Jo-Ann records 1Q deficit of $6.4M

Hudson, OH — Getting the new year off to a rocky start — and forecasting a loss for all of this year — Jo-Ann Fabrics Inc. recorded a first-quarter deficit of $6.4 million vs. a prior-year profit of $3.0 million.

Sales at the nation's largest fabric and crafts chain edged up by 1.1 percent, to $328.9 million from $325.4 million last year. But same-store sales dipped by 2.0 percent, up against a 5.6 percent gain the prior year.

Weighing on the bottom line, in addition to lower same-store sales, were margins weakened by a deteriorating shrink rate in the company's stores and sharply higher costs. Acting as a further drag, the retailer posted a one-time, after-tax charge of $600,000 stemming from the early retirement of debt.

Costs, in line with company expectations, jumped up by 320 basis points, to 43.6 percent of sales from 40.4 percent last year, hurt by lower same-store sales, higher utility costs and higher distribution expense stemming from the opening of a new West Coast distribution center.

Average gross margin eroded by 90 basis points, to 45.9 percent from 46.8 percent a year ago, stung by a weakening in shrink rates. So far, about 36 percent of Jo-Ann units have completed a physical inventory, recording a 50 basis-point deterioration in the shrink rate, the company said. "Consequently, shrink expense was $4.3 million worse on an after-tax basis, or $0.23 per share," than the historical shrink rate, the retailer reported.

Due to the eroding shrink rate, average gross margin came in lower than expected, "and more than offset the rate improvement we achieved in gross margins from product sales," said Alan Rosskamm, chairman and ceo. "We are aggressively pursuing the causes of our negative shrink results, and shrink reduction will become an additional focus of our turnaround plan."

If current shrink trends persist through the balance of the year, the company said 12-month results could be hurt by $9 to $10 million in after-tax shrink costs.