J. Crew Group, showing some progress in its turnaround effort, reported that fourth-quarter net income rose to $36.6 million from $1.1 million in the year-ago period, though there was a $64.8 million tax benefit impacting the bottom line.
The latest quarter, ended Feb. 3, was also impacted by $18.7 million in transformation costs, $4.3 million in non-cash impairment charges, $1.3 million of transaction costs and $1.3 million in severance costs. Net income a year ago reflected the impact of non-cash impairment charges.
Adjusted earnings before interest, taxes, depreciation and amortization, which the company considers the best barometer of performance, increased $13.1 million, or 25 percent, to $64.6 million from $51.5 million in the year-ago fourth quarter.
Operating income was $6.1 million compared to $15 million in the fourth quarter last year.
Total revenues increased 2 percent to $710.6 million, which includes $28.6 million generated in the 14th or extra week. Comparable sales decreased 3 percent.
By division, J. Crew sales decreased 4 percent in the quarter to $547.1 million, while comparable sales decreased 7 percent.
Madewell sales increased 32 percent to $135.8 million; comparable sales rose 17 percent.
Gross margin increased to 36.6 percent from 34.7 percent in the fourth quarter last year.
“With our transformation strategy under way, we delivered gross margin expansion and double-digit adjusted EBITDA growth in the fourth quarter and the full year,” said Jim Brett, chief executive officer. “While we are only at the very beginning of our evolution of the J. Crew brand, meaningful change is happening and we are already seeing results in our most important business — women’s apparel — signaling that our strategy is working. With the right strategy and leadership in place, we are uniquely prepared to respond to the growing customer preference for a more personalized experience.
“We will scale Madewell more rapidly, building upon its proven and consistent record of growth, through strategic investments with highly profitable returns,” added Brett. “We are a house of American brands, J. Crew our most iconic, all with significant opportunity to expand and enhance our product range while engaging our customers in more meaningful ways.”
“Overall, we are proud of the progress we made toward our strategic transformation,” said Michael Nicholson, president and chief operating officer, during a conference call.
Last year’s debt restructuring and financing — extending the nearest debt maturity to 2021 and reducing debt by $300 million — and the company’s cash flow (cash and cash equivalents were $107.1 million at the end of the fourth quarter) positions the group to meet its goals for 2018 and beyond, Nicholson said.
Among other turnaround steps taken last year, the company:
* Shortened the product development process.
* Launched a centralized pricing team to support merchandise planning.
* Implemented new technologies and services including personalized product recognition, same-day pickup in stores, shipping online orders to stores, and additional pay options.
* Several new categories were introduced including plus sizes, intimate and beauty at Madewell.
* More than 50 stores were closed.
Nicholson called out strong full-price selling of denim at Madewell and said the first year of Madewell’s loyalty program was successful, with a significantly higher average spend by its members.
Overall, “The actions taken throughout 2017 position us to better serve our customers and provide financial flexibility,” Nicholson said.
Looking ahead, Nicholson said the company aims to reduce promotions and explore wholesale partnerships domestically and globally, similar to the one that’s been in place at Nordstrom, which sells J. Crew and Madewell products.
This year, the company plans to open 10 Madewell stores and one J. Crew store and close 20. More than 50 stores closed last year.
“While J. Crew brand’s top line is still declining, adjusted EBITDA outperformed 2017 guidance driven by cost savings, and leverage has decreased by over two turns since July 2017 when the debt exchange was completed,” said Raya Sokolyanska, vice president and senior analyst at Moody’s. “J. Crew is focusing on transforming the business by providing better value to customers, extending its customer reach with new categories, investing in omnichannel, and other initiatives.”
For the year, the company reported a net loss of $125 million, including a benefit for income taxes of $105.5 million, as well as the impact of non-cash impairment charges, transformation costs, transaction costs and severance costs. Adjusted EBITDA increased $33.7 million, or 18 percent, to $222.2 million.
Total revenues decreased 2 percent to $2.37 billion, which includes $28.6 million generated in the 53rd week. Comparable company sales decreased 6 percent.
By division, J. Crew sales decreased 8 percent to $1.85 billion; comparable sales decreased 10 percent.
Madewell sales increased 23 percent to $421.1 million; comparable sales increased 13 percent.