WWD.com/business-news/financial/j-crew-3rd-qtr-profit-leaps-2379799/
government-trade
government-trade

J. Crew Profit More Than Doubles

J. Crew Group reported net income of $43.9 million for the third quarter ended Oct. 31.

J. Crew at the Galleria Dallas.

J. Crew Group is sticking with the formula — and it’s paying off.

This story first appeared in the November 25, 2009 issue of WWD.  Subscribe Today.

The New York-based specialty retailer on Tuesday reported net income of $43.9 million, or 67 cents a diluted share, for the third quarter ended Oct. 31, more than twice the $19 million, or 30 cents, reported in last year’s period and 9 cents above analysts’ consensus estimates.

Revenues grew 14.1 percent, to $414.1 million from $363.1 million, as same-store sales advanced 8 percent. Included in revenues was 19.6 percent growth in store sales, to $300.1 million, and a 3.6 percent pickup in direct sales, to $105.5 million. Gross margins jumped to 48.4 percent of sales in the quarter, up from 41.6 percent a year ago.

On a conference call with analysts, Millard “Mickey” Drexler, chairman and chief executive officer, said, “Regardless of the economic environment, our long-term mission does not change — it’s about product, it’s about quality, it’s about design, it’s about service, it’s about creativity. It might sound simple, but in this business, sometimes the simplest things are the hardest to achieve.”

Although the third-quarter results were strong, the company is still being conservative in its holiday forecasting. Chief financial officer James Sculley said, “Our fourth-quarter outlook reflects comp-store sales growth in the high-single digits and direct sales growth in the mid- to high-single digits.”

Pressed by analysts to identify from whom J. Crew was taking market share, Drexler declined to name names, but said: “We’re not specifically looking at where our customer came from. You cannot buy J. Crew anyplace else but in our stores or online. We control our distribution and our pricing. I don’t know if we’re getting share or not, but I do know that if you sell a product that’s sold in other places today, you better be prepared to meet prices or lose customers.”

Drexler said that in his early days in department store retailing, “my inventories were, in fact, managed too often by my competition. So, as I look at it, if we can offer equivalent or better style, better value, better service, I don’t think the customer really leaves someone, but she will join someone else.”

Drexler said he was pleased with the Madewell line’s progress and said: “Customers are loving the tweaks we’ve made to our assortments.” Madewell has moved away from classic T-shirts and begun to offer more fashion merchandise — such as plaid and chambray shirts, denim leggings, rail-straight jeans, blazers and boots — and customers are responding.

Drexler said there are no plans for an aggressive rollout of Madewell, which he said was in a “somewhat incubation stage.” However, he added its e-commerce launch next year should “make a big difference” in getting more exposure for the brand.

Turning to opportunities for spring and beyond, Drexler said the company is determined to “own the men’s suit business” by stacking up its $650 Ludlow or Aldrich model against a $2,000 suit made in Italy. J. Crew also expects jewelry, new versions of art T-shirts, women’s blazers, an expanded assortment of dresses, slimmer-fit shirts and men’s dress shirts to continue to have traction next year.

There are no plans to expand internationally or open pop-up stores in the foreseeable future, he said.

The firm said it expects earnings per share in the crucial fourth quarter of 37 cents to 42 cents, effectively straddling the current consensus estimate of 40 cents.

For the nine months, J. Crew’s profits grew 22.6 percent to $82.9 million, or $1.29 a diluted share, from $67.7 million, or $1.06, in the first three quarters of 2008. Revenues expanded 7.5 percent to $1.12 billion from $1.04 billion. Comparable-store sales declined 0.4 percent, matching the performance of the prior year.

J. Crew’s numbers were disclosed after the close of the markets on Tuesday. Earlier in the day, American Eagle Outfitters Inc. met analyst expectations with a 38.9 percent increase in third-quarter profits.

For the three months ended Oct. 31, the Pittsburgh-based teen retailer reported net income of $59.2 million, or 28 cents a diluted share, compared with year-ago profits of $42.6 million, or 21 cents. Subtracting a tax benefit of 7 cents a share, the firm’s third-quarter profits equaled 21 cents a share, in line with the average estimates for adjusted earnings of analysts polled by Yahoo Finance.

Sales in the quarter fell 0.7 percent, to $749 million from $754 million, and declined 4 percent on a same-store sales basis. At AEO Direct, sales rose 10 percent. Gross margin declined to 40.1 percent of sales from 41 percent in the 2008 period.

“The AE brand showed improvement across key merchandise categories,” said ceo Jim O’Donnell, who described the quarterly results as “below our standards.” He lauded top-line growth at the firm’s aerie and Martin + Osa nameplates.

The company said comparable-store sales were down 5 percent during the first three weeks of November, but because of the importance of the Thanksgiving weekend, fourth-quarter guidance would be provided as part of its November sales report on Dec. 3.

Todd Slater, retail analyst at Lazard Capital Markets, maintained his “hold” rating on the stock as well as his estimate for fourth-quarter EPS of 32 cents, assuming a low-single- to midsingle-digit increase in same-store sales. He said AEO’s inventory “could be a cause for concern” unless comps trend more positively in the quarter.

In the nine months, net income fell 25 percent to $109.7 million, or 53 cents a diluted share, as sales contracted 3.1 percent to $2.02 billion.