All right, we're gonna get started. I'm Steve Forbes, Guggenheim's Hardlines retail analyst, I have the pleasure of hosting today's fireside chat with JOANN. To my right is JOANN's President and CEO, Wade Miquelon, to the right of Wade is JOANN's CFO, Scott Sekella. We're gonna keep today's fireside chat to about 20 minutes, 22 minutes 'cause the team has an exciting video to show you guys at the end to end the presentation in regards to one of their Blue Ocean initiatives. With that, Wade, Scott, thank you for being here. Thank you. Would love to sort of start off the conversation, Wade, with a 12-month sorta look back. Maybe set the stage, right, as we think about the business, what it's been through over the past 12 months, as it's migrated through some of the challenges it faced, and what makes you really excited about entering 2023. Yeah. I think the last 12 months have been, to put it, you know, mildly, very challenging. It's really because we've had these three, I would say, currents we've been fighting. Number one is just the natural coming out of the pandemic, where we had very high comps. We've had to kind of a level set of what is the new normal. We'll get to that. We've also had supply chains, which are incredibly disrupted, in terms of ocean freight, ports, you name it. For someone who imports, you know, almost everything, that's been very brutal. Then we've had really inflation, which has been hitting, you know, every aspect of our cost side. We've had to surf that wave a bit. It was a challenging year. Having said that, all three of those trends are now moving in the other direction, where we feel we're gaining a lot of steam with the consumer. We're gonna be, you know, rounding the horn on what was the toughest comps to a new level in the first quarter next year. Our ocean freight has basically normalized to what it was pre-pandemic after paying up to 10 times more last year. The ports have normalized, so the in-transit issues and all the penalties have pretty much faded away. For us, in terms of the inputs that we pay for, we're entering into a deflationary environment, even which is, you know, probably ahead of what the consumer's gonna see in terms of deflation. We're feeling very good about that. I know at the end we'll come to the Blue Ocean initiatives. We've been working on many Blue Oceans for several years. Our biggest one is about to hit prime time. We're pretty optimistic on that. I think there's a lot of exciting things to talk about in terms of the margin recovery, but maybe if we just start on the sales trajectory of the business. I think you called out a slower start to November, and sort of a pickup in trend. Yeah A round that Cyber Five time period. I don't know if you could just speak directionally or just any color on how December turned out relative to expectations. We did see a November which was, you know, below expectations, and then we saw December pick up very nicely. That's about as much as we've said about it. What we kind of, at least our observation through our data is that, you know, last year, there wasn't a lot of product because of all the disruption in supply chains when you got to, you know, Halloween, fall, and holiday. A lot of that was late, but there was a real fear of missing out with the consumer, so anything you had, they were buying. This year was a little bit different, where everybody had pretty good in-stocks, but the consumer was more or less, you know, waiting out for a deal. Once we hit Black Friday, our business really took off nicely and I think it gives us a lot of confidence moving forward what the new normal looks like. Another topic that was noted on the call was a closure of one of your online competitors. I don't know if you can sort of tell the audience here, you know, if you're seeing anything post that closure that's sort of supportive of the December trends, and, you know, what does that sort of give you in terms of conviction as you look out to 2023. Right. Fabric.com, which was owned by Amazon since, I wanna say, you know, probably more or less for a decade, closed in the quarter. We are seeing a nice pickup from that business. That's right in our wheelhouse. A lot of that business is kind of fashion apparel, special occasion, cotton, notions, and the like. So we are seeing a lot of that pick up, in particular online. And then you think about, you know, maybe just the normalization of channel trends in 2023 that may happen. From a infrastructure standpoint, online, you know, capacity, the ability to fulfill, any sort of challenges you have, or do you have enough capacity to sort of take advantage of? S ome of the disruptions that you're seeing in other players? Our online business is healthy, and it's been growing, and our penetration's gone from, you know, pre-pandemic to about 4% to now in the, you know, the low teens. Having said that, most of that growth has come fulfilling it from store, which is actually a pretty profitable business for us. We have a similar margin structure. We're able to pick it pretty efficiently. What it does do when you put all that burden on stores is it forces a lot of splits. We split almost 50% of our shipments, which means we're paying an extra, you know, shipment cost at least once, sometimes two or three. Also it reduces the line fill rate because of the gap between when your system thinks you have it and when you actually pull it, someone can buy it in the meantime. We get a lot of line fill issues. About two years ago, we embarked on bringing up a new dedicated omni DC, multipurpose DC in Columbus that is actually producing as we speak right now. That will continue to ramp to full production, but that will with the algorithms, that will allow us to dramatically reduce our splits and also dramatically increase our line fills, as well as bring extended tail and a variety of other things which can grow the business. Omni is profitable for us. It's growing nicely. I think on the upside for growth and profitability is now kinda built into the system. If we think about that Columbus DC, maybe just help us understand where we are in that maturation process. you know, 'cause it sounds like 2023 should benefit from... Yeah ... you know, those cost saves as well. I would say, you know, for us, when we really need, you know, all motors, you know, clicking is kind of around September. That's when our omni business really picks up. Right now we're producing, It made a dent this year, but not a huge dent. As it increases productivity every single day, we're gonna see by the time we come around next September, we're gonna see that should be at 100% full operating capacity. Then maybe, you think about consumer behaviors. The categories you serve from sewing to arts and crafts, maybe just summarize as we think about digesting learnings from the past three years of the pandemic, has there been any sort of structural change as you view it from a consumer engagement standpoint, or how would you sort of summarize the health of the industry? Yeah. We saw dramatic new entrants into our categories during the pandemic as people were, you know, whether they were sewing PPE or they were crafting at home or engaging in new activities, so we built a huge database. We have seen over the past year that we've seen, you know, a drop in participation of many of the new entrants. They haven't gone away, but they haven't been as engaged. But I think it's probably normal because a lot of them are, you know, traveling and doing other activities in this opened up economy. Our core customer, that top $3 million, which is 30% of our business and the most active, that customer base is as strong as ever and with us. You know, we do feel good about that. As we look at the overall business, you know, two of the headwinds we've been fighting the last year is one of which in our sewing business, I call that impact from the economy not being fully open because so much of that business depends upon, you know, cosplay conventions and weddings and proms and all of those types of events. As the world is opening up now, we're seeing a very nice strengthening in that business. We have a lot of optimism moving forward about where that business is going. On the arts and crafts and seasonal side, arts and crafts in particular, we've seen over the past, you know, few years, nice growth in the versus pre-pandemic baseline. But over the last year, we've had really a big headwind in what we call Craft Technology, which was so big at the pandemic that we're kinda cycling that. As we get through the next quarter, we're pretty much gonna be past the pain, but that business in particular has been down, you know, about 50%. So you mean, just to summarize, right, we're entering 2023, you're sort of through the worst of hopefully through the worst of machine comp. You're through potentially the worst, right, of some of the event, you know, cadence and activities. Yeah, as you, as you think about just framing for the audience here, as you look at 2023, is it predictable in terms of the top line for the business, and do you feel confident in the ability for the business to grow next year? You know. Yeah. I believe it will grow next year. I mean, right, you know, we're sitting here making forecasts, but I think we've got that in us. In particular, you know, our comp on the first quarter versus last year's first quarter, I think is 600 basis points easier. That's how much of a, of a step up we're fighting. I believe that we've got the fundamentals in the business. We've got nice balance across the business, across the geographies. I feel pretty good about it. And also importantly, I cannot emphasize enough the fact that these supply chains have normalized, ocean freight has normalized, and we're seeing, you know, deflationary trends in other costs. You know, last year we incurred over $200 million in incremental costs, versus what we've seen in any other year. To have that now revert the other way for us, is incredibly important, so. That sounds like it should be an exciting year. As we move down the P&L and we think about, you know, gross margin implications, we were talking earlier about, you know, just promotional activity. Maybe talk about, how, you know, the industry participants are promoting, you know, frequency, depth, you know, two big topics, right, in this category. What'd you guys see? So rt of how do you expect promotional activity to play out? We've been in a pretty good promotional environment the last, you know, year and a half or so. I think it's still a pretty good environment from a standpoint of no one being, you know, overzealous or probably the one exception to that was from the fall through the holiday, we did see a bit more aggressive promotions with our competitive set. We did some too. I think that was a function of everyone having ample inventory and making sure they were able to sell through it. At the end of the day, like I said, in December, our customers responded. I think, you know, we feel good about that. That's probably the one area I would say that we've seen an amplification in promotional activity. And you know, our business is kinda two parts. One is we have basics, which we sell every day all the time, and then we have kind of a fashion or seasonal, which if you don't sell it, you know, it's not worth anything. So i think it was also just everybody making sure that whatever inventory they had this year, much more than the prior year, they were able to get through in time, without having to get to a discard phase. Right. Even though, you know, we saw the depth of promotional activity get pretty deep, right, in certain categories this holiday, as we look out to next year, frequency and depth of promotions, you sort of seem normalizing and relatively rational across the industry. Yeah. I mean, that seasonal business for us is important, but it's a small part of the overall business, so being more aggressive on that as part of a portfolio is not a huge deal. For us, what's really important is to have clean inventory and, you know, less than 5% of our inventory has, right now, been consistently labeled for, you know, for clearance discard, et cetera, which is historic lows for us. We've never been cleaner in inventory, at least in the past several years. That's just a huge advantage because it allows us to keep bringing in innovation. It allows us to be able to hold the course on our general goods and not have to discount. I think we're set up very well from an inventory point of view. If we were just to isolate the adjusted gross margin performance right over the last couple years, I think we're up a couple hundred basis points. We're a few hundred basis points. Maybe help the audience here better understand, you know, the sustainability of that expansion, 'cause the business, you know, does appear to be generating a 50%+ gross margin and so forth. As you look out to next year and you look at the factors sort of driving that, you know, how confident are you ability for it to hold, right, or further expand the adjusted gross margin profile of the business? Yeah. The historical increase is really driven by AUR outpacing AUC. We see that trend continuing. The price increases we were able to take have more than outweighed the cost increases. As part of the cost savings initiative that we launched, you know, Focus, Simplify, Grow, we're gonna continue to take out product costs. That's gonna, you know, hold and if even more expand as we come into, not necessarily fiscal 2024, but definitely fiscal 2025 and beyond. Maybe, you know, as we think about just the margin potential, right? The longer term margin profile of the business, I think Wade, you're on record sort of stating, you know, a rebuilding to that double-digit adjusted EBITDA margin profile. Right. Within 24 months, right? I think it is. you know, so you think about, you know, the building blocks behind it and what would be the risk, right, as you see it today, of if the, if the business was unable to achieve such a result? Yeah, I think we've got all the ammo and all the dynamics to get back to that double digit EBITDA margin%, and we're gonna be there even faster on a cash basis because of the way, you know, our reduction in COGS buying and ocean freight flows through. I think the biggest risk is the one that I think is waning, and I've said many times that, you know, the worst position for our business is what I would call stagflation. You know, where you have very high consumer, you know, inflation or just high consumer inflation, right? Where they're getting squeezed out from every angle, and where we're getting, you know, very high inflationary underpinnings. We can price, but we can't, at the end, price like a grocer. People have to buy eggs, milk, and, you know, gasoline and things before they have to buy what we sell. We see that moving away towards whether it's a soft landing or recession, that's much better for us. Because even in recession, we do very well because consumers will forego maybe a trip, but they'll double down on the activities we have. It's just when an inflation is squeezing everything out. I think the fact that our core inputs are now moving towards a deflationary environment, the fact that our consumer is getting more towards normalized inflation, tells me, from everything we're seeing that we should be back to more of a normalized demand pattern, and we should be able to drive accretion on our costs, and we should be able to drive, you know, substantial improvements in cash flow. I think this company has probably been cash generative almost every one of its, you know, 75, 77 years, with exception of really last year or year, 15 months, because of this $200 million of inflation. Now these are moving the other direction. You know, if there were to be some shock that put us back into some systemic inflation from a consumer point of view, and if there was an existential shock, oil went to $150 or something, and our input started to change, I'd be more concerned. Right now, at least, I feel that these things are moving in the right direction. You asked earlier what has us most excited about 2023, which is our fiscal 2024. It is that cash generation. All these things that we're able to attack, yes, we get the tailwinds from ocean freight, but to have the leverage to address our product costs, to go after our SG&A, it really has set us up nice to have a significant cash generation year and then have EBITDA falling, you know, late in the year and into fiscal 2025 and beyond. I mean, ocean freight is just one part of the inflation we saw last year. Right now, you know, kind of year-over-year, we're saving about $2 million on average cash per week just on the lower ocean freight. I think it just gives you a part of the perspective of how rough that challenge has been with this inflation. I mean, you put the sales and margin picture together, and you think about the normalization of the business model, we it almost feels like we should be back at that, I don't know what the right number is, $50 million-$100 million of free cash flow generation on an annual basis, right? On, hopefully here on out. Absolutely. That would be close to $200 million year-over-year improvement. That's that gets me excited every day. That's awesome. Absolutely. Maybe, you know, transitioning, right, in the last eight or nine minutes here to some of the more strategic initiatives, right? Maybe just remind the group where we are with the refresh initiative. I know, obviously, just, you know, capital deployment may be more limited, the difficulties around HVAC and so forth. Maybe just a refresh on that initiative, where we are, and what's the right way to think about it for next year. Yeah. Our refresh is, you know, we have a refresh, which is by any standard in retail is very accretive. We are able to get about an average four-year payback, and we're able to do it through a variety of means. Part of that refresh has also been a lot of relocations and a lot of two-for-ones and upsizing. Unlike any retailer I know of, every quartile that we go up in terms of store size, we do more sales per square foot. That's because our stores range from, you know, 8,000-9,000 per sq ft up to 50,000, but below 20,000 sq ft or 25,000 sq ft, we're really more sewing-centric. When we're able to get the full assortment, as we do, you know, either a refresh or an upside or a two-for-one, and we have arts and crafts, and we have seasonal, we get a whole new customer in the consideration set while we also keep our sewing customer. We've done probably closing in on about 100 of those. You know, over time, we want to refresh the whole chain. We were originally targeting, you know, if you go back a year and a half ago or something, as many as 60, 70 a year. We're probably gonna be around a third of that for a little while, both as we drive cash, but also, you know, in this environment where fixtures are, you know, overpriced, sometimes six months late, where contractors have been raising premiums 40%. I think we're gonna wait it out and make sure we do the ones that make sense because I believe those things will normalize too, and there's no reason to overspend. Maybe if we just, you know, think about those refresh relocations, right, the store expansion initiative, maybe just remind us what you typically see in terms of category penetration, right, and just overall engagement across, you know, those three core product categories, right? Sewing, arts and crafts, and seasonal. Is it fair to assume, right, that, you know, sewing should be more stable, and arts and crafts, right, is the bigger contributor to the secular growth outlook? You know, we have about a third of the sewing market, and I think that we can slowly. It's a very stable market, we can probably slowly increase that over time through a variety of initiatives. Kind of roll it up little by little. In arts and crafts, you know, if you look versus pre-pandemic, we're, you know, up significantly. A part of it is we've just been under-shared historically. Number one is I'm not sure we always brought our A game to assortments, but number two is our smaller stores didn't allow for our broader assortments. I think we'll keep growing in the arts and crafts segment. I think we're gonna be able to kinda slowly roll up share on the other side of the house, which is sewing. We've got other growth engines like omni and some of the Blue Oceans surrounding that as well, so. On the omni-channel, you know, initiative, right, and just overall business model, maybe help us understand, you know, that core customer. You talked about those top three 1/3 of the business. You know, how often do they engage, right, or convert, you know? You know, through what channels are they converting? Any sort of high-level statistics- Yeah ... as we think about that loyal customer spend and wallet share. Like I said, we've got, let's call it 12% or so penetration in terms of omni. About a third of that is actually buy online, pickup in store. Sometimes they want curbside, sometimes they go in. When they go in, they often, you know, spend a lot more on the basket. In the overall omni piece, there's not a huge percent of the business which is omni customers only. The vast majority of are customers who kinda bounce between channels. Sometimes they're in store, sometimes they're online, sometimes they're, you know, picking up curbside. I could probably spend 20 minutes at least talking about all the reasons they do. Sometimes in yarn they're doing a project where they need nine skeins of the same color, but you can't get the same dye lot at any one store, and so they might, you know, go in store and see it and then order online. They might want a long run of fabric where they wanna see it, feel it, touch it, and order online. They know there's a new machine coming out that's gonna be sold out quickly, so they go online and book it so they can get that, and then they go in store and they fill a basket around it. But if you look at the growth in online for this industry, the big growth are all the core retailers that have online too. It really is a very difficult business to be, we just saw it with Fabric.com, to be a pure play in. It's very expensive and difficult to house thousands of SKUs, not a high ring, very tactile, and the customer wants not only the experience, but to replenish it if you're not replenishing stores is very expensive as a pure play. In our last three or four minutes here, you know, Wade, I would love to sort of transition over to Blue Ocean initiatives. Yeah. I don't know, before we show this exciting video, maybe just summarize, right, the initiatives as a whole and then obviously lean right into the one that's launching soon here. Yeah, if you go back, you know, about four years ago, we started some what we call Blue Ocean initiatives. These are really designed to kinda take us to the next level, capture new profit pools, value creation pools, you know, adjacent to, but, you know, outside of maybe what we would call our four-wall core. We've talked a little bit about some of them like wholesale, some of the digital fabric, and the company that we own that does that. We've also talked about something called Ditto. If there's any sewists in the room, they'll totally get it. If you're not a sewist, you might not get it. You know, the number 1 most painful part of sewing and the reason people don't sew more is because of the pattern process. You have to find a pattern, get the tissue paper, you've gotta pin it, you've gotta cut. Takes hours, it's clunky, it's very difficult, and it's akin to people hate to tape off their home to paint, but if someone does it and give you a spray gun, it's kinda fun. That's how the sewist feels. We spent four years and worked with one of the top design firms in the world, and we have multiple patents on a product which makes it now the most enjoyable process. Basically it combines, you know, AI with a digital laser projector and a rotary cutout, and allows for, you know, very quick, seamless, you know, instantaneous, infinite ways to do it. It's tested one of the highest ever Definitely Would Buy at almost 80% among core consumers. There's a hardware purchase, there's a subscription purchase, basically now any sewer, anyone in the world can have, you know, infinite patterns at their fingertips. If you think about it, there are pattern companies that have been in business for a long time and make established patterns of tissue and the like, there's also, if you just go to Etsy, I think last I checked, there's over 3 million people on there selling PDF sewing downloads, where you print out nine sheets of paper. It's even worse. You tape them together, you cut them, you know, you pin, you cut, all of those will be able to be available on our platform as an AI digital projection. Really changing the game. We have a 50/50 joint venture with Singer on that. We'll be launching at Fashion Week, in early February, and then we'll be launching in dealers and stores in March and beyond. It's gonna be hard to find a sewist anywhere in the world who's not gonna wanna have access to this. I do think we have a one-minute sizzle reel. Yeah. With that, let's play the video. Exciting stuff. Well, I think we're just about up on time here, so I wanna thank you all for joining. Thank you, Wade, Scott, for the conversation today. I think the team has one or two more breakout sessions, right? Two. Two more breakout sessions. Palazzo Ballroom, right? Coquina That one. J-J one. If you guys wanna find more information out on the Blue Ocean initiatives, thank you all again. Thank you. All right. Thank you.