J.Jill May Be The Best Story In Retail (NYSE:JILL) (2024)

A largely forgotten name, J.Jill's (NYSE:JILL) CEO has done a tremendous job turning the company around. With the retailer throwing off robust free cash, deleveraging is the next step to unlock value in this name.

Company Profile

JILL is a women’s apparel retailer that targets women between 45-65 years old. It says its typical customer has an annual household income of approximately $175,000.

It sells a variety of women’s apparel, including sweaters, dresses, tops and bottoms. If also offers footwear and other accessories such as jewelry. Products also come in a variety of sizes, including Petite, Tall, Misses, and Women’s.

The company, which originally sold its offerings through catalogs, today mostly sells its goods through its own stores and website. However, it still does derive some sales through its catalog via phone orders, and its catalog is also used as a marketing tool. Online sales and retail store sales are pretty evenly split.

Opportunities and Risks

One of the most important things that JILL has been able to do under CEO Claire Spofford, who took over about 2 years ago, is improve it gross margins. Under prior management, the company would often offer new collections at a -30% discount right out of the gate.

This type of strategy has some obvious implications. First, the company would never have the opportunity to realize full prices. The average JILL customer is pretty wealthy, so the opportunity would certainly be there to sell new items at full price, which in turn would also be higher margin.

Second, immediate discounting can diminish the brand. JILL is catering to an affluent customer base. One of the appeals of luxury brands is that they cost so much and are less attainable to the average person. The top luxury brands never have sales to keep that allure. While JILL may never be a top-tier luxury brand, too much discounting can make its brand seem less upscale.

And finally, a lot of discounting, especially immediately, conditions customers to expect discounts, and to want more discounts. In a blog post about discounts, HubSpot (HUBS) pointed out that discounting can set a “bad precedent,” as customers get used to lowered prices and get turned off if prices rise.

Sporford has helped rectify this through inventory management. The company used to have entire new collections nearly every month, which doesn’t give it a lot of time to sell these collections before the next one is coming through the door. The company now has been getting away from this to let items flow more naturally.

Speaking at ICR in January, CFO Mark Webb said:

“I mean a primary driver of the margin recovery was the inventory positioning, that supply demand equation is so important. We're going to continue to manage that very conservatively. We like to lag demand. We will invest into growth, but we will do so conservatively. We're not a swing for the fences invest on the come sort of place right now with our business model. Drivers to that gross margin really are full price selling and selling full price closer to ticket. So lower promos at full price, higher yield on the full price product, and then marking stuff down when needed and getting a better yield on the mark down.

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“We feel great about the recovery of the gross margin. And our intent as we think about that going forward is to manage the puts and takes in the tailwinds and headwinds, we all know in our industry what those have been. But freight has been a headwind flipping into tailwind. And then as we're now sort of anniversary that full price, promotional cadence that becomes a neutral to us. And we aim to manage and maintain that margin as much as we can.”

A return to store growth is another opportunity for JILL. The number of JILL retail stores peaked in 2019 at 287 stores, and since then the company has been optimizing its fleet by closing underperforming stores. The company guided for 243 stores at fiscal year-end.

At ICR, management said 97% of its stores are EBITDA positive, and that it could look to open 20-25 stores. It noted that currently its fleet is split about 50-50 between mall and lifestyle centers, and it has the ability to slightly lower its square footage for new stores.

Being able to return to store growth would be big for JILL. However, there is obviously risk involved, given that it’s had to close quite a number of stores over the past few years. I know anecdotally, I would observe its nearby mall store when it IPO’d and traffic was always very light, so finding the right markets and locations would be very important.

JILL carries the typical risks most apparel brands do. First and foremost is the economy. In my opinion, JILL should be able to handle a weakening economy and inflation better than most given its affluent customer base. However, it’s not so far up the luxury ladder that it isn’t immune. If there is a recession, even its customer base is likely to cut back.

Fashion risk is also present, especially given JILL’s history of offering a lot of collections. Given the more conservative nature of its styles and clients, though, it should be considerably less than a brand that caters to teens and younger consumers.

One of the biggest opportunities and risks, though, revolves around JILL’s debt. The company had around $117.5 million in net debt. I never like to see a lot of debt with retailers, because if things go downhill, bankruptcy can be on the table. However, JILL has a huge opportunity to deleverage. The company has generated about $80 million in FCF the last 12 months and that is growing.

Valuation

JILL currently trades around 5x the FY 2024 (ending January) consensus EBITDA of $111.5 million.

It trades at a forward PE of 8.8x the FY24 consensus of $3.17.

The company is projected to grow revenue 4.1% in FY24 to $635.6 million.

JILL has generated ~$80 million in FCF the past 12 months, which equates to a whopping FCF yield of 28%.

JILL's valuation and FCF yield are unmatched compared to other specialty apparel retailers.

Earnings Preview

JILL reaffirmed its guidance after the holidays in January ahead of ICR, so I wouldn't expect too many surprises with its results given that there were only a few weeks left in the quarter. The company is projecting Q4 sales to be flat to down -3%. It's looking for adjusted EBITDA to be between $9.0-$11.0 million.

Guidance thus will be key. For FY24, the current consensus is for revenue to grow 4% to $635.6 million, with adjusted EBITDA of $111.5 million, which represents about 7% growth. Notably, this is a one analyst estimate.

Given the tone of other retailers, I'd expect JILL to generally take a cautious tone. I'd pay particular attention to margin commentary, though, because if the company can maintain its margin gains, the stock looks very undervalued, even if growth stalls a bit. I'd also like to hear about the company's capital allocation plans for the year, and prefer some debt to be paid down.

Conclusion

JILL is one of those stocks that has largely been forgotten. And as such, many investors are missing out on a great turnaround and deleveraging story.

CEO Claire Spofford has done a tremendous job rightsizing the ship. Her work improving the company’s margins and profitability have been tremendous. The next step is deleveraging, and with its ample FCF, the company can do this fairly quickly.

I love a good deleveraging story, and with a 28% FCF yield, JILL is way too cheap to ignore. I could see the stock doubling from here and still think it is cheap.

Former Senior Equity Analyst at $600M long-short hedge fund Raging Capital.