Misguided strategies of the past year leading to inventory write-downs dragged the J. Crew Group to a net loss of $74.4 million in the fourth quarter, compared with net income of $34.7 million in the year-ago fourth quarter.
“The J.Crew brand delivered disappointing results in 2018 as many new strategies we deployed were ultimately not successful and negatively impacted our financial performance, while Madewell generated another year of record results, accelerating its path to becoming a $1 billion global brand,” said Michael J. Nicholson, president and chief operating officer.
The company was beset by issues at the J. Crew brand, mainly a confusing subbrand strategy that was dropped, inventory increases and exaggerated marketing and overhead expenditures. “J. Crew tested a new vision and new strategies,” Nicholson said later during a conference call Wednesday. While the company obtained “a better understanding of what does and does not resonate with customers, many strategies were not successful.”
Not all of the new J. Crew strategies flopped. Nicholson cited as accomplishments the point-based loyalty program, growth in wholesaling, and a healthier inventory position entering 2019.
Total revenues in the fourth quarter ended Feb. 3 increased 3 percent to $733.8 million. Comparable sales increased 9 percent following a decrease of 3 percent in the fourth quarter last year.
By division, J.Crew sales in the fourth quarter decreased 4 percent to $527.9 million. J.Crew comparable sales increased 6 percent following a decrease of 7 percent in the fourth quarter last year.
Madewell sales in the fourth quarter increased 16 percent to $157.9 million. Madewell comparable sales increased 22 percent following an increase of 19 percent in the fourth quarter last year.
“Despite continued strong performance at Madewell, we believe our 2018 results do not reflect the opportunity inherent in the collective strength of our iconic brands,” Nicholson said. “Accordingly, we have taken immediate and decisive action to refocus our strategy and improve performance in 2019 with the goal of returning J. Crew to profitability and sustaining momentum at Madewell. Finally, we remain highly focused on managing inventory with increased discipline while aggressively optimizing expenses.”
Last November, ceo Jim Brett abruptly left the company after just 15 months into his mission to turn around the business. The retailer said at the time that a “mutual agreement” was reached by the board and Brett, but others said Brett was forced out, that he had disagreements with the board over strategy, and that the quality of the merchandise and how the value of it was perceived by consumers had declined. The company is still searching for a new ceo.
Chris Benz was brought on as chief designer for the J. Crew brand. He’s known for a distinct and vivid approach to color, patterns and style that could work for J. Crew.
In other plans, the J. Crew catalogue will migrate to a “digital-first” model with personalized content, segmented offers and less reliance on mass promotions. J. Crew will close about 20 stores, after closing 34 last year.
Last quarter, gross margin decreased to 22.4 percent from 36.7 percent in the year-ago quarter. During the fourth quarter of fiscal 2018, the company recorded a charge of $39.3 million for expected losses on the disposition of excess merchandise inventories.
Selling, general and administrative expenses were $227.7 million, or 31 percent of revenues, compared to $252.1 million, or 35.4 percent of revenues in the fourth quarter last year. This year includes transformation, transaction and severance costs of $10.8 million and a benefit of $6.6 million related to the lease termination payment in connection with the corporate headquarters relocation. Last year includes transformation, transaction and severance costs of $21.3 million.
Excluding these items, selling, general and administrative expenses were $223.5 million, or 30.5 percent of revenues, compared to $230.8 million, or 32.4 percent of revenues, in the fourth quarter last year.
Operating loss was $64.2 million compared with an operating income of $4.9 million in the fourth quarter last year. The fourth quarter this year reflects the impact of excess inventory write-downs. The fourth quarter last year reflects the impact of transformation costs.
Adjusted EBITDA loss was $31.9 million compared with adjusted EBITDA of $63.4 million in the fourth quarter last year.
For all of 2018, J. Crew Group had a net loss of $120.1 million compared to a net loss of $123.2 million in 2017. Adjusted EBITDA was $112.8 million compared to $225.9 million in the year prior.
Total revenues increased 5 percent to $2.48 billion; comparable sales increased 6 percent. J. Crew sales decreased 4 percent to $1.78 billion; comparable sales increased 2 percent. Madewell sales increased 26 percent to $529 million; comparable sales increased 25 percent.
Gross margin decreased to 33.6 percent from 37.8 percent in 2017.