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

NEW YORK, May 30, 2012 /PRNewswire/ -- J.Crew Group, Inc. today announced financial results for the three months ended April 28, 2012.

On March 7, 2011, J.Crew was acquired by Chinos Holdings, Inc., a company formed 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 April 30, 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 quarter last year, 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.      

First Quarter highlights:

• Revenues increased 23% to $503.5 million, with comparable company sales increasing 16%.  Comparable company sales decreased 3% in the first quarter last year.  Store sales increased 26% to $354.0 million.  Store sales decreased 3% in the first quarter last year.  Direct sales increased 19% to $143.4 million following an increase of 5% in the first quarter last year.  
• Gross margin increased to 47.6% from 44.7% in the first quarter last year.    
• Selling, general and administrative expenses increased to $164.2 million, or 32.6% of revenues, from $131.1 million, or 32.0% of revenues, in the first quarter last year.             
• Operating income increased 45% to $75.7 million, or 15.0% of revenues, compared to $52.0 million, or 12.7% of revenues, in the first quarter last year.        
• Net income was $30.7 million compared to $16.2 million in the first quarter last year.     
• Adjusted EBITDA increased $26.9 million to $101.6 million compared to $74.7 million in the first quarter last year.  An explanation of how we use Adjusted EBITDA and a reconciliation to GAAP measures are included in Exhibit (4). 

Balance Sheet highlights:   

• Cash and cash equivalents were $216.1 million compared to $280.5 million at the first quarter end last year. 
• Total debt was $1,591 million, consisting of the seven-year senior secured term loan of $1,191 million and the eight-year senior unsecured notes of $400 million, incurred in connection with the acquisition, compared with $1,600 million at the first quarter end last year. 
• Inventories were $250.6 million compared to $265.6 million at the first quarter end last year.  Inventories last year included a purchase accounting step-up adjustment and higher in-transit inventories compared to this year.  Inventories and inventories per square foot, adjusted for purchase accounting and in-transit last year, increased 14% and 6%, respectively.

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 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 (4). 

Conference Call Information

A conference call to discuss first quarter results is scheduled for tomorrow, May 31, 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 June 7, 2012 and can be accessed by dialing (877) 870-5176 and entering conference ID number 393917.  

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 May 30, 2012, the Company operates 277 retail stores (including 229 J.Crew retail stores, nine crewcuts stores and 39 Madewell stores), jcrew.com, the J.Crew catalog, madewell.com, the Madewell catalog, and 96 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 projected store count and square footage in Exhibit (5) 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.

Notes to Pro Forma Statement of Operations

(a)     To give effect to the following adjustments:

(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, and amortization of the step-up in the carrying value of inventory.

(b)     To give effect to the following adjustments:

(1)     To record thirteen 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%.

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. 

(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 stores. Closed one crewcuts and one Madewell store.
Q3 – Six retail, one international retail, four factory, two international factory, and five Madewell stores.
Q4 – Three retail, three factory, and two Madewell stores.  Closed one retail store.

(2)  Reflects actual activity.

(3)  Reflects projected activity.               

SOURCE J. Crew Group, Inc.

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