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As filed with the Securities and Exchange Commission on February 10, 2017

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Jill Intermediate LLC

to be converted as described herein into a corporation named

J.Jill, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   5621   45-1459825

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

4 Batterymarch Park

Quincy, MA 02169

(617) 376-4300

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

David Biese

Chief Financial Officer

4 Batterymarch Park

Quincy, MA 02169

(617) 376-4300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Raphael M. Russo, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY 10019-6064

(212) 373-3000

 

Marc D. Jaffe, Esq.

Ian D. Schuman, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

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

 

Large accelerated filer ☐   Accelerated filer ☐    Non-accelerated filer ☑   Smaller reporting company ☐

(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

Title of each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock, par value $0.01 per share

  $100,000,000   $11,590

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes offering price of any additional shares that the underwriters have the option to purchase to cover over-allotments, if any.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

Jill Intermediate LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the closing of this offering, Jill Intermediate LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to J.Jill, Inc. Shares of the common stock of J.Jill, Inc. are being offered by the prospectus included in this registration statement.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated February 10, 2017

PROSPECTUS

                 Shares

 

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J.Jill, Inc.

Common Stock

 

 

This is J.Jill, Inc.’s initial public offering. All of the                  shares of common stock are being sold by the selling stockholder. We will not receive any proceeds from the sale of shares to be offered by the selling stockholder.

We are an “emerging growth company” as defined under the federal securities laws and are eligible for reduced public company reporting requirements. Please see “Prospectus Summary—Implications of being an Emerging Growth Company.” We will also be a “controlled company” under the corporate governance rules for New York Stock Exchange listed companies and will be exempt from certain corporate governance requirements of the rules. See “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock.”

We expect the public offering price to be between $        and $        per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol “JILL.”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 16 of this prospectus.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $           $     

Underwriting discount(1)

   $           $     

Proceeds, before expenses, to the selling stockholder

   $           $     

 

  (1) We refer you to the section “Underwriting” beginning on page 128 of this prospectus for additional information regarding underwriting compensation.

The underwriters may also exercise their option to purchase up to an additional                  shares from the selling stockholder at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                 , 2017.

 

 

 

BofA Merrill Lynch   Morgan Stanley   Jefferies

 

Deutsche Bank Securities   RBC Capital
Markets
  UBS Investment
Bank
  Wells Fargo Securities

 

Cowen and Company   Macquarie Capital   SunTrust Robinson Humphrey

 

 

The date of this prospectus is                 , 2017.


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For investors outside the United States: neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

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PROSPECTUS SUMMARY

     1   

RISK FACTORS

     16   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     38   

USE OF PROCEEDS

     40   

DIVIDEND POLICY

     40   

CORPORATE CONVERSION

     41   

CAPITALIZATION

     42   

DILUTION

     43   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

     45   

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     47   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     54   

BUSINESS

     78   

MANAGEMENT

     92   

EXECUTIVE COMPENSATION

     97   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     113   

PRINCIPAL AND SELLING STOCKHOLDERS

     115   

DESCRIPTION OF CAPITAL STOCK

     117   

SHARES ELIGIBLE FOR FUTURE SALE

     122   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     124   

UNDERWRITING

     128   

LEGAL MATTERS

     136   

EXPERTS

     136   

WHERE YOU CAN FIND MORE INFORMATION

     136   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

You should rely only on the information contained in this prospectus and any related free writing prospectus that we may provide to you in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

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Trademarks, Trade Names and Service Marks

We use various trademarks, trade names and service marks in our business, including without limitation J.Jill®, The J.Jill Wearever Collection® and Pure Jill®. This prospectus contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

Industry and Market Data

Industry and market data used throughout this prospectus were obtained through company research, surveys and studies conducted by third parties and industry and general publications. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Statistical data in this prospectus related to our customers is based on the approximately 97% of transactions that we are able to match to an identifiable customer. Although we believe the industry and market data to be reliable as of the date of this prospectus, this information could prove to be inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from the sources relied upon or cited herein. While we are not aware of any misstatements regarding the industry data presented herein, estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

Basis of Presentation

On May 8, 2015, an investment vehicle of investment funds affiliated with TowerBrook Capital Partners L.P. acquired all of our outstanding equity interests through the newly formed entities JJill Holdings, Inc. (“JJill Holdings”) and JJill Topco Holdings, LP (“JJill Topco Holdings”). We refer to such acquisition and the related financing transactions as the “Acquisition.” As a result of the Acquisition and related change in control, JJill Holdings applied purchase accounting as of May 8, 2015. We elected to push down the effects of the Acquisition to our consolidated financial statements. As such, the financial information provided in this prospectus is presented as “Predecessor” or “Successor” to indicate whether they relate to the period preceding the Acquisition or the period succeeding the Acquisition, respectively. Due to the change in the basis of accounting resulting from the Acquisition, the consolidated financial statements for the Predecessor periods and the consolidated financial statements for the Successor periods, included elsewhere in this prospectus, are not necessarily comparable.

Our fiscal year is the 52- or 53-week period ending on the Saturday closest to the January calendar month-end. The Predecessor period from February 1, 2015 to May 7, 2015, which is presented separately as the “2015 Predecessor Period” in this prospectus, consisted of approximately 14 weeks. The Successor period from May 8, 2015 to January 30, 2016, which is presented separately as the “2015 Successor Period” in this prospectus, consisted of approximately 38 weeks. References in this prospectus to “pro forma fiscal year 2015” refer to the unaudited pro forma consolidated statement of operations, which has been derived from our consolidated audited statements of operations included elsewhere in this prospectus and represents the addition of the Predecessor period from February 1, 2015 through May 7, 2015 and the Successor period from May 8, 2015 through January 30, 2016 and gives effect to the following as if they had occurred on February 1, 2015: (i) the Acquisition; (ii) the related Acquisition financing as provided for under our term loan credit agreement, dated as of May 8, 2015, by and among Jill Holdings LLC, Jill Acquisition LLC, a wholly-owned subsidiary of us, the various lenders party thereto and Jefferies Finance LLC as the administrative agent, as amended on May 27, 2016 by Amendment No. 1 thereto (the “Term Loan”) and 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

 

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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”); and (iii) our merger with our direct parent company, JJill Holdings, which will occur prior to the completion of this offering, as if they had occurred on February 1, 2015. See “Unaudited Pro Forma Consolidated Financial Information” included elsewhere in this prospectus for additional information. References in this prospectus to “fiscal year 2016” refer to the fiscal year ending January 28, 2017, references to “fiscal year 2015” refer to the year ended January 30, 2016, references to “fiscal year 2014” refer to the fiscal year ended January 31, 2015 and references to “fiscal year 2013” refer to the fiscal year ended February 1, 2014.

As used in this prospectus, unless otherwise indicated or the context otherwise requires, references to:

 

    the “Company,” “J.Jill,” “we,” “us” and “our” refer to J.Jill, Inc. and its consolidated subsidiaries;

 

    “TowerBrook” means TowerBrook Capital Partners L.P. or the investment funds affiliated with TowerBrook Capital Partners L.P. or an investment vehicle of such funds, as the context requires;

 

    “GAAP” refers to U.S. generally accepted accounting principles;

 

    “retention rate” refers to, for a one-year period or fiscal year, the percentage of customers that made at least one purchase at J.Jill in the previous one-year period or fiscal year and also made at least one purchase at J.Jill in such one-year period or fiscal year;

 

    “4-wall contribution” refers to a particular store’s or group of stores’ net sales, less product costs and direct operating costs, including payroll, occupancy and other operating costs specifically associated with that store or group of stores. 4-wall contribution is an assessment of store-level profitability and a supplemental measure of the operating performance of our stores that is neither required by, nor presented in accordance with, GAAP and our calculations thereof may not be comparable to those reported by other companies. We present this measure as we believe it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and we use it internally as a benchmark to compare our performance to that of our competitors. This measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP;

 

    “payback” or “payback period” refer to, for a particular store or group of stores, the period of time from its opening measured in years, that it takes for the cumulative 4-wall contribution for a particular store or group of stores to equal our net cash investment in that store or group of stores;

 

    “cash-on-cash return” is calculated by dividing the 4-wall contribution for a particular store or group of stores by our total net cash investment in that store or group of stores. Cash-on-cash return is a supplemental measure of operating performance that is neither required by, nor presented in accordance with, GAAP and our calculations thereof may not be comparable to those reported by other companies. We present this measure as we believe it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and we use it internally as a benchmark to compare our performance to that of our competitors. This measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP;

 

    “total company comparable sales” refers to net sales from our full-price stores, open for more than 52 weeks, and our direct channel. 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. Total company comparable sales for fiscal year 2012 are based on 52 weeks and exclude the 53rd week in fiscal year 2012;

 

    “average unit volume” is calculated by dividing our total net retail sales by our total number of stores;

 

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    “active customer base” refers to unique customers who have made a purchase within the past twelve months;

 

    “Aided Brand Awareness” refers to a measure of the number of people who recognize the J.Jill brand from a list of possible names offered as a prompt in a customer survey we conducted;

 

    “Net Promoter Score” refers to a customer loyalty metric used in a customer survey we conducted, that was calculated based on responses to a single question: How likely are you to recommend J.Jill to your friends and family?;

 

    “full-price store” or “full-price location” refer to a store that is not a clearance store; and

 

    “E-commerce business” refers to the orders of J.Jill’s products that are placed through our website, www.jjill.com.

Non-GAAP Financial Measures

The following financial measures presented in this prospectus are key performance indicators used by management and typically used by our competitors in the retail industry, but are not recognized under GAAP:

 

    “Adjusted EBITDA” represents net income (loss) plus interest expense, provision (benefit) for income taxes, depreciation and amortization, the amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition, certain Acquisition-related expenses, sponsor fees, 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; and

 

    “Adjusted EBITDA margin” represents, for any period, Adjusted EBITDA as a percentage of net sales.

Adjusted EBITDA and Adjusted EBITDA margin are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP and our calculations thereof may not be comparable to those reported by other companies. We present these measures as we believe they are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and we use them internally as a benchmark to compare our performance to that of our competitors. These measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.

Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income (loss), operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of our liquidity. We believe Adjusted EBITDA facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to ongoing operating performance. Potential differences between our measure of Adjusted EBITDA versus other similar companies’ measures of Adjusted EBITDA may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

For a discussion of the use of these financial measures and a reconciliation of net income to Adjusted EBITDA and the calculation of Adjusted EBITDA margin, see “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data.”

 

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PROSPECTUS SUMMARY

The following summary contains selected information about us and about this offering. It does not contain all of the information that is important to you and your investment decision. Before you make an investment decision, you should review this prospectus in its entirety, including matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. Some of the statements in the following summary constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

In this prospectus, unless otherwise indicated or the context otherwise requires, references to the “Company,” “J.Jill,” “we,” “us,” and “our” refer to J.Jill, Inc. and its consolidated subsidiaries.

Overview

Our Company

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 omni-channel platform that is well diversified across our direct (42% of net sales for the twelve months ended October 29, 2016) and retail (58% of net sales for the twelve months ended October 29, 2016) channels. We began as a catalog company and have been a pioneer of the omni-channel model with a compelling presence across stores, website and catalog since 1999. We have developed an industry-leading customer database that allows us to match approximately 97% of transactions to an identifiable customer. 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. Our goals are to Create a great brand, to Build a successful business and to Make J.Jill a great place to work. To achieve this, we have aligned our strategy and team around four guiding pillars – Brand, Customer, Product and Channel.

Brand and Customer. Our brand promise to the J.Jill woman is to delight her with great wear-now product, to inspire her confidence through J.Jill’s approach to dressing and to provide her with friendly, guiding service wherever and whenever she chooses to shop. While we find that women of all ages are attracted to our brand, our typical customer is 40-65 years old, is college educated and has an annual household income that exceeds $150,000. She leads a busy, yet balanced life, as she works outside the home, is involved in her community and has a family with children. She engages across both our direct and retail channels and is highly loyal, as evidenced by the fact that approximately 70% of our gross sales in pro forma fiscal year 2015 came from customers that have been shopping with J.Jill for at least five years.

Product. Our customers strongly associate our products with a modern balance of style, quality, comfort and ease suitable for a broad range of occasions at accessible prices. Our product assortment is marketed under the J.Jill brand name, sold exclusively through our 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. We also offer most of these products across our two sub-brands, Pure Jill and Wearever. We design and merchandise our products in-house around clear product stories, grounded with essential yet versatile styles and fabrications updated each month with fresh colors, layering options, novelty and fashion. Each of our monthly merchandised collections includes approximately 40% new styles, which provides a consistent flow of fresh product.

Channel. We operate an omni-channel platform that delivers a seamless experience to our customer wherever and whenever she chooses to shop across our website, retail stores and catalog. Driven by our direct-to-consumer heritage, we have a highly profitable omni-channel platform that is well-diversified across our direct

 



 

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and retail channels. As of January 28, 2017, our retail store portfolio consists of 275 stores in 43 states. Of these stores, 273 are full-price locations averaging approximately 3,750 square feet, with approximately half of our stores located in lifestyle centers and approximately half in premium malls. Our stores have produced strong and consistent performance, with 98% of our full-price locations generating positive 4-wall contribution in pro forma fiscal year 2015. Our new store openings have produced an average payback of approximately two years. We introduced a new store design in 2013 that showcases our brand concept and elevates, yet simplifies the J.Jill shopping experience. Within our direct channel, E-commerce represented 88% of net sales for the twelve months ended October 29, 2016 and catalog orders represented 12% of net sales for the twelve months ended October 29, 2016. Our website provides customers with continuous access to the entire J.Jill product offering and features rich content, including updates on new collections and guidance on how to wear and wardrobe our styles, as well as the ability to chat live with a customer service representative. We produce 25 annual editions of our catalog and circulated 57 million copies in 2015. Our catalog, combined with an increased investment in online marketing, drives customer acquisition and engagement across all of our channels. Our omni-channel approach allows us to drive customer response and purchasing behavior in all channels.

Under the leadership of Paula Bennett, our President and Chief Executive Officer, we have delivered strong, consistent growth in sales and profitability. We have established a solid foundation to support long-term, sustainable growth by investing to build our team, market our brand and enhance our systems, distribution center and data insight capabilities. Net income in pro forma fiscal year 2015 was $14.3 million. We believe our customer-focused strategy, foundational investments and data insights have resulted in consistent, profitable growth and industry-leading Adjusted EBITDA margins of 14.6% in pro forma fiscal year 2015. For a reconciliation of our Adjusted EBITDA to our net income, please see “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data.” Recent financial highlights include:

 

    Total net sales growth from $432 million in fiscal year 2012, to $562 million in pro forma fiscal year 2015, reflecting a 9% compound annual growth rate (“CAGR”), and to $617 million for the twelve months ended October 29, 2016, reflecting a 10% CAGR;

 

    Positive total company comparable sales growth in 17 of the last 19 consecutive quarters, including in each of the last ten consecutive quarters;

 

    Net income growth from a loss of $3.6 million in fiscal year 2012, to $14.3 million in pro forma fiscal year 2015 and to $23.5 million for the twelve months ended October 29, 2016;

 

    Net income margin expansion of 330 basis points, from (0.8%) in fiscal year 2012, to 2.5% in pro forma fiscal year 2015, and of 460 basis points to 3.8% for the twelve months ended October 29, 2016;

 

    19 consecutive quarters of positive Adjusted EBITDA growth;

 

    Adjusted EBITDA growth from $44 million in fiscal year 2012, to $82 million in pro forma fiscal year 2015, reflecting a 23% CAGR, and to $99 million for the twelve months ended October 29, 2016, reflecting a 24% CAGR; and

 

    Adjusted EBITDA margin expansion of 440 basis points, from 10.2% in fiscal year 2012, to 14.6% in pro forma fiscal year 2015, and of 580 basis points to 16.0% for the twelve months ended October 29, 2016.

 



 

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$ in millions

 

Net Sales

 

Total Company Comparable Sales

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Net Income & Margin

 

Adjusted EBITDA & Margin

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Competitive Strengths

We attribute our success to the following competitive strengths:

Distinct, Well-Recognized Brand. 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 have cultivated a differentiated brand that resonates with our customers, as evidenced by the fact that we have one of the highest levels of brand satisfaction and one of the highest aided brand awareness scores relative to our peers. Through our commitment to our customer and our brand building activities, we have created significant brand trust and an emotional connection with our customers that we believe will facilitate sustainable sales growth and market share gains over time.

Industry-Leading Omni-Channel Business. We have developed a powerful, omni-channel business model comprised of our industry-leading direct channel and our retail stores. Our direct and retail channels complement and drive traffic to one another, and we leverage our targeted marketing initiatives to acquire new customers across all channels. While 64% of new to brand customers first engage with J.Jill through our retail stores, we have a strong track record of migrating customers from a single-channel customer to a more valuable, omni-channel customer. On average, our omni-channel customers purchase on nearly three more occasions per year and spend nearly three more times per year than our single-channel customers. As a result, our direct penetration has grown rapidly and accounted for 42% of net sales for the twelve months ended October 29, 2016 driven primarily by growth in our E-commerce business. We believe our strong omni-channel capabilities enable us to deliver a seamless brand experience to our customer, wherever and whenever she chooses to shop.

 



 

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Data-Centric Approach That Drives Consistent Profitability and Mitigates Risk. We believe we have strong customer and transaction data capabilities, but it is our use of the data that distinguishes us from our competitors. We have developed industry-leading data capture capabilities that allow us to match approximately 97% of transactions to an identifiable customer, which we believe is significantly ahead of the industry standard. We maintain an extensive customer database that tracks customer details from personal identifiers and demographic overlay (e.g., name, address, age and household income) and transaction history (e.g., orders, returns and order value). We continually leverage this database and apply our insights to operate our business, as well as to acquire new customers and then create, build and maintain a relationship with each customer to drive optimum value. For example, in fiscal year 2015 we utilized insights from our data to expand our marketing investment and focus our initiatives to emphasize customer acquisition. This drove growth in active customers by 12% and new customers by 15%. We also increased spend per customer by 6% as customers purchased more frequently and spent more per transaction. We believe our data-centric approach allows us to respond to customer preferences and mitigate risk leading to consistent, predictable operating and financial performance over time.

Affluent and Loyal Customer Base. We target an attractive demographic of affluent women in the 40-65 age range, a segment of the population that is experiencing outsized population growth between 2010 and 2020 in the United States, according to the U.S. Census Bureau. With an average annual household income that exceeds $150,000, our customer has significant spending power. She is highly loyal as evidenced by the fact that approximately 70% of our gross sales in pro forma fiscal year 2015 came from customers that have been shopping with J.Jill for at least five years. Customers who remain with our brand for five years or longer spend nearly twice as much and shop with us 1.5 times more per year than a new-to-brand customer. Our private label credit card program also drives customer loyalty and encourages spending, as average spend per card holder is over two times higher than non-card holders. We believe we will continue to develop long-term customer relationships that will drive profitable sales growth.

Customer-Focused Product Assortment. Our customers strongly associate our product with a modern balance of style, quality, comfort and ease suitable for a broad range of occasions at accessible price points, with an average selling price of $45. Our customer-focused assortment spans a full range of sizes and is designed to provide easy wardrobing that is relevant to her lifestyle. Each year we offer 12 merchandise collections that are introduced approximately every four weeks and designed and delivered to provide a consistent flow of fresh products. We create product newness through the use of different fabrics, colors, patterns and silhouettes, with approximately 40% new styles delivered in each monthly collection, which motivates our customer to visit our stores and/or our website more frequently. We have an in-house, customer centric product design and development process that leverages our extensive database of customer feedback and allows us to identify and incorporate changes in our customers’ preferences, mitigating fashion risk. We believe our customer focused approach to product development and continual delivery of fresh, high quality products drives traffic, frequency and conversion.

Highly Experienced Leadership Team, Delivering Superior Results. Our leadership team is led by President and Chief Executive Officer, Paula Bennett, who joined J.Jill in 2008 and is responsible for leading our successful revitalization and profitable growth. Ms. Bennett is a retail veteran with over 35 years of experience who understands the importance of a strong brand, possesses deep knowledge of our customers and has extensive direct and retail channel experience. Ms. Bennett previously served as Chief Operating Officer of Eileen Fisher, Inc. and also held leadership positions at Bloomingdale’s and Tiffany & Co. She has built a team from leading global organizations with an average of 25 years of industry experience and significant expertise in merchandising, marketing, retail, E-commerce, human resources and finance. We have developed a strong and collaborative culture aligned around our goals to Create a great brand, Build a successful business and Make J.Jill a great place to work. Additionally, we have enhanced and realigned our organizational structure to further elevate the omni-channel customer experience including the recent hires of a Chief Information Officer and a Senior Vice President of Marketing. Our leadership team is aligned and incentivized around growing Adjusted EBITDA and has delivered superior and consistent operating results, growing net sales by a 10% CAGR, Adjusted EBITDA by a 24% CAGR and Adjusted EBITDA margin by 580 basis points from fiscal year 2012 through the twelve months ended October 29, 2016.

 



 

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Business Growth Strategies

Key drivers of our growth strategy include:

Grow Size and Value of Our Active Customer Base. We have a significant opportunity to continue to attract new customers to our brand and to grow the size and value of our active customer base across all channels. Historically, we grew our business by driving spend per customer. We strategically increased our marketing investment to drive growth through the acquisition of new customers, reactivation of lapsed customers and the retention of existing customers. This investment has proven effective as, for example, in fiscal year 2015 we increased our marketing investment by 16%, resulting in active customer base growth of 12%, including new customer growth of 15%. We also experienced an increase in spend per customer by 6% as customers purchased more frequently and spent more per transaction. In addition, in fiscal year 2015, the number of our omni-channel customers, who purchase on nearly three more occasions per year and spend nearly three more times per year than our single-channel customers, increased by 21%. We recently began a brand voice and customer segmentation initiative which, upon completion, will further enhance our ability to target the highest value customers and increase customer spending. Through these initiatives, we believe we will continue to attract new customers to our brand, migrate customers from single-channel to more profitable omni-channel customers and increase overall customer retention and spend.

Increase Direct Sales. Given our strong foundation that positions us to capitalize on the growth of online and mobile shopping, we believe we have the opportunity to grow our direct sales from 42% of our net sales to approximately 50% over the next few years. According to Euromonitor, online apparel sales are expected to grow at a CAGR of approximately 15% from 2015 to 2020, which is significantly above the long-term growth of the broader apparel industry. We are undertaking several initiatives to enhance our capabilities and drive additional direct sales. We are in the process of re-platforming our website to improve our customers’ personalized shopping experience and increase the ease of navigation, checkout and overall engagement. Our new platform, managed by our experienced team, will provide us with the opportunity to expand internationally. In addition, our mobile platform provides us with the ability to effectively engage with our customer on her mobile device by providing her with access to product research and the ability to connect with the brand socially. We believe our powerful direct platform will enable us to further strengthen our dominant market position and broaden our customer reach.

Profitably Expand Our Store Base. Based on our proven new store economics, we believe that we have the potential to grow our store base by up to 100 stores over the long term from our total of 275 stores as of January 28, 2017. We will target new locations in lifestyle centers and premium malls, and we plan to open 10-15 new stores in fiscal year 2017 and in each year thereafter. Our new store model targets an average of approximately $1.0 million of net sales per store and approximately $270,000 of 4-wall contribution within the first full year of operations. We introduced a new store design concept in 2013 that showcases our brand concept and elevates, yet simplifies the J.Jill shopping experience. The new store concept provides a welcoming, easy-to-shop format that guides her through clearly merchandised product stories. All of our new and refreshed stores will reflect our new design concept. We also plan to selectively close underperforming stores on an annual basis, including one in 2016.

Strengthen Omni-Channel Capabilities. We are pursuing a variety of initiatives designed to enhance our omni-channel capabilities focused on best serving our customer, wherever and whenever she chooses to shop. We have recently enhanced our management team to focus on the omni-channel customer experience, including the recent hires of a Chief Information Officer and a Senior Vice President of Marketing. We will continue to leverage our insight into customer attributes and behavior, which will guide strategic investments in our business. For example, we will enhance our ability to seamlessly manage our inventory across all of our channels. We also plan to implement technology to further fulfill customer demand, including ship from store to customer and order online for pickup in store. We expect our sustainable model, combined with our omni-channel initiatives, will continue to drive traffic, increase average transaction value and enhance conversion across all of our channels.

 



 

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Enhance Product Assortment. We believe there is an opportunity to grow our business by selectively broadening and enhancing our assortment in certain product categories, including our Pure Jill and Wearever sub-brands, our Women’s and Petite’s businesses, and accessories. Based on strong demand for our extended size product and our sub-brands, we believe we have the opportunity to expand and focus these categories in selected stores as well as test the offering in stand-alone store formats. We also believe we have the opportunity to continue to optimize our assortment architecture and productivity by delivering the right mix and flow of fashion and basics to our channels. In addition, we will continue delivering high quality customer focused product assortments across each of our channels, while strengthening visual merchandising. Through our focused and enhanced product offering, particularly in our sub-brands and extended sizes, we believe we will continue to drive profitable sales growth over time.

Risks Relating to Our Business and Our Common Stock

An investment in our common stock involves a high degree of risk. You should carefully consider the risks summarized in the “Risk Factors” section of this prospectus immediately following this prospectus summary.

Corporate Conversion

We are currently a Delaware limited liability company. Prior to the sale of shares in this offering, we will convert into a Delaware corporation and change our name to J.Jill, Inc. In conjunction with the conversion, all of our outstanding equity interests will convert into                  shares of common stock. Jill Intermediate LLC has one class of equity interests, all of which are held by JJill Holdings, our direct parent company, and JJill Topco Holdings, the direct parent company of JJill Holdings. In conjunction with our conversion into a Delaware corporation, JJill Holdings and JJill Topco Holdings will each receive shares of our common stock in proportion to the percentage of Jill Intermediate LLC’s equity interests held by them prior to the conversion. Following our conversion into a Delaware corporation and prior to the sale of shares in this offering, JJill Holdings, our direct parent, will merge with and into us, and we will be the surviving entity to such merger. We are a holding company, and Jill Acquisition LLC, our wholly-owned subsidiary, will remain the operating company for our business assets. Immediately after the merger, all of the shares of our common stock will be held by JJill Topco Holdings, our current indirect parent. For more information, please see “Corporate Conversion.”

 



 

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The diagram below depicts our organizational structure immediately following the consummation of this offering and the transactions described above:

 

LOGO

Our Sponsor

We were acquired by TowerBrook in May 2015. TowerBrook is an investment management firm that is based in the United States and Europe. It focuses on making investments in European and North American companies.

Following this offering, TowerBrook will control approximately     % of the voting power of our outstanding common stock (or     % if the underwriters exercise their option to purchase additional shares). As a result, TowerBrook will control any action requiring the general approval of our stockholders, including the election of our board of directors (which will control our management and affairs), the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. Because TowerBrook will hold more than     % of the combined voting power of our outstanding common stock, we will be a “controlled company” under the corporate governance rules for New York Stock Exchange listed companies. We will therefore be permitted to, and we intend to, elect not to comply with certain corporate governance requirements. See “Management—Controlled Company.”

Control by TowerBrook may give rise to actual or perceived conflicts of interest with holders of our common stock. TowerBrook’s significant ownership in us, its rights under the Stockholders Agreement and its resulting ability to effectively control us may discourage a third party from making a significant equity investment in us or a transaction involving a change of control, including transactions in which holders of shares of our common stock might otherwise receive a premium for such holders’ shares over the then-current market price. See “Risk Factors— Risks Related to this Offering and Ownership of Our Common Stock” for a summary of the potential conflicts of interests that may arise as a result of our control by TowerBrook.

 



 

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Implications of being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or “JOBS Act” enacted in April 2012. As an “emerging growth company,” we may take advantage of specified reduced reporting and other requirements that are otherwise applicable to public companies. These provisions include, among other things:

 

    being permitted to present only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

    exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting;

 

    exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;

 

    exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (United States), requiring mandatory audit firm rotation or a supplement to our auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements;

 

    an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

    reduced disclosure about executive compensation arrangements.

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” if we have $1.0 billion or more in “total annual gross revenues” during our most recently completed fiscal year, if we become a “large accelerated filer” with a market capitalization of $700 million or more, or as of any date on which we have issued more than $1.0 billion in non-convertible debt over the three-year period to such date. We may choose to take advantage of some, but not all, of these reduced burdens. For example, we have taken advantage of the reduced reporting requirement with respect to disclosure regarding our executive compensation arrangements and expect to take advantage of the exemption from auditor attestation on the effectiveness of our internal control over financial reporting. For as long as we take advantage of the reduced reporting obligations, the information that we provide stockholders may be different from information provided by other public companies. We are irrevocably electing to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-“emerging growth companies.”

In addition, upon the closing of this offering, we will be a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards because more than 50% of our voting common stock will be owned by TowerBrook. For further information on the implications of this distinction, see “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock” and “Management—Board Committees.”

Corporate Information

We were originally organized as Jill Intermediate LLC, a Delaware limited liability company, in February 2011. Prior to the closing of this offering, we will complete transactions pursuant to which we will

 



 

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convert into a Delaware corporation and change our name to J.Jill, Inc. Our principal executive office is located at 4 Batterymarch Park, Quincy, MA 02169, and our telephone number is (617) 376-4300. Our website address is www.jjill.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus. You should not rely on our website or any such information in making your decision whether to purchase shares of our common stock.

 



 

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The Offering

 

Issuer in this offering

J.Jill, Inc.

 

Common stock offered by the selling stockholder

             shares (or              shares, if the underwriters exercise in full their option to purchase additional shares as described below).

 

Option to purchase additional shares

The selling stockholder has granted the underwriters an option to purchase up to an additional              shares. The underwriters may exercise this option at any time within 30 days from the date of this prospectus. See “Underwriting.”

 

Common stock outstanding after giving effect to this offering

                  shares (or              shares if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

The selling stockholder will receive all the proceeds from the sale of shares of our common stock in this offering. We will not receive any proceeds from the sale of shares of our common stock in this offering.

 

Controlled company

Upon completion of this offering, TowerBrook will continue to beneficially own more than 50% of our outstanding common stock. As a result, we intend to avail ourselves of the “controlled company” exemptions under the rules of the New York Stock Exchange (“NYSE”), including exemptions from certain of the corporate governance listing requirements. See “Management—Controlled Company”

 

Voting rights

Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.

 

Dividend policy

We do not currently intend to pay dividends on our common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth.

 

Listing

We have applied to list our common stock on the NYSE under the symbol “JILL.”

 

Risk factors

You should read the section entitled “Risk Factors” beginning on page 16 of, and the other information included in, this prospectus for a discussion of some of the risks and uncertainties you should carefully consider before deciding to invest in our common stock.

The number of shares of our common stock to be outstanding immediately after the closing of this offering is based on              shares of common stock outstanding as of October 29, 2016 and, except as otherwise indicated, all information in this prospectus, reflects and assumes the following:

 

    assumes an initial public offering price of $         per share of common stock, the midpoint of the price range on the cover of this prospectus;

 



 

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    assumes the completion of our corporate conversion from a Delaware limited liability company to a Delaware corporation and the merger of JJill Holdings with and into us, as described under “Corporate Conversion”;

 

    reflects the conversion of all of our outstanding equity interests into                      shares of our common stock, which will be effectuated prior to the closing of this offering;

 

    assumes no exercise of the underwriters’ option to purchase              additional shares of common stock in this offering; and

 

    does not reflect an additional              shares of our common stock reserved for future grant under our Equity Incentive Plan (as defined herein) which we expect to adopt in connection with this offering.

 



 

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SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

The following tables present our summary consolidated financial and other data as of and for the periods indicated. The summary consolidated statements of operations data for the fiscal years ended February 1, 2014 and January 31, 2015, the periods from February 1, 2015 to May 7, 2015 (Predecessor) and from May 8, 2015 to January 30, 2016 (Successor), and the summary consolidated balance sheet data as of January 31, 2015 and January 30, 2016 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical audited results are not necessarily indicative of the results that should be expected in any future period.

The summary consolidated statements of operations data for the period from May 8, 2015 to October 31, 2015 (Successor) and the thirty-nine weeks ended October 29, 2016 (Successor) and the summary consolidated balance sheet data as of October 29, 2016 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to present fairly the financial information set forth in those statements. The results for any interim period are not necessarily indicative of the results that may be expected for the full year and our historical unaudited results are not necessarily indicative of the results that should be expected in any future period.

We have derived the summary consolidated statements of operations data for the twelve months ended October 29, 2016 by adding the summary consolidated statements of operations data for the thirty-nine weeks ended October 29, 2016 to the summary consolidated statements of operations data for the 2015 Successor Period and subtracting the summary consolidated statements of operations data for the period from May 8, 2015 to October 31, 2015. We believe that presentation of the summary consolidated statements of operations data for the twelve months ended October 29, 2016 is useful to investors because it presents information about how our business has performed in the twelve month period immediately preceding the date of our most recent interim financial statements, which allows investors to review our current performance trends over a period consisting of our four most recent consecutive fiscal quarters.

For purposes of presenting a comparison of our fiscal year 2013 and fiscal year 2014 results, in addition to standalone results for the 2015 Predecessor Period and 2015 Successor Period, we have also presented summary unaudited pro forma consolidated financial and other data for the fiscal year ended January 30, 2016. The unaudited pro forma consolidated statement of operations for the fiscal year ended January 30, 2016 has been derived from the historical audited statements of operations included elsewhere in this prospectus, and represents the addition of the 2015 Predecessor Period and the 2015 Successor Period and gives effect to certain transactions, as described in “Unaudited Pro Forma Consolidated Financial Information” contained elsewhere in this prospectus, as if they had occurred on February 1, 2015. We believe that this presentation provides meaningful information about our results of operations on a period to period basis. The unaudited pro forma consolidated statement of operations is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the transactions had occurred as of the date indicated or what the results of operations would be for any future periods.

 



 

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The summary historical financial data presented below does not purport to project our financial position or results of operations for any future date or period and should be read together with “Selected Historical Consolidated Financial and Other Data,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

          Interim Periods        
    Predecessor          

Pro Forma

(unaudited)

         

Predecessor

         

Successor

   

Predecessor

          Successor
(unaudited)
 

(in thousands,

except share

and per share data)

 

For the
Fiscal

Year
Ended
February 1,
2014

   

For the
Fiscal

Year
Ended
January 31,
2015

         

For the
Fiscal

Year
Ended
January 30,
2016

         

For the
Period
from
February 1,
2015 to
May 7,
2015

         

For the
Period
from
May 8,
2015 to
January 30,
2016

   

For the
Period
from
February 1,
2015 to
May 7,
2015

         

For the
Period
from
May 8,
2015 to
October 31,
2015

   

For the
Thirty-
Nine
Weeks
Ended
October 29,
2016

   

Twelve
Months
Ended
October  29,
2016

 

Statements of Operations Data:

                               

Net sales

  $ 456,026      $ 483,400        $ 562,015          $ 141,921          $ 420,094      $ 141,921          $ 274,741      $ 472,139      $ 617,492   

Costs of goods sold

    161,261        164,792          188,852            44,232            155,091        44,232            101,185        149,673        203,579   
 

 

 

   

 

 

     

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Gross profit

    294,765        318,608          373,163            97,689            265,003        97,689            173,556        322,466        413,913   

Selling, general and administrative expenses

    267,319        279,557          331,752            80,151            246,482        80,151            161,236        273,882        359,128   

Acquisition-related expenses

    —          —            —              13,341            —          13,341            —          —          —     
 

 

 

   

 

 

     

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Operating income

    27,446        39,051          41,411            4,197            18,521        4,197            12,320        48,584        54,785   

Interest expense

    19,064        17,895          16,893            4,599            11,893        4,599            7,922        13,630        17,601   
 

 

 

   

 

 

     

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    8,382        21,156          24,518            (402         6,628        (402         4,398        34,954        37,184   

Provision (benefit) for income taxes

    3,884        10,860          10,223            1,499            2,322        1,499            1,541        12,924        13,705   
 

 

 

   

 

 

     

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income
(loss)

  $ 4,498      $ 10,296        $ 14,295          $ (1,901       $ 4,306      $ (1,901       $ 2,857      $ 22,030      $ 23,479   
 

 

 

   

 

 

     

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income (loss) per common unit(1):

                               

Basic and diluted(1)

  $ 4.50      $ 10.30        $ 14.30          $ (1.90       $ 4.31      $ (1.90       $ 2.86      $ 22.03      $ 23.48   

Weighted average number of common units(1):

                               

Basic and diluted(1)

    1,000,000        1,000,000          1,000,000            1,000,000            1,000,000        1,000,000            1,000,000        1,000,000        1,000,000   
       

Other Financial Data:

                               

Adjusted
EBITDA(2)

  $ 54,241      $ 65,720        $ 81,955          $ 23,672          $ 59,699      $ 23,672          $ 44,277      $ 83,539      $ 98,961   

Adjusted EBITDA margin(3)

    11.9     13.6       14.6         16.7         14.2     16.7         16.1     17.7     16.0

 

     Successor  

(in thousands)

  

January 30, 2016

    

October 29, 2016
(unaudited)

 

Balance Sheet data (at end of period):

     

Cash

   $ 27,505       $ 4,955   

Net operating assets and liabilities(4)

     3,477         19,749   

Total assets

     582,032         578,468   

Current and non-current portions of long-term debt, net of discount and debt issuance costs

     239,978         277,256   

Total equity

     166,571         118,754   

 



 

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(1) See Note 15 to our audited consolidated financial statements included elsewhere in this prospectus for additional information regarding the calculation of basic and diluted net income (loss) per common unit. As there are no potentially dilutive securities outstanding in any period presented, basic and diluted net income (loss) per common unit is the same in each period.
(2) Adjusted EBITDA represents net income (loss) plus interest expense, provision (benefit) for income taxes, depreciation and amortization, the amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition, certain Acquisition-related expenses, sponsor fees, 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 measure of our comparative operating performance from period to period. Adjusted EBITDA is not a measurement of financial performance under GAAP. It should not be considered an alternative to net income (loss) as a measure of our operating performance or any other measure of performance derived in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Our definition and calculation of Adjusted EBITDA is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation. To address these limitations we reconciled Adjusted EBITDA to the nearest GAAP financial measure, net income (loss).

The following provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:

 

                      Interim Periods        
    Predecessor          

Pro Forma

(unaudited)

         

Predecessor

         

Successor

   

Predecessor

          Successor
(unaudited)
 

(in thousands)

 

For the
Fiscal

Year
Ended
February 2,
2013

   

For the
Fiscal

Year
Ended
February 1,
2014

   

For the
Fiscal

Year
Ended
January 31,
2015

         

For the
Fiscal

Year
Ended
January 30,
2016

         

For the
Period
February 1,
2015 to
May 7,
2015

         

For the
Period
May 8,
2015 to
January 30,
2016

   

For the
Period
February 1,
2015 to
May 7,
2015

         

For the
Period
May 8,
2015 to
October 31,
2015

   

For the
Thirty-

Nine Weeks
Ended
October 29,
2016

   

Twelve
Months
Ended
October 29,
2016

 

Statements of Operations Data:

                                 

Net income (loss)

  $ (3,601   $ 4,498      $ 10,296        $ 14,295          $ (1,901       $ 4,306      $ (1,901       $ 2,857      $ 22,030      $ 23,479   

Interest expense

    19,183        19,064        17,895          16,893            4,599            11,893        4,599            7,922        13,630        17,601   

Provision (benefit) for income
taxes

    (2,583     3,884        10,860          10,223            1,499            2,322        1,499            1,541        12,924        13,705   

Depreciation and amortization

    27,333        22,910        19,051          37,802            5,147            28,702        5,147            20,112        27,282        35,872   

Inventory step-up(a)

    —          —          —            —              —              10,471        —              10,471        —          —     

Acquisition-related expenses(b)

    —          —          —            —              13,341            —          13,341            —          —          —     

Sponsor fees(c)

    1,000        1,000        1,000          —              250            —          250            —          —          —     

Equity-based compensation expense(d)

    417        1,930        5,152          609            441            168        441            119        458        507   

Write-off of property and equipment(e)

    250        386        58          349            112            237        112            48        384        573   

Other non-recurring expenses(f)

    1,914        569        1,408          1,784            184            1,600        184            1,207        6,831        7,224   
 

 

 

   

 

 

   

 

 

     

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 43,913      $ 54,241      $ 65,720        $ 81,955          $ 23,672          $ 59,699      $ 23,672          $ 44,277      $ 83,539      $ 98,961   
 

 

 

   

 

 

   

 

 

     

 

 

       

 

 

       

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net sales

  $ 431,881      $ 456,026      $ 483,400        $ 562,015          $ 141,921          $ 420,094      $ 141,921          $ 274,741      $ 472,139      $ 617,492   

Adjusted EBITDA margin(3)

    10.2     11.9     13.6       14.6         16.7         14.2     16.7         16.1     17.7     16.0

 

  (a) Represents the impact to cost of goods sold resulting from the amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition.
  (b) Represents transaction costs incurred in connection with the Acquisition, consisting substantially of legal and advisory fees, which are not expected to recur.
  (c) Represents management fees charged by our previous equity sponsors.
  (d) Represents expenses associated with equity incentive units granted to our management. Prior to the Acquisition, incentive units were accounted for as a liability-classified award and the related compensation expense was recognized based on changes in the intrinsic value of the award at each reporting period. Subsequent to the Acquisition, new incentive units were granted to management and are accounted for as equity-classified awards with the related compensation expense recognized based on fair value at the date of the grants.
  (e) Represents the net gain or loss on the disposal of fixed assets.
  (f) Represents items management believes are not indicative of ongoing operating performance. These expenses are primarily composed of legal and professional fees associated with non-recurring events. The fiscal year 2012 costs are primarily associated with legal and professional services incurred in connection with the Company having entered into agreements with lenders to amend certain loan agreement covenants. The fiscal year 2014 expenses were primarily related to legal and professional services associated with the Company’s evaluation of a sale of the business. The pro forma fiscal year 2015 expenses are primarily due to legal, accounting, and professional fees incurred in connection with this offering.

 



 

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(3) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by net sales.
(4) Net operating assets and liabilities consist of current assets excluding cash, less current liabilities excluding the current portion of long-term debt.

 



 

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RISK FACTORS

This offering and investing in our common stock involve a high degree of risk. You should carefully consider the risks and uncertainties described below, as well as the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our common stock. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial condition and results of operations. Any of the following risks could adversely affect our business, financial condition and results of operations, in which case the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

Our business is sensitive to economic conditions and consumer spending.

We face numerous business risks relating to macroeconomic factors. The retail industry is cyclical and consumer purchases of discretionary retail items, including our merchandise, generally decline during recessionary periods and other times when disposable income is lower. Factors impacting discretionary consumer spending include general economic conditions, wages and employment, consumer debt, reductions in net worth based on severe market declines, residential real estate and mortgage markets, taxation, volatility of fuel and energy prices, interest rates, consumer confidence, political and economic uncertainty and other macroeconomic factors. Deterioration in economic conditions or increasing unemployment levels may reduce the level of consumer spending and inhibit consumers’ use of credit, which may adversely affect our revenues and profits. In recessionary periods and other periods where disposable income is adversely affected, we may have to increase the number of promotional sales or otherwise dispose of inventory for which we have previously paid to manufacture, which could further adversely affect our profitability. It is difficult to predict when or for how long any of these conditions can affect our business and a prolonged economic downturn could have a material adverse effect on our business, financial condition and results of operations.

Our inability to anticipate and respond to changing customer preferences and shifts in fashion and industry trends in a timely manner could have a material adverse effect on our business, financial condition and results of operations.

Our success largely depends on our ability to consistently gauge tastes and trends and provide a balanced assortment of merchandise that satisfies customer demands in a timely manner. We enter into agreements to manufacture and purchase our merchandise well in advance of the applicable selling season and our failure to anticipate, identify or react appropriately in a timely manner to changes in customer preferences, tastes and trends and economic conditions could lead to, among other things, missed opportunities, excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability and have a material adverse effect on our business, financial condition and results of operations. Failure to respond to changing customer preferences and fashion trends could also negatively impact our brand image with our customers and result in diminished brand loyalty.

Our inability to maintain our brand image, engage new and existing customers and gain market share could have a material adverse effect on our growth strategy and our business, financial condition and results of operations.

Our ability to maintain our brand image and reputation is integral to our business, as well as the implementation of our strategy to grow. Maintaining, promoting and growing our brand will depend largely on the success of our design, merchandising and marketing efforts and our ability to provide a consistent, high-quality customer experience. Our reputation could be jeopardized if we fail to maintain high standards for

 

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merchandise quality and integrity and any negative publicity about these types of concerns may reduce demand for our merchandise. While our brand enjoys a loyal customer base, the success of our growth strategy depends, in part, on our ability to keep existing customers engaged as well as attract new customers to shop our brand. If we experience damage to our reputation or loss of consumer confidence, we may not be able to retain existing customers or acquire new customers, which could have a material adverse effect on our business, financial condition and results of operations.

Our inability to manage our inventory levels and merchandise mix, including with respect to our omni-channel retail operations, could have a material adverse effect on our business, financial condition and results of operations.

Customer demand is difficult to predict and the lead times required for a substantial portion of our merchandise make it challenging to respond quickly to changes. Though we have the ability to source certain merchandise categories with shorter lead times, we generally enter into contracts for a substantial portion of our merchandise well in advance of the applicable selling season. Our business, financial condition and results of operations could be materially adversely affected if we are unable to manage inventory levels and merchandise mix and respond to changes in customer demand patterns. Inventory levels in excess of customer demand may result in lower than planned profitability. On the other hand, if we underestimate demand for our merchandise, we may experience inventory shortages resulting in missed sales and lost revenues. Either of these events could significantly affect our operating results and brand image and loyalty. Our profitability may also be impacted by changes in our merchandise mix and changes in our pricing. These changes could have a material adverse effect on our business, financial condition and results of operations.

In addition, our omni-channel operations create additional complexities in our ability to manage inventory levels, as well as certain operational issues in stores and on our website, including timely shipping and returns. Accordingly, our success depends to a large degree on continually evolving the processes and technology that enable us to plan and manage inventory levels and fulfill orders, address any related operational issues in store and on our website and further align channels to optimize our omni-channel operations. If we are unable to successfully manage these complexities, it may have a material adverse effect on our business, financial condition and results of operations.

Competitive pressures from other retailers as well as adverse structural developments in the retail sector may have a material adverse effect on our business, financial condition and results of operations.

The women’s apparel industry is highly competitive. We compete with local, national and international retail chains and department stores, specialty and discount stores, catalogs and internet businesses offering similar categories of merchandise. We face a variety of competitive challenges, including price pressure, anticipating and quickly responding to changing customer demands or preferences, maintaining favorable brand recognition and effectively marketing our merchandise to our customers in diverse demographic markets, sourcing merchandise efficiently and developing merchandise assortments in styles that appeal to our customers in ways that favorably distinguish us from our competitors. In addition, the internet and other new technologies facilitate competitive entry and comparison shopping. We strive to offer an omni-channel shopping experience for our customers that enhances their shopping experiences. Omni-channel retailing is constantly evolving and we must keep pace with changing customer expectations and new developments by our competitors. Furthermore, many of our competitors have advantages over us, including substantially greater financial, marketing and other resources. Increased levels of promotional activity by our competitors, some of whom may be able to adopt more aggressive pricing policies than we can, both on our website and in stores, may negatively impact our sales and profitability. There can be no assurances that we will be able to compete successfully with these companies in the future. In addition to competing for sales, we compete for favorable store locations, lease terms and qualified sales associates and professional staff. Increased competition in these areas may result in higher costs and reduced profitability, which could have a material adverse effect on our business, financial condition and results of operations.

 

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We may be unable to accurately forecast our operating results and growth rate, which may adversely affect our reported results.

We may not be able to accurately forecast our operating results and growth rate. We use a variety of factors in our forecasting and planning processes, including historical results, recent history and assessments of economic and market conditions, among other things. The growth rates in sales and profitability that we have experienced historically may not be sustainable as our active customer base expands and we achieve higher market penetration rates, and our percentage growth rates may decrease. The growth of our sales and profitability depends on the continued growth of demand for the merchandise we offer. A softening of demand, whether caused by changes in customer preferences or a weakening of the economy or other factors, may result in decreased net sales or growth. Furthermore, many of our expenses and investments are fixed, and we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our net sales results. Failure to accurately forecast our operating results and growth rate could cause our actual results to be materially lower than anticipated, and if our growth rates decline as a result, investors’ perceptions of our business may be adversely affected, and the market price of our common stock could decline.

Our inability to successfully optimize our omni-channel operations and maintain a relevant and reliable omni-channel experience for our customers could have an adverse effect on our growth strategy and our business, financial condition and results of operations.

Growing our business through our omni-channel operations is key to our growth strategy. Our goal is to offer our customers seamless access to our merchandise across our channels, including both our direct and retail channels. Accordingly, our success depends on our ability to anticipate and implement innovations in sales and marketing strategies to appeal to existing and potential customers who increasingly rely on multiple channels, such as E-commerce, to meet their shopping needs. Failure to enhance our technology and marketing efforts to align with our customers’ developing shopping preferences could significantly impair our ability to meet our strategic business and financial goals. If we do not successfully optimize our omni-channel operations or if they do not achieve their intended objectives, it could have a material adverse effect on our business, financial condition and results of operations.

We depend on our E-commerce business and failure to successfully manage this business and deliver a seamless omni-channel shopping experience to our customers could have an adverse effect on our growth strategy and our business, financial condition and results of operations.

Sales through our direct channel, of which our E-commerce business constitutes the vast majority, accounted for approximately 42% of our total net sales for the twelve months ended October 29, 2016. Our business, financial condition and results of operations are dependent on maintaining our E-commerce business and expanding this business is an important part of our strategy to grow through our omni-channel operations. Dependence on our E-commerce business and the continued growth of our direct and retail channels subjects us to certain risks, including:

 

    the failure to successfully implement new systems, system enhancements and internet platforms;

 

    the failure of our technology infrastructure or the computer systems that operate our website and their related support systems, causing, among other things, website downtimes, telecommunications issues or other technical failures;

 

    the reliance on third-party computer hardware/software providers;

 

    rapid technological change;

 

    liability for online content;

 

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    violations of federal, state, foreign or other applicable laws, including those relating to data protection;

 

    credit card fraud;

 

    cyber security and vulnerability to electronic break-ins and other similar disruptions; and

 

    diversion of traffic and sales from our stores.

Our failure to successfully address and respond to these risks and uncertainties could negatively impact sales, increase costs, diminish our growth prospects and damage the reputation of our brand, each of which could have a material adverse effect on our business, financial condition and results of operations.

Our business depends on effective marketing and increasing customer traffic and the success of our direct channel depends on customers’ use of our website and response to catalogs and digital marketing.

We have many initiatives in our marketing programs. If our competitors increase their spending on marketing, if our marketing expenses increase, if our marketing becomes less effective than that of our competitors, or if we do not adequately leverage technology and data analytics needed to generate concise competitive insight, we could experience a material adverse effect on our business, financial condition and results of operations. A failure to sufficiently innovate or maintain adequate and effective marketing strategies could inhibit our ability to maintain brand relevance and increase sales.

In particular, the level of customer traffic and volume of customer purchases through our direct channel, which accounted for approximately 42% of our net sales for the twelve months ended October 29, 2016, is substantially dependent on our ability to provide a content-rich and user-friendly website, widely distributed and informative catalogs, a fun, easy and hassle-free customer experience and reliable delivery of our merchandise. If we are unable to maintain and increase customers’ use of our E-commerce platform, and the volume of purchases declines, our business, financial condition and results of operations could be adversely affected.

Customer response to our catalogs and digital marketing is substantially dependent on merchandise assortment, merchandise availability and creative presentation, as well as the selection of customers to whom our catalogs are sent and to whom our digital marketing is directed, changes in mailing strategies and the size of our mailings. Our maintenance of a robust customer database has also been a key component of our overall strategy. If the performance of our website, catalogs and email declines, or if our overall marketing strategy is not successful, it could have a material adverse effect on our business, financial condition and results of operations.

We occupy our stores under long-term leases, which are subject to future increases in occupancy costs and which we may be unable to renew or may limit our flexibility to move to new locations.

We lease all of our store locations, our corporate headquarters and our distribution and customer contact center. We typically occupy our stores under operating leases with terms of up to ten years, which may include options to renew for additional multi-year periods thereafter. We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially harm our business. In the future, we may not be able to negotiate favorable lease terms. Our inability to do so may cause our occupancy costs to be higher in future years or may force us to close stores in desirable locations. If we are unable to renew our store leases, we may be forced to close or relocate a store, which could subject us to significant construction and other costs. Closing a store, for even a brief period to permit relocation, would reduce the revenue contribution of that store. Additionally, the revenue and profit, if any, generated at a relocated store may not equal the revenue and profit generated at the previous location.

 

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Long-term leases can limit our flexibility to move a store to a new location. Some of our leases have early cancellation clauses, which permit the lease to be terminated if certain sales levels are not met in specific periods, whereas some of our leases are non-cancelable. If an existing or future store is not profitable, and we have the right to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could have a material adverse effect on our business, financial condition and results of operations.

Our growth strategy depends in part on our ability to open and operate new retail stores on a profitable basis and if we are not successful in implementing future retail store expansion, or if such new stores would negatively impact sales from our existing stores or from our direct channel, our growth and profitability could be adversely impacted.

Our growth strategy depends in part on our ability to open and operate new retail stores on a profitable basis. We may be unable to identify and open new retail locations in desirable places in the future. We compete with other retailers and businesses for suitable retail locations. Local land use, local zoning issues, environmental regulations, governmental permits and approvals and other regulations may affect our ability to find suitable retail locations and also influence the cost of leasing them. We also may have difficulty negotiating real estate leases for new stores on acceptable terms. In addition, construction, environmental, zoning and real estate delays may negatively affect retail location openings and increase costs and capital expenditures. If we are unable to open new retail store locations in desirable places and on favorable terms, our net sales and profits could be materially adversely affected.

As we expand our store base, our lease expense and our cash outlays for rent under the lease terms will increase. Such growth will require that we continue to expand and improve our operating capabilities, including making investments in our information technology and operational infrastructure, and expand, train and manage our employee base, and we may be unable to do so. We primarily rely on cash flow generated from our operations to pay our lease expenses and to fund our growth initiatives. It requires a significant investment to open a new retail store. If we open a large number of stores relatively close in time, the cost of these retail store openings and lease expenses and the cost of continuing operations could reduce our cash position. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not have sufficient cash available to address other aspects of our business or we may be unable to service our lease expenses, which could materially harm our business.

As we increase the number of retail stores, our stores may become more highly concentrated in geographic regions we already serve. As a result, the number of customers and related net sales at individual stores may decline and the payback period may be increased. The growth in the number of our retail stores could also draw customers away from our direct business and if our competitors open stores with similar formats, our retail store format may become less unique and may be less attractive to customers as a shopping destination. If either of these events occurs, our business, financial condition and results of operations could be materially adversely affected.

There can be no assurances that we will be able to achieve our store expansion goals, nor can there be any assurances that our newly opened stores will achieve revenue or profitability levels comparable to those of our existing stores in the time periods estimated by us. In addition, the substantial management time and resources which our retail store expansion strategy requires may result in disruption to our existing business operations which may decrease our profitability. If our stores fail to achieve, or are unable to sustain, acceptable revenue, profitability and cash flow levels, we may incur store asset impairment charges, significant costs associated with closing those stores or both, which could have a material adverse effect on our business, financial condition and results of operations.

 

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We rely on third-party service providers, such as Federal Express and the U.S. Postal Service, for the delivery of our merchandise and our catalogs.

We primarily utilize Federal Express to support retail store shipping. We also use the U.S. Postal Service to deliver millions of catalogs each year, and we depend on third parties to print and mail our catalogs. As a result, postal rate increases and paper and printing costs will affect the cost of our catalog and promotional mailings. We rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting. The operational and financial difficulties of the U.S. Postal Service are well documented. Any significant and unanticipated increase in postage, shipping costs, reduction in service, slow-down in delivery or increase in paper and printing costs could impair our ability to deliver merchandise and catalogs in a timely or economically efficient manner and could adversely impact our profitability if we are unable to pass such increases directly on to our customers or if we are unable to implement more efficient delivery and order fulfillment systems, all of which could have a material adverse effect on our business, financial condition and results of operations.

Competitive pricing pressures with respect to shipping our merchandise to our customers may harm our business and results of operations.

Historically, the shipping and handling fees we charge our direct customers are intended to recover the related shipping and handling expenses. Online and omni-channel retailers are increasing their focus on delivery services, as customers are increasingly seeking faster, guaranteed delivery times and low-price or free shipping. To remain competitive, we may be required to offer discounted, free or other more competitive shipping options to our customers, which may result in declines in our shipping and handling fees and increased shipping and handling expense. Declines in the shipping and handling fees that we generate may have a material adverse effect on our profitability to the extent that our shipping and handling expense is not declining proportionally, or if our shipping and handling expense would increase, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to payment-related risks.

We accept payments using a variety of methods, including credit cards, debit cards, gift cards, cash and bank checks. For existing and future payment methods we offer to our customers, we may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in increased costs and reduce the ease of use of certain payment methods), as well as fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time, thereby raising our operating costs and lowering profitability. We rely on third-party service providers for payment processing services, including the processing of credit and debit cards. In each case, it could disrupt our business if these third-party service providers become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ and others’ costs, subject to fines and higher transaction fees and/or lose our ability to accept credit and debit card payments from our customers and process electronic funds transfers or facilitate other types of payments. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.

On October 1, 2015, under payment card industry standards, liability shifted for certain debit and credit card transactions to retailers who do not accept Europay, MasterCard and Visa (“EMV”) chip technology transactions. Until we complete the implementation of EMV chip technology in our stores, we may be liable for chargebacks related to counterfeit transactions generated through EMV chip enabled cards, which could have a material adverse effect on our business, financial condition and results of operations. Further, we may experience a decrease in transaction volume if we cannot process transactions for cardholders whose issuer has migrated entirely from magnetic strip to EMV chip enabled cards.

 

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If we fail to acquire new customers in a cost-effective manner, it could have an adverse impact on our growth strategy as we may not be able to increase net revenue or profit per active customer.

The success of our growth strategy depends in part on our ability to acquire new customers in a cost-effective manner. In order to expand our active customer base, we must appeal to and acquire customers who identify with our brand. We have made significant investments related to customer acquisition and expect to continue to spend significant amounts to acquire additional customers. As our brand becomes more widely known in the market, future marketing campaigns may not result in the acquisition of new customers at the same rate as past campaigns. There can be no assurances that the revenue from new customers we acquire will ultimately exceed the cost of acquiring those customers.

We use paid and non-paid advertising. Our paid advertising includes catalogs, paid search engine marketing, email, display and other advertising. Our non-paid advertising efforts include search engine optimization and social media. We obtain a significant amount of traffic via search engines and, therefore, rely on search engines such as Google, Yahoo! and Bing. Search engines frequently update and change the logic that determines the placement and display of results of a user’s search, such that the purchased or algorithmic placement of links to our site can be negatively affected. A major search engine could change its algorithms in a manner that negatively affects our paid or non-paid search ranking, and competitive dynamics could impact the effectiveness of search engine marketing or search engine optimization. We also obtain traffic via social networking websites or other channels used by our current and prospective customers. As E-commerce and social networking continue to rapidly evolve, we must continue to establish relationships with these channels and may be unable to develop or maintain these relationships on acceptable terms. Additionally, digital advertising costs may continue to rise and as our usage of these channels expands, such costs may impact our ability to acquire new customers in a cost-effective manner. If the level of usage of these channels by our active customer base does not grow as expected, we may suffer a decline in customer growth or net sales. If we are unable to acquire new customers in a cost-effective manner, it could have a material adverse effect on our business, financial condition and results of operations.

Interruptions in our foreign sourcing operations and the relationships with our suppliers and agents could disrupt production, shipment or receipt of our merchandise, which would result in lost sales and increased costs.

We do not own or operate any manufacturing facilities and therefore depend upon independent third-party suppliers for the manufacturing of all of our merchandise, primarily through the use of agents. In pro forma fiscal year 2015, approximately 81% of our products were sourced through agents and 19% were sourced directly from suppliers and factories. Our merchandise is manufactured to our specifications primarily by factories outside of the United States. Some of the factors that might affect a supplier’s ability to ship orders of our merchandise in a timely manner or to meet our quality standards are outside of our control, including inclement weather, natural disasters, political and financial instability, legal and regulatory developments, strikes, health concerns regarding infectious diseases, and acts of terrorism. Inadequate labor conditions, health or safety issues in the factories where goods are produced can negatively impact our brand’s reputation. Late delivery of merchandise or delivery of merchandise that does not meet our quality standards could cause us to miss the delivery date requirements of our customers or delay timely delivery of merchandise to our stores for those items. These events could cause us to fail to meet customer expectations, cause our customers to cancel orders or cause us to be unable to deliver merchandise in sufficient quantities or of sufficient quality to our stores, which could result in lost sales.

We have no long-term merchandise supply contracts as we typically transact business on an order-by-order basis. If we are unable to maintain the relationships with our suppliers and agents and are unexpectedly required to change suppliers or agents, or if a key supplier or agent is unable or unwilling to supply acceptable merchandise in sufficient quantities on acceptable terms, we could experience a significant disruption in the supply of merchandise. We could also experience operational difficulties with our suppliers, such as reductions in the availability of production capacity, supply chain disruptions, errors in complying with merchandise

 

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specifications, insufficient quality control, shortages of fabrics or other raw materials, failures to meet production deadlines or increases in manufacturing costs.

We source our imported merchandise from eight countries including China, India, the Philippines, Indonesia and Vietnam. Approximately 75% of our products were sourced in Asia in pro forma fiscal year 2015. Any event causing a sudden disruption of manufacturing or imports from Asia or elsewhere, including the imposition of additional import restrictions, could materially harm our operations. Many of our imports are subject to existing or potential duties, tariffs or quotas that may limit the quantity of certain types of goods that may be imported into the United States from countries in Asia or elsewhere. We compete with other companies for production facilities and import quota capacity. While substantially all of our foreign purchases of our merchandise are negotiated and paid for in U.S. dollars, the cost of our merchandise may be affected by fluctuations in the value of relevant foreign currencies.

In addition, we are engaging in growing the amount of production carried out in other developing countries. These countries may present other risks with regard to infrastructure available to support manufacturing, labor and employee relations, political and economic stability, corruption, regulatory, environmental, health and safety compliance. While we endeavor to monitor and audit facilities where our production is done, any significant events with factories we use can adversely impact our reputation, brand and product delivery.

Furthermore, many of our suppliers rely on working capital financing to support their operations. To the extent any of our suppliers are unable to obtain adequate credit or their borrowing costs increase, we may experience delays in obtaining merchandise, our suppliers increasing their prices or our suppliers modifying payment terms in a manner that is unfavorable to us.

The failure of our suppliers to comply with our social compliance program requirements could have a material adverse effect on our reputation, business, financial condition and results of operations.

We require our third-party suppliers to comply with all applicable laws and regulations, as well as our Terms of Engagement-Commitment to Ethical Sourcing, which cover many areas, including labor, health, safety, environmental and other legal standards. We monitor compliance with these standards using third-party monitoring firms. Although we have an active program to provide training for our third-party suppliers and monitor their compliance with these standards, we do not control the suppliers or their practices. Any failure of our third-party suppliers to comply with our ethical sourcing standards or labor or other local laws in the country of manufacture, or the divergence of a third-party supplier’s labor practices from those generally accepted as ethical in the United States, could disrupt the shipment of merchandise to our stores, force us to locate alternative manufacturing sources, reduce demand for our merchandise, damage our reputation and/or expose us to potential liability for their wrongdoings. Any of these events could have a material adverse effect on our reputation, business, financial condition and results of operations.

We rely on third parties to provide services in connection with certain aspects of our business, and any failure by these third parties to perform their obligations could have an adverse effect on our business, financial condition and results of operations.

We have entered into agreements with third parties that include, but are not limited to, logistics services, information technology systems (including hosting our website), servicing certain customer calls, software development and support, catalog production, select marketing services, distribution and employee benefits servicing. Services provided by third-party suppliers could be interrupted as a result of many factors, such as acts of nature or contract disputes. Any failure by a third party to provide services for which we have contracted on a timely basis or within expected service level and performance standards could result in a disruption of our business and have an adverse effect on our business, financial condition and results of operations.

 

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Increases in the demand for, or the price of, cotton and other raw materials used to manufacture our merchandise or other fluctuations in sourcing or distribution costs could increase our costs and negatively impact our profitability.

We believe that we have strong supplier relationships, and we work continuously with our suppliers to manage cost increases. Our overall profitability depends, in part, on the success of our ability to mitigate rising costs or shortages of raw materials used to manufacture our merchandise. Cotton and other raw materials used to manufacture our merchandise are subject to availability constraints and price volatility impacted by a number of factors, including supply and demand for fabrics, weather, government regulations, economic climate and other unpredictable factors. In addition, our sourcing costs may fluctuate due to labor conditions, transportation or freight costs, energy prices, currency fluctuations or other unpredictable factors. The cost of labor at many of our third-party suppliers has been increasing in recent years, and we believe it is unlikely that such cost pressures will abate.

Most of our merchandise is shipped from our suppliers by ocean vessel. If a disruption occurs in the operation of ports through which our merchandise is imported, we may incur increased costs related to air freight or use of alternative ports. Shipping by air is significantly more expensive than shipping by ocean and our margins and profitability could be reduced. Shipping to alternative ports could also lead to delays in receipt of our merchandise. We rely on third-party shipping companies to deliver our merchandise to us. Failures by these shipping companies to deliver our merchandise to us or lack of capacity in the shipping industry could lead to delays in receipt of our merchandise or increased expense in the delivery of our merchandise. Any of these developments could have a material adverse effect on our business, financial condition and results of operations.

Reductions in the volume of mall traffic or the closing of shopping malls as a result of changing economic conditions or demographic patterns could significantly reduce our sales and leave us with unsold inventory.

A significant portion of our stores are currently located in shopping malls. Sales at stores located in malls are highly dependent on the traffic in those malls and the ability of developers to generate traffic near our stores. In recent years, there has been increased purchasing of merchandise online. This has adversely affected mall traffic. A continuation of this trend could adversely impact the sales generated by our mall stores, which could have a material adverse effect on our business, financial condition and results of operations.

Unseasonal or severe weather conditions may adversely affect our merchandise sales.

Our business is adversely affected by unseasonal weather conditions. Sales of certain seasonal apparel items are dependent in part on the weather and may decline when weather conditions do not favor the use of this apparel. Severe weather events may also impact our ability to supply our retail stores, deliver orders to customers on schedule and staff our retail stores and distribution and customer contact center, which could have a material adverse effect on our business, financial condition and results of operations.

Material damage to, or interruptions in, our information systems could have a material adverse effect on our business, financial condition and results of operations, and we may be exposed to risks and costs associated with protecting the integrity and security of our customers’ information.

We depend largely upon our information technology systems in the conduct of all aspects of our operations, including to operate our website, process transactions, respond to customer inquiries, manage inventory, purchase, sell and ship goods on a timely basis and maintain cost-efficient operations. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural disasters. Damage or interruption to our information technology systems may require a significant investment to fix or replace the affected system, and we may suffer interruptions in our operations in the interim. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations.

 

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Additionally, a significant number of customer purchases across our omni-channel platform are made using credit cards, and a significant number of our customer orders are placed through our website. We process, store and transmit large amounts of data, including personal information, for our customers. From time to time, we may implement strategic initiatives related to elevating our customer service experience, such as customer membership programs, where we collect and maintain increasing amounts of customer data. We also handle and transmit sensitive information about our suppliers and workforce, including social security numbers, bank account information and health and medical information. We depend in part throughout our operations on the secure transmission of confidential information over public networks. In addition, security breaches can also occur as a result of non-technical issues, including vandalism, catastrophic events and human error. Our operations may further be impacted by security breaches that occur at third-party suppliers. Although we maintain cyber-security insurance, there can be no assurances that our insurance coverage will be sufficient, or that insurance proceeds will be paid to us in a timely manner.

States and the federal government have enacted additional laws and regulations to protect consumers against identity theft, including laws governing treatment of personally identifiable information. As the data privacy and security laws and regulations evolve, we may be subject to more extensive requirements to protect the customer information that we process in connection with the purchases of our merchandise. There can be no assurances that we will be able to operate our operations in accordance with Payment Card Industry Data Security Standards (PCI DSS), other industry recommended practices or applicable laws and regulations or any future security standards or regulations, or that meeting those standards will in fact prevent a data breach. These laws have increased the costs of doing business and, if we fail to implement appropriate safeguards or we fail to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies.

If a third party is able to circumvent our security measures, they could destroy or steal valuable information or disrupt our operations. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could expose us to risks of data loss, fines, litigation and liability and could seriously disrupt our operations and harm our reputation. In addition, we could be required to expend significant resources to change our business practices or modify our service offerings in connection with the protection of personally identifiable information, which could have a material adverse effect on our business, financial condition and results of operations.

The impact of privacy breaches at service providers could also severely damage our business and reputation.

We rely heavily on technology services provided by third parties for the successful operation of our business, including electronic messaging, digital marketing efforts and the collection and retention of customer data and associate information. We also rely on third parties to process credit card transactions, perform E-commerce and social media activities and retain data relating to our financial position and results of operations, strategic initiatives and other important information. The facilities and systems of our third-party service providers may be vulnerable to cyber-security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any actual or perceived misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information by our third-party service providers could severely damage our reputation and our relationship with our customers, associates and investors as well as expose us to risks of litigation, liability or other penalties, all of which could have a material adverse effect on our business, financial condition and results of operations.

Our failure to comply with data protection laws and regulations could subject us to sanctions and damages and could harm our reputation and business.

We collect and process personal data as part of our business. As a result, we are subject to U.S. data protection laws and regulations at both the federal and state levels. The legislative and regulatory landscape for data protection continues to evolve, and in recent years there has been an increasing focus on privacy and data

 

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security issues. The strategic use of our customer data base, including interactions with our customers, marketing efforts and analysis of customer behavior, rely on the collection, retention and use of customer data and may be affected by these laws and regulations and their interpretation and enforcement. Alleged violations of laws, regulations or contractual obligations relating to privacy and data protection, and any relevant claims, may expose us to potential liability, require us to expend significant resources in responding to and defending such allegations and claims, and result in negative publicity and a loss of confidence in us by our customers, all of which could have an adverse effect on our business, financial condition and results of operations. Further, it is unclear how the laws and regulations relating to the collection, process and use of personal data will further develop in the United States, and to what extent this may affect our operations in the future. Any failure to comply with data protection laws and regulations, or future changes required to the way in which we use personal data, could have a material adverse effect on our business, financial condition and results of operations.

Increased usage of social media poses reputational risks.

As use of social media becomes more prevalent, our susceptibility to risks related to social media increases. The immediacy of social media precludes us from having real-time control over postings made regarding us via social media, whether matters of fact or opinion. Information distributed via social media could result in immediate unfavorable publicity for which we, like our competitors, do not have the ability to reverse. This unfavorable publicity could result in damage to our reputation and therefore have a material adverse effect on our business, financial condition and results of operations.

We depend on our executive management and key personnel and may not be able to retain or replace these employees or recruit additional qualified personnel, which could harm our business.

We believe that we have benefited substantially from the leadership and experience of our senior executives, including our President and Chief Executive Officer, Paula Bennett. The loss of the services of any of our senior executives could have a material adverse effect on our business, financial condition and results of operations, as we may not be able to find suitable management personnel to replace departing executives on a timely basis. In addition, as our business expands, we believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for personnel in the retail industry. Our inability to meet our staffing requirements in the future could impair our ability to increase revenue and could otherwise harm our business.

Our failure to find store employees that reflect our brand image and embody our culture could adversely affect our business, financial condition and results of operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of store employees, including store managers, who understand and appreciate our culture and customers, and are able to adequately and effectively represent this culture and establish credibility with our customers. The store employee turnover rate in the retail industry is generally high. Labor shortages and excessive store employee turnover will result in higher employee costs associated with finding, hiring and training new store employees. If we are unable to hire and retain store personnel capable of consistently providing a high level of customer service, our ability to open new stores and operate existing stores may be impaired and our performance and brand image may be negatively impacted. Competition for such qualified individuals and wage increases by other retailers could require us to pay higher wages to attract a sufficient number of employees. We are also dependent upon temporary personnel to adequately staff our stores and distribution and customer contact center, with heightened dependence during busy periods such as the holiday season. There can be no assurances that there will be sufficient sources of suitable temporary personnel to meet our demand. Any such failure to meet our staffing needs or any material increases in employee turnover rates could have a material adverse effect on our business, financial condition and results of operations.

 

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Labor organizing and other activities could negatively impact us.

Currently, none of our employees are represented by a union. However, our employees have the right at any time to form or affiliate with a union. Such organizing activities could lead to work slowdowns or stoppages, which could lead to disruption in our operations and increases in our labor costs, either of which could materially adversely affect our business, financial condition and results of operations.

Increases in labor costs, including wages, could adversely affect our business, financial condition and results of operations.

The labor costs associated with our retail stores and our distribution and customer contact center are subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. From time to time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in a number of individual states and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. Any increase in the cost of our labor could have an adverse effect on our business, financial condition and results of operations or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs could force us to increase prices, which could adversely impact our sales. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline and could have a material adverse effect on our business, financial condition and results of operations.

We could be materially and adversely affected if our distribution and customer contact center is damaged or closed or if its operations are diminished.

Our distribution and customer contact center is located in in Tilton, New Hampshire. The distribution center manages the receipt, storage, sorting, packing and distribution of merchandise to our stores and to our direct customers. Independent third-party transportation companies then deliver merchandise from the distribution center to our stores or direct to our customers. The customer contact center handles all customer interactions, other than those in retail stores, including phone sales orders and service calls, emails and internet contacts. Any significant interruption in the operations of our Tilton distribution and customer contact center, our third-party distribution, fulfillment or transportation providers, for any reason, including natural disasters, accidents, inclement weather, technology system failures, work stoppages, slowdowns or strikes or other unforeseen events and circumstances, could delay or impair our ability to receive orders and to distribute merchandise to our stores and/or our customers. This could lead to inventory issues, increased costs, lower sales and a loss of loyalty to our brand, among other things, which could adversely affect our business, financial condition and results of operations.

Inventory shrinkage could have a material adverse effect on our business, financial condition and results of operations.

We are subject to the risk of inventory loss and theft. Although our inventory shrinkage rates have not been material, or fluctuated significantly in recent years, there can be no assurances that actual rates of inventory loss and theft in the future will be within our estimates or that the measures we are taking will effectively reduce inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, it could have a material adverse effect on our business, financial condition and results of operations.

 

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We may be unable to protect our trademarks and other intellectual property rights.

We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and service marks. We are not aware of any valid claims of infringement or challenges to our right to use any of our trademarks and service marks. Nevertheless, there can be no assurances that the actions we have taken to establish and protect our trademarks and service marks will be adequate to prevent imitation of our merchandise by others or to prevent others from seeking to block sales of our merchandise as a violation of the trademarks, service marks and intellectual property of others. Also, others may assert rights in, or ownership of, our trademarks and other intellectual property and we may not be able to successfully resolve these types of conflicts to our satisfaction.

We may be subject to liability if we infringe upon the intellectual property rights of third parties.

Third parties may sue us for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend against such litigation. If the party claiming infringement were to prevail, we could be forced to discontinue the use of the related trademark or design and/or pay significant damages or enter into expensive royalty or licensing arrangements with the prevailing party, assuming these royalty or licensing arrangements are available at all on an economically feasible basis, which they may not be. We could also be required to pay substantial damages. Such infringement claims could harm our brand. In addition, any payments we are required to make and any injunction we are required to comply with as a result of such infringement could have a material adverse effect on our business, financial condition and results of operations.

We are subject to laws and regulations in the jurisdictions in which we operate and changes to the regulatory environment in which we operate or failure to comply with applicable laws and regulations could adversely affect our business, financial condition and results of operations.

Our business requires compliance with many laws and regulations in the United States and abroad, including, without limitation, labor and employment, tax, environmental, privacy, anti-bribery laws and regulations, trade laws and customs, truth-in-advertising, E-commerce, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. In addition, in the future, there may be new legal or regulatory requirements or more stringent interpretations of applicable requirements, which could increase the complexity of the regulatory environment in which we operate and the related cost of compliance. While it is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to ensure such compliance, failure to achieve compliance could subject us to lawsuits and other proceedings, and could also lead to damage awards, fines and penalties. Litigation matters may include, among other things, government and agency investigations, employment, commercial, intellectual property, tort, advertising and, after this offering, stockholder claims. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies. The outcome of some of these legal proceedings, audits and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations or require us to pay substantial amounts of money adversely affecting our business, financial condition and results of operations. Even a claim of an alleged violation of applicable laws or regulations could negatively affect our reputation. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in substantial costs and diversion of management’s attention and resources, causing a material adverse effect on our business, financial condition and results of operations. Any pending or future legal proceedings and audits could have a material adverse effect on our business, financial condition and results of operations.

 

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Changes in tax laws and regulations or in our operations may impact our effective tax rate and may adversely affect our business, financial condition and operating results.

Changes in tax laws in any of the multiple jurisdictions in which we operate, or adverse outcomes from tax audits that we may be subject to in any of the jurisdictions in which we operate, could result in an unfavorable change in our effective tax rate, which could adversely affect our business, financial condition and operating results.

Additionally, results of the November 2016 U.S. elections have introduced greater uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the U.S. and other countries. We source the majority of our merchandise from manufacturers located outside of the U.S., including a significant amount from Asia. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.

War, terrorism, civil unrest or other violence may negatively impact availability of merchandise and/or otherwise adversely impact our business.

In the event of war, terrorism, civil unrest or other violence, our ability to obtain merchandise available for sale in our stores or on our websites may be negatively impacted. A substantial portion of our merchandise is imported from other countries, see “—Interruptions in our foreign sourcing operations and the relationships with our suppliers and agents could disrupt production, shipment or receipt of our merchandise, which would result in lost sales and could increase our costs.” If commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution and customer contact center and stores, as well as fulfilling catalog and website orders. In addition, our stores are located in public areas where large numbers of people typically gather. Terrorist attacks, threats of terrorist attacks or civil unrest involving public areas could cause people not to visit areas where our stores are located. Other types of violence in malls or in other public areas could lead to lower customer traffic in areas in which we operate stores. If any of these events were to occur, we may be required to suspend operations in some or all of our stores, which could have a material adverse effect on our business, financial condition and results of operations.

The terms of our term loan credit agreement and asset-based revolving credit facility restrict our operational and financial flexibility, which could adversely affect our ability to respond to changes in our business and to manage our operations.

Our Term Loan and our ABL Facility (together with the Term Loan, the “Credit Agreements”), contain, and any additional debt financing we may incur would likely contain, covenants that restrict our operations, including limitations on our ability to grant liens, incur additional debt, pay dividends, cause our subsidiaries to pay dividends to us, make certain investments and engage in certain merger, consolidation or asset sale transactions. A failure by us to comply with the covenants or financial ratios contained in our Credit Agreements could result in an event of default, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in our Credit Agreements. If the indebtedness under our Credit Agreements were to be accelerated, our future financial condition could be materially adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

Changes to estimates related to our property, fixtures and equipment or operating results that are lower than our current estimates at certain store locations may cause us to incur impairment charges on certain long-lived assets, which may adversely affect our results of operations.

In accordance with accounting guidance as it relates to the impairment of long-lived assets, we make certain estimates and projections with regard to individual store operations, as well as our overall performance, in

 

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connection with our impairment analyses for long-lived assets. When impairment triggers are deemed to exist for any location, the estimated undiscounted future cash flows are compared to its carrying value. If the carrying value exceeds the undiscounted cash flows, an impairment charge equal to the difference between the carrying value and the fair value is recorded. The projections of future cash flows used in these analyses require the use of judgment and a number of estimates and projections of future operating results. If actual results differ from our estimates, additional charges for asset impairments may be required in the future. If future impairment charges are significant, our reported operating results would be adversely affected.

Goodwill and identifiable intangible assets represent a significant portion of our total assets and any impairment of these assets could adversely affect our results of operations.

Our goodwill and indefinite-lived intangible assets, which consist of goodwill from the Acquisition, and our trade name, represented a significant portion of our total assets as of January 30, 2016. Accounting rules require the evaluation of our goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Such indicators are based on market conditions and the operational performance of our business.

To test goodwill for impairment, we may initially use a qualitative approach to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If our management concludes, based on its assessment of relevant events, facts and circumstances that it is more likely than not that a reporting unit’s carrying value is greater than its fair value, then a quantitative analysis will be performed to determine if there is any impairment. We may also elect to initially perform a quantitative analysis, which is a two-step assessment. In step one we estimate the reporting unit’s fair value by estimating the future cash flows of the reporting units to which the goodwill relates, and then discount the future cash flows at a market-participant-derived weighted average cost of capital. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. If the carrying value of a reporting unit exceeds its estimated fair value in the first step, a second step is performed. Step two compares the implied fair value of goodwill to the carrying amount of goodwill. The implied fair value of goodwill is determined by a hypothetical purchase price allocation using the reporting unit’s fair value as the purchase price. If the implied fair value of the goodwill is less than the reporting unit’s carrying amount, then goodwill is impaired and is written down to the implied fair value amount.

To test our other indefinite-lived assets for impairment, which consists of our trade name, we determine the fair value of our trade name using the relief-from-royalty method, which estimates the present value of royalty income that could be hypothetically earned by licensing the brand name to a third party over the remaining useful life. If in conducting an impairment evaluation we determine that the carrying value of an asset exceeded its fair value, we would be required to record a non-cash impairment charge for the difference between the carrying value and the fair value of the asset. If a significant amount of our goodwill and identifiable intangible assets were deemed to be impaired, our business, financial condition and results of operations could be materially adversely affected.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, business combinations, impairment of goodwill, indefinite-lived intangible assets and long-lived assets, inventory and equity-based compensation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial performance or financial condition.

 

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Changes in lease accounting standards may materially and adversely affect us.

The Financial Accounting Standards Board, or FASB, recently adopted new accounting rules, to be effective for our fiscal year beginning after December 2018 that will require companies to capitalize all leases on their balance sheets by recognizing a lessee’s rights and obligations. When the rules are effective, we will be required to account for the leases for stores as assets and liabilities on our balance sheet, where previously we accounted for such leases on an “off balance sheet” basis. As a result, a significant amount of lease related assets and liabilities will be recorded on our balance sheet and we may be required to make other changes to the recording and classification of our lease related expenses. Though these changes will not have any direct impact on our overall financial condition, these changes could cause investors or others to believe that we are highly leveraged and could change the calculations of financial metrics and covenants under our debt facilities, as well as third-party financial models regarding our financial condition.

Risks Related to this Offering and Ownership of Our Common Stock

We are an “emerging growth company,” and will be able take advantage of reduced disclosure requirements applicable to “emerging growth companies,” which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, for as long as we continue to be an “emerging growth company,” we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies.” These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company particularly after we are no longer an “emerging growth company.”

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be required to comply with certain of the requirements of 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 Securities and Exchange Commission, and the NYSE, our stock exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements 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 divert attention from operational and other business matters 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 expect to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other

 

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public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.

We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

If we are unable to design, implement and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, it could have a material adverse effect on our business and stock price. We have identified material weaknesses in our internal control over financial reporting.

As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our operating results. In addition, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

In connection with the audit of our consolidated financial statements as of January 30, 2016 and for the period from May 8, 2015 through January 30, 2016, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

We determined that we did not maintain a sufficient complement of personnel with the level of accounting expertise and supervisory review structure commensurate with the complexity of our financial accounting and financial reporting requirements. We also did not design and maintain controls related to the accounting for business combinations. Specifically, we did not design controls to review certain purchase accounting adjustments such as the amortization of customer list intangibles. These control deficiencies resulted in audit adjustments to our consolidated financial statements and could result in material misstatements to our annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our

 

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management has determined that these control deficiencies constitute material weaknesses. We are in the process of implementing measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to our material weaknesses, including that we have hired additional finance personnel and are establishing formalized accounting policies and procedures and internal controls.

We cannot assure you that the measures we have taken to date, together with any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or to avoid potential future material weaknesses. If we are unable to conclude that we have effective internal control over financial reporting or if our efforts are not successful to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or other material weaknesses or control deficiencies occur in the future, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements and investors may lose confidence in our financial reporting, which could have a material adverse effect on the trading price of our stock.

We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements.

Following this offering, TowerBrook will continue to control a majority of the voting power of our outstanding voting stock, and as a result we will be a controlled company within the meaning of the          corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:

 

    a majority of the board of directors consist of independent directors;

 

    the nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    there be an annual performance evaluation of the nominating and corporate governance and compensation committees.

These requirements will not apply to us as long as we remain a controlled company. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

We continue to be controlled by TowerBrook, and TowerBrook’s interests may conflict with our interests and the interests of other stockholders.

Following this offering, TowerBrook will own     % of our common equity (or     % if the underwriters exercise their option to purchase additional shares in full). In addition, representatives of TowerBrook comprise a majority of our directors. As a result, TowerBrook will have effective control over the outcome of votes on all matters requiring approval by our stockholders, including entering into significant corporate transactions such as mergers, tender offers and the sale of all or substantially all of our assets and issuance of additional debt or equity. The interests of TowerBrook and its affiliates could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by TowerBrook could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us. Additionally, TowerBrook is in the business of making

 

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investments in companies and may, from time to time, acquire and hold interests in businesses that compete, directly or indirectly with us. TowerBrook may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as TowerBrook continues to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, TowerBrook will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.

Our certificate of incorporation will contain a provision renouncing our interest and expectancy in certain corporate opportunities.

Our certificate of incorporation will provide for the allocation of certain corporate opportunities between us and TowerBrook. Under these provisions, neither TowerBrook, its portfolio companies, funds or other affiliates, nor any of their officers, directors, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities or lines of business in which we operate. For instance, a director of our company who also serves as a director, officer, partner or employee of TowerBrook or any of its portfolio companies, funds or other affiliates may pursue certain acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by TowerBrook to itself or its portfolio companies, funds or other affiliates instead of to us. The terms of our certificate of incorporation are more fully described in “Description of Capital Stock.”

Provisions in our organizational documents and Delaware law may discourage our acquisition by a third party.

Our certificate of incorporation will authorize our board of directors to issue preferred stock without stockholder approval. If the board of directors elects to issue preferred stock, it could be more difficult for a third party to acquire us. In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders.

Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”) affects the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.” We will elect in our certificate of incorporation not to be subject to Section 203 of the DGCL. Nevertheless, our certificate of incorporation will contain provisions that have the same effect as Section 203 of the DGCL, except that it will provide that affiliates of TowerBrook and their transferees will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and will therefore not be subject to such restrictions. These charter provisions may limit the ability of third parties to acquire control of our company. See “Description of Capital Stock—Certain Anti-Takeover, Limited Liability and Indemnification Provisions.”

We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.” The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.

 

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Investors in this offering will experience immediate and substantial dilution.

Based on our pro forma net tangible book value per share as of October 29, 2016 and an assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $        per share, representing the difference between our pro forma net tangible book value per share and the assumed initial public offering price. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. See “Dilution.”

Future sales of our common stock in the public market, or the perception in the public market that such sales may occur, could reduce our stock price.

After the completion of this offering, we will have          outstanding shares of common stock. This number includes                  shares that the selling stockholder is selling in this offering, which may be resold immediately in the public market. The number of outstanding shares of common stock also includes                  shares, including shares controlled by TowerBrook, that are “restricted securities,” as defined under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), and eligible for sale in the public market subject to the requirements of Rule 144. We, each of our officers and directors, TowerBrook and substantially all of our existing stockholders have agreed that (subject to certain exceptions), for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC and Jefferies LLC, dispose of any shares or any securities convertible into or exchangeable for our common stock, see “Underwriting.” Following the expiration of the applicable lock-up period, all of the issued and outstanding shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding periods and other limitations of Rule 144. Sales of significant amounts of stock in the public market could adversely affect prevailing market prices of our common stock. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.

There can be no assurances that a viable public market for our common stock will develop.

Prior to this offering, our common stock was not traded on any market. An active, liquid and orderly trading market for our common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. We cannot predict the extent to which investor interest in our common stock will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. If an active public market for our common stock does not develop, or is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you or at all.

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering.

The initial public offering price was determined by negotiations between us and representatives of the underwriters, based on numerous factors which we discuss in “Underwriting” and may not be indicative of the market price of our common stock after this offering. If you purchase our common stock, you may not be able to resell those shares at or above the initial public offering price.

 

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Our stock price may be volatile.

The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The following factors could affect our stock price:

 

    our operating and financial performance;

 

    quarterly variations in the rate of growth (if any) of our financial indicators, such as net income per share, net income and revenues;

 

    the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

    strategic actions by our competitors;

 

    changes in operating performance and the stock market valuations of other companies;

 

    announcements related to litigation;

 

    our failure to meet revenue or earnings estimates made by research analysts or other investors;

 

    changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

    speculation in the press or investment community;

 

    sales of our common stock by us or our stockholders, or the perception that such sales may occur;

 

    changes in accounting principles, policies, guidance, interpretations or standards;

 

    additions or departures of key management personnel;

 

    actions by our stockholders;

 

    general market conditions;

 

    domestic and international economic, legal and regulatory factors unrelated to our performance; and

 

    the realization of any risks described under this “Risk Factors” section, or other risks that may materialize in the future.

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, financial condition and results of operations.

If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our

 

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company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our common stock or if our operating results do not meet their expectations, our stock price could decline.

The issuance by us of additional shares of common stock or convertible securities may dilute your ownership of us and could adversely affect our stock price.

In connection with this offering, we intend to file a registration statement with the SEC on Form S-8 providing for the registration of                  shares of our common stock issued or reserved for issuance under our long-term incentive plan. Subject to the satisfaction of vesting conditions and the expiration of lock-up agreements,                  shares registered under the registration statement on Form S-8 will be available for resale immediately in the public market without restriction. From time to time in the future, we may also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including acquisitions. The issuance by us of additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock.

We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.

Our certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.

Our designation of the Delaware Court of Chancery as the exclusive forum for certain types of stockholder legal proceedings could limit our stockholders’ ability to obtain a more favorable forum.

Our certificate of incorporation will provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. See “Description of Capital Stock—Forum Selection.” Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition and results of operations.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and include, among other things, statements relating to:

 

    our strategy, outlook and growth prospects;

 

    our operational and financial targets and dividend policy;

 

    our planned expansion of the store base and the implementation of the new design in our existing stores;

 

    general economic trends and trends in the industry and markets; and

 

    the competitive environment in which we operate.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause our results to vary from expectations include, but are not limited to:

 

    our ability to successfully expand and increase sales;

 

    our ability to maintain and enhance a strong brand image;

 

    our ability to successfully optimize our omni-channel operations and maintain a relevant and reliable omni-channel experience;

 

    our ability to generate adequate cash from our existing business to support our growth;

 

    our ability to identify and respond to new and changing customer preferences;

 

    our ability to compete effectively in an environment of intense competition;

 

    our ability to contain the increase in the cost of shipping our merchandise, mailing catalogs, paper and printing;

 

    our ability to acquire new customers in a cost-effective manner;

 

    the success of the locations in which our stores are located and our ability to open and operate new retail stores on a profitable basis;

 

    our ability to adapt to changes in consumer spending and general economic conditions;

 

    natural disasters, unusually adverse weather conditions, boycotts and unanticipated events;

 

    our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices;

 

    increases in costs of raw materials, distribution and sourcing costs and in the costs of labor and employment;

 

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    the susceptibility of the price and availability of our merchandise to international trade conditions;

 

    failure of our suppliers and their manufacturing sources to use acceptable labor or other practices;

 

    our dependence upon key executive management or our inability to hire or retain the talent required for our business;

 

    failure of our information technology systems to support our current and growing business;

 

    disruptions in our supply chain and distribution and customer contact center;

 

    our ability to protect our trademarks or other intellectual property rights;

 

    infringement on the intellectual property of third parties;

 

    acts of war, terrorism or civil unrest;

 

    the impact of governmental laws and regulations and the outcomes of legal proceedings;

 

    our ability to secure the personal information of our customers and employees and comply with applicable security standards;

 

    impairment charges for goodwill, indefinite-lived intangible assets or other long-lived assets;

 

    our failure to maintain adequate internal controls over our financial and management systems;

 

    increased costs as a result of being a public company; and

 

    other risks, uncertainties and factors set forth in this prospectus, including those set forth under “Risk Factors.”

These forward-looking statements reflect our views with respect to future events as of the date of this prospectus and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus and, except as required by law, we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. You should read this prospectus and the documents filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. Our forward-looking statements do not reflect the potential impact of any future acquisitions, merger, dispositions, joint ventures or investments we may undertake. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

The selling stockholder is selling all of the shares of our common stock being sold in this offering, including any shares that may be sold in connection with the exercise of the underwriters’ option to purchase additional shares. See “Principal and Selling Stockholders.” Accordingly, we will not receive any proceeds from the sale of shares of our common stock in this offering. We will bear all costs, fees and expenses in connection with this offering, which are estimated to be $        .

DIVIDEND POLICY

We currently do not plan to declare cash dividends on shares of our common stock in the foreseeable future. We expect that we will retain all of our future earnings for use in the operation and expansion of our business. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, restrictions imposed by applicable law, our overall financial condition, restrictions in our debt agreements, including our Term Loan and ABL Facility, and any other factors deemed relevant by our board of directors. As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of restrictions on their ability to pay dividends to us under our Term Loan, our ABL Facility and under future indebtedness that we or they may incur. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

 

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CORPORATE CONVERSION

We are currently a Delaware limited liability company. Prior to the sale of shares in this offering, we will convert into a Delaware corporation and change our name to J.Jill, Inc. In order to consummate the corporate conversion, a certificate of conversion will be filed with the Secretary of State of the State of Delaware. In conjunction with the conversion all of our outstanding equity interests will be converted into                      shares of common stock. Jill Intermediate LLC has one class of equity interests, all of which are held by JJill Holdings, our direct parent company, and JJill Topco Holdings, the direct parent company of JJill Holdings. In conjunction with our conversion into a Delaware corporation, JJill Holdings and JJill Topco Holdings will each receive shares of our common stock in proportion to the percentage of Jill Intermediate LLC’s equity interests held by them prior to the conversion.

In connection with the conversion, J.Jill, Inc. will continue to hold all assets of Jill Intermediate LLC and will assume all of its liabilities and obligations. We are a holding company, and Jill Acquisition LLC, our wholly-owned subsidiary, will remain the operating company for our business assets. J.Jill, Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material portions of which are described in this prospectus under “Description of Capital Stock.”

Following our conversion into a Delaware corporation and prior to the sale of shares in this offering, JJill Holdings, our direct parent company, will merge with and into us, and we will be the surviving entity to such merger. Immediately after the merger and prior to the completion of this offering, all of the shares of our common stock will be held by JJill Topco Holdings, our current indirect parent.

The diagram below depicts our organizational structure immediately following the consummation of this offering and the transactions described above:

 

LOGO

 

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CAPITALIZATION

The following table sets forth our cash and our capitalization as of October 29, 2016, on:

 

    an actual basis; and

 

    a pro forma basis to give effect to the assumed completion of our corporate conversion from a Delaware limited liability company to a Delaware corporation, the assumed merger of JJill Holdings with and into us and the assumed conversion of all of our outstanding common units into              shares of common stock as described under “Corporate Conversion.”

 

    As of
October 29, 2016
 
    Actual     Pro Forma  

(in thousands, except share and per share data)

 

 

   

 

 

Cash

  $ 4,955      $                
 

 

 

   

 

 

 

Debt:

   

Term Loan(1)

  $ 274,356     

Current portion of long-term debt

    2,900     
 

 

 

   

 

 

 

Total debt, net of discount and debt issuance costs

    277,256     

Equity:

   

Preferred stock, $0.01 par value, no shares authorized, issued and outstanding (historical and pro forma)

    —       

Common stock, par value $0.01 per share; no shares authorized, issued and outstanding (historical);              shares authorized,              issued and outstanding (pro forma)

    —       

Common units, zero par value, 1,000,000 units authorized, issued and outstanding (historical); no units authorized, issued and outstanding (pro forma)

    —       

Contributed capital

    107,712     

Accumulated earnings

    11,042     
 

 

 

   

 

 

 

Total equity

    118,754     
 

 

 

   

 

 

 

Total capitalization

  $ 396,010      $     
 

 

 

   

 

 

 

 

(1) On January 18, 2017, we made a voluntary prepayment of $10.1 million, including accrued interest, on our Term Loan. This prepayment is not reflected in the table above.

You should read this table together with the information included elsewhere in this prospectus, including “Prospectus Summary—Summary Consolidated Financial Data,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto.

The foregoing table is based on                  shares of our common stock outstanding as of October 29, 2016, and except as otherwise indicated, reflects and assumes the following:

 

    assumes an initial public offering price of $        per share of common stock, the midpoint of the price range on the cover of this prospectus;

 

    assumes the completion of our corporate conversion from a Delaware limited liability company to a Delaware corporation and the merger of JJill Holdings with and into us, as described under “Corporate Conversion”;

 

    reflects the conversion of all of our outstanding equity interests into                      shares of our common stock, which will be effectuated prior to the closing of this offering;

 

    assumes no exercise of the underwriters’ option to purchase                  additional shares of common stock in this offering; and

 

    does not reflect an additional                  shares of our common stock reserved for future grant under our Equity Incentive Plan (as defined herein), which we expect to adopt in connection with this offering.

 

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DILUTION

Purchasers of the common stock in this offering will experience immediate and substantial dilution to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock as of October 29, 2016.

Our historical net tangible book value (deficit) as of October 29, 2016 was $(245.4) million, or $(245.42) per unit. Our historical net tangible book value (deficit) represents the amount of our total tangible assets (total assets less total intangible assets) less total liabilities. Historical net tangible book value (deficit) per share represents historical net tangible book value (deficit) divided by the number of shares of common stock issued and outstanding as of October 29, 2016.

Our pro forma net tangible book value (deficit) as of October 29, 2016 was $         million, or $         per share of our common stock. Pro forma net tangible book value (deficit) represents the amount of our total tangible assets (total assets less total intangible assets) less total liabilities, after giving effect to the assumed completion of our corporate conversion from a Delaware limited liability company to a Delaware corporation and the assumed merger of JJill Holdings with and into us, as described under “Corporate Conversion.” Pro forma net tangible book value (deficit) per share represents our pro forma net tangible book value (deficit) divided by the total number of shares outstanding as of October 29, 2016, after giving effect to the assumed conversion of all of our outstanding common units into              shares of common stock.

Dilution per share to new investors is determined by subtracting the net tangible book value per share from the initial public offering price per share paid by new investors. Because all of the shares of our common stock to be sold in this offering, including those subject to the underwriters’ option to purchase additional shares, will be sold by the selling shareholder, there will be no increase in the number of shares of our common stock outstanding as a result of this offering. The following table illustrates the per share dilution to new investors purchasing shares in this offering, based on an assumed initial public offering price of $         per share (which is the midpoint of the range set forth on the cover page of this prospectus):

 

Assumed initial public offering price per share

      $                

Historical net tangible book value per unit as of October 29, 2016

     (245.42   

Increase per share attributable to the pro forma adjustments described above

     
  

 

 

    

Pro forma net tangible book value per share as of October 29, 2016

     
     

 

 

 

Dilution in net tangible book value per share

      $     
     

 

 

 

The following table summarizes, as of October 29, 2016, the total number of shares of common stock owned by existing stockholders and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors in this offering at the assumed initial public offering price of $         per share, calculated before deduction of estimated underwriting discounts and commissions.

 

    

Shares Purchased

   

Total Consideration

   

Average
Price per
Share

 
    

Number

    

Percent

   

Amount

    

Percent

   

Existing stockholders

               $                             $                

Investors in the offering

                          
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $                      100   $                
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and average price per share paid by new investors by $         million, $         million and $         per share, respectively. An increase (decrease) of 1.0 million in the number of shares offered by the selling shareholder, assuming no changes in the assumed initial public offering price per share would increase (decrease) total consideration paid by new investors and total consideration paid by all shareholders by $         million and $         million, respectively.

If the underwriters were to fully exercise their option to purchase additional shares of our common stock, the percentage of common stock held by existing investors would be     %, and the percentage of shares of common stock held by new investors would be     %.

The foregoing tables and calculations are based on                  shares of our common stock outstanding as of October 29, 2016, and except as otherwise indicated, reflects and assumes the following:

 

    assumes an initial public offering price of $        per share of common stock, the midpoint of the price range on the cover of this prospectus;

 

    assumes the completion of our corporate conversion from a Delaware limited liability company to a Delaware corporation and the merger of JJill Holdings with and into us, as described under “Corporate Conversion”;

 

    reflects the conversion of all of our outstanding equity interests into                      shares of our common stock, which will be effectuated prior to the closing of this offering;

 

    assumes no exercise of the underwriters’ option to purchase                  additional shares of common stock in this offering; and

 

    does not reflect an additional                  shares of our common stock reserved for future grant under our Equity Incentive Plan (as defined herein) which we expect to adopt in connection with this offering.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present our selected consolidated financial and other data as of and for the periods indicated. The selected consolidated statements of operations data for the fiscal years ended February 1, 2014 and January 31, 2015, the periods from February 1, 2015 to May 7, 2015 (Predecessor) and from May 8, 2015 to January 30, 2016 (Successor), and the selected consolidated balance sheet data as of January 30, 2016 and January 31, 2015 are derived from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected consolidated balance sheet data as of February 2, 2013 and February 1, 2014 and the consolidated statement of operations data for the fiscal year ended February 2, 2013 from our audited consolidated financial statements, which are not included in this prospectus. Our historical audited results are not necessarily indicative of the results that should be expected in any future period.

The selected consolidated statements of operations data for the period from May 8, 2015 to October 31, 2015 (Successor) and the thirty-nine weeks ended October 29, 2016 (Successor) and the selected consolidated balance sheet data as of October 29, 2016 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to present fairly the financial information set forth in those statements. The results for any interim period are not necessarily indicative of the results that may be expected for the full year and our historical unaudited results are not necessarily indicative of the results that should be expected in any future period.

The selected historical financial data presented below does not purport to project our financial position or results of operations for any future date or period and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

          Interim Periods  
    Predecessor          

Successor

   

Predecessor

          Successor  

(in thousands, except
share and per share
data)

 

For the
Fiscal Year
Ended
February 2,
2013

   

For the
Fiscal Year
Ended
February 1,
2014

   

For the
Fiscal Year
Ended
January 31,
2015

   

For the
Period
February 1,
2015 to
May 7,
2015

         

For the
Period

May 8,
2015 to
January 30,
2016

   

For the
Period
February 1,
2015 to
May 7,
2015

         

For the
Period
May 8,
2015 to
October 31,
2015

(unaudited)

   

For the
Thirty-Nine
Weeks
Ended
October 29,
2016

(unaudited)

 

Statements of Operations Data:

                         

Net sales

  $ 431,881      $ 456,026      $ 483,400      $ 141,921          $ 420,094      $ 141,921          $ 274,741      $ 472,139   

Costs of goods sold

    155,363        161,261        164,792        44,232            155,091        44,232            101,185        149,673   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Gross profit

    276,518        294,765        318,608        97,689            265,003        97,689            173,556        322,466   

Selling, general and administrative expenses

    263,519        267,319        279,557        80,151            246,482        80,151            161,236        273,882   

Acquisition-related expenses

    —          —          —          13,341            —          13,341            —          —     
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Operating income

    12,999        27,446        39,051        4,197            18,521        4,197            12,320        48,584   

Interest expense

    19,183        19,064        17,895        4,599            11,893        4,599            7,922        13,630   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (6,184     8,382        21,156        (402         6,628        (402         4,398        34,954   

Provision (benefit) for income taxes

    (2,583     3,884        10,860        1,499            2,322        1,499            1,541        12,924   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss)

  $ (3,601   $ 4,498      $ 10,296      $ (1,901       $ 4,306      $ (1,901       $ 2,857      $ 22,030   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss) per common unit(1):

                         

Basic and diluted(1)

  $ (3.60   $ 4.50      $ 10.30      $ (1.90       $ 4.31      $ (1.90       $ 2.86      $ 22.03   

Weighted average number of common units(1):

                         

Basic and diluted(1)

    1,000,000        1,000,000        1,000,000        1,000,000            1,000,000        1,000,000            1,000,000        1,000,000   
     

Other Financial Data:

                         

Adjusted EBITDA(2)

  $ 43,913      $ 54,241      $ 65,720      $ 23,672          $ 59,699      $ 23,672          $ 44,277      $ 83,539   

Adjusted EBITDA margin(3)

    10.2     11.9     13.6     16.7         14.2     16.7         16.1     17.7

 

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(in thousands)

   Predecessor            Successor  
    

February 2,
2013

   

February 1,
2014

   

January 31,
2015

          

January 30,
2016

    

October 29, 2016
(unaudited)

 

Balance Sheet data (at end of period):

                

Cash

   $ 673      $ 518      $ 604           $ 27,505       $ 4,955   

Net operating assets and liabilities(4)

     2,338        (7,472     (8,055          3,477         19,749   

Total assets

     254,441        259,735        278,232             582,032         578,468   

Current and non-current portions of long-term debt, net of discount and debt issuance costs

     106,318        94,153        82,369             239,978         277,256   

Preferred capital

     72,824        72,824        72,824             —           —     

Total equity

     (22,986     (16,765     (1,317          166,571         118,754   

 

(1) Basic net income (loss) per common unit is computed by dividing net income (loss) by basic weighted average common shares outstanding. Diluted net income (loss) per common unit is computed by dividing net income (loss) by the diluted weighted average common shares outstanding, which has been adjusted to include any potentially dilutive securities. There are no potentially dilutive securities outstanding in any period presented. As such, basic and diluted net income (loss) per common unit is the same in each period.
(2) Adjusted EBITDA represents net income (loss) plus interest expense, provision (benefit) for income taxes, depreciation and amortization, the amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition, certain Acquisition-related expenses, sponsor fees, 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 measure of our comparative operating performance from period to period. Adjusted EBITDA is not a measurement of financial performance under GAAP. It should not be considered an alternative to net income (loss) as a measure of our operating performance or any other measure of performance derived in accordance with GAAP. In addition, Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items, or affected by similar nonrecurring items. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported under GAAP. Our definition and calculation of Adjusted EBITDA is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation. We recommend that you review the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, under “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data” and not rely solely on Adjusted EBITDA or any single financial measure to evaluate our business.
(3) Adjusted EBITDA margin is defined as Adjusted EBITDA divided by net sales. We recommend that you review the calculation of Adjusted EBITDA margin, under “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data.”
(4) Net operating assets and liabilities consist of current assets excluding cash, less current liabilities excluding the current portion of long-term debt.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial statements should be read in conjunction with “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of the Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto, included elsewhere in this prospectus.

The unaudited pro forma consolidated balance sheet at October 29, 2016 has been derived from the unaudited historical balance sheet included elsewhere in this prospectus and gives effect to our conversion into a Delaware corporation (the “Corporate Conversion”) and the merger of JJill Holdings, our direct parent, with and into us (the “Parent Merger”), which will occur prior to the completion of this offering as if they had occurred on October 29, 2016. As the Acquisition and the Financing (as defined below) are reflected in our historical consolidated balance sheet as of October 29, 2016, included elsewhere in this prospectus, there are no pro forma adjustments to our consolidated balance sheet to reflect the Acquisition and the Financing.

The unaudited pro forma consolidated statement of operations for the year ended January 30, 2016 has been derived from our consolidated audited statements of operations included elsewhere in this prospectus and represents the addition of the Predecessor period from February 1, 2015 through May 7, 2015 and the Successor period from May 8, 2015 through January 30, 2016, and gives effect to the following as if they had occurred on February 1, 2015:

 

    JJill Holdings’ acquisition of approximately 94% of the outstanding interests of Jill Intermediate LLC and JJill Topco Holdings’ acquisition of approximately 6% of the outstanding interests of Jill Intermediate LLC and our election to push down the effects of the Acquisition to our consolidated financial statements (the “Acquisition”); and

 

    the related Acquisition financing as provided for under the Term Loan for $250.0 million and the ABL Facility for $40.0 million (the “Financing”).

The unaudited pro forma consolidated statement of operations does not include the impacts of any revenue, cost or other operating synergies that may result from the Acquisition. There are no pro forma adjustments to our statement of operations (i) for the year ended January 30, 2016 or for the nine months ended October 29, 2016 related to the Parent Merger as there will be no impact to our statements of operations as a result of the Parent Merger; or (ii) for the nine months ended October 29, 2016 related to the Acquisition and the Financing, as both of these transactions were reflected for the entire period in our unaudited consolidated statement of operations for the nine months ended October 29, 2016.

The accompanying unaudited pro forma consolidated financial information has been prepared in accordance with Article 11 of Regulation S-X. The pro forma adjustments reflect events that are (i) directly attributed to the Acquisition, the Financing and the Parent Merger; (ii) factually supportable; and (iii) with respect to the pro forma statements of operations, expected to have a continuing impact on the consolidated results.

The unaudited pro forma consolidated financial information presented is based on available information and assumptions we believe are reasonable. The unaudited pro forma consolidated balance sheet and the unaudited pro forma consolidated statement of operations are presented for illustrative purposes and do not purport to represent what the results of operations would actually have been if the Acquisition, the Financing and the Parent Merger had occurred as of the dates indicated or what the results of operations would be for any future periods.

 

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Jill Intermediate LLC

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

(in thousands, except share and per share data)

 

     October 29, 2016  
    

Actual

    

Pro Forma
Adjustments

   

Pro Forma

 

Assets

       

Current assets:

       

Cash

   $ 4,955       $                   $                

Accounts receivable

     11,338        

Inventories, net

     79,041        

Prepaid expenses and other current assets

     18,215        
  

 

 

    

 

 

   

 

 

 

Total current assets

     113,549        

Property and equipment, net

     98,050        

Intangible assets, net

     167,603        

Goodwill

     196,572        

Receivable from related party

     1,617        

Other assets

     1,077        
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 578,468       $        $     
  

 

 

    

 

 

   

 

 

 

Liabilities and Members’ / Stockholders’ Equity

       

Current liabilities:

       

Accounts payable

   $ 39,574       $        $     

Accrued expenses and other current liabilities

     49,271        

Current portion of long-term debt

     2,900        
  

 

 

    

 

 

   

 

 

 

Total current liabilities

     91,745        

Long-term debt, net of current portion

     274,356        

Deferred income taxes

     77,342        

Other liabilities

     16,271        
  

 

 

      

Total liabilities

   $ 459,714        
  

 

 

    

 

 

   

 

 

 

Commitments and contingencies

       

Members’ Equity / Stockholders’ Equity

       

Preferred stock, $0.01 par value, no shares authorized, issued and outstanding (historical and pro forma)

       

Common stock, par value $0.01 per share; no shares authorized, issued and outstanding (historical);              shares authorized,          issued and outstanding (pro forma)

        (1 )   

Common units, zero par value, 1,000,000 units authorized, issued and outstanding (historical); no units authorized, issued and outstanding (pro forma)

     —           (1 )   

Contributed capital

     107,712         (1 )   

Accumulated earnings (deficit)

     11,042        
  

 

 

    

 

 

   

 

 

 

Total members’/ stockholders’ equity

     118,754        
  

 

 

    

 

 

   

 

 

 

Total liabilities and members’/ stockholders’ equity

   $ 578,468       $        $     
  

 

 

    

 

 

   

 

 

 

See notes to Unaudited Pro Forma Consolidated Balance Sheet

 

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Jill Intermediate LLC

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except share and per share data)

 

    

Predecessor

          

Successor

          

Pro
Forma

 
    

For the Period
from February 1,
2015 through
May 7, 2015

          

For the Period
from May 8,
2015 through
January 30,
2016

    

Pro Forma
Adjustments

   

For the
Fiscal
Year
ended
January
30, 2016

 

Net sales

   $ 141,921           $ 420,094       $ —        $ 562,015   

Costs of goods sold

     44,232             155,091         (10,471 )(2)      188,852   
  

 

 

        

 

 

    

 

 

   

 

 

 

Gross profit

     97,689             265,003         10,471        373,163   

Operating expenses

     80,151             246,482         2,044 (3)      331,752   
               1,943 (4)   
               (250 )(5)   
               (34 )(6)   
               973 (7)   
               443 (8)   

Acquisition-related expenses

     13,341             —           (13,341 )(9)      —     
  

 

 

        

 

 

    

 

 

   

 

 

 

Operating income

     4,197             18,521         18,693        41,411   

Interest expense

     4,599             11,893         401 (10)      16,893   
  

 

 

        

 

 

    

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (402          6,628         18,292        24,518   

Provision for income taxes

     1,499             2,322         6,402 (11)      10,223   
  

 

 

        

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (1,901        $ 4,306       $ 11,890      $ 14,295   
  

 

 

        

 

 

    

 

 

   

 

 

 
 

Net income (loss) per common unit/share:

              

Basic and diluted

   $ (1.90        $ 4.31         $     

Weighted average number of common units/shares:

              

Basic and diluted

     1,000,000             1,000,000              (12)   

See notes to Unaudited Pro Forma Consolidated Statement of Operations

 

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NOTE A—Description of the Acquisition, Financing and Parent Merger

On May 8, 2015, JJill Holdings and JJill Topco Holdings completed the Acquisition of the Company. The purchase price of the Acquisition was $396.4 million, which was funded through an equity contribution by JJill Holdings and JJill Topco Holdings and borrowings under our Term Loan. JJill Holdings accounted for the Acquisition as a business combination under the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of Acquisition. We have elected to push down the effects of the Acquisition to our consolidated historical financial statements.

In conjunction with the Acquisition, we entered into our seven-year Term Loan of $250.0 million, which contains certain terms and conditions that require us to comply with financial and other covenants. The Term Loan has a variable interest rate which is based on a rate per annum equal to LIBOR plus 5.0%, with a minimum required LIBOR per annum of 1.0%. The rate per annum was 6.0% at January 30, 2016. The Term Loan is collateralized by all of our assets and contains a provision requiring scheduled quarterly repayments that began October 31, 2015 and that continue until maturity on May 8, 2022.

We also entered into our five-year secured $40.0 million asset-based ABL Facility. Our ABL Facility is collateralized by a first lien on accounts receivable and inventory. Amounts outstanding under the ABL Facility bear interest of LIBOR plus the applicable margin, as defined in the agreement. The ABL Facility consists of revolving loans whereby interest on each revolving loan is payable upon maturity, with durations ranging between 30 to 180 days. Principal is payable upon maturity of the ABL Facility on May 8, 2020. The ABL Facility also requires the payment of monthly fees based on the average quarterly unused portion, as well as a fee on the balance of the outstanding letters of credit. As of October 29, 2016, there were no amounts that had been drawn under the ABL Facility. Based on the borrowing terms of the agreement, the available borrowing capacity at October 29, 2016 was $38.5 million.

In securing the Term Loan and the ABL Facility, we incurred financing and issuance costs of $9.6 million. Debt issuance costs are deferred and amortized using the effective interest rate method for the Term Loan and the straight-line method for the ABL Facility. Debt discounts are deferred and amortized using the effective interest rate method over the term of the related debt agreements.

Prior to the closing of this offering, we will complete transactions pursuant to which we will be converted into a Delaware corporation and change our name to J.Jill, Inc. In order to consummate the corporate conversion, a certificate of conversion will be filed with the Secretary of State of the State of Delaware. In conjunction with the conversion, all of our outstanding equity interests will be converted into shares of common stock. In connection with the conversion, J.Jill, Inc. will continue to hold all assets of Jill Intermediate LLC and will assume all of its liabilities and obligations. Following our conversion into a Delaware corporation, JJill Holdings, our direct parent company, will merge with and into us and we will be the surviving entity to such merger. Following the merger, all of the shares of our common stock will be held by JJill Topco Holdings, our current indirect parent.

JJill Topco Holdings controlled both JJill Holdings and Jill Intermediate LLC. As a result, the merger of Jill Intermediate LLC, after our conversion to a corporation, and JJill Holdings, its direct parent, will be a merger of entities under common control. Accordingly, the merger does not result in a change in the basis of accounting. The results of the merger reflect the combination of the results of operations of JJill Holdings and the Company. JJill Holdings did not have operations on its own, except for transaction cost of $8.6 million incurred to execute the Acquisition of the Company. As these costs are non-recurring in nature, the unaudited pro forma consolidated statement of operations did not reflect such costs.

Notes to Unaudited Pro Forma Consolidated Balance Sheet

 

  (1) Represents the (i) conversion of our common units to                  shares of common stock and (ii) the reclassification of $8.6 million from contributed capital to accumulated deficit upon the Parent Merger.

 

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Notes to Unaudited Pro Forma Consolidated Statement of Operations Adjustments

 

  (2) Represents the elimination of the increase in cost of goods sold resulting from the amortization of the fair value step-up of merchandise inventory reflected in the purchase price allocation at the date of the Acquisition. The Company’s inventory turn is approximately four times per year. As such, the step up in the fair value of inventory, which increased cost of goods sold within approximately the first three months after the Acquisition, has been removed from the unaudited pro forma consolidated statement of operations as there is no continuing impact on the results of operations.

 

  (3) Represents the incremental depreciation expense resulting from the increase in fair value of certain fixed assets, reflected in the purchase price allocation at the date of the Acquisition.

 

Fixed Asset

  

Estimated

Useful Life

    

Fair Value at
Acquisition
Date

    

Estimated
Depreciation
Expense, Year
ended
January 30,  2016

 

Leasehold improvements

    
 
Shorter of estimated
useful life or lease term
  
  
   $ 39,924       $ 11,012   

Furniture, fixtures & equipment

     5-7 years         21,222         6,812   

Computer software

     3-5 years         5,490         3,286   

Computer hardware

     3-5 years         3,209         1,426   

Construction in process

     N/A         8,839         —     
     

 

 

    

 

 

 

Total

      $ 78,684         22,536   
     

 

 

    

Less: historical depreciation expense

           (20,492
        

 

 

 

Additional depreciation expense

         $ 2,044   
        

 

 

 

 

  (4) Represents the incremental amortization expense resulting from the increase in fair value of certain definite-lived intangible assets, reflected in the purchase price allocation at the date of acquisition.

 

Intangible Asset

  

Estimated
Useful Life

    

Fair Value at
Acquisition Date

    

Estimated
Amortization
Expense, for the
Year Ended
January 30, 2016

 

Customer relationship—retail

     8 years       $ 12,400       $ 2,607   

Customer relationship—direct

     9 years         41,700         8,067   

Customer relationship—multi-channel

     16 years         80,100         5,293   
     

 

 

    

 

 

 

Total

      $ 134,200         15,967   
     

 

 

    

Less: historical amortization expense

           (14,024
        

 

 

 

Pro forma adjustment

         $ 1,943   
        

 

 

 

 

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Total amortization of acquired intangible assets over the next five years is expected to be as follows:

 

Fiscal Year

  

Amortization

 

2016

   $ 16,025   

2017

     14,143   

2018

     12,471   

2019

     11,008   

2020

     9,805   

Thereafter

     54,781   
  

 

 

 
   $ 118,233   
  

 

 

 

 

  (5) Represents the elimination of the management fee charged by our previous equity sponsor for the period from February 1, 2015 through May 7, 2015 as it is not expected to have a continuing impact on the results of operations.

 

  (6) Represents the net decrease in amortization expense related to recognition of the fair value of favorable/unfavorable leases.

 

  (7) Represents incremental pro forma deferred rent expense resulting from the recalculation of deferred rent expense from the Acquisition.

 

  (8) Represents the incremental compensation expense related to certain management incentive bonuses awarded in connection with the Acquisition. These bonuses are being amortized over the required service period, which is greater than a year, and thus were deemed to have an ongoing impact on the results of operations.

 

  (9) Represents the elimination of the transaction costs incurred in connection with the Acquisition, consisting substantially of legal and advisory fees, which are not expected to have a continuing impact on the results of operations.

 

  (10) Represents the net change in interest expense resulting from (i) the elimination of cash interest and amortization of deferred issuance costs related to our debt facilities in place during the 2015 Predecessor Period, which were repaid in conjunction with the Acquisition and (ii) the addition of interest expense and amortization of deferred issuance costs for the same period related to our new debt facilities. The following table summarizes the interest expense under the respective facilities for the period:

 

    

Interest Expense
for the Year Ended
January 30, 2016

 

Annual pro forma interest expense:

  

Term Loan interest expense

   $ 15,138 (a) 

Amortization of deferred issuance costs on the Term Loan

     1,197 (b) 

ABL Facility interest expense

     331 (c) 

Other interest expense

     227   
  

 

 

 

Total interest expense

     16,893   

Less: historical interest expense

     (16,492
  

 

 

 

Additional interest expense

   $ 401   
  

 

 

 

 

  (a) Reflects annual interest expense on the $250 million Term Loan, assuming an interest rate of 6%.

 

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  (b) Reflects amortization of deferred issuance costs for the year.
  (c) Reflects various fees under the ABL Facility, including the unused line fee of 0.375% and amortization of deferred financing fees.

A 1/8% increase or decrease in the variable interest rate of the Term Loan facility would increase or decrease our annual interest expense by $0.3 million.

 

  (11) Represents the income tax effect for the above adjustments reflecting an estimated statutory tax rate of 35%.

 

  (12) Basic and diluted net income (loss) per share for the pro forma fiscal year ended January 30, 2016 are based on our capital structure after giving effect to the Corporate Conversion and the pro forma statement of operations for the fiscal year ended January 30, 2016.

 

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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 prospectus, as well as the information presented under “Selected Historical Consolidated Financial and Other Data” and “Unaudited Pro Forma Consolidated Financial Information.” 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 prospectus titled “Risk Factors” and “Cautionary 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 of that year. 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. Fiscal year 2013, fiscal year 2014 and pro forma fiscal year 2015 ended on February 1, 2014, January 31, 2015 and January 30, 2016, respectively, and were each comprised of 52 weeks.

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 omni-channel platform that is well diversified across our direct (42% of net sales for the twelve months ended October 29, 2016) and retail (58% of net sales for the twelve months ended October 29, 2016) channels. We began as a catalog company and have been a pioneer of the omni-channel model with a compelling presence across stores, website and catalog since 1999. We have developed an industry-leading customer database that allows us to match approximately 97% of transactions to an identifiable customer. 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. Our goals are to Create a great brand, to Build a successful business and to Make J.Jill a great place to work. To achieve this, we have aligned our strategy and team around four guiding pillars – Brand, Customer, Product and Channel.

Our Growth Strategy

We plan to pursue the following strategies to continue to enhance our competitive positioning and drive growth in sales and profitability:

 

    Grow the size and value of our active customer base. We have a significant opportunity to continue to attract new customers to our brand and to grow the size and value of our active customer base across all channels. We have strategically increased our marketing investment to drive growth through the acquisition of new customers, reactivation of lapsed customers and the retention of existing customers.

 

    Increase direct sales. Given our strong foundation that positions us to capitalize on the growth of online and mobile shopping, we believe we have the opportunity to grow our direct sales from 42% of our net sales to approximately 50% over the next few years. We are undertaking several initiatives to enhance our capabilities and drive additional direct sales.

 

    Profitably expand our store base. Based on our proven new store economics, we believe that we have the potential to grow our store base by up to 100 stores over the long term from our total of 275 stores as of January 28, 2017. We will target new locations in lifestyle centers and premium malls, and we plan to open 10-15 new stores in fiscal year 2017 and in each year thereafter.

 

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    Strengthen omni-channel capabilities. We are pursuing a variety of initiatives designed to enhance our omni-channel capabilities focused on best serving our customer, wherever and whenever she chooses to shop. We expect our sustainable model, combined with our omni-channel initiatives, will continue to drive traffic, increase average transaction value and enhance conversion across all of our channels.

 

    Enhance product assortment. We believe there is an opportunity to grow our business by selectively broadening and enhancing our assortment in certain product categories including our Pure Jill and Wearever sub-brands, our Women’s and Petite’s businesses and accessories. Through our focused and enhanced product offering, particularly in our sub-brands and extended sizes, we believe we will continue to drive profitable sales growth over time.

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 are affected by general economic conditions. For example, reduced consumer confidence and lower availability and higher cost of consumer credit reduces demand for our merchandise and 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 trends we have generally had more favorable results.

Competition. 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 Initiatives. 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, including our brand voice and customer segmentation initiatives. 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 Mix. 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 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.

 

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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 omni-channel customers, who on average spend nearly three times more than single 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 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 cost of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of goods sold includes the direct cost 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 report cost 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 cost 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 cost 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 Securities and Exchange Commission, 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

 

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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 expect to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

Adjusted EBITDA represents net income (loss) plus interest expense, provision (benefit) for income taxes, depreciation and amortization, the amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition, certain Acquisition-related expenses, sponsor fees, 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 measure of our comparative operating performance from period to period. We also use 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 actual 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 and Adjusted EBITDA margin are useful in evaluating our business, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures that have limitations as an analytical tool. Adjusted EBITDA should not be considered as 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 and Adjusted EBITDA margin differently or not at all, which reduces the usefulness of Adjusted EBITDA and Adjusted EBITDA margin as a tool for comparison. We recommend that you review the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, and our calculation of Adjusted EBITDA margin, under “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data” and not rely solely on Adjusted EBITDA, Adjusted EBITDA margin or any single financial measure to evaluate our business.

Factors Affecting the Comparability of our Results of Operations

Acquisition

On May 8, 2015, JJill Holdings acquired approximately 94% of the outstanding interests of Jill Intermediate LLC and JJill Topco Holdings acquired the remaining 6% of the outstanding interests of Jill Intermediate LLC. JJill Topco Holdings owns 100% of JJill Holdings. The purchase price was $396.4 million, which consisted of $386.3 million of cash consideration and $10.1 million of noncash consideration in the form of an equity rollover by Jill Intermediate LLC’s predecessor management owners. The Acquisition was funded through an equity contribution by JJill Holdings and JJill Topco Holdings and borrowings under our seven-year $250.0 million Term Loan, as described under “Credit Facilities” below.

JJill Holdings accounted for the Acquisition as a business combination under the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of Acquisition.

We have elected to push down the effects of the Acquisition to our consolidated financial statements. The financial information for all periods after May 7, 2015 represents the financial information of the Successor. Prior to, and including, May 7, 2015, the consolidated financial statements, included elsewhere in this prospectus, include the accounts of the Predecessor.

Due to the change in the basis of accounting resulting from the Acquisition, the Predecessor’s consolidated financial statements and the Successor’s consolidated financial statements, included elsewhere in

 

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this prospectus, are not comparable. See “Unaudited Pro Forma Consolidated Financial Information” and our historical audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus for additional information regarding the Acquisition.

Recent Transactions

Amendment to Credit Facility and Dividend

On May 27, 2016, we entered into an agreement to amend our Term Loan to borrow an additional $40.0 million in loans. The other terms and conditions of the Term Loan remained substantially unchanged, as discussed in “—Liquidity and Capital Resources—Credit Facilities.” We used the additional loan proceeds, along with cash on hand, to fund a $70.0 million dividend to the partners of JJill Topco Holdings, which was approved by the members of Jill Intermediate LLC and the board of directors of JJill Topco Holdings on May 27, 2016.

On January 18, 2017, we made a voluntary prepayment of $10.1 million, including accrued interest, on our Term Loan.

Results of Operations

Period from February 1, 2015 to May 7, 2015 (Predecessor) and Period from May 8, 2015 through October 31, 2015 (Successor) Compared to the Thirty-Nine Weeks Ended October 29, 2016 (Successor)

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

 

     Predecessor      Successor  
     For the Period from
February 1, 2015 to
May 7, 2015
     For the Period from May 8,
2015 to October 31, 2015
     For the Thirty-Nine Weeks
Ended October 29, 2016
 

(in thousands)

  

Dollars

   

% of Net
Sales

    

  Dollars  

    

  % of Net  
Sales

    

Dollars

    

    % of Net    
Sales

 

Net sales

   $ 141,921        100.0%       $ 274,741         100.0%       $ 472,139         100.0%   

Costs of goods sold

     44,232        31.2%         101,185         36.8%         149,673         31.7%   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     97,689        68.8%         173,556         63.2%         322,466         68.3%   

Selling, general and administrative expenses

     80,151        56.5%         161,236         58.7%         273,882         58.0%   

Acquisition-related expenses

     13,341        9.4%         —           —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     4,197        2.9%         12,320         4.5%         48,584         10.3%   

Interest expense

     4,599        3.2%         7,922         2.9%         13,630         2.9%   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before provision for income taxes

     (402     (0.3)%         4,398         1.6%         34,954         7.4%   

Provision (benefit) for income taxes

     1,499        1.0%         1,541         0.6%         12,924         2.7%   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (1,901     (1.3)%       $ 2,857         1.0%       $ 22,030         4.7%   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales

Net sales were $472.1 million for the thirty-nine weeks ended October 29, 2016, compared to $141.9 million for the Predecessor period from February 1, 2015 to May 7, 2015 (the “2015 Predecessor Period”) and $274.7 million for the Successor period from May 8, 2015 to October 31, 2015 (the “2015 Interim Successor Period”). This increase was due to an increase in total comparable company sales, primarily driven by an increase in our active customer base in the thirty-nine weeks ended October 29, 2016.

Our direct channel was responsible for 37% of our net sales for the 2015 Predecessor Period, 38% in the 2015 Interim Successor Period, and 41% in the thirty-nine weeks ended October 29, 2016. Our retail channel was responsible for 63% of our net sales for the 2015 Predecessor Period, 62% in the 2015 Interim Successor Period, and 59% in the thirty-nine weeks ended October 29, 2016. At the end of those same periods, we operated 250, 260, and 271 retail stores, respectively.

 

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Gross Profit and Cost of Goods Sold

Gross profit was $322.5 million for the thirty-nine weeks ended October 29, 2016, compared to $97.7 million for the 2015 Predecessor Period and $173.6 million for the 2015 Interim Successor Period. This increase was primarily due to an increase in net sales, partially offset by an increase in cost of goods sold resulting from amortizing the increase in the fair value of merchandise inventory in the 2015 Interim Successor Period as a result of the application of purchase accounting.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $273.9 million for the thirty-nine weeks ended October 29, 2016, compared to $80.2 million for the 2015 Predecessor Period and $161.2 million for the 2015 Interim Successor Period. The increase included higher sales related expenses, increased marketing costs to acquire and retain customers and increased corporate payroll and other expenses to support business growth. The increase also related to increased depreciation and amortization expense, including deferred rent amortization, due to (i) the revaluation of assets and liabilities that occurred in connection with the Acquisition, (ii) increased capital spending in stores as a result of opening new stores and remodeling existing stores, and (iii) increased capital spending on information systems, primarily due to the implementation of a new merchandising system. The selling, general and administrative expenses increases were partially offset by lower equity-based compensation due to a change in our equity-based compensation plan following the Acquisition compared to the plan that was in place prior to the Acquisition.

As a percentage of net sales, selling, general and administrative expenses were 58.0% for the thirty-nine weeks ended October 29, 2016, compared to 56.5% for the 2015 Predecessor Period and 58.7% for the 2015 Interim Successor Period.

Acquisition-Related Expenses

We incurred expenses related to the Acquisition of $13.3 million during the 2015 Predecessor Period, consisting primarily of legal and advisory fees. No such costs were incurred during the 2015 Interim Successor Period or the thirty-nine weeks ended October 29, 2016.

Interest Expense

Interest expense was $13.6 million for the thirty-nine weeks ended October 29, 2016, compared to $4.6 million for the 2015 Predecessor Period and $7.9 million for the 2015 Interim Successor Period. This increase is due to the addition of $40.0 million to our Term Loan pursuant to an amendment on May 27, 2016.

Provision for Income Taxes

The provision for income taxes was $12.9 million for the thirty-nine weeks ended October 29, 2016, compared to $1.5 million for the 2015 Predecessor Period and $1.5 million for the 2015 Interim Successor Period. Our effective tax rate for the same periods was 37.0%, (372.9%) and 35.0%, respectively. The disparity in the 2015 Predecessor Period was due to lower income (loss) before provision for income taxes as a result of the inclusion of certain expenses related to the Acquisition in that period, which are not deductible for tax purposes.

 

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Period from February 1, 2015 to May 7, 2015 (Predecessor) and Period from May 8, 2015 through January 30, 2016 (Successor) Compared to the Fiscal Year Ended January 31, 2015 (Predecessor)

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

 

    Predecessor     Successor  
    For the Fiscal Year
ended January 31,
2015
    For the Period
February 1, 2015 to
May 7, 2015
    For the Period
May 8, 2015 to
January 30, 2016
 

(in thousands)

 

Dollars

   

% of Net
Sales

   

Dollars

   

% of Net
Sales

   

Dollars

    

% of Net
Sales

 

Net sales

  $ 483,400        100.0%      $ 141,921        100.0%      $ 420,094         100.0%   

Costs of goods sold

    164,792        34.1%        44,232        31.2%        155,091         36.9%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

    318,608        65.9%        97,689        68.8%        265,003         63.1%   

Selling, general and administrative expenses

    279,557        57.8%        80,151        56.5%        246,482         58.7%   

Acquisition-related expenses

    —          —          13,341        9.4%        —           —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

    39,051        8.1%        4,197        2.9%        18,521         4.4%   

Interest expense

    17,895        3.7%        4,599        3.2%        11,893         2.8%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) before provision for income taxes

    21,156        4.4%        (402     (0.3)%        6,628         1.6%   

Provision for income taxes

    10,860        2.3%        1,499        1.0%        2,322         0.6%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

  $ 10,296        2.1%      $ (1,901     (1.3)%      $ 4,306         1.0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Sales

Net sales were $141.9 million for the Predecessor period from February 1, 2015 to May 7, 2015 (the “2015 Predecessor Period”) and $420.1 million for the Successor period from May 8, 2015 to January 30, 2016 (the “2015 Successor Period”), compared to $483.4 million for the Predecessor fiscal year ended January 31, 2015 (“fiscal year 2014”). At the end of those same periods, we operated 250, 261, and 248 retail stores, respectively.

Our direct channel was responsible for 39% of our net sales in fiscal year 2014, 37% in the 2015 Predecessor Period, and 41% in the 2015 Successor Period. Our retail channel was responsible for 61% of our net sales in fiscal year 2014, 63% in the 2015 Predecessor Period, and 59% in the 2015 Successor Period. The increase in net sales was due to an increase in total comparable company sales, primarily driven by an increase in our active customer base.

Gross Profit and Cost of Goods Sold

Gross profit was $97.7 million for the 2015 Predecessor Period and $265.0 million for the 2015 Successor Period, compared to $318.6 million for fiscal year 2014. The increase was primarily due to an increase in net sales partially offset by an increase in cost of goods sold during the 2015 Successor Period resulting from the amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $80.2 million for the 2015 Predecessor Period and $246.5 million for the 2015 Successor Period, compared to $279.6 million for fiscal year 2014. The increase included higher sales related expenses, increased marketing costs to acquire and retain customers and increased corporate payroll and other expenses to support business growth. The increase also reflects increased depreciation and amortization expense, including deferred rent amortization, due to (i) the revaluation of assets

 

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and liabilities that occurred in connection with the Acquisition, (ii) increased capital spending in stores as a result of opening new stores and remodeling existing stores, and (iii) increased capital spending on information systems primarily due to the implementation of a new merchandising system. This increase also includes an increase in incentive compensation expense driven by the improved performance of our business.

As a percentage of net sales, selling, general and administrative expenses were 56.5% for the 2015 Predecessor Period and 58.7% for the 2015 Successor Period, compared to 57.8% for fiscal year 2014.

Acquisition-Related Expenses

We incurred acquisition-related expenses of $13.3 million during the 2015 Predecessor Period, consisting primarily of legal and advisory fees. No such costs were incurred during the 2015 Successor Period or fiscal year 2014.

Interest Expense

Interest expense was $4.6 million for the 2015 Predecessor Period and $11.9 million for the 2015 Successor Period, compared to $17.9 million for fiscal year 2014. In fiscal year 2014, our interest expense was higher due to voluntary prepayments on our predecessor term loan facility, which accelerated the amortization of deferred financing costs. During the 2015 Successor Period, interest incurred on debt decreased as a result of a decrease in the weighted average interest rate and lower amortization of deferred financing costs, offset by an increase in debt.

Provision for Income Taxes

The provision for income taxes was $1.5 million for the 2015 Predecessor Period and $2.3 million for the 2015 Successor Period, compared to $10.9 million for fiscal year 2014. Our effective tax rates for the same periods were (372.9)%, 35.0% and 51.3%, respectively. The decrease in provision for income taxes was primarily due to lower income (loss) before provision for income taxes for the 2015 Predecessor Period as a result of the inclusion of certain expenses related to the Acquisition in that period.

Supplemental Pro Forma Fiscal Year Ended January 30, 2016 Compared to Fiscal Year Ended January 31, 2015 (Predecessor)

In addition to the historical analysis of results of operations for the audited historical statements of operations presented for fiscal year 2014, the 2015 Predecessor Period and the 2015 Successor Period, we have also presented a supplemental unaudited pro forma consolidated statement of operations for the fiscal year ended January 30, 2016 (“pro forma fiscal year 2015”).

The unaudited consolidated statement of operations for pro forma fiscal year 2015 was derived from our historical audited statements of operations included elsewhere in this prospectus. The unaudited pro forma consolidated statement of operations gives effect to (i) the Acquisition and (ii) the related financing as provided for under our Term Loan for $250.0 million and our ABL Facility of $40.0 million (the “Financing”) as if they were entered into on February 1, 2015. The historical financial information has been adjusted to give effect to the pro forma adjustments that are (i) directly attributed to the Acquisition and related Financing, (ii) factually supportable and (iii) expected to have a continuing impact on the consolidated statement of operations.

The unaudited consolidated pro forma fiscal year 2015 statement of operations has been prepared in accordance with Article 11 of Regulation S-X. Although this presentation is not prepared in accordance with GAAP, we believe this information provides a meaningful comparison of our performance for our unaudited pro forma fiscal year 2015 as compared to fiscal year 2014. Management believes the assumptions applied to these adjustments are reasonable based on available information. The unaudited pro forma consolidated statement of

 

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operations is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been reported had the Acquisition and related transactions occurred on February 1, 2015, or indicative of results of operations expected to occur in the future. This unaudited pro forma information should be read in conjunction with “Unaudited Pro Forma Consolidated Financial Information,” “Selected Historical Financial Information,” “—Predecessor Period from February 1, 2015 to May 7, 2015 and Successor Period from May 8, 2015 to January 30, 2016 Compared to the Fiscal Year Ended January 31, 2015 (Predecessor)” and our historical audited consolidated financial statements included elsewhere in this prospectus.

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

 

   

Predecessor

   

Pro Forma

   

Change from Fiscal
Year Ended
January 31, 2015  to
Pro Forma Fiscal
Year Ended
January 30, 2016

 
   

For the Fiscal
Year Ended

January 31, 2015

   

For the Fiscal
Year Ended

January 30, 2016

   

(in thousands)

 

Dollars

   

% of Net
Sales

   

Dollars

   

% of Net
Sales

   

$ Change

   

% Change

 

Net sales

  $ 483,400        100.0%      $ 562,015        100.0%      $ 78,615        16.3%   

Costs of goods sold

    164,792        34.1%        188,852        33.6%        24,060        14.6%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

    318,608        65.9%        373,163        66.4%        54,555        17.1%   

Selling, general and administrative expenses

    279,557        57.8%        331,752        59.0%        52,195        18.7%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Operating income

    39,051        8.1%        41,411        7.4%        2,360        6.0%   

Interest expense

    17,895        3.7%        16,893        3.0%        (1,002     (5.6)%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income before provision for income taxes

    21,156        4.4%        24,518        4.4%        3,362        15.9%   

Provision for income taxes

    10,860        2.3%        10,223        1.8%        (637     (5.9)%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income

  $ 10,296        2.1%      $ 14,295        2.6%      $ 3,999        38.8%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net Sales

Net sales for pro forma fiscal year 2015 increased $78.6 million, or 16.3%, to $562.0 million, from $483.4 million for fiscal year 2014. This increase was primarily due to an increase in total comparable company sales of 12.4%, which was driven by an 11.6% increase in our active customer base. Our direct channel was responsible for 40% of our net sales in pro forma fiscal year 2015, an increase from 39% in fiscal year 2014. Our retail channel was responsible for 60% of our net sales in pro forma fiscal year 2015 and 61% in fiscal year 2014. At the end of those same periods, we operated 261 and 248 retail stores, respectively.

Gross Profit and Cost of Goods Sold

Gross profit for pro forma fiscal year 2015 increased $54.6 million, or 17.1%, to $373.2 million, from $318.6 million for fiscal year 2014. This increase was due primarily to the increase in net sales of 16.3%. The balance of the increase reflects gross margin for pro forma fiscal year 2015 increasing to 66.4% from 65.9% for fiscal year 2014. The increased gross margin was primarily due to supply chain efficiencies.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for pro forma fiscal year 2015 increased $52.2 million, or 18.7%, to $331.8 million from $279.6 million for fiscal year 2014. As a percentage of net sales, selling, general and administrative expenses for pro forma fiscal year 2015 were 59.0% as compared to 57.8% for fiscal year 2014. These increases related to higher sales related expenses of $16.6 million, increased marketing costs of $7.6 million and increased corporate payroll and other expenses of $5.3 million to support business growth. The

 

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increase also related to increased depreciation and amortization expense of $22.6 million, including deferred rent amortization, due to (i) the revaluation of assets and liabilities that occurred in connection with the Acquisition, (ii) increased capital spending in stores as a result of opening new stores and remodeling existing stores, and (iii) increased capital spending on information systems primarily due to the implementation of a new merchandising system. Further, incentive compensation expenses increased $4.7 million, driven by improved performance of the business, offset by an equity-based compensation decrease of $4.5 million due to the implementation of a new equity-based compensation plan following the Acquisition compared to the plan that was in place prior to the Acquisition.

Interest Expense

Interest expense for pro forma fiscal year 2015 decreased by $1.0 million, or 5.6%, to $16.9 million from $17.9 million for fiscal year 2014. The decrease in interest expense was due to a decrease in the weighted average interest rate to 6.1% from 15.4% and lower amortization of deferred financing costs. In fiscal year 2014, we incurred additional amortization resulting from voluntary prepayments on our predecessor term loan facility, which accelerated the amortization of deferred financing costs. The decrease in interest expense was partially offset by an increase in average debt outstanding, to $249.4 million during pro forma fiscal year 2015 from $97.3 million in fiscal year 2014.

The average debt balance and weighted average interest rates for pro forma fiscal year 2015 assume our Term Loan and ABL Facility were entered into on February 1, 2015. See “Unaudited Pro Forma Consolidated Financial Information,” “—Factors Affecting the Comparability of our Results of Operations—Acquisition,” “—Liquidity and Capital Resources—Credit Facilities” elsewhere in this prospectus for additional information regarding our Term Loan and ABL Facility and the Acquisition.

Provision for Income Taxes

The provision for income taxes for pro forma fiscal year 2015 decreased by $0.6 million, or 5.9%, to $10.2 million from $10.9 million for fiscal year 2014. Our effective tax rate was 41.7% for pro forma fiscal year 2015 and 51.3% for fiscal year 2014. This decrease in the effective rate was due to the higher amount of non-deductible equity-based compensation expenses in fiscal year 2014 compared to pro forma fiscal year 2015.

Fiscal Year Ended January 31, 2015 (Predecessor) Compared to Fiscal Year Ended February 1, 2014 (Predecessor)

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

 

    

Predecessor

    

Change from Fiscal Year
Ended February 1, 2014
to Fiscal Year Ended
January 31, 2015

 
    

For the Fiscal Year
Ended February 1, 2014

    

For the Fiscal Year
Ended January 31, 2015

    

(in thousands)

  

Dollars

    

% of Net
Sales

    

Dollars

    

% of Net
Sales

    

$ Change

   

% Change

 

Net sales

   $ 456,026         100.0%       $ 483,400         100.0%       $ 27,374        6.0%   

Costs of goods sold

     161,261         35.4%         164,792         34.1%         3,531        2.2%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Gross profit

     294,765         64.6%         318,608         65.9%         23,843        8.1%   

Selling, general and administrative expenses

     267,319         58.6%         279,557         57.8%         12,238        4.6%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Operating income

     27,446         6.0%         39,051         8.1%         11,605        42.3%   

Interest expense

     19,064         4.2%         17,895         3.7%         (1,169     (6.1)%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Income before provision for income taxes

     8,382         1.8%         21,156         4.4%         12,774        152.4%   

Provision for income taxes

     3,884         0.8%         10,860         2.3%         6,976        179.6%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Net income

   $ 4,498         1.0%       $ 10,296         2.1%       $ 5,798        128.9%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

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Net Sales

Net sales for fiscal year 2014 increased $27.4 million, or 6.0%, to $483.4 million, from $456.0 million for fiscal year ended February 1, 2014 (“fiscal year 2013”). This increase was primarily due to an increase in total comparable company sales of 5.4%, driven by an increase in the average net sales per customer. Our direct channel was responsible for 39% of our net sales in both fiscal year 2014 and fiscal year 2013. Our retail channel was responsible for 61% of our net sales in both fiscal year 2014 and fiscal year 2013. At the end of those same periods, we operated 248 and 234 retail stores, respectively.

Gross Profit and Cost of Goods Sold

Gross profit for fiscal year 2014 increased $23.8 million, or 8.1%, to $318.6 million, from $294.8 million for fiscal year 2013. This increase was due primarily to the increase in net sales of 6.0%. The balance of the increase reflects gross margin for fiscal year 2014 increasing to 65.9% from 64.6% for fiscal year 2013. The increased gross margin was primarily due to a reduction in promotional markdowns.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal year 2014 increased $12.2 million, or 4.6%, to $279.6 million from $267.3 million for fiscal year 2013. The increase included higher sales related expenses of $6.1 million and increased incentive and equity-based compensation expenses of $5.0 million due primarily to improved performance, as well as increased corporate payroll and other expenses of $3.8 million and increased marketing costs of $1.8 million to support the growth of the business. These increases were partially offset by decreased depreciation and amortization expense of $3.9 million, resulting from certain fixed assets becoming fully-depreciated during fiscal year 2014. As a percentage of net sales, selling, general and administrative expenses for fiscal year 2014 were 57.8% as compared to 58.6% for fiscal year 2013. This rate reduction was due primarily to gaining efficiencies on increased sales and the associated leveraging of fixed costs.

Interest Expense

Interest expense for fiscal year 2014 decreased by $1.2 million, or 6.1%, to $17.9 million, from $19.1 million for fiscal year 2013. Interest incurred on debt decreased by $0.6 million, resulting from a decrease in average debt from $97.3 million during fiscal year 2014 compared to $107.0 million for fiscal year 2013 as a result of scheduled payments and voluntary prepayments on our predecessor term loan facility in fiscal year 2014. This was partially offset by an increase in the weighted average interest rate to 15.4% compared to 14.5% during the same periods.

Provision for Income Taxes

The provision for income taxes for fiscal year 2014 increased by $7.0 million, or 179.6%, to $10.9 million from $3.9 million for fiscal year 2013 due to the improved performance of our business. Our effective tax rate was 51.3% and 46.3% for fiscal year 2014 and fiscal year 2013, respectively. This increase in the effective rate was due to a higher amount of non-deductible equity-based compensation expenses in fiscal year 2014.

 

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Quarterly Results

The following table sets forth our historical consolidated statements of income for each of the eleven fiscal quarters through the thirteen weeks ended October 29, 2016. This unaudited quarterly information has been prepared on the same basis as our annual audited consolidated financial statements included elsewhere in this prospectus and includes all adjustments, consisting of only normal recurring adjustments, that we consider necessary to fairly present the financial information for the fiscal quarters presented below. The unaudited quarterly data below should be read in conjunction with our audited and unaudited consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

    Predecessor     Successor  
    Fiscal
Year 2014
    Fiscal Year 2015     Fiscal
Year 2016
 
    Thirteen weeks ended    

 

   

Period
from
May 3,
2015 to

May 7,
2015

   

Period
from
May 8,
2015 to
August 1,
2015

    Thirteen weeks ended  
   

May 3,
2014

   

August 2,
2014

   

November 1,
2014

   

January 31,
2015

   

May 2,
2015

       

October 31,
2015

   

January 30,
2016

   

April 30,
2016

   

July 30,
2016

   

October 29,
2016

 

(in thousands,
unaudited)

                                                                       

Net sales

  $ 106,857      $ 121,890      $ 125,710      $ 128,943      $ 132,552      $ 9,369      $ 132,112      $ 142,629      $ 145,353      $ 147,665      $ 165,035      $ 159,439   

Costs of goods sold

    33,680        40,133        41,021        49,958        42,156        2,076        54,468        46,717        53,906        46,159        52,179        51,335   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    73,177        81,757        84,689        78,985        90,396        7,293        77,644        95,912        91,447        101,506        112,856        108,104   

Selling, general and administrative expenses

    66,078        67,604        71,938        73,937        74,946        5,205        75,276        85,960        85,246        87,072        94,173        92,637   

Acquisition-related expenses

    —          —          —          —          —          13,341        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    7,099        14,153        12,751        5,048        15,450        (11,253     2,368        9,952        6,201        14,434        18,683        15,467   

Interest expense

    4,491        4,631        4,492        4,281        4,335        264        3,902        4,020        3,971        4,112        4,674        4,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision (benefit) for income taxes

    2,608        9,522        8,259        767        11,115        (11,517     (1,534     5,932        2,230        10,322        14,009        10,623   

Provision (benefit) for income taxes

    1,339        4,888        4,239        394        790        709        (538     2,079        781        4,249        5,860        2,815   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 1,269      $ 4,634      $ 4,020      $ 373      $ 10,325      $ (12,226   $ (996   $ 3,853      $ 1,449      $ 6,073      $ 8,149      $ 7,808   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Company Comparable Sales

    (2.4 %)      5.0     7.3     11.1     20.1     *        *        9.6     8.6     10.9     13.1     10.0

 

* We do not calculate total company comparable sales for the period from May 3, 2015 to May 7, 2015 and the period from May 8, 2015 to August 1, 2015 as they do not present a meaningful comparison to our other periods.

Liquidity and Capital Resources

General

Our primary sources of liquidity and capital resources are cash generated from operating activities and availability under our 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 and upgrading information systems. Additional future liquidity needs will include costs of operating as a public company.

 

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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.

Capital expenditures were $7.4 million during the 2015 Predecessor Period, $26.6 million during the 2015 Successor Period, $34.0 million during pro forma fiscal year 2015 and $24.1 million during fiscal year 2014. The increase in capital expenditures was due primarily to an increase in the remodeling of stores and investment in information systems. We currently expect that our capital expenditures for fiscal year 2016 will be approximately $40.0 million including approximately $12.0 million for construction of new stores, $15.0 million for remodeling of existing stores and $13.0 million for investments in information technology. During the thirty-nine weeks ended October 29, 2016 capital expenditures totaled $25.7 million.

Cash Flow Analysis

The following table shows our cash flows information for the periods presented:

 

    Fiscal Periods     Interim Periods  
    Predecessor    

Successor

   

Predecessor

    Successor  
   

For the
Fiscal Year
Ended
February 1,
2014

   

For the
Fiscal Year
Ended
January 31,
2015

   

For the
Period
from
February 1,
2015
through
May 7,
2015

   

For the
Period
from
May 8,
2015
through
January 30,
2016

   

For the
Period
from
February 1,
2015
through
May 7,
2015

   

For the
Period
from May 8,
2015
through
October 31,
2015

   

For the

Thirty-Nine

Weeks
Ended October 29,
2016

 

(in thousands)

                                (unaudited)     (unaudited)  

Net cash provided by operating activities

  $ 45,293      $ 41,374      $ 5,733      $ 50,562      $ 5,733      $ 18,932      $ 36,971   

Net cash used in investing activities

    (27,419     (24,143     (7,406     (412,303     (7,406     (403,613     (25,706

Net cash (used in) provided by financing activities

    (18,029     (17,145     1,604        389,246        1,604        389,871        (33,815

Net Cash provided by (used in) Operating Activities

Net cash provided by operating activities during the thirty-nine weeks ended October 29, 2016 was $37.0 million. Key elements of cash provided by operating activities were (i) net income of $22.0 million, (ii) adjustments to reconcile net income to net cash provided by operating activities of $29.6 million, primarily driven by depreciation and amortization, and (iii) an increase in net operating assets and liabilities of $14.7 million, primarily driven by increases in inventories and accounts receivable, which was partially offset by increases in accrued expenses and other noncurrent liabilities.

Net cash provided by operating activities during the 2015 Interim Successor Period was $18.9 million. Key elements of cash provided by operating activities were (i) net income of $2.9 million, (ii) adjustments to reconcile net loss to net cash provided by operating activities of $34.8 million, primarily driven by depreciation and amortization and amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition, and (iii) an increase in net operating assets and liabilities of $18.7 million, primarily due to increases in taxes receivable, inventories and prepaid expenses and other current assets, partially offset by increases in accrued expenses and other noncurrent liabilities.

 

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Net cash provided by operating activities during the 2015 Successor Period was $50.6 million. Key elements of cash provided by operating activities were (i) net income of $4.3 million, (ii) adjustments to reconcile net income to net cash provided by operating activities of $36.4 million, primarily driven by depreciation and amortization and amortization of the step-up to fair value of merchandise inventory resulting from the application of a purchase accounting adjustment related to the Acquisition, and (iii) a decrease in net operating assets and liabilities and other activities of $9.9 million, primary due to a decrease in accounts receivable and an increase in accounts payable as well as an increase in accrued incentive plan expenses resulting from increased earnings, partially offset by increases in taxes receivable, prepaid expenses, and other current assets.

Net cash provided by operating activities during the 2015 Predecessor Period was $5.7 million. Key elements of cash provided by operating activities were (i) net loss of $1.9 million, (ii) adjustments to reconcile net loss to net cash provided by operating activities of $6.7 million, which primarily consisted of depreciation and amortization, and payment-in-kind interest on debt, and (iii) a decrease in net operating assets and liabilities and other activities of $0.9 million, primarily driven by accrued Acquisition expenses paid at the Acquisition date, partially offset by a decrease in accounts payable and increases in accounts receivable and inventories.

Net cash provided by operating activities during fiscal year 2014 was $41.4 million. Key elements of cash provided by operating activities were (i) net income of $10.3 million, (ii) adjustments to reconcile net income to net cash provided by operating activities of $28.8 million, primarily driven by depreciation and amortization, payment-in-kind interest, and equity-based compensation charges, and (iii) a decrease in net operating assets and liabilities of $2.3 million, largely due to an increase in accrued expenses and an increase in accounts payable partially offset by increases in inventories and accounts receivable.

Net cash provided by operating activities during fiscal year 2013 was $45.3 million. Key elements of cash provided by operating activities were (i) net income of $4.5 million, (ii) adjustments to reconcile net income to net cash provided by operating activities of $27.1 million, primarily driven by depreciation and amortization and payment-in-kind interest on debt, and (iii) a decrease in net operating assets and liabilities and other activities of $13.7 million, largely due to an increase in accounts payable partially offset by increases in inventories and prepaid assets and a decrease in accrued taxes payable.

Net Cash used in Investing Activities

Net cash used in investing activities during the thirty-nine weeks ended October 29, 2016 was $25.7 million, representing purchases of property and equipment related to new store openings, remodeling existing stores, and upgrading our information systems, including our merchandising system.

Net cash used in investing activities during the 2015 Interim Successor Period was $403.6 million, consisting of $385.7 million of cash paid in connection with the Acquisition, net of cash received, and $17.9 million of purchases of property and equipment related to new store openings, remodeling existing stores and upgrading our information systems, including our merchandising system.

Net cash used in investing activities during the 2015 Successor Period was $412.3 million, consisting of the $385.7 million of cash paid in connection with the Acquisition, net of cash received, and $26.6 million of purchases of property and equipment to new store openings, remodeling existing stores and upgrading our information systems, including our merchandising system.

Net cash used in investing activities during the 2015 Predecessor Period was $7.4 million, consisting of purchases of property and equipment related to new store openings, remodeling existing stores and upgrading our information systems, including our merchandising system.

Net cash used in investing activities during fiscal year 2014 was $24.1 million, representing purchases of property and equipment related to new store openings, remodeling existing stores and upgrading our information systems infrastructure and select software.

 

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Net cash used in investing activities during fiscal year 2013 was $27.4 million, representing purchases of property and equipment related to new store openings, remodeling existing stores and upgrading our information systems infrastructure and select software.

Net Cash (used in) provided by Financing Activities

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 JJill Topco Holdings. Financing activities also included $2.1 million of scheduled repayments on our Term Loan.

Net cash provided by financing activities during the 2015 Interim Successor Period was $389.9 million, primarily consisting of $240.4 million of proceeds from borrowings under our Term Loan, net of $9.6 million debt issuance costs paid, and $160.5 million of equity proceeds, both incurred in connection with the Acquisition. Financing activities also included an $8.6 million distribution to JJill Topco Holdings as reimbursement for Acquisition-related costs.

Net cash provided by financing activities during the 2015 Successor Period was $389.2 million, primarily consisting of $240.4 million of proceeds from borrowings under our Term Loan, net of $9.6 million debt issuance costs paid, and $160.5 million of equity proceeds, both incurred in connection with the Acquisition. Financing activities also included an $8.6 million distribution to JJill Topco Holdings as reimbursement for Acquisition-related costs and $1.3 million of scheduled repayments of our Term Loan.

Net cash provided by financing activities during the 2015 Predecessor Period was $1.6 million, consisting of $7.3 million of net proceeds from borrowings on our previous revolving credit facility in excess of repayments, which was partially offset by $5.0 million of prepayments and $0.7 million of scheduled repayments on our predecessor term loans.

Net cash used in financing activities during fiscal year 2014 was $17.1 million, consisting of the use of cash from operations to make voluntary prepayments and scheduled payments of our predecessor term loans.

Net cash used in financing activities during fiscal year 2013 was $18.0 million consisting of the use of cash from operations to make voluntary prepayments and scheduled payments of our predecessor term loans.

Dividends

On June 6, 2016, we paid a $70.0 million dividend to the partners of JJill Topco Holdings.

After completion of this offering, 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. See “Dividend Policy” elsewhere in this prospectus for additional information regarding dividends.

Credit Facilities

As described above, we entered into our Term Loan and ABL Facility in connection with the Acquisition. Concurrently, we repaid the principal and interest balances outstanding under our previous credit facilities, as required by the respective agreements upon a change-in-control transaction. The following describes the credit facilities entered into in connection with the Acquisition.

On May 8, 2015, we entered into the seven-year Term Loan of $250.0 million in conjunction with the Acquisition. Obligations under the Term Loan are guaranteed by all of our current and future domestic restricted subsidiaries, subject to certain exceptions. Our borrowings under the Term Loan are secured by (i) first-priority liens on substantially all assets other than the ABL Priority Collateral (as defined below) and (ii) second-priority

 

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liens on the ABL Priority Collateral, in each case subject to permitted liens and certain exceptions. The Term Loan contains certain terms and conditions which require us to comply with financial and other covenants, including certain restrictions on our ability to incur additional indebtedness, create liens, enter into transactions with affiliates, transfer assets, pay dividends, cause our subsidiaries to pay dividends to us, consolidate or merge with other entities or undergo a change in control, make advances, investments and loans and modify our organizational documents. The financial covenants requiring us to comply with a maximum leverage ratio and limiting our capital expenditures are considered by us to be the covenants which are currently the most restrictive. The maximum leverage ratio covenant requires us not to exceed, with respect to the four quarter period ending October 31, 2016, a ratio of consolidated debt (net of unrestricted cash) to Adjusted EBITDA (subject to certain adjustments under the Term Loan) of 5.0 to 1.0, which steps down to 3.0 to 1.0 over time. The Term Loan contains a financial covenant limiting our capital expenditures to $45.0 million for the fiscal year ending January 28, 2017 plus additional amounts as permitted, decreasing to $27.5 million per fiscal year over time. The Term Loan prohibits our ability to pay dividends to our shareholders and the ability of our subsidiaries to pay dividends to us, subject to certain exceptions. We may pay dividends, and our subsidiaries may pay dividends to us, if our leverage ratio would not exceed 2.5 to 1.0 after giving effect thereto. We may also pay dividends up to the amount of our retained excess cash flow, plus certain other amounts, if our leverage ratio would not exceed 3.25 to 1.0 after giving effect thereto. The Term Loan contains certain events of default. If a default occurs and is not cured within an applicable cure period or is not waived, our obligations under the Term Loan may be accelerated. The Term Loan allows us to elect, at our own option, the applicable interest rate for borrowings under the Term Loan using a LIBOR or Base Rate variable interest rate plus an applicable margin. LIBOR loans under the Term Loan accrue interest at a rate equal to LIBOR plus 5.00%, with a minimum LIBOR per annum of 1.00%. Base Rate loans under the Term Loan accrue interest at a rate equal to (i) the highest of (a) the prime rate, (b) the Federal Funds Effective Rate plus 0.50%, (c) LIBOR with a one-month interest period plus 1.00% and (d) 2.00%, plus (ii) 4.00%. As of October 29, 2016, we were in compliance with all financial covenants under our Term Loan.

On May 8, 2015, we also entered into the ABL Facility, our five-year secured $40.0 million asset-based revolving credit facility. Obligations under the ABL Facility are guaranteed by all of our current and future domestic restricted subsidiaries, subject to certain exceptions. Our borrowings under the ABL Facility are secured by (i) first-priority liens on accounts, inventory and certain other assets (the “ABL Priority Collateral”) and (ii) second-priority liens on substantially all other assets, in each case subject to permitted liens and certain exceptions. The ABL Facility provides for a calculated borrowing base of up to (i) 90% of the net amount of eligible credit card receivables, plus (ii) 85% of the net book value of eligible accounts receivable, plus (iii) the lesser of (A) 100% of the value of eligible inventory and (B) 90% of the net orderly liquidation value of eligible inventory, plus (iv) the least of (A) 100% of the value of eligible in-transit inventory, (B) 90% of the net orderly liquidation value of eligible in-transit inventory and (C) the in-transit maximum amount (the in-transit maximum amount is an amount not to exceed $12.5 million during the 1st and 3rd calendar quarters and $10.0 million during the 2nd and 4th calendar quarters), minus (v) the sum of certain reserves established from time to time by the administrative agent under the ABL Facility.

The ABL Facility allows us to elect, at our own option, the applicable interest rate for borrowings under the ABL Facility using a LIBOR or Base Rate variable interest rate plus an applicable margin. LIBOR loans under the ABL Facility accrue interest at a rate equal to LIBOR plus a spread ranging from 1.75% to 1.50, subject to availability. Base Rate loans under the ABL Facility accrue interest at a rate equal to (i) the highest of (a) the prime rate, (b) the overnight Federal Funds Effective Rate plus 0.50%, (c) LIBOR with a one-month interest period plus 1.00% and (d) 2.00%, plus (ii) a spread ranging from 0.50% to 0.75%, subject to availability. Principal is payable upon maturity of the ABL Facility on May 8, 2020. The ABL Facility also requires the payment of monthly fees based on the average quarterly unused portion of the commitment, as well as a fee on the balance of the outstanding letters of credit.

The ABL Facility contains certain terms and conditions which require us to comply with financial and other covenants, including certain restrictions on the ability to incur additional indebtedness, create liens, enter into

 

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transactions with affiliates, transfer assets, pay dividends, consolidate or merge with other entities, undergo a change in control, make advances, investments and loans or modify our organizational documents. The ABL Facility contains a financial covenant requiring us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0, with the ratio being Adjusted EBITDA (subject to certain adjustments under the ABL Facility) to fixed charges. The ABL Facility prohibits our ability to pay dividends to our shareholders and the ability of our subsidiaries to pay dividends to us, subject to certain exceptions. We may pay dividends, and our subsidiaries may pay dividends to us, if our fixed charge coverage ratio is at least 1.0 to 1.0 and our availability under the ABL Facility exceeds certain thresholds after giving effect thereto. The ABL Facility contains certain events of default. If a default occurs and is not cured within an applicable cure period or is not waived, our obligations under the ABL Facility may be accelerated. As of October 29, 2016, we were in compliance with all financial covenants under our ABL Facility.

As of January 30, 2016 and October 29, 2016 there were no amounts outstanding under the ABL Facility. Based on the borrowing terms of the ABL Facility, the maximum additional borrowing capacity at both January 30, 2016 and October 29, 2016 was $38.5 million.

On May 27, 2016, we entered into an agreement to amend our Term Loan to borrow an additional $40.0 million in additional loans, for a total of $288.1 million outstanding, to permit certain dividends and to make certain adjustments to the financial covenant. The other terms and conditions of the Term Loan remained substantially unchanged.

On January 18, 2017, we made a voluntary prepayment of $10.1 million, including accrued interest, on our Term Loan.

See our audited consolidated financial statements and Note 9 thereto for a discussion of our credit facilities prior to the Acquisition.

Contractual Obligations

We enter into long-term contractual obligations and commitments in the normal course of business. As of October 29, 2016 our outstanding contractual cash obligations were due during the periods presented below:

 

           

Payments Due by Period

 

(in thousands)

  

Total

    

Less than 1
year

    

1 - 3 years

    

3 - 5 years

    

More than 5
years

 

Long-Term Debt Obligations

              

Principal payment obligations(1)

   $ 286,675       $ 2,900       $ 5,800       $ 5,800       $ 272,175   

Interest expense on long-term debt(2)

     94,313         17,516         34,405         33,741         8,651   

Operating Lease Obligations(3)

     302,508         42,336         75,078         63,531         121,563   

Purchase Obligations(4)

     124,883         124,883         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 808,379       $ 187,635       $ 115,283       $ 103,072       $ 402,389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts assume that the Term Loan is paid upon maturity, and the ABL Facility remains undrawn, which may or may not reflect future events. The table above includes $10.1 million of principal and interest obligations due on our Term Loan, which was voluntarily prepaid on January 18, 2017.
(2) Assumes an interest rate of 6.0% per annum, consistent with the interest rate at October 29, 2016.
(3) Assumes the base lease term included in our outstanding operating lease arrangements as of October 29, 2016. Our future operating lease obligations would change if we were to exercise renewal options or if we renewed existing leases or entered into new operating leases.
(4) Purchase obligations represent purchase commitments on inventory that are short-term and are typically made six to nine months in advance of planned receipt. It also includes commitments related to certain selling, general and administrative expenses that are generally for periods of a year or less.

Off Balance Sheet Arrangements

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

 

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Critical Accounting Policies and Significant Estimates

Our discussion of results of operations and financial condition is based upon the consolidated financial statements and unaudited consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and certain assumptions about future events that affect the classification and amounts reported in our consolidated financial statements and accompanying notes, including revenue and expenses, assets and liabilities, and the disclosure of contingent assets and liabilities. These estimates and assumptions are based on our historical results as well as management’s judgment. Although management believes the judgment applied in preparing estimates is reasonable based on circumstances and information known at the time, actual results could vary materially from estimates based on assumptions used in the preparation of our consolidated financial statements.

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 below (see Note 2 to our audited consolidated financial statements and Note 1 of our unaudited consolidated financial statements presented elsewhere in this prospectus for additional information regarding our critical accounting policies).

Revenue Recognition

We recognize revenue and the related cost of merchandise sold when merchandise is received by our customers. Revenue from our retail operations is recognized at the time of sale. Revenue from catalog and e-commerce sales is recognized upon receipt of merchandise by the customer. Discounts provided to customers are recorded as a reduction to sales revenue. The criteria for recognition of revenue is met when persuasive evidence that an arrangement exists, delivery of product has occurred, the price is fixed or determinable and collectability is reasonably assured. In circumstances where either title or risk of loss pass upon receipt by the customer, we defer recognition of revenue until such event occurs, based on shipping records.

At the time sales revenue is recognized, we record a reserve for merchandise returns based on prior returns experience and expected future returns in accordance with our return policy and discretionary returns practices. We monitor our returns experience and resulting reserves on an ongoing basis and we believe our estimates are reasonable. We do not believe there is a reasonable likelihood that there will be a material change in the assumptions used to calculate the allowance for sales returns. However, if the actual cost of sales returns are significantly different than the estimated allowance, our results of operations could be materially affected.

We sell gift cards without expiration dates to customers. Proceeds from the sale of gift cards are deferred and reflected as gift cards redeemable until the customer redeems the gift card or when the likelihood of redemption is remote. Based upon historical experience, we estimate the value of outstanding gift cards that will ultimately not be redeemed (breakage) nor escheated under statutory unclaimed property laws. This amount is recognized as revenue over the time pattern established by our historical gift card redemption experience. We monitor our gift card redemption experience and associated accounting on an ongoing basis. Our historical experience has not varied significantly from amounts historically recorded and we believe our assumptions are reasonable.

 

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Business Combinations

JJill Holdings accounted for the Acquisition under the acquisition method of accounting. We elected to push down the effects of the Acquisition and the application of the acquisition method of accounting to our consolidated financial statements. This method requires allocating the purchase price to the acquisition date fair value of assets acquired, including separately identifiable intangible assets, and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, based on available information at the time of acquisition and subsequently obtained during a measurement period up to one year following the date of acquisition, relating to events or circumstances that existed at the acquisition date. Management’s judgment relies upon estimates and assumptions related to future cash flows, discount rates, useful lives of assets, market conditions and other items. The fair value of assets acquired and liabilities assumed in a business combination is estimated in accordance with the policies described below.

Inventory: Our inventory consists entirely of finished good merchandise. Management values the inventory acquired in business combinations based on the income approach, which bases fair value on the net retail value, less operating expenses and a reasonable profit allowance.

Property and Equipment: Our property and equipment consists primarily of leasehold improvements, furniture and fixtures, computer software and hardware, and construction in progress. To determine the fair value of property and equipment acquired in a business transaction, we primarily apply the replacement cost approach, which assumes that replacement cost is the best indication of fair value. In certain instances, particularly with respect to determining the fair value of assets with an active secondary market, we also give consideration to the market approach, which is based on current selling prices of similar assets available for purchase in an arms-length transaction.

Intangible assets other than goodwill: The fair value of intangible assets other than goodwill acquired in a business combination is recorded at fair value at the date of acquisition, as follows:

Trade Name: The fair value of our trade name is determined using the relief-from-royalty method, a variation of the income approach. The relief-from-royalty method determines the present value of the economic royalty savings associated with the ownership or possession of the trade name based on an estimated royalty rate applied to the cash flows to be generated by the business. The estimated royalty rate is determined based on the assessment of a reasonable royalty rate that a third party would negotiate in an arm’s-length license agreement for the use of the trade name.

Customer Relationships: The fair value of customer relationships are calculated using the excess earnings method. Under this method, the value of an intangible asset is equal to the present value of the after-tax cash flows attributable solely to the subject intangible asset, after making adjustments for the required return on and of the other associated assets.

Leasehold interests: Leasehold interests acquired are recorded as intangible real estate assets to the extent the terms of a lease are favorable compared to current market transactions, or as liabilities to the extent lease terms are unfavorable compared to the current market transactions. We assess the value of its assumed leaseholds based on the difference between contractual rent and market rent calculated for each remaining lease year of each lease, discounted to present value. Market rent is estimated by analyzing comparable leases in the location of its retail locations and an assumed annual inflation rate. The rate applied to calculate present value is based upon data available from industry reports. Variations in any of these factors could have an impact on the classification of leaseholds and the value of resulting assets and liabilities. We include favorable and unfavorable leasehold interests as other assets and other liabilities, respectively, on its consolidated balance sheet.

Deferred tax assets and liabilities: We record deferred tax assets and liabilities in connection with a business combination in accordance with the basis of the purchase price consideration for tax purposes as allocated to the assets acquired, based on the established hierarchy of tax regulations.

 

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Merchandise Inventory

Inventory consists of finished goods merchandise held for sale to our customers. Inventory is stated at the lower of cost or net realizable value, net of reserves for inventory. Cost is calculated using the weighted average method of accounting, and includes the cost to purchase merchandise from our manufacturers, duties and inbound freight.

In the normal course of business, we record inventory reserves based on past and projected sales performance, as well as the inventory on hand. The carrying value of inventory is reduced to estimated net realizable value when factors indicate that merchandise will not be sold on terms sufficient to recover its cost.

We monitor inventory levels, sales trends and sales forecasts to estimate and record reserves for excess, slow-moving and obsolete inventory. We utilize internal channels, including sales catalogs, the internet, and price reductions in retail and outlet stores to liquidate excess inventory. In some cases, external channels such as discount marketers and inventory liquidators are utilized. The prices obtained through these off-price selling methods varies based on many factors. Accordingly, estimates of future sales prices requires management judgment based on historical experience, assessment of current conditions and assumptions about future transactions. In addition, we conduct physical inventory counts to determine and record actual shrinkage. Estimates for shrinkage are recorded between physical counts, based on actual shrinkage experience. Actual shrinkage can vary from these estimates. When observed differences are identified, we adjust our inventory balances accordingly. We believe our assumptions are reasonable, and monitor actual results to adjust estimates and inventory balances on an ongoing basis. We have not made significant changes to our assumptions during the periods presented in our consolidated financial statements included elsewhere in this prospectus, and estimates have not varied significantly from historically recorded amounts.

Asset Impairment Assessments

Goodwill

We evaluate goodwill annually during the fourth fiscal quarter to determine whether the carrying value reflected on the balance sheet is recoverable, and more frequently if events or circumstances indicate that the fair value of a reporting unit is less than its fair value. Our two reporting units applicable to goodwill impairment assessments are defined as its direct and retail sales channels. Examples of impairment indicators that would trigger an impairment assessment of goodwill between annual evaluations include, among others, macro-economic conditions, competitive environment, industry conditions, changes in our profitability and cash flows, and changes in sales trends or customer demand.

We may assess our goodwill for impairment initially using a qualitative approach (“step zero”) to determine whether conditions exist to indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If management concludes, based on assessment of relevant events, facts and circumstances, that it is more likely than not that a reporting unit’s fair value is greater than its carrying value, no further impairment testing is required.

If management’s assessment of qualitative factors indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative assessment is performed. We also have the option to bypass the qualitative assessment described above and proceed directly to the two-step quantitative assessment. “Step one” requires comparing the fair value of a reporting unit to its carrying value, including goodwill. We estimate the fair value of reporting units using the income approach. The income approach uses a discounted cash flow analysis, which involves significant estimates and assumptions, including preparation of revenue and profitability growth forecasts, selection of the discount rate and the terminal year multiple.

 

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If the fair value of the respective reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is to measure the amount of impairment loss, if any. “Step two” compares the implied fair value of goodwill to the carrying amount of goodwill. The implied fair value of goodwill is determined by a hypothetical purchase price allocation using the reporting unit’s fair value as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recorded to write down goodwill to its implied fair value.

To assess for impairment, during the fourth quarter of the 2015 Successor Period, we performed a step one test, and for fiscal year 2014 and fiscal year 2013, we performed a step zero test. Our tests for impairment of goodwill resulted in a determination that the fair value of each reporting unit exceeded the carrying value of its net assets during the 2015 Successor Period, fiscal year 2014 and fiscal year 2013. We do not anticipate any material impairment charges in the near term. This analysis contains uncertainties because it requires us to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material.

Indefinite-Lived Intangible Assets

Our trade name has been assigned an indefinite life as we currently anticipate that it will contribute cash flows to us indefinitely. Our trade name is reviewed at least annually to determine whether events and circumstances continue to support an indefinite, useful life.

We evaluate our trade name for potential impairment at least annually during the fourth fiscal quarter, or whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Conditions that may indicate impairment include, but are not limited to, significant loss of market share to a competitor, the identification of other impaired assets within a reporting unit, loss of key personnel that negatively and materially has an adverse effect on our operations, the disposition of a significant portion of a reporting unit or a significant adverse change in business climate or regulations.

Impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. We measure the fair value of our trade name using the income approach, which uses a discounted cash flow analysis. The most significant estimates and assumptions inherent in this approach are the preparation of revenue and profitability growth forecasts, selection of the discount rate, and selection of the terminal year multiple.

We assessed the carrying value of intangible assets as described above and determined that no impairment losses were required during the 2015 Successor Period, fiscal year 2014 or fiscal year 2013.

Long-Lived Assets

Long-lived assets include definite-lived intangible assets subject to amortization and property and equipment. Long-lived assets obtained in a business combination are recorded at the acquisition-date fair value, while property and equipment purchased in the normal course of business is recorded at cost.

We assess the carrying value of long-lived assets for potential impairment whenever indicators exist that the carrying value of an asset group might not be recoverable. Indicators of impairment include, among others, a significant decrease in the market price of an asset, a significant adverse change in the extent or manner in which an asset is being used or in its physical condition, and operating or cash flow performance that demonstrates continuing losses associated with an asset group.

When indicators of potential impairment exist, we compare the sum of estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset group to the carrying value of the asset group. If the carrying value of an asset group exceeds the sum of estimated undiscounted future cash flows,

 

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we record an impairment loss in the amount required to reduce carrying value of the asset group to fair value. We estimate the fair value of an asset group based on the present value of estimated future cash flows, calculated by discounting the cash flow projections used in the previous step.

We assessed the carrying value of long-lived assets as described above and determined that no impairment losses were required during the 2015 Successor Period, the 2015 Predecessor Period, fiscal year 2014 or fiscal year 2013.

Determining the fair value of long-lived assets requires management judgment and relies upon the use of significant estimates and assumptions, including future sales, our margins and cash flows, current and future market conditions, discount rates applied, useful lives and other factors. We believe our assumptions are reasonable based on available information. Changes in assumptions and estimates used in the impairment analysis, or future results that vary from assumptions used in the analysis, could affect the estimated fair value of long-lived intangible assets and could result in impairment charges in a future period.

Equity-based Compensation

Successor

JJill Topco Holdings maintains an Incentive Equity Plan that allows JJill Topco Holdings to grant incentive units to certain of our directors and senior executives, by granting Class A Common Interests (“Common Interests”). During the 2015 Successor Period, JJill Topco Holdings issued Common Interests, which are considered to be equity-classified awards. We recognize the fair value of the awards as compensation expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the award. We account for equity-based compensation for JJill Topco Holdings’ Common Interests by recognizing the fair value of equity-based compensation as an expense within selling, general and administrative expenses in our consolidated statements of operations and comprehensive income (loss) as the costs are deemed to be for our benefit. Fair value of the awards is determined at the date of grant using an option pricing model. Use of an option pricing model requires that we make assumptions as to the volatility of JJill Topco Holdings’ Common Interests, the expected dividend yield, the expected term and the risk-free interest rate that approximates the expected term. All key assumptions and inputs are the responsibility of management and we believe them to be reasonable.

During the periods presented, JJill Topco Holdings’ Common Interests were not publicly traded. As there has been no public market for JJill Topco Holdings’ Common Interests to date, the estimated fair value of the Common Interests has been determined by JJill Topco Holdings’ board of directors as of the respective grant date of each Common Interest, with input from management, considering as one of the factors the most recently available third-party valuations of common stock and JJill Topco Holdings’ board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. JJill Topco Holdings’ Common Interests valuation was prepared using the option-pricing method (“OPM”), which uses market approaches to estimate the enterprise value. The OPM treats common interests and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common interest has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a sale. In addition to considering these valuations, JJill Topco Holdings’ board of directors considered various objective and subjective factors to determine the fair value of JJill Topco Holdings’ common interest as of each grant date, including:

 

    our financial position, including cash on hand, and our historical and forecasted performance and operating results;

 

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    external market conditions affecting our industry;

 

    the lack of an active market for JJill Topco Holdings’ Common Interests and preferred stock; and

 

    the likelihood of achieving a liquidity event, such as an initial public offering (“IPO”) or sale of our company in light of prevailing market conditions.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation expense could be materially different.

Following the closing of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock.

Predecessor

During the Predecessor periods, we accounted for compensation expense related to our share-based awards using the intrinsic value method, as permitted by ASC 718 for nonpublic entities, with changes in the value of the share-based awards being recognized as compensation expense at each reporting period. JJIP LLC (“JJIP”), a Limited Partnership, was formed by our then current owners and held a portion of our outstanding common units. A management incentive unit equity program was established by JJIP to provide the opportunity for our key employees to participate in the appreciation of the business. During such periods, service-based and performance-based awards were issued. For service-only share-based awards, we recognized the related compensation expense in the period in which the award holder is required to provide service, which is generally over the required service period.

For the performance-based awards, vesting occurred upon achievement or satisfaction of a specified performance condition. Such conditions would be met upon the earlier of the attainment of a predetermined return on investment by certain equity investors in the Predecessor entity, or a change in control, whereby all outstanding unvested awards would immediately vest. We considered the probability of achieving the established performance targets in determining our equity-based compensation with respect to these awards at the end of each reporting period. During fiscal year 2014 and the 2015 Predecessor Period, there was no compensation expense recognized for the performance-based awards. The performance conditions of the Predecessor plan were met only on the date of the Acquisition.

Jumpstart Our Business Startups Act of 2012 (JOBS Act)

In April 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable.

We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (United States) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional

 

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information about the audit and the consolidated financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. We may remain an “emerging growth company” until the last day of the fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue equals or exceeds $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an “emerging growth company” prior to the end of such five-year period.

Recent Accounting Pronouncements

See Note 3 to our audited consolidated financial statements and Note 1 to our unaudited interim consolidated financial statements included elsewhere in this prospectus for information regarding recently issued accounting pronouncements.

Quantitative and Qualitative Disclosure of Market Risks

Interest Rate Risk

We are subject to interest rate risk in connection with borrowings under the Term Loan and ABL Facility, which bear interest at variable rates equal to LIBOR plus a margin as defined in the respective agreements described above. As of October 29, 2016, there was no outstanding balance under the ABL Facility, the undrawn borrowing availability under the ABL Facility was $38.5 million and the amount outstanding under the Term Loan had increased to $286.7 million as a result of the amendment described above. We currently do not engage in any interest rate hedging activity and we have no intention to do so in the foreseeable future. Based on the average interest rate on the ABL Facility during the period from the date the facility was entered into on May 8, 2015 through January 30, 2016, and during the first nine months of fiscal year 2016, and to the extent that borrowings were outstanding, a 10% change in our current interest rate would reduce net income $1.1 million during fiscal year 2016.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you our business will not be affected in the future by inflation.

 

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BUSINESS

Company 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 omni-channel platform that is well diversified across our direct (42% of net sales for the twelve months ended October 29, 2016) and retail (58% of net sales for the twelve months ended October 29, 2016) channels. We began as a catalog company and have been a pioneer of the omni-channel model with a compelling presence across stores, website and catalog since 1999. We have developed an industry-leading customer database that allows us to match approximately 97% of transactions to an identifiable customer. 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. Our goals are to Create a great brand, to Build a successful business and to Make J.Jill a great place to work. To achieve this, we have aligned our strategy and team around four guiding pillars – Brand, Customer, Product and Channel.

Brand and Customer. Our brand promise to the J.Jill woman is to delight her with great wear-now product, to inspire her confidence through J.Jill’s approach to dressing and to provide her with friendly, guiding service wherever and whenever she chooses to shop. While we find that women of all ages are attracted to our brand, our typical customer is 40-65 years old, is college educated and has an annual household income that exceeds $150,000. She leads a busy, yet balanced life, as she works outside the home, is involved in her community and has a family with children. She engages across both our direct and retail channels and is highly loyal, as evidenced by the fact that approximately 70% of our gross sales in pro forma fiscal year 2015 came from customers that have been shopping with J.Jill for at least five years.

Product. Our customers strongly associate our products with a modern balance of style, quality, comfort and ease suitable for a broad range of occasions at accessible prices. Our product assortment is marketed under the J.Jill brand name, sold exclusively through our 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. We also offer most of these products across our two sub-brands, Pure Jill and Wearever. We design and merchandise our products in-house around clear product stories, grounded with essential yet versatile styles and fabrications updated each month with fresh colors, layering options, novelty and fashion. Each of our monthly merchandised collections includes approximately 40% new styles, which provides a consistent flow of fresh product.

Channel. We operate an omni-channel platform that delivers a seamless experience to our customer wherever and whenever she chooses to shop across our website, retail stores and catalog. Driven by our direct-to-consumer heritage, we have a highly profitable omni-channel platform that is well-diversified across our direct and retail channels. Our retail store portfolio consists of 273 full-price stores averaging approximately 3,750 square feet across 43 states, with approximately half of our stores located in lifestyle centers and approximately half in premium malls. Our stores have produced strong and consistent performance, with 98% of our full-price locations generating positive 4-wall contribution in pro forma fiscal year 2015. Our new store openings have produced an average payback of approximately two years. We introduced a new store design in 2013 that showcases our brand concept and elevates, yet simplifies the J.Jill shopping experience. Within our direct channel, E-commerce represented 88% of net sales for the twelve months ended October 29, 2016 and catalog orders represented 12% of net sales for the twelve months ended October 29, 2016. Our website provides customers with continuous access to the entire J.Jill product offering and features rich content, including updates on new collections and guidance on how to wear and wardrobe our styles as well as the ability to chat live with a customer service representative. We produce 25 annual editions of our catalog and circulated 57 million copies in 2015. Our catalog, combined with an increased investment in online marketing, drives customer acquisition and engagement across all of our channels. Our omni-channel approach allows us to drive customer response and purchasing behavior in all channels.

 

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Under the leadership of Paula Bennett, our President and Chief Executive Officer, we have delivered strong, consistent growth in sales and profitability. We have established a solid foundation to support long-term, sustainable growth by investing to build our team, market our brand and enhance our systems, distribution center and data insight capabilities. Net income in pro forma fiscal year 2015 was $14.3 million. We believe our customer-focused strategy, foundational investments and data insights have resulted in consistent, profitable growth and industry-leading Adjusted EBITDA margins of 14.6% in pro forma fiscal year 2015. For a reconciliation of our Adjusted EBITDA to our net income, please see “Prospectus Summary—Summary Consolidated Historical and Pro Forma Financial and Other Data.” Recent financial highlights include:

 

    Total net sales growth from $432 million in fiscal year 2012, to $562 million in pro forma fiscal year 2015, reflecting a 9% compound annual growth rate (“CAGR”), and to $617 million for the twelve months ended October 29, 2016, reflecting a 10% CAGR;

 

    Positive total company comparable sales growth in 17 of the last 19 consecutive quarters, including in each of the last ten consecutive quarters;

 

    Net income growth from a loss of $3.6 million in fiscal year 2012, to $14.3 million in pro forma fiscal year 2015 and to $23.5 million for the twelve months ended October 29, 2016;

 

    Net income margin expansion of 330 basis points, from (0.8%) in fiscal year 2012, to 2.5% in pro forma fiscal year 2015, and of 460 basis points to 3.8% for the twelve months ended October 29, 2016;

 

    19 consecutive quarters of positive Adjusted EBITDA growth;

 

    Adjusted EBITDA growth from $44 million in fiscal year 2012, to $82 million in pro forma fiscal year 2015, reflecting a 23% CAGR, and to $99 million for the twelve months ended October 29, 2016, reflecting a 24% CAGR; and

 

    Adjusted EBITDA margin expansion of 440 basis points, from 10.2% in fiscal year 2012, to 14.6% in pro forma fiscal year 2015, and of 580 basis points to 16.0% for the twelve months ended October 29, 2016.

 

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$ in millions

 

Net Sales

 

Total Company Comparable Sales

LOGO   LOGO

 

Net Income & Margin

 

Adjusted EBITDA & Margin

LOGO   LOGO

Competitive Strengths

We attribute our success to the following competitive strengths:

Distinct, Well-Recognized Brand. 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 have cultivated a differentiated brand that resonates with our customers, as evidenced by the fact that we have one of the highest levels of brand satisfaction and one of the highest aided brand awareness scores relative to our peers. Through our commitment to our customer and our brand building activities, we have created significant brand trust and an emotional connection with our customers that we believe will facilitate sustainable sales growth and market share gains over time.

Industry-Leading Omni-Channel Business. We have developed a powerful, omni-channel business model comprised of our industry-leading direct channel and our retail stores. Our direct and retail channels complement and drive traffic to one another, and we leverage our targeted marketing initiatives to acquire new customers across all channels. While 64% of new to brand customers first engage with J.Jill through our retail stores, we have a strong track record of migrating customers from a single-channel customer to a more valuable, omni-channel customer. On average, our omni-channel customers shop and spend nearly three times more per year compared to a single-channel customer. As a result, our direct penetration has grown rapidly and accounted for 42% of net sales for the twelve months ended October 29, 2016 driven primarily by growth in our E-commerce business. We believe our strong omni-channel capabilities enable us to deliver a seamless brand experience to our customer, wherever and whenever she chooses to shop.

Data-Centric Approach That Drives Consistent Profitability and Mitigates Risk. We believe we have strong customer and transaction data capabilities, but it is our use of the data that distinguishes us from our competitors. We have developed industry-leading data capture capabilities that allow us to match approximately 97% of transactions to an identifiable customer, which we believe is significantly ahead of the industry standard.

 

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We maintain an extensive customer database that tracks customer details from personal identifiers and demographic overlay (e.g., name, address, age, household income) and transaction history (e.g, orders, returns, order value). We continually leverage this database and apply our insights to operate our business as well as to acquire new customers and then create, build and maintain a relationship with each customer to drive optimum value. For example, in pro forma fiscal year 2015 we utilized insights from our data to expand our marketing investment and focus our initiatives to emphasize customer acquisition. This drove growth in active customers by 12% and new customers by 15%. We also increased spend per customer by 6% as customers purchased more frequently and spent more per transaction. We believe our data-centric approach allows us to respond to customer preferences and mitigate risk leading to consistent, predictable operating and financial performance over time.

Affluent and Loyal Customer Base. We target an attractive demographic of affluent women in the 40-65 age range, a segment of the population that is experiencing outsized population growth between 2010 and 2020 in the United States, according to the U.S. Census Bureau. With an average annual household income that exceeds $150,000, our customer has significant spending power. She is highly loyal as evidenced by the fact that approximately 70% of our gross sales in pro forma fiscal year 2015 came from customers that have been shopping with J.Jill for at least five years. Customers who remain with our brand for five years or longer spend nearly twice as much and shop with us 1.5 times more per year than a new-to-brand customer. Our private label credit card program also drives customer loyalty and encourages spending, as the spend per card holder is over two times higher than non-card holders. We believe we will continue to develop long-term customer relationships that will drive profitable sales growth.

Customer-Focused Product Assortment. Our customers strongly associate our product with a modern balance of style, quality, comfort and ease suitable for a broad range of occasions at accessible price points, with an average selling price of $45. Our customer-focused assortment spans a full range of sizes and is designed to provide easy wardrobing that is relevant to her lifestyle. Each year we offer 12 merchandise collections that are introduced approximately every four weeks and designed and delivered to provide a consistent flow of fresh products. We create product newness through the use of different fabrics, colors, patterns and silhouettes, with approximately 40% new styles delivered in each monthly collection, which motivates our customer to visit our stores and/or our website more frequently. We have an in-house, customer centric product design and development process that leverages our extensive database of customer feedback and allows us to identify and incorporate changes in our customers’ preferences, mitigating fashion risk. We believe our customer focused approach to product development and continual delivery of fresh, high quality products drives traffic, frequency and conversion.

Highly Experienced Leadership Team, Delivering Superior Results. Our leadership team is led by President and Chief Executive Officer, Paula Bennett, who joined J.Jill in 2008 and is responsible for leading our successful revitalization and profitable growth. Ms. Bennett is a retail veteran with over 35 years of experience who understands the importance of a strong brand, possesses deep knowledge of our customers and has extensive direct and retail channel experience. Ms. Bennett previously served as Chief Operating Officer of Eileen Fisher, Inc. and also held leadership positions at Bloomingdale’s and Tiffany & Co. She has built a team from leading global organizations with an average of 25 years of industry experience and significant expertise in merchandising, marketing, retail, E-commerce, human resources and finance. We have developed a strong and collaborative culture aligned around our goals to Create a great brand, Build a successful business and Make J.Jill a great place to work. Additionally, we have enhanced and realigned our organizational structure to further elevate the omni-channel customer experience including the recent hires of a Chief Information Officer and a Senior Vice President of Marketing. Our leadership team is aligned and incentivized around growing Adjusted EBITDA and has delivered superior and consistent operating results, growing net sales by a 10% CAGR, Adjusted EBITDA by a 24% CAGR and Adjusted EBITDA margin by 580 basis points from fiscal year 2012 through the twelve months ended October 29, 2016.

 

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Growth Strategy

Key drivers of our growth strategy include:

Grow Size and Value of Our Customer Base. We have a significant opportunity to continue to attract new customers to our brand and to grow the size and value of our active customer base across all channels. Historically, we grew our business by driving spend per customer. We strategically increased our marketing investment to drive growth through the acquisition of new customers, reactivation of lapsed customers and the retention of existing customers. This investment has proven effective as, for example, in pro forma fiscal year 2015 we increased our marketing investment by 16%, resulting in active customer base growth of 12% and new customer growth of 15%. We also experienced an increase in spend per customer by 6% as customers purchased more frequently and spent more per transaction. In addition, in pro forma fiscal year 2015, the number of our omni-channel customers, who purchase on nearly three more occasions per year and spend nearly three more times per year than our single-channel customers, increased by 21%. We recently began a brand voice and customer segmentation initiative which, upon completion, will further enhance our ability to target the highest value customers and increase customer spending. Through these initiatives, we believe we will continue to attract new customers to our brand, migrate customers from single-channel to more profitable omni-channel customers and increase overall customer retention and spend.

Increase Direct Sales. Given our strong foundation that positions us to capitalize on the growth of online and mobile shopping, we believe we have the opportunity to grow our direct sales from 42% of our net sales to approximately 50% over the next few years. According to Euromonitor, online apparel sales are expected to grow at a CAGR of approximately 15% from 2015 to 2020, which is significantly above the long-term growth of the broader apparel industry. We are undertaking several initiatives to enhance our capabilities and drive additional direct sales. We are in the process of re-platforming our website to improve our customers’ personalized shopping experience and increase the ease of navigation, checkout and overall engagement. Our new platform, managed by our experienced team will provide us with the opportunity to expand internationally. In addition, our mobile platform provides us with the ability to effectively engage with our customer on her mobile device by providing her with access to product research and the ability to connect with the brand socially. We believe our powerful direct platform will enable us to further strengthen our dominant market position and broaden our customer reach.

Profitably Expand Our Store Base. Based on our proven new store economics, we believe that we have the potential to grow our store base by up to 100 stores over the long term from our total of 275 stores as of January 28, 2017. We will target new locations in lifestyle centers and premium malls, and we plan to open 10-15 new stores in fiscal year 2017 and in each year thereafter. Our new store model targets an average of approximately $1.0 million of net sales per store and approximately $270,000 of 4-wall contribution within the first full year of operations. We introduced a new store design concept in 2013 that showcases our brand concept and elevates, yet simplifies the J.Jill shopping experience. The new store concept provides a welcoming, easy-to-shop format that guides her through clearly merchandised product stories. All of our new stores will reflect our new design concept, and we intend to continue this design for new stores and refresh our existing stores as appropriate. We also plan to selectively close underperforming stores on an annual basis, including one in 2016.

Strengthen Omni-Channel Capabilities. We are pursuing a variety of initiatives designed to enhance our omni-channel capabilities focused on best serving our customer, wherever and whenever she chooses to shop. We have recently enhanced our management team to focus on the omni-channel customer experience, including the recent hires of a Chief Information Officer and a Senior Vice President of Marketing. We will continue to leverage our insight into customer attributes and behavior, which will guide strategic investments in our business. For example, we will enhance our ability to seamlessly manage our inventory across all of our channels. We also plan to implement technology to further fulfill customer demand, including ship from store to customer and order online for pickup in store. We expect our sustainable model, combined with our omni-channel initiatives, will continue to drive traffic, increase average transaction value and enhance conversion across all of our channels.

 

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Enhance Product Assortment. We believe there is an opportunity to grow our business by selectively broadening and enhancing our assortment in certain product categories, including our Pure Jill and Wearever sub-brands, our Women’s and Petite’s businesses, and accessories. Based on strong demand for our extended size product and our sub-brands, we believe we have the opportunity to expand and focus these categories in selected stores as well as test the offering in stand-alone store formats. We also believe we have the opportunity to continue to optimize our assortment architecture and productivity by delivering the right mix and flow of fashion and basics to our channels. In addition, we will continue delivering high quality customer-focused product assortments across each of our channels, while strengthening visual merchandising. Through our focused and enhanced product offering, particularly in our sub-brands and extended sizes, we believe we will continue to drive profitable sales growth over time.

Market

J.Jill operates as a specialty retailer in the large and growing women’s apparel industry. According to Euromonitor, total apparel sales in the United States grew from $301 billion in 2010 to $343 billion in 2015, reflecting a CAGR of 3%. Within apparel, E-commerce sales grew at a 15% CAGR from $23 billion to $46 billion, while brick-and-mortar sales remained relatively flat. As we continue to grow our business and expand beyond the United States, global apparel sales are expected to grow at a CAGR of 4%. Online sales are expected to grow at a CAGR of approximately 15%, which is significantly above the long-term growth of the broader apparel industry. Given our strong foundation that positions us to capitalize on the growth of online and mobile shopping, we believe we have the opportunity to grow our direct sales from 42% of our net sales to approximately 50% over the next few years. Within the women’s apparel market, we believe we have an opportunity to gain share within the Sportswear market for women over the age of 40, which has a market size of approximately $42 billion for the twelve month period ended May 2015, according to data from the NPD Group, Inc., and consists of 79 million women, according to a U.S. Census Bureau projection. With our sales of $0.6 billion and an active customer base of 1.7 million for the twelve months ended October 29, 2016, we believe we have significant runway ahead to gain share within this market.

J.Jill’s active customer base is primarily comprised of women in the attractive 40 to 65 age range. This age group contains the largest share of households earnings more than $100,000 annually and represents a sizable market opportunity for J.Jill.

 

   

% of U.S. Households Earning More Than $100K / Year By Age

 

   
  LOGO  
  Source:    U.S. Census Bureau  

Pillars

We manage J.Jill to deliver our goals to Create a great brand, to Build a successful business and to Make J.Jill a great place to work. To achieve this, we have aligned our strategy and team around four guiding pillars—Brand, Customer, Product and Channel.

Brand

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 have developed a unique brand image that encourages customers to build deep,

 

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personal connections with our brand and that differentiates us from our peers. Our brand promise to the J.Jill woman is to delight her with great wear-now product, to inspire her confidence through J.Jill’s approach to dressing and to provide her with friendly, guiding service wherever and whenever she chooses to shop. We use our key brand attributes—Naturally Authentic, Thoughtfully Engaging, Relaxed Femininity, Positive Energy and Confident Simplicity—to guide all brand messaging, which is consistently communicated to our customers, whether she chooses to shop on our www.jjill.com website, in our retail stores or through our catalog.

We believe we have the ability to create and maintain positive brand associations with customers. We have cultivated a differentiated brand that resonates with our loyal customers, as evidenced by one of the highest levels of brand satisfaction and one of the highest aided brand awareness scores relative to our peers.

Customer

While we find that women of all ages are attracted to our brand, our typical customer is 40 to 65 years old, is college educated and has an annual household income that exceeds $150,000. She leads a busy, yet balanced life, as she works outside the home, is involved in her community and has a family with children. She values comfort, ease and versatility in her wardrobe, in addition to quality fabrics and thoughtful details. She is fashion conscious and looks to J.Jill to interpret current trends most relevant to her needs and lifestyle. She buys wear-now product and is willing to invest in special, unique pieces. She is tech savvy, but also loves the J.Jill store experience and frequently engages with us across all channels.

Our customers are highly loyal, as evidenced by our average customer tenure of seven years and annual retention rate of 59% in pro forma fiscal year 2015. As our customers increase their tenure with our brand, they tend to spend more and order more frequently. Customers who have been with the brand for more than five years comprise approximately 61% of our active customer base, and in pro forma fiscal year 2015 represented approximately 70% of our gross sales and shopped with us 1.5 times more per year than new-to-brand customers. Additionally, as customers are retained over time, they tend to migrate from single channel customers to more valuable, omni-channel customers. Overall, our omni-channel customers shop nearly three more times per year and spend nearly three more times per year than our single-channel customers, and are highly loyal, as evidenced by their average annual retention rate of 84%. Omni-channel customers now reflect 21% of our active customer base for the twelve months ended October 29, 2016, which has increased from 19% in fiscal year 2014 and 20% in pro forma fiscal year 2015.

Product

Our Products

Our products are marketed under the J.Jill brand name and sold exclusively through our direct and retail channels. Our diverse assortment of apparel spans knit and woven tops, bottoms and dresses as well as sweaters and outerwear. We also offer a range of complementary footwear and accessories, including scarves, jewelry and hosiery. By presenting our merchandise to her in clear product stories, we strive to uncomplicate fashion across her entire wardrobe, providing comfortable, easy and versatile collections that enable her to dress confidently for a broad range of occasions. Our products are available across the full range of sizes including Misses, Petites, Women’s and Tall, and reflect a modern balance of style, quality, comfort and ease at accessible price points, with an average selling price of $45.

Our apparel assortment represents our brand concept of an easy, relaxed and inspired style that reflects the confidence and comfort of a woman with a rich, full life. The core products of our assortment are designed and merchandised in-house around clear product stories, grounded with essential yet versatile styles and fabrications that are typically represented across a season. Assortments are updated each month with fresh colors, layering options, novelty and fashion. Our foundation is comprised of a full assortment of knits, wovens and

 

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sweaters, and provides easy dressing options for everyday wear. In addition to our core assortment, we have developed two sub-brands as extensions of our brand aesthetic and our customer lifestyle needs:

 

    Pure Jill. Our Pure Jill sub-brand reflects the art of understated ease. It is designed with a clear focus and minimalist approach to style, and reflected in simple shapes, unstructured silhouettes, interesting textures, soft natural fabrics and artful details.

 

    Wearever. Our Wearever sub-brand consists of our refined rayon jersey knit collection that is designed for work, travel and home. It has a foundational collection of versatile shapes and proportions, in solids and prints that mix easily to provide endless options—everything works together. These soft knits are easy care and wrinkle-free, and always look great.

We also offer accessories in unique, versatile and wearable collections, inspired by the raw materials and organic motifs found in nature. Primarily driven by scarves and jewelry, they seamlessly complete our customer’s wardrobe.

Product Design and Development

Each year we offer 12 merchandise collections that are introduced approximately every four weeks and designed and delivered to provide a consistent flow of fresh products. All of our merchandise is designed in-house, and we create newness through the use of different fabrics, colors, patterns and silhouettes, with approximately 40% new styles in each monthly collection. We introduce each collection simultaneously on our website, in our retail stores and in our catalogs. We support each collection with continuous web updates, sequenced floor sets and 25 corresponding catalog editions in addition to regular, coordinated marketing activities. Our new product development lifecycle typically takes 48 weeks from design concept through delivery. We leverage feedback and purchasing data from our customer database along with continual collaborative hindsighting to guide our product and merchandising decision making. Joann Fielder, our Executive Vice President and Chief Creative and Merchandising Officer, oversees a team responsible for design, product development, sourcing, creative, merchandising and inventory planning. This close coordination between our creative and merchandising teams ensures that our product and brand message is clearly communicated to our customers across all channels.

We believe our merchandising strategy, flow of fresh, new styles and ability to integrate continuous customer feedback and purchasing data allow us to consistently deliver relevant products to our customers. Our disciplined planning and product lifecycle management strategies enable effective in-season inventory management to maximize inventory turn and productivity. Through these effective inventory management practices, we are able to minimize markdowns and promotional activity, allowing us to drive favorable gross margins.

Omni-Channel

We are an omni-channel retailer, delivering a seamless brand experience to our customer, wherever and whenever she chooses to shop across our website, retail stores and catalog. Driven by our direct-to-consumer heritage, we have a highly profitable omni-channel platform that is well-diversified across our direct and retail channels. In 1999, we became an omni-channel retailer, with the launch of our website and the opening of our first retail stores in Natick, Massachusetts and Providence, Rhode Island. Our channels reinforce one another and drive traffic to each other, and we deliver a consistent brand message by coordinating the release of our monthly collection across our website, retail stores and catalogs, allowing our customers to experience a uniform brand message. We believe that our customers’ buying decisions are influenced by this consistent messaging and experience across our sales channels. While 64% of new customers first engage with J.Jill through our retail stores, we have a strong track record of migrating customers from a single-channel customer to a more valuable, omni-channel customer over time.

 

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Direct Channel

Our direct channel, which represented 42% of total net sales for the twelve months ended October 29, 2016, consists of our website and catalog orders. Given our recent growth in the direct channel, we expect to grow this business to approximately 50% of total net sales over the next few years.

Industry-Leading E-commerce Platform

Our website, www.jjill.com, is a natural extension of our retail stores and our catalog, and provides customers with a broader range of colors and sizes, including Women’s and Tall sizes, than available in our stores. Our website has been optimized for shopping and purchasing across desktop, mobile phone and tablet devices. The website features updates on new collections, guidance on how to wear and match our products and the ability to chat live with a sales representative, all of which facilitate customer engagement and interaction. Additionally, we leverage our website as an efficient inventory clearance vehicle, which allows us to keep our retail store products fresh and representative of our newest collection. Within our direct channel, E-commerce represented 86% of pro forma fiscal year 2015 net sales, an increase from 85% of fiscal year 2014 net sales. For the twelve months ended October 29, 2016, E-Commerce represented 88% of net sales.

Catalog

Our catalogs are an integral part of our business. As one of our primary marketing vehicles, our catalogs promote and reinforce our brand image and drive customer acquisition and engagement across all of our channels. In fiscal year 2015, we produced and issued 25 catalog editions for a total circulation of 57 million copies distributed to both new and existing customers. As on our website and in our retail stores, our catalogs reflect our product offering in settings that align with our merchandise segments, including our sub-brands, and provide guidance on styling and wardrobing. Our catalogs are designed in-house, providing us with greater creative control as well as effectively managing our catalog production costs. Within our direct channel, catalog orders represented 14% of pro forma fiscal year 2015 net sales, a decrease from 15% of fiscal year 2014 net sales. For the twelve months ended October 29, 2016, catalog represented 12% of net sales.

Retail Channel

Our Stores

Our retail channel represented 58% of net sales for the twelve months ended October 29, 2016. As of October 29, 2016, we operated 271 stores across 43 states with approximately half located in lifestyle centers and the remaining in premium malls; all of our stores are leased. Our stores range in size from approximately 2,350 to 6,550 square feet, and the average store is approximately 3,750 square feet. Our stores are profitable, with 98% of our 261 full-price locations contributing positive 4-wall contribution in pro forma fiscal year 2015. The average unit volume of the store portfolio is $1.3 million with net sales per square foot of $355 in pro forma fiscal year 2015, up from $306 in fiscal year 2012.

We introduced a new store design concept in 2013 that showcases our brand concept and elevates, yet simplifies the J.Jill shopping experience. The new store concept provides a welcoming, easy-to-shop format that guides her through clearly merchandised product stories. With natural materials in soothing neutral colors, comfortable fabrics and elegant seating areas, the atmosphere is aspirational, yet attainable. When she cannot find an item in-stock at her local store, our concierge service leverages our in-store ordering platform and ships products to her home with no shipping charge. Between fiscal year 2013 and 2016, we remodeled or refreshed approximately 20 stores per year. In fiscal year 2017, we anticipate refreshing approximately 30 stores per year as leases come up for renewal. By the end of fiscal year 2016, approximately 70% of our store base will be refreshed.

 

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Site Selection

We believe our store expansion model supports our ability to grow our store footprint in both new and existing markets across the United States with the potential to simultaneously enhance our direct channel sales by migrating single-channel customers to omni-channel customers. New store locations are evaluated on various factors, including customer demographics within a market, concentration of existing customers, location of existing stores and center tenant quality and mix. We also leverage our customer database, including purchasing history and customer demographics, to determine geographic locations that may benefit from a retail store. We target opening new stores in high traffic locations with desirable demographic characteristics and favorable lease economics. We believe we can add up to 100 stores to our store base of 275 over the long term. We plan to open 10-15 new stores in fiscal year 2017 and in each year thereafter. We also plan to selectively close underperforming stores on an annual basis, including one in 2016.

Our store growth is supported by proven new store economics that we believe are compelling. Our new store operating model targets an average store size of 3,600 square feet and net sales per store of approximately $1.0 million in the first full year of operations. The new store operating model targets 4-wall contribution of approximately $270,000 within the first full year of operations. The average payback period of the new store operating model is approximately two years, reflecting a target pre-tax cash-on-cash return of approximately 50%.

The following table shows new store openings since fiscal year 2012. The stores opened in the last three years were primarily in lifestyle centers.

 

Store Open Year

  

Total Stores
Opened

    

Total Stores at
the End of the
Fiscal Year

 

Fiscal Year 2012

     7         227   

Fiscal Year 2013

     13         234   

Fiscal Year 2014

     19         248   

Pro Forma Fiscal Year 2015

     15         261   

Data Analytics

Driven by our rich catalog heritage and omni-channel platform, we have significant customer insights and data, which we use to drive the majority of our decision making. We have developed industry-leading data capture capabilities which allow us to match approximately 97% of transactions to an identifiable customer, which we believe is significantly ahead of the industry standard. Our extensive database of customer information contains personal identifiers (e.g., name, address and email), demographic overlay (e.g., age, household income and occupation), contact history (e.g., catalog and email) and transaction history (e.g., orders, returns and order value). As of the end of pro forma fiscal year 2015, our database had over ten million names.

We have significant visibility into our customers’ transaction behavior, including purchases made across our channels. As such, we can identify a single-channel customer who purchases a product through our website, our retail store or our catalog, as well as an omni-channel customer who purchases in more than one channel. We continually leverage this customer database to drive data analysis and insights that we use in managing our business. This analysis, along with continuous testing strategies, has created a foundation of knowledge that underlies our confidence in our strategies and our decision making. We also use the database to acquire, develop and retain customers and then create, build and maintain a relationship with each customer to drive optimum value. We believe our use of customer data and our data insight capabilities distinguish us from our competitors.

Marketing and Advertising

We leverage a variety of marketing and advertising vehicles to increase brand awareness, acquire new customers, drive customer traffic across our channels, and strengthen and reinforce our brand image. These

 

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include our 25 annual catalog editions, promotional mailings, email communications, digital and print advertisements and public relations initiatives. We leverage our customer database to strategically optimize the value of our marketing investments across customer segments and channels. This enables us to productively acquire new customers, effectively market to existing customers, increase customer retention levels and reactivate lapsed customers.

Our catalog, combined with an increased investment in online marketing, drive customer acquisition and engagement across all of our channels. We reinforce a consistent brand message by coordinating the release of our monthly collection across our website, retail stores and catalogs, allowing our customers to experience a uniform brand message wherever and whenever she chooses to shop. We also engage in a wide range of other marketing and advertising strategies to promote our brand, including media coverage in specialty publications and magazines.

In late 2014, we strategically increased our marketing investment to drive growth through the acquisition of new customers, reactivation of lapsed customers and the retention of existing customers. This investment has proven effective as, for example, in pro forma fiscal year 2015 we increased our marketing investment by 16%, resulting in active customer base growth of 12%, from 1.4 million to 1.5 million, including new customer growth of 15%. We have continued to increase our marketing investment in fiscal year 2016, resulting in continued growth of our active customer base to 1.7 million for the twelve months ended October 29, 2016. In pro forma fiscal 2015, we also experienced an increase in spend per customer by 6% as customers purchased more frequently and spent more per transaction. We believe these efforts will drive increased brand awareness, leading to higher sales in our stores and direct business over time. Our active customer base represents unique customers who have made a purchase within the past twelve months.

We offer a private label credit card program through an agreement with Comenity Capital Bank, under which they own the credit card receivables. We recently renewed our agreement with ADS on favorable terms to us. All credit card holders receive invitations to exclusive customer events and promotions including special purchase events three times per year, a special offer for her birthday, and a 5% discount when purchases are made on the card. We promote the benefits of the credit card throughout our website, our retail stores and our catalog through banner ads, signage and customer service and selling associate representatives. Additionally, we leverage regional print advertising to promote the card and its benefits to new and existing customers. We believe that our credit card program encourages customer loyalty, repeat visits and additional spending. In pro forma fiscal year 2015, 52% of our gross sales were generated by our credit card holders and we had nearly one million credit card holders. In addition, spend per customer for a J.Jill credit card holder was over two times higher in pro forma fiscal year 2015 versus a non-card holder.

Sourcing and Supply Strategy

We outsource the manufacturing of our products, which eliminates the need to own or operate manufacturing facilities. In order to efficiently source our products, we work primarily with agents who represent suppliers and factories. In pro forma fiscal year 2015 approximately 81% of our products were sourced through agents and 19% were sourced directly from suppliers and factories. We currently work with three primary agents that help us identify quality suppliers and coordinate our manufacturing requirements. Additionally, the agents manage the development of samples of merchandise produced in the factories, inspect finished merchandise, ensure the timely delivery of goods and carry out other administrative and oversight functions on our behalf. We source the remainder of our products by interacting directly with suppliers and factories both domestically and abroad.

Agents work with 24 suppliers on our behalf and we work directly with five suppliers. We source our merchandise globally from eight countries including China, India, the Philippines, Indonesia, and Vietnam, and no single supplier accounts for more than 20% of merchandise purchased. Approximately 75% of our products were sourced in Asia in pro forma fiscal year 2015.

 

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We have no long-term merchandise supply contracts as we typically transact business on an order-by-order basis to maintain flexibility. We believe our strong relationships with suppliers have provided us with the ability to negotiate favorable pricing terms, further improving our overall cost structure and profitability. Our dedicated sourcing team actively negotiates and manages product costs to deliver initial mark-up objectives. The team further focuses on quality control to ensure that merchandise meets required technical specifications and inspects the merchandise to ensure it meets our strict standards, including regular in-line inspections while goods are in production. Upon receipt, merchandise is further inspected on a test basis for consistency in cut, size and color, as well as for conformity with specifications and overall quality of manufacturing. Our sourcing team ensures that the customer has a consistent product and satisfying brand experience regardless of product size, color or collection.

Omni-Channel Distribution and Customer Contact Center

We lease our 520,000 square foot state-of-the-art distribution and customer contact center in Tilton, New Hampshire. The facility manages the receipt, storage, sorting, packing and distribution of merchandise for our direct and retail channels. Retail stores are replenished at least once a week from this facility and shipped by third-party delivery services, providing our retail stores with a steady flow of new inventory that helps to maintain product freshness. Our distribution system is designed to operate in a highly-efficient and cost-effective manner, including our ability to profitably support individual direct orders which we believe differentiates ourselves from our competitors. In pro forma fiscal year 2015, the distribution center handled 29.2 million units, split between 15.8 million retail (54%) and 13.4 million direct (46%) pieces, and we believe this facility is sufficient to support our future growth.

The customer contact center is an extension of our brand, providing a consistent customer experience at every stage of a purchase across all of our channels. We manage over 3.3 million annual customer interactions through our in-house customer contact center in Tilton, New Hampshire. Our customer contact center is responsible for nearly all live customer interactions, other than in retail stores, including order taking and further serves as an important feedback loop in gathering customer responses to our brand, product and service. We continue to refine and improve our contact center strategy and experience to support the constantly evolving digital landscape.

Information Systems

We use information systems to support business intelligence and processes across our sales channels. We continue to invest in information systems and technology to enhance the customer experience, drive sales and create operating efficiencies. We utilize third-party providers for customer database and customer campaign management, ensuring efficient maintenance of information in a secure, backed-up environment. We also utilize a proprietary E-commerce platform hosted by a third-party provider and a well-developed proprietary data warehouse for business intelligence.

We recently implemented a new core merchandising system in support of a single view of inventory across all channels, increased efficiency in sales support areas and superior product management and reporting tools. This system is foundational to our plans to create a more scalable and seamless omni-channel platform and enhances our capabilities in merchandising and inventory management. We also intend to replace our e-commerce platform in 2017 to drive future growth and further enable digital capabilities.

We also invested in a new central processor and upgraded infrastructure and communication networks to increase system processing speed and uptime, improve security, and increase system back-up and recovery capabilities. We also made strategic investments, including a significant upgrade to our retail inventory allocation system and the implementation of a new, scalable design and sourcing system (PLM) that enables significant benefits by enhancing collaboration and sharing in the creative process, increasing automation and adding analysis tools.

 

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Seasonality

While the retail business is generally seasonal in nature, we have historically not experienced significant seasonal fluctuations in our sales. Our merchandise offering drives consistent sales across seasons with no quarter contributing more than 26% of total annual net sales in pro forma fiscal year 2015.

Competition

The women’s apparel industry is highly competitive. We compete with local, national and international retail chains and department stores, specialty and discount stores, catalogs and internet businesses offering similar categories of merchandise. We compete primarily on the basis of design, service, quality and value. We believe our distinct combination of design, service, quality and value allows us to compete effectively and we believe we differentiate ourselves from competitors based on the strength of our brand, our industry-leading omni-channel platform, our strong data capabilities, our loyal customer base, our customer-focused product assortment and our highly experienced leadership team. Our competitors range from smaller, growing companies to considerably larger players with substantially greater financial, marketing and other resources.

Employees

As of January 28, 2017, we employed 1,406 full-time and 2,395 part-time employees. Of these employees, 342 are employed in our headquarters in Quincy, Massachusetts, 3,009 are employed in our retail stores and 450 work in our distribution and customer contact center and administrative office in Tilton, New Hampshire. The number of employees, particularly part-time employees, fluctuates depending upon seasonal needs.

Our employees are not represented by a labor union and are not party to a collective bargaining agreement. We consider our relations with our employees to be good.

Intellectual Property

Our trademarks are important to our marketing efforts. We own or have the rights to use certain trademarks, service marks and trade names that are registered with the U.S. Patent and Trademark Office or other foreign trademark registration offices or exist under common law in the United States and other jurisdictions. Trademarks that are important in identifying and distinguishing our products and services include, but are not limited to, J.Jill®, The J.Jill Wearever Collection® and Pure Jill®. Our rights to some of these trademarks may be limited to select markets. We also own domain names, including “www.jjill.com.”

Properties

We are headquartered in Quincy, Massachusetts. Our principal executive offices are leased under a lease agreement expiring in December 2021, with options to renew thereafter. Our 520,000 square foot distribution and customer contact center, located in Tilton, New Hampshire, supports both our direct and retail channels and is leased under a lease agreement expiring in September 2030, with options to renew thereafter. We consider these properties to be in good condition and believe that our facilities are adequate for operations and provide sufficient capacity to meet our anticipated future requirements.

As of January 28, 2017, we operated 275 stores in 43 states. Of these stores, 273 are full-price locations with approximately half located in lifestyle centers and half in premium malls. The average size of our stores is approximately 3,750 square feet. All of our retail stores are leased from third parties and new stores historically have had terms of ten years. The average remaining lease term is 4.6 years. A portion of our leases have options to renew for periods up to five years. Generally, store leases contain standard provisions concerning the payment of rent, events of default and the rights and obligations of each party. Rent due under the leases is generally comprised of annual base rent plus a contingent rent payment based on the store’s sales in excess of a specified threshold. Some of the leases also contain early termination options, which can be exercised by us or the landlord under certain conditions. The leases also generally require us to pay real estate taxes, insurance and certain common area costs. We renegotiate with landlords to obtain more favorable terms as opportunities arise.

 

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Table of Contents

The current terms of our leases expire as follows:

 

Fiscal Years Lease Terms Expire

 

Number of Stores

 

2016 – 2018

    107   

2019 – 2021

    55   

2022 – 2024

    63   

2025 and later

    50   

The table below sets forth the number of retail stores by state that we operated as of January 28, 2017.

 

State

  

Number
of Stores

    

State

  

Number
of Stores

    

State

  

Number
of Stores

 

Alabama

     5      

Louisiana

     3      

Ohio

     9   

Arizona

     6      

Maine

     2      

Oklahoma

     2   

Arkansas

     3      

Maryland

     8      

Oregon

     5   

California

     30      

Massachusetts

     13      

Pennsylvania

     11   

Colorado

     7      

Michigan

     9      

Rhode Island

     2   

Connecticut

     8      

Minnesota

     8      

South Carolina

     4   

Delaware

     1      

Mississippi

     1      

Tennessee

     6   

Florida

     12      

Missouri

     6      

Texas

     17   

Georgia

     10      

Nebraska

     2      

Utah

     1   

Idaho

     1      

Nevada

     2      

Vermont

     1   

Illinois

     16      

New Hampshire

     1      

Virginia

     10   

Indiana

     2      

New Jersey

     14      

Washington

     6   

Iowa

     2      

New Mexico

     1      

Wisconsin

     4   

Kansas

     2      

New York

     11         

Kentucky

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