J. Crew Group (JCG)

Q2 2011 Earnings Call

September 01, 2011 4:30 pm ET

Executives

James Scully - Chief Administration Officer, Chief Financial Officer and Principal Accounting Officer

Stuart Haselden -

Libby Wadle - Executive Vice President of Retail & Factory

Analysts

Karru Martinson - Deutsche Bank AG

Spenser Samms - BofA Merrill Lynch

Emily Shanks - Lehman Brothers

Karen Eltrich - Goldman Sachs Group Inc.

Carla Casella - JP Morgan Chase & Co

Presentation

Operator

Greetings, and welcome to the J. Crew Second Quarter 2011 Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Stuart Haselden, Treasurer of J. Crew. Thank you, Mr. Haselden, you may now begin.

Stuart Haselden

Thank you for joining us to review our second quarter 2011 results. With me today are Jim Scully, Chief Administrative Officer and Chief Financial Officer; Libby Wadle, Head of our J. Crew brand; and other members of our management team.

Before we begin, I would like to remind you of the company's Safe Harbor language, with which I am sure you are familiar. The statements contained in this conference call, which are not historical fact, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC and in the press release issued in connection with today's call.

During this call, we will refer to adjusted EBITDA, which adjusts for items such as noncash share-based compensation, transaction-related litigation, as well as the impact of purchase accounting resulting from the acquisition. You can find a reconciliation of the adjusted EBITDA in Exhibit 3 of our press release, as well as additional information in the MD&A section of our Form 10-Q for the second quarter of fiscal 2011.

With that, I would now like to turn the call over to Jim Scully.

James Scully

Thanks, Stuart. I will start with an overview of our second quarter results and an update on some of our key strategic initiatives. Stuart will then walk you through our financials in more detail, after which we will open up the call for your questions.

For the second quarter, total revenues increased 7%, with our comparable company sales increasing 3%. Our comp store sales increased 1% and direct sales increased 13%. Our adjusted EBITDA totaled $64 million or 14.8% of revenues in the second quarter versus $70 million or 17.1% last year.

While we are never happy with the year-over-year decline in earnings, our results did represent a sequential improvement in our top line trend, driven by an improving trend in our Women's business while we continue to see strong performance from Men's, Crewcuts and Accessories. As we mentioned at the end of the first quarter, we were able to make more significant adjustments to our Women's second quarter assortment as well as the back half of this year, and we are beginning to see the benefit of those adjustments.

Our top priorities as always remain our focus on our product and our customers. We are also moving forward on a number of key strategic initiatives and will continue to keep you posted on some of these as part of our quarterly calls. They include international expansion, our direct business, store growth across retail and factory, our Madewell business, and building the infrastructure to support the execution of these initiatives.

We celebrate some exciting milestones regarding these initiatives over the last 2 weeks, and I'll mention a few of these today. On our international expansion effort, we opened our first store outside of the United States with a women's only store at the Yorkdale Centre in Toronto opening on August 18. We are really pleased with the results and customer feedback so far. We also successfully launched international shipping to the U.K. on August 18. Additionally on the direct side, we moved to a flat rate shipping structure online, and although early, customers are responding positively.

Turning to store growth. We plan to open additional stores in Canada in support of our plan to grow our retail square footage in the low to single-digit range annually over the next 3 to 5 years. We are planning to open a total of 9 new retail stores in 2011, including one Crewcut store. This also includes our next Men's only store opening at Columbus Circle in the fourth quarter.

In our factory channel, we opened 4 new stores in the second quarter, including one factory Crewcuts location. So far in the third quarter, we have opened an additional 3 stores and plan to open a total of 11 new factory stores in fiscal 2011. Our long-term plans remain to grow our factory square footage by approximately 10% a year over a 3- to 5-year horizon through a combination of new units and expansions in existing centers where we see potential upside. We've expanded our factory Crewcuts business significantly year-to-date and now operate 3 standalone locations and 58 shop-'n-shops in our factory stores.

We also have a lot of excitement going on in our Madewell business. On the store side, we opened 2 new locations in the second quarter at San Francisco Center and Lincoln Road, Miami. More recently, we also opened Madewell stores in Corte Madera, California, and Towson Center in Maryland earlier this week. We currently operate 26 stores and have plans to open 6 additional net new stores by the end of this year. We remain pleased with how our Madewell stores are performing and are pursuing opportunities to expand our footprint at a higher rate than previously.

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