J.Crew Group, Inc. Announces Third Quarter Fiscal 2012 Results
NEW YORK, Nov. 28, 2012 /PRNewswire/ — J.Crew Group, Inc. today announced financial results for the three months and the nine months ended October 27, 2012.
On March 7, 2011, J.Crew was acquired by investment funds affiliated with TPG Capital, L.P. and Leonard Green & Partners, L.P. Although the Company continued as the same legal entity after the acquisition, last year’s financial statements were prepared for the following periods: (i) March 8, 2011 to October 29, 2011 (Successor) and (ii) January 30, 2011 to March 7, 2011 (Predecessor). To facilitate a meaningful comparison of our results, we have presented a pro forma statement of operations for the first nine months of fiscal 2011, which reflects the combination of the Successor and Predecessor periods, giving effect to the acquisition and related transactions as if they occurred on the first day of the fiscal year. The results of the third quarter of fiscal 2011 have not been prepared on a pro forma basis, as the transaction was effective prior to the first day of the quarter.
Third Quarter highlights:
- Revenues increased 16% to $555.8 million, with comparable company sales increasing 10%. Comparable company sales increased 5% in the third quarter last year. Store sales increased 17% to $391.7 million. Store sales increased 10% in the third quarter last year. Direct sales increased 13% to $156.8 million following an increase of 18% in the third quarter last year.
- Gross margin increased to 47.3% from 42.1% in the third quarter last year. Last year included amortization of inventory step-up from purchase accounting of $5.8 million.
- Selling, general and administrative expenses increased to $188.6 million, or 33.9% of revenues, from $143.9 million, or 30.0% of revenues, in the third quarter last year. This year reflects additional share-based and incentive compensation of $8.3 million. Last year included transaction-related net insurance recoveries of $3.6 million.
- Operating income increased to $74.5 million, or 13.4% of revenues, compared to $57.9 million, or 12.1% of revenues, in the third quarter last year. Operating income last year was negatively impacted by amortization of inventory step-up, partially offset by transaction-related net insurance recoveries noted above.
- Net income was $33.2 million compared to $21.6 million in the third quarter last year. Net income last year included the after-tax effect of the amortization of inventory step-up and transaction-related net insurance recoveries noted above.
- Adjusted EBITDA increased to $98.9 million from $83.8 million in the third quarter last year. An explanation of the manner in which we use adjusted EBITDA and an associated reconciliation to GAAP measures is included in Exhibit (5).
First Nine Months highlights:
- Revenues increased 20% to $1,584.8 million, with comparable company sales increasing 13%. Comparable company sales increased 2% in the first nine months of last year. Store sales increased 22% to $1,129.8 million. Store sales increased 4% in the first nine months of last year. Direct sales increased 16% to $434.1 million following an increase of 12% in the first nine months of last year.
- Gross margin increased to 46.7% from 43.1% in the first nine months of last year.
- Selling, general and administrative expenses increased to $527.4 million, or 33.3% of revenues, from $418.4 million, or 31.6% of revenues, in the first nine months of last year. This year reflects additional share-based and incentive compensation of $25.0 million.
- Operating income increased to $212.2 million, or 13.4% of revenues, compared to $152.6 million, or 11.5% of revenues, in the first nine months of last year.
- Net income was $85.9 million compared to $46.5 million in the first nine months of last year.
- Adjusted EBITDA increased to $289.2 million compared to $222.8 million in the first nine months of last year. An explanation of the manner in which we use adjusted EBITDA and an associated reconciliation to GAAP measures is included in Exhibit (6).
Balance Sheet highlights:
- Cash and cash equivalents were $195.7 million compared to $142.7 million at the end of the third quarter last year.
- Total debt was $1,585 million, consisting of the seven-year senior secured term loan of $1,185 million and the eight-year senior unsecured notes of $400 million, compared to $1,597 million at the end of the third quarter last year.
- Inventories were $348.6 million compared to $291.7 million at the end of the third quarter last year. Inventories and inventories per square foot increased 19% and 11%, respectively.
Subsequent Event
Superstorm Sandy struck the East Coast on October 29, 2012, resulting in (i) personal property damage in three of our stores, one of which will remain closed indefinitely and (ii) temporary closures of 131 additional stores for periods of one to fourteen days. We believe the impact on revenues will not be material to the results of the fourth quarter.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. A key measure used in our evaluation is comparable company sales, which includes (i) net sales from stores that have been open for at least twelve months, (ii) direct net sales, and (iii) shipping and handling fees.
Use of Non-GAAP Financial Measures
This announcement includes certain non-GAAP financial measures. An explanation of the manner in which we use adjusted EBITDA and an associated reconciliation to GAAP measures is included in Exhibits (5) and (6).
Conference Call Information
A conference call to discuss third quarter results is scheduled for tomorrow, November 29, 2012, at 11:00 AM Eastern Time. Investors and analysts interested in participating in the call are invited to dial (877) 407-3982 approximately ten minutes prior to the start of the call. The conference call will also be webcast live at www.jcrew.com. A replay of this call will be available until December 6, 2012 and can be accessed by dialing (877) 870-5176 and entering conference ID number 403785.
About J.Crew Group, Inc.
J.Crew Group, Inc. is a nationally recognized multi-channel retailer of women’s, men’s and children’s apparel, shoes and accessories. As of November 28, 2012, the Company operates 294 retail stores (including 241 J.Crew retail stores, eight crewcuts stores and 45 Madewell stores), jcrew.com, jcrewfactory.com, the J.Crew catalog, madewell.com, the Madewell catalog, and 106 factory stores. Additionally, certain product, press release and SEC filing information concerning the Company are available at the Company’s website www.jcrew.com.
Forward?Looking Statements:
Certain statements herein, including the statements regarding our estimated impact on revenues as a result of Superstorm Sandy and projected store count and square footage in Exhibit (7) hereof, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect our current expectations or beliefs concerning future events and actual results of operations may differ materially from historical results or current expectations. Any such forward-looking statements are subject to various risks and uncertainties, including our substantial indebtedness and lease obligations, the strength of the global economy, declines in consumer spending or changes in seasonal consumer spending patterns, competitive market conditions, our ability to anticipate and timely respond to changes in trends and consumer preferences, our ability to successfully develop, launch and grow our newer concepts and execute on strategic initiatives, products offerings, sales channels and businesses, material disruption to our information systems, our ability to implement our real estate strategy, our ability to attract and retain key personnel, interruptions in our foreign sourcing operations, and other factors which are set forth in the section entitled “Risk Factors” and elsewhere in our Annual Report on Form 10-K and in all filings with the SEC made subsequent to the filing of the Form 10-K. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Exhibit (1)
J.Crew Group, Inc
Condensed Consolidated Statements of Operations
(in thousands, except percentages)
(unaudited)
Third Quarter Third Quarter
Fiscal 2012 Fiscal 2011
----------- -----------
Net sales:
Stores $391,720 $334,483
Direct 156,786 138,544
Other 7,302 6,548
----- -----
Total
revenues 555,808 479,575
Cost
of
goods
sold,
including
buying
and
occupancy
costs 292,738 277,806
------- -------
Gross
profit 263,070 201,769
As a
percent
of
revenues 47.3% 42.1%
Selling,
general
and
administrative
expenses 188,569 143,876
As a
percent
of
revenues 33.9% 30.0%
---- ----
Operating
income 74,501 57,893
As a
percent
of
revenues 13.4% 12.1%
Interest
expense,
net 24,089 25,349
------ ------
Income
before
income
taxes 50,412 32,544
Provision
for
income
taxes 17,233 10,944
------ ------
Net
income $33,179 $21,600
======= =======
Exhibit (2)
J.Crew Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except percentages)
(unaudited)
First Nine Pro forma
Months First Nine
Fiscal 2012 Months
Fiscal 2011
-----------
Net sales:
Stores $1,129,769 $926,706
Direct 434,167 374,860
Other 20,882 22,480
------ ------
Total
revenues 1,584,818 1,324,046
Cost
of
goods
sold,
including
buying
and
occupancy
costs 845,223 753,050
------- -------
Gross
profit 739,595 570,996
As
a
percent
of
revenues 46.7% 43.1%
Selling,
general
and
administrative
expenses 527,357 418,422
As
a
percent
of
revenues 33.3% 31.6%
---- ----
Operating
income 212,238 152,574
As
a
percent
of
revenues 13.4% 11.5%
Interest
expense,
net 74,860 76,404
------ ------
Income
before
income
taxes 137,378 76,170
Provision
for
income
taxes 51,496 29,706
------ ------
Net
income $85,882 $46,464
======= =======
Exhibit (3)
J.Crew Group, Inc.
Condensed Consolidated Pro Forma Statement of Operations
(in thousands, except percentages)
(unaudited)
For the Period For the Period Adjustments Pro forma
March 8, 2011 to January 30, 2011 First Nine
October 29, 2011 to March 7, 2011 Months
(Successor) (Predecessor) Fiscal 2011
---------- ------------ -----------
Net sales:
Stores $840,232 $86,474 $ - $926,706
Direct 331,218 43,642 - 374,860
Other 19,358 3,122 - 22,480
------ ----- --- ------
Total revenues 1,190,808 133,238 - 1,324,046
Cost of goods sold, including buying and occupancy
costs 712,066 70,284 (a) (29,300) 753,050
------- ------ -------------- -------
Gross profit 478,742 62,954 29,300 570,996
As a percent of revenues 40.2% 47.2% 43.1%
Selling, general and administrative expenses 415,748 79,736 (a) (77,062) 418,422
As a percent of revenues 34.9% 59.8% 31.6%
---- ---- ----
Operating income (loss) 62,994 (16,782) 106,362 152,574
As a percent of revenues 5.3% (12.6)% 11.5%
Interest expense, net 66,588 1,166 (b) 8,650 76,404
------ ----- ---------------- ------
Income (loss) before income taxes (3,594) (17,948) 97,712 76,170
Provision (benefit) for income taxes (856) (1,798) (c) 32,360 29,706
---- ------ --------------- ------
Net income (loss) $(2,738) $(16,150) $65,352 $46,464
======= ======== ======= =======
See notes to pro forma statement of operations
Notes to Pro Forma Statement of Operations
(a) To give effect to the following adjustments:
(in thousands)
Adjustments
-----------
Amortization expense(1) $813
Depreciation expense(2) 880
Sponsor monitoring fees(3) 700
Amortization of lease commitments,
net(4) 1,865
Elimination of non-recurring charges(5) (110,620)
--------
Total pro forma adjustment $(106,362)
=========
Pro forma adjustment:
---------------------
Recorded in cost of goods sold $(29,300)
Recorded in selling, general and
administrative expenses (77,062)
-------
Total pro forma adjustment $(106,362)
=========
(1) To record five weeks of additional
amortization expense of intangible
assets for our Madewell brand
name, loyalty program and customer
lists amortized on a straight-
line basis over their respective
useful lives.
(2) To record five weeks of additional
depreciation expense of the step-
up of property and equipment
allocated on a straight-line
basis over a weighted average
remaining useful life of 8.2
years.
(3) To record five weeks of additional
expense (calculated as the greater
of 40 basis points of annual
revenues or $8 million) to be paid
to the Sponsors in accordance with
a management services agreement.
(4) To record five weeks of additional
amortization expense of favorable
and unfavorable lease commitments
amortized on a straight-line
basis over the remaining lease
life, offset by the elimination of
the amortization of historical
deferred rent credits.
(5) To eliminate non-recurring charges
that were incurred in connection
with the acquisition and related
transactions, including
acquisition-related share based
compensation, transaction costs,
transaction-related litigation
costs and recoveries, and
amortization of the step-up in
the carrying value of inventory.
(b) To give effect to the following adjustments:
(in thousands)
Adjustments
-----------
Pro forma cash interest expense(1) $69,203
Pro forma amortization of deferred
financing costs(1) 7,201
Less recorded interest expense, net (67,754 )
--------
Total pro forma adjustment to interest
expense, net $8,650
======
(1) To record thirty-nine weeks
of interest expense
associated with borrowings
under the term loan facility
and notes, and the
amortization of deferred
financing costs. Pro forma
cash interest expense
reflects a weighted-average
interest rate of 5.6%.
(c) To reflect our expected
annual effective tax rate of
approximately 39%.
Exhibit (4)
J.Crew Group, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands) October 27, 2012 January 28, 2012 October 29, 2011
---------------- ---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $195,675 $221,852 $142,714
Inventories 348,601 242,659 291,737
Prepaid expenses and other current assets 61,646 58,023 53,258
Prepaid income taxes 7,012 4,087 3,880
----- ----- -----
Total current assets 612,934 526,621 491,589
Property and equipment, net 321,797 264,572 258,815
Favorable lease commitments, net 38,070 48,930 52,271
Deferred financing costs, net 52,178 58,729 61,129
Intangible assets, net 977,968 985,322 987,773
Goodwill 1,686,915 1,686,915 1,686,429
Other assets 1,784 2,433 2,473
----- ----- -----
Total assets $3,691,646 $3,573,522 $3,540,479
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $161,523 $158,116 $157,222
Other current liabilities 154,680 116,339 123,096
Interest payable 12,983 26,735 -
Deferred income taxes, net - - 5,678
Current portion of long-term debt 15,000 15,000 12,000
------ ------ ------
Total current liabilities 344,186 316,190 297,996
Long-term debt 1,570,000 1,579,000 1,585,000
Unfavorable lease commitments and deferred credits 65,840 53,700 46,839
Deferred income taxes, net 409,787 410,515 409,704
Other liabilities 37,896 37,065 33,264
Stockholders' equity 1,263,937 1,177,052 1,167,676
--------- --------- ---------
Total liabilities and stockholders' equity $3,691,646 $3,573,522 $3,540,479
========== ========== ==========
Exhibit (5)
J.Crew Group, Inc.
Reconciliation of Adjusted EBITDA
Non-GAAP Financial Measure
The following table reconciles net
income reflected on the Company's
condensed consolidated statements of
operations for the third quarter to:
(i) Adjusted EBITDA (a non-GAAP
measure), (ii) cash flows from
operating activities (prepared in
accordance with GAAP) and (iii) cash
and cash equivalents as reflected on
the condensed consolidated balance
sheet (prepared in accordance with
GAAP).
(in millions) Third Quarter Third Quarter
Fiscal 2012 Fiscal 2011
----------- -----------
Net income $33.2 $21.6
Provision for income taxes 17.2 10.9
Interest expense, net 24.1 25.3
Depreciation and amortization 20.9 18.4
---- ----
EBITDA 95.4 76.2
---- ----
Share-based compensation 1.1 1.0
Amortization of inventory step-up - 5.8
Amortization of lease commitments 0.2 2.2
Sponsor monitoring fees 2.2 2.2
Transaction-related litigation - (3.6)
--- ----
Adjusted EBITDA 98.9 83.8
---- ----
Taxes paid (16.8) (9.1)
Collection of refundable taxes - 64.2
Interest paid (30.9) (30.6)
Changes in working capital (31.1) (27.3)
----- -----
Cash flows from operating
activities 20.1 81.0
Cash flows from investing
activities (34.0) (25.0)
Cash flows from financing
activities (3.9) (1.6)
---- ----
Increase (decrease) in cash (17.8) 54.4
Cash and cash equivalents,
beginning 213.5 88.3
----- ----
Cash and cash equivalents, ending $195.7 $142.7
====== ======
We present Adjusted EBITDA, a non-GAAP financial measure, because we use such measure to: (i) monitor the performance of our business, (ii) evaluate our liquidity, and (iii) determine levels of incentive compensation. We believe the presentation of this measure will enhance the ability of our investors to analyze trends in our business, evaluate our performance relative to other companies in the industry, and evaluate our ability to service debt.
Adjusted EBITDA is not a presentation made in accordance with generally accepted accounting principles, and therefore, differences may exist in the manner in which other companies calculate this measure. Adjusted EBITDA should not be considered an alternative to (i) net income, as a measure of operating performance, or (ii) cash flows, as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool and should not be considered in isolation to, or as a substitute for analysis of the Company’s results as measured in accordance with GAAP.
Exhibit (6)
J.Crew Group, Inc.
Reconciliation of Adjusted EBITDA
Non-GAAP Financial Measure
The following table reconciles net
income reflected on the Company's
condensed consolidated statements of
operations for the first nine months
(which is presented on a pro forma
basis last year) to: (i) Adjusted
EBITDA (a non-GAAP measure), (ii)
cash flows from operating activities
(prepared in accordance with GAAP)
and (iii) cash and cash equivalents
as reflected on the condensed
consolidated balance sheet (prepared
in accordance with GAAP).
(in millions) First Nine Pro forma
Months First Nine
Fiscal 2012 Months
Fiscal 2011
-----------
Net income $85.9 $46.5
Provision for income taxes 51.5 29.7
Interest expense, net 74.9 76.4
Depreciation and amortization 59.7 52.3
---- ----
EBITDA 272.0 204.9
----- -----
Share-based compensation 3.2 3.2
Amortization of lease commitments 7.2 8.7
Sponsor monitoring fees 6.8 6.0
--- ---
Adjusted EBITDA 289.2 222.8
----- -----
Taxes paid (56.2) (18.1)
Collection of refundable taxes - 64.2
Interest paid (81.4) (48.4)
Changes in working capital (58.0) (184.5)
----- ------
Cash flows from operating
activities 93.6 36.0
Cash flows from investing
activities (109.6) (3,053.4)
Cash flows from financing
activities (10.2) 2,778.8
----- -------
Decrease in cash (26.2) (238.6)
Cash and cash equivalents,
beginning 221.9 381.3
----- -----
Cash and cash equivalents, ending $195.7 $142.7
====== ======
Exhibit (7)
Actual and Projected Store Count and Square Footage
Fiscal 2012
-----------
Quarter Total stores open at Number of stores Number of stores closed Total stores open at end
beginning of the opened during the during the quarter(1) of the quarter
quarter quarter(1)
--- ------- ---------
1st Quarter(2) 362 10 - 372
2nd Quarter(2) 372 6 (2) 376
3rd Quarter(2) 376 16 - 392
4th Quarter(3) 392 13 (3) 402
Fiscal 2012
-----------
Quarter Total gross square feet Gross square feet for Reduction of gross Total gross square feet
at beginning of the stores opened or square feet for stores at end of the quarter
quarter expanded during the closed or downsized
quarter during the quarter
--- ------- ------------------
1st Quarter(2) 2,138,663 42,057 (1,811) 2,178,909
2nd Quarter(2) 2,178,909 38,575 (4,446) 2,213,038
3rd Quarter(2) 2,213,038 85,421 (327) 2,298,132
4th Quarter(3) 2,298,132 62,838 (22,910) 2,338,060
(1) Actual and Projected number of
stores to be opened or closed
during fiscal 2012 by channel are
as follows:
Q1 - Two retail, one international
retail, and seven Madewell stores.
Q2 - Three retail, one
international retail, one factory,
and one Madewell store. Closed one
crewcuts and one Madewell store.
Q3 -Six retail, one international
retail, four factory, one
international factory, and four
Madewell stores.
Q4 - Three retail, one
international retail, three
factory, one international
factory, and five Madewell stores.
Closed three retail stores.
(2) Reflects actual activity.
(3) Reflects projected activity.
SOURCE J. Crew Group, Inc.
