Quick Take
JOANN (NASDAQ:JOAN) has filed to raise $175 million from the sale of its common stock in an IPO, according to an amended registration statement.
The company sells sewing and craft-making products to consumers in North America.
While JOAN has grown revenue impressively during the pandemic, it contracted before the pandemic, the company has significant debt and I’m concerned about its growth trajectory as the pandemic wanes, so I'll pass on the IPO.
Company and Technology
Hudson, Ohio-based JOANN was founded to make sewing and arts and crafts supplies available to consumers via its large retail network of 860 stores, with over 95,000 SKUs in stores and 245,000 SKUs via its online website.
Management is headed by president and CEO Wade Miquelon, who has been with the firm since 2016 and was previously CFO and EVP at Walgreens Boots Alliance (WBA) and held the same positions at Tyson Foods (TSN).
The company’s primary offerings include:
Own-brand portfolio
Omnichannel fulfillment
In-store and online education
JOANN has received at least $124 million from investors including private equity firms Leonard Green & Partners and TCW/Crescent.
Customer Acquisition
The firm pursues an omnichannel approach, seeking customers through all manner of online and offline media, advertising, social media, direct mail and in-store promotions, events and instructional classes.
Management says the firm has approximately 33% of market share for sewing retail products in the U.S., which represented 49% of its net sales in the twelve months ended Oct. 31, 2020.
Selling, G&A expenses as a percentage of total revenue have been trending higher as revenues have fluctuated, as the figures below indicate:
Selling, G&A | Expenses vs. Revenue |
Period | Percentage |
39 Weeks Ended Oct. 31, 2020 | 42.6% |
FYE February 1, 2020 | 43.6% |
FYE February 2, 2019 | 40.9% |
Source: Company registration statement
The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, swung into positive territory in the most recent reporting period, as shown in the table below:
Selling, G&A | Efficiency Rate |
Period | Multiple |
39 Weeks Ended Oct. 31, 2020 | 0.5 |
FYE February 1, 2020 | -0.1 |
Source: Company registration statement
Market and Competition
According to a 2020 market research report by IBISWorld, the U.S. market for craft and sewing supplies will be an estimated $3.6 billion in 2021.
This represents a forecast growth rate of 2.3% over the previous year.
However, the annualized growth rate from 2016 to 2021 is expected to be negative (4.7%).
Also, the main negative factor impacting the industry is a "declining life cycle stage and low barriers to entry."
However, the impact of the COVID-19 pandemic may provide an impetus to growth as consumers perform more arts & crafts and hobby work in the home in response.
Management seeks to cast the company as part of the Creative Products industry and cites a much larger market size of $40 billion.
Major competitive or other industry participants include:
Financial Performance
JOANN’s recent financial results can be summarized as follows:
Fluctuating topline revenue
Variable gross profit and stable gross margin
Uneven operating profit
A swing to net income
A swing to positive cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
39 Weeks Ended Oct. 31, 2020 | $ 1,921,500,000 | 24.3% |
FYE February 1, 2020 | $ 2,241,200,000 | -3.6% |
FYE February 2, 2019 | $ 2,324,800,000 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | % Variance vs. Prior |
39 Weeks Ended Oct. 31, 2020 | $ 971,700,000 | 25.1% |
FYE February 1, 2020 | $ 1,105,300,000 | -6.1% |
FYE February 2, 2019 | $ 1,176,500,000 | |
Gross Margin | ||
Period | Gross Margin | |
39 Weeks Ended Oct. 31, 2020 | 50.57% | |
FYE February 1, 2020 | 49.32% | |
FYE February 2, 2019 | 50.61% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
39 Weeks Ended Oct. 31, 2020 | $ 93,700,000 | 4.9% |
FYE February 1, 2020 | $ (436,400,000) | -19.5% |
FYE February 2, 2019 | $ 149,100,000 | 6.4% |
Net Income (Loss) | ||
Period | Net Income (Loss) | |
39 Weeks Ended Oct. 31, 2020 | $ 174,000,000 | |
FYE February 1, 2020 | $ (546,600,000) | |
FYE February 2, 2019 | $ 35,300,000 | |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
39 Weeks Ended Oct. 31, 2020 | $ 185,800,000 | |
FYE February 1, 2020 | $ (33,900,000) | |
FYE February 2, 2019 | $ 99,000,000 | |
Source: Company registration statement
As of Oct. 31, 2020, JOANN had $33.2 million in cash and $2.5 billion in total liabilities.
Free cash flow during the twelve months ended Oct. 31, 2020, was $280.3 million.
IPO Details
JOAN intends to sell 11 million shares of common stock (5.5 million from the company and 5.5 million from selling shareholders) at a proposed midpoint price of $16.00 per share for gross proceeds of approximately $175 million, not including the sale of customary underwriter options.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $1.5 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 27.09%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:
We intend to use the net proceeds from this offering, including any net proceeds from the underwriters’ exercise of the over-allotment option to purchase additional shares from us, to pay down outstanding borrowings on our Second Lien Facility and the remainder, if any, to pay down outstanding borrowings on our ABL Facility. As of January 30, 2021, there was $72.8 million in outstanding borrowings under our Second Lien Facility.
Management’s presentation of the company roadshow is available here.
Listed underwriters of the IPO are BofA Securities, Credit Suisse, Guggenheim Securities, Barclays, Wells Fargo Securities, Piper Sandler, William Blair and Telsey Advisory Group.
Commentary
JOAN is seeking public capital primarily to pay down debt and the firm is private equity owned, and its balance sheet shows significant debt, which is typical of PE-owned companies.
The firm’s financials indicate strong growth during the 2020 pandemic period but also revenue contraction just prior, a concern.
Selling, G&A expenses as a percentage of total revenue have been uneven and its Selling, G&A efficiency ratio swung to positive territory in the most recent reporting period.
The market opportunity for selling sewing and crafts items in the U.S. is significant and will likely remain robust as consumers have switched to more do-it-yourself activities.
BofA Securities is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 90.7% since their IPO. This is a top-tier performance for all major underwriters during the period.
The primary risk to the company’s outlook is consumers moving to perform fewer do-it-yourself activities as the effects of the pandemic wane in the wake of increasing vaccinations, which are occurring in the U.S. at up to 2 million per day.
As for valuation, JOAN is favorably priced compared to competitor The Michaels Companies, so the IPO does not appear to present pricing challenges.
While the firm’s 2020 topline revenue growth results were impressive, I’m concerned about its pre-pandemic revenue contraction and generally uneven results.
Additionally, the company has significant debt like so many private equity owned firms and will use all the IPO proceeds to pay the debt down, with none left over for future growth plans.
Given the pre-pandemic revenue contraction, the debt load and my concern that consumers will be less enthusiastic buyers of craft items as the pandemic wanes in 2021, I'll pass on the IPO.
Expected IPO Pricing Date: March 11, 2021.
Gain Insight and actionable information on U.S. IPOs with IPO Edge research.
Members of IPO Edge get the latest IPO research, news, and industry analysis.
Get started with a free trial!
