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J. Crew Net Falls in Third Qtr., but Revenues Rise

The results were impacted by costs associated with the retailer's acquisition last March by TPG Capital L.P. and Leonard Green & Partners L.P.

Though the bottom line was impacted by costs related to its going private last March, J. Crew Group Inc.’s operations and sales improved in the third quarter, fueled by greater full-price selling and a retooled women’s assortment.

This story first appeared in the December 2, 2011 issue of WWD.  Subscribe Today.

J. Crew’s net income for the third quarter ended Oct. 29 dropped 43 percent to $21.6 million from $37.8 million a year ago. But, executives talked up adjusted earnings before interest, taxes, depreciation and amortization as a better gauge of the company’s performance, and said adjusted EBITDA rose to $83.8 million from $78.2 million.

The big hit to the bottom line in the third quarter was $10.8 million in purchasing accounting items, which involves revaluing inventory and leases which is done after a company is sold, affecting buying, merchandise margins and occupancy costs. Executives said acquisition-related costs will continue for some time. J. Crew was purchased by TPG Capital and Leonard Green & Partners for $3 billion.

In the third quarter, the top line was strong. Total revenues increased 12 percent to $479.6 million from $429.3 million, and comparable revenues were up 5 percent. Aside from increasing full-price selling, there were several bestsellers including mini pants, schoolboy blazers, ballet flats, novelty fashion and prints. “The third quarter was when we were really able to retool the line,” James Scully, chief administrative and financial officer, said during a conference call Thursday.

In the first half of this year and fourth quarter of 2010, J. Crew experienced softness in women’s. Scully said the collection at that time was “too broad” but now has “a stronger point of view” that’s focused on key categories and items. Also, inventories are more in line with sales trends, and were up 11 percent last quarter compared to 15 percent in the second quarter.

At this juncture, J. Crew considers handbags and shoes “important initiatives” to further bolster the collection. Scully said results in women’s were stronger in the third quarter than recent quarters, and that the business continued to be strong in men’s wear and accessories.

Regarding other growth initiatives, the company sees low-to mid-single-digit square-footage growth domestically in the next three to five years.

Abroad, additional lease signings appear imminent in Canada where J. Crew opened its first store in the Yorkdale Shopping Centre in Toronto earlier this year. After Canada, J. Crew on the international front is most keen on opening stores in the U.K., and potentially Hong Kong and China. From its direct business, J. Crew currently ships to the U.K., France, Germany and Italy and is considering additional western European countries for the next wave.

Square footage on outlets will grow 10 percent over the next three to five years, and the direct business is seen experiencing “outsized” growth in the period.

Merchandise margins were up 40 basis points and would have been double that were it not for the reduction in shipping revenues due to more free shipping.

The Madewell division is moving forward. Upwards of 20 openings are seen for next year, compared to 13 this year. That should bring the total number of Madewell units to more than 50 in 2012. Madewell has yet to turn a profit but is expected to eventually as it gains scale to ease the growing pains and leverage the cost structure.