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Daily Trouble
By
How Did it Find Trouble? Jill took a spill and fell down the hill, leaving shareowners out a lot of jack. So ends investors' storybook romance with this catalog company that sells apparel to well-to-do women ages 35 and up. Well, truth be told, the J. Jill Group -- formerly DM Management Co. -- has given investors a wild ride over the last year as these incredibly volatile shares have repeatedly dropped in half, doubled, and then dropped by half again. The latest plunge into penny-stock land came swiftly. Trading around $17 a share at the beginning of September, the stock began a meltdown as management reportedly stopped returning phone calls from investors. The market, though, began discounting a big disappointment. On September 20, the stock tumbled 46% to $6 1/8 per share on 40 times average trading volume. Most of that bruising came before Nasdaq halted afternoon trading so the company could cough up the news that people feared. CEO Gordon Cooke finally said that J. Jill would report a Q3 operating loss of $0.11 per share versus Wall Street's forecast for a $0.08 per share gain. Revenues will hit just $46 million, well below projections of around $51 million. The repositioning of its faltering Nicole Summers catalog didn't pay off as planned. Also, increased competition, particularly from the Internet, hurt sales at the J. Jill unit, which seems to have "matured" -- eh, run out of growth opportunities -- faster than expected. So, the company will shutter its Nicole business and restructure to slim down. This means Q4 should look equally ugly and that the last half of FY99 will be marred by major restructuring charges. With a couple of brawny mutual fund groups holding 21% of the company as of the latest proxy, the selling on September 21 was as furious as angry investors, with trading volume topping 7 million. Business Description Based in Hingham, Massachusetts, the company is a direct marketer of women's apparel targeting two niches. The core J. Jill catalog offers relaxed office apparel and weekend wear in natural fibers to active, affluent women ages 35 to 55. The J. Jill catalog accounted for 75% of FY98 sales, with about 91% coming from private label items. The Nicole Summers catalog offered more classic apparel to women 45 and older. Sales declined 13% last year, leading to the catalog's repositioning. Just a third of Nicole sales have been private label. The company has a database of more than 3.3 million customers, a third of whom have purchased something in the last year. Some 44% of the company's sales in FY98 came from extended size apparel (below size 4 or above size 20). J. Jill operates a 24/7 call center, with more than 340 representatives taking customer orders. In February 1999, it opened a new 400,000 square foot operations and order fulfillment center in Tilton, New Hampshire, consolidating operations previously spread over three locations. This year, it also launched a new J. Jill catalog offering bed, bath, and accessory items. Moreover, it expanded distribution channels by opening its online store on September 1, and it plans to launch its first retail stores later this year. Insiders own 9.8% of the company. Financial Facts
Income Statement How Could You Have Seen it Coming? Sales last year rose 61% to $219 million, as a 124% gain in J. Jill revenues made up for troubles with the Nicole unit. Management became extremely aggressive about acquiring new customers, boosting overall catalog circulation by 46% to 73.8 million. With that kind of growth, the stock bounced off last October's low of $6 per share and hit $26 by May. Yet, April brought a spate of insider sales in the low $20s, suggesting that some presumably informed investors thought it was time to take some profits. However, Q2 results announced July 15 showed business was still booming. Sales rose 31% to $78.0 million, a fashionable follow-up to the stylish 81% sales growth in the year-ago period. Meanwhile, operating income shot up 43% to $6.7 million. Higher expenses related to sales and operations were more than offset by a 200 basis point improvement in gross margins and significant leveraging of general and administrative expenses relative to the burgeoning sales. Yes, much heftier interest expenses meant earnings per share rose just 29% to $0.36. Still, that was $0.04 per share ahead of expectations. Moreover, inventories were up just 10% compared to June 1998, suggesting J. Jill had a good handle on its operations. Of course, the Internet has proven a threat to other catalog companies, and J. Jill didn't yet have a functioning e-commerce site. Moreover, other apparel retailers have been hit hard by fears the Fed interest rate hikes would cool consumer spending in general. The only real sign of trouble ahead, though, was that management stopped talking and the stock price kept falling. In such cases, investors should always listen to the market, which often does a terrific job of discounting news, or the lack thereof. Where to From Here? The current earnings estimates are useless since the latter half of the year will include losses and massive charges. That's not great news, given that the company has taken on debt to build the new distribution center and to fund expansion. This expansion includes plans to open two stores in November -- in Natick, Massachusetts, and Providence, Rhode Island. It's also negotiating with some of the nation's top upscale malls to open another 5 stores early next year as part a rollout of 10 to 12 locations by the end of FY2000. Also, J. Jill recently launched a new storefront on Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> Shopping, expanding its nascent Web presence. So far, the company's e-commerce site is paying off, generating "average daily demand" of $35,000 or 5% of overall company sales, according to the firm's September 20 press release. Given J. Jill's penchant for shaking up shareowners only to rebound a few months later, small-cap investors with a taste for adventure might want to check out the recent conference call and look for Q3 earnings, to be announced October 14. However, the company's balance sheet doesn't offer the flexibility it did a year ago, and it soon will look a lot worse. This time, Jill may be too bruised to get up.
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