J. Crew Group, Inc. Announces Second Quarter Fiscal 2011 Results

NEW YORK, Sept. 1, 2011 /PRNewswire/ -- J. Crew Group, Inc. today announced financial results for the three months (second quarter) and six months (first six months) ended July 30, 2011.  

The results below for the first six months of fiscal 2011 reflect the Company's performance for the "combined period" which consists of the period prior to its acquisition ("predecessor period") by affiliates of TPG Capital, L.P. and Leonard Green & Partners, L.P. in the first quarter of fiscal 2011 and the period after completion of the acquisition on March 7, 2011 ("successor period").  

The combination of the predecessor and successor periods by adding the amounts to present ("combined") totals is not consistent with GAAP and may yield results that are not comparable on a period-to-period basis due to the changes of accounting basis during these periods.  For purposes of comparing results of operations for the first six months of fiscal 2011 to the comparable period in the prior year the Company believes that it is a meaningful comparison.  Combined operating results (i) have not been prepared on a pro forma basis as if the acquisition occurred on the first day of the period, (ii) may not reflect the actual results we would have achieved absent the acquisition and (iii) may not be predictive of future results of operations.  

Second Quarter highlights:

• Revenues increased 7% to $435.0 million.  Comparable company sales increased 3% in the second quarter.  Comparable company sales increased 12% in the second quarter of fiscal 2010. Comparable company sales include comparable store sales, direct sales and shipping and handling revenues.  Store sales increased 5% to $311.0 million, with comparable store sales increasing 1%. Comparable store sales increased 11% in the second quarter of fiscal 2010.  Direct sales (Internet and Phone) increased 13% to $116.0 million.  Direct sales increased 16% to $102.5 million in the second quarter of fiscal 2010.  
• Gross margin was 36.5% compared to 44.6% in the second quarter of fiscal 2010.  The decrease in gross margin was impacted by amortization of step-up in inventory value and the net impact of favorable/unfavorable store lease amortization which totaled $23.0 million that were recorded in connection with the acquisition.  
• Selling, general and administrative expenses increased to $146.4 million from $122.5 million in the second quarter of fiscal 2010.  The second fiscal quarter includes $14.0 million of incremental expenses as a result of purchase accounting and related transaction impact which includes:  $5.5 million increase in depreciation and amortization related to purchase accounting and a $6.5 million charge in connection with the August 30, 2011 settlement of the shareholder litigation and certain legal costs.  
• Operating income was $12.3 million, or 2.8% of revenues, compared to $59.0 million, or 14.5% of revenues, in the second quarter of fiscal 2010.  Operating income in the second quarter of fiscal 2011 includes $37.0 million of incremental costs and amortization incurred with the acquisition and related to purchase accounting.  Operating income in the second quarter of fiscal 2010 included a benefit of $3.2 million in share-based compensation for recognition of forfeited share-based awards.  
• Net loss was $10.5 million compared with net income of $34.9 million in the second quarter of fiscal 2010.  The second quarter of fiscal 2011 was impacted by costs and amortization incurred with the acquisition and related to purchase accounting as noted above and increased interest expense as a result of debt incurred in connection with the acquisition.  
• Adjusted EBITDA in the second quarter of fiscal 2011 was $64.2 million compared to $69.5 million in the second quarter of fiscal 2010.  An explanation of how we use Adjusted EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA are included in Exhibit (3).  

First Six Months highlights:

• Revenues increased 3% to $844.4 million.  Comparable company sales were flat in the first six months of fiscal 2011.  Comparable company sales increased 14% in the first six months of fiscal 2010.  Store sales increased 1% to $592.2 million, with comparable store sales decreasing 3%.  Comparable store sales increased 13% in the first six months of fiscal 2010.  Direct sales increased 9% to $236.3 million.  Direct sales increased 18% to $216.9 million in the first six months of fiscal 2010.  
• Gross margin was 40.3% compared to 46.8% in the first six months of fiscal 2010.  The decrease in gross margin was impacted by amortization of step-up in inventory value and the net impact of favorable/unfavorable store lease amortization which totaled $26.7 million that were recorded in connection with the acquisition.  
• Selling general and administrative expenses increased to $351.6 million from $249.7 million in the first six months of fiscal 2010.  The first six months of fiscal 2011 includes $95.5 million of incremental expenses as a result of purchase accounting and related transaction impact which includes:  $32.2 million of transaction expenses, $44.7 million of acquisition related share-based compensation, $8.9 million increase in depreciation and amortization related to purchase accounting, and a reserve for litigation settlement and legal costs of $6.5 million.  
• Operating loss was $11.7 million, or 1% of revenues, compared with operating income of $134.4 million, or 16.4% of revenues, in the first six months of fiscal 2010.  Operating loss in the first six months of fiscal 2011 includes $122.2 million of incremental costs and amortization incurred with the acquisition and related to purchase accounting.  Operating income in the first six months of fiscal 2010 included a benefit of $3.2 million in share-based compensation for recognition of forfeited share-based awards.  
• Net loss was $40.5 million compared with net income of $79.6 million in the first six months of fiscal 2010.  The first six months of fiscal 2011 was impacted by costs and amortization incurred with the acquisition and related to purchase accounting as noted above and increased interest expense as a result of debt incurred in connection with the acquisition.  
• Adjusted EBITDA was $138.9 million compared to $158.4 million in the first six months of fiscal 2010.  

Balance Sheet highlights as of July 30, 2011:  

• Cash and cash equivalents were $88.3 million at the end of the second fiscal quarter compared to $340.5 million at the end of the second fiscal quarter in the prior year.  
• Total debt was $1,597 million at the end of the second quarter, comprised of a $1,197 million seven-year senior secured term loan and $400 million in senior unsecured notes maturing in eight years, incurred in connection with the acquisition, compared to $49.2 million at the end of the second fiscal quarter in the prior year.  
• Inventories at the end of the second fiscal quarter were $260.1 million (including $7.4 million of inventory step-up value recorded related to the transaction), compared to $219.5 million at the end of the second quarter of fiscal 2010.  Inventory per square foot (excluding step-up value related to the transaction) increased 11% compared to the end of the second quarter of fiscal 2010.  

Use of Non-GAAP Financial Measures

This announcement contains non-GAAP financial measures.  An explanation of these measures and a reconciliation to the most directly comparable GAAP financial measures are included in Exhibit (3).  

Conference Call Information

A conference call to discuss second quarter results is scheduled for today, September 1, 2011, at 4:30 PM Eastern Time.  Investors and analysts interested in participating in the call are invited to dial (877) 407-0784 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 September 8, 2011 and can be accessed by dialing (877) 870-5176 and entering conference ID number 377999.  

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 August 31, 2011, the Company operates 258 retail stores (including 222 J.Crew retail stores, 10 crewcuts stores and 26 Madewell stores), the J. Crew catalog business, jcrew.com, madewell.com and 93 factory outlet 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 information in Exhibit (4) 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 the Company's 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 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, 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, impact of costs of mailing, paper and printing,  and other factors which are set forth in the Company's Annual Report on Form 10-K and in all filings with the SEC made by the Company subsequent to the filing of the Form 10-K. The Company does not undertake to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

We present the non-GAAP financial measure Adjusted EBITDA because we use this measure to monitor and evaluate both the performance of our business and our liquidity, and we believe the presentation of this measure will enhance investors' ability to analyze trends in our business, evaluate our performance relative to other companies in our industry and evaluate our ability to service our debt.  

Adjusted EBITDA does not reflect the impact of items such as non-cash share-based compensation, transaction costs, litigation costs, sponsor monitoring fees, as well as the impact of purchase accounting adjustments resulting from the acquisition of the Company by affiliates of TPG Capital, L.P. and Leonard Green & Partners, L.P.

Adjusted EBITDA is not a presentation made in accordance with generally accepted accounting principles in the U.S. (GAAP) and this computation may vary from others in the industry.  Adjusted EBITDA should not be considered as an alternative to net income or other GAAP measures as a measure of operating performance or 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 reported under GAAP.  

The addition of the predecessor and successor period amounts to present combined totals is not consistent with GAAP and may yield results that are not comparable on a period-to-period basis due to the changes of accounting basis during these periods.

Note 1 – Store count and square footage summary excludes three clearance store locations.  Above summary also includes one factory store that is temporarily closed at the time of this announcement due to flooding.

Note 2 – Actual and Projected number of stores to be opened and closed during Fiscal 2011 by quarter:
1st Quarter – one retail, one factory, one retail crewcuts and two Madewell stores.  We closed one retail store (actual).
2nd Quarter – three factory, one crewcuts factory and two Madewell stores (actual).
3rd Quarter – six retail, four factory and seven Madewell stores (projected)
4th Quarter – one retail, one factory, one crewcuts factory and two Madewell stores.  
We anticipate closing two retail and one Madewell store (projected).

SOURCE J. Crew Group, Inc.

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