Byline: Thomas J. Ryan

NEW YORK — Stung by higher debt costs and weakness in its core catalog, J. Crew Group Inc. more than doubled its first-quarter losses, to $12.8 million from $6.1 million.
Revenues in the period ended May 2 inched up 0.3 percent to $165.8 million from $165.2 million, reflecting greater sales in its full-price retail operations, according to a filing with the Securities & Exchange Commission.
J. Crew retail sales jumped 32.6 percent to $50 million, partly reflecting the opening of 16 stores since the start of 1997 as well as a same-store gain of 6.1 percent in the quarter. As of May 2, Crew operated 55 full-price stores.
However, these gains offset a 21.9 percent sales decline at J. Crew Mail Order to $38.6 million for the quarter. This reflected a 16 percent decrease in pages circulated to 1.39 billion from 1.65 billion in the 1997 quarter, the elimination of a sale book and efforts to increase customer segmentation of mailings.
Crew said the page reductions should cut paper and postage costs and raise sales per page.
Crew’s remaining businesses — J. Crew Factory Outlets, Clifford & Wills and Popular Club Plan — together posted flat sales of about $75 million in the period.
Crew noted in its filing that it has retained an investment banking firm to sell the Clifford & Wills mail order and outlet divisions as part of the company’s strategy to focus on building the J. Crew brand. Clifford & Wills, which targets older, more conservative customers than the core Crew catalog, had sales of $14.4 million in the quarter and $72 million in 1997.
Gross margins in the quarter eroded to 41.6 percent from 44.3 percent due to lower initial markups on spring merchandise in the J. Crew Retail and J. Crew Mail Order divisions and increased clearance markdowns.
Selling, general and administrative expenses increased slightly to 49 percent of sales from 48.9 percent. Savings from reduced pages and a cost-cutting program at J. Crew Mail Order were matched by increased selling costs in other catalogs and higher in-store expenses at J. Crew Retail.
Interest costs shot up to $9.4 million from $2.6 million as a result of the October sale of the firm to Texas Pacific investment group in a $560 million leveraged buyout.
The business was sold by founder Arthur Cinader and his family, including his daughter Emily Woods, who continues as chairman and chief designer. Woods retains a 14.8 percent stake in Crew.
Due to the recent results, Moody’s Investor Service Inc. downgraded the debt ratings of J. Crew, cutting Crew’s senior secured term loan to b1 from ba3, and its senior subordinated notes to caa1 from ba3.
While noting Crew’s cost-cutting initiatives since the buyout and better productivity on mailings, Moody’s said, “a lower overall volume of units sold through catalogs is likely to result in negative operating leverage and lower-than-expected operating profitability for 1998.”
Moody’s also said Crew’s full-price stores posted lower profits last year due to clearance markdowns, and it expects about half the existing stores to be cannibalized by new openings. Nonetheless, it added that overall comp-store growth should be positive this year, with changes in merchandise mix improving productivity.
Moody’s said Clifford & Wills has been a “moderate contributor” to profitability.
Crew lost $29.4 million in 1997 after about $25 million in charges related to the sale to Texas Pacific. Sales inched up 3.1 percent to $834 million.
Moody’s said its ratings recognize Crew’s strong brand franchise; sales of more than $500 per square foot in its stores; its experienced, new management, and the potential to generate cash through sales of non-core businesses.
Moody’s said its ratings are based on the “inherent fashion risk and potential for volatility in the company’s apparel business and the growth of competition from labels such as Tommy Hilfiger, CK Calvin Klein and Banana Republic.”

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