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Edited Transcript of J Crew Group Inc earnings conference call or presentation 13-Sep-19 8:30pm GMT

Q2 2019 J Crew Group Inc Earnings Call

NEW YORK Sep 18, 2019 (Thomson StreetEvents) -- Edited Transcript of J Crew Group Inc earnings conference call or presentation Friday, September 13, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael J. Nicholson

J.Crew Group, Inc. - Interim CEO

* Vincent Zanna

J.Crew Group, Inc. - CFO & Treasurer

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Presentation

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Operator [1]

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Greetings. Welcome to the J.Crew, Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Vincent Zanna, Chief Financial Officer and Treasurer for J.Crew. Mr. Zanna, you may begin.

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Vincent Zanna, J.Crew Group, Inc. - CFO & Treasurer [2]

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Thank you, and welcome to our conference call to discuss the company's second quarter fiscal 2019 results. Joining me on the call today is Mike Nicholson, Interim Chief Executive Officer.

Before we begin, we would like to remind you that the statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may 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 the cautionary disclosures 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, impairments, certain severance, transaction and transformation costs as well as the impact of purchase accounting resulting from the acquisition in 2011. We believe that adjusted EBITDA provides an important measure of our profitability and performance as well as our liquidity. You can find a reconciliation of adjusted EBITDA in Exhibit (3) of our press release.

With that, I would like to turn the call over to Mike.

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Michael J. Nicholson, J.Crew Group, Inc. - Interim CEO [3]

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Thanks, Vin, and good afternoon, everyone. I will begin today's call with an overview of our second quarter result and provide an update on our strategic plan to maximize growth and profitability for the company in 2019, and then Vin will walk you through our financials in more detail.

Our second quarter results reflect our ongoing commitment to returning J.Crew to profitable growth over time. Our work to reignite the J.Crew brand with new designs, assortments and brand expression is well underway, and we remain focused on advancing our digital transformation and elevating our customer engagement across all channels.

For the second quarter, total revenues were essentially flat at $589 million, with comparable company sales decreasing 1%. Nearly 50% of total company net sales continue to be generated through our digital channels. J.Crew brand comparable sales decreased 4% following a 1% increase last year driven by a flat comp at J.Crew, which was more than offset by a comp decrease at Factory. Despite this softer performance at Factory, we remain optimistic that the recovery strategy we previously shared with you will deliver improved performance as the year progresses.

Madewell delivered another strong quarter, with comparable sales increasing 10% on top of a 28% increase last year. Gross profit was $209 million, with gross margin rate decreasing 290 basis points from last year driven by 400 basis points of margin rate decline primarily a function of promotional activity to optimize inventory levels as we head into the third quarter. This decline was partially offset by 110 basis points of buying and occupancy expense leverage.

SG&A expenses were $208 million compared to $193 million last year. Adjusted SG&A decreased $7 million to $191 million in the quarter, reflecting our continued commitment to further optimize our cost structure. Adjusted EBITDA decreased to $42 million versus $54 million last year.

Overall, we remain focused on our key priorities, the first of which is to return J.Crew to profitable growth over time. We are dedicated to relentlessly driving profitability through more efficient inventory investment and optimization of promotional activity, while aggressively managing expenses.

As we discussed last quarter, at J.Crew, we have simplified our label strategy and continue to refine our product assortment, enabling us to quickly reestablish our position in key franchise categories, while also increasing the frequency of product newness. While we are still early on with this work, we are committed to consistently delivering the quality, value and color proposition that our customer expects from us.

We are also reevaluating our brand expressions across all of our marketing touch points to improve customer acquisition and retention through coordinated proactive marketing campaigns that align with our new design and assortment strategies. To ensure we have a single vision for the customer journey and the leadership and accountability to drive improved performance everywhere that we interact with our customers, we have hired Billy May as Chief Customer Officer for the J.Crew brand, where he will lead marketing, loyalty, stores and e-commerce. His diverse experience in building omnichannel and digital businesses across a range of retail brands positions him well to further our efforts to connect and convert in our store business, inspire customers and drive acquisition through our marketing channels and maximize our e-commerce opportunities as we continue to lean digital-first across the organization.

During the quarter, we completed a comprehensive review of our J.Crew business and launched a multiyear cost-optimization program designed to improve profitability and efficiency. The cost-optimization program is expected to generate savings of approximately $50 million over the next 3 years, with approximately $10 million expected to be realized in fiscal 2019. These actions, combined with the ongoing assessment of our previously announced strategic alternatives, further support the company's initiatives to maximize value, position the company for long-term growth and deleverage and strengthen the company's balance sheet.

Finally, in connection with our efforts to explore strategic alternatives to maximize the value of the company, we are pleased to announce that a registration statement on Form S-1 has been filed today with the Securities and Exchange Commission relating to a proposed initial public offering of Madewell, details of which can be found on our Investor Relations website in a separate press release.

I will now turn the call over to Vin to review our financials in more detail.

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Vincent Zanna, J.Crew Group, Inc. - CFO & Treasurer [4]

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Thank you, Mike, and good afternoon, everyone. For the second quarter, total revenues were essentially flat at $589 million, with total company comparable sales decreasing 1% following a 5% increase last year. J.Crew brand sales decreased 7% to $399 million, reflecting the net closure of 39 stores in the last 12 months, with comparable sales decreasing 4% following an increase of 1% last year.

Madewell brand sales increased 15% to $140 million, with comparable sales increasing 10% on top of a 28% increase last year. Gross profit was $209 million compared to $226 million last year. Gross margin rate decreased 290 basis points from last year driven by 400 basis points of margin rate decline primarily a function of promotional activity to optimize inventory levels as we head into the third quarter. This decline was partially offset by 110 basis points of buying and occupancy expense leverage.

SG&A expenses were $208 million or 35.3% of revenues compared to $193 million or 32.8% of revenues in the second quarter of last year. This year includes transformation, debt transaction and severance costs of $20 million, offset by a $4 million benefit related to the $35 million lease termination payment in connection with our corporate office relocation.

Last year includes transformation, debt transaction and severance costs of $2 million and a $7 million benefit related to the lease termination payment previously described. Excluding these items, SG&A expenses this year were $191 million, a 3% decrease over last year or 32.5% of revenues.

Operating loss for the second quarter was $2 million compared with operating income of $33 million last year. Adjusted EBITDA, as outlined in Exhibit (3) of our press release, was $42 million or 7.1% of revenues compared to adjusted EBITDA of $54 million last year or 9.2% of revenues. Net interest expense for the second quarter totaled $38 million compared to $34 million last year.

Turning to key balance sheet highlights. Cash and cash equivalents were $27 million at the end of the second quarter versus $35 million last year, and as of close of business yesterday, we had approximately $216 million of borrowings outstanding under our $375 million ABL Facility, with excess availability of approximately $93 million.

Our inventory increased 1% to $416 million at the end of the second quarter compared to $413 million last year and reflected increase at Madewell, offset by a decrease at J.Crew. Total debt was $1.9 billion at the end of the second quarter versus $1.7 billion last year.

And finally, capital expenditures for the second quarter were $22 million. Capital expenditures for 2019 are planned in the range of $55 million to $65 million, which excludes the benefit of lease incentives of $35 million to support the buildout of our new corporate headquarters. We currently expect to open 1 J.Crew store and 10 Madewell stores and will continue to opportunistically rationalize our J.Crew and Factory store fleets, and we expect to close approximately 20 stores in 2019.

Lastly, as Mike mentioned, the registration statement on Form S-1 has been filed today with the Securities and Exchange Commission relating to a proposed initial public offering of Madewell. Additionally, we filed a Form 8-K, providing information regarding the status of our strategic discussions with our lenders and certain other security holders. For further information, the company refers you to the publicly filed Form 8-K and other public information it is releasing or filing concurrently with this release. In light of these ongoing processes, we will not be hosting any follow-up calls this quarter.

Thank you for joining us today. We look forward to sharing further updates as the year unfolds.

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Operator [5]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.