Heavy Expectations Sink J. Crew

The high-flying retailer's shares drop 9% after failing to meet Wall Street's lofty views.
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SAN FRANCISCO -- J. Crew (JCG) investors bailed Thursday despite a strong earnings report from the retailer, calling into question whether the high-flying company can keep up with expectations on Wall Street.

J. Crew

topped profit estimates in the second quarter but missed expectations for sales. The company reported revenue of $304.7 million, a 13% increase over the same period last year but still short of the $308.5 million estimate by analysts.

Shares slid $4.35, or 8.8%, to $43.35 on Thursday.

Dana Cohen, an analyst for Banc of America, said the apparel chain's second quarter benefited from higher-than-expected gross margins, which were up 170 basis points over last year. Nonetheless, Wall Street may have wanted more.

"Given the stock's valuation, we suspect results may not be quite enough relative to real Street expectations," she wrote in her research.

Jeff Black, an analyst for Lehman Brothers, said that J. Crew's stock is valued at 26.2 times his projected 2008 earnings estimate of $1.90. That compares with the company's high-growth peers, which trade at an average of 17.3 times earnings, and the softlines group average of 14.7 times.

"We think valuation is still relatively rich," he wrote in his research.

J. Crew reported a 4% increase in same-store sales, or sales at stores open at least a year. Realigning last year's calendar to be consistent with this year, same-store sales were up 6%.

"A 4% comp reported and 6% adjusted for the calendar shift is a good number, particularly give the surrounding environment, but clearly, given the company's trend since their IPO of average comps of double digits, this may be a bit disappointing," Cohen wrote.

J. Crew reported a same-store sales jump of 16% last year in the second quarter. It expects same-store sales to grow in the mid single-digit percentage range this year.

On its conference call Wednesday, the company raised its earnings guidance for the year to a range of 1.42 to $1.46 from an earlier forecast of $1.37 to $1.41. For the current quarter, the company forecast earnings of 35 cents and 37 cents a share. Analysts had estimated per-share earnings of 37 cents for the third quarter.

Black noted that J. Crew's second-quarter inventory growth outpaced its sales growth. Inventory rose 14% per square foot, vs. 9.6% growth in sales per square foot.

"This gives us pause, although management credits it to timing differences and feels comfortable with inventory levels and content," he wrote.