Jo-Ann Scales Back Growth

HUDSON, OH-Faced with dismal quarterly results and admitting mistakes, fabric retailer Jo-Ann Stores Inc. has reduced its planned store openings for 2006 and has implemented initiatives designed to return it to profitability. The company outlined the reasons for its $4.1 million quarterly loss and explained its recovery plans during a conference call with financial analysts on Monday.

The $4.1 million loss for the quarter ended Oct. 29 amounted to 18 cents per share, compared with net income of $6.9 million, or 30 cents per share, in the comparable quarter of the previous fiscal year. The company suffered the loss despite net sales that increased 5.8% to $474.2 million for the quarter and same-store sales that increased 0.7%.

Alan Rosskamm, chairman and CEO of the chain, said that Jo-Ann will open 25 to 30 new stores in its next fiscal year, compared with 44 this year, as part of a plan to pare its losses and “focus on improving core operations.” Scaling back the store expansion program marks a dramatic change of direction for the chain, which was pursuing a far more aggressive growth strategy until its recent missteps.

Jo-Ann opened a record 12 new stores in the first two weeks of November, for example, and even though Rosskamm in Monday’s conference call mentioned “strong initial reactions from customers,” he said the company needs to reduce store expansions and other capital expenditures substantially as part of its plan to improve financial results. Jo-Ann will cut capital spending by 60% next year, he said.

Even with the steps that the company is taking to rebound, it is adopting a conservative view and forecasting that its first-half financial results “will be difficult” next year, Rosskamm said, but he added that the second half of the year should start to show some improvement. Among the chain’s cost-cutting steps will be “reducing advertising, being more discreet with coupons, and taking steps to reduce clearance,” Rosskamm said.

Although the industry Jo-Ann competes in has been sliding of late, Rosskamm said that the company accepts much of the blame for its poor performance. “While there is no question that the industry is experiencing a down cycle, the impact on our results was exacerbated by decisions we have made,” he said.

Jo-Ann’s quarterly results stemmed in part from general industry softness, particularly in soft-lines and home-related categories, he noted, but he said that “It is clear that decisions we made have compounded the problem.” For example, Jo-Ann went into the year with an aggressive sales plan, and made inventory commitments in an attempt to boost sales in the second-half of the year.

That effort sagged in the face of slowing demand, so the company now faces the challenge of liquidating excess inventory in what Rosskamm called “a very difficult retail environment.” The result has been and likely will continue to be deteriorating gross margins, as the chain is forced to take markdowns to sell its inventory, the Jo-Ann CEO said.