Things remained tough for J. Crew Group in the third quarter.
The struggling retailer on Thursday reported that increased impairment charges pushed it to a larger loss in the quarter, while the core brand continued to struggle with double-digit declines in comparable-store sales.
The retailer reported a net loss for the third quarter of $759.7 million, compared to $607.8 million in the third quarter last year when the company also reported impairment charges. Total revenues decreased 6 percent to $619.4 million. Comparable company sales decreased 11 percent.
J.Crew’s total sales decreased 9 percent to $526.9 million. J. Crew’s comparable sales decreased 12 percent.
Gross margin was 38.6 percent compared to 40.2 percent in the third quarter last year.
On the bright side, Madewell sales increased 14 percent to $78.7 million, and 1 percent on a comparable basis.
“It goes without saying that much of the retail industry is experiencing dramatic changes. However, I can only speak to my own business and know we are capable of performing at a much higher level,” Mickey Drexler, chairman and chief executive officer, said during a conference call. “Our results are still not where we would like them to be.”
However, Drexler added that there have been “encouraging responses” to product improvements, most noticeable in women’s blazers, dresses and suitings, and men’s shirtings, outerwear, suitings and denim. Drexler also said that J. Crew’s “heritage” items are resonating with customers, and that there has been some “sharpening of prices where warranted.”
This year, the company put greater focus on its heritage products, which include such items and categories as ballet flats, cashmere, the Jackie cardigans, the Regent blazers, washed shirts and denim. That’s led to less emphasis on its higher-priced J. Crew Collection products, which it has used over the last few years to try to move more upmarket and generate greater press attention.
“Overall, we believe the product is where it needs to be,” Drexler said Thursday.
He added that the company has been working on customer-facing strategies to enhance the omni experience, including better inventory management so the company is in stock where and when it needs to be, targeted marketing for greater personalization, improved catalogue segmentation and enhancing the mobile experience. The company offers a “single swipe” functionality enabling customers to purchase in-stores and online in a single transaction.
“We believe these initiatives along with having the right product in the right place will enable us to build our customer loyalty and better position us over the long term,” said the J. Crew chief.
Drexler also said he was pleased with the performance at Madewell, which will open its 100th store on December 9 and end the year with 103 stores.
Regarding the performance of the first eight J. Crew Mercantile stores, the lower price division targeting value customers which was launched earlier this year, Drexler said he was “encouraged.” With the international business, he said the company is taking a “disciplined approach” to growth.
“The team and I are committed on delivering on our initiatives,” Drexler said.
In its third-quarter financial report, the company noted that during fiscal 2014 and the first quarter of fiscal 2015, it recorded non-cash impairment charges of $562 million and $341 million, respectively, related to goodwill, and $145 million and $190 million, respectively, related to the intangible asset for the J. Crew trade name.
Last quarter, there was further reduction in the profitability of the J.Crew brand, and the company said the carrying value exceeded its fair value. Therefore, the company recorded additional non-cash impairment charges of $676 million related to goodwill and $170 million related to the intangible asset for the J. Crew trade name. Executives stressed that the non-cash impairment charges have no impact on liquidity, financial covenants, operations or strategy.
After recording the impairment charges in the third quarter, the carrying value of goodwill is $107.9 million, which entirely relates to the Madewell brand — meaning the carrying value of the goodwill of the J. Crew brand itself is zero. The carrying value of the intangible asset for the J.Crew trade name was $380 million as of Oct. 31, the company said, but added that if its performance continues to fall below its expectations, “additional impairment charges may be recorded in the future.”
Into the fourth quarter, merchandise margins will continue to be under pressure with promotional activity required to move through excess inventories.
According to Wall Street sources, adjusted EBITDA was “slightly higher” than expected, reaching $73.6 million compared to $80.9 million in the third quarter last year. Other sources indicated the company overall had a decent Black Friday selling period.
Also on Thursday, the company said that Michael J. Nicholson will become president, chief operating officer and chief financial officer on Jan. 11. He will report to Drexler.
Nicholson was most recently executive vice president, chief operating officer, cfo, and treasurer at Ann Inc, which earlier this year was purchased by the Ascena Retail Group. He will be responsible for finance, global supply chain, sourcing, information technology, real estate, asset management and investment management. J.Crew Group has two other presidents: Jenna Lyons, president and executive creative director, and Libby Wadle, president of the J.Crew Brand.
Nicholson effectively succeeds James Scully, who left in January.