Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the J.Jill Third 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 press release -- on this recording are as of December 5, 2023, and J.Jill does not undertake any obligation to update these forward-looking statements. Finally, J.Jill may refer to certain adjusted or 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 December 5, 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 will begin our discussion by reviewing highlights from our third quarter performance and will 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. We are pleased with our third quarter performance and our continued strong execution of our disciplined operating model, which enabled us to deliver sales and adjusted EBITDA above our expectations. We saw particular strength earlier in the quarter, supported by solid customer reception to our transitional product as we entered the fall season. Throughout the quarter, we continued to deliver collections that were versatile, modern, and that appealed to our loyal customer base. This product flow drove nice growth in our core assortment in the third quarter, highlighted by particular strengths in sweaters, as well as woven. As a result, we saw full price performed well across both our retail and direct channels. We were pleased with the sequential top line improvement we delivered within direct, compared to the prior quarter. As we have discussed on prior call, we're leveraging aspects of our assortment to not only celebrate the totality of women everywhere and fuel their journey with joy and ease, but to build strength and momentum across our customer file. In Q3, we continued to see growth in new-to-brand customers across both channels with particular strengths in direct. Our size inclusivity initiative and wherever sub-brand are continuing to support our acquisition of new-to-brand customers, who are younger than our average customer, but consistent with our target demographic. During the third quarter, we successfully anniversaried the launch of our size inclusivity initiative from last year and delivered growth across all extended sizes, despite the…

Thank you, Claire, and good morning everyone. Our results again show the strength of the J.Jill brand and the benefits of our disciplined, purposeful operating model, especially amidst a dynamic macro environment. Sales and adjusted EBITDA both actualized above guided levels as customers responded well to new floor sets, particularly early in the quarter. In addition, cash flow was once again strong in the quarter and disciplined inventory management resulted in clean end of quarter inventory levels. Total company comparable sales for the third quarter increased 1.9%, compared to last year's negative 1.2% comp. Total company sales for the quarter were $150 million flat, compared to Q3 2022. Store sales for Q3 were flat versus Q3 2022 on about 1% fewer stores. Higher average unit retails in the channel were offset by lower units sold per transaction, driven primarily by fewer markdown units sold. Direct sales as a percentage of total sales were 45% in the quarter. Compared to the third quarter of fiscal 2022, direct sales were down 0.5%, representing a sequential improvement, compared to Q2. Q3 total company gross profit was $108 million, up $2.8 million, compared to Q3 2022. Q3 gross margin was 71.8%, up 190 basis points versus Q3 2022, as favorability and freight costs and underlying first cost AUCs, strong full price selling and lower promotions all contributed. SG&A expenses were $85.7 million, compared to $84.9 million last year as increases in selling costs and general overhead primarily due to wage inflation were partially offset by lower depreciation and amortization. Adjusted EBITDA was $28.3 million in the quarter, up 3%, compared to $27.5 million in Q3 2022. Please refer to today's press release for a reconciliation of adjusted EBITDA. Turning to cash flow, third quarter marked another strong quarter generating $21 million of cash from…

Thank you. [Operator Instructions] Your first question comes from Jeff Lick from B. Riley Financial. Please go ahead.

Good morning, Claire and Mark. Congrats on a nice quarter. Guys, I was wondering if you could just, you know, you referenced the third quarter, you know, the end of third quarter weakness and then obviously into the fourth quarter, but the Black Friday pickup. I wonder if you could unpack that a little bit and then also you reference the customer survey work. Maybe you could wrap what you've learned there with the observations you're seeing at the end of the third quarter, into the fourth quarter, and then the Black Friday, kind of, promotional period?

Sure. Thanks, Jeff. We did see sort of a slowdown coming out of Q3, which we attributed to sort of more discernment on the part of the customer. We do, do every quarter at least this pulse survey just to understand kind of where our customers mind is relative to purchase intent, macro environment, how she's feeling about things in general. And we did see that there is a level of concern there, which is understandable given the macro uncertainty. So, you know, we pay attention to that. And we did see softness coming out of Q3. As we entered Q4, we continued to see that trend. We held our powder on the promotional levels, unlike, I think, some of the macro or some of the competitive environment where people were initiating their Black Friday level promotions earlier, we did not do that. And we did continue to see some softness coming into Q4 as we moved into the promotional period over the Black Friday, Cyber Monday weekend, we did see her respond to those promotions. So that's just a little bit more color and, you know, we're obviously continuing to watch her behavior very carefully. And I think that, that cautiousness is reflected in our guide for the fourth quarter.

And then one for Mark, with the Q3 gross margins continue to kind of shine, especially if you look at it relative to two and three years ago, your guidance would imply, your Q4 guidance would imply you've left some room there for the promotional environment that we just talked about. I was wondering if you could comment on that? And then also just wrapping anything with the POS that's now in place and the OMS that's getting in place to where there might be some benefits in the P&L for that?

Sure, Jeff. Thanks. Yes, I think the drivers of the gross margin in Q3, and it continues to be another hallmark of the operating model, just the strength in the gross margin, and we were pleased with it in Q3. The drivers were freight, though we've indicated that freight is a diminishing benefit throughout this year, so that'll continue to be less of a benefit, a small benefit, but less of a benefit into Q4. We cited underlying first cost AUCs. That's really cotton, which we've talked a bit about, but the price broke on cotton late last year, and we're starting to see that benefit come in. That is going to be a tailwind for us as we go forward. Then the other two drivers really were a function of the operating environment with full price selling and a lower promotional environment. Again, happy with how that played out over the course of Q3, though obviously as Claire just mentioned in response to your question, the end was a bit softer than the start. But that AUC benefit does create the opportunity for us as we go forward to continue to deploy some of it if needed into promotions. And I think as we mentioned in the guide and the cautious approach, we're expecting it to be a promotional environment. It certainly has started to be with Black Friday, Cyber Monday, and this is the time of year for promotions. So we stand ready to do that. And then you mentioned POS, OMS. Sorry, you want to follow-up?

Yes, no, go ahead. I was going to ask about that. And also, it'd be great if maybe you could just compare and contrast some of the lessons you had in your previous life at the GAAP. Who's done all this? Because I think maybe what you're doing here is underappreciated?

Well, let me, so POS, OMS, super happy to have gotten the full fleet deployed in Q3. When you roll out a new system, it is a great thing. The store staff, the customers have noticed the new technology. We are still learning a new technology, so that's going to continue. We're excited for the opportunities that it presents for us to really take an existing customer experience and enhance it and improve it, drive conversion by really making it a more seamless transaction within the store with respect to returns, with respect to exchanges, and then initially with POS with respect to store purchase of an online good, an in-store purchase of an item from our website, right? So that is all enhanced with the new POS rollout, excited to get OMS underway. OMS sort of completes the rest of the enterprise inventory picture and does enable us to be more efficient in the operations just because the technology that we're replacing is aged and getting new technology in will help streamline some of the technology handoffs and then it also enables omni capabilities with respect to shipping from store and buy online, picking up in store, all of those things that are out in the marketplace that we feel we are a fast follower on and a good place for us to be and looking forward to getting those benefits in the years to come.

Awesome. Thank you very much and congrats on the great quarter.

Thanks, Jeff.

Thanks, Jeff.

Your next question comes from Ryan Meyers from Lake Street Capital Markets. Please go ahead.

Hey, good morning guys. Thanks for taking my questions. First one for me, obviously another quarter of really strong cash flow generation. Just wondering if you guys can provide us with some detail on what your capital allocation strategy is going forward?

Sure, Ryan. You know, we've been pretty consistent. We were super pleased to be able to refinance our debt earlier this year. Tough market to do so, but feel like we got a good piece of paper in place with tenor and a lowered quantum and feel like that was a good result for us. As we continue to execute our operating model, the cash flow generation is a big part of the story. And we feel like that cash creates the opportunity for us to invest in the business and drive profitable growth. Claire mentioned several examples of that in her remarks and has spoken before about it. And it allows us to enhance the foundational systems of the company, which we're doing with POS and OMS. And then there's still cash left over. So what we've said before and we continue to evaluate is how best to deploy that cash to obtain the ultimate objective of driving total shareholder returns. More to come on that as time progresses I would imagine, but nothing more to say at this point on that other than that is our objective.

Okay, that makes sense. And then obviously you kind of talked about that for Q4 margin, a lot of that's going to be coming from the promotional environment. Obviously we've kind of had one month here of this running promotions in this environment. Have you seen some increased spend from the customers as you've ran some of these promotions, or how has this push of this more promotional environment Q4? How have you seen customers respond to that so far?

Yes, thanks, Ryan. As we mentioned, reflected in our guide is the room to promote appropriately in order to achieve our objectives of driving sales, moving through our inventory and coming out of the year in the position we want to from an inventory perspective. Obviously we are a brand and a business that tries to not promote more than we have to. And so we try to toe the line as much as we can, but recognize that the fourth quarter is a very promotional quarter. As I mentioned in my remarks, it is also our smallest quarter from a top line and EBITDA standpoint. So we're navigating, we're staying close, and we're pulling the levers that we need to pull to achieve those objectives of the sales and the clean inventory position, while maintaining our margin profile to the extent possible. But all of that is rolled into our guide for the fourth quarter and we, as always, feel great about our brand, feel great about our product, and feel great about our customer, and we're just navigating. But consistent with the way we've been managing the business all year.

Okay, great. Thank you for taking my questions.

Thanks Ryan.

Thank you.

Your next question comes from the line of Dana Telsey from Telsey Group. Please go ahead.

Hi. Good morning, everyone, and nice to see the progress. As you think about on the gross margin side, the AUC opportunity going forward, where are we in that path of AUC and how does that look? And then you mentioned, Claire, about some of the categories. Anything you saw on the pure Jill or whatever collection is compared to the core categories and what you saw the customer responding to? Or how the return rates differing by category? And lastly, you've talked about capturing the younger customer. Anything that you saw this quarter from the young customer and their buying preferences compared to the core? Thank you.

Sure, I'll answer the latter two, Dana, and then I'll hand it over to Mark to address the AUC question. So from a category standpoint in Q3, we really saw nice strength in our core assortment, we saw growth there. I think a couple of things in particular. We had a robust refresh in August, which performed very well. And we had a really nice transition into fall and saw nice response to our transitional product, which we feel like we got right from a silhouette standpoint, from a color palette change standpoint and saw a nice response to all of that. In the core assortment in particular, we saw strength in sweaters and in woven, particularly woven tops where print and pattern were very strong, and we saw some strength in denim as well. From a sub-brand standpoint, this was a quarter where wherever was really the shining star from a sub-brand standpoint. As you know, we've been leaning into wherever for the work usage occasion for our customers and we've been seeing nice traction there in attracting new, younger, as I say, younger, but still consistent with our target demographic customers. Post Labor Day we had a capsule called Wherever Works, which was kind of the ultimate expression of that. Slightly higher price points, a little bit more kind of waste interest, and a little bit more sophistication and refinement, which we really aimed at the where to work usage occasion and we saw really nice response to that as well. So that's a concept and a capsule that we will continue to lean into over the course of the coming months and quarters. And that work where edit as well as our size inclusivity initiative were both continued to be great avenues for us in terms of new-to-brand customer acquisition and new-to-brand customers that were a little bit on the younger side of our target and also from a size inclusivity initiative that we lacked in Q3 versus the launch last year and we continue to see the acquisition of really valuable customers onto the file. So all of that we felt some nice traction in Q3 and our initiatives that we will continue to lean into as we go forward.

And Dana with respect to the AUCs as I mentioned previously it's really the go-forward tailwind that I would point to as related to raw materials and cotton. And I would expect that tailwind to continue. It started a little bit last quarter, so probably continue forward for, you know, maybe through the first-half of next year. There are some on-the-horizon pressures coming from other crops that are out there, flax and linen, et cetera. So we're always watching the crop reports that can have tugs and pulls on AUC for us. But overall, expect that cotton-based benefit to continue. We've said before that the margin rates that we're achieving are very healthy for us as a business. We don't necessarily need to expand them anymore for our business model. And so view those tailwinds, why it's good to have them as an opportunity for us to feel within our disciplined operating model comfortable making the investments that we've talked about which inherently do carry in their inception a little bit more risk and allow us to go into those with a bit more comfort. So that's how we're thinking about the underlying AUCs right now.

Got it. Any thoughts that were breaking down by channel stores and online? What the drivers were this quarter? And lastly, any thoughts on store openings for next year as you're beginning to dip your toe in the water a little bit? Thank you.

Sure. We've said, Dana, that we expect next year to be a year where we would return to some level of store growth. That's of course dependent upon successful negotiations with our landlords and getting the right deals. But we've worked through much of the fleet and feel like we're at a place where we can start to think about returning to some net store growth. As far as in the quarter channels, that the channels and the drivers, we were pleased to see direct improve sequentially. The channel has had some investments, Claire mentioned in her remarks that have helped to drive that channel and it's one that we feel good about. The stores, there wasn't a lot of geographical difference in the drivers through the quarter. The lifestyle centers continue to perform better from a traffic perspective than malls and then no real differentials on a large scale across the rest of the geographies.

Thank you.

And we have no further questions in our queue at this time. And with that, that concludes today's conference call. Thank you for your participation and you may now disconnect.