At J. Crew Group Inc. on Thursday, the disappointment was clear after the company posted a steep third-quarter net loss due to impairment charges, margin declines and difficulty selling women’s fashions.

This story first appeared in the December 5, 2014 issue of WWD. Subscribe Today.

“We’ve had a very tough year and I, along with the team, own this,” Millard “Mickey” Drexler, J. Crew’s chairman and chief executive officer, told WWD. “We saw a significant slowdown in our women’s business. We own that even more. In that regard, we need to improve.”

In an exclusive and candid interview on why women’s is such a challenging sector and how his company is coping, Drexler said he wasn’t about to justify the weak performance, shift the strategy from its long-term focus on growth, or “compromise” the business.

Citing the impact of noncash impairment charges and lower merchandise margins from promotional activity, J. Crew reported a net loss of $607.8 million in the quarter ended Nov. 1, compared with net income of $35.4 million a year ago. The noncash impairment charges of $684 million led to an operating loss of $636.3 million compared with operating income of $82.9 million in the third quarter last year. Adjusted earnings before interest, taxes, depreciation and amortization were $80.9 million, compared with $110.4 million in the third quarter last year.

Explaining the impairment charge, J. Crew said for the first and second quarters of fiscal 2014, it determined that “there was substantial deterioration in the excess of fair value over the carrying value of its stores reporting unit. During the third quarter, the company saw a further significant reduction in the profitability of its stores reporting unit, primarily driven by performance of women’s apparel and accessories in stores, which the company expects to continue at least through the first quarter of fiscal 2015.”

Revenues in the third quarter increased 6 percent to $655.2 million, although comparable sales declined 2 percent. Total store sales in the quarter increased 4 percent to $437.8 million, while direct sales increased 10 percent to $207.8 million.

It wasn’t all bad. Madewell, with a 32 percent gain in revenues; direct, and men’s wear did well. However, the J. Crew stores and the women’s business were difficult. Gross margin declined due to stepped up promotional activity to manage inventory levels as the company transitioned into holiday.

“Extremely challenging and very difficult, but no excuses,” was how Drexler characterized the quarter.

For the current three months, Drexler likes the merchandise and believes inventory levels are more in line with the rate of sales compared with the previous quarter.

“The inventory that we have now is in a much better position than it’s been over the past year,” he said. “Our women’s, men’s and crewcuts merchandise look very good. Six months ago, I wouldn’t have said that I am so proud. We have a lot of great things working, but not working at the level of traffic and volume we would like them to work, as objective as I can be.”

Will the industry get even more promotional than it’s been? “I would like not to see a race to the bottom,” Drexler said. “We are not going there because our inventories are in line.

“From a macro point of view, we are not immune. Apparel spending is down across our industry. It’s common knowledge that store traffic has been down for the past couple of years. Customers are shopping online more than ever, and the promotional environment is like I have never seen before. Clearly, this is not business as usual. The world is changing, and customer behavior and expectations are changing even faster.”

J. Crew wasn’t alone Thursday in reporting poor bottom- and top-line results: Retailers including Express, Christopher & Banks and American Eagle Outfitters did so, too, while Deb Shops said it was going bankrupt.

Retailers, Drexler said, “are selling price and I don’t think they’re selling quality at the level they need to. They don’t care about quality and fit — that’s quite widespread around the marketplace. We are in the fit business, the better fabric business, the style business. That’s what we are known for and we are not going to change our focus.”

Drexler was somewhat at a loss to explain the big shift in spending away from women’s wear. “I can only speculate,” he said. “Last month was the second biggest month for car sales in the last 10 years, then there’s the home business, the computer business. Traffic is down and things are on sale. I don’t have the answer. There are no particular mistakes I can point to in women’s.

“In the shopping malls, people are not going to apparel stores, but restaurants are up, active is up and nonapparel is doing OK. Perhaps there are too many apparel businesses out there with too many players — and a lack of quality and style. Women’s has been denigrated or downgraded as a category.

“But we will not compromise what we do. We will not have a sale every day,” he stressed.

“When you go online today, there are so many back-door ways to get bargains, on designer goods as well. There are deals to be had. People are really smart. There’s clearly a migration to online. That’s OK for us, but we have to keep working on the product. That’s our job,” added Drexler.

Some retailers are shifting the balance of categories, pumping up ath-leisure and contemporary styles, for example, and backing off from other areas. Asked if J. Crew would do the same, Drexler replied: “We are constantly evaluating percentages and the investments we make by category.” Going forward, he said there will be “more ambitious merchandising of certain categories we feel are not well represented in the marketplace and in the categories we do best. We are not going to give away anything we do well.”

Drexler, a veteran of fashion retailing, noted that he’s experienced many women’s downturns in his career. “I don’t like it. It’s never any fun. When it seems worse, it usually gets better. That being said, we all have a job to do. We are going to fight the fight and do a better job.”

J. Crew is “a very loved brand,” Drexler said. “The emotional attachment is critically important.”

In highlights from other earnings reports Thursday:

n Express Inc. shares fell 9 percent to $13.19 on a weak forecast for fourth-quarter results, but analysts’ attentions were drawn to another portion of the retailer’s third-quarter earnings report. It said during the quarter it repurchased no shares of its stock and didn’t proceed with the refinancing of about $200 million in senior notes due in 2018. Sycamore Partners in June disclosed a 9.9 percent stake in Express and expressed interest in acquiring the rest of its shares. FBR Capital Markets analyst Susan Anderson noted that the refinancing delay “could indicate continued Sycamore interest.” Janney Capital Markets analyst Adrienne Yih-Tennant cited Sycamore’s Stefan Kaluzny’s previous involvement with Express during his time with Golden Gate Capital.

n Shares of Christopher & Banks Corp. dove 28 percent to $4.95 after the Minneapolis-based women’s specialty retailer projected fourth-quarter sales of $94 million to $98 million, 6.6 percent to 10.4 percent below last year’s final quarter and even further below the $107.4 million expected, on average, by analysts. Discussing the marked decline in traffic throughout the physical retailing world since just after Labor Day, LuAnn Via, president and ceo, said, “I haven’t seen this type of an impact, so widespread across retail sectors outside of electronics, in a very long time. And there is no single factor that you can attribute it to, which is a little concerning.”

n American Eagle Outfitters Inc.’s profits still fell 63.7 percent. For the three months ended Nov. 1, net income dropped to $9 million, or 5 cents a diluted share, from $24.9 million, or 13 cents a year ago. Excluding restructuring and asset impairment charges, adjusted diluted earnings per share were 22 cents. Net sales slipped 0.4 percent, to $854.3 million from $857.3 million, while comps dropped 5 percent on top of a 5 percent drop in the third quarter last year.

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