J. Crew beats Street, shares jump

LOS ANGELES (Reuters) - Apparel retailer J. Crew Group Inc (JCG.N) posted a surprising 21 percent rise in revenues and net profit above Wall Street's expectations on Thursday, while a raised outlook for the full year sent shares up over 10 percent.

A focus on unique fashions for a more affluent customer at J. Crew stores, catalog and online businesses kept revenue robust, the company said, during a pre-holiday quarter marked by uneven consumer spending for other American retailers.

Net income in the third quarter increased to $26.8 million, or 42 cents per share, from $26 million, or 40 cents per share, a year earlier, when the company's tax rate was significantly lower.

Analysts, on average, had expected earnings of 36 cents, according to Reuters Estimates.

Sales rose to $332.7 million, the company said, well ahead of a Wall Street consensus view of $312.7 million.

Same-store sales, a key gauge of retail performance that measures sales at established stores, rose 8 percent in the quarter, while sales through the company's catalog and Web site rose by 36 percent, the company said.

The effective tax rate in the quarter was 39.8 percent compared with 7.1 percent a year earlier.

Higher-than-expected sales, together with better leverage from selling, general and administrative expenses, helped drive a 44 percent increase in operating income, while improving operating profit margins to 14.3 percent of revenues from 12 percent a year earlier.

Chief Executive Millard Drexler said the company's direct- to-consumer business was seeing fewer returns, while investments in that business, such as a new email strategy to stay in touch with consumers, were paying off.

"Quality and style keeps us, I think, at the forefront," Drexler told analysts during a conference call. "We don't want to be in the price business. As I look at the world today, there's some great price players out there on basics, on commodities and we move away from that.

"We have taken our business very strategically up a notch or two every season so to speak, since we have all been running the company," said Drexler, adding that his customers do not express "resistance to price."

In posting third quarter results, many apparel retailers complained of light mall traffic and consumers that stayed away from stores due to warm weather and more cautious spending amid high gas prices, a slowing housing market and residual effects from the credit crisis.

As part of J Crew's focus on unique, quality design, Drexler said the company was moving away from certain lower- price fabrications, saying he would leave the strategy of using cheaper fabrics to sell trendy designs at low prices to fast- fashion retailers such as Top Shop and H&M, owned by Hennes & Mauritz AB (HMb.ST).

"We don't want to be in the unit velocity game, but the dollar velocity game," Drexler said. "We just want to play in that niche which is style and quality and great product design."

Looking ahead, J Crew expects earnings per share for the fiscal year of between $1.50 and $1.52, up from its earlier outlook of a range between $1.42 and $1.46.

Wall Street, on average, has been expecting fiscal 2007 earnings of $1.46, according to Reuters Estimates.

Same-store sales are expected to rise in the mid-single digit range, the company said.

The company's shares rose $4.20 to $44.50 after closing at $40.30 on the New York Stock Exchange.

(Reporting by Alexandria Sage; editing by Jeffrey Benkoe and Andre Grenon)