By  on September 11, 2013

NEW YORK — J. Crew Group Inc. combatted slow traffic in the second quarter with vigorous promotions, and its profits fell in the process.

For the three months ended Aug. 3, the New York-based operator of J. Crew and Madewell stores registered net income of $17.5 million, down 20.7 percent from $22 million in the year-ago quarter. Excluding interest, taxes, depreciation, amortization and a series of items related to its capital structure, adjusted EBITDA contracted 6.4 percent to $83 million.

Revenues advanced 6.4 percent to $559.1 million from $525.5 million, with store sales up 3.9 percent to $399.1 million and direct sales up 13.4 percent to $151.8 million on top of a 16 percent advance in last year’s quarter. Direct channel sales accounted for 27.6 percent of retail sales in this year’s quarter, up from 25.9 percent in the corresponding period of 2012.

“Generally speaking, it was a challenging quarter with a continuation of a lot of the trends that we and others in the industry saw in the first quarter, such as a promotional climate and traffic headwinds,” Stuart Haselden, chief financial officer, told WWD. “It required us to get more aggressive to clear through our inventory, and the pressure on gross margins and merchandise margins was a direct result of actions we took to make sure our inventory ended in good shape.”

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Inventories rose 13.6 percent, to $321.2 million, over year-ago levels. Haselden noted that the company ended the quarter with less carryover inventory than it did a year ago.

“We feel good about how we’re heading into the second half,” he said. “Our inventory is very current.”

Comparable sales — same-store sales combined with e-commerce activity — declined 1 percent but were up 1 percent after adjustment for calendar differences. Men’s apparel grew to 26 percent of sales from 24 percent, while women’s fell to 56 percent from 59 percent. Accessories accounted for 12 percent in both periods, while children’s rose to 6 percent from 5 percent.

Gross margin receded 400 basis points to 41.1 percent of revenues from 45.1 percent in the prior-year quarter. Cost of goods sold grew 14 percent, to $329.1 million, reflecting the intensity of promotional activity. Selling, general and administrative expenses were down fractionally, to $174.2 million, and corresponded to 31.2 percent of sales, down from 33.2 percent a year ago.

The cfo said the company is “very pleased” with its double-digit growth in the direct channel. “There’s certainly been some shifting in the way that consumers shop, but I don’t sense that it’s a matter of cannibalization or due to the traffic trends in our business or across the industry,” he noted, adding that J. Crew is reaping e-commerce benefits from its outlet site launched last October at and from the expansion of its international e-commerce sites, now in more than 100 countries.

He compared the growth in international to the performance of “Madewell’s been online since 2010 and as its store footprint grows, it drives traffic to the site and accelerates that growth,” said Haselden.

The company expects online benefits in the U.K. after it opens its Regent Street flagship in London in November. Smaller stores — one for men’s and another for women’s — are expected to open prior to that. The company currently operates 264 J. Crew units, 60 Madewell stores and eight Crewcuts stores in addition to 114 outlets and its portfolio of Web sites.

For the first half of the year, net income was down 11.2 percent, to $46.8 million from $52.7 million, while revenues escalated 9.2 percent to $1.12 billion from $1.03 billion. Year-to-date gross margin stood at 24.9 percent of revenues versus 46.3 percent in the first six months of 2012.

The company will hold a conference call Thursday morning to discuss the results.

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