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J.Crew Group, Inc. Announces Third Quarter Fiscal 2012 Results

November 28, 2012

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.


Source: PR Newswire