J Jill (JILL), a women's apparel brand, is trading sharply lower today (-16%) after reporting Q2 (Jul) earnings this morning. Before getting into the quarter, a little background would help. J.Jill is a women's apparel brand focused on affluent customers in the 40-65 age segment. Its typical customer is college educated and has an annual household income above $150,000. JILL enjoys a loyal customer base as 70% of its sales come from customers that have been shopping with J.Jill for at least five years.
Its product assortment is marketed under the J.Jill brand name, sold exclusively through its direct and retail channels, and includes knit and woven tops, bottoms and dresses as well as sweaters, outerwear and accessories across a full range of sizes, including Misses, Petites, Women's and Tall. It also offers most of these products across its two sub-brands, Pure Jill and Wearever. JILL turns over its merchandise frequently, about once a month so that keeps its selection fresh and keeps customers coming back. Approximately 40% new styles are delivered in each monthly collection so that motivates customers to visit more frequently.
JILL operates an omni-channel platform, meaning it has brick-and-mortar stores (currently operates 270+ stores mostly in high-end boutique and premium malls), but it also has a large online channel as more than 40% of revenue comes from its direct segment (online and catalog).
Online makes up 88% of direct sales, so when we do the calculation, 36% of total revenue comes from online sales which is a lot. Plus, JILL thinks it can get its direct channel up to 50% of sales over the long term from the current 41% in 1H18. With such a strong online presence, JILL seems a bit more insulated from online competitors than most other apparel retailers. What helps is that JILL's products are not sold outside via wholesale to department stores so you need to shop at JILL's stores or its website to get its apparel.
Turning to the Q2 (Jul) results, non-GAAP EPS came in at $0.24, which was on the high end of prior guidance of $0.22-0.24. This result is down from $0.29 earned in the prior year period. Revenue fell 0.9% year/year to $179.7 mln, which was roughly in-line with prior guidance of negative low single digits to flat. Adjusted EBITDA margin declined to 16.3% from 19.4% in the prior year period. Same store comps came in at +2.2%, again roughly in-line with prior guidance of flat to positive low single digits. Direct to consumer sales represented 40.9% of total sales, down from 43.1% in the prior year period.
Looking ahead to Q3 (Oct), JILL expects total comps to decrease -2% to -4%. Total sales are expected to increase 2-4% YoY, driven by the calendar shift created by the 53rd week in fiscal 2017, that will shift sales from Q4 into Q3 this year. GAAP EPS is expected in the range of $0.09-0.11, which appears to be lower than market expectations.
On the call this morning, JILL said while its JulQ performance was in line with guidance, it knows it has work to do to deliver growth and ensure consistent performance. JILL went on to say that all of its channels will benefit from a new focus on product. JILL says it needs to be more relevant and current. For a period, JILL relied too heavily on variants of tried and true offerings. And some customers became fatigued with the absence of newness. JILL is working closely with its merchandising and design teams, and the company is adjusting plans where it can.
Specifically, JILL is putting a greater focus on its extended size women's business and is testing various merchandising options in its stores, as well as improving messaging and search on its digital platforms. There will be more inclusive imagery and messaging across multiple touch points in the upcoming quarter. Helping in this regard will be JILL's new Chief Merchandising Officer, Shelly Leach.
In sum, the stock appears to be down for several reasons. While JulQ EPS and revenue was decent, the OctQ EPS guidance is being seen as a disappointment. Also, there was some adjusted EBITDA margin compression in JulQ. JILL concedes it needs to shake up its product offering and offer more newness. We will see if they can improve results later this year.