By  on November 30, 2007

Rising above the retail fray, J. Crew Group Inc. on Thursday posted better-than-expected third-quarter results and elevated its outlook for the fourth quarter.

J. Crew extended its string of very positive results by reporting third-quarter revenues increased 21 percent to $332.7 million; same-store sales rose 5 percent on a calendar-adjusted basis, and operating income increased 44 percent to $47.7 million, versus $33.2 million in the third quarter of fiscal 2006.

Net income was 42 cents a share versus 27 cents a share on an adjusted basis, reflecting a normalized tax rate. In total dollars, net was $26.8 million versus $26 million in the same period a year ago, when there was an unusually low tax rate of 7.1 percent compared with 39.8 percent in the latest quarter

As a result of the strong quarter, the company now expects fiscal 2007 diluted earnings per share of $1.50 to $1.52, compared with previous guidance of $1.42 to $1.46.

Among the highlights of the quarter cited by executives: 

- Direct sales that grew 36 percent to $90 million, but are expected to moderate in the fourth quarter.

- Strong reaction to differentiated colors and details in the collections.

- Sales, general and administrative expenses leverage.

In addition, there's been ongoing quality and style upgrades for a luxury appeal resulting in some higher prices, though still lower than those offered by designers. "We don't see any resistance to price and it's all relevant to our investment in higher-price goods," said Millard "Mickey" Drexler, J. Crew's chairman and chief executive officer, during a conference call. "But if you look at our prices, none of them are unreasonable."

Productivity is also up to $560 in sales a square foot from $510 a year ago. "We are constantly asking what can we do to drive our productivity and maximize every square inch," Drexler said.

"The only way to rise above the crowd and build a powerful franchise is to continue to stand for quality business. We will continue to push the envelope in terms of quality and style, as we move further into the holiday business."Competition is rising, but Drexler said he's "thrilled" that Britain's Topshop chain and Sweden's H&M are infiltrating America. "We just stay away from the cheaper fabrics they do well," Drexler said. "We are moving chunks of our investments out of certain lower-priced fabrications. We don't play the unit velocity game. We want to be in the margin dollar velocity game."

He also outlined projects reflecting some research and development. They include the first two men's-only J. Crew stores; Madewell's first permanent Manhattan store slated to open in late January (a temporary store has been operating in the meantime) and gift card kiosks that are being tested in seven stores. They were installed about a week ago. The company is also expanding its costume jewelry assortment.

Drexler suggested that by segmenting men's, either through separate units or expanding existing units, it would free up space in key stores that are crammed with merchandise, and help make shopping easier. The Rockefeller Center store has a separate men's floor and it's one of the chain's top volume units.

J. Crew Group operates 198 retail stores (including four Crewcuts and six Madewell stores), the J. Crew catalogue, and 61 outlets.

In the fourth quarter, the company will open seven stores and close one for a net gain of 34 new stores and square footage growth of 10 percent for the year.

Explaining why direct will slow to high-single-digit growth this quarter, Drexler said inventories are planned conservatively. "December is always a treacherous, uncomfortable month" when it's "very hard to forecast a fashion business."

The impressive growth to date in the direct division has been driven by several factors, among them a growing customer file, fewer returns, adding expertise to the team and getting more creative in selecting locales for photo shoots. Also, one third of the product is unique to the channel and not available in the J. Crew stores.

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