J.Crew Group, Inc. Announces Third Quarter Fiscal 2012 Results
Revenues Rise 16% to $556 Million
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 Fiscal 2012 |
Third Quarter 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 Months Fiscal 2012 |
Pro forma First Nine 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 March 8, 2011 to October 29, 2011 (Successor) |
For the Period January 30, 2011 to March 7, 2011 (Predecessor) |
Adjustments |
Pro forma First Nine Months 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 Fiscal 2012 |
Third Quarter 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 Months Fiscal 2012 |
Pro forma First Nine 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 beginning of the quarter |
Number of stores opened during the quarter(1) |
Number of stores closed during the quarter(1) |
Total stores open at end of the quarter |
||||
| 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 at beginning of the quarter |
Gross square feet for stores opened or expanded during the quarter |
Reduction of gross square feet for stores closed or downsized during the quarter |
Total gross square feet at end of 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.
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