J.Crew Group, Inc. Announces Third Quarter Fiscal 2013 Results

NEW YORK, Dec. 4, 2013 /PRNewswire/ -- J.Crew Group, Inc. today announced financial results for the three and nine months ended November 2, 2013.

Third Quarter highlights:

  • Revenues increased 11% to $618.8 million, with comparable company sales increasing 4%.  When realigning last year to be consistent with the current year retail calendar, comparable company sales increased 5% on top of an increase of 10% in the third quarter last year.  Store sales increased 7% to $420.2 million on top of an increase of 17% in the third quarter last year. Direct sales increased 21% to $189.8 million following an increase of 13% in the third quarter last year.  
  • Gross margin was 43.9% compared to 47.3% in the third quarter last year.        
  • Selling, general and administrative expenses were flat to last year at $188.6 million, or 30.5% of revenues compared to 33.9% of revenues in the third quarter last year. This year reflects a decrease of $7 million in share-based and incentive compensation.                       
  • Operating income increased to $82.9 million, or 13.4% of revenues, from $74.5 million, or 13.4% of revenues, in the third quarter last year. 
  • Net income increased to $35.4 million from $33.2 million in the third quarter last year. 
  • Adjusted EBITDA increased to $110.4 million from $98.9 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 are included in Exhibit (3).    

First Nine Months highlights:

  • Revenues increased 10% to $1,742.0 million, with comparable company sales increasing 3% (which was the same on a realigned basis) on top of an increase of 13% in the first nine months last year.  Store sales increased 6% to $1,199.5 million on top of an increase of 22% in the first nine months last year.  Direct sales increased 19% to $517.8 million following an increase of 16% in the first nine months last year.   
  • Gross margin was 43.3% compared to 46.7% in the first nine months last year. 
  • Selling, general and administrative expenses were $541.2 million, or 31.1% of revenues, compared to $527.4 million, or 33.3% of revenues, in the first nine months last year.  This year reflects a decrease of $23 million in share-based and incentive compensation.   
  • Operating income was $212.3 million, or 12.2% of revenues, compared to $212.2 million, or 13.4% of revenues, in the first nine months last year.       
  • Net income was $82.2 million compared to $85.9 million in the first nine months last year.    
  • Adjusted EBITDA increased to $294.4 million from $289.2 million in the first nine months last year.  An explanation of the manner in which we use adjusted EBITDA and an associated reconciliation to GAAP measures are included in Exhibit (3).   

Balance Sheet highlights:   

  • Cash and cash equivalents decreased to $77.9 million from $195.7 million at the end of the third quarter last year, which reflects a special dividend of $197.5 million that was paid in the fourth quarter last year.
  • Total debt was $1,570 million, consisting of the senior secured term loan of $1,170 million, maturing in 2018, and the senior unsecured notes of $400 million, maturing in 2019; compared to $1,585 million at the end of the third quarter last year. 
  • Inventories were $418.4 million compared to $348.6 million at the end of the third quarter last year.  Inventories and inventories per square foot increased 20% and 11%, respectively.

Subsequent Event

On November 4, 2013 in a private transaction, Chinos Intermediate Holdings A, Inc., (Issuer) an indirect parent holding company of J.Crew Group, Inc. (Group), issued $500 million aggregate principal of 7.75/8.50% Senior PIK Toggle Notes due May 1, 2019 (PIK Notes).  The PIK Notes pay interest semi-annually on May 1 and November 1 of each year.  Interest for the first and final interest periods is required to be paid in cash at the cash interest rate of 7.75%.  For each other interest period, the Issuer is required to pay interest in cash, unless certain conditions are satisfied, in which case the Issuer may elect to pay PIK interest either by increasing the principal amount or issuing new notes.  The PIK interest rate is equal to the cash interest rate plus 75 basis points, or 8.50%.         

The PIK Notes are: (i) senior unsecured obligations of the Issuer, (ii) structurally subordinated to all of the liabilities of the Issuers' subsidiaries, and (iii) not guaranteed by any of the Issuers' subsidiaries, including Group, and therefore are not recorded in the financial statements of Group.  The PIK Notes provide for redemption at certain prices, including with respect to a change in control or equity offering.  While not required, the Company intends to pay dividends to the Issuer to fund interest payments.  If interest on the PIK Notes is paid in cash, the semi-annual interest payments will be $19 million, or $213 million through the maturity date.  The dividends will be recorded as a reduction of stockholders' equity in the consolidated financial statements of Group.                     

The net proceeds of $490 million from this offering were used by the Issuer to fund a cash dividend of $484 million to equity holders, and dividend equivalent compensation payments of $6 million to certain equity-award holders.  Additionally, the exercise prices of certain equity-awards were reduced by an amount equal to the dividend of $0.53 per share.     

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 Exhibit (3). 

Conference Call Information

A conference call to discuss third quarter results is scheduled for tomorrow, December 5, 2013, 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 12, 2013 and can be accessed by dialing (877) 870-5176 and entering conference ID number 13573042.  

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 December 4, 2013, the Company operates 329 retail stores (including 256 J.Crew retail stores, eight crewcuts stores and 65 Madewell stores), jcrew.com, jcrewfactory.com, the J.Crew catalog, madewell.com, the Madewell catalog, and 121 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 projected store count and square footage 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 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 implement our international expansion 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

(unaudited)



















(in thousands, except percentages)


Third Quarter
Fiscal 2013


Third Quarter
Fiscal 2012


First Nine
Months
Fiscal 2013


First Nine
Months
Fiscal 2012










Net sales:









Stores


$         420,224


$         391,720


$      1,199,534


$      1,129,769

Direct


189,805


156,786


517,795


434,167










Other


8,798


7,302


24,711


20,882










Total revenues


618,827


555,808


1,742,040


1,584,818










Cost of goods sold, including buying
and occupancy costs


347,332


292,738


988,537


845,223










Gross profit


271,495


263,070


753,503


739,595

As a percent of revenues


43.9%


47.3%


43.3%


46.7%










Selling, general and administrative
expenses


188,583


188,569


541,207


527,357

As a percent of revenues


30.5%


33.9%


31.1%


33.3%



















Operating income


82,912


74,501


212,296


212,238

As a percent of revenues


13.4%


13.4%


12.2%


13.4%










Interest expense, net


26,467


24,089


78,386


74,860



















Income before income taxes


56,445


50,412


133,910


137,378










Provision for income taxes


21,017


17,233


51,703


51,496



















Net income


$           35,428


$           33,179


$           82,207


$           85,882










 






Exhibit (2)

J.Crew Group, Inc.

Condensed Consolidated Balance Sheets

(unaudited)













(in thousands)

November 2,
2013


February 2,
2013


October 27,
2012







Assets






Current assets:






Cash and cash equivalents

$           77,893


$           68,399


$         195,675

Inventories

418,401


265,628


348,601

Prepaid expenses and other current assets

82,478


65,791


61,646

Prepaid income taxes


11,620


7,012







Total current assets

578,772


411,438


612,934







Property and equipment, net

369,054


324,111


321,797







Favorable lease commitments, net

28,612


35,104


38,070







Deferred financing costs, net

44,396


51,851


52,178







Intangible assets, net

968,500


975,517


977,968







Goodwill

1,686,915


1,686,915


1,686,915







Other assets

3,507


1,778


1,784







Total assets

$      3,679,756


$      3,486,714


$      3,691,646













Liabilities and Stockholders' Equity






Current liabilities:






Accounts payable

$         243,374


$         141,119


$         161,523

Other current liabilities

150,137


153,743


154,680

Interest payable

10,036


18,812


12,983

Income taxes payable

2,424



Current portion of long-term debt

12,000


12,000


15,000







Total current liabilities

417,971


325,674


344,186







Long-term debt

1,558,000


1,567,000


1,570,000







Unfavorable lease commitments and deferred credits

91,741


71,146


65,840







Deferred income taxes, net

397,087


392,984


409,787







Other liabilities

33,268


38,419


37,896







Stockholders' equity

1,181,689


1,091,491


1,263,937







Total liabilities and stockholders' equity

$      3,679,756


$      3,486,714


$      3,691,646







 








Exhibit (3)

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 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 2013


Third Quarter
Fiscal 2012


First Nine
Months
Fiscal 2013


First Nine
Months
Fiscal 2012









Net income

$               35.4


$               33.2


$               82.2


$               85.9

Provision for income taxes

21.0


17.2


51.7


51.5

Interest expense, net

26.4


24.1


78.4


74.9

Depreciation and amortization

21.3


20.9


64.5


59.7









EBITDA

104.1


95.4


276.8


272.0









Share-based compensation

1.5


1.1


4.4


3.2

Amortization of lease commitments

2.3


0.2


5.9


7.2

Sponsor monitoring fees

2.5


2.2


7.3


6.8









Adjusted EBITDA

110.4


98.9


294.4


289.2









Taxes paid

(11.4)


(16.8)


(38.8)


(56.2)

Interest paid

(32.2)


(30.9)


(76.6)


(81.4)

Changes in working capital

(45.3)


(31.1)


(57.3)


(58.0)









Cash flows from operating activities

21.5


20.1


121.8


93.6

Cash flows from investing activities

(39.6)


(34.0)


(102.6)


(109.6)

Cash flows from financing activities

(3.1)


(3.9)


(9.6)


(10.2)









Effect of changes in foreign exchange
rates on cash and cash equivalents

0.3



(0.1)










Increase (decrease) in cash

(20.9)


(17.8)


9.5


(26.2)

Cash and cash equivalents, beginning

98.8


213.5


68.4


221.9









Cash and cash equivalents, ending

$               77.9


$             195.7


$               77.9


$             195.7









 

     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 (4)


Actual and Projected Store Count and Square Footage



Fiscal 2013

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)


401


8



409

2nd Quarter(2)


409


12



421

3rd Quarter(2)


421


16


(1)


436

4th Quarter(3)


436


14



450

 



Fiscal 2013

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)


2,330,687


40,113



2,370,800

2nd Quarter(2)


2,370,800


60,852


(2,019)


2,429,633

3rd Quarter(2)


2,429,633


66,869


(5,105)


2,491,397

4th Quarter(3)


2,491,397


88,642



2,580,039

 

(1)      Actual and projected number of stores opened or closed during fiscal 2013 by channel are as follows:


          Q1 – Three retail, one factory, and four Madewell stores.

          Q2 – Three international retail, four factory, one international factory, and four Madewell stores.

          Q3 – Four retail, one international retail, four factory, and seven Madewell stores. Close one retail store.

          Q4 Four retail, three international retail, five factory, and two Madewell stores.


(2)     Reflects actual activity.


(3)     Reflects projected activity.


SOURCE J.Crew



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