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joan-10q_20210501.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 1, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 001-40204

JOANN Inc.

(Exact name of registrant as specified in its charter)

Delaware	46-1095540
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5555 Darrow Road, Hudson, Ohio	44236
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (330) 656-2600

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

JOAN

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 28, 2021, the registrant had 42,159,899 shares of common stock, par value $0.01 per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of May 1, 2021, May 2, 2020 and February 1, 2020 (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the thirteen weeks ended May 1, 2021 and May 2, 2020 (Unaudited)	4
	Consolidated Statements of Cash Flows for the thirteen weeks ended May 1, 2021 and May 2, 2020 (Unaudited)	5
	Consolidated Statements of Shareholders’ Equity (Deficit) for the thirteen weeks ended May 1, 2021 and May 2, 2020 (Unaudited)	6
	Notes to Unaudited Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
	Signatures	26

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology. Forward-looking statements include those we make regarding the following matters:

•

the effects of potential changes to U.S. trade regulations and policies, including tariffs, on our business;

•

developments involving our competitors and our industry;

•

potential future impacts of the COVID-19 pandemic;

•

our ability to timely identify or effectively respond to consumer trends, and the potential effects of that ability on our relationship with our customers, the demand for our products and our market share;

•

our expectations regarding the seasonality of our business;

•

our ability to manage the distinct risks facing our e-commerce business and maintain a relevant omni-channel experience for our customers;

•

our ability to maintain or negotiate favorable lease terms;

•

our ability to anticipate and effectively respond to disruptions or inefficiencies in our distribution network, e-commerce fulfillment function and transportation system, including availability and cost of import and domestic freight;

•

our ability to execute on our growth strategy to renovate and improve the performance of our existing locations;

•

our ability to execute on our cost-saving initiatives;

•

our ability to attract and retain a qualified management team and other team members while controlling our labor costs;

•

the impact of our debt and lease obligations on our ability to raise additional capital to fund our operations and maintain flexibility in operating our business;

•

our reliance on and relationships with third party service providers;

•

our reliance on and relationships with foreign suppliers and their ability to supply us with adequate, timely, and cost-effective product supplies;

•

our ability, and our third party service providers’ ability, to maintain security and prevent unauthorized access to electronic and other confidential information;

•

the impacts of potential disruptions to our information systems, including our websites and mobile applications;

•

our ability to respond to risks associated with existing and future payment options;

•

our ability to maintain and enhance a strong brand image;

•

our ability to maintain adequate insurance coverage;

•

our status as a “controlled company” and control of us as a public company by affiliates of Leonard Green & Partners, L.P.; and

•

the impact of evolving governmental laws and regulations and the outcomes of legal proceedings.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we

operate, are consistent with the forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods. Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

JOANN Inc.

Consolidated Balance Sheets

	(Unaudited)
	May 1, 2021			May 2, 2020			January 30, 2021
	(Dollars in millions)
Assets
Current assets:
Cash and cash equivalents	$	22.7		$	147.0		$	27.4
Inventories		539.3			614.4			555.9
Prepaid expenses and other current assets		66.6			42.0			71.5
Total current assets		628.6			803.4			654.8

Property, equipment and leasehold improvements, net		282.0			303.5			280.5
Operating lease assets		828.2			924.6			837.0
Goodwill, net		162.0			162.0			162.0
Intangible assets, net		375.5			382.4			377.2
Other assets		25.2			17.7			25.8
Total assets	$	2,301.5		$	2,593.6		$	2,337.3

Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	205.1		$	182.6		$	250.1
Accrued expenses		127.1			116.3			171.3
Current portion of operating lease liabilities		180.4			154.3			187.2
Current portion of long-term debt		—			9.1			—
Total current liabilities		512.6			462.3			608.6

Long-term debt, net		760.4			1,329.9			786.3
Long-term operating lease liabilities		755.2			875.4			766.4
Long-term deferred income taxes		86.9			92.0			87.3
Other long-term liabilities		51.2			29.1			46.3

Shareholders’ equity (deficit):
Common stock, stated value $0.01 per share; 200,000,000 authorized; issued 44,080,177 shares at May 1, 2021 and 36,822,658 shares at May 2, 2020 and January 30, 2021		0.4			0.3			0.3
Additional paid-in capital		202.2			123.6			124.7
Retained deficit		(53.9	)		(304.9	)		(69.0	)
Accumulated other comprehensive loss		(0.2	)		(0.8	)		(0.3	)
Treasury stock at cost; 1,920,278 shares at May 1, 2021, May 2, 2020 and January 30, 2021		(13.3	)		(13.3	)		(13.3	)
Total shareholders’ equity (deficit)		135.2			(195.1	)		42.4
Total liabilities and shareholders’ equity (deficit)	$	2,301.5		$	2,593.6		$	2,337.3

See notes to unaudited consolidated financial statements.

JOANN Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Thirteen Weeks Ended
	May 1, 2021			May 2, 2020
	(Dollars in millions except per share data)
Net sales	$	574.4		$	499.4
Cost of sales		271.7			253.6
Selling, general and administrative expenses		249.9			242.1
Depreciation and amortization		20.4			19.8
Operating profit (loss)		32.4			(16.1	)
Interest expense, net		13.2			22.7
Debt related gain		(0.1	)		(3.1	)
Income (loss) before income taxes		19.3			(35.7	)
Income tax provision (benefit)		4.2			(12.1	)
Net income (loss)	$	15.1		$	(23.6	)

Other comprehensive income:
Cash flow hedges		0.2			0.2
Income tax provision on cash flow hedges		(0.1	)		(0.1	)
Other comprehensive income		0.1			0.1
Comprehensive income (loss)	$	15.2		$	(23.5	)

Earnings per common share:
Basic	$	0.39		$	(0.68	)
Diluted	$	0.38		$	(0.68	)
Weighted-average common shares outstanding:
Basic		38,384,718			34,902,380
Diluted		39,707,652			34,902,380

See notes to unaudited consolidated financial statements.

JOANN Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Thirteen Weeks Ended
	May 1, 2021			May 2, 2020
	(Dollars in millions)
Net cash (used for) provided by operating activities:
Net income (loss)	$	15.1		$	(23.6	)
Adjustments to reconcile net income (loss) to net cash (used for) provided by operating activities:
Non-cash operating lease expense		39.3			37.3
Depreciation and amortization		20.4			19.8
Deferred income taxes		(0.4	)		1.0
Stock-based compensation expense		0.6			0.4
Amortization of deferred financing costs and original issue discount		0.8			1.1
Debt related gain		(0.1	)		(3.1	)
Loss on disposal and impairment of fixed assets		—			1.8
Changes in operating assets and liabilities:
Decrease in inventories		16.6			35.3
Decrease in prepaid expenses and other current assets		6.1			3.9
Decrease in accounts payable		(45.0	)		(44.5	)
(Decrease) increase in accrued expenses		(47.5	)		9.3
Decrease in operating lease liabilities		(48.5	)		(27.4	)
(Decrease) increase in other long-term liabilities		(1.5	)		0.3
Other, net		0.6			1.7
Net cash (used for) provided by operating activities		(43.5	)		13.3
Net cash used for investing activities:
Capital expenditures		(10.5	)		(12.3	)
Other investing activities		(0.2	)		—
Net cash used for investing activities		(10.7	)		(12.3	)
Net cash provided by financing activities:
Term loan payments		(70.9	)		(2.3	)
Borrowings on revolving credit facility		147.6			169.1
Payments on revolving credit facility		(102.1	)		(42.6	)
Purchase and retirement of debt		(0.9	)		(2.4	)
Principal payments on finance lease obligations		(1.2	)		(0.2	)
Issuance of common stock, net of underwriting commissions and offering costs		77.0			—
Net cash provided by financing activities		49.5			121.6
Net (decrease) increase in cash and cash equivalents		(4.7	)		122.6
Cash and cash equivalents at beginning of period		27.4			24.4
Cash and cash equivalents at end of period	$	22.7		$	147.0
Cash paid during the period for:
Interest	$	12.8		$	15.5
Income taxes, net of refunds		(0.3	)		—

See notes to unaudited consolidated financial statements.

JOANN Inc.

Consolidated Statements of Shareholders’ Equity (Deficit)

(Unaudited)

	Thirteen Weeks Ended
	Net Common Shares		Treasury Shares		Common Stock Par Value		Additional Paid-In Capital		Treasury Stock			Retained Deficit			Accumulated Other Comprehensive Loss			Total Shareholders' Equity (Deficit)
	(Shares in thousands)				(Dollars in millions)
Balance, February 1, 2020		34,902.4		1,920.3	$	0.3	$	123.2	$	(13.3	)	$	(281.3	)	$	(0.9	)	$	(172.0	)
Net loss		—		—		—		—		—			(23.6	)		—			(23.6	)
Other comprehensive income		—		—		—		—		—			—			0.1			0.1
Stock-based compensation		—		—		—		0.4		—			—			—			0.4
Balance, May 2, 2020		34,902.4		1,920.3	$	0.3	$	123.6	$	(13.3	)	$	(304.9	)	$	(0.8	)	$	(195.1	)

Balance, January 30, 2021		34,902.4		1,920.3	$	0.3	$	124.7	$	(13.3	)	$	(69.0	)	$	(0.3	)	$	42.4
Net income		—		—		—		—		—			15.1			—			15.1
Other comprehensive income		—		—		—		—		—			—			0.1			0.1
Issuance of common stock, net		7,109.4		—		0.1		76.9		—			—			—			77.0
Stock-based compensation		—		—		—		0.6		—			—			—			0.6
Exercise of stock options		148.1		—		—		—		—			—			—			—
Balance, May 1, 2021		42,159.9		1,920.3	$	0.4	$	202.2	$	(13.3	)	$	(53.9	)	$	(0.2	)	$	135.2

See notes to unaudited consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JOANN Inc.

Note 1—Significant Accounting Policies

Nature of Operations

JOANN (as defined below) is the nation’s category leader in sewing and fabrics (collectively, “Sewing”) and one of the fastest growing competitors in the arts and crafts category. The Creative Products industry is a large and growing market, which according to a 2017 Association for Creative Industries study is in excess of $40 billion. The industry is currently experiencing strong product demand in response to multiple themes that have been further solidified during the COVID-19 pandemic, such as heightened do-it-yourself customer behavior, amplified participation from both new and existing customers and increased digital engagement, of which the Company (as defined below) is a key beneficiary because it has positioned itself and its go-forward strategies to capitalize on increased demand for Creative Products. As a well-established and trusted brand for over 75 years, the Company believes it has a deep understanding of its customers, what inspires their creativity and what fuels their incredibly diverse projects. Since 2016, the Company has embarked on a strategy to transform JOANN, which has helped it pivot from a traditional retailer to a fully-integrated, digitally-connected provider of Creative Products. As of May 1, 2021, the Company operated 855 retail stores in 49 states.

Basis of Presentation

The accompanying Consolidated Financial Statements and these notes have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The Consolidated Financial Statements reflect all normal recurring adjustments which management believes are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for all periods presented. The Consolidated Financial Statements, however, do not include all information necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying Consolidated Financial Statements and these notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021.

Consolidation

The Consolidated Financial Statements include the accounts of JOANN Inc. (formerly known as Jo-Ann Stores Holdings Inc.) (the “Holding Company”), Needle Holdings LLC (“Needle Holdings”) and Jo-Ann Stores, LLC and its wholly-owned subsidiaries (collectively, “JOANN”). Effective February 9, 2021, Jo-Ann Stores Holdings Inc. amended its certificate of incorporation to change its corporate name to “JOANN Inc.” The amendment was approved by the Board of Directors and was effected by the filing of a Certificate of Amendment with the Delaware Secretary of State. All of the entities referenced in the prior sentence hereinafter will be referred to collectively as the “Company” and are all controlled by affiliates of Leonard Green & Partners, L.P. (“LGP”). All intercompany accounts and transactions have been eliminated upon consolidation.

The Holding Company has no operating activities and is limited to the issuance of shares of common stock and stock-based awards, the repurchase of common shares, the issuance and repurchase of debt, the receipt and payment of dividends or distributions and the payment of interest expense. The authorized, issued and outstanding common shares and treasury shares shown on the Consolidated Balance Sheets are of the Holding Company. Likewise, Needle Holdings has no operating activities and is limited to the issuance of initial shares of common stock and stock-based awards and the payment of dividends or distributions.

Fiscal Periods

The Company’s fiscal year ends on the Saturday closest to January 31 and refers to the year in which the period ends (e.g., fiscal 2022 refers to the fiscal year ending January 29, 2022). Fiscal years consist of 52 weeks, unless noted otherwise. The fiscal quarters ended May 1, 2021 and May 2, 2020 were both comprised of 13 weeks.

Seasonality

Typical of most retail companies, the Company’s business is seasonal, with the majority of revenues and operating profits generated in the second half of the fiscal year. Accordingly, earnings or losses for a particular interim period are not necessarily indicative of full-year results. In addition, due to demand volatility the Company has experienced during the COVID-19 pandemic, the seasonality of its fiscal 2022 results may differ from its historical experience.

Initial Public Offering

On March 11, 2021, the Company’s registration statement on Form S-1 (File No. 333-253121) relating to its initial public offering was declared effective by the SEC. The Company’s shares of common stock began trading on the Nasdaq Global Market on March 12, 2021. The public offering price of the shares sold in the initial public offering was $12.00 per share. The initial public offering closed on March 11, 2021 and included 5,468,750 shares of common stock. As part of the Company’s initial public offering, the underwriters were provided with an option to purchase 1,640,625 additional shares at the initial public offering price. This option was exercised on April 13, 2021. In aggregate, the shares issued in the offering, including the exercise of the underwriters’ option, generated approximately $77.0 million in net proceeds, which amount is net of $5.7 million in underwriters’ discount and commissions and $2.6 million in offering costs incurred.

On March 19, 2021, in connection with the closing of the initial public offering, the Company used all net proceeds received from the initial public offering and borrowings from the Revolving Credit Facility (as defined below) to repay all of the outstanding borrowings and accrued interest under the Term Loan due 2024 totaling $72.7 million. Following such repayment, all obligations under the Term Loan due 2024 have been terminated.

Stock Split

On March 3, 2021, the Company’s Board of Directors approved and effected an 85.8808880756715-for-1.0 unit split of its common stock. All share and per share data included in these Consolidated Financial Statements give effect to the stock split and have been retroactively adjusted for all periods.

Use of Estimates

In the opinion of management, the accompanying interim Consolidated Balance Sheets and related interim Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Cash Flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Since actual results may differ from those estimates, the Company revises its estimates and assumptions, as new information becomes available.

Recently Adopted Accounting Guidance

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 remove certain exceptions to the general principles in Accounting Standards Codification Topic 740. The amendments also clarify and amend existing guidance to improve consistent application. The amendments became effective for the Company’s interim and annual reporting periods beginning after December 15, 2020. The transition method (retrospective, modified retrospective, or prospective basis) related to the amendments depends on the applicable guidance, and all amendments for which there is no transition guidance specified are to be applied on a prospective basis. The Company adopted ASU 2019-12 on January 31, 2021, and the adoption did not have a material impact on its Consolidated Financial Statements.

Future Adoption of Recently Issued Accounting Guidance

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.

Related Party Transactions

Prior to the completion of the Company’s initial public offering, the Company paid a monthly management fee to LGP, which is included in selling, general and administrative (“SG&A”) expenses on the accompanying Consolidated Statements of Comprehensive Income (Loss). Starting in April 2020, the management fee payable to LGP was forgiven until the end of calendar year 2020 due to the

impact of the COVID-19 pandemic. Payment of the monthly management fee was discontinued upon the completion of our initial public offering in March 2021 as LGP no longer provides managerial services to us in any form.

During the thirteen weeks ended May 1, 2021, the Company paid a management fee to LGP of $0.4 million compared to $0.8 million for the thirteen weeks ended May 2, 2020.

Note 2—Financing

Long-term debt consisted of the following:

	May 1, 2021			May 2, 2020			January 30, 2021
	(Dollars in millions)
Revolving Credit Facility	$	131.0		$	300.0		$	85.5
Term Loan due 2023		635.3			842.2			635.4
Term Loan due 2024		—			211.9			72.8
Total debt		766.3			1,354.1			793.7
Less unamortized discount and debt costs		(5.9	)		(15.1	)		(7.4	)
Total debt, net		760.4			1,339.0			786.3
Less current portion of debt		—			(9.1	)		—
Long-term debt, net	$	760.4		$	1,329.9		$	786.3

Revolving Credit Facility

On October 21, 2016, the Company entered into an asset-based revolving credit facility agreement, which originally provided for senior secured financing of up to $400.0 million, subject to a borrowing base, maturing on October 20, 2021. On November 25, 2020, the Company entered into an agreement to amend various terms of the asset-based revolving credit facility agreement (as amended, the “Revolving Credit Facility”), which provides for senior secured financing of up to $500.0 million, subject to a borrowing base, maturing on November 25, 2025 (subject to a springing maturity date to the extent the Term Loan due 2023 (as defined below) has not been refinanced prior to its current maturity date).

As of May 1, 2021, there were $131.0 million of borrowings on the Revolving Credit Facility and our outstanding letters of credit obligation was $24.8 million. As of May 1, 2021, our excess availability on the Revolving Credit Facility was $215.5 million. During the first quarter of fiscal 2022, the weighted average interest rate for borrowings under the Revolving Credit Facility was 2.84 percent, compared to 2.79 percent for the first quarter of fiscal 2021. As of May 2, 2020, the Company had $300.0 million of borrowings on the Revolving Credit Facility and our outstanding letters of credit obligation was $16.9 million. As of May 2, 2020, our excess availability on the Revolving Credit Facility was $83.1 million.

Term Loan Due 2023

On October 21, 2016, the Company entered into a $725.0 million senior secured term loan facility (the “Term Loan due 2023”) which was issued at 98.0 percent of face value. The Term Loan due 2023 facility is with a syndicate of lenders and is secured by substantially all the assets of JOANN, excluding the Revolving Credit Facility collateral, and has a second priority security interest in the Revolving Credit Facility collateral. It is guaranteed by existing and future wholly-owned subsidiaries of JOANN, subject to certain exceptions. The Term Loan due 2023 agreement does not contain any financial covenants.

Term Loan Due 2024

On May 21, 2018, the Company entered into a $225.0 million term loan facility (the “Term Loan due 2024” and, together with the Term Loan due 2023, the “Term Loans”), which was issued at 98.5 percent of face value. The Term Loan due 2024 was with a syndicate of lenders. The Term Loan due 2024 was secured by a second priority security interest in all the assets of JOANN, excluding the Revolving Credit Facility collateral, and had a third priority security interest in the Revolving Credit Facility collateral. It was guaranteed by existing and future wholly-owned subsidiaries of JOANN, subject to certain exceptions.

interest under the Term Loan due 2024 totaling $72.7 million. Following such repayment, all obligations under the Term Loan due 2024 have been terminated.

Covenants

The covenants contained in the credit agreements restrict JOANN’s ability to pay dividends or make other distributions; accordingly, any dividends may only be made in accordance with such covenants. Among other restrictions, the credit agreements allow for dividends after an initial public offering in amounts not to exceed 6% per annum of the net proceeds received by, or contributed to Jo-Ann Stores, LLC. So long as there is no event of default, the credit agreements also allow dividends in amounts not less than $25 million, which amount can increase if certain other conditions are satisfied, including if JOANN’s leverage does not exceed certain thresholds. Additionally, the Revolving Credit Facility allows for unlimited dividends, so long as there is no event of default and the Company’s excess availability is greater than 20% of the maximum credit, calculated on a pro forma basis for 60 days. At May 1, 2021, the Company was in compliance with all covenants under its credit agreements.

For further details on the Company’s debt, see Note 2 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 30, 2021.

Note 3—Derivative Instruments

The Company is exposed to certain market risks during the normal course of its business arising from adverse changes in interest rates. The Company’s exposure to interest rate risk results primarily from its variable-rate borrowings. The Company may selectively use derivative financial instruments to manage the risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks. Consequently, these fluctuations could have a significant effect on the Company’s financial results.

In July 2018, the Company purchased, for $2.2 million, a forward starting interest rate cap based on 3-month LIBOR effective October 23, 2018 through October 23, 2021. The objective of the hedging instrument is to offset the variability of cash flows in term loan debt interest payments attributable to fluctuations in LIBOR beyond 3.5 percent.

The following table summarizes the fair value and balance sheet classification of the Company’s outstanding derivative within the accompanying Consolidated Balance Sheets as of May 1, 2021 and May 2, 2020:

Instrument

Balance Sheet Location

May 1,

2021

May 2,

2020

(Dollars in millions)

Interest Rate Cap

Other Assets

—

0.1

The interest rate cap had an amortized notional amount of $663.7 million and $685.8 million as of May 1, 2021 and May 2, 2020, respectively.

The time value of the interest rate cap is excluded from the assessment of effectiveness and is being amortized to interest expense over the life of the hedge. The impacts of the Company’s derivative instrument on the accompanying Consolidated Statements of Comprehensive Income (Loss) for the thirteen weeks ended May 1, 2021 and May 2, 2020 are presented in the table below:

	Thirteen Weeks Ended
	May 1, 2021		May 2, 2020
	(Dollars in millions)
Gain recognized in Other Comprehensive Income (Loss) on derivatives, gross of income taxes	$	—	$	0.2
Amount reclassified from Other Comprehensive Income (Loss) into earnings		—		—
Amortization of excluded component to interest expense		0.2		0.2

Note 4—Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities;

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable; and

Level 3 – Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.

The valuation of the interest rate cap is measured as the present value of all expected future cash flows based on the LIBOR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement. Both the carrying and fair value of the Company’s interest rate cap was zero as of May 1, 2021 and $0.1 million as of May 2, 2020.

The fair values of cash and cash equivalents, accounts payable and borrowings on the Company’s Revolving Credit Facility approximated their carrying values because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy.

Long-term debt is presented at carrying value in the Company’s Consolidated Balance Sheets. The fair value of the Company’s Term Loans was determined based on quoted market prices or recent trades of these debt instruments in less active markets. If the Company’s long-term debt was recorded at fair value, it would be classified as Level 2 in the fair value hierarchy. The following provides the carrying and fair values of the Company’s Term Loans as of May 1, 2021 and May 2, 2020:

	May 1, 2021				May 2, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(Dollars in millions)
Term Loan due 2023 (a)	$	629.4	$	626.4	$	831.5	$	249.5
Term Loan due 2024 (a)		—		—		207.5		41.5

(a)Net of deferred financing costs and original issue discount.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). The fair values are determined based on either a market approach, an income approach, in which the Company utilizes internal cash flow projections over the life of the underlying assets discounted using a discount rate that is considered to be commensurate with the risk inherent in the Company’s current business model, or a combination of both. These measures of fair value, and related inputs, are considered a Level 3 approach under the fair value hierarchy.

The Company uses the end of the period when determining the timing of transfers between levels. There were no transfers between levels during the periods presented.

Note 5—Accrued Expenses and Other Long-Term Liabilities

Due to the Company’s favorable financial performance during fiscal 2021, the Company increased the accrual for incentive compensation. The accrual reflected the expected incentive compensation payout to all salaried store support center and distribution center team members as well as all store and district managers. As of January 30, 2021, $38.7 million of incentive compensation was

recorded in accrued expenses and $1.9 million of incentive compensation was recorded in other long-term liabilities on the accompanying Consolidated Balance Sheet of which, $35.0 million was paid in the first quarter of fiscal 2022.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law by the President on March 27, 2020, allows companies to defer the payment of the employer portion of the Social Security Tax. The deferral period lasted until December 31, 2020 with half of the deferred amount due at December 31, 2021 and the other half due at December 31, 2022. The Company elected to defer payment of its portion of the Social Security Tax as permitted by the CARES Act, and as a result, has accrued for the full amount of these deferred payments in the amount of $10.7 million within accrued expenses and $10.7 million within other long-term liabilities on the accompanying Consolidated Balance Sheets.

Note 6—Goodwill and Other Intangible Assets

The carrying amount of goodwill at May 1, 2021 and May 2, 2020, was as follows:

	May 1, 2021			May 2, 2020
`	(Dollars in millions)
Goodwill, gross	$	643.8		$	643.8
Accumulated impairment		(481.8	)		(481.8	)
Goodwill, net	$	162.0		$	162.0

The carrying amount and accumulated amortization of identifiable intangible assets at May 1, 2021 and May 2, 2020 was as follows:

May 1, 2021

May 2, 2020

Estimated

Life

in Years

Gross

Carrying

Amount

Accumulated

Amortization

Gross

Carrying

Amount

Accumulated

Amortization

(Dollars in millions)

Indefinite-lived intangible assets: