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01 Jul 2003
MOODY'S RAISES JO-ANN STORES RATINGS
Approximately $77 Million of Debt Affected
New York, July 01, 2003 -- Moody's Investor Service upgraded the ratings of Jo-Ann Stores
, Inc. concluding a review action that began March 2003.
The following ratings were affected by this action:
Senior implied rating to Ba3 from B1;
$76.9 million 10.375% senior subordinated
notes due 2007 to B2 from B3;
Senior unsecured issuer rating to B1 from B2
Moody's does not rate Jo-Ann's current senior secured
bank credit facility.
The rating outlook is stable.
The ratings upgrade reflects improvements to leverage and coverage measures
following Jo-Ann's redemption of $46 million of its
subordinated notes through cash generated from operations. The
upgrade also reflects Moody's belief that recent top-line
and margin improvements the company achieved as a result of its turnaround
strategy should be sustainable. Moody's also recognizes that
some of these improvements may be moderated in the near term due to increased
costs associated with the renewed growth of its Jo-Ann etc.
Ratings are supported by Jo-Ann's ability to reduce debt
and finance operations and growth through internally generated cash flow;
increased debt protection measures; and significant improvements
to Jo-Ann's operations due to the company's SKU reduction,
improved inventory in-stocks, new distribution facilities
and efficiencies, inventory management improvements, and reduced
shrink rates. The ratings are also supported by the closure of
less productive stores; favorable industry and demographic trends;
conservative financial management; and by Jo-Ann's strong
national brand in the crafting segment and its leading position in the
fabrics side of the industry.
The ratings are constrained by the risks inherent with the company's
return to growth of its superstore concept; the highly competitive
and fragmented nature of the crafting market; and increasing fashion
risk as Jo-Ann continues to increase the amount of crafting products
as a percentage of its total mix; and higher levels of seasonality
as the company increases the amount of superstores, which have a
larger crafting component. Ratings also recognize the potential
for liquidity to tighten as the company usescash balances to redeem its
subordinated notes at the same time that it pursues a growth strategy
which could potentially require draws on its working capital line to fund
growth or operations.
The stable outlook reflects the expectation that Jo-Ann will be
able maintain the improvements to its operating performance now that many
of its turnaround initiatives are behind it. Moody's expects the
company to fund its growth from operating cash flow and anticipates that
management will continue to have conservative financial policies focused
on generating cash flow for debt reduction. The ratings could be
impacted positively if Jo-Ann was able to continue to reduce leverage,
and sustain operating improvements while it grows its superstore concept.
The ratings could respond negatively if the company's same store
sales, margin, and inventory improvements are negatively affected
by its growth strategy beyond Moody's expectations or if Jo-Ann
needs to take on additional leverage to fund its growth.
The B2 rating on the subordinated notes reflects their legal subordination
to the company's $365 million in secured obligations and
the potential for the company to issue senior unsecured debt ahead of
the notes. Both the notes and the credit facility are guaranteed
by Jo-Ann's subsidiaries. The company's bank
credit does not have any financial covenants unless availability falls
below $35 million, at which time it is subject to a minimum
tangible net worth test. The credit facility also has a CAPEX restrictor
which only allows the company to spend $50 million on CAPEX per
year, with any unused portion being carried forward and available
for use in following years.
Moody's expects leverage measures to remain relatively stable over
the near to medium term as the company embarks on its growth strategy.
Adjusted debt to EBITDAR is expected to remain around 4.0 times,
with potential improvements to interest and fixed charge coverage.
EBITDA to interest is expected to rise above 6.0 times and EBITDAR
to Interest plus rents is expected to remain at or above 1.7 times
for the near to medium term.
Jo-Ann has been able to improve operations, growing both
sales and margins to record levels in 2002. Jo-Ann's turnaround
strategy included closing numerous less productive stores and reducing
its number of SKUs, which helped to permanently reduce inventory
levels. The company has also worked to improve its in-stock
position, which had been suffering during the implementation of
the company's SAP system. Jo-Ann has also been successful
at combating shrink, which has helped to improve gross margins.
The company is now shipping from its second owned distribution center
in Visalia, CA, which now services approximately one third
of the chain.
With many of the goals in the turnaround plan close to being achieved,
management has begun to shift back to a growth strategy. The company
plans to open approximately 20 new superstores in FYE 2004 and an additional
40 in FYE 2005. The company also plans to close an 40 and convert
5 traditional stores in FYE 2004. Management states that during
its return to growth it will remain committed to focusing on further operational
improvements and generating cash flow for debt reduction. The company
has stated that it is targeting a debt-to-capitalization
ratio around 20% for FYE 2004.
Jo-Ann Stores is one of the nation's largest fabric and craft specialty
retailers. The company operates through two store formats,
its 847 Jo-Ann Fabrics and Crafts stores ('traditional')
and its 77 Jo-Ann superstores. The traditional stores average
approximately 14,400 square feet in size and have average sales
per store around $1.4 million while the superstores average
45,400 square feet in size and have average sales per store around
$6 million per store. The superstores average 30%
more in sales per square foot than the traditional stores.
Jo-Ann Stores is headquartered in Hudson, Ohio and had revenues
of $1.68 billion in the year ended February 2003.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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