JOANN: Discussion and analysis by management of the financial situation and operating results. (form 10-Q)

This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and the audited consolidated financial statements and accompanying notes and management analysis. financial statements Statement and results of operations in our annual report on Form 10-K for the year ended January 30, 2021. Some of the information included in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information regarding our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should refer to the “Caution Regarding Forward-Looking Statements” section in this quarterly report and the “Summary Risk Factors” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended. January 30, 2021 for a discussion of the important factors that could cause actual results to differ materially from the results described or implied by forward-looking statements contained in the following discussion and analysis.

Our fiscal year ends on the Saturday closest to January 31 and refers to the year in which the period ends (e.g. fiscal year 2022 refers to the year ending
January 29, 2022). Fiscal years consist of 52 weeks, unless otherwise specified. The fiscal quarters have ended May 1, 2021 and May 2, 2020 were both composed of 13 weeks.

Presentation of JOANN

JEANNE is the national leader in the sewing category and one of the fastest growing competitors in the arts and crafts category. The creative products industry is a large and growing market that, according to a 2017 study Creative Industries Association the study exceeds 40 billion dollars. The industry is currently experiencing strong demand for products in response to multiple themes that have grown even stronger during the COVID-19 pandemic, such as increased DIY customer behavior, increased participation from new and existing customers, and engagement. digital technology, of which we are a key beneficiary because we have positioned ourselves and our future strategies to capitalize on the increased demand for creative products. As a well-established and trusted brand for over 75 years, we believe we have a deep understanding of our clients, what inspires their creativity, and what fuels their incredibly diverse endeavors. Since 2016, we have been committed to a transformation strategy JEANNE, which has helped us move from a traditional retailer to a fully integrated, digitally connected creative product provider.

Highlights of the thirteen completed weeks May 1, 2021

   •  Net sales increased 15.0% compared to the first quarter of fiscal 2021, to
      $574.4 million, with total comparable sales increasing 15.0%.


   •  Gross margin increased 23.1% compared to the same period in the prior fiscal
      year, to $302.7 million, at a rate to net sales of 52.7% compared to 49.2%
      for the same period in the prior fiscal year.


   •  Net income was $15.1 million in the of first quarter fiscal 2022, compared
      to a $23.6 million net loss in the same period in the prior fiscal year.


   •  Adjusted EBITDA increased 165.0% compared to the same period in the prior
      fiscal year, to $57.5 million, or 10.0% as a percentage of net sales
      compared to 4.3% as a percentage of net sales for the same fiscal period
      last year.


   •  For the first quarter of fiscal 2022, we had diluted earnings per share of
      $0.38, compared to a diluted loss per share of $0.68 for the first quarter
      of fiscal 2021.


   •  We successfully completed our initial public offering generating $77.0
      million in net proceeds, which we used to repay all of the outstanding
      borrowings and accrued interest under the Term Loan due 2024 totaling $72.7
      million.

Effects of COVID-19 on our business

We continue to closely monitor the impact of the COVID-19 epidemic on all facets of our business. We have taken steps to protect the safety of our team members and clients and to run the business in the resulting fluid and difficult environment. Our measures to manage the operation of our sites during the pandemic have added costs to our business, some of which are of a one-time nature, including overtime hours and supplies to maintain sanitation and social distancing protocols. These precautions may change from time to time as local conditions and applicable health mandates change, and as a result, we may be required to temporarily close locations or limit our operations. From May 1, 2021, we operated 855 sites in 49 states and all sites were open and fully operational.

As the impact of the COVID-19 pandemic has started to ease with the distribution and administration of approved vaccines, some states in which we operate have lifted mandatory mask warrants and relaxed social distancing requirements. In states where these


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mandates and requirements are still in place, we continue to require our team members and customers to follow applicable guidelines when entering, exiting and shopping in our stores.

While the circumstances surrounding the COVID-19 pandemic remain fluid, we continue to actively monitor the impact of the pandemic on the Company, including our financial condition, liquidity, results of operations and cash flow, all managing our response to the crisis through collaboration with employees, customers, suppliers, government authorities, health officials and other business partners. Please see Part 1, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the Year Ended January 30, 2021 for more information on the risks associated with the impact of the COVID-19 pandemic on our business.

Total comparable sales

Total comparable sales is an important measure across the retail industry. This metric allows us to assess the performance of our location base and e-commerce activity by measuring the period-to-period change in net sales in locations that were opened during the applicable period. We define comparable sales total as the net sales of locations that have been open for 13 months or more and that have not been relocated, expanded, or reduced in the past 13 months. In addition, the comparable sales total includes our e-commerce sales generated through joann.com (online sales for all products) and creativebug.com (online sales of digital videos for craft projects). There may be variations in the way some of our competitors and other retailers calculate comparable sales. Therefore, the data in this Quarterly Report on Form 10-Q regarding our total comparable sales may not be comparable to similar data made available by other retailers.


Non-GAAP Financial Measures

Adjusted EBITDA

We present Adjusted EBITDA, which is not a recognized financial measure under GAAP because we believe it helps investors and analysts compare our operating performance between reporting periods in a consistent manner by excluding items that , in our view, are not representative of our baseline operating performance. . Management believes that Adjusted EBITDA is useful in highlighting trends in our core operating performance relative to other metrics, which may differ significantly depending on long-term strategic decisions regarding capital structure, jurisdictions tax in which companies operate and capital investments. We also use Adjusted EBITDA in determining annual discretionary incentive compensation; complement GAAP performance measures in evaluating the effectiveness of our business strategies; make budget decisions; compare our performance to that of other comparable companies using similar metrics; and because our credit facilities use measures similar to Adjusted EBITDA to measure our compliance with certain covenants.

We define Adjusted EBITDA as net income (loss) plus provision (income) for income tax, interest expense, net debt loss (gain), and depreciation and amortization, adjusted for eliminate the impact of certain non-cash and other items. that we do not consider to be an indication of our continued operational performance, including costs related to strategic initiatives, costs related to COVID-19, technology development expenses, stock-based compensation expenses, loss on disposal and impairment of fixed and operational rental assets, sponsor management fees and other one-off costs. The other adjustments are detailed in the table below.

Adjusted EBITDA has its limitations as an analytical tool, and you should not view it in isolation or as a substitute for analyzing our results as presented 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 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


    •   other companies in our industry may calculate Adjusted EBITDA differently
        than we do.


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We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as additional information.


The following is a reconciliation of our net income (loss) to Adjusted EBITDA
for the periods presented:



                                                              Thirteen Weeks Ended
                                                           May 1,              May 2,
(In millions)                                               2021                2020
Net income (loss)                                       $        15.1       $       (23.6 )
Income tax provision (benefit)                                    4.2               (12.1 )
Interest expense, net                                            13.2                22.7
Debt related gain (1)                                            (0.1 )              (3.1 )
Depreciation and amortization (2)                                20.6                19.9
Strategic initiatives (3)                                         0.3                 1.1
COVID-19 costs (4)                                                1.3                10.7
Technology development expense (5)                                1.8                 1.1
Stock-based compensation expense                                  0.6                 0.4
Loss on disposal and impairment of fixed and
operating lease assets                                              -                 3.4
Sponsor management fee (6)                                        0.4                 0.8
Other (7)                                                         0.1                 0.4
Adjusted EBITDA                                         $        57.5       $        21.7



(1) The “debt gain” represents the gains associated with the debt redemptions below

at par and write off the unamortized costs and the associated original issue discount

with debt refinancing.

(2) “Depreciation and amortization” represents the depreciation, amortization of

intangible assets and amortization of content costs.

(3) “Strategic initiatives” represent non-recurring costs, such as

    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, including costs (i) to design a new prototype and
    assortment optimization process for locations, (ii) related to our efforts to
    initially evaluate and implement opportunities to offset the significant
    costs incurred due to the new U.S. tariffs on merchandise produced in China,
    (iii) to start up a new technology product that would traditionally be
    incurred by our vendors, (iv) to evaluate our opportunity in new potential
    lines of business and (v) to analyze improved supply chain capabilities.

(4) “COVID-19 costs” represent premium salary for site team members, cleanup

    and location capacity management labor, incremental seasonal clearance
    associated with location closures, donations for our mask making initiative
    and additional location cleaning supplies.

(5) “Technological development expenses” represent one-off 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.

(6) The “sponsor management fees” represent the management fees paid to our sponsor, LGP

    (or advisory affiliates thereof), in accordance with our management services
    agreement. The management fee was discontinued upon the completion of our
    initial public offering in March 2021 as LGP no longer provides managerial
    services to us in any form.

(7) “Other” represents a single severance payment, certain legal and executive directors

    transition and business transition expenses.



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Results of Operations

The following tables summarize the key elements of our operating results for the periods indicated. The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes.

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