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Getting Back on Course: J. Crew Operating Profits Leap to $20M in Quarter

The J. Crew revival is under way, judging by the improvements in sales for the fourth quarter and fiscal year ended Jan. 29.

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NEW YORK — J. Crew is in a groove, and it has stronger numbers to prove it.

The retailer will disclose today significant gains for the fourth quarter and fiscal year ended Jan. 29. In a preview given to WWD, J. Crew said fourth-quarter operating income jumped to $20 million, from $1 million in the year-ago period, and revenues leaped 26 percent to $264 million from $210 million.

The company did have a net loss of $52 million, but $50 million of that was from debt refinancing, a key component to the turnaround. Excluding the refinancing, the net loss for the quarter was $2 million, an $18 million decrease in the loss over the year-ago fourth quarter.

Highlights for the full year included a 17 percent jump in revenues, to $804 million from $690 million, and an operating income increase to $38 million, compared to an operating loss of $31 million the year before.

Executives have been attacking the business from all angles, though at the core of the turnaround drive are efforts to improve the quality of the clothes and provide consistent fits. That’s been largely achieved through sourcing changes.

There has also been a massive infusion of vibrant colors and the addition of some higher-ticket and limited-edition items, such as shearling coats. Previously underplayed categories, particularly shoes, accessories and bridal, have been built up in recent seasons, and some new ones are being introduced. Jewelry, for example, will be part of the mix beginning in May, company executives disclosed.

The J. Crew team cited debt reduction as critical. The company has $297 million in long-term debt, but has been whittling it down to continue to improve the profit picture going forward. Debt restructuring efforts are expected to reduce annual interest expense by $16 million in 2005, the company said.

By reenergizing itself, the brand is expected to go down the path to a public offering, possibly in 2006, as previously reported. J. Crew has been majority owned by The Texas Pacific Group since 1997 and was founded by the Cinader family.

Two years ago, Mickey Drexler, Gap Inc.’s former chief executive officer, was brought in to reverse years of deterioration in J. Crew’s image and financial performance. One of the first things he did was recruit a colleague from the Old Navy division of Gap, Jeff Pfeifle, to be president. Drexler also sought to reduce overhead and cut down the staff at J. Crew’s headquarters, at Ninth Street and Broadway, to 400 people from 600.

An IPO, aside from enabling Texas Pacific to make money off its investment, would fuel store expansion, which lately has been on hold. J. Crew operates 157 stores, as well as the J. Crew catalogue business, jcrew.com and 41 outlets. Previously, executives have said the store count could double.

In interviews on Tuesday, J. Crew executives stayed clear of declaring the company turned around, or predicting when it will post profits on a net basis. However, they were ebullient discussing how far along J. Crew has come.

“We are pleased with both our fourth-quarter and full-year results,” Drexler, J. Crew’s chairman and ceo, said in a statement. “Our obsessive focus on quality, style and design, along with endless attention to our customers’ needs, is reflected in J. Crew’s performance.”

“We feel really good about what we accomplished. The results are far better than we thought to be able to accomplish,” added Pfeifle in an interview. “We’ve built strong relationships with our customers and continue to do so. The product has resonated with customers. They like the colors. They love the fabrications and they have responded to details and limited-edition items.

“Shoes and accessories are two really, really strong areas for us,” particularly the English leather collection of handbags, Manhattan loafers, Paris ballet flats, suede shoes and limited-edition $1,500 shearling coats, he added.

For the year, retail sales reached $580 million from $487 million, primarily due to a comp-store gain of 16 percent. Direct sales increased by 14 percent to $198 million, and there were $26 million in additional revenues such as shipping and handling.

The net loss for 2004 was $100 million, compared with a loss of $50 million the year before, including the debt refinancing of $50 million. Also, 2003 included a gain on exchange of debt of $41 million. Adjusted for these financing transactions, the net loss in 2004 would have been $50 million, compared to a net loss of $91 million last year.

J. Crew’s gross margin for the fourth quarter was 39 percent, about the same as the year before. Selling, general and administrative expenses in the quarter were $82 million, or 31 percent of revenues, compared with $80 million, or 38 percent of revenues in the prior year. The decrease as a percentage of revenues was driven primarily by operating leverage attained through comp-store gains.

Gross margin for the fiscal year increased to 40 percent from 36 percent the year before due to better full-price selling. According to company information, last year’s gross margin was negatively impacted by the liquidation of obsolete inventories.

The company said selling, general and administrative expenses during the year were $287 million, or 36 percent of revenues, compared to $281 million, or 41 percent of revenues in the prior year. The percent decrease was driven primarily by operating leverage achieved through higher comp-store sales and reduced catalogue selling expenses.

The company described how it restructured its debt. It redeemed $319 million of its long-term debt with $275 million in new term loans borrowed by the company and internally available funds. The new term loans were subsequently converted into equivalent 9 percent senior subordinated notes due in 2014. The company also has a $22 million note due in 2008. The $50 million loss posted for the fourth quarter stemmed from fees and write-offs due to these transactions.

“It’s a good capitalization for the company,” said Amanda Bokman, the chief financial officer. “We are continuing our momentum.”

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