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J. Crew on the Mark: Across-the-Board Gains As Earnings Jump 51%

Bolstered by robust sales across its segments, J. Crew Group posted operating profits that soared 51 percent in the third quarter.

J. Crew is putting preppy back on point.

Bolstered by robust sales across its women’s, men’s and children’s businesses, the J. Crew Group reported operating profits on Tuesday that soared 51 percent in the third quarter, as the retailer’s bottom line swung to a profit from a loss. Based on the company’s stellar performance, management raised its full-year earnings guidance after saying it was bullish on the outlook for holiday shopping.

“We remain confident as we enter the holiday season and expect continued strength from our third-quarter drivers, while layering on our important gift-giving and cold-weather assortment,” Millard “Mickey” Drexler, chairman and chief executive officer, said during a call with Wall Street analysts.

For the three months ended Oct. 28, the company reported net income of $26 million, or 40 cents a diluted share, which compares with a loss of $336,000, or 1 cent, in the year-ago period. Adjusted earnings related to the company’s tax rate were 27 cents a share. Results include $500,000 of stock option expense.

Sales at the preppy apparel retailer jumped 23 percent in the quarter to $275.6 million from $223.4 million last year. Total same-store sales increased 19 percent, and direct sales from the company’s Web site and mail-order catalogue rose 18 percent to $66.3 million. Operating income increased 51 percent to $33.2 million, and there was a 210 basis-point improvement in operating margin compared with last year.

For the nine-month period, earnings were $27.7 million, or 62 cents a diluted share, which compares with a loss of $435,000, or 2 cents, in the prior year’s period. Sales increased 15.4 percent to $785.4 million from $663.3 million.

J. Crew shares rose 2.6 percent to $36.26 in after-market trading on the New York Stock Exchange, after closing up 4 percent to $35.35 at the bell. Since its initial public offering earlier this year, the stock price has increased about 29 percent.

“We experienced across-the-board sales strength in our women’s, men’s and crewcut businesses, driven by our focus on offering what we call here ‘accessible luxury’ through our extraordinary commitment for quality, design, style and customer service and everything we do across all of our businesses,” Drexler said on the conference call.

Retail analyst Jennifer Black, of Jennifer Black and Associates, said in a report: “The company has maintained a cohesive product assortment that J. Crew refers to as ‘affordable luxury.’ As we have said before, affordable luxury is where the consumer is buying big. J. Crew has taken advantage of this trend, and it is showing in both the comp-store gains, as well as the positive leverage on the bottom line.”

During the quarter, J. Crew had a 160 basis-point expansion in merchandise margin. “It was largely through higher full-price sell-through than we anticipated, and that was just driven by the strong comps on the top line,” Drexler said. “As you know, when you experience a comp like that, you potentially have higher sell-throughs and higher flow-throughs of margin, which we did.”

Management also said that, in order to improve customer satisfaction, the company has shifted its focus from “lots of suitings” and “wardrobings” to reinvestment in key, novelty goods such as cold-weather items.

The company raised its earnings guidance for fiscal 2006 to a range of 95 to 97 cents a diluted share, from previous guidance of between 86 and 88 cents. It eventually plans 40 more J. Crew stores.

During the quarter, J. Crew opened 11 new stores, including eight retail, one factory and two Madewell locations. Regarding its children’s wear business, Drexler said he was more than satisfied with its performance.

“We are very pleased with the reaction to crewcuts, which filled the niche in the market where there has been — in our opinion — a void for better quality boys’ and girls’ apparel,” Drexler said. “We opened two new crewcut shops during the third quarter.”

The company plans to launch 10 to 20 mall-based crewcuts shops next year and one or two stand-alone stores. Drexler also said he is pleased with the progress of Madewell, which was launched in August and sells casual apparel that targets women in their Twenties and beyond who are looking for an edgy twist on classic trends.