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JOANN’s liquidity in focus as cash burn projections intensify; lenders informally in talks with counsel

JOANN’s [NASDAQ:JOAN] cash burn trajectory is expected to accelerate after the company released adjusted EBITDA projections for FY24 that trailed investor expectations, said two buysiders.

The retailer has been working with Houlihan Lokey as it continues to evaluate balance sheet options to boost liquidity, according to two sources familiar with the matter. The financial advisor already advised JOANN on a USD 100m first-in last-out (FILO) facility in March. “[The] transaction helped to provide the company additional liquidity, optimize the balance sheet, and drive free cash flow across the enterprise,” noted a JOANN spokesperson.

Latham & Watkins, the company’s corporate counsel, which also assisted JOANN in raising the FILO due 2026, is on standby in case the firm’s mandate shifts to a restructuring role, the sources familiar continued.

As for their part, a group of first lien loan holders has been in informal talks with Gibson Dunn, the sources familiar added.

The Hudson, Ohio-based retailer, which has been a mainstay for arts and crafts enthusiasts for more than 75 years, has been struggling to drive traffic and increase sales across its 831 retail locations, amid high inflation levels and unique supply chain disruptions. Further deepening the company’s woes are expectations of a recession, which could put more pressure on consumers to cut down on discretionary spending.

While the company took pro-active steps in the past years to push out debt maturities, it is still threading a tight rope when it comes to liquidity due to high freight costs, increasing interest expense and declining margins.

For its fiscal 1Q24 ended 29 April, JOANN booked USD 3.5m in adjusted EBITDA, marking a more than 80% nosedive from USD 18.6m reported year-over-year, according to SEC filings. Leading to the drop, the retailer recorded a USD 54.2m net loss for the three months, versus a USD 35.1m net loss booked in the same quarter last year. Its liquidity at quarter-end comprised a USD 19.7m cash balance and USD 61.3m in availability under its USD 500m ABL due 2026. The liquidity was down 44% year-over-year.

Going forward, the arts and crafts retailer outlined expectations in its 1Q24 earnings release to generate between USD 85m and USD 95m in adjusted EBITDA and spend roughly USD 40m to USD 45m in capex in FY24. Taking the lower-end of the EBITDA estimate, the retailer is projected to burn roughly USD 55m this year, assuming USD 40m in capex and USD 100m in interest expense, two sellsiders said.

“We remain focused on cash generation in fiscal year 2024,” said Scott Sekella, JOANN’s CFO and co-lead of the Interim Office of the CEO in a press release.

What specifically caused liquidity to dwindle was the excess ocean bound freight charges, noted one of the buysiders. While the retailer is expected to benefit going forward from lower freight rates, there is still uncertainty whether it will be able to invigorate sales. “We are still cautiously optimistic, since they have no near-term maturities,” the buysider said. “They have runway to thread the cash flow needle.”

JOANN has identified USD 200m of annual cost reductions, which include USD 100m of supply chain costs, USD 60m of product costs, according to the press release.

The company’s stock traded down 29% after the missed earnings projections on 6 June to USD 1.14 from USD 1.61. The stock, which is down 66% year-to-date, traded today at USD 1.01 for a market capitalization of USD 41.64m.

Meanwhile, the issuer’s USD 675m covenant-lite Libor+ 475bps first lien TL due 2028 is quoted 50.8/54.4, from 53.528/56.194 a month ago and 67.167/70 at the start of the year, according to Markit.

JOANN went public in an IPO priced at USD 12 a share in March 2021, a decade after the company was taken private by PE firm Leonard Green in a USD 1.6bn leverage buyout deal for USD 61 a share.

Houlihan, Latham and Gibson Dunn did not return requests for comment.

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