Fashion misses had J. Crew Group Inc. seeing red in the first quarter, but executives stressed they’ve made corrections in the women’s assortment involving fashion content and inventory levels.

This story first appeared in the June 10, 2011 issue of WWD. Subscribe Today.

“Very simply, we underbought the best goods and categories,” Millard “Mickey” Drexler, J. Crew Group’s chairman and chief executive officer, told WWD. “In more cases than we would have liked, we didn’t have for our customers what we should have had.”

On Thursday, J. Crew posted losses of $29.9 million on revenues of $409.5 million for the first quarter ended April 30. A year earlier, J. Crew registered profits of $44.7 million on revenues of $413.9 million.

Same-store sales dropped 6 percent, versus a 15 percent increase in the year-ago period, and there was a 3 percent decline in comparable revenues, which includes store sales, direct sales and other sources of revenue. The retailer, which had been on a roll for a long time, started to slow midway through last year as it cut a $3 billion deal to be taken private by TPG Capital and Leonard Green & Partners. The transaction was completed March 7. J. Crew releases financial results because of public debt.

“We missed a bit on the fashion novelty end of the business, but we feel very comfortable that has been fixed,” Drexler said. “It’s all about product, as it always is in our business, and frankly every other business.”

Drexler acknowledged not being “well balanced in the agelessness and timelessness of our assortments” and cited a lack of full-length sleeves, too many at three-quarter length, and skirts that were “a little too short.…They’re not anymore,” he assured.

The quarter wasn’t without some upsides. “We continued to strengthen our franchise businesses — cashmere, pencil skirts, blazers, ballet flats — those categories where we have leadership and customers come back to us day in, day out,” Drexler said.

He also cited strength in Crewcuts, accessories and men’s wear, as well as Madewell, where the attitude is getting increasingly bullish. Madewell is opening 13 stores this year, taking the chain to 33 units, in addition to recently launching

In an earlier conference call, James Scully, chief administrative and financial officer, noted: “While we are disappointed in the year-over-year decline in first-quarter earnings, it is worth noting that last year was an historical peak by a significant margin.”

Scully sees “continued weakness” in the top line through the first half of the year. However, “The good news is comparisons get easier in the back half.”

Also, “year-over-year declines in Q2 will not be worse than it was in Q1,” Scully said referring to gross margins, which fell to 44.3 percent of sales from 49 percent on increased markdowns and promotional selling, as well as accounting changes related to the deal taking the company private. Adjusted earnings before interest, taxes, depreciation and amortization, eliminating costs from the transaction, fell 16 percent to $74.7 million from $88.9 million.

“We feel comfortable inventories will come in line with sales as we move through the second quarter and second half of the year,” added Stuart Haselden, treasurer.

Promotional activity in the second quarter “won’t be any worse than Q1.…We’re hoping that it’s better.”

Industry analysts noted Thursday that J. Crew isn’t the only retailer hitting headwinds in women’s. Through the industry, there’s been a lack of newness, high inventories, quality being compromised to mitigate inflationary cost increases, rampant discounting of brands online and exorbitant gas prices pinching spending, primarily at the low and midtiers.

Still, despite its recent weakness, women’s will continue to remain the biggest piece of the J. Crew business, according to Libby Wadle, executive vice president, retail, factory outlets and direct. “We still have franchise [women’s] businesses that we are not walking away from.” In addition, the company will emphasize more novelty items, prints and color. “As we get back into those businesses, we feel better positioned,” Wadle said.

J. Crew is also sticking to its plan to increase retail square footage in the low- to mid-single digits annually over the next three to five years. J. Crew is opening nine stores in 2011, including one Crewcuts and the first J. Crew in Canada in September. The Web site goes live late summer in the U.K. The company is also looking at Asia and other parts of the globe for possible expansion, but is early in the process.

The outlet business is another growth vehicle, with 10 percent annual increases in square footage seen over the next three to five years through store expansions and new stores.

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