After 81 years in business, national craft and fabric retailer Joann filed for Chapter 11 bankruptcy on Monday. The company, which operates more than 800 stores in the U.S., said its locations will remain open as it works to address its total debt of over $2.44 billion.
Under an agreement with a majority of its financial stakeholders and some financing partners, the publicly held company has commitments for $132 million in new financing. The new capital plus financial accommodations will allow Joann to reduce its funded debt by $505 million.
"This agreement is a significant step forward in addressing JOANN’s capital structure needs, and it will provide us with the financial resources and flexibility necessary to continue to deliver best-in-class product assortments and enhance the customer experience wherever they are shopping with us," said CFO Scott Sekella in a statement announcing the filing.
Labor Cost Cuts
Sekella showed confidence in the company’s ability to right itself through growth in 2023 by promoting efficiency during its busy season.
“In addition to [reducing] costs, we are confident we are enhancing the in-store selling experience as we have converted more labor hours to customer-facing sales activities," said Sekella on the company’s third-quarter earnings call last December. “And critically important, during the peak holiday selling period, we have right-sized labor hours to more effectively staff our stores during the busiest selling hours of the day.”
Sekella reaffirmed Joann’s EBITDA outlook in multiple earnings calls last year. However, instead of pursuing debt reduction through strategic initiatives and restructuring as Sekella had planned, the company now has to address its debt under court supervision.
Joann is returning to private ownership after a decade removed from going private in 2011 when it was acquired by private equity firm Leonard Green & Partners for $1.6 billion. The PE firm brought Joann back to the public market in 2021 through an IPO that sold 10 million shares at $12 per share. The company’s market capitalization on Tuesday morning fell to about $8 million.
In the final earnings call, the company attributed its 4.1% decline in sales to the decision to move its Halloween assortment to the second quarter. Sekella described this move as successful but acknowledged its negative impact on third-quarter sales by "approximately 70 basis points."
Sekella also highlighted the company's utilization of advanced data analytics to enhance responsiveness. While he expressed caution due to the industry's challenging environment, he commended his team's execution of their growth priorities up to that point.
However, some of the data and analytics approaches, particularly regarding inventory management, may not have yielded the desired results. Sekella credited an additional 150 basis points of loss to strategic inventory reduction during the call. Craft technology, an area that saw significant consumer interest during the pandemic, also underperformed, accounting for another 100 basis points of loss.
Retention Bonus and Consumer Frustration
Sekella, who also holds the title of co-lead of the interim office of the CEO since the May 2023 retirement of former CEO Wade Miquelon, is poised to play a significant role in the company's recovery. He was awarded a $400,000 retention bonus the day before the bankruptcy filing. According to SEC filings, Sekella must repay the bonus if he is terminated or voluntarily leaves his position within six months.
Retention bonuses, facilitated under key employee retention programs (KERPs) have been scrutinized after their payouts during the COVID-19 pandemic. Regulations around KERPs already exist, allowing payments only if the executive has another offer, is essential to the survival of the business, and the compensation is not greater than ten times the amount of the average bonus payments given to non-management employees during the same calendar year.
If no bonuses were given, the law limits the bonus to no greater than 25% of the amount of any similar payment made to the executive during the calendar year preceding the year in which the payment is made.
Consumers have voiced negative opinions about Joann publicly long before the bankruptcy announcement.
While the company's website states that it offers price matching on products sold by competitors, customers report that Joann’s online pricing policy and customer service issues have been misleading and the source of major frustration.