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Headwinds Persist as J. Crew Enters Spring

Fourth-quarter results were marked by a decline in net profits but gains in adjusted earnings and on the revenue side as well.

Though it’s still early for spring selling, J. Crew Group Inc. is feeling no letup in the pressures and headwinds experienced last year.

This story first appeared in the March 25, 2014 issue of WWD.  Subscribe Today.

“In general, the difficult traffic trends we saw in the fourth quarter are persisting into the early part of the first quarter,” Stuart Haselden, J. Crew’s chief financial officer, told WWD, just after the company reported its fourth-quarter results, marked by a decline in net profits but gains in adjusted earnings and on the revenue side as well.

“The promotional environment continues to be challenging,” Haselden added. “Those things are affecting all retailers in the industry and we are certainly not immune to that. The weather hasn’t helped either.”

J. Crew entered the spring season with its inventory level still “a little high — we wish we had less,” Haselden acknowledged, though he added, “When we look at the composition of the inventory, we have less that’s old than we do current spring-summer inventory. The increase is related to flows of new products for Q1 versus fall-holiday [merchandise] we didn’t clear.”

Looking forward, Haselden said, “Given the traffic trends, and just the headwinds there, we could see some pressure on margins going forward based on the amount of inventory we have.”

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For the fourth quarter ended Feb. 1, J. Crew’s net fell 42 percent to $5.9 million from $10.2 million in the year-ago period. The net was brought down by a $6.1 million dividend-equivalent expense.

However, adjusted earnings before interest, taxes, depreciation and amortization rose 7.5 percent to $75.7 million from $70.4 million in the fourth quarter last year.

Revenues in the quarter increased 7 percent to $686.2 million, from $642.9 million, with comparable company sales increasing 3 percent.

J. Crew’s gross margin rate slipped to 36.8 percent in the last quarter, compared to 38.4 percent a year ago, largely resulting from “a combination of the promotional environment and actions taken to move through the inventory to make sure we ended the quarter with current inventory and that we weren’t carrying a lot of inventory,” Haselden said.

Despite headwinds, Haselden did say that J. Crew’s international strategy began to get traction with store openings; that Madewell continued to ramp up, and that the factory outlet business was “pretty strong with healthy new store opportunities there.” J. Crew plans to open two stores in Hong Kong in May and last fall opened three stores in the U.K., as well as a unit in Toronto, giving the retailer 10 locations in Canada.

In addition, “The direct business grew faster than the business overall,” Haselden said. “Folks just seem to be ready to shop online more than ever before. That plays to our strength given the compelling online offering we have. It represents about 30 percent of our business, which is higher than most of our competitors.”

The direct business was up 10 percent last quarter, which came on top of a 27 percent increase in the year-ago fourth quarter that had an extra week.

Haselden would not comment on the company’s future ownership. Talks to be acquired by Fast Retailing Co. Ltd. reportedly recently broke down, suggesting that J. Crew could proceed with an initial public offering with Goldman Sachs. TPG and Leonard Green & Partners bought J. Crew for $3 billion in 2011, taking the company private. J. Crew reports its financial results because of its publicly held debt.

For the year, J. Crew’s net income amounted to $88.1 million, compared to $96.1 million in 2012. Adjusted EBITDA increased to $370.2 million from $359.6 million. Revenues increased 9 percent to $2.43 billion, with comparable company sales increasing 3 percent. Store sales increased 6 percent to $1.6 billion, and direct sales increased 16 percent to $755.9 million. Gross margin was 41.4 percent, compared to 44.3 percent in the year before.

“The entire year was marked by difficult traffic, headwinds and a more pronounced promotional environment. That certainly was the case in Q4,” Haselden stressed.

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