Good morning. My name is Jay El, and I will be your conference operator today. At this time, I would like to welcome everyone to the J.Jill's Second Quarter 2023 Earnings Conference Call. On today's call are Claire Spofford, President and Chief Executive Officer; and Mark Webb, Executive Vice President, Chief Financial Officer and Chief Operating Officer. [Operator Instructions] After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Before we begin, I need to remind you that certain comments made during these remarks may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J.Jill's SEC filings. The forward-looking statements made on this recording are as of August 31, 2023, and J.Jill does not undertake any obligation to update these forward-looking statements. Finally, J.Jill may refer to certain adjustments of non-GAAP financial measures during these remarks. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in the press release issued August 31, 2023. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of the website at jjill.com. I will now turn the call over to Claire.

Thank you, operator, and hello, everyone. Thank you for joining us this morning. I'll begin our discussion by reviewing highlights from our second quarter performance, and we'll then provide an update on a few of our strategic initiatives before turning the call over to Mark to review our financial performance and outlook in more detail. Our second quarter results exceeded our expectations and reflected a nice improvement in trend that progressed over the quarter. As a reminder, the second quarter is an important period for us as it has historically been our largest quarter from a sales and EBITDA perspective. In this season, we lean into our key franchises like dresses, summer tees and linen that our customer seeks for her late spring and summer wardrobes. While our customer exhibited more hesitancy with her spend early on in the quarter, as we moved into the key summer months, she responded well to our seasonal summer favorites, accessories and novelty items, which were highlighted with trend forward details and a bright and joyful color pallet. In addition, in line with our strategy to maintain a disciplined approach to inventory management, we leveraged category-specific promotions that not only drove sales of those items, but spurred an energizing effect across the assortment. In July, while typically a sales-focused month for retail, we were pleased with the level of full price selling we drove in conjunction with a balanced, but clear value message appropriate for the season. We were pleased to see customer growth in both channels, and especially pleased to see strength in new-to-brand customers in our direct channel. We saw nice results from our size inclusivity initiative, which has also brought new customers to J.Jill that are at the lower-end of our target age demographic, a trend we are also seeing with…

Thank you, Claire, and good morning, everyone. Overall, we were pleased with second quarter results, which, once again, reflected the strength of our operating model as we delivered solid adjusted EBITDA and generated strong cash from operations. Total company comparable sales for the second quarter decreased 1.3% compared to last year's positive 0.8% comp. Total company sales for the quarter were $156 million, down 2.9% compared to Q2 2022. Store sales for Q2 were down about 1% versus Q2 2022 on about 1% fewer stores. We were pleased with the trends we saw in the period, with store sales improving sequentially each month compared to last year. Customers continued to respond to full price, which drove a higher average unit retail, but was offset by lower units sold per transaction, primarily driven by fewer markdown units sold. Direct sales as a percentage of total sales were 45% in the quarter. Compared to the second quarter of fiscal 2022, direct sales were down 5%. Unit sales mixed more to markdown versus last year, and while higher online returns continued to negatively impact net sales, we did see some encouraging signs of return rates stabilizing in the quarter and were sequentially better on a year-over-year basis than they were in Q1. Q2 total company gross profit was $111 million, down $1.1 million, compared to Q2 2022. Q2 gross margin was 71.6%, up 140 basis points versus Q2 2022, driven by the full abatement of incremental freight costs incurred last year, while the impact of increased promotional activity in the quarter was offset by better underlying first-cost AUCs. SG&A expenses were $83 million, compared to $84 million last year. Increases in selling costs and general overhead, primarily due to wage inflation, were offset by lower depreciation and amortization and lower management incentive accruals.…

Thank you. [Operator Instructions] Your first question comes from the line of Dana Telsey of Telsey Advisory Group. Your line is open.

Hi, everyone. Congratulations on the very nice results. It certainly sounds like as you move through the quarter, business improved. Did you see that both in digital and in stores? And capturing that younger customer that you mentioned, Claire, certainly is encouraging. What are you seeing there in terms of more data on that customer and what appeals to them? And Mark, the gross margin was very impressive. How much is the improvement due to the lower AUC, and what's the magnitude of that going forward? And lastly, the technology investments that are being made to enhance the business, how do you see that playing out in the margin profile? Thank you.

Thank you, Dana. I'll take the first part and then hand it over to Mark for the latter. So yes, we did see a nice improvement over the course of the quarter, particularly in full price sales. Interestingly, July was our strongest full-price month of the quarter, and that's in a time period where, typically, as you know, it's very often a big sale period. So we are really pleased to see that progression. With regard to the new-to-brand customers that we saw over the quarter and your comment about the younger end of the spectrum, a lot of what we did from a digital acquisition strategy standpoint played out well in the quarter. In addition, creatively and from a product standpoint, we really curated elements of the assortment and pointed them creatively to that younger target and saw a nice response, both on the inclusive sizing messaging as well as the wear-to-work messaging led by our -- parts of our core assortment, but also our Wearever sub-brand.

And Dana, just regarding the gross margin, a very healthy gross margin in the quarter. As we mentioned on the call, we did -- the increase was really driven by the better freight on a year-over-year basis. That benefit really is weighted to the first quarter, which we saw, and then the second quarter. That benefit of freight does start to minimize into the back half of the year. And then underneath that, we mentioned that better AUCs, underlying first-cost AUCs, which really is the result of starting to see some benefit from raw materials, primarily cotton, and then just negotiations, really great work on behalf of the teams to negotiate in the current environment underlying that and allowing us to offset what was a more promotional quarter for us. And we've said that the margin profile of the company at the rates we've been achieving of late is a very healthy place for us to be with respect to the operating model. And our objective, I think, as we move forward, and it relates to your question on technology, there should be on the margin opportunities for better yield as we implement more omni capabilities. There are inherent operational benefits to doing so. In reality, we view it as another opportunity for us to now lean more heavily into driving profitable growth. And with the current margin profile using whatever levers we have available to us managing that margin profile to drive profitable growth. So very excited to see the POS project going as well as it is, in over 80% of the fleet now, completing in Q3. Moving on to OMS, which is another big, very important part of the puzzle. And feeling great about the ability to make these investments now and really lean into driving some of that growth.

Got it. And just one follow-up. The cash flow also is certainly moving in a nice direction, doing nicely. Any further update on cash flow and how you're thinking about it for the year? And then you mentioned that the third and fourth quarter, obviously, the pickup in the fourth quarter, as compared to the third, anything we should be mindful of there?

Yes. I mean cash, really, it's a big part of our story. The operating model generates significant cash flow. It's a pretty straightforward operating model when thinking about the free cash flow generation. We have, earlier this year, successfully refinanced our debt. So that was a big initial call on our cash. Now as we think about investing in the business, you're seeing us step into our technology investments and really start to execute that strategic road map. And even with that have generate sufficient cash that we can start to really think about how to drive any other opportunities to drive total shareholder returns. So that's something that's on our radar, and nothing to talk about specifically today, but we definitely are thinking about options to continue to utilize our cash to drive total value over time. And with respect to Q4, we had mentioned in the guidance that just on a year-over-year comparative basis, the third quarter is a more challenging profit comparison to last year than Q4, in part because Q4 had just some easier comparisons in our view, and then the 53rd week is obviously a benefit as well.

Thank you.

Thanks, Dana.

Your next question comes from the line of Jeff Lick of B. Riley. Your line is open.

Hi, guys. Congrats on a great quarter. I was wondering if you took your business and thought about it in terms of a matrix, basics and fashionable and then stores and direct, it looks like stores probably were a little stronger in Q2. I'm just wondering, as the quarter progressed and then obviously into Q3, is there anything you can glean from your strategies or the external environment from the kind of how the setup is?

Yes. Thanks, Jeff. So the comparison of the quarters, we frequently talk about the balance in our business model and how we really appreciate how balanced our business model is with split of direct being about 45% of sales. We've seen really nice strong full price performance in stores throughout the quarter. And as we said, we saw a nice progression in direct as well. And the direct channel plays a very different role for us today than it did a few years ago in the sense that it's much more of a full-price channel than it was. And we are now very excited to see some of the growth coming in terms of the full price sales and the customer file there in the direct channel.

And just to clarify -- well, I'm just kind of curious, as the quarter progressed and then obviously, you're seeing some strength in -- or just follow through in Q3, I mean aspects of your results are a little bit of an outlier, compared to some of the others, I mean, to the good side. I'm just curious, there are things that you control. Obviously, your product strategy seems to be paying benefits in gross margin. And then maybe it just seems like your consumer -- your core customer might be a little stronger. I was just wondering if you had any thoughts on that?

Sure. So yes, I think you touched on two things that we frequently cite as real strength in our business. One is the profile of our customer and her relative resistance and her loyalty to the brand. And we're seeing all of that -- the benefit of all of that, I think, coming out of Q2, and as Mark commented, at the start of Q3 as well. So those are definitely hallmarks -- she is definitely a hallmark of why our brand is so strong. And then I think the product assortments are very balanced. I think we have a really strong understanding of what our consumer is looking for, both from a core franchise basic standpoint, but also the novelty and the newness and the fashion that she's been looking for. And that has been strong throughout the first-half of the year, and we certainly intend for that to continue into the third quarter and beyond. So there's a balance in the business model. There's a great customer driving the business and then great balance in the assortment as well.

Fascinating. And just as a follow-up, your inventory is -- as it relates to as a ratio of sales or cost of goods sold is lower than -- it's more efficient than pre-pandemic. I'm wondering, could you ever see a scenario where you might go back to having a little more inventory just to chase gross margin dollars versus gross margin percent? Or do you think that now you're seeing the full price selling here is better than the chasing gross margin dollars?

Yes. We absolutely intend to continue with this business model that has really strong maintained margins, and, as Mark pointed out, very strong generation of cash. But we do believe that now that we have this strong foundation in place, we can begin to invest in inventory to drive that profitable growth, but not at the expense of the gross margin. We feel like we will be investing cautiously and prudently and earning our way into that investment as we go forward, but not at the expense of the margin profile that we've worked so hard to create.

Jeff, just -- at the risk of oversimplifying it, right? Inventory management and discipline, there are two main components. The first is the pre-season planning and the buy, and the second is the in-season management of the yield. And the teams in place really, learning through COVID and post-COVID, are really much more focused and disciplined in both of those sides of the equation. The inventory that we're reporting, and it's why I put a little bit more color into my remarks, the inventory is down 16% at the end of Q2. The buy side of that, we're buying more in the flattish range. It's the in-season yield management and then a little bit of that -- well, a lot of that supply chain disruption impact on in-transits, et cetera, last year. But as we -- as Claire just mentioned, as we come through -- return rates stabilizing should benefit direct. But as we come through and start to think about the go-forward profile of the business, we're excited about some of these areas that Claire is mentioning that we will continue to lean into with a lot of discipline and the prudence we put to the business, but to start stepping in to drive some profitable growth.

Congrats on a very impressive operational quarter.

Thank you, Jeff.

Thanks, Jeff.

There are no further questions at this time. And with that, we thank you for joining today's conference call. This concludes today's conference call. You may now disconnect.