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Edited Transcript of J Crew Group Inc earnings conference call or presentation 29-May-19 8:30pm GMT

Q1 2019 J Crew Group Inc Earnings Call

NEW YORK Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of J Crew Group Inc earnings conference call or presentation Wednesday, May 29, 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. First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I would 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 first 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 future 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 could 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 a brief overview of our first quarter results and provide an update on our strategic plans to maximize growth and profitability for the company in 2019, and then Vin will walk you through our financials in more detail.

During our fiscal 2018 fourth quarter call, we provided an overview of the key pillars of our strategy, which remain our priorities for 2019. As a reminder, our first priority is to capitalize on J.Crew's momentum and focus on returning it to profitable growth over time. Next, we remain committed to fueling Madewell's success towards achieving its full potential as a leading global brand. And finally, we remain relentlessly focused on driving gross margin improvement through more efficient inventory investment and optimization of promotional activity, which along with aggressively managing expenses, will enable us to significantly improve EBITDA over time. In fact, our first quarter results reflect a 31% increase in adjusted EBITDA over last year and demonstrates the progress we've made across our strategic priorities.

Turning to the highlights of our first quarter results. Total revenues increased 7% to $579 million, with comparable company sales increasing 1% to last year and nearly 50% of total company net sales generated through our digital channels. J.Crew brand comparable sales decreased 1% compared to a 6% decrease in the same period last year, driven by a positive comp at J.Crew, which was more than offset by a comp decrease at Factory.

Madewell delivered another quarter of strong growth with comparable sales increasing 10% on top of a 31% increase last year. Madewell's performance was driven by a continuation of outsized growth in our online channel, where our digital marketing strategy continues to fuel a robust increase in online traffic. Gross profit increased 3% over last year to $214 million. Gross margin rate decreased 130 basis points to last year, driven by 290 basis points of margin rate decline, partially offset by 160 basis points of buying and occupancy expense leverage. Our margin rate decline was primarily impacted by the dilutive effect of the planned inventory liquidation discussed during our fourth quarter fiscal 2018 call and increased penetration of wholesale.

SG&A expenses were $190 million compared to $201 million last year. Adjusted SG&A decreased $5 million to $189 million in the quarter, reflecting our early efforts and continued commitment to further optimize our cost structure. Adjusted EBITDA increased 31% over last year to $48 million. Overall, we are encouraged by the progress we made delivering on our priorities in the first quarter and remain confident that our strategy has positioned us to significantly improve performance over time.

At J.Crew, we are focused on reigniting the brand through inspired product designed with our core DNA in mind, classics with a twist, refining our product and brand messaging while increasing the flow of new product that resonates with our customer. During the quarter, we worked towards refreshing our assortments to position our brand in an elevated traditional context, while speaking to the eccentric, playful spirit our customers have grown to love.

We have also begun to rationalize our assortment to focus on key franchises while simplifying our label strategy as we continue to eliminate our previously introduced sub-brands. Under the new design direction of Chris Benz, we are reimagining franchise pieces and introducing new franchise items that are on-trend extensions of our biggest heritage items.

We have also taken actions to evolve our merchandise strategy, including increasing the frequency of product newness. We believe our actions will enable us to quickly reestablish clear dominance in key categories as we deliver to our customers the consistency they expect with our quality, value and color proposition, leaning into our best fits, fabrics and styling that our customers know and love.

From a digital standpoint, we are making targeted investments in the capabilities of our J.Crew and Factory websites to support peak selling periods, which will allow us to continue to achieve outsized digital growth while satisfying customer demand. We are also re-establishing our creative brand expression across all marketing touch points to improve customer acquisition, retention and engagement through coordinated, proactive marketing and loyalty campaigns that align with our design and assortment strategies.

We are excited to share more updates later this summer on the evolution of our J.Crew digital and customer strategy as we look to accelerate our efforts to drive loyalty, connect more closely to our J.Crew customers and further expand upon our strong omnichannel presence.

At Factory, we remain optimistic that the recovery strategy we shared on our fourth quarter 2018 call will deliver improved performance as the year progresses. We are acutely focused on re-examining the efficiency of our digital marketing investments as we reimagine and refresh our product, assortment and label strategy to capitalize on the equity of the J.Crew brand. We are also ramping up local and outlet center marketing with our real estate partners to drive traffic in stores while introducing our Win at Holiday approach organized around peak selling periods to drive traffic through relevant pricing and promotions in order to capture market share.

Finally, as we reset our approach at J.Crew to focus on the clear articulation of the brand, we will leave the same ethos of consistent quality, value and unique color and novelty to win with our reinvigorated Factory offerings.

At Madewell, the brand continues to outperform in a competitive marketplace and delivered another quarter of double-digit top line growth, driven by exclusive products differentiated through impeccable fit and technology and refined omnichannel shopping experiences designed with today's customers in mind.

During the first quarter, we capitalized on the success of our rapidly growing denim business, which represents 1/3 of our overall sales by opening our first Madewell Denim Edit store in Nashville featuring an expanded in-store assortment of denim in a wider range of styles and sizes for all of our customers. We also introduced our first men's shop-in-shop and are excited to share more details later this year as we have already had a great initial response to both specialty concepts.

We continue to innovate on our product offerings while remaining committed to sustainability as a key element of our strategic priorities. We launched our first-ever swim assortment, Second Wave swim, with fabric made from recycled plastic, and introduced our first Fair Trade denim capsule. Lastly, we also launched our first-ever Madewell sneaker collection, the Sidewalk sneaker, featuring an ultra-supportive Madewell Cloudlift insole to further fuel the success of our growing footwear business. As the year progresses, we remain focused on evolving our product offering to the latest trends, fits and technologies that our customers want while continuing to expand our Fair Trade partnership into other product categories in the years to come.

Finally, as you may recall, we recently announced our intention to explore strategic alternatives to maximize the value of the company. Our review of these alternatives, including the potential IPO of Madewell, supports our conviction in Madewell's long-term growth potential and could generate meaningful proceeds to strengthen our balance sheet and overall financial flexibility to address our 2021 debt maturities. We believe this will provide an improved platform to continue to support J.Crew's turnaround while allowing Madewell to achieve its full potential over the long term as a leading global brand. We will provide more details on these strategies over the course of this year.

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 first quarter, total revenues increased 7% to $579 million with total company comparable sales increasing 1% following a 1% increase last year. J.Crew brand sales decreased 4% to $376 million, reflecting the net closure of 35 stores in the last 12 months, with comparable sales decreasing 1% following a decrease of 6% last year. Madewell brand sales increased 15% to $133 million with comparable sales increasing 10% on top of a 31% increase last year.

Gross profit was $214 million compared to $207 million last year. Gross profit increased 3% with gross margin rate declining 130 basis points to 37%, driven by a 290 basis point decrease in margin due primarily to the dilutive effect of a planned inventory liquidation as discussed during our fourth quarter fiscal 2018 call as well as an increased penetration of wholesale. This decline was partially offset by 160 basis points of buying and occupancy expense leverage.

SG&A expenses were $190 million or 32.8% of revenues compared to $201 million or 37.2% of revenues in the first quarter last year. This year includes transformation, debt transaction and severance costs of $7 million, partially offset by a $6 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 $7 million. Excluding these items, SG&A expenses this year were $189 million, a 3% decrease over last year or 32.7% of revenues.

Operating income for the first quarter was $22 million compared to an operating loss of $1 million last year. Adjusted EBITDA, as outlined in Exhibit (3) of our press release, was $48 million or 8.3% of revenues compared to adjusted EBITDA of $37 million last year or 6.8% of revenues. Net interest expense for the first quarter totaled $37 million compared to $33 million last year.

Turning to key balance sheet highlights. Cash and cash equivalents were $30 million at the end of the first quarter versus $36 million last year. As of the close of business yesterday, we had approximately $113 million of excess availability under our $375 million ABL Facility.

Our inventory increased 21% to $418 million at the end of the first quarter compared to $345 million last year largely in support of planned growth in our wholesale business as well as Madewell and reflects a low single-digit increase at the J.Crew brand. We are committed to further reducing our overall investment and inventory throughout 2019.

Total debt was $1.9 billion at the end of the first quarter versus $1.8 billion last year. And finally, capital expenditures for the first quarter were $18 million. Capital expenditures for 2019 are planned in the range of $60 million to $70 million, which excludes the benefit of lease incentives of $21 million to support the build-out 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 expect to close approximately 20 stores in 2019.

In closing, we are pleased with our progress in the first quarter, and we remain optimistic about our plan to drive meaningful EBITDA improvement across J.Crew brand while continuing to fuel outsized growth at Madewell. We are committed to rigorously pursuing opportunities to rationalize our cost structure while prioritizing investments that drive meaningful returns.

Thank you for joining us today, and 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.