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J. Crew’s Operating Income Up 33%

J. Crew issued its first quarterly report and staged its first conference call since going public.

NEW YORK — J. Crew Group Inc. on Thursday issued its first quarterly report and staged its first conference call since going public last month — and made a good impression on almost all fronts.

Operating income increased 33 percent to $26.8 million for the second quarter ended July 29, compared with $20.1 million in the second quarter of fiscal 2005.

Revenues for the second quarter increased 17 percent to $269.2 million from $229.4 million, driven by a 16 percent comparable-store sales gain and a 5 percent increase in square footage.

Sales at stores and outlets increased 21 percent to $197.4 million, and sales from catalogues and the Web site rose 7 percent to $62.8 million.

But there was a wider net loss of $2.8 million after dividends, or 8 cents per diluted share, compared with $1.6 million, or 7 cents per diluted share, in the year ago quarter. After stripping away $10 million related to debt refinancing and $500,000 for stock option expense, there would have been a net income of $7.2 million or 20 cents per share.

For the first six months, net income totaled $1.7 million, compared with net losses of $99,000, while sales rose to $509.8 million from $439.9 million.

“We are pleased with our second-quarter results, and look forward to building on the new foundation we have created for J. Crew Group,” Millard Drexler, J. Crew’s chairman and chief executive officer, said in a statement. “Our team is focused on driving productivity across all areas of the business, and we are confident about our near- and long-term prospects.”

On July 3, J. Crew completed its initial public offering, selling 21.6 million shares of common stock and raising $402.3 million. Subsequently, Texas Pacific Group acquired an additional 3.7 million shares with $73.5 million of proceeds from the redemption of preferred stock.

In the conference call, J. Crew made some long-term projections, among them:

l Mid-single digit comparable-store sales increases and high single-digit direct sales growth.

l Seven to 9 percent net square footage expansion annually for the next few years.

l Earnings per share growth in excess of 20 percent.

For the second half, Drexler projected conservative comps and conservative inventories and offered his philosophy on retail success in light of the outlook. “At the end of the day it’s the [nature of] the product investment. We look at the investment by style and product….The rule is, if the goods are good, you usually beat your plan.”

A post-IPO J. Crew “moves forward with increased financial flexibility,” Drexler told analysts. On the selling side, the business has momentum. The second quarter was marked by “balanced growth in women’s and men’s and all product categories,” Drexler said.

J. Crew shares rose 55 cents, or 2.1 percent, to close at $26.70 on the New York Stock Exchange. The shares added 99 cents, or 3.7 percent, to $27.69 in after-hours trading, following the release of the results.

Analysts were most curious about J. Crew’s two new growth vehicles, Crewcuts and Madewell, which is lower priced and more casual than the J. Crew brand and opened its first store in NorthPark Center in Dallas on Tuesday. A second Madewell will open in the Century City mall in Los Angeles on Sept. 2. “This is R&D for us. We will update you as we progress,” said Drexler.

Analysts had more questions about Crewcuts, the new children’s division launched this year. It currently operates two freestanding stores, and 10 shops inside J. Crew stores. Drexler said two additional in-store shops will be added before the end of the year, and next year another 10 to 20 in-store shops will be up and running.

Drexler said the company will stay focused on driving productivity across all areas of the company and build on “key franchise businesses,” which he listed as chinos; T-shirts; Italian cashmere; special occasion, including dresses and bridal; hair goods; flip-flops, and suitings. “We are very religious about key franchise categories,” Drexler said. He also characterized the direct business as very healthy and said it was driving customers to the Web site.

J. Crew operates 169 retail stores, 50 outlets, the J. Crew catalogue and jcrew.com.

Among those bestowing kudos on Drexler and his team was Jennifer Black, president of Jennifer Black Associates, who asked Drexler what he wished his stores had more of in the second quarter. “More dresses, for sure. The other thing is we wished we had were more hoodies.”

In her “store checks” review earlier in the week, Black said, “J. Crew’s assortment is extremely compelling. The merchandise is clean and sharp looking, in true J. Crew style. J. Crew is very focused on corduroy bottoms. In-store inventories look light. Stores are virtually absent promotions.”