Top-line and margin growth, along with product innovation, led J. Crew Group to a fourth-quarter performance that transcends the economic malaise pulling down most retailers.

This story first appeared in the March 12, 2008 issue of WWD. Subscribe Today.

J. Crew said profit fell to $25 million, or 39 cents a share in the quarter ended Feb. 2, from $44 million, or 71 cents a share, in the year-ago period. However, the year before had an extra week and a nonrecurring tax benefit of $10.9 million, and in the 2007 quarter, there was a severance charge of 2 cents a share.

On an adjusted basis, net income for the fourth quarter of fiscal 2007 totaled $26.3 million, or 41 cents a diluted share, compared with $20.5 million, or 33 cents a share, for the fourth quarter of fiscal 2006.

Revenues increased 9 percent to $399.9 million, with store and outlet sales up 8 percent to $260.6 million, and comparable- store sales flat. On a calendar-adjusted basis, comparable-store sales rose 4 percent.

Direct sales increased 11 percent to $126 million, and gross margin went up to 41.3 percent of revenues from 40.8 percent.

“It’s all about inventory today and differentiation,” Millard “Mickey” Drexler, chairman and chief executive officer, said during a conference call. “It’s about the quality of goods, service and innovation. We are in a game right now of beating the competition. The winners will win not because they’re cutting expense. Long term, they’re winning because they are innovating their product.

“Looking at the recession, we are worried,” Drexler added. “Day-to-day, [the business climate] changes. As long as we don’t live with too much inventory, we are prepared for some downside.”

Drexler said the key to J. Crew’s continued success has been being “obsessively focused on our customers and our product,” down to the stitching, the buttons, the colors and all the details.

Briefly commenting on last quarter’s departure of former J. Crew president Jeff Pfeifle, Drexler said: “Nothing much has changed. It creates one less layer of management.”

Addressing key merchandise initiatives this year and in the future, Drexler stressed the ongoing upgrade of merchandise. “As we continue to do that and concurrently look at the escalating prices of designer clothes and accessories, we see that as an important opportunity, frankly at prices that don’t require you to take out a mortgage for a wardrobe.”

Among other initiatives Drexler cited:

– “Much more definition” in women’s and men’s pants, meaning the assortments will be more clearly defined and edited.

– Intensified focus on women’s suitings and costume jewelry.

– Greater editing in men’s and a focus on the best 15 or 20 items.

– Continued buildup in cashmere, wedding and kids’ brand Crewcuts, as well as shoes and accessories, especially online.

– More investment in Crewcuts mailings.

– Photo shoots in historically significant towns and places: “Not just where there’s pretty blue water and a beach.”

– A small men’s shop opening at 335 West Broadway in New York’s TriBeCa at the end of May, with a short-term lease.

– Opening a Collection store at Madison Avenue and 79th Street in Manhattan in June to showcase better products.

– Launching Madewell e-commerce in June.

“Madewell is a nice business,” Drexler said, referring to the new division of J. Crew Group. “From a year ago to today, it’s night and day on assortments and on the team. There is a renewed energy about making it work. I can’t emphasize the importance of having a store about 10 blocks away,” he noted, referring to the Madewell flagship at 486 Broadway that opened Feb. 20. “We are in there every day looking at it and we’re living and breathing it, and still calling [Madewell] officially R & D [research and development].”

“New businesses are really hard to start. They only work if there is strong long-term vision and tremendous passion and a product that’s focused on the consumer.” he said. “We are really pleased with the progress….We are very conservative.”

Five Madewell openings are planned for this year, giving the chain 11 by the end of the year.

For the fiscal year, revenues increased 16 percent to $1.33 billion, with comparable-store sales up 6 percent. Gross margin rose to 44.1 percent of revenues from 43.4 percent. Operating income jumped 37 percent to $172.5 million, compared with $125.6 million the previous year.

Net income was $97.1 million, or $1.52 a share, versus $71.6 million, or $1.49 a share.

Adjusted net income for fiscal 2007 totaled $98.5 million, or $1.54 a share, compared with $65.2 million, or $1.05 a diluted share, for fiscal 2006.

“J. Crew is a company that has a clear, differentiated and well-executed strategy that is not only enabling it to better weather the difficult retail environment, but also gain market share, in our opinion,” retail analyst Jennifer Black of the firm that bears her name said in a research note Tuesday. “We continue to believe Mickey Drexler’s experience and obsession with product is driving this company’s merchandising strength and ability to adapt to the changing landscape.”