JILL J Jill Inc

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and assumptions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements”.

We operate on a 52- or 53-week fiscal year that ends on the Saturday that is closest to January 31. Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period. The fiscal year ended January 28, 2017 (“Fiscal Year 2016”) and the f iscal year ending February 3, 2018 (“Fiscal Year 2017”) are comprised of 52 weeks and 53 weeks, respectively.

Overview

J.Jill is a nationally recognized women’s apparel brand focused on a loyal, engaged and affluent customer in the attractive 40-65 age segment. The J.Jill brand represents an easy, relaxed and inspired style that reflects the confidence and comfort of a woman with a rich, full life. We operate a highly profitable omnichannel platform that is well diversified across our direct and retail channels. We began as a catalog company and have been a pioneer of the omnichannel model with a compelling presence across stores, website and catalog since 1999. We take a data-centric approach, in which we leverage our database and apply our insights to manage our business as well as to acquire and engage customers to drive optimum value and productivity.

Factors Affecting Our Operating Results

Various factors are expected to continue to affect our results of operations going forward, including the following:

Overall Economic Trends . Consumer purchases of clothing and other merchandise generally decline during recessionary periods and other periods when disposable income is adversely affected, and consequently our results of operations may be affected by general economic conditions. For example, reduced consumer confidence and lower availability and higher cost of consumer credit may reduce demand for our merchandise and may limit our ability to increase or sustain prices. The growth rate of the market could be affected by macroeconomic conditions in the United States.

Consumer Preferences and Fashion Trends . Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to anticipate fashion trends. During periods in which we have successfully anticipated fashion trend s , we have generally had more favorable results.

Competitio n . The retail industry is highly competitive and retailers compete based on a variety of factors, including design, quality, price and customer service. Levels of competition and the ability of our competitors to more accurately predict fashion trends and otherwise attract customers through competitive pricing or other factors may impact our results of operations.

Our Strategic Initiative s . We are in the process of implementing significant business initiatives that have had and will continue to have an impact on our results of operations. Although these initiatives are designed to create growth in our business and continuing improvement in our operating results, the timing of expenditures related to these initiatives, as well as the achievement of returns on our investments, may affect our results of operation in future periods.

Pricing and Changes in Our Merchandise Mi x . Our product offering changes from period to period, as do the prices at which goods are sold and the margins we are able to earn from the sales of those goods. The levels at which we are able to price our merchandise are influenced by a variety of factors, including the quality of our products, cost of production, prices at which our competitors are selling similar products and the willingness of our customers to pay for products.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of financial and operating metrics, including GAAP and non-GAAP measures, including the following:

Net sales consists primarily of revenues, net of merchandise returns and discounts, generated from the sale of apparel and accessory merchandise through our direct channel and retail channel. Net sales also include shipping and handling fees collected from

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customers. Revenue from our retail channel is recognized at the time of sale and revenue from our direct channel is recognized upon receipt of merchandise by the customer.

Net sales are impacted by the size of our active customer base, product assortment and availability, marketing and promotional activities and the spending habits of our customers. Net sales are also impacted by the migration of single-channel customers to omnichannel customers who, on averag e , spend nearly three times more than singl e -channel customers.

Total company comparable sales includes net sales from our full-price stores that have been open for more than 52 weeks and from our direct channel. This measure highlights the performance of existing stores open during the period, while excluding the impact of new store openings and closures. When a store in the total company comparable store base is temporarily closed for remodeling or other reasons, it is included in total company comparable sales only using the full weeks it was open. Certain of our competitors and other retailers may calculate total company comparable sales differently than we do. As a result, the reporting of our total company comparable sales may not be comparable to sales data made available by other companies.

Number of stores reflects all stores open at the end of a reporting period. In connection with opening new stores, we incur pre-opening costs. Pre-opening costs include expenses incurred prior to opening a new store and primarily consist of payroll, travel, training, marketing, initial opening supplies and costs of transporting initial inventory and fixtures to store locations, as well as occupancy costs incurred from the time of possession of a store site to the opening of that store. These pre-opening costs are included in selling, general and administrative expenses and are generally incurred and expensed within 30 days of opening a new store.

Gross profit is equal to our net sales less costs of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Costs of goods sold includes the direct costs of sold merchandise, inventory shrinkage, and adjustments and reserves for excess, aged and obsolete inventory. We review our inventory levels on an ongoing basis to identify slow-moving merchandise and use product markdowns to efficiently sell these products. Changes in the assortment of our products may also impact our gross profit. The timing and level of markdowns are driven by customer acceptance of our merchandise. Certain of our competitors and other retailers may report costs of goods sold differently than we do. As a result, the reporting of our gross profit and gross margin may not be comparable to other companies.

The primary drivers of the costs of goods sold are raw materials, which fluctuate based on certain factors beyond our control, including labor conditions, transportation or freight costs, energy prices, currency fluctuations and commodity prices. We place orders with merchandise suppliers in United States dollars and, as a result, are not exposed to significant foreign currency exchange risk.

Selling, general and administrative expenses include all operating costs not included in costs of goods sold. These expenses include all payroll and related expenses, occupancy costs and other operating expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization. These expenses also include marketing expense, including catalog production and mailing costs, warehousing, distribution and shipping costs, customer service operations, consulting and software services, professional services and other administrative costs.

Our historical revenue growth has been accompanied by increased selling, general and administrative expenses. The most significant increases were in occupancy costs associated with retail store expansion, and in marketing and payroll investments. While we expect these expenses to increase as we continue to open new stores, increase brand awareness and grow our business, we believe these expenses will decrease as a percentage of net sales over time.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We expect that compliance with the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of the Sarbanes-Oxley Act. In that regard, we have hired additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

Adjusted EBITDA and Adjusted EBITDA Margi n . Adjusted EBITDA represents net income (loss) plus interest expense, provision (benefit) for income taxes, depreciation and amortization, equity-based compensation expense, write-off of property and equipment, and other non-recurring expenses, primarily consisting of outside legal and professional fees associated with certain non-recurring transactions and events. We present Adjusted EBITDA on a consolidated basis because our management uses it as a supplemental measure in assessing our operating performance, and we believe that it is helpful to investors, securities analysts and other interested parties as a supplemental measure of our comparative operating performance from period to period. We also use

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Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance of our business and for evaluating on a quarterly and annual basis a ctual results against such expectations. Further, we recognize Adjusted EBITDA as a commonly used measure in determining business value and as such, use it internally to report results. Adjusted EBITDA margin represents, for any period, Adjusted EBITDA as a percentage of net sales.

While we believe that Adjusted EBITDA is useful in evaluating our business, Adjusted EBITDA is a non-GAAP financial measure that has limitations as an analytical tool. Adjusted EBITDA should not be considered an alternative to, or substitute for, net income (loss), which is calculated in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces the usefulness of Adjusted EBITDA as a tool for comparison. We recommend that you review the reconciliation and calculation of Adjusted EBITDA and Adjusted EBITDA margin to net income (loss), the most directly comparable GAAP financial measure, below and not rely solely on Adjusted EBITDA or any single financial measure to evaluate our business.

Factors Affecting the Comparability of our Results of Operations

On February 24, 2017, we completed a conversion from a Delaware limited liability company named Jill Intermediate LLC into a Delaware corporation and changed our name to J.Jill, Inc. In conjunction with the conversion, all of our outstanding equity interests converted into shares of common stock. Accordingly, all historical earnings per share amounts presented in the accompanying c onsolidated s tatements of operations and comprehensive i ncome and the related notes to the consolidated financial statements have been retroactively adjusted to reflect our conversion from a limited liability company to a corporation.

Following our conversion from a limited liability company to a corporation, J.Jill, Inc. merged with and into its direct parent company, JJill Holdings, Inc., on February 24, 2017, with J.Jill, Inc. continuing as the surviving entity. JJill Holdings, Inc. did not have operations of its own, except for buyer transaction costs of $8.6 million incurred in the second quarter of 2015 to execute the acquisition of Jill Intermediate LLC.

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Net Sales

Net sales for the thirteen weeks ended October 28, 2017 increased $2.5 million, or 1.6%, to $162.0 from $159.4 million for the thirteen weeks ended October 29, 2016.    At the end of those same periods, we operated 275 and 271 retail stores, respectively. The increase in net sales was due to an increase in our active customer base and store count.

Our direct channel contributed 39.5% of our net sales in the thirteen weeks ended October 28, 2017 and 40.4% in the thirteen weeks ended October 29, 2016. Our retail channel contributed 60.5% of our net sales in the thirteen weeks ended October 28, 2017 and 59.6% in the thirteen weeks ended October 29, 2016.

Gross Profit and Costs of Goods Sold

Gross profit for the thirteen weeks ended October 28, 2017 increased $0.4 million, or 0.4%, to $108.5 from $108.1 million for the thirteen weeks ended October 29, 2016. The increase w as primarily due to increased sales.  The gross margin for the thirteen weeks ended October 28, 2017 was 67.0% compared to 67.8% for the thirteen weeks ended October 29, 2016, largely driven by added promotions and markdowns to clear certain goods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the thirteen weeks ended October 28, 2017 increased $2.6 million, or 2.8%, to $95.2 from $92.6 million for the thirteen weeks ended October 29, 2016. The increase is related to higher sales related expenses of $2.7 million, including retail payroll, occupancy and direct fulfillment and increased marketing costs of $1.0 million.  T hese increases were offset by a decrease in employee related incentive expense of $1.2 million.

As a percentage of net sales, selling, general and administrative expenses were 58.8% for the thirteen weeks ended October 28, 2017 compared to 58.1% for the thirteen weeks ended October 29, 2016.  

Interest Expense

Interest expense for the thirteen weeks ended October 28, 2017 decreased $0.3 million, or 7.2%, to $4.5 from $4.8 million for the thirteen weeks ended October 29, 2016. The decrease wa s primarily due to voluntary principal prepayments on the Term Loan in January 2017 and June 2017, partially offset by an increase of approximately 40 basis points to the average interest rate on the Term Loan.  

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Provision for Income Taxes

The provision for income taxes was $2.8 million for both the thirteen weeks ended October 28, 2017 and the thirteen weeks ended October 29, 2016. Our effective tax rates for the same periods were 31.6% and 26.5%, respectively. The increase in the effective tax rate is primarily due to a tax credit taken in the thirteen weeks ended October 29, 2016, which reduced the rate for that period.

Thirty-nine weeks ended October 28, 2017 Compared to Thirty-nine weeks ended October 29, 2016

The following table summarizes our consolidated results of operations for the periods indicated:

Net Sales

Net sales for the thirty-nine weeks ended October 28, 2017 increased $37.3 million, or 7.9%, to $509.5 from $472.1 million for the thirty-nine weeks ended October 29, 2016.    At the end of those same periods, we operated 275 and 271 retail stores, respectively. The increase in net sales was due to a 5.6% increase in total comparable company sales driven by an increase in our active customer base, and an increase in store count.

Our direct channel contributed 41.8% of our net sales in the thirty-nine weeks ended October 28, 2017 and 41.2% in the thirty-nine weeks ended October 29, 2016. Our retail channel contributed 58.2% of our net sales in the thirty-nine weeks ended October 28, 2017 and 58.8% in the thirty-nine weeks ended October 29, 2016.

Gross Profit and Costs of Goods Sold

Gross profit for the thirty-nine weeks ended October 28, 2017 increased $24.3 million, or 7.5%, to $346.8 from $322.5 million for the thirty-nine weeks ended October 29, 2016. The increase w as driven by increased sales. The gross margin rate was 68.1% for the thirty-nine weeks ended October 28, 2017 and 68.3% for the thirty-nine weeks ended October 29, 2016.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the thirty-nine weeks ended October 28, 2017 increased $15.4 million, or 5.6%, to $289.3 from $273.9 million for the thirty-nine weeks ended October 29, 2016. The increase is related to higher sales related expenses of $10.7 million, including retail payroll, occupancy and direct fulfillment, increased marketing costs of $3.6 million and increased corporate payroll and other expenses of $4.0 million to support business growth.  This increase was offset by decreases related to depreciation and amortization expense of $2.4 million.

As a percentage of net sales, selling, general and administrative expenses were 56.8% for the thirty-nine weeks ended October 28, 2017 compared to 58.0% for the thirty-nine weeks ended October 29, 2016 .  

Interest Expense

Interest expense for the thirty-nine weeks ended October 28, 2017 increased $0.9 million, or 6.6%, to $14.5 from $13.6 million for the thirty-nine weeks ended October 29, 2016. The increase wa s primarily due to an increase in deferred financing amortization

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costs associated with a voluntary principal prepayment on the Term Loan of $20.0 million made in June 2017 and an increase of approximately 20 basis points to the average interest rate on the Term Loan.

Provision for Income Taxes

The provision for income taxes for the thirty-nine weeks ended October 28, 2017 increased $4.0 million, or 31.0%, to $16.9 from $12.9 million for the thirty-nine weeks ended October 29, 2016. Our effective tax rates for the same periods were 39.4% and 37.0%, respectively. The increase in the effective tax rate was primarily due to non-deductible IPO related costs in the thirty-nine weeks ended October 28, 2017.

Liquidity and Capital Resources

General

Our primary sources of liquidity and capital resources are cash generated from operating activities and availability under our ABL credit agreement, dated as of May 8, 2015, by and among Jill Holdings LLC, Jill Acquisition LLC, certain subsidiaries from time to time party thereto, the lenders party thereto and CIT Finance LLC as the administrative agent and collateral agent, as amended on May 27, 2016 by Amendment No. 1 thereto (the “ABL Facility”). Our primary requirements for liquidity and capital are working capital and general corporate needs, including merchandise inventories, marketing, including catalog production and distribution, payroll, store occupancy costs and capital expenditures associated with opening new stores, remodeling existing stores, upgrading information systems and costs of operating as a public company. We believe that our current sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to incur as a public company for at least the next 12 months. There can be no assurance, however, that our business will generate sufficient cash flows from operations or that future borrowings will be available under our ABL Facility or otherwise to enable us to service our indebtedness, or to make capital expenditures in the future. Our future operating performance and our ability to service or extend our indebtedness will be subject to future economic conditions and to financial, business, and other factors, many of which are beyond our control.

Purchases of property and equipment were $22.3 million during the thirty-nine weeks ended October 28, 2017, primarily representing investments in stores and information systems. Purchases of property and equipment in 2017 are planned to be approximately $38.0 million and reflects our investments in stores and information systems.

Net Cash provided by Operating Activities

Net cash provided by operating activities during the thirty-nine weeks ended October 28, 2017 was $54.5 million. Key elements of cash provided by operating activities were (i) net income of $26.0 million, (ii) adjustments to reconcile net income to net cash provided by operating activities of $27.5 million, primarily driven by depreciation and amortization and noncash amortization of deferred financing and debt discount costs, and (iii) a decrease in net operating assets and liabilities of $1.0 million, primarily driven by cash provided by prepaid expenses and other current assets, accounts payable, and other noncurrent assets and liabilities, offset by cash uses in accounts receivable and inventory.

Net cash provided by operating activities during the thirty-nine weeks ended October 29, 2016 was $37.1 million. Key elements of cash provided by operating activities were (i) net income of $22.0 million, and (ii) adjustments to reconcile net income to net cash provided by operating activities of $29.6 million, primarily driven by depreciation and amortization, offset by (iii) an increase in net operating assets and liabilities and other activities of $14.5 million, prima r ily driven by cash uses in accounts receivable, inventory, and accounts payable, offset with cash provided by tax receivables, accrued expenses and other nonconcurrent assets and liabilities.

Net Cash used in Investing Activities

Net cash used in investing activities during the thirty-nine weeks ended October 28, 2017 was $22.3 million, representing purchases of property and equipment related investments in stores and information systems.

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Net cash used in investing activities during the thirty-nine weeks e nded October 29, 2016 was $25.8 million, representing purchases of property and equipment related investments in stores and information systems.

Net Cash used in Financing Activities

Net cash used in financing activities during the thirty-nine weeks ended October 28, 2017 was $19.9 million, which was primarily due to a voluntary principal prepayment on the Term Loan of $20.0 million made in June 2017.

Net cash used in financing activities during the thirty-nine weeks ended October 29, 2016 was $33.8 million, including $38.3 million of proceeds received on long-term debt, net of $1.7 million debt issuance costs paid. The proceeds from the long-term debt, along with cash on hand, were used to fund a $70.0 million dividend to the partners of Topco. Financing activities also included $2.1 million of scheduled repayments on our Term Loan.

Dividends

We intend to retain any future earnings for use in the operation and growth of our business, and therefore we do not anticipate paying any cash dividends in the foreseeable future.

Credit Facilities

At October 28, 2017 and January 28, 2017 there were no loan amounts outstanding under the ABL Facility. At those same dates, we had outstanding letters of credit in the amounts of $1.6 million and $2.1 million, respectively, and our maximum additional borrowing capacity was $38.4 million and $37.9 million, respectively.

Contractual Obligations

The Company’s contractual obligations consist primarily of long-term debt obligations, interest payments, operating leases and purchase orders for merchandise inventory. These contractual obligations impact the Company’s short-term and long-term liquidity and capital resource needs. During the thirty-nine weeks ended October 28, 2017, there were no material changes in the contractual obligations as of January 28, 2017.

Contingencies

Shareholder Class Action Lawsuits

On October 13, 2017, a securities lawsuit was filed in the United States District Court for the District of Massachusetts against the Company, several members of our Board of Directors and our Chief Financial Officer, among others. The complaint is brought under the Securities Act of 1933 and seeks certification of a class of plaintiffs comprised of all shareholders that acquired stock issued by the Company in its initial public offering in March 2017. The plaintiffs would seek compensation for losses they incurred since purchasing the stock. Following the filing of this lawsuit, two additional, similar actions were brought in the same court. It is likely that these matters will eventually be consolidated. The Company has not yet filed responsive pleadings in these matters. The Company believes the claims are without merit and intends to defend the matter vigorously.

Off - Balance Sheet Arrangements

We are not a party to any off - balance sheet arrangements.

Critical Accounting Policies and Significant Estimates

The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include those made in connection with revenue recognition, including accounting for gift card breakage and estimated merchandise returns; accounting for business combinations; estimating the value of inventory; impairment assessments for goodwill and other indefinite-lived intangible assets, and long-lived assets; and estimating equity-based compensation expense. Management evaluates its policies and assumptions on an ongoing basis.

Our significant accounting policies related to these accounts in the preparation of our consolidated financial statements are described under the heading “Management Discussion and Analysis of Financial Condition and Results of Operations – Critical

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Accounting Policies and Significant Estimates” in our Annual Report on Form 10-K for the fiscal ye ar ended January 28, 2017. As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates previously described in our Annual Report on Form 10-K.