It's been a tough couple of years for brick-and-mortar retail chains. Online stores were already chipping away at loyal customer bases before COVID-19, but even the most stalwart fans were forced to embrace e-commerce amid lockdowns in 2020.
Many of those customers will likely never return. That unfortunate fact has already caused the failure of Bed Bath & Beyond and Christmas Tree Shops. It's also forced the restructuring of other once-common retail chains, such as Party City.
The list of troubled retailers is growing, and recent research suggests yet another retailer may be on the ropes. If things don't improve, this well-known chain may also be forced to close stores, restructure itself, or, in the worst case, liquidate itself.
This retailer may be fighting for survival
Joann Fabrics is a leading retailer of goods used in arts and crafts. It operates 831 stores in 49 states, and it's been in business for 80 years.
Related: The alarming reason why this popular retailer is on the brink of bankruptcy
The company's in the middle of a cost-cutting plan it hopes will save up to $200 million annually, but it's also struggling under the weight of significant debt because of rising interest rates.
It owed $352 million on a loan backed by assets like inventory and receivables in July, and during the second quarter of fiscal 2024, the weighted average interest rate on that debt was 7.41%, up from 2.55% the year before.
It also owed $100 million it borrowed in March, with a weighted average interest rate of 15.04%, plus a $663 million term loan taken out in 2021 with a weighted average interest rate of 10.17%, up from 6.13% last year.
As a result of the higher rates it's paying, Joann Inc.'s interest expense has surged higher. It paid $26.8 million in interest alone last quarter, more than double the amount it paid in the same quarter last year.
That extra interest expense wouldn't be a problem if the company's sales and profit were growing. Unfortunately, revenue slumped 2% year-over-year last quarter to $454 million, and losses swelled to $73 million in the quarter, or $1.76 per share. That brought the company's losses to over $120 million through the first two quarters of its fiscal year.
As of July 29, it boasted just $19.1 million in cash and equivalents on its balance sheet.
The company's financial situation is likely a big reason why Joann's shares are down 69% this year and currently trade below $1.
A troubling statistic suggests Joann Fabrics is struggling
Inventory is key to the survival of every retailer. If you don't have enough products on the shelves, frustrated customers will go elsewhere, regardless of their loyalty.
For now, that doesn't appear to be a problem. However, if suppliers worry the company can't pay its bills, things could change.
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According to Matthew Debbage, CEO of the Americas and Asia at Creditsafe, Joann is taking longer to pay invoices. That could be a sign of financial strain.
"Days Beyond Terms (DBT) refers to the number of days it takes to pay invoices past payment terms (i.e. Net 30, Net 60, etc.)," says Debbage. "Our data shows that Joann’s DBT was 9 in November 2022, which isn’t too bad. But in December 2022, the company’s DBT spiked to 48, and then it jumped even higher to 83 in January 2023. That’s incredibly high. For context, if they have agreed on Net 60 or Net 90 payment terms with other companies, then it could be five months or longer before that company can expect to receive payment from Joann."
The increase in the amount of time it's taking the company to pay its bills wouldn't be as concerning if it were happening industry-wide, but it's not. According to CreditSafe, the industry average is between seven and eight days.
CreditSafe's data shows Joann's DBT improved to 27 in May, but it's since rebounded to 35.
"That’s still a high score, with the biggest issue being the instability of the DBT – it’s been up and down for almost a full year," says Debbage.
This volatility led CreditSafe to move Joann’s risk score ranking to a "C" from an “A” in June.
"The risk score has stayed at a ‘C’ level for the last four months," said Debbage. "This is likely the result of multiple internal issues and financial troubles, including the fact that its DBT has been both high and unstable for almost an entire year."
The company recently confirmed it's laying off corporate staff to cut costs. According to an SEC filing on September 15, one of them is Tom Dryer, the company's controller.
Typically, controllers oversee daily accounting operations, including accounts payable. It's unclear who will take over Dryer's responsibilities or why he was let go, given the filing only says he was terminated without cause.
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