Jo-Ann Stores announced today that they have agreed to be acquired by Leonard Green & Partners, L.P., a private equity firm, for approximately $1.6 billion. The $61 per share purchase price is a 34% premium over the company’s trading price at market close on Wednesday.

Leonard Green & Partners is a Los Angeles-based private equity firm with over $9 billion in managed capital. Their retail investments include Whole Foods Market, PETCO Animal Supplies, Sports Authority, The Container Store, David’s Bridal, and Neiman Marcus.

The purchase was approved by a unanimous vote of the company’s board of directors, after a recommendation was made to it by a special committee of independent directors.

Jo-Ann Stores’ lead director and chairman of the Special Committee, Scott Cowen, explained the decision:

After a thorough assessment, the Special Committee and the board of directors concluded that the proposal put forth by Leonard Green & Partners is the best way to maximize value for shareholders, who will receive a substantial and immediate cash premium for their shares. While the company was not actively seeking this transaction, once the offer was received and negotiated, the Special Committee determined that it was in the best interest of the company’s shareholders, as well as its employees and other partners. Leonard Green & Partners has significant expertise in the retail space and is dedicated to cultivating and supporting the growth of Jo-Ann’s business.

The transaction still has to be approved by a vote of Jo-Ann Stores stockholders, and receive regulatory approval. Jo-Ann Stores also holds the right to solicit other competing offers for itself until February 14th, 2011 to ensure its stockholders receive the best deal.

Financing for the transaction will be provided by J.P. Morgan, Bank of America Merrill Lynch and TCW/Crescent Mezzanine.

The buyout of Jo-Ann Stores by a private equity firm will leave the struggling AC Moore as the only major craft chain that is publicly held. Hobby Lobby is family owned, and Michaels is owned by private equity groups Bain and Blackstone (although rumors persist that a public stock offering is in the near future).

Jo-Ann Stores has been growing steadily the past few years, increasingly its sales and improving its financial results, making it an attractive takeover target in a declining retail economy. On December 1st, the company announced its 3rd quarter 2011 sales (quarter ended Oct. 31st). Net sales were up 5.1% over the 3rd quarter of 2010, while same-store sales were up 4.1%. For the nearly-concluded Fiscal 2011 year, the company said it expected to open 30 new stores and close 25 stores. In Fiscal 2012 they are planning even more expansion – anticipating opening 55 to 60 new stores. These numbers are in addition to large numbers of store remodels that are also being done. Online has also been an area of growth for the company, where sales have gone up in double-digit percentages, although the website still accounts for only a tiny portion of the company’s total.

The transaction is expected to be completed in the first half of 2011.

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Jo-Ann Stores, Inc announced its first quarter 2011 financial results on May 26th. The quarter ended on May 1st, 2010.

Net income from the quarter was $18.2 million ($.66 per diluted share) compared with 2010′s first quarter of $8.6 million ($.33 per diluted share).

First quarter net sales were up 4.4%, from $460.0 million last year to $480.3 million this year. Same-store sales saw a 4.1% increase, compared to a 1% in the first quarter last year.

Here are the company’s sales broken down by store type:

• Large format stores: Net sales increased 3.9% over the same period last year, to $257.2 million. Same-store sales increased 1.9% for the period after being down .6% in the period last year.
• Small format stores: Net sales were up 4.9% to $212.8 million over the same period last year. Same-store sales were up 6.9%, after being up 3% for the same quarter last year.
• Online: Sales were up 8.4% over the same period last year to $10.3 million. According to Jo-Ann Stores executives in the conference call announcing the results, Joann.com only accounts for 2.1% of the company’s sales, although there are 33% more SKUs available online now than this time last year.

Gross margin increased in the first quarter to 50.5%, up from 48.5% in the same quarter last year. The company attributes this increase to “global sourcing efforts, improved inventory management of seasonal and clearance merchandise, and promotional markdown optimization.” Company executives stressed in the earnings call that the company cannot continue this rate of improvement in their gross margin.

The company had no debt outstanding at the end of the quarter, and their average debt load during the quarter was $14 million. At the end of the first quarter of last fiscal year, the company had $50.5 million in debt. Their average debt load during the previous year’s same quarter was $55 million. The company’s cash position also improved to $160.7 million, up $75.7 million from the previous year’s same quarter.

For the current fiscal year, the company expects to open 30 new stores, close 25 stores, and remodel 40 stores. In the first quarter, the company opened ten stores (two large format & eight small format) and closed six small format stores. It also remodeled 12 stores, including transitioning one store from small to large format.

Other interesting points from the earnings call:

• 53% of the company’s sales come from the sewing department
• The food department is emerging as a strong category
• Transactions are up 2.9% over last year same quarter; Ticket amount is also up.
• The company is keeping lower inventory levels than it has historically.
• The company says consumers are realizing that retailers are keeping tight inventories on seasonal items so they aren’t delaying those purchases which helps sell-through and margin on those items.
• Scrapbooking as a category was not mentioned at all in the earnings call.

One of the company’s major competitors is Walmart, which is accelerating the pace of store remodels that are removing fabric departments from many stores. Walmart’s planogram reset in June will be a key indicator of whether they intend to reduce footage in the crafts department. According to the Jo-Ann Stores earnings call, a previous reset showed vendor consolidation and a reduction in SKUs but no reduction in the linear footage of the department.

Darrell Webb, chairman and chief executive officer stated, “Our team delivered record financial results in the first quarter of fiscal 2011. Sales remained strong, even as we began to cycle positive sales results from the previous year. Our seasonal merchandise and custom framing categories, which struggled through the recession, delivered positive sales trends for the first time in two years. I was also pleased with our continuing progress on global sourcing and inventory management which contributed to our gross margin improvement.” Webb concluded, “We believe Jo-Ann Stores is positioned for sustainable sales and margin growth as we execute our strategic initiatives.”

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Jo-Ann Stores, Inc. reported their first quarter 2011 sales today, and the company continued their strong performance from the end of 2010.

For the quarter of fiscal 2011 which ended May 1st, 2010, net sales increased 4.4% to $480.3 million compared to $460.0 million for the same period in fiscal 2010. Same-store sales increased 4.1% versus a same-store sales increase of 1.0% for the first quarter last year. Traffic increased 2.9% and average ticket increased 1.2%.

Jo-Ann was led by the performance of its large-format stores. Net sales for the quarter in those stores increased 3.9% to $257.2 million compared to the same period last year. Same-store sales for the large-format stores increased 1.9% compared with a decrease of 0.6% in the first quarter last year.

The company’s small-format stores were also strong contributors, with net sales in those stores increasing 4.9% to $212.8 million compared to the same period last year. Same-store sales in these small-format stores increased 6.9% compared with an increase of 3.0% in the first quarter last year.

Jo-Ann Stores’ sales online through Joann.com also grew significantly in the first quarter, up 8.4% to $10.3 million compared to the same period last year.

Same-store sales in the sewing segment were up 5.5% over the same period last year. Same-store sales in non-sewing categories were up 3.2%, which the company attributes to growth in core craft merchandise categories and strong seasonal category performance.

The company’s stock (NYSE: JAS) closed down $2.31 (5.21%) to $42.07 on the news. However, the entire market dropped significantly on the day, with the Dow closing down 3.2% for the day.

Jo-Ann Stores was also recently named by Forbes magazine as one of America’s 100 most trustworthy companies based on their accounting, corporate governance, and management practices. The Forbes list was based on the results of a survey conducted for the magazine by Audit Integrity.

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