right, it gets pretty aggressive. We get to the point where we’re converting upwards of 50, 60 stores per week as we get deep into the process the team is prepared for it. Kevin Stack and his organization have worked really hard to make sure it goes smoothly.

James Kerr

You wanted to talk about SG&A and some of the incremental costs that will put pressure on, most of that is training so we’re putting a lot of emphasis on training the store associates and making sure not only are the systems ready to go but the store associates are ready to go as well.

Robert Rodriguez – First Pacific Advisors

And remind me again, who’s the supplier of this?

Darrell Webb

It’s JDA Systems. Their POS system is Traversity and then we’re also putting in Workforce Management and other tools.

James Kerr

SAP Systems.

Darrell Webb

I’m sorry.

James Kerr

We’re looking at JDA on the replenishment and forecasting things.

Operator

Your next question comes from Michael Corelli.

Michael Corelli

Did you say you haven’t seen any significant change in the sales trend so far in the second quarter?

Darrell Webb

Yes, just in general we haven’t seen change in any of our business trends.

Michael Corelli

As far as the American Greetings is that still mostly at the large format stores or have you rolled that out or are you considering rolling that out at this point?

Darrell Webb

Primarily in the large format stores, we’ve been adding it to the small format stores that we’re remodeling, some of the larger ones in the 20,000 square foot range. Then we’re also testing some seasonal small representations of that product.

Michael Corelli

Any new product categories or anything that you’re excited about at this point?

Darrell Webb

I called out a handful in the prepared remarks. One thing that’s just doing extraordinarily well for us right now is the whole Debbie Mumm design product. We have her designs in the quilt shop and other fabrics, in the seasonal shop and a new program in paper crafting and all of those are doing very, very well for us.

Michael Corelli

As far as the website, the Internet sales, are concerned what kind of a percentage increase did you achieve there versus what might have been the case a year ago and was that profitable in the quarter?

James Kerr

It wasn’t a significant increase year-over-year. However we do expect over time for the Internet comp to be greater than the store comp. In terms of P&L impact for the quarter we’re not going to break that out separately but it wasn’t a significant impact one way or another on the earnings.

Michael Corelli

And you expect it to be profitable for the year?

James Kerr

When we made the purchase we said we would expect it to be accretive to earnings beginning in the first year.

Michael Corelli

As far as your guidance obviously it seems very conservative considering you were up by $0.19 a share in the first quarter and late in the year you should be benefiting from the new point of sales systems in the new stores you’re opening and there is significant margin opportunity in the second quarter. Are you just being conservative because of the environment at this point?

Darrell Webb

We think we’re being prudent just based on what the economy looks like and a year ago things were looking very good through the first two quarters for us and we ended up raising guidance a little bit and then the economy went South in the third quarter. We had to revise guidance back to our original range. We just think it’s prudent to watch a little bit further into the year and see how things go.

Operator

Your next question comes from Karu Martinson.

Karu Martinson

In terms of the non-sewing comps you mentioned you were down on the spring and summer seasonal, how big is that in terms of the quarter here? I thought fourth quarter really we saw the bulk of the seasonals and then it would be a modest piece of the rest of the year.

James Kerr

We have summer and spring assortments that we consider seasonal in our stores at this point in time. Not as significant as a Christmas holiday would be but certainly when it’s running negative it has an impact. Without that business our core craft business would have been positive but the seasonal business is negative at this point.

Karu Martinson

In your earlier comments that we haven’t seen the significant change in business trends in the second quarter we can assume that that relationship has held steady?

James Kerr

Yes, I think as everyone is seeing right now seasonal businesses which tend to be more discretionary in nature are tougher right now.

Karu Martinson

In terms of the higher average ticket that you referenced, do you feel that that’s your core customers are shopping more? You mentioned traffic is up, what’s driving that side of the equation?

Darrell Webb

I think it’s a number of the things that I referenced earlier, it’s the taste and quality of our product assortment, it’s the flow of newness, new products that are constantly arriving in our stores, basic in stocks. It’s a lot of those things that the merchant and operator teams are doing.

Karu Martinson

The stimulus checks haven’t been really referenced that much by retailers as a benefit, is that something that you are seeing or expect to see going forward?

Darrell Webb

It’s really hard for us to tell. We don’t do check cashing in our stores so we wouldn’t see it from that perspective. Given that our trends have not changed significantly it’s really hard for us to tell.

Karu Martinson

In terms of shipping costs, diesel has risen significantly, are you seeing any cost pressures on that side of the equation for you?

Darrell Webb

Absolutely, both from an inflation in terms of products costs from our vendors as well as just managing our own transportation network. Fortunately our logistics team has done a terrific job so far of reworking routes and finding savings on the distribution side to offset increases on transportation but it’s certainly a concern as we look forward throughout the rest of the year.

Karu Martinson

Lastly on the advertising front you mentioned you started advertising in some of the new 16 stores, did the Sunday advertising and so forth. I was wondering if you’re seeing a competitive response to that advertising and just in general the environment that you’re seeing out there?

Darrell Webb

No, we haven’t seen a response. Those stores are scattered around the country so it would be very difficult for a competitor probably to even notice that we have made those changes and the competitive marketplace remains fairly benign. We’re not seeing aggressive pricing or advertising changes from anyone out there.

Operator

Your next question comes from Doug Pardon.

Doug Pardon

On the balance sheet, it looks like you are in a significantly better position than you’ve ever been in. I think net debt last 12 months is down a little over $50 million, $57 million a year you’re at a net debt of $42 million. Any thoughts on balance sheet management going forward? What to do with the extra cash? Buy back stock? Pay down debt, etc.?

James Kerr

We have ongoing discussions about that and will continue to have discussions about that amongst ourselves and with our Board but at this point nothing specific that we’d want to communicate.

Doug Pardon

Some target leverage ratio or anything like that?

James Kerr

Nothing specific at this point to speak to.

Operator

Your next question comes from Jeffrey S. Stein - CFA Soleil Group.

Jeffrey S. Stein - CFA Soleil Group

Jim and Darrell, follow up question with regard to remodels, first of all just a housekeeping question. When you remodel a store and it goes from a small format to a large format layout, does it get pulled out of the comp?

James Kerr

We move it to the appropriate small or large format grouping.

Darrell Webb

But it stays in the comp.

Jeffrey S. Stein - CFA Soleil Group

It stays in the comp? Okay.

James Kerr

Right, it’s no different than any other remodel that the difference is based on that store’s size we’re able to get more of a craft assortment in to that store.

Jeffrey S. Stein - CFA Soleil Group

So in other words, you’re not adding to the selling space of the store. All you’re doing is changing the layout?

James Kerr

Changing the layout and better utilizing the space.

Jeffrey S. Stein - CFA Soleil Group

Secondly, given the fact that it probably doesn’t take a lot of capital to do a remodel like that and you’re getting a double digit increase why not do more than 25 to 30?

Darrell Webb

Really it’s an organizational bandwidth issue just making sure we have enough resources that are properly trained to execute them. We do expect to continue ramping up that number as we look ahead but it’s just making sure we have the resources to do it properly.

James Kerr

And it’s tying it into our overall real estate strategy where we’re going to have closures due to new store openings so the two need to go together.

Jeffrey S. Stein - CFA Soleil Group

Final question you’ve referenced in the last several conference calls your framing business which seems to be getting a lot better, in fact one of the stronger performing categories and given the fact that it seems to be a fairly discretionary category how would you explain the fact that that business has been so good for you?

Darrell Webb

It has been a great performing category for us, as I mentioned it’s growing at a high single digit rate and what’s very impressive is the average ticket in that business as you know is very high in the hundreds of dollars. Really we have a new marketing approach for promoting the category a bit more frequently. I think operationally we’re managing the business more effectively. But really beyond that I couldn’t speak to why we’re having such success for it.

Jeffrey S. Stein - CFA Soleil Group

Any thoughts in terms of how large the custom framing category is?

Darrell Webb

I think if you refer to a recent presentation by Michael’s they quote a $2.4 billion? I think that was the number.

Operator

Your next question is a follow up question from Michael Corelli.

Michael Corelli

Just two questions, one on the decline in the seasonal summer and spring product sales, was some of that self inflicted by over purchasing less versus a year ago?

Darrell Webb

Well we certainly did purchase a bit less than a year ago but we’re seeing sales decline at a greater rate than our purchases declined. So as Jim said I think this is a category that consumers have said in this economic environment it’s one of the more discretionary things they maybe don’t need that extra home décor item for this year so they’re passing on that category.

Michael Corelli

As far as for the next couple of quarters has the plan been purchasing it down again?

Darrell Webb

That would be a fair assumption, yes.

Michael Corelli

Just a question about the custom framing, one of your competitors talks about a technology they’re using with the custom framing that they think is a very good technology, is that something you’re exploring?

Darrell Webb

We do have digital custom framing that we offer to our customers. There are some differences in what that competitor is referencing than what we do, but we are looking at some enhancements to our existing technology as well.

Operator

Your next question comes from Joan Storms - Wedbush Morgan Securities.

Joan Storms - Wedbush Morgan Securities

You’re going up against some pretty tough comparisons from the comp perspective heading into the second quarter, do you have incremental merchandising or marketing plans that you’ll be doing differently in order to go up against that comp?

Darrell Webb

Not beyond those that I referenced in my prepared remarks. As you noted a year our comps were plus 7%. As we’ve said a couple of times now we haven’t seen a trend change since the first quarter and thus far in the second. We’re pretty comfortable with the plans that we have in place.

Operator

Your next question comes from William Armstrong - C. L. King & Associates Inc.

William Armstrong - C. L. King & Associates Inc.

Two questions, on the comps if you’re seeing trends continuing in that 4% to 5% range in the second quarter, that would imply you’re looking for a pretty big slow down at the back half of the year to get to 1% to 3%. Am I thinking about that right?

Darrell Webb

Again, I’ll refer back to Jim’s comments on the outlook, it’s just so early in the year that we are not comfortable changing that full year guidance at this point. We’ve left that in place. Clearly if things continue through the second quarter we’ve have to take a look at revising that after the second quarter.

James Kerr

The majority of our business is done in the third and fourth quarters.

William Armstrong - C. L. King & Associates Inc.

Finally are you seeing any material trends in the crafting business, product trends that may have some promise going forward? Something like we saw with yarn or scrapbooking in past years?

Darrell Webb

There are two that I’ve mentioned in a couple of the past calls. The food crafting business, the Wilton products continues to be very strong and the craft textiles which are things folks to do to decorate their clothing. Those remain very strong. Beyond that we haven’t seen anything else emerge.

Operator

At this time there are no further questions.

Darrell Webb

We appreciate all of you listening in and appreciate your interest in Jo-Ann Stores. We look forward to speaking with you again in late August to review our second quarter results. Have a good afternoon.

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