As the retailer on Wednesday reported a narrowed net loss for the first quarter on a decline in sales, executives revealed aggressive expansion plans for the lower-cost J. Crew Mercantile format as well as the value-driven Madewell chain.
J. Crew saw a lower net loss in the first three months of the year to $8 million, compared to $462.4 million in the first quarter last year, reflecting the impact of the non-cash impairment charges.
Adjusted earnings before interest, taxes, depreciation and amortization increased to $45.4 million from $44.8 million in the first quarter last year. The company considers adjusted EBITDA an important measure of the company’s profitability and performance.
Total revenues decreased 3 percent to $567.5 million from $581.8 million. Comparable company sales decreased 7 percent following a decrease of 8 percent in the first quarter last year.
J. Crew isn’t alone in reporting weak results. For the past year, specialty and department stores have been challenged by macroeconomic forces and changing consumer shopping dynamics, with shifts to spending more on home products, cars, restaurants, travel and other experiences, and away from fashion. In addition, international tourists, particularly from Russia, Brazil and China, are spending less money in U.S. stores due to the strength of the dollar and economic issues in their own countries.
At the J. Crew brand, the situation is compounded by product issues, to some degree, though executives have told WWD that they are working to correct the problems and have been pumping up assortments of several of the classic best-selling items and categories. There are 287 J. Crew retail stores and 164 J. Crew factory outlets. This year, the J. Crew brand will open two stores and close four, one of which will be converted to a J. Crew Mercantile unit. The J. Crew Factory division will open three units and convert nine to Mercantile stores.
On the other hand, the Madewell division continues on its roll, and is planning 10 openings and one closing this year. Madewell has 106 stores.
The J. Crew Mercantile value division, currently with 22 locations, has 30 openings slated this year. The lower-priced chain was launched a year ago and is geared to reach more value-oriented customers and help reverse weak results.
The company continues to operate J. Crew Factory Outlets, but Mercantile represents an expanded effort to seek that value-driven customer in more places than just factory outlet centers, such as at strip centers, off-price centers and power centers.
“Overall, we have been aggressive in managing all aspects of our business in a challenging retail environment while continuing to focus on delivering the very best product and brand experience for our customers across all channels,” said chairman and chief executive officer Millard Drexler. “We look forward to the contributions from our assortment and merchandising strategies within our J.Crew brand, the continued growth of Madewell and Mercantile and other key operational initiatives including our [Selling, General and Administrative Expenses], sourcing and supply chain optimization programs.”
At the J. Crew brand, sales decreased 6 percent to $480.7 million, and comparable sales decreased 8 percent following a decline of 10 percent in the first quarter last year.
At Madewell, sales increased 17 percent to $72.5 million and comparable sales increased 6 percent on top of an increase of 12 percent in the first quarter last year.
Gross margin was 36.1 percent compared to 37.2 percent in the first quarter last year.
Selling, general and administrative expenses were $192.2 million, or 33.9 percent of revenues, compared to $203.8 million, or 35 percent of revenues in the first quarter last year.
Operating income was $7.3 million compared with an operating loss of $520.6 million in the first quarter last year, reflecting pre-tax, non-cash impairment charges of $5.4 million this year and $533.4 million last year, respectively.
“Overall, the retail environment continued to be challenging during the first quarter,” said Michael J. Nicholson, president, chief operating officer and chief financial officer. However, Nicholson added that the company “effectively” managed margins and inventory levels, bringing the adjusted EBITDA slightly ahead of last year.
He cited several key initiatives including the “continued focus” on providing customers with a “seamless” omnichannel experience, enhancing the mobile site, and actively exploring opportunities to enhance sourcing and supply chain capabilities.
“Madewell continued its solid performance. We remain excited about the prospects to further grow this brand through additional stores and enhanced e-commerce,” he said.
Regarding Mercantile, “We will continue to assess its long-term potential as we enter new markets in 2016.”
Regarding inventories, “We are comfortable with the overall level of inventory so far this quarter.”
On the less optimistic side, Nicholson said, “We expect traffic headwinds to persist,” but he stressed the company has a “disciplined approach” to managing expenses and capital expenditures.
“We continue to invest for the long term while carefully managing through the retail environment,” he said.