J. Crew Group Management Discusses Q3 2011 Results - Earnings Call Transcript

J. Crew Group (JCG)

Q3 2011 Earnings Call

December 01, 2011 11:00 am ET

Executives

Stuart Haselden -

Libby Wadle - Executive Vice President of Retail & Factory

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

Analysts

Grant Jordan - Wells Fargo Securities, LLC, Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Emily E. Shanks - Barclays Capital, Research Division

Karen Eltrich - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Greetings, and welcome to the J. Crew Third Quarter 2011 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stuart Haselden, Treasurer. Thank you. Mr. Haselden, you may begin.

Stuart Haselden

Thank you for joining us to review our third quarter 2011 results. With me today are Jim Scully, Chief Administrative Officer and Chief Financial Officer; Jenna Lyons, President and Executive Creative Director; 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 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 third quarter of fiscal 2011.

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

James S. Scully

Thanks, Stuart, and good morning. I will start today with a brief overview of our third quarter results followed by 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 to your questions.

For the third quarter, total revenues increased 12%, with our comparable company sales increasing 5%. Our comp store sales increased 2%, and direct sales increased 18%. Our adjusted EBITDA totaled $84 million, or 17.5% of revenues, in the third quarter versus $78 million, or 18.2%, last year.

We are pleased with the sequential improvement in our top line trend and the response to our fall assortment. We saw improved results from our Women's business, while we continued to experience strong performance in Men's and Accessories. As always, our #1 focus remains our products. We work every day to offer the quality, style and design that our customers have come to expect. We were excited to have our first-ever presentation during fashion week in New York City in September and could not have been more pleased with the response as well as the domestic and international press coverage.

We also made exciting progress on some of our key initiatives in the third quarter, which include strong growth across both retail and factory, the continued growth in our direct and Madewell businesses, our international expansion efforts and building the infrastructure to support the execution of these initiatives. We saw a solid growth in the third quarter from both our store and direct businesses.

On the retail store side, our long-term goal continued to be to grow our North American square footage in the low- to mid-single-digit range annually over the next 3 to 5 years. In the third quarter, we opened 6 new retail stores, including our first store outside of the United States at the Yorkdale Centre in Toronto in August. We also opened our newest men's-only store at Columbus Circle in early November, which was our ninth and final retail store opening this year. We are actively pursuing a number of opportunities in Canada and the U.S. that will support our future growth plans.

Our factory store strategy remains to grow our square footage by approximately 10% a year over the next 3 to 5 years through a combination of new units and expansions in existing centers where we see potential upside. We opened 4 new factory stores in the third quarter and 2 stores in November, including one factory crewcuts location. We have opened a total of 11 factory stores in 2011, which includes 2 crewcuts locations. We have also expanded our factory crewcuts business significantly in 2011 and now operate 4 standalone locations and 59 shop-in-shops in our factory stores.

Our plans for our direct business calls for outsized growth over the next 3 to 5 years, driven by several key initiatives, including our online international expansion, continued growth from our madewell.com and factory.com businesses as well as focused customer acquisition and marketing efforts in our core J. Crew business. Direct sales in the third quarter increased 18% versus last year, with our penetration to total company revenues increasing to 30% from 28% on an LTM basis. Additionally, on the direct side, in the third quarter, we moved to a flat rate shipping structure, and customers are responding positively.

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