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Rating Action:

MOODY'S LOWERS JO-ANN'S BANK DEBT TO B1, SUB NOTES TO B3; OUTLOOK STABLE

15 Mar 2001
MOODY'S LOWERS JO-ANN'S BANK DEBT TO B1, SUB NOTES TO B3; OUTLOOK STABLE

Approximately $450 Million of Debt Affected.

New York, March 15, 2001 -- Moody's Investors Service downgraded the debt of Jo-Ann Stores, Inc., concluding a rating review started in January 2001. The following ratings were affected by this action:

Senior implied rating to B1 from Ba3;

$300 million unsecured guaranteed revolving credit agreement to B1 from Ba3;

$150 million guaranteed senior subordinated notes to B3 from B2;

Senior unsecured issuer rating to B2 from B1.

The downgrade reflects revised expectations about Jo-Ann's ability to achieve previous profitability and leverage targets during 2001 and 2002. The company's growth engine, the Jo-Ann Etc. superstores, have not performed to expectations. Moody's believes this is due in part to persistent inventory management problems, which may have disappointed customers to the point of hurting longer term franchise value. Moody's believes that the traditional fabric stores operate in a stagnant market segment, and face difficult challenges in improving productivity and profitability.

The ratings reflect expectations that Jo-Ann's high leverage and debt protection measures will not improve significantly for at least the next 12-18 months; that profitability will remain challenged due to prolonged inventory rebalancing throughout the chain and to the inability to achieve anticipated productivity gains from the Etc. superstores; high levels of competition for the crafts segment of the superstores; and concerns about the ability to achieve desired share of market for the crafts business.

The ratings are supported by management's focus on cash flow and generally conservative financial strategies in the face of disappointing operations; stable performance from the traditional fabric stores and limited competition for their core customers; and the potential for future benefits to operating performance from infrastructure improvements whose costs are largely behind the company.

The rating outlook is stable. Moody's believes that Jo-Ann's financial condition is unlikely to deteriorate further, although profitability and balance sheet measures will continue to fluctuate in the short term. Management has slowed growth and taken other steps to conserve cash, which Moody's believes have reduced downside risk. The company is in discussions with lenders regarding financing alternatives; Moody's believes that Jo-Ann's has sufficient liquidity to support operations in the near term.

Jo-Ann recently reported results for the year ended January 2001 in line with Moody's prior expectations, Moody's has reduced its expectations for future periods, and now expects Jo-Ann to maintain operating performance and leverage consistent with recent results. Moody's expects the EBITDA margin, net of special items, will be around 4.5%, and that EBITDA to interest will be about 2.3 times to 2.5 times. Moody's believes that operating cash flow will be sufficient to cover reduced capital expenditures. Jo-Ann's is looking to reduce working capital investment in the stores by reducing SKU's while improving fill rates and product flow of faster turning items. Moody's believes that improvements may be offset by the start up of the Visalia, California distribution center, and that debt levels are likely to remain stable this year. Lease-adjusted debt to EBITDAR is likely to remain high at about 6.5 times. Balance sheet leverage does not reflect a $40 million synthetic lease being used to finance a new warehouse.

Jo-Ann recently reported one-time charges to clear inventory and advance the closing of certain traditional stores. The company intends to reduce the number of SKU's to focus working capital investment on the most productive products. This should reduce working capital needs and reduce operating complexity in the medium term. However, Moody's believes the effort will introduce near term challenges since it is being done at the same time that the SAP replenishment system is being implemented, and at a time when the company is trying to woo customers who have been disappointed by out-of-stocks. Maintaining its in-stock position and its feel of broad selection is critical to the company's ability to gain market share and retain customers.

Jo-Ann Stores, headquartered in Hudson, Ohio, is a retailer of fabrics and crafting items. Revenues were $1.48 billion in the year ended January 2001.

New York
Daniel Gates
Senior Vice President
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Marie Menendez
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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