J.Crew Group, Inc. Announces Second Quarter Fiscal 2012 Results Revenues Rise 21% to $525.5 Million

NEW YORK, Aug. 29, 2012 /PRNewswire/ -- J.Crew Group, Inc. today announced financial results for the second quarter and first half of fiscal 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 July 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 half 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 second 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.       

Second Quarter highlights:

  • Revenues increased 21% to $525.5 million, with comparable company sales increasing 14%.  Comparable company sales increased 3% in the second quarter last year.  Store sales increased 24% to $384.0 million.  Store sales increased 5% in the second quarter last year.  Direct sales increased 16% to $134.0 million following an increase of 13% in the second quarter last year.  
  • Gross margin increased to 45.1% from 36.5% in the second quarter last year.  Last year included amortization of inventory step-up from purchase accounting of $22 million.      
  • Selling, general and administrative expenses increased to $174.7 million, or 33.2% of revenues, from $146.4 million, or 33.7% of revenues, in the second quarter last year.  This year reflects additional share-based and incentive compensation of $10 million.  Last year included transaction-related litigation costs of $6.5 million.                   
  • Operating income increased $49.8 million to $62.1 million, or 11.8% of revenues, compared to $12.3 million, or 2.8% of revenues, in the second quarter last year.  Operating income last year was negatively impacted by amortization of inventory step-up and transaction-related litigation costs noted above.         
  • Net income was $22.0 million compared with a net loss of $10.5 million in the second quarter last year. The net loss last year included the after-tax effect of the amortization of inventory step-up and transaction-related litigation costs noted above.     
  • Adjusted EBITDA increased $24.5 million to $88.7 million compared to $64.2 million in the second quarter last year.  An explanation of how we use Adjusted EBITDA and a reconciliation to GAAP measures are included in Exhibit (5). 

First Half highlights:

  • Revenues increased 22% to $1,029.0 million, with comparable company sales increasing 15%.  Comparable company sales were flat in the first half last year.  Store sales increased 25% to $738.0 million.  Store sales increased 1% in the first half last year.  Direct sales increased 17% to $277.4 million following an increase of 9% in the first half last year.   
  • Gross margin increased to 46.3% from 43.1% in the first half last year. 
  • Selling, general and administrative expenses increased to $338.8 million, or 32.9% of revenues, from $271.0 million, or 32.1% of revenues, in the first half last year.  This year reflects additional share-based and incentive compensation of $17 million
  • Operating income increased $45.0 million to $137.7 million, or 13.4% of revenues, compared to $92.7 million, or 11.0% of revenues, in the first half last year. 
  • Net income was $52.7 million compared to $25.3 million in the first half last year. 
  • Adjusted EBITDA increased $51.4 million to $190.3 million compared to $138.9 million in the first half last year.  An explanation of how we use Adjusted EBITDA and a reconciliation to GAAP measures are included in Exhibit (6).   

Balance Sheet highlights:   

  • Cash and cash equivalents were $213.4 million compared to $88.3 million at the end of the second quarter last year. 
  • Total debt was $1,588 million, consisting of the seven-year senior secured term loan of $1,188 million and the eight-year senior unsecured notes of $400 million, compared to $1,597 million at the end of the second quarter last year. 
  • Inventories were $282.8 million compared to $260.1 million at the end of the second quarter last year.  Inventories last year included a purchase accounting step-up adjustment and lower in-transit inventories compared to this year.  Inventories and inventories per square foot, adjusted for purchase accounting and in-transit last year, increased 24% and 15%, 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 Exhibits (5) and (6). 

Conference Call Information

A conference call to discuss second quarter results is scheduled for tomorrow, August 30, 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 September 6, 2012 and can be accessed by dialing (877) 870-5176 and entering conference ID number 399026.  

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 29, 2012, the Company operates 285 retail stores (including 236 J.Crew retail stores, eight crewcuts stores and 41 Madewell stores), jcrew.com, the J.Crew catalog, madewell.com, the Madewell catalog, and 99 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 (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)





Second Quarter

Fiscal 2012


 

Second Quarter

Fiscal 2011





Net sales:




Stores

$       384,041


$       311,046

Direct

133,944


115,955





Other

7,503


8,014





Total revenues

525,488


435,015





Cost of goods sold, including buying and occupancy costs

288,751


276,350





Gross profit

236,737


158,665

As a percent of revenues

45.1%


36.5%





Selling, general and administrative expenses

174,669


146,385

As a percent of revenues

33.2%


33.7%









Operating income

62,068


12,280

As a percent of revenues

11.8%


2.8%





Interest expense, net

25,359


25,713









Income (loss) before income taxes

36,709


(13,433)





Provision (benefit) for income taxes

14,702


(2,889)









Net income (loss)

$         22,007


$       (10,544)





 

Exhibit (2)

J.Crew Group, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except percentages)

(unaudited)






First Half

Fiscal 2012


Pro forma

First Half

Fiscal 2011





Net sales:




Stores

$       738,049


$       592,223

Direct

277,381


236,316





Other

13,580


15,932





Total revenues

1,029,010


844,471





Cost of goods sold, including buying

 and occupancy costs

552,485


480,771





Gross profit

476,525


363,700

As a percent of revenues

46.3%


43.1%





Selling, general and administrative expenses

338,787


271,009

As a percent of revenues

32.9%


32.1%









Operating income

137,738


92,691

As a percent of revenues

13.4%


11.0%





Interest expense, net

50,771


51,177









Income before income taxes

86,967


41,514





Provision for income taxes

34,263


16,190









Net income

$         52,704


$         25,324





 

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 July 30, 2011


For the Period January 30, 2011 to March 7, 2011


Adjustments


Pro forma

First Half

Fiscal 2011


(Successor)


(Predecessor)













Net sales:








Stores

$       505,749


$         86,474


$          —


$      592,223

Direct

192,674


43,642



236,316









Other

12,810


3,122



15,932









Total revenues

711,233


133,238



844,471









Cost of goods sold, including buying and occupancy costs

434,260


70,284


  (a)  (23,773) 


480,771









Gross profit

276,973


62,954


23,773


363,700

As a percent of revenues

38.9%


47.2%




43.1%









Selling, general and administrative expenses

271,872


79,736


(a)  (80,599)


271,009

As a percent of revenues

38.2%


59.8%




32.1%

















Operating income (loss)

5,101


(16,782 )


104,372


92,691

As a percent of revenues

0.7%


(12.6 )%




11.0%









Interest expense, net

41,239


1,166


(b)  8,772


51,177

















Income (loss) before income taxes

(36,138)


(17,948 )


95,600


41,514









Provision (benefit) for income taxes

(11,800)


(1,798 )


(c)   29,788


16,190

















Net income (loss)

$        (24,338 )


$        (16,150 )


$        65,812


$      25,324









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)


763

Amortization of lease commitments, net(4)


1,626

Elimination of non-recurring charges(5)


(108,454 )




Total pro forma adjustment


$           (104,372 )




Pro forma adjustment:



Recorded in cost of goods sold


$             (23,773 )

Recorded in selling, general and administrative expenses


(80,599 )




Total pro forma adjustment


$           (104,372 )




(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 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)


$               46,376

Pro forma amortization of deferred financing costs(1)


4,801

Less recorded interest expense, net


(42,405 )




Total pro forma adjustment to interest expense, net


$                 8,772




(1) To record twenty-six 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)

July 28, 2012


January 28, 2012


July 30, 2011







Assets






Current assets:






Cash and cash equivalents

$       213,466


$       221,852


$         88,338

Inventories

282,811


242,659


260,137

Prepaid expenses and other current assets

57,297


48,052


43,634

Deferred income taxes, net

9,971


9,971


Prepaid income taxes

8,994


4,087


70,979







Total current assets

572,539


526,621


463,088







Property and equipment, net

306,195


264,572


249,716







Favorable lease commitments, net

42,095


48,930


55,613







Deferred financing costs, net

53,928


58,729


63,529







Intangible assets, net

980,420


985,322


990,225







Goodwill

1,686,915


1,686,915


1,686,220







Other assets

2,234


2,433


2,735







Total assets

$    3,644,326


$    3,573,522


$    3,511,126













Liabilities and Stockholders' Equity






Current liabilities:






Accounts payable

$       155,532


$       158,116


$       157,057

Other current liabilities

134,148


116,339


115,828

Interest payable

22,079


26,735


Deferred income taxes, net



5,678

Current portion of long-term debt

15,000


15,000


12,000







Total current liabilities

326,759


316,190


290,563







Long-term debt

1,573,000


1,579,000


1,585,000







Unfavorable lease commitments and deferred credits

65,123


53,700


46,480







Deferred income taxes, net

409,712


410,515


411,994







Other liabilities

39,323


37,065


28,308







Stockholders' equity

1,230,409


1,177,052


1,148,781







Total liabilities and stockholders' equity

$    3,644,326


$    3,573,522


$    3,511,126







 

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 second 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)

Second Quarter

 of Fiscal 2012


Second Quarter

 of Fiscal 2011





Net income (loss)

$              22.0


$           (10.5)

Provision (benefit) for income taxes

14.7


(2.9)

Interest expense, net

25.4


25.7

Depreciation and amortization

19.7


18.1





EBITDA

81.8


30.4





Share-based compensation

1.1


1.1

Amortization of inventory step-up


22.0

Amortization of lease commitments

3.3


2.2

Sponsor monitoring fees

2.5


2.0

Transaction-related litigation


6.5





Adjusted EBITDA

88.7


64.2





Taxes paid

(36.2 )


(5.0 )

Interest paid

(13.5 )


(17.6 )

Changes in working capital

(0.2 )


5.8





Cash flows from operating activities

38.8


47.4

Cash flows from investing activities

(38.2 )


(236.5 )

Cash flows from financing activities

(3.2 )


(3.1)





Decrease in cash

(2.6 )


(192.2)

Cash and cash equivalents, beginning

216.1


280.5





Cash and cash equivalents, ending

$            213.5


$              88.3





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 half (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 Half

Fiscal 2012


Pro forma

First Half

Fiscal 2011





Net income

$              52.7


$              25.3

Provision for income taxes

34.2


16.2

Interest expense, net

50.8


51.2

Depreciation and amortization

38.9


33.9





EBITDA

176.6


126.6





Share-based compensation

2.2


2.2

Amortization of lease commitments

7.0


6.1

Sponsor monitoring fees

4.5


4.0





Adjusted EBITDA

190.3


138.9





Taxes paid

(39.4 )


(9.0 )

Interest paid

(50.4 )


(17.8 )

Changes in working capital

(27.1 )


(155.7 )





Cash flows from operating activities

73.4


(43.6 )

Cash flows from investing activities

(75.6 )


(3,028.4 )

Cash flows from financing activities

(6.2 )


2,779.0





Decrease in cash

(8.4 )


(293.0)

Cash and cash equivalents, beginning

221.9


381.3





Cash and cash equivalents, ending

$            213.5


$              88.3





 

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(3)

376


17



393

4th Quarter(3)

393


9


(3)


399

 


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(3)

2,213,038


91,856


(327)


2,304,567

4th Quarter(3)

2,304,567


44,228


(28,038)


2,320,757









(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 four Madewell stores.


Q4 Two retail, one international retail, three factory, and three Madewell stores. Closed three retail stores.

(2) Reflects actual activity.

(3) Reflects projected activity.

 

SOURCE J.Crew Group, Inc.



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