J Crew beats in quarter, shares rise 17 percent

SAN FRANCISCO Thu May 28, 2009 6:07pm EDT

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SAN FRANCISCO (Reuters) - Upscale apparel retailer J Crew Group Inc JCG.N posted first-quarter profit that handily beat Wall Street estimates and forecast an unexpected second-quarter profit.

The retailers shares were up 17 percent after hours.

For the first time since last spring, J Crew also posted a rise in same-store sales, a key measure of retail performance closely watched by Wall Street.

"While we don't have a crystal ball, it certainly feels better than it did in the fourth quarter," said Chief Executive Millard Drexler, noting improved sales trends in the business.

Still, profit did fall by a third as increased markdowns to clear unsold fashions in the downturn hurt the company's profit in the first quarter.

Eric Beder, a retail analyst with Brean Murray Carret, called the results "a really solid start in a really tough economy."

"Hat's off to them," Beder said. "They cleared out the inventory, they drove better results than the Street had expected, they gave better-than-expected guidance -- it's an impressive feat."

Thursday's share rally was a dramatic reversal for the former retail darling that has weathered slashed profit projections, website glitches and declining sales that showed the company was ultimately unable to rise above the dramatic decline in U.S. consumer spending.

But the better-than-expected results in the first quarter were largely due to traffic improvements and Drexler said items such as T-shirts, feminine shirts, jackets and jewelry had been selling well.

J Crew, which also operates a catalog and website, said net income in its first quarter fell to $20.4 million, or 32 cents per share, from $30.5 million, or 48 cents per share, a year earlier.

Excluding 2 cents per share related to severance and asset impairment charges, earnings were 34 cents per share, well above the 11 cents per share expected, on average, by analysts, according to Reuters Estimates.

"WAKE-UP CALL"

The company, whose clothing carries higher prices than most retailers in the mall, has struggled in recent quarters with falling profit, as too-high inventory levels have forced the company to discount, undermining profit margins.

Inventory per square foot was flat with the year-ago quarter, but J Crew said it opened 43 net stores in the interim. At the beginning of the first quarter, inventories were up by 7 percent.

Wall Street has been criticizing the retailer since last year for carrying inventory levels that did not reflect sales trends in the downturn.

Markdowns caused gross profit margins to fall to 42.2 percent of revenues from 46.9 percent a year earlier.

Revenue rose 2 percent in the quarter to $345.8 million, while same-stores sales rose 2 percent. That was a significant improvement over the 13 percent drop in the fourth quarter and the 3 percent drop in the third.

"In a very perverse way the bad environment was a big wake- up call," Drexler said.

"You just don't put the goods out anymore and expect them to sell," he said. "The customer has been so much more acute and educated about how they buy goods, it just makes us all do our job better. They're discerning, they're comparing and you know something? It's just not so cool to spend that much money anymore today."

Looking to the second quarter, J Crew expects earnings per share to range between 8 cents and 12 cents. That was well above the loss of 3 cents per share expected, on average, by Wall Street, according to Reuters Estimates.

Same-store sales in the second quarter are expected to be down in the negative mid- to high-single digits on a percentage basis, the company said.

The company's shares, which have lost over half their value since last year, rose to $24 after closing at $20.46, up 1.4 percent, on the New York Stock Exchange.

(Reporting by Alexandria Sage; editing by Carol Bishopric and Andre Grenon)

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