Retail sewing store company Joann Inc. (NASDAQ ticker:JOAN) has released preliminary details about its upcoming IPO.
Fortune reported last week that the company’s owners, private equity firm Leonard Green & Partners, made the decision to go public. Leonard Green bought Joann in 2010 in $1.6 billion, and looks to use what has been a very successful past 12 months to sell to investors.
But this very success should serve as a warning sign. The problem for Joann, and for many IPOs in general, is that if the company is going to be so successful in the years to come, why are the owners choosing now to bail out? While we do not yet know Joann’s planned valuation nor how large this IPO will be, the fact is that Leonard Green will be giving up some portion of its share.
Renaissance Capital reported that Joann will be aiming to raise up to $400 million.
There is no denying that Joann has been successful over the past 12 months. But that success has been fostered due to conditions created by the pandemic, and there are major reasons to be concerned about whether it can sustain that success going forward. For that reason, Joann’s shaky history pre-COVID is just as relevant as its history during the crisis.
Joann and COVID-19
Joann is a fabric and craft retailer broadly comparable to Michaels (NASDAQ:MIK). While Michaels focuses on all sort of DIY projects, Joann emphasizes sewing, including machines and supplies. In its S-1 report, Joann describes itself as “the nation’s category leader in sewing and one of the fastest growing players in the arts and crafts category.”
When the pandemic hit and we were all forced into our homes, many turned towards various DIY and crafting projects to pass the time. Furthermore, initial shortages in masks meant that some turned towards sewing their own. This trend has affected not just Joann, but other competitors as well.
Michaels has seen its own share price more than triple compared to 12 months ago based off stronger financial numbers, and the same is true for Etsy (NASDAQ:ETSY) as well.
As more Americans get vaccinated and the prospect of the pandemic ending becomes more likely, the fundamental question which Joann and these other companies face is whether this interest in sewing and crafts will continue in subsequent years. There is a case to be made that this will continue, with articles predating the pandemic which argued that millennials and younger customers can get into sewing if craft stores create goods which will appeal to them, and that the interest exists.
Joann’s Financials, Competition, and Valuation
The problem with that positive theory is Joann’s own financial numbers. If we look at its S-1 report, we find that from 2015 to 2019, the company’s revenue declined from $2.35 billion to $2.24 billion. Furthermore, the company like most retail outlets reported thin profit margins, with an operating margin of 6% in 2018 followed by major losses in 2019.
Revenue did jump from the first nine months of Gr 2019 to the subsequent period in 2020 by 24%, which does show that growing interest in sewing due to the pandemic was a real phenomenon which improved the company’s bottom line. The fact that Joann had a positive cash flow from operations of $185.8 million in 2020 and a net income of $174 million shows that if this growth keeps up, this company is in strong shape.
But the period before that shows that this interest did not appear before the pandemic despite articles talking about potential interest. It is possible that things could change after the pandemic, as no one denies that our lives will be permanently altered in the years to come. But it is far from a sure thing.
And there are other problems with Joann as well. The company is heavily indebted, with over $921 million in long-term debt as of October 31, 2020. There is the threat of competition from companies like Michaels as well as larger companies like Target (NYSE:TGT) or Walmart (NYSE:WMT).
Joann also notes that its successful 2020 was initially blunted “by the unanticipated headwind of incremental U.S. tariffs on Chinese imports that we estimate, before mitigation, would have amounted to $75 million of additional annual costs.”
Practically any IPO can point to some period beforehand when things went well and, like land investments, will use the argument that those positive trends will continue. Sometimes it happens and sometimes things change which cause the company to take a negative direction. In Joann’s case, it appears clear that Leonard Green wants to bail on its investor at the peak and leave someone else holding the bag for when this company loses value.
That is not to say that Joann is certain to fail. Perhaps those who began buying sewing equipment and cloth due to the fabric will continue to buy, and it will continue to grow. But given the company’s difficulties before the pandemic, it is far more reasonable to conclude that those troubles will return after the pandemic is over. Joann also faces other challenges such as high debt, tough competition, and geopolitical tensions, which are just a few ways this IPO could fail.
As the company’s valuation has not been announced yet, it is not possible to decisively state that Joann is a bad buy. But with the numbers we are looking at here, this appears to be a company at its peak, and now Leonard Green is looking for someone else to hold the bag. Do not be that person.Leave a comment