J. Crew Group Inc., which reported a 29 percent drop in third-quarter earnings Tuesday, is poised to capitalize on the quest for value and will intensify its focus on “more friendly price points” for spring.

This story first appeared in the November 26, 2008 issue of WWD. Subscribe Today.

The company also reduced full-year earnings projections.

“The reset button has been pushed on value in America,” Millard “Mickey” Drexler, chairman and chief executive officer, told analysts on a conference call after the release of third-quarter earnings on Tuesday.

“We see a nice movement [away] from designer,” Drexler added, a trend he said he believes will ultimately benefit J. Crew. “Our core prices are not very high. Eighty-five percent of our goods are under 100 bucks.”

For spring, the company will offer key items such as ballet flats retailing for less than $100 for the first time, as well as T-shirts selling for $18 and up “with good margins,” Drexler said. “When you have better goods at a value price, the customer recognizes that.”

But for the time being, the company is feeling the effects of the consumer pullback in spending. Despite the 29 percent drop in earnings, J. Crew beat consensus estimates.

For the three months ended Nov. 1, net income slid to $19 million, or 30 cents a diluted share, from $26.8 million, or 42 cents, in the year-ago quarter. Analysts on average expected EPS of 27 cents.

Revenues gained 9.1 percent to $363.1 million from $332.7 million. The retail channel grew 7.4 percent, to $250.9 million, despite a 3 percent decline in comparable-store sales. Direct sales were up 12.7 percent to $101.8 million. Gross margin fell to 41.6 percent of sales from 45.6 percent in the year-ago quarter.

The company also pulled back on its store-expansion program and will reduce square footage growth to 4 to 5 percent from the traditional 7 to 8 percent. “Deals have to be done with a very conservative mind-set,” Drexler said. “And if it’s not signed, it’s being revisited.”

The exception is the Madewell division, which will add 10 to 15 stores next year.

Inventory levels were a focus of the call, with analysts pointedly asking the company when it planned to work through its excess stock levels. Management said it would probably take until the second quarter.

The company reduced full-year earnings expectations to a range of $1.11 to $1.16 a diluted share from previous guidance of $1.44 to $1.54. The revised figure translates into fourth-quarter EPS of 5 cents to 10 cents based on assumptions of a high-single digit decline in fourth-quarter comps and direct channel sales that are flat to ahead in the midsingle digits.

Year-to-date net income declined 6.2 percent to $67.7 million, or $1.06 a diluted share. Revenues rose 11.2 percent to $1.04 billion from $934.8 million on a 0.4 percent decrease in same-store sales.

J. Crew reported results after the market closed Tuesday. Earlier, American Eagle Outfitters Inc. blamed a deep decline in third-quarter earnings on the slowdown in consumer spending, particularly in the women’s market.

Profits in the quarter ended Nov. 1 fell 57.2 percent to $42.6 million, or 21 cents a diluted share, from $99.4 million, or 45 cents a share, in last year’s period. Excluding an investment-related impairment charge of 9 cents, the performance matched the consensus EPS estimate of 30 cents. Sales for the three months gained 1.3 percent, to $754 million from $744.4 million, but declined 7 percent on a comparable-store basis. In the first two weeks of November, comps were down 17 percent, the company reported.

Jim O’Donnell, chief executive officer of the Pittsburgh-based teen retailer, said the company has reduced capital spending plans and now expects to open 29 stores next year, down from the 90 previously projected. Capital expenditures will drop to $110 million to $135 million next year from this year’s range of $250 million to $275 million.

For the first three quarters, the company’s profits fell 43.6 percent to $146.3 million, or 70 cents a share, from $259.5 million, or $1.17 a share, last year. Sales in the nine months rose 1.1 percent to $2.08 billion from $2.06 billion a year ago.