NEW YORK — J. Crew Group Inc., showing a decline in gross margin but picking up on the revenue side, said net income in the third quarter ended Nov. 2 rose 6.6 percent to $35.4 million from $33.2 million in last year’s quarter.
Adjusted earnings before interest, taxes, depreciation and amortization, which the company says is an important measure of its performance, rose 12 percent to $110.4 million, compared to $98.9 million a year ago.
“I think the 12 percent in adjusted EBITDA speaks for itself,” said Stuart Haselden, J. Crew’s chief financial officer, when asked to characterize the company’s performance. “The third quarter was sequentially better than the first half.”
Third-quarter revenues increased 11 percent to $618.8 million from $555.8 million, with comparable sales increasing 4 percent.
Store sales increased 7 percent to $420.2 million on top of an increase of 17 percent in the third quarter last year. Direct sales rose 21 percent to $189.8 million following an increase of 13 percent in the third quarter last year.
Gross margin in the quarter declined to 43.9 percent, compared to 47.3 percent in the year-ago quarter, reflecting aggressive efforts to manage inventory in a challenging business climate. As Haselden said, “We continued to see tough traffic headwinds in the third quarter, much as we had in the first half. We are always focused on ending each quarter with a clean inventory position, so we take what measures we need to from a markdown and promotional standpoint to move through our inventories to make sure we are clean. We ended the third quarter on a very clean basis. We are very comfortable with the currency of the inventory in terms of the period we are in. We would probably like to have a little less than we have but we remain comfortably clean and expect to end Q4 in a clean position.
“It has been a difficult promotional environment all year,” Haselden added. “There’s nothing new there. It’s been weighing on our margins and a lot of other companies’ margins. We are not immune to what we view as a heightened markdown environment.”
As reported, J. Crew’s owners, TPG Capital and Leonard Green & Partners, might be ready to sell all or part of J. Crew Group soon. They could launch an initial public offering, or sell the company to another private owner, as soon as some time next year, sources have said.
Interest in taking J. Crew public again or selling the business is being driven by the company’s expansion with its J. Crew and Madewell brands; increased international awareness; the strong stock market, and because TPG and Leonard Green will be going into their fourth year of ownership in March. TPG and Leonard Green took J. Crew private in early 2011 for $2.86 billion. Also last month, a dividend was issued to the owners, in another sign they could be ready to sell.
Outside the U.S., J. Crew operates three stores in London and nine retail stores and three outlets in Canada. The company is in discussions for a couple of locations in Hong Kong, which Haselden said could be revealed in the first half of next year.
There has been some controversy about prices at the London stores, which some consumers have been complaining are higher compared to the U.S. Responding to the situation, Haselden said. “I think it’s safe to say we price our goods competitively for the market. There are additional costs to do business overseas that factor into how we price the goods, such as duties, taxes and supply chain costs. In addition we look at the competitive environment to make sure the goods are priced where they ought to be. We look at every item and price. It’s not an across-the-board strategy, to make sure it is appropriate.”