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J. Crew Profits Rise

In the midst of the sharpest downturn since the Great Depression, J. Crew Group is staying the course.

J. Crew at the Galleria Dallas.

In the midst of the sharpest downturn since the Great Depression, J. Crew Group is staying the course.

This story first appeared in the August 28, 2009 issue of WWD.  Subscribe Today.

On Thursday, J. Crew posted a slight increase in net income for the second quarter to $18.6 million, or 29 cents a diluted share, from $18.1 million, or 28 cents, in last year’s quarter. The per-share gain handily beat the Wall Street estimate of 15 cents and came despite a comparable-store sales drop of 5 percent.

“There’s nothing like a good old-fashioned recession to make you run a better business,” Millard “Mickey” Drexler, J. Crew’s chairman and chief executive officer, told analysts during a conference call.

Other retailers have been reporting lower profits or losses and complaining about stagnant store traffic, but Drexler, encouraged by his company’s performance, told WWD: “From what I am seeing and hearing and feeling, consumers seem to be loosening up from the lowest depths of the fourth quarter, though it’s still not where it once was.”

He went on to cite Crew’s cropped fitted Minnie pants, “toothpick” and “match stick” jeans, Italian shoe boots, jewelry, boy blazers, wedding attire and hair accessories as among the bestsellers during the quarter, when total revenues increased 6 percent to $357.6 million.

Operating income rose 2 percent to $32.2 million from $31.5 million. Gross margin increased to 41.2 percent of revenues from 41 percent in last year’s quarter. In addition, the balance sheet remains in good shape with $204.3 million in cash and cash equivalents on the books at the end of the second quarter versus $113.4 million in the year-ago quarter. Inventories were down 11 percent last quarter, on a square-foot basis.

While analysts applauded the performance, one down note was with Madewell, which is expected to lose $15 million to $16 million this year, partially due to a recent store closing in Las Vegas. On the other hand, Drexler said Madewell’s flagship in New York’s SoHo is doing “really well,” and in the call he said: “Madewell is gaining momentum,” although he acknowledged some locations still have volume issues. “We continue to view this business as a long-term opportunity.” Madewell is lower priced and more casual than the J. Crew brand.

Drexler disclosed the company is seeking sites on Madison Avenue to open its first bridal salon and another men’s unit. Earlier this year, a Crewcuts flagship and a J. Crew Collection store opened on Madison Avenue, as J. Crew continues to capitalize on the high vacancy rate plaguing Manhattan’s most upscale venue, and the lowered rents that some landlords have recently begun to offer.

However, Drexler cautioned: “The reality is we don’t want to have too many stores,” in Manhattan or elsewhere, to avoid being too saddled with rents.

J. Crew projected third-quarter profits of 30 cents to 33 cents a diluted share, comps in negative midsingle digits and a gross margin expansion of 100 basis points. For the fourth quarter, comp-store and direct sales are seen in the positive low-single digits.

The company has opened 23 stores this year and has one more to go. There are 216 J. Crew retail stores, nine Crewcuts stores, 17 Madewells and 78 outlets. The company also distributes catalogues and operates jcrew.com.

Drexler credited the company with not being in the markdown business, providing designer-quality fabrics and styles but at prices representing greater value, and service.

“This was not a cutting cost quarter,” he said. “It’s about a building product quarter. There is just so far you can go as far as shaving costs. We are not expensing ourselves to earnings here. We are investing in our business. The only area where we are quite conservative is rents, though we maintain solid expense controls. We review all expenses, but we still continue to invest in our future.”

The company also changed its merchandise flow so there is a lot less corduroy, outerwear and cashmere in the stores this time of year. “It isn’t inventory that drives profit. It’s the right inventory.”

By channel in the second quarter, retail and outlets increased 7 percent to $259.1 million, with comparable-store sales decreasing 5 percent. Direct sales increased by 6 percent to $88.2 million.

For the six months, net income was $39.1 million, or 61 cents a diluted share, compared with $48.6 million, or 76 cents a diluted share, in the first six months of fiscal 2008. Operating income decreased 20 percent to $67.5 million. Total revenues increased 4 percent to $703.3 million; comparable-store sales decreased 5 percent. Direct sales decreased 0.3 percent to $183.5 million.