Amit Chokshi_

The Short Case On Jo-Ann Stores

1) I partially agree, after all I stated that they were able to generate increasing GMs in a declining sales environment by getting rid of clearance items earlier on so this quarter looked ok. But as far as inventory goes, they are not lying but I believe that they are still carrying a lot of stale inventory. From Oct 2005 to Oct 2006, they did bring down a lot of inventory but that was mostly through the holiday season of 2005, since at Jan 06, they had $514mm of inventory, so for most of 2006 they've been working at a much lower inventory level, which is a good job by Webb. The problem I have is that Webb said that they didn't buy a lot of new inventory heading into the fall season which is fine but sales were still extremely slow meaning to me that this current level of inventory is still not being moved and the inventory is mostly out of season stuff. Also, Nov and Dec comp sales were very bad, so I suspect inventory may still just be sitting there. In this type of industry, that stale, out of season inventory loses value fairly quickly so I would not be surprised if they just write off a bunch of it and start clean or Webb decides to aggressive slash prices again.

2) Debt has been reduced from $290 to $200, but it's still levered at close to 4.0x EBITDA. Also, that doesn't include the gross up for the sale-leaseback which now as a lease where they pay rent would essentially represent off balance sheet debt, so the actual leverage is higher than what's represented on the balance sheet. That's fine, it's a common practice but for a business with the industry dynamics and low cash flow JAS produces, that's a lot of leverage.

3) I expect SS to pick up for the same reason but I would not be surprised if the comps come in at 0-2%.

4) Fair enough, I think arts and crafts require more "trendiness" or some sort of "fashion" angle to pick up sales. Groceries has been a tough industry, WINN went bankrupt, etc and there are trends as demonstrated by WFMI and OATS but the bigger guys in my opinion, the traditional stores like Safeway, Kroger, Publix, Albertsons, have been fairly steady players, WMT has been difficult especially when considering the grocery union, but I feel the arts and crafts industry faces different dynamics overall. I am sure Webb will get the operation streamlined but I don't have a lot of faith in doing much on the sales end.

At any rate, good luck with your view on JAS and investment (if you are long).