Executives
[Tim Ryan] - Director of Investor Relations
Darrell Webb - Chairman of the Board, President, Chief Executive Officer
James Kerr - Chief Financial Officer, Executive Vice President
Analysts
Jeffrey S. Stein - Soleil Group
William Armstrong - C.L. King & Associates, Inc.
Michael Corelli - Barry Vogel & Associates
Laura Richardson - BB&T Capital Markets
Gary Martinson - Deutsche Bank
Joan Storms - Wedbush Morgan Securities
[David Berman - Berman Capital]
Jo-Ann Stores, Inc. (JAS) F2Q09 Earnings Call August 27, 2008 4:30 PM ET
Operator
Welcome everyone to the Jo-Ann Stores fiscal year 2009 second quarter earnings call. (Operator Instructions) I would now like to turn the conference over to Tim Ryan, Director of Investor Relations.
Tim Ryan
In just a minute Darrell Webb, our Chairman, President and Chief Executive Officer, and Jim Kerr, our Chief Financial Officer, will review the second 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 second 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, September 3, by dialing 1-800-642-1687. The conference ID number to access this call is 59755496. 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 www.streetevents.com. A replay will be available shortly after the call. The replay may be accessed at www.joann.com and at www.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 results to differ materially from our current expectations. The risks 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 delivered another solid performance in the second quarter with a 3.3% increase in same-store sales on top of a 7% increase last year. This was our sixth consecutive quarter of same-store sales growth. Our sales performance was driven by strength in basic categories including sewing notions, quilting, needle arts, and food crafting. Craft sales grew at a slightly faster rate than our sewing business for the quarter which helped offset weakness in our seasonal category.
Gross margin improved significantly in the quarter due primarily to less clearance activity than last year. We are managing inventory levels carefully and we’re down $35 million or 7% compared to the second quarter last year. Basic in-stocks remain very healthy but we’ve reduced the higher risk fashion and seasonal inventory. We also improved the markdown process for Planogram resets. These actions resulted in less clearance markdown activity for the quarter and led to a 190 basis point improvement from gross margin. We expect to continue expanding gross margin going forward through effective inventory and markdown management as well as global sourcing initiatives, but we don’t expect the same magnitude of improvement that we achieved in the second quarter.
We continue to make progress in reducing SG&A expenses. As a percent of sales SG&A improved by 90 basis points compared to the second quarter last year which we attribute to both sales leverage and continued focus on expense management. As a result of our improvement in sales, gross margin and SG&A, we were able to reduce our loss to $0.47 per share from a loss of $0.76 per share in the second quarter last year. This was our eighth consecutive quarter of year-over-year earnings improvement.
To update you on our new point of sale system, we are still on track to complete the rollout in all stores by the end of this third quarter and all applications are performing as expected. We will incur additional SG&A expenses related to the POS project in the third quarter, but as I’ve said before this investment in systems will deliver a return that exceeds our cost of capital and will help us achieve stronger financial results over the long term.
In addition to investing in systems, another key initiative for the company is revitalizing our store portfolio. In the second quarter we opened three new large format stores and remodeled 11 stores. Our activity ramps up in the third quarter when we will open 13 new stores and complete most of the work on five additional new stores that will open early in the fourth quarter. This will take our total new store openings for the year to 21 with an average size of 26,000 square feet. This compares to only six new stores last year at an average of 34,000 square feet. We will also complete seven more remodels in the third quarter bringing our total for the year to 29 compared to 26 last year.
Plus, we will complete approximately 200 small format store optimization projects during the third quarter. This involves remerchandising stores which are too small or have shorter lease horizons and therefore would not qualify for a full remodel. The optimization projects will allow us to better utilize the existing square footage in these stores, add a number of new fixtures, and expand our craft assortment.
All of these store initiatives - opening new large format stores, remodeling small format stores, and the store optimization project - allow us to expand our craft assortments in more markets. This will help us continue to capture additional market share in the craft business.
At the same time our initiatives to improve the quality and selection of fabrics along with Wal-Mart’s decision to remove fabric from many stores are allowing us to capture additional market share in the sewing business as well.
In summary, I’m proud of our team’s performance in this tough operating environment. We’ve managed to deliver positive sales and earnings growth in spite of the weak economy and our balance sheet continues to get stronger each quarter. While the economy and consumer spending environment remains challenging in the near term, I’m confident that we will deliver improved financial results this year while enhancing our market share and competitive position for the long term.
At this point I’ll turn the call over to Jim Kerr.
James Kerr
First I’ll go through the second quarter and year-to-date financial results and then I’ll wrap up with an update on our outlook for fiscal 2009.
Net loss for the second quarter improved to $11.7 million or $0.47 per share versus a net loss of $18.4 million or $0.76 per share for the same period last year. The year-to-date net loss was $8.7 million or $0.35 per share versus a net loss of $20.1 million or $0.83 per share in the prior year.
Net sales for the second quarter were $403 million, up 3.7% compared to the prior year. Same-store sales increased 3.3% versus an increase of 7% for the same period last year. Positive same-store sales were primarily driven by higher average ticket. Customer transactions were also positive due to an improvement in our conversion rate partially offset by a slight decrease in traffic. Large format stores accounted for 51.8% of total second quarter sales and small format stores accounted for 46.4%. Internet sales through www.joann.com accounted for the remaining 1.8% of sales.
Same-store sales for large format stores increased 2.3% for the second quarter on top of an increase of 9.2% for the same period last year. Same-store sales in small format stores increased 4.4% for the second quarter versus an increase of 4.8% for the same period last year. We continue to see the ongoing benefits from store remodels in our small format stores as well as benefits from capitalizing on competitive changes in the sewing business. Our sewing business represented 51% of our second quarter sales volume and increased 4.5% on a same-store sales basis. We continue to experience positive same-store sales in the majority of our fabric and sewing notion merchandise categories especially in quilting. Our non-sewing business represented 49% of our second quarter sales volume and was up 1.3% on a same-store sales basis. Gains in needle art and basic craft categories were partially offset by declines in summer seasonal categories.
Year-to-date net sales increased 4.5% to $849.1 million. Year-to-date same-store sales increased 3.9% versus a same-store sales increase of 4.2% for the same period last year. Year-to-date same-store sales for large format stores and small format stores were 2.8% and 5.2% respectively.
Second quarter gross margin rate increased 190 basis points to 47.6%. The improvement in the gross margin rate was primarily due to a smaller percentage of clearance sales to total sales this year compared to last year. The gross margin rate for the first half increased 40 basis points to 46.9%.
As a percentage of net sales SG&A expense for the second quarter improved by approximately 90 basis points to 47.5%. Year-to-date SG&A expense improved by approximately 170 basis points to 44.3%. Our improved SG&A leverage reflects the continued focus on managing our costs which have increased 0.7% on a year-to-date basis while for the same time period net sales increased 4.5%. For the balance of the year we do not expect the same level of SG&A improvement that we saw on the first half as we begin to cycle through last year’s expense reductions as well as incur incremental expenses related to our store systems rollout.
Year-to-date store pre-opening and closing costs were up $0.2 million to $5.3 million. During the first half of fiscal 2009 we had three openings and closed nine stores compared to last year when we opened five stores and closed 17 stores. Second quarter store pre-opening and closing costs include spending related to stores that will open and close in the third quarter.
Interest expense in the second quarter decreased by $0.5 million due to lower average debt levels. During the second quarter our debt levels improved form an average of $123 million outstanding in fiscal 2008 to an average of $100 million in fiscal 2009.
We ended the quarter at $472.6 million in inventory, a $35.3 million or 7% decrease versus a year ago. Basic inventories are relatively flat versus the second quarter last year with most of the reductions coming out of our clearance and fashion inventories. We continue to see high distribution center service levels and good in-stocks.
Total borrowings were $100 million versus $159 million at the end of the second quarter last year. We currently have approximately $285 million of excess availability under our senior bank credit facility. In addition, we have $41.2 million in cash on hand versus $16.7 million at the end of the second quarter last year.
Year-to-date capital expenditures were $30.9 million net of landlord allowances of $2.8 million. Investment in IT and store related expenditures including store remodels and new store openings represented the majority of the capital spending. We have increased our full year capital expenditure guidance to approximately $60 million due to more store openings than originally planned as well as spending this year for store openings that will occur earlier in fiscal 2010 than previously anticipated.
We are pleased with our progress this far in fiscal 2009 and we are raising our full year earnings per share guidance by $0.20 primarily due to the better-than-expected results in the first half. We now expect full year earnings per share to be in the range of $0.95 to $1.05. While we continue to execute and remain optimistic as we look forward to the remainder of the year, we are cognizant of the ongoing challenges in the economic environment. Also, remember that the majority of our earnings and operating leverage is derived from the third and particularly the fourth quarters. 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 you may have.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Jeffrey S. Stein - Soleil Group.
Jeffrey S. Stein - Soleil Group
Darrell I’ve got a question for you regarding the guidance. I guess my question is this. It looks like if you meet your 2% to 3.5% guidance for the year, you’re still probably at the low end looking for positive comps in the back half of the year, and you’re indicating that you expect gross margins to be up for the year. And when you put that into a model, it would suggest you’re looking at up earnings in the back half of the year yet your $0.95 to $1.05 suggests down earnings in the back half of the year. I’m wondering if you could just kind of reconcile that for me.
Darrell Webb
As we run the numbers Jeff the full-year guidance does imply that we expect the second half to be a little weaker than the first half, certainly for sales. At this point in time we do expect that the sales will be positive in the second half but the weight of our seasonal business does concern us a little bit since that’s been a soft area for us in terms of sales. But when we put the numbers together it does imply that earnings could be down slightly in the second half although we have room for upside as well. We’re just really counting on the consumer spending environment to dictate what the second half looks like.
James Kerr
I think the other impact will be depending on what the comp store sales increase. That’ll have an impact on our SG&A leverage.
Jeffrey S. Stein - Soleil Group
Has your leverage point changed for the back half of the year? It sounded to me like you have some more point of sale expenses you’re going to bear in Q3? Is that enough to raise the leverage point considerably so that perhaps on a 2% or 3% comp you’re not going to be able to leverage your expenses?
James Kerr
What we’ve said in the past is around a 2.5% to 3% comp is what we need to leverage expenses. We’ve been able to find expense savings that have helped us get better leverage than that but going forward I think that’s a good benchmark for us. The incremental costs related to the POS rollout would be on top of that so it would make it tougher to get leverage at that level of comp sales for Q3.
Jeffrey S. Stein - Soleil Group
This is just kind of a merchandising question. I noticed in your latest Sunday circular that you were advertising your custom framing offer at 60% off and that is the most aggressive offer I’ve seen you guys advertise on that particular category, and I know that’s one that you’d really like to grow. Is this kind of a strategic change in your thinking in terms of trying to be more aggressive vis-à-vis Michaels Stores or should we view this as just kind of a one-off test or just a one-off promotion?
Darrell Webb
Jeff that’s a promotion that we do around this time each year. There’s an annual major event that we do every summer. So if you look back over the last several years you would see the same kind of promotion about this same time.
Jeffrey S. Stein - Soleil Group
So we should not expect anything out of the ordinary going forward? Would that be fair?
Darrell Webb
I think that’s fair, yes.
Operator
Our next question comes from William Armstrong - C.L. King & Associates, Inc.
William Armstrong - C.L. King & Associates, Inc.
Could you discuss comp trends during the quarter, how they progressed by month?
Darrell Webb
Bill we’re going to stick with what we have for the past two years that we’re not going to comment on comps within the quarter due to promotional changes and things like that.
William Armstrong - C.L. King & Associates, Inc.
Any color on how August is progressing?
Darrell Webb
No. Again as I said a few minutes ago that our guidance really bakes in what we expect for the second half of the year and we’re not going to comment intra-quarter.
William Armstrong - C.L. King & Associates, Inc.
On last night’s conference call with Michaels Stores they noted that they’ve seen competitors, and I assume they included you in that, significantly stepping up the promotional cadence and couponing and so forth. Now you just indicated that I guess in the previous question that that wasn’t necessarily the case. Are you seeing that more broadly in the market?
Darrel Webb
I think they were referencing what they might expect for the remainder of the year, not looking backward. In the second quarter there was actually far less promotional activity. If you look at the number of pages of advertising that were run in the second quarter, depending on the competitor, it was down between 25% and 40%. Each of the major craft competitors ran one fewer week of inserts during the second quarter. Now there was some activity which took 40% off coupons and raised them to 50% in a few weeks but overall I would say it’s a less promotional environment, at least thus far this year.
William Armstrong - C.L. King & Associates, Inc.
Right. I think you were really referring to the more recent past few weeks.
Darrell Webb
Yes. I haven’t noticed any significant change in the last few weeks.
William Armstrong - C.L. King & Associates, Inc.
Any update on your field count of how many departments Wal-Mart has closed?
Darrell Webb
Not a specific number. I can tell you that overall the pace is in line with what they did last year so on track to do between 300 and 350 stores over the course of the year.
Operator
Our next question comes from Michael Corelli - Barry Vogel & Associates.
Michael Corelli - Barry Vogel & Associates
I had a question about store activity for next year. Could you give us a little detail on what your plans are at this point?
James Kerr
At the end of last year we talked a little bit about our longer term plans and we said that we would increase our new store opening count by about 10 per year. As you remember though this year we’ve taken our store count up by about six since our original count. So as we look at next year I would say as we sit here today probably an increase of five to 10 stores over the 21 that we’re going to open this year.
Michael Corelli - Barry Vogel & Associates
As far as the guidance, it does seem pretty conservative considering your trailing 12 month earnings are ahead of those numbers but I know you guys have been relatively conservative in the past, so do you think there’s potential for upside versus these numbers if things go kind of according to your hopes?
Darrell Webb
We’d sure like to think so but at this point it’s a wait and see approach that we’re taking.
Operator
Our next question comes from Laura Richardson - BB&T Capital Markets.
Laura Richardson - BB&T Capital Markets
I’m going to bug you on the guidance too. I guess I’m going to get a little bit specific because I do get what you’re saying about seasonal and the fourth quarter and everything. Last year that hurt your margin in the fourth quarter and you’re buying less this year, right, of seasonal?
Darrell Webb
That’s correct.
Laura Richardson - BB&T Capital Markets
Explain to me again if you don’t mind what was the gross margin difference between the second quarter and the first, and then Jim saying up slightly for the year? Is that what you’re trying to say? And what does that mean for the second half in gross margin?
James Kerr
What we have said is we expect gross margin in the back half to show an improvement year-over-year but not to the levels we’ve shown so far in the first half. We’ll have a slight improvement in gross margin in the back half. Q2 in particular with being up against last year’s decline of 170 basis points and this year it came back 190 basis points, so we got back everything we gave up plus a little bit more. So that’s why we don’t want people to read too much into that 190 basis point improvement. We explained last year what caused that and as expected, it came back.
Laura Richardson - BB&T Capital Markets
Clearance last year; less clearance this year.
James Kerr
Right.
Laura Richardson - BB&T Capital Markets
Do you see any difference in the amount of clearance in Q3 versus Q4 this year?
Darrell Webb
Should be a bit less clearance in Q3 than we had a year ago and by Q4 should be in a similar position.
Laura Richardson - BB&T Capital Markets
If you don’t mind Jim, can you repeat what you said about SG&A? You said don’t expect the same amount of improvement as first half. You’re adding POS. Did you mention the new stores or those really aren’t pressuring SG&A?
James Kerr
Those aren’t pressuring SG&A. The cost of opening stores and closing stores is separated out in our pre-opening and close so in terms of the pure SG&A that wouldn’t have that much of an impact. What our guidance boils down to is really where we come in on the same-store sales range. We can control the margin rate and we’re confident saying that we’ll have a positive back half margin. SG&A gets a little tougher. We know we can control expenses but the kind of leverage we get will obviously be dictated on where we come in on that same-store sales range and it’s hard to sit here and predict what that’s going to be given what’s going on with the economy. So that’s really the variables in the guidance that we’ve given.
Laura Richardson - BB&T Capital Markets
I know it’s tough out there but I saw the Michaels comp yesterday and the A.C. Moore comp recently and your non-fabric business is better than theirs. Any thoughts on why?
Darrell Webb
I think it’s some of the things we’ve talked about. The remodels to our small format stores are helping. The Wal-Mart withdrawals from fabric are benefiting those small format stores better than the large format stores because sewing is a bigger part of their business. We’re adding craft assortment to more stores. I think all those things are contributing.
James Kerr
Consistently over the last few quarters we’ve talked about our comp being driven by average ticket and we’ve seen a nice increase in conversion. We are suffering a little bit on traffic just like everybody in the industry is, but I think some of the things we’ve done over the last couple years related to the overall store experience has helped us overcome that with better conversion and getting the customer to buy a little more product when they’re in the store.
Laura Richardson - BB&T Capital Markets
Can you repeat the store openings and the type of store by quarter; what you did in the second quarter and what’s coming in Q3 and Q4?
Darrell Webb
We opened three new large format stores in the second quarter. We have 13 more coming in the third quarter and then five additional in the fourth quarter.
Laura Richardson - BB&T Capital Markets
And you said 26,000 square feet is the average?
Darrell Webb
That’s correct.
Laura Richardson - BB&T Capital Markets
So you’re counting 26,000 as large now?
Darrell Webb
Yes. We’ve been using around 24,000 as long as a store has been remodeled and hasn’t expanded craft assortment as the markation line between small and large formats.
James Kerr
For the 21 stores, and I don’t have the breakout in front of me, there will be some of those that are on the lower end of 20,000 that may be considered small format stores. I just don’t have that number in front of me.
Operator
Our next question comes from Gary Martinson - Deutsche Bank.
Gary Martinson - Deutsche Bank
On the custom framing that I think Jeff mentioned here, that was an area of weakness that some of your competitors have talked about. So while this is an annual promotion, what are you seeing in that category and other high ticket items as well?
Darrell Webb
I’m not going to speak to the current promotion going on but I can tell you that after several robust sales quarters in a row for our custom framing business, it did soften considerably in this second quarter and was actually down just very slightly. But I think you can read into that that the consumer is being cautious on those higher ticket items.
Gary Martinson - Deutsche Bank
In terms of the classes that you guys hosted in your stores Michaels talked last night about basically, I think with the exception of bakeware, doing away with those. Are you seeing pickup from that on a competitive basis?
Darrell Webb
We absolutely have. Year to date I believe our class attendance is up 12% or 13% so we are gaining some of that traffic.
Gary Martinson - Deutsche Bank
Is there a way to kind of quantify what that brings into your stores in terms of sales or is it more of just a building awareness for the product offerings and the changes that you guys have successfully implemented here?
Darrell Webb
We haven’t publicly articulated what we think that brings us. There is a little bit of scientific estimation in the process. It’s not precise. You have to make some assumptions about how much product that customer buys following a class. But clearly we think it is worth continuing to offer and continuing to grow. And the good news is that some of our best classes, our most popular, are introductory sewing classes both for adults and for children which bodes well for the future of the sewing business.
Gary Martinson - Deutsche Bank
In terms of your competition on the sewing side as Wal-Mart continues to exit and Hancock’s out, what competition do you really see there besides in the true mom and pop stores out there?
Darrell Webb
Hobby Lobby is still a competitor in that space. They don’t have a large department; they don’t offer a wide range of price points and quality options, but they are still in that business. They would be the only other major chain.
Gary Martinson - Deutsche Bank
So these trends in fabric should continue for some time then for you guys, correct?
Darrell Webb
We’re optimistic that they will, yes.
Operator
Our next question comes from Joan Storms - Wedbush Morgan Securities.
Joan Storms - Wedbush Morgan Securities
Given that you have your comp guidance out now, is there any way to quantify what you’re expecting from the Thanksgiving calendar shift this year in the fourth quarter?
Darrell Webb
We have certainly baked that into our budget and our plans for this year but beyond the guidance we’ve provided we’re not going to speak publicly to it.
Joan Storms - Wedbush Morgan Securities
You just do the newspaper inserts, right? So there’s no interruption from the election?
Darrell Webb
We do direct mail as well but not electronic media, no.
Joan Storms - Wedbush Morgan Securities
Gross margins were up pretty significantly in the second quarter and I know it’s a little bit less, but if you could remind us. The major clearance you did last year, you did it early and you did it in the second quarter. What was the cadence as far as the third quarter and the fourth quarter last year?
James Kerr
Last year it was a shift in the process that we went through. So in the past we would put things into clearance and they would stay in the clearance process for nine months or a year and they would sit on the shelves and we would get rid of them very slowly. Last year we switched over to a process that gets rid of clearance really within a quarter’s worth of time. So obviously the first item through that was painful and it took the expense of that in the second quarter last year and as expected we saw benefits in Q3 and Q4 because we didn’t have the carry-over of clearance. This quarter we saw that come back. Last year we were down 170 basis points in margin in the second quarter. This year we came back with 190 basis point improvement. And the reason the second quarter is a big clearance quarter is it’s tied into our Planogram process. So a lot of the Planogram activity that’s taking place in the non-peak months is what drives that.
Operator
Our next question comes from [David Berman - Berman Capital].
[David Berman - Berman Capital]
I’m just looking at the income statement and balance sheet and first of all congratulations on bringing your net cash down. I don’t know if my numbers are correct here, I did it quite quickly, but it seems like a year ago you had almost $6.00 a share in net debt and now it’s down to $2.37, which is about $59 million. There’s a swing there of about $19 million improvement in cash flow year-over-year and there’s no cash flow statement that I can see attests to your numbers. I’m just wondering where that came from. First of all, congratulations. About two-thirds of it I think comes from inventory reduction.
James Kerr
Right. We’ll put a cash flow in obviously with our 10Q that gets filed here in a few weeks. The key drivers: Our non-cash depreciation expense will run about $54 million this year; we have stock-based comp which is a non-cash expense which is in our numbers; and then as you mentioned nice inventory management as well as maintaining a very solid and improved AP ratio. So those are the key drivers.
[David Berman - Berman Capital]
Right now your days of inventory are down from 217 days last year to 201 days. Now 201 days is still very high compared to most retailers that we follow but nonetheless it’s a nice improvement. So you’re obviously on track. What do you think you can get that down to and should we see continued cash flow coming from that as a source of funds?
James Kerr
I would say I wouldn’t expect continued cash flow coming from a reduction. I think what our opportunity is is to get more sales off of the inventory investment that we have. We see our turn improving but as you mentioned we’re a very low-turn business so it will be slow incremental turns as we go forward. But the thought would be we could do more sales on the same inventory and not really take out much more inventory.
[David Berman - Berman Capital]
So we shouldn’t be seeing going forward a similar as big of a differential you’d say between sales growth and inventory growth?
James Kerr
No.
[David Berman - Berman Capital]
Given that you’ve got 201 days obviously the aging of the inventory is very important to be monitored carefully. How do you do that and how comfortable are you with that aging?
James Kerr
Our merchants go through a very detailed SKU by SKU process on an ongoing basis primarily in the packaged side once a year as they look at redoing the Planogram for those products. We also once a quarter go through a very extensive process tied to our financial statement looking for any inventory that needs to be reserved for. So we feel very comfortable with the process that we’re going through and don’t feel we have any big issues out there from an aging standpoint.
[David Berman - Berman Capital]
Finally, on the balance sheet issue the accrued expenses line which I really look at because it doesn’t usually fluctuate much from year to year. In your case it’s up 20% which in this case is a good thing in the sense it means that, if you don’t’ know anything from the outside, you’re saying “There’s income to be put into the P&L going forward.” What is that $20 million?
James Kerr
It relates to taxes. Since we have less of a loss, there’s less of a tax asset imbedded into that liability. It simply relates to taxes.
Operator
Our next question comes from Jeffrey S. Stein - Soleil Group.
Jeffrey S. Stein - Soleil Group
Jim, I’m wondering if you could quantify a little bit your estimate for store opening costs in Q3 and 4. You obviously were up slightly in second quarter but with 13 store openings, where will that put you in Q3?
James Kerr
Probably the best way to look at it is on a full-year basis. It’ll be up about 50% to last year’s full-year number. When you’re looking at the quarters it gets tough; Q2 was up even though we had less store activity because a lot of the spending on Q3 openings falls into Q2. So it’s hard to get into the quarter breakouts but if you use a 50% increase year-over-year for the full year, you’ll get to a good number.
Jeffrey S. Stein - Soleil Group
And Darrell, could you tell us a little bit about the difference between your spring seasonal programs and your fall seasonal programs? Obviously I have a fairly good understanding about holiday but is there any reason why your fall seasonal programs might or should or shouldn’t behave differently than your spring seasonal programs?
Darrell Webb
From a selection standpoint I think our team continues to bring in better quality, better looking, more compelling merchandise assortments. I think fall compared to a year ago fall looks a lot better. So really the reservations we have are not about the nature of the goods we’re buying and how we’re merchandising and marketing them; it’s all about consumer behavior. With the economy being what it is, I think is one of the first categories - seasonal merchandise, home décor merchandise - that people can defer until some future date. So that’s the reason we’re concerned about it.
Jeffrey S. Stein - Soleil Group
Just roughly, back half of the year, what percent of your business would you guestimate is seasonal?
James Kerr
That’s something we haven’t given out in the past Jeff and we’re not going to give that out.
Jeffrey S. Stein - Soleil Group
Can you talk a little bit about pricing for spring? With the cost of goods in China going up, where do you see your price points moving spring 09 versus 08?
Darrell Webb
I don’t have one number to answer that question. I can tell you that we have seen some inflation on costs from goods coming out of China and domestically as well. Obviously it tends to be tied to items that are based on petroleum; so plastics, also high cube items like foam and fiber which cost more to transport, and then also some of the inflationary issues coming out of Asia. I would say on average for those categories and items that we are seeing increases, I would call it high single digit, around 8%. But it’s not like we’re seeing cost increases on every SKU. It’s still a relatively small percentage of our overall assortment. And based on the turns in our business it will be quite some time before that shows up in our cost of goods on our P&L.
Jeffrey S. Stein - Soleil Group
And when it does Darrell, is the strategy to pass it through to the consumer or will you absorb any of that in the supply chain?
Darrell Webb
In general you would expect that we would pass it through but I can tell you that we don’t use just a broad brush to answer that question. We look at each item individually. We look at the sales velocity of the item. We look at magic price points; do you want to cross that $1.99 threshold for example. So in general we would expect to pass them along but we do evaluate each SKU individually.
Operator
Our next question comes from Michael Corelli - Barry Vogel & Associates.
Michael Corelli - Barry Vogel & Associates
Two questions. One following up on the store activity for next year. What about the remodel activity for next year?
James Kerr
Probably a similar level as this year. We’re still finalizing plans there but I would say based on the success we’re having with that we would continue at a similar pace.
Michael Corelli - Barry Vogel & Associates
Can you talk a little bit more about the store optimization program?
Darrell Webb
I can give you a little further detail on that. Essentially as we’re looking at the success of these small format store remodels, most of the benefit is coming from adding additional craft assortment to those stores. So the question was, how could we more quickly gain that benefit in more stores? So we began looking at our portfolio and said “We have several hundred stores, call it 400 to 500, which are either too small to gain a lot of benefit from a major remodel or have a lease that ends in a few years so it wouldn’t make sense to invest a lot of capital.” So we looked at how we could go into those stores, line up the gondolas differently, utilize the space more efficiently, add a few fixtures, and carve out space for another 60 to 100 to 120 linear feet of craft products. So that’s essentially the project that we’ll be undertaking here over the next couple months in about 200 stores. It’s not a huge capital investment on average; it’s about $4,000 per store.
Operator
The last question comes from Jeffrey S. Stein - Soleil Group.
Jeffrey S. Stein - Soleil Group
I forgot to ask one. I understand that Wal-Mart is picking up some Martha Stewart lines in crafts and wondering if you’re aware of that, because it seems like something that really fits in well with what you’re doing, and why you seem to continue to pass on Martha Stewart products?
Darrell Webb
We’re very much aware of the product line and actually walked it in their stores the week it was set. Wilton is the manufacturer, the same people that make the Wilton cake decorating supplies that we carry in our stores. We actually had the vendor in the building today meeting with them. Our sense is that it’s not performing extraordinarily well for them. Our business in cake decorating and food crafting continues to perform extraordinarily well so we think it’s more about having the right products, the right selection; not necessarily about Martha’s name and the higher costs you’re going to pay for having her name on it.
Operator
We have no further questions.
Darrell Webb
Thank you operator and thank everyone else for your interest in Jo-Ann Stores. And have a nice evening.
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