J.Crew Group, Inc. Announces Third Quarter Fiscal 2014 Results

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Dec 04, 2014, 04:01 ET

NEW YORK, Dec. 4, 2014 /PRNewswire/ -- J.Crew Group, Inc. (the "Company") today announced financial results for the third quarter and first nine months of fiscal 2014, ending November 1, 2014.

Third Quarter highlights:

Revenues increased 6% to $655.2 million, with comparable company sales decreasing 2%. Comparable company sales increased 4% in the third quarter last year. Store sales increased 4% to $437.8 million on top of an increase of 7% in the third quarter last year. Direct sales increased 10% to $207.8 million following an increase of 21% in the third quarter last year.
Gross margin was 40.2% compared to 43.9% in the third quarter last year.
Selling, general and administrative expenses were $215.7 million, or 32.9% of revenues, compared to $188.6 million, or 30.5% of revenues in the third quarter last year.
Operating loss was $636.3 million compared with operating income of $82.9 million in the third quarter last year. The operating loss includes pre-tax, non-cash impairment charges of $684.0 million.
Net loss was $607.8 million compared with net income of $35.4 million in the third quarter last year. This year reflects the impact of non-cash impairment charges.
Adjusted EBITDA was $80.9 million compared to $110.4 million in the third quarter last year. An explanation of the manner in which the Company uses adjusted EBITDA and an associated reconciliation to GAAP measures are included in Exhibit (3).

First Nine Months highlights:

Revenues increased 8% to $1,874.3 million, with comparable company sales remaining flat. Comparable company sales increased 3% in the first nine months last year. Store sales increased 6% to $1,267.7 million on top of an increase of 6% in the first nine months last year. Direct sales increased 12% to $578.4 million following an increase of 19% in the first nine months last year.
Gross margin was 38.8% compared to 43.3% in the first nine months last year.
Selling, general and administrative expenses were $609.7 million, or 32.5% of revenues, compared to $540.5 million, or 31.0% of revenues in the first nine months last year.
Operating loss was $566.3 million compared with operating income of $212.3 million in the first nine months last year. The operating loss includes pre-tax, non-cash impairment charges of $684.0 million.
Net loss was $627.2 million compared with net income of $82.2 million in the first nine months last year. This year reflects the impact of (i) non-cash impairment charges and (ii) a loss on refinancing incurred in connection with the refinancing of our term loan facility and the redemption of our senior notes.
Adjusted EBITDA was $213.1 million compared to $294.4 million in the first nine months last year. An explanation of the manner in which the Company uses adjusted EBITDA and an associated reconciliation to GAAP measures are included in Exhibit (3).

Balance Sheet highlights:

Cash and cash equivalents were $80 million compared to $78 million at the end of the third quarter last year.
Total debt, net of discount, was $1,552 million reflecting the new senior secured term loan which matures in 2021. Total debt of $1,570 million in the third quarter last year consisted of (i) the former senior secured term loan of $1,170 million and (ii) senior unsecured notes of $400 million, which were refinanced and redeemed, respectively, in the first quarter of fiscal 2014.
Inventories were $450 million compared to $418 million at the end of the third quarter last year. Inventories increased 8% and inventories per square foot decreased 5%.

Impairment

As noted in the first and second quarters of fiscal 2014, the Company determined that there was substantial deterioration in the excess of fair value over the carrying value of its Stores reporting unit. During the third quarter, the Company saw a further significant reduction in the profitability of its Stores reporting unit, primarily driven by performance of women's apparel and accessories in stores, which the Company expects to continue at least through the first quarter of fiscal 2015. As a result of current and expected future operating results, the Company concluded that the carrying value of the Stores reporting unit exceeded its fair value and recorded an estimated non-cash goodwill impairment charge of $536 million. There has been no deterioration of the excess of fair value over the carrying value of its Direct reporting unit. Additionally, the Company recorded a non-cash impairment charge of $145 million to write down the intangible asset related to the J.Crew trade name.

After recording the non-cash goodwill charge of $536 million, the carrying value of goodwill is $405 million in the Stores reporting unit and $746 million in the Direct reporting unit. After recording the non-cash intangible asset charge of $145 million, the carrying value of the J.Crew trade name is $740 million. If operating results continue to decline below the Company's expectations, additional impairment charges may be recorded in the future.

These impairment charges do not have an effect on the Company's operations, liquidity or financial covenants, and do not change management's long-term strategy, which includes its plans to drive disciplined growth across its brands and channels.

Refinancing

On March 5, 2014, the Company refinanced its term loan facility, the proceeds of which were used to (i) refinance amounts outstanding under the former senior secured term loan of $1,167 million and (ii) together with cash on hand, redeem in full the outstanding senior notes of $400 million, and to pay fees, call premiums and accrued interest. The maturity date of the new term loan facility is March 5, 2021. The refinancing is expected to result in an annual savings of $16 million in interest expense.

Related Party

On November 4, 2013, Chinos Intermediate Holdings A, Inc. (the "Issuer"), an indirect parent holding company of J.Crew Group, Inc., issued $500 million aggregate principal of 7.75/8.50% Senior PIK Toggle Notes due May 1, 2019 (the "PIK Notes"). 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, and therefore are not recorded in the Company's financial statements. The Company declared dividends to the Issuer in the first and third quarters of fiscal 2014 to fund the semi-annual interest payments due May 1, 2014 and November 3, 2014. Additionally, while not required, we intend to pay dividends to fund future interest payments, which would aggregate to $174 million through the remainder of the term if all interest on the PIK Notes is paid in cash.

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. We also consider gross profit and selling, general and administrative expenses in assessing the performance of our business.

Use of Non-GAAP Financial Measures

This announcement includes certain non-GAAP financial measures. An explanation of the manner in which the Company uses 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 today, December 4, 2014, at 4:30 PM 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 11, 2014 and can be accessed by dialing (877) 870-5176 and entering conference ID number 13596296.

About J.Crew Group, Inc.

J.Crew Group, Inc. is an internationally recognized multi-brand retailer of women's, men's and children's apparel, shoes and accessories. As of December 4, 2014, the Company operates 281 J.Crew retail stores, 83 Madewell stores, jcrew.com, jcrewfactory.com, the J.Crew catalog, madewell.com, the Madewell catalog, and 138 factory stores. 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 the indebtedness of our indirect parent, for which we pay and intend to continue to pay dividends to service such debt, and our substantial 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, adverse or unseasonable weather, 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 2014			Third Quarter Fiscal 2013			First Nine Months Fiscal 2014			First Nine Months Fiscal 2013
Net sales:
Stores	$	437,803		$	420,224		$	1,267,677		$	1,199,534
Direct		207,789			189,805			578,430			517,795
Other		9,565			8,798			28,248			24,711
Total revenues		655,157			618,827			1,874,355			1,742,040
Cost of goods sold, including buying and occupancy costs		391,846			347,332			1,146,957			988,537
Gross profit		263,311			271,495			727,398			753,503
As a percent of revenues		40.2	%		43.9	%		38.8	%		43.3	%
Selling, general and administrative expenses		215,669			188,583			609,724			540,534
As a percent of revenues		32.9	%		30.5	%		32.5	%		31.0	%
Impairment losses		683,985			—			683,985			673
Operating income (loss)		(636,343)			82,912			(566,311)			212,296
As a percent of revenues		NM	%		13.4	%		(30.2)	%		12.2	%
Interest expense, net		17,724			26,467			57,142			78,386
Loss on refinancing		—			—			58,786			—
Income (loss) before income taxes		(654,067)			56,445			(682,239)			133,910
Provision (benefit) for income taxes		(46,218)			21,017			(55,058)			51,703
Net income (loss)	$	(607,849)		$	35,428		$	(627,181)		$	82,207

Exhibit (2)
J.Crew Group, Inc.
Condensed Consolidated Balance Sheets
(unaudited)

(in thousands)	November 1, 2014		February 1, 2014		November 2, 2013
Assets
Current assets:
Cash and cash equivalents	$	79,575	$	156,649	$	77,893
Inventories		449,678		353,976		418,401
Prepaid expenses and other current assets		62,667		56,434		82,478
Prepaid income taxes		—		2,782		—
Deferred income taxes, net		13,607		11,831		—
Total current assets		605,527		581,672		578,772

Property and equipment, net		406,706		375,092		369,054

Favorable lease commitments, net		21,852		26,560		28,612

Deferred financing costs, net		23,295		41,911		44,396

Intangible assets, net		816,178		966,175		968,500

Goodwill		1,150,715		1,686,915		1,686,915

Other assets		4,459		3,895		3,507
Total assets	$	3,028,732	$	3,682,220	$	3,679,756

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	273,057	$	237,019	$	243,374
Other current liabilities		167,676		154,796		150,137
Interest payable		5,466		18,065		10,036
Income taxes payable		17,280		—		2,424
Current portion of long-term debt		15,670		12,000		12,000
Total current liabilities		479,149		421,880		417,971

Long-term debt, net		1,536,406		1,555,000		1,558,000

Unfavorable lease commitments and deferred credits		113,472		93,788		91,741

Deferred income taxes, net		315,518		389,403		397,087

Other liabilities		32,840		31,729		33,268

Stockholders' equity		551,347		1,190,420		1,181,689
Total liabilities and stockholders' equity	$	3,028,732	$	3,682,220	$	3,679,756

Exhibit (3)
J.Crew Group, Inc.
Reconciliation of Adjusted EBITDA
Non-GAAP Financial Measure

The following table reconciles net income (loss) 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 2014		Third Quarter Fiscal 2013		First Nine Months Fiscal 2014		First Nine Months Fiscal 2013
Net income (loss)	$	(607.8)	$	35.4	$	(627.2)	$	82.2
Provision (benefit) for income taxes		(46.2)		21.0		(55.1)		51.7
Interest expense, net		17.7		26.4		115.9		78.4
Depreciation and amortization		26.3		21.3		75.1		63.8
EBITDA		(610.0)		104.1		(491.3)		276.1
Impairment losses		684.0		—		684.0		0.7
Share-based compensation		1.5		1.5		4.5		4.4
Amortization of lease commitments		2.8		2.3		8.2		5.9
Sponsor monitoring fees		2.6		2.5		7.7		7.3
Adjusted EBITDA		80.9		110.4		213.1		294.4
Taxes paid		(2.0)		(11.4)		(3.9)		(38.8)
Interest paid		(19.1)		(32.2)		(74.0)		(76.6)
Changes in working capital		(8.1)		(45.3)		(53.0)		(57.3)
Cash flows from operating activities		51.7		21.5		82.2		121.8
Cash flows from investing activities		(42.7)		(39.6)		(104.3)		(102.6)
Cash flows from financing activities		(4.0)		(3.1)		(56.2)		(9.6)
Effect of changes in foreign exchange rates on cash and cash equivalents		1.0		0.3		1.2		(0.1)
Increase (decrease) in cash		6.0		(20.9)		(77.1)		9.5
Cash and cash equivalents, beginning		73.5		98.8		156.6		68.4
Cash and cash equivalents, ending	$	79.5	$	77.9	$	79.5		77.9

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 2014
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
1^st Quarter (2)		451		7		—		458
2^nd Quarter (2)		458		10		(1)		467
3^rd Quarter (2)		467		28		—		495
4^th Quarter (3)		495		10		(1)		504


	Fiscal 2014
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
1^st Quarter (2)		2,585,539		34,229		(147)		2,619,621
2^nd Quarter (2)		2,619,621		54,303		(7,524)		2,666,400
3^rd Quarter (2)		2,666,400		136,975		—		2,803,375
4^th Quarter (3)		2,803,375		44,712		(5,972)		2,842,115


(1)	Actual and projected number of stores opened or closed during fiscal 2014 by channel are as follows:
	Q1 – One international retail, one factory, and five Madewell stores.
	Q2 – Four international retail, four factory, one international factory, and one Madewell store. Close one retail store.
	Q3 – Nine retail, two international retail, seven factory, one international factory, and nine Madewell stores.
	Q4 – One retail, four factory, and five Madewell stores. Close one retail store.
(2)	Reflects actual activity.
(3)	Reflects projected activity.