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Article by DailyStocks_admin    (08-18-08 06:37 AM)

The Daily Magic Formula Stock for 08/17/2008 is J Crew Group Inc. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

J.Crew ® is a nationally recognized apparel and accessories brand that we believe embraces a high standard of style, craftsmanship, quality and customer service while projecting an aspirational American lifestyle. We are a fully integrated multi-channel specialty retailer. We seek to consistently communicate our vision of J.Crew through every aspect of our business, including through the imagery in our catalogs and on our Internet website and the inviting atmosphere of our stores.

We focus on creating product lines featuring the high quality design, fabrics and craftsmanship as well as consistent fits and detailing that our customers expect of J.Crew. We offer complete assortments of women’s, men’s and children’s apparel and accessories, including, wedding and special occasion attire, weekend clothes, swimwear, loungewear, outerwear, shoes, bags, belts, hair accessories and jewelry. The J.Crew brand is widely recognized and features high quality designs, fabrics and craftsmanship. We believe that we differentiate ourselves from our competitors in three primary ways:


•

through our signature product design, which we refer to as “classic with a twist”—meaning our iconic styles refined with differentiating prints, fabrics, colors and high quality craftsmanship,


•

by using a multi-tiered pricing strategy of offering select designer-quality products at higher price points and more casual items at lower price points, and


•

by offering our customers “one stop shopping” for their wardrobe needs, including apparel and accessories for weekend, business, wedding and special occasions.

We seek to project our brand image through consistent creative messages in our catalog and through our Internet website, our store environments and our superior customer service. We believe that our brand image, which we describe as an “aspirational lifestyle,” is key to our success.

J.Crew products are distributed through our retail and factory stores, our J.Crew catalog and our Internet website located at www.jcrew.com. As of February 2, 2008, we operated 199 retail stores, including four crewcuts ® and six Madewell ® stores, and 61 factory stores throughout the United States. In fiscal 2007, we distributed 23 catalog editions with a circulation of approximately 49 million copies and our website logged over 95 million visits, representing a 34% increase over fiscal 2006. Our retail stores are designed by our in-house design staff and are fixtured to create a distinctive, sophisticated and inviting atmosphere, with clear displays that highlight the quality of our products and their fabrication. Our factory stores are designed with simple, volume-driving visuals to maximize sales of our key items and drive faster inventory turns.

Other revenues consist principally of shipping and handling fees derived from our Direct business.

We were incorporated in the State of New York in 1988 and reincorporated in the State of Delaware in October 2005. Our principal executive offices are located at 770 Broadway, New York, NY 10003, and our telephone number is (212) 209-2500.

Products

We offer complete assortments of women’s, men’s and children’s apparel and accessories, including, wedding and special occasion attire, weekend clothes, swimwear, loungewear, outerwear, shoes, bags, belts, hair accessories and jewelry. We focus on creating product lines featuring the high quality design, fabrics and craftsmanship as well as consistent fits and detailing that our customers expect of J.Crew, and are designed internally by our design team to embody our “classic with a twist” branding and styling strategies. We use a multi-tiered pricing strategy of offering a product assortment ranging from casual t-shirts and broken-in chinos at opening price points, to cashmere items and limited edition “collection” items, such as dresses, hand-beaded skirts and double-faced cashmere jackets, at higher price points, which we believe elevates the overall perception of our brand.

We have introduced several successful new product lines and product line expansions, including our Italian cashmere collection, our wedding and party dresses, our Italian leather accessories and our women’s jewelry. Our J.Crew factory line offers the J.Crew brand with similar styles made at lower costs and sold at lower price points. We have launched crewcuts, an apparel and accessories line for children ages two through ten, which offers a product assortment that reflects the high quality, styled-classic apparel and accessories we offer under the J.Crew brand, such as argyles, embroidered critters and cable knits for the children’s market. In fiscal 2007, we opened two crewcuts standalone stores and 22 crewcuts shop-in-shops in our J.Crew retail stores. As of February 2, 2008, we operated four crewcuts standalone stores and 34 crewcuts shop-in-shops. In addition, we continue to develop Madewell, a casual women’s clothing, footwear and accessories retail concept. In fiscal 2007, we opened four Madewell stores. As of February 2, 2008, we operated six Madewell stores. On February 20, 2008, we opened a Madewell store in New York City. Additionally, we maintain a Madewell website at www.madewell1937.com that provides customers with a toll free number to place orders for Madewell merchandise and intend to add the necessary functionality to enable customers to place orders online during 2008.

Design and Merchandising

We believe one of our key strengths is our internal design team, which designs products that reinforce our brand image. Our products are designed to reflect a clean and fashionable aesthetic that incorporates high quality fabrics and construction as well as comfortable, consistent fits and detailing.

Our products are developed in four seasonal collections and are subdivided for monthly product introductions in our monthly catalog mailings and in our retail stores. The design process begins with our designers developing seasonal collections eight to twelve months in advance. Our designers regularly travel domestically and internationally to develop color and design ideas. Once the design team has developed a season’s color palette and design concepts, they order a sample assortment in order to evaluate the details of the assortment, such as how color takes to a particular fabric.

Our design team consists of seasoned, talented designers who have experience in the specialty apparel industry, and we give them a significant amount of creative freedom in the design process. This method, which we refer to as “design-driven retailing,” allows our designers to be driven primarily by their artistic vision and industry experience, enables them to incorporate high quality fabrics, yarns and prints into their designs and allows them to collaborate with our merchandisers rather than being directed by them, all of which we believe leads to high quality products that reinforce the J.Crew brand image.

From the sample assortment, our merchandising team selects which items to market in each of our sales channels and edits the assortment as necessary to increase its commerciality. Our teams communicate regularly and work closely with each other in order to leverage market data, ensure the quality of J.Crew products and remain true to a unified brand image. Our technical design teams develop construction and fit specifications for every product, ensuring quality workmanship and consistency across product lines. Because our product offerings originate from a single concept assortment, we believe that we are able to efficiently offer an assortment of styles within each season’s line while still maintaining a unified brand image. As a final step that is intended to ensure image consistency, our senior management reviews all of our products from all of our sales channels before they are manufactured.

We believe we further maintain our brand image by exercising substantial control over the presentation and pricing of our merchandise by selling all our products ourselves in North America.

Pricing

We offer our customers a mix of select designer-quality products at higher price points and more casual items at lower price points, consistent with our multi-tiered pricing strategy and our signature styling strategy of pairing luxury items with more casual items. We have introduced limited edition “collection” items such as hand-beaded skirts, which we believe elevates the overall perception of our brand. We also offer more moderately priced products, such as t-shirts, broken-in chinos and jeans. We believe offering a broad range of price points maintains a more accessible, less intimidating atmosphere.

Sales Channels

We conduct our business through two primary sales channels: Stores, which consists of our retail, crewcuts, Madewell and factory stores, and Direct, which consists of the J.Crew catalog and our Internet website.

Stores

Retail Stores

As of February 2, 2008, we operated 199 retail stores, including four crewcuts and six Madewell stores, throughout the United States. Our retail stores are located in upscale regional malls, lifestyle centers, shopping centers and street locations. We believe situating our stores in desirable locations is critical to the success of our business, and we determine store locations, as well as individual store sizes, based on several factors, including geographic location, demographic information, presence of anchor tenants in mall locations and proximity to other higher-end specialty retail stores. Our retail stores are designed by our in-house design staff and fixtured with the goal of creating a distinctive, sophisticated and inviting atmosphere, with clear displays and information about product quality and fabrication.

Each of our retail stores is led by a single store director, and each store has a management team that includes one manager primarily responsible for overseeing our customers’ shopping experience and another manager primarily responsible for overseeing operations. Our store directors have experience in the retail industry prior to joining our team, or have typically been promoted from within J.Crew based on performance. Each store director has discretion, within company-wide guidelines, to implement marketing and store presentation strategies that he

or she feels are appropriate for the particular local atmosphere. For example, store directors decide whether to organize special marketing events held within their store or at area locations, such as fashion shows where J.Crew merchandise is shown to an assembled group of invited guests. Store directors decide, within guidelines, which local businesses to partner with for cross-marketing initiatives. In addition to their base salary, store directors are eligible to receive monthly bonuses that are determined against sales and payroll goals.

In order to provide our sales associates with incentive to deliver superior customer service and to drive sales, each sales associate’s compensation consists of a base hourly rate supplemented by eligibility for commissions on sales above a certain dollar amount. In addition, our associates are eligible to earn a bonus based on fiscal year sales thresholds, payable at the end of each month in which the threshold sales goal has been met. We believe our associate hiring policy and compensation structure enables us to maintain high standards of visual presentation and customer service standards in our stores. Our non-sales store employees’ compensation consists of a base hourly rate supplemented by eligibility for a bonus based on store-wide sales goals.

We also make available to our customers a “We’ll Find it For You” SM service and “Client Specialists,” who serve as personal shoppers and wardrobe consultants.

Our retail stores averaged approximately 6,700 total square feet at the end of fiscal 2007, but are “sized to the market,” which means that we adjust the size of a particular retail store based on the projected revenues from that particular store. For example, at the end of fiscal 2007, our largest retail store, located in New York, was approximately 15,000 square feet, and our smallest retail store, also located in New York, was approximately 1,100 square feet.

We expanded our retail store base by 17 net new stores in fiscal 2006 and 23 net new stores in fiscal 2007, including crewcuts and Madewell stores. Also in 2007, we added crewcuts shop-in-shops in 22 of our J.Crew retail stores, bringing our total crewcuts shop-in-shops to 34 as of February 2, 2008. We plan to expand our retail store base by 25 to 30 retail stores in fiscal 2008, including crewcuts and Madewell stores. Thereafter, in the near term, we plan to expand our retail store base by 30 to 40 retail stores annually, including crewcuts and Madewell stores. In each year, we plan to open and close retail stores in varying numbers. Our new J.Crew retail store operating model assumes a target J.Crew retail store size of 5,500 square feet and sales per square foot of $425 in the first twelve months. Our target net investment to open a J.Crew retail store is approximately $844,000, which includes $660,000 of build-out costs net of landlord contributions, $149,000 of initial inventory net of payables and pre-opening expenses of $35,000. This operating model results in a first year targeted pretax cash return on investment of approximately 69%.

Factory Stores

As of February 2, 2008, we operated 61 factory stores throughout the United States. Our factory stores are located primarily in large factory-outlet malls. Factory stores are designed with simple, volume-driving visuals to maximize sales of key items and drive faster inventory turns. Our factory stores also use strategic and focused short-term promotional offerings designed to achieve higher margins and faster inventory turns. Sales associates in our factory stores adhere to the same customer-service focus as our retail stores, and are trained to help customers locate styles similar to those they have seen in our retail stores or catalog. Compensation of factory sales associates is based on a model similar to that of our retail sales associates, with differences relating to bonus and commission structure.

Our factory stores averaged 5,700 total square feet at the end of fiscal 2007, but are “sized to the market,” which means that we adjust the size of a particular factory store based on the projected revenues from that particular store. For example, at the end of fiscal 2007, our largest factory store, located in Connecticut, was approximately 9,000 square feet, and our smallest factory store, located in Colorado, was approximately 4,000 square feet.

We expanded our factory store base by seven net new stores in fiscal 2006 and 10 new stores in fiscal 2007. We plan to expand our factory store base by 10 to 15 factory stores in fiscal 2008. Thereafter, in the near term, we plan to expand our factory store base by 5 to 10 factory stores annually. In each year, we plan to open and close factory stores in varying numbers. Our new factory store operating model assumes a target factory store size of 4,700 square feet and sales per square foot of $380 in the first twelve months. Our target net investment to open a factory store is approximately $511,000, which includes $353,000 of build-out costs net of landlord contributions, $133,000 of initial inventory net of payables and pre-opening expenses of $25,000. This operating model results in a first year targeted pretax cash return on investment of approximately 87%.

Central Real Estate Management for Retail and Factory Stores

Our real estate management team focuses on a specific set of guidelines and considerations when selecting locations for retail and factory store openings, relocations, repositionings and closures. We lease all of our stores and generally seek to locate our stores in affluent markets. We analyze factors such as the demographics of the local markets, the performance of a particular shopping center, the quality and nature of existing shopping center tenants, the quality of the location, the configuration of the space and the lease terms being offered to us. In addition to analyzing factors to select locations, we also analyze similar factors to determine the size of the store for each location. We also try to limit our capital investment in new stores by seeking significant construction allowances from landlords, and size our stores based on the anticipated strength of the market.

Our real estate management team consists of real estate, construction, purchasing and lease administration professionals. While we use the services of outside architects and contractors in designing and constructing our stores, our in-house design and construction directors supervise and manage the process. Our real estate management team is also assisted by a third party that negotiates leases and lease renewals on our behalf.

Direct net sales as a percentage of total revenues
26.6 % 26.8 % 28.3 %

In addition to driving revenues, we use our Direct channel to introduce and test new product offerings, to sell specialty product lines such as J. Crew Collection and Wedding, to offer extended sizes and colors on various products and to expand customer files to drive targeted marketing campaigns by collecting customer data to further segment customer groups.

We currently obtain customer information for 100% of our catalog and Internet customers. As of February 2, 2008, our customer database contained approximately 24.3 million individual customer names, of which 3.2 million customers had placed a catalog or Internet order with us or made a store purchase from us within the previous twelve months, and 3.6 million email addresses of customers who had agreed to receive promotional emails from us.

We maintain a database of “customer records,” which include sales patterns, detailed purchasing information, certain demographic information, geographic locations and email addresses of our customers. This database enables us to see how our customers use our various sales channels to shop and facilitates targeted marketing strategies. We segment our customer files based on several variables, and we tailor our catalog offerings and email notifications to address the different product needs of our customer groups. For example, we currently send targeted emails to such customer groups as purchasers of men’s merchandise, women’s merchandise, kid’s crewcuts merchandise and sale merchandise. We focus on continually improving the segmentation of customer files and the acquisition of additional customer names from several sources, including our retail stores, our Internet website, list rentals and list exchanges with other catalog companies.

In fiscal 2007, approximately 57% of J.Crew Direct net sales were generated by customers who had made a purchase from a J.Crew catalog or on our Internet website in the prior 12 months.

Catalog

The J.Crew catalog is the primary branding and advertising vehicle for the J.Crew brand. We believe our catalog reinforces the J.Crew brand image and drives sales across all of our sales channels. For example, over 30% of our Internet customers referenced using a catalog prior to their Internet purchase, which we believe shows that our catalog drives sales on our Internet channel. We believe we have distinguished ourselves from other catalog retailers by utilizing high quality photography and art direction. We further this image by not promoting clearance merchandise in our catalogs, and instead redirect primary liquidation activity to our www.jcrew.com website. In fiscal 2007, we distributed 23 catalog editions with a circulation of approximately 48.6 million copies and approximately 5.3 billion pages circulated.

We segment our customer files and tailor our catalog offerings to address the different product needs of our customer groups. To increase catalog productivity and improve the effectiveness of marginal and prospecting circulation, each customer group is offered a distinct array of catalog editions. For example, we circulate a “Women’s Collections” edition to our women’s product customers and a men’s only edition to our men’s product customers. Our focus is consistently to deliver the most relevant catalogs possible to identified customer groups.

All creative work on the J.Crew catalog is coordinated by our in-house personnel, and we believe this allows us to shape and reinforce our brand image. Photography is executed both on location and in studios, and creative design and copy writing are executed on a desktop publishing system. Digital images are transmitted directly to outside printers, thereby reducing lead times and improving reproduction quality.

While we do not have long-term contracts with our suppliers of paper for our catalog, we believe our long-standing relationships with a number of the largest coated paper mills in the United States allow us to purchase paper at favorable prices. Projected paper requirements are communicated on an annual basis to paper mills to ensure the availability of an adequate supply.

Internet Website

Since 1996, our website located at www.jcrew.com has allowed our customers to purchase our merchandise over the Internet. We continue to see an ongoing shift of orders to the Internet from our catalog. In fiscal 2007, this website logged over 95 million visits, an increase of 34% over our fiscal 2006 visits of 71 million. Internet revenues represented 78% of the Direct business in fiscal 2007, compared to 71% of the Direct business in fiscal 2006. We also maintain a Madewell website at www.madewell1937.com, which provides customers with a toll-free number to place orders for Madewell merchandise and intend to add the necessary functionality to enable customers to place orders online during 2008. We design and operate our websites using an in-house technical staff. Our www.jcrew.com website emphasizes simplicity and ease of customer use while integrating the J.Crew brand’s aspirational lifestyle imagery used in the catalog. We update our website periodically throughout the day to accurately reflect product availability and to determine where on the website a particular product generates the best sales. In addition to selling our regular merchandise on our www.jcrew.com website, we also use that website as a means to sell marked-down merchandise.

We have enhanced our online presence by adding category-based “shops” to our www.jcrew.com website, such as J.Crew swimfinder, wedding & party shop and our new accessories shop.

Marketing and Advertising

The J.Crew catalog is the primary branding and advertising vehicle for the J.Crew brand. We believe our catalog reinforces the J.Crew brand image and drives sales in all of our sales channels. Our direct sales channels enable us to maintain a database of customer sales patterns and we are thus able to target segments of our customer base with specific marketing. Depending on their spending habits, we send certain customers special catalog editions and/or emails.

We also offer a private-label credit card through an agreement with World Financial Network National Bank (“WFNNB”), under which WFNNB owns the credit card accounts and Alliance Data Systems Corporation provides services to our private-label credit card customers. In fiscal 2007, sales on J.Crew credit cards made up 15.9% of our total net sales. We believe that our credit card program encourages frequent store and website visits and catalog sales and promotes multiple-item purchases, thereby cultivating customer loyalty to the J.Crew brand and increasing sales. During fiscal 2006, we enhanced our J.Crew credit card loyalty program by offering rewards for customer spending on J.Crew credit cards.

Sourcing Production and Quality

Our Sourcing Strategy

We have no long-term merchandise supply contracts, and we typically transact business on an order-by-order basis. We source our merchandise in two ways: through the use of buying agents, and by purchasing merchandise directly from trading companies and manufacturers. In fiscal 2007, we worked with eleven buying agents, who together supported our relationships with vendors of approximately 60% of our merchandise, with one buying agent supporting our relationships with vendors that supplied approximately 50% of our merchandise. In exchange for a commission, our buying agents identify suitable vendors and coordinate our purchasing requirements with the vendors by placing orders for merchandise on our behalf, ensuring the timely delivery of goods to us, obtaining samples of merchandise produced in the factories, inspecting finished merchandise and carrying out other administrative communications on our behalf. In fiscal 2007, we worked with two trading companies, purchasing approximately 25% of our merchandise from these companies. Trading companies control factories which manufacture merchandise and also handle certain other shipping and customs matters related to importing the merchandise into the United States. We sourced the remaining 15% of our merchandise by dealing directly with manufacturers both within the United States and abroad with the majority of whom we have long-term, and we believe, stable relationships.

Our sourcing base currently consists of approximately 141 vendors who operate 225 factories in approximately 24 countries. Our top 10 vendors supply 52% of our merchandise.

Each of our top 10 vendors uses multiple factories to produce its merchandise, which we believe gives us a high degree of flexibility in placing production of our merchandise. We believe we have developed strong relationships with our vendors, some of which rely upon us for a significant portion of their business.

In fiscal 2007, approximately 86% of our merchandise was sourced in Asia (with 73% of our products sourced from China, Hong Kong and Macau), 4% was sourced in the United States and 10% was sourced in Europe and other regions. Substantially all of our foreign purchases are negotiated and paid for in U.S. dollars.

Vendors located abroad ship our merchandise to us primarily by boat, which in most cases takes an average of 28 days in transit. The remainder of our merchandise from abroad is shipped to us by plane, which takes an average of nine days in transit. In the case of merchandise manufactured abroad, vendors deliver merchandise to one of our overseas consolidators. From there, the merchandise is shipped to one of our two U.S. deconsolidators, one of which is located on the east coast and the other on the west coast. From our U.S. deconsolidators, independent trucking companies transport our merchandise to one of our distribution centers, which generally takes two to three days of transit time. In the case of merchandise manufactured in the United States, we contract with an independent trucking company to transport merchandise from its manufacturer to one of our distribution centers, which generally takes a week or less.

Regardless of the sourcing method used, each factory, subcontractor, supplier and agent that manufactures our merchandise is required to adhere to our Code of Vendor Conduct, which is designed to ensure that each of our suppliers’ operations are conducted in a legal, ethical and responsible manner. Our Code of Vendor Conduct requires that each of our suppliers operates in compliance with applicable wage, benefit, working hours and other local laws, and forbids the use of practices such as child labor or forced labor. Our Code of Vendor Conduct is currently administered internally by J.Crew employees, including a dedicated J.Crew employee, and two outside compliance audit firms that we contract with to make periodic visits to the facilities that produce our goods to monitor compliance, and includes prequalification of new suppliers and a requirement that each supplier execute an annual compliance certification.

Distribution Facilities

We operate one customer call center and outsource a portion of our customer calls to one vendor. We operate two distribution facilities. We own a 282,000 square foot facility in Asheville, North Carolina that houses our distribution operations for our retail and factory stores. This facility currently employs approximately 160 full and part-time employees during our non-peak season and approximately 50 additional employees during our peak season. In fiscal 2007, we completed a 120,000 square foot expansion of this facility to support our expected future growth. Merchandise is transported from this distribution center to our retail and factory stores by independent trucking companies, Federal Express or UPS, with a transit time of approximately two to five days.

CEO BACKGROUND

Millard Drexler . Mr. Drexler has been our Chief Executive Officer, Chairman of the Board of Directors and a director since 2003. Before joining J.Crew, Mr. Drexler was Chief Executive Officer of The Gap, Inc. from 1995 until 2002, and was President of The Gap, Inc. from 1987 to 1995. Mr. Drexler also serves on the Board of Directors and Compensation and Nominating and Corporate Governance Committees of Apple, Inc.

Tracy Gardner . Ms. Gardner has been our President—Retail and Direct since 2007 and, before that, was Executive Vice President, Merchandising, Planning & Production since 2004. Prior to joining J.Crew, Ms. Gardner held various positions at The Gap, Inc., including Senior Vice President of Adult Merchandising for the Gap brand from 2002 to 2004, Vice President of Women’s Merchandising for the Banana Republic division from 2001 to 2002, Vice President of Men’s Merchandising for the Banana Republic division from 1999 to 2001 and Divisional Merchandising Manager of Men’s Wovens for the Banana Republic division prior to 1999.

James Scully . Mr. Scully has been our Executive Vice President and Chief Financial Officer since 2005. Prior to joining J.Crew, Mr. Scully served as Executive Vice President of Human Resources and Strategic Planning of Saks Incorporated from 2004. Before that Mr. Scully served as Saks Incorporated’s Senior Vice President of Strategic and Financial Planning from 1999 to 2004 and as Senior Vice President, Treasurer from 1997 to 1999. Prior to joining Saks Incorporated, Mr. Scully held the position of Senior Vice President of Corporate Finance at Bank of America (formerly NationsBank) from 1994 to 1997.

Libby Wadle. Ms. Wadle has been our Executive Vice President of J.Crew Factory since 2007 and, before that, served as Vice President and then Senior Vice President of J.Crew Factory since 2004. Prior to joining J.Crew, Ms. Wadle was Division Vice President of Women’s Merchandising at Coach, Inc. from 2003 to 2004 and held various merchandising positions at The Gap Inc. from 1995 to 2003.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

J.Crew is a nationally recognized apparel and accessories brand that we believe embraces a high standard of style, craftsmanship, quality and customer service, while projecting an aspirational American lifestyle.

On the basis of data collected on our Internet channel customers, we believe our customer base consists primarily of affluent, college-educated and professional and fashion-conscious women and men. As of February 2, 2008, we operated 199 retail stores, including four crewcuts and six Madewell stores, and 61 factory stores throughout the United States.

The following is a brief summary of fiscal 2007 highlights:


•

Revenues totaled $1,334.7 million, reflecting a 16% increase over prior year revenues of $1,152.1 million.


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Comparable store sales increased 6%. Realigning last year’s retail calendar to be consistent with this year’s fiscal period did not change comparable store sales.


•

Direct net sales increased 22% to $377.4 million.


•

Income from operations increased 37% to $172.5 million, or 12.9% of revenues.


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Aggregate voluntary prepayments of $75.0 million were made under the Term Loan.


•

We opened 21 and closed four J.Crew retail stores; opened 10 J.Crew factory stores, two crewcuts standalone stores and four Madewell stores.

Our recent revenue growth has led to increased selling, general and administrative expenses. The most significant components of these increases were wage costs, particularly at retail and factory stores due primarily to the opening of new stores. We expect these expenses to continue to grow as our business continues to grow.

We also expect these and other costs—particularly our store occupancy costs and employee wages and benefits costs—to increase as we pursue our strategy of expanding our retail and factory store base.

While we believe our growth strategy offers significant opportunities, it also presents significant risks and challenges, including, among others, the risks that we may not be able to hire and train qualified sales associates, that our new product offerings and expanded sales channels may not maintain or enhance our brand identity and that our order fulfillment and distribution facilities and information systems may not be adequate to support our growth plans. In addition, we must also seek to ensure that implementation of these plans does not divert management’s attention from continuing to build on the strengths that we believe have driven our recent success, including, among others, our focus on improving the quality of our products, pursuing a disciplined merchandising strategy and improving our store environments and our customer service. For a more complete discussion of the risks facing our business, see “Risk Factors.”

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are comparable store sales for Stores and net sales for Direct. We also consider gross profit and selling, general and administrative expenses in assessing the performance of our business.

Net Sales

Net sales reflect our revenues from the sale of our merchandise less returns and discounts.

We aggregate our merchandise into four sales categories: women’s, men’s, and children’s apparel, which consist of items of clothing such as shirts, sweaters, pants, dresses, jackets, outerwear and suits; and accessories, which consists of items such as shoes, socks, jewelry, bags, belts and hair accessories.

Our crewcuts children’s concept was introduced in the first quarter of fiscal 2006 with the opening of 10 shops within our J.Crew retail stores followed by the opening of two stand-alone stores in the third quarter of fiscal 2006. As of February 2, 2008, we operated 34 crewcuts shop-in-shops and four standalone crewcuts stores.

Comparable Store Sales

Comparable store sales reflects net sales at stores that have been open for at least twelve months. Therefore, a store is included in comparable store sales on the first day it has comparable prior year sales. Non-comparable store sales include net sales from new stores that have not been open for twelve months and net sales from closed stores and temporary stores. In fiscal 2006, comparable store sales excluded the impact of the 53 rd week.

By measuring the change in year-over-year net sales in stores that have been open for twelve months or more, comparable store sales allows us to evaluate how our core store base is performing. Various factors affect comparable store sales, including:


•

consumer preferences, buying trends and overall economic trends,


•

our ability to anticipate and respond effectively to fashion trends and customer preferences,


•

competition,


•

changes in our merchandise mix,


•

pricing,


•

the timing of our releases of new merchandise and promotional events,


•

the level of customer service that we provide in our stores,


•

changes in sales mix among sales channels,


•

our ability to source and distribute products efficiently, and


•

the number of stores we open, close (including for temporary renovations) and expand in any period.

As we continue our store expansion program, we expect that a greater percentage of our revenues will come from non-comparable store sales.

Cyclicality and Seasonality

The industry in which we operate is cyclical, and consequently our revenues are affected by general economic conditions. Purchases of apparel and accessories are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence.

Our business is seasonal. As a result, our revenues fluctuate from quarter to quarter. We have four distinct selling seasons that align with our four fiscal quarters. Revenues are usually substantially higher in our fourth fiscal quarter, particularly December, as customers make holiday purchases. For example, in fiscal 2007, we realized approximately 30% of our revenues in the fourth fiscal quarter.

Gross Profit

Gross profit is equal to our revenues minus our cost of goods sold. Cost of goods sold includes the direct cost of purchased merchandise, freight, design, buying and production costs, occupancy costs related to store operations (such as rent and utilities) and all shipping costs associated with our Direct business. Our cost of goods sold is substantially higher in the holiday season because cost of goods sold generally increases as revenues increase and cost of goods sold includes the cost of purchasing merchandise that we sell to generate revenues. Cost of goods sold also generally changes as we expand or contract our store base and incur higher or lower store occupancy and related costs. The primary drivers of the costs of individual goods are the costs of raw materials and labor in the countries where we source our merchandise. Gross margin measures gross profit as a percentage of our revenues.

Our gross profit may not be comparable to other specialty retailers, as some companies include all of the costs related to their distribution network in cost of goods sold while others, like us, exclude all or a portion of them from cost of goods sold and include them in selling, general and administrative expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include all operating expenses not included in cost of goods sold, primarily catalog production and mailing costs, certain warehousing expenses, administrative payroll, store

expenses other than occupancy costs, depreciation and amortization and credit card fees. These expenses do not necessarily vary proportionally with net sales. As a result, selling, general and administrative expenses as a percentage of net sales are usually higher in the spring season than the fall season.

Results of Operations

Fiscal 2007 Compared to Fiscal 2006

Revenues

Revenues in fiscal 2007 increased by $182.6 million, or 15.8%, to $1,334.7 million from $1,152.1 million in fiscal 2006. We believe the increase in revenues resulted from the continuing appeal of our expanded product line in both Stores and Direct, the additional number of store locations compared to the prior year and our continuing commitment to customer service. Fiscal 2007 consisted of 52 weeks, as compared to fiscal 2006, which consisted of 53 weeks. The impact of the 53 rd week on fiscal 2006 revenues was $12.6 million.

Stores sales increased by $106.3 million, or 13.1%, to $914.8 million in fiscal 2007 from $808.5 million in fiscal 2006. Comparable store sales increased by 5.6% to $838.5 million in fiscal 2007 from $794.3 million in the prior year. Realigning last year’s calendar weeks to be consistent with the current year retail calendar weeks would increase comparable store sales last year to $794.4 million, resulting in a comparable store sales increase of 5.5%. Non-comparable store sales were $76.3 million in fiscal 2007. The impact of the 53 rd week on fiscal 2006 store sales was $8.2 million.

Direct sales increased by $68.8 million, or 22.3%, to $377.4 million in fiscal 2007 from $308.6 million in fiscal 2006. We believe this increase is attributable to the factors that drove overall revenue growth. Additionally, a lower return rate accounted for 3.5 percentage points of the increase. We believe the return rate decreased in part because of improvements in fit and quality as well as an increase in the penetration of categories with lower returns. The Direct sales increase reflects an increase in our Internet revenues of $74.6 million, or 34.1%, partially offset by a decrease in our catalog revenues of $5.8 million, or 6.5% as compared to fiscal 2006. We continue to see the ongoing shift of orders to the Internet from our catalog. The impact of the 53 rd week on fiscal 2006 direct sales was $3.9 million.

The increase in Stores and Direct sales during fiscal 2007 was primarily driven by an increase in sales of women’s apparel. This increase was largely driven by sales of sweaters, knits and jackets. Sales of men’s apparel and accessories also increased during the year.

Other revenues increased by $7.5 million due primarily to an increase in shipping and handling fees of $6.6 million from $31.3 million in fiscal 2006 to $37.9 million in fiscal 2007 primarily as a result of an increase in orders in the Direct business. The impact of the 53 rd week on fiscal 2006 other revenues was $0.5 million.

Gross Profit

Gross margin increased from 43.4% in fiscal 2006 to 44.1% in fiscal 2007. The increase in gross margin was due primarily to an increase of 90 basis points in merchandise margin expansion, offset by a 20 basis point increase in buying and occupancy costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $41.4 million, or 11.0%, to $416.1 million in fiscal 2007 from $374.7 million in fiscal 2006. The increase resulted primarily from:


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an increase in Direct and Stores operating expenses, primarily payroll and payroll related expenses associated with new stores, of $27.5 million,

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an increase in expenses related to the Madewell and crewcuts concepts of $4.0 million,


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an increase in corporate occupancy expenses of $3.4 million attributable to additional office space,


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an increase in share-based compensation expense of $3.2 million, and


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severance costs of $2.3 million recorded in connection with the departure of a senior executive.

As a percentage of revenues, selling, general and administrative expenses decreased to 31.2% in fiscal 2007 from 32.5% in fiscal 2006, resulting primarily from the fact that these expenses increased at a slower rate than revenues during fiscal 2007.

Interest Expense, Net

Interest expense, net decreased $32.8 million to $11.2 million in fiscal 2007 from $44.0 million in fiscal 2006. This decrease primarily reflects our lower average outstanding debt in fiscal 2007 resulting from voluntary prepayments under the Term Loan. All debt and preferred stock outstanding at the beginning of fiscal 2006 was redeemed during the second quarter of 2006 with the proceeds of the $285.0 million Term Loan entered into in May 2006 and the issuance of 21.6 million shares of common stock at $20.00 per share in our initial public offering (the “IPO”) in July 2006.

Loss on Refinancing of Debt

The loss on refinancing of debt of $10.0 million in fiscal 2006 reflects $4.8 million of tender fees and other expenses and $5.2 million related to the write-off of unamortized deferred financing costs incurred in connection with the redemption in May 2006 of the 9 3 / 4 % Senior Subordinated Notes due 2014.

Income Taxes

The provision for income taxes in fiscal 2007 and fiscal 2006 is not comparable. The effective tax rate in fiscal 2006 of (8.7)% was not reflective of a normalized rate due to several factors, including (a) preferred stock dividends included in interest expense for financial statement purposes but not deductible for income tax purposes, and (b) the reversal at February 3, 2007 of a valuation allowance which fully reserved net deferred income tax assets.

The income tax provision for fiscal 2007 reflects a more normalized effective tax rate of 39.8%.

Net Income

Net income increased $19.3 million to $97.1 million in fiscal 2007 from $77.8 million in fiscal 2006. This increase was due to an $88.1 million increase in gross profit primarily driven by the 15.8% increase in revenues, a $32.8 million decrease in interest expense, offset by a $41.4 million increase in selling, general and administrative expenses, and a $70.4 million increase in the provision for income taxes. In addition, fiscal 2006 included a $10.0 million loss on refinancing of debt.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations – First Quarter of Fiscal 2008 Compared to First Quarter of Fiscal 2007

Revenues

Revenues for the first quarter of fiscal 2008 (the thirteen weeks ended May 3, 2008) increased $43.3 million, or 14.6%, to $340.6 million from $297.3 million in the first quarter of fiscal 2007 (the thirteen weeks ended May 5, 2007). We believe the increase in revenues for the first quarter of fiscal 2008 resulted from the continuing appeal of our expanded product line in both Stores and Direct, the additional number of store locations compared to the prior year and our continuing commitment to customer service.

Stores sales increased $28.1 million, or 14.0%, to $229.1 million in the first quarter of fiscal 2008 from $201.0 million in the first quarter of fiscal 2007. Comparable store sales increased $4.7 million, or 2.4%, to $200.1 million in the first quarter of fiscal 2008 from $195.4 million in the comparable period last year. Non-comparable store sales were $29.0 million in the first quarter of fiscal 2008.

Direct sales increased $14.3 million, or 16.6%, to $100.9 million in the first quarter of fiscal 2008 from $86.6 million in the first quarter of fiscal 2007. The number of catalog pages circulated in the first quarter of fiscal 2008 decreased 3% from the comparable period last year. We continue to see a shift of orders place on the phone to the Internet.

The increase in Stores and Direct sales in the first quarter of fiscal 2008 was primarily driven by an increase in sales of women’s apparel. This increase was largely driven by sales of sweaters, knits and pants. Sales of men’s apparel and accessories also increased during the period. We offer our children’s apparel both in shops within our retail stores and stand-alone stores, in addition to our Direct channel. As of May 3, 2008, we operated 37 crewcuts shop-in-shops and four stand-alone stores.

Other revenues, which consist primarily of shipping and handling fees and royalties, increased to $10.6 million in the first quarter of fiscal 2008 from $9.7 million in the comparable period last year. The increase resulted primarily from an increase in shipping and handling fees attributable to the increase in Direct sales.

Gross Profit

Gross profit increased $21.4 million to $159.9 million in the first quarter of fiscal 2008 from $138.5 million in the first quarter of fiscal 2007. This increase resulted from the following factors:

Gross margin increased to 46.9% in the first quarter of fiscal 2008 from 46.6% in the first quarter of fiscal 2007. The increase in gross margin was driven by approximately 110 basis point expansion in merchandise margin partially offset by approximately 70 basis point increase in buying and occupancy costs as a percentage of revenues.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $12.6 million, or 13.5%, to $106.8 million in the first quarter of fiscal 2008 from $94.2 million in the first quarter of fiscal 2007. This increase primarily resulted from an increase in Direct and Stores operating expenses, primarily payroll and internet marketing costs.

As a percentage of revenues, selling, general and administrative expenses decreased to 31.4% in the first quarter of fiscal 2008 from 31.7% in the comparable period last year, resulting primarily from the fact that these expenses increased at a slower rate than revenues during fiscal 2008.

Interest Expense, Net

Interest expense, net decreased $1.0 million to $2.4 million in the first quarter of fiscal 2008 from $3.4 million in the first quarter of fiscal 2007. This decrease primarily reflects our lower average outstanding debt in fiscal 2008 resulting from voluntary prepayments under the Term Loan.

Income Taxes

The income tax provisions for the first quarter of fiscal 2008 and 2007 reflect our estimated annual effective tax rate of 39.8%.

Net Income

Net income increased $5.9 million to $30.5 million in the first quarter of fiscal 2008 from $24.6 million in the first quarter of fiscal 2007. This increase was due to a $21.4 million increase in gross profit driven by the 14.6% increase in revenues, a $1.0 million decrease in interest expense, offset by a $12.6 million increase in selling, general and administrative expenses, and a $3.9 million increase in the provision for income taxes.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operations and borrowings under the Credit Facility (as defined below). Our primary cash needs are (a) making capital expenditures in connection with opening new stores, enhancing information technology systems and expanding our distribution centers, (b) meeting debt service requirements and (c) funding working capital requirements. The most significant components of our working capital are cash and cash equivalents, merchandise inventories, accounts payable and other current liabilities.

Operating Activities

Cash provided by operating activities in the first three months of fiscal 2008 was $13.8 million and consisted of (i) net income of $30.5 million, (ii) adjustments to net income of $11.7 million, offset by (iii) changes in operating assets and liabilities – including the impact of excess tax benefits from share-based compensation – of $28.4 million due primarily to increases in inventories and accounts payable resulting from anticipated sales increases.

Cash provided by operating activities in the first three months of fiscal 2007 was $15.2 million and consisted of (i) net income of $24.6 million, (ii) adjustments to net income of $9.1 million, offset by (iii) changes in operating assets and liabilities – including the impact of excess tax benefits from share-based compensation – of $18.5 million due primarily to increases in inventories and accounts payable resulting from anticipated sales increases.

Investing Activities

Capital expenditures were $14.8 million in the first three months of fiscal 2008 compared to $10.8 million in the first three months of fiscal 2007. Capital expenditures for the opening of new stores were $6.7 million and $6.3 million in the first three months of fiscal 2008 and fiscal 2007, respectively. Capital expenditures are planned at approximately $80 to $85 million for fiscal 2008, including approximately $35 to $40 million for new stores, $20 to $25 million for information technology enhancements and the remainder for store renovations and refurbishments and general corporate purposes.

Cash used in financing activities in the three months of fiscal 2008 was $8.9 million due to (i) a voluntary principal payment under the Term Loan of $25.0 million, offset by (ii) proceeds from share-based compensation plans of $6.0 million and (iii) excess tax benefits from share-based compensation of $10.1 million.

Cash used in financing activities in the first three months of fiscal 2007 was $12.0 million due to (i) a voluntary principal payment under the Term Loan of $25.0 million, (ii) costs incurred in connection with the amended and restated credit agreement of $1.1 million, offset by (iii) proceeds from share-based compensation plans of $4.0 million and (iv) excess tax benefits from share-based compensation of $10.1 million.

Amended and Restated Credit Agreement

On May 4, 2007, J. Crew Group, Inc. and certain of its subsidiaries, as guarantors, and Operating and certain of its subsidiaries, as borrowers, entered into a Second Amended and Restated Credit Agreement (the “Credit Facility”) with Citicorp USA, Inc. (“Citicorp”), as administrative agent, Citicorp, as collateral agent, and Bank of America, N.A. and Wachovia Bank, National Association, as syndication agents.

The Credit Facility provides for revolving loans and letters of credit of up to $200 million (which amount may be increased to up to $250 million subject to certain conditions) at floating interest rates based on Citibank N.A.’s prime rate plus a margin of up to 0.25% or LIBOR plus a margin ranging from 1.0% to 1.25%. The total amount of availability is limited to the sum of: (a) 100% of qualified cash, (b) 90% of eligible receivables, (c) 92.5% of the net recovery percentage of inventories (as determined by periodic inventory appraisals) for the period August 1 through December 31, or 90% of the net recovery percentage of inventories for the period January 1 through July 31, and (d) 65% of the fair market value of eligible real estate. The Credit Facility expires on May 4, 2013.

Borrowings under the Credit Facility are guaranteed by the Company and certain of its subsidiaries, and are secured by a perfected first priority security interest in substantially all of the Company’s assets and those of certain of its subsidiaries. The Credit Facility includes restrictions on the Company’s ability and the ability of certain of its subsidiaries to incur additional indebtedness and liens, pay dividends or make other distributions, make investments, dispose of assets and merge. If excess availability under the Credit Facility is less than $20 million at any time, then the Company’s fixed charge coverage ratio for the most recently ended period of four consecutive fiscal quarters may not be less than 1.10 to 1.00.

If an event of default occurs under the Credit Facility, the lenders may declare all amounts outstanding under the Credit Facility immediately due and payable. In such event, the lenders may exercise any rights and remedies they may have by law or agreement, including the ability to cause all or any part of the collateral securing the Credit Facility to be sold.

There were no short-term borrowings during the first three months of fiscal 2008 or fiscal 2007. There was $175.5 million of excess availability under the Credit Facility at May 3, 2008.

Demand Documentary Credit Facility

On October 31, 2007, Operating entered into an unsecured, demand letter of credit facility with HSBC which provides for the issuance of up to $35 million of documentary letters of credit on a no fee basis. Availability under this line was $18.3 million at May 3, 2008.

Outlook

Management anticipates that capital expenditures in fiscal 2008 will be approximately $80 to $85 million, primarily for opening 43 new stores, information technology enhancements, store renovations and refurbishments and general corporate purposes. Management believes that the Company’s current cash position, cash flow from operations and availability under the Credit Facility will be adequate to finance working capital needs, planned capital expenditures and debt service obligations for the next twelve months. Our ability to fund our operations and make planned capital expenditures, to make scheduled debt payments, and to remain in compliance with the financial covenants under our debt agreements depends on our future financing activities, our future operating performance and our future cash flow, which in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

CONF CALL

Allison Malkin

Before we get started, I would like to remind you of the company’s Safe Harbor language, which I’m sure you are all familiar with. 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.

With respect to any reference we make on this call to adjusted earnings per share in fiscal 2007, the reconciliation of earnings per share on a GAAP basis to adjusted has been provided in exhibit 3 of our earnings release issued on March 11, 2008, which are available on our website.

Now I’d like to turn the call over to J. Crew's Chairman and CEO, Millard Drexler.

Millard Drexler

I will go through the comments quickly because I know you all have a lot of questions. Thanks for joining us on our first quarter 2008 results. Jim Scully, our CFO, is here along with our other senior partners in the company. I’ll turn the call over to Jim for financial highlights and updating our outlook. We’ll then open it up to questions.

For the quarter revenues increased 15% to $341 million with comp sales increasing 2% and direct sales increasing 17%. This strong revenue increase coupled with gross margin expansion and SG&A leverage drove a 20% in operating income to $53 million or 15.6% of revenues versus 14.9% last year. The 70 basis point improvement came on top of a 110 basis point improvement last year.

We continued our conservative planning and investing which led to strong first quarter results despite the difficult consumer environment. We drove high quality sales growth and increased margin. That said of course we would have liked to have higher comp sales but direct did over-achieve our goals.

We continue to drive the business through our investments in quality, style and design with a focus on our customers. As we always say those who continue to move forward and innovate are going to win over the long-term. We are not cost-cutting for the short-term but building and investing in our business for the future.

Our direct business which includes our catalog and online continues to exceed our expectations as said with a 70% increase in the quarter on top of a 31% increase in the first quarter last year. We continue to gain efficiency through the management of our stores and online as one seamless business proactively managing our inventory as one.

We see opportunities every day in new and existing businesses and categories. Our customers continue to love our wedding and bridesmaids dresses and we continue to differentiate ourselves in this business. We launched Yoga Online and our customers cannot get enough of it. We’re getting feedback and this is arguable that we have the best fitting and quality yoga clothes. We also have a terrific new costume jewelry assortment both in our stores and online and we will continue to expand on and elevate the offerings.

These opportunities of course go along with our franchise businesses such as Jackie cardigans, café Capri’s to name a few are our elements of design to differentiate ourselves. During the quarter we opened 7 new stores; 4 retail and 2 factory, along with our permanent Madewell store in Manhattan at Broadway and Broom. We remain on track to open a total of 43 new stores in 2008 and have been pleased with our recent openings.

We increased our store productivity with sales per square foot increasing 6% to $574 from $542 last year while our square footage has increased 10% over the last twelve months. We continue to be pleased with our Crewcuts business both in our stores, our catalog and online which offers our famous J. Crew iconic style for ages 2-10. We are very pleased with the performance of Madewell which continues to gain momentum and more and more customers every day.

As said, we opened our permanent store at Broadway and Broom and opened our eighth Madewell store in Annapolis on May 20th. We are very pleased with the reaction to the concept and to our product and merchandise. We plan to open two additional Madewell stores in 2008; Lennox Square in Atlanta and Tyson’s Corner and launch an eCommerce site some time during this summer.

We ended the quarter with a solid balance sheet and our inventories are well positioned for the summer. Our revised annual outlook, which we believe is appropriate, assume that our first quarter comparable store sales trend will continue for the balance of the year. For direct we have maintained our expectations of a high single-digit increase and as you know we have exceeded this target in the quarter.

We are comfortable with how we are positioned and proud of what the team is doing to differentiate J. Crew in a difficult economic environment.

With that I’ll turn the call over to Jim to review our first quarter results and outlook in more detail.

James Scully

Turning to the details for the first quarter, total revenues increased 15% in the first quarter to $341 million. Our store sales which include our retail, factory, Crewcuts and Madewell stores increased 14% to $229 million. This increase was driven by a 2% comp store sales increase and a 10% increase in net square footage. Our direct business experienced a 17% increase to $101 million.

Internet sales represented 86% of our direct business versus 76% last year reflecting the ongoing shift of orders to the Internet from the phone.

Gross profit for first quarter increased 15% to $160 million with gross margin expanding approximately 30 basis points to 46.9% on top of 110 basis points of expansion last year. The 30 basis point expansion was driven by 110 basis points of merchandise margin expansion contributable to conservative planning and the efficient management of our inventory between our stores and online partially offset by 70 basis points by buying and occupancy de-leverage which was primarily related to non-comp occupancy pressure due to the accelerated timing of new store openings during the first quarter as compared to last year.

SG&A expenses for the first quarter were $107 million or 31.4% of revenues versus 31.7% last year. We achieved this leverage while investing in Madewell and Crewcuts and opening 34 net new stores in the last 12 months.

Top line growth coupled with gross margin expansion and SG&A leverage led to a 20% increase in operating income to $53 million or 70 basis points of operating margin expansion. We were able to achieve this operating margin expansion while absorbing approximately $3 million in operating losses related to Madewell as compared to $2 million last year.

Net interest expense for the first quarter totaled $2 million compared to net interest expense of $3 million in the first quarter of last year. The decline in interest expense primarily reflects our lower average out standing debt. Income before income tax increased 24% to $51 million compared to $41 million last year. Net income was $31 million or $0.48 per diluted share compared to net income of $25 million or $0.39 per diluted share in the first quarter last year.

Turning to key balance sheet highlights. We ended the first quarter with cash and cash equivalents totaling approximately $122 million with 100% of our invested cash in U.S. Government money market funds. Inventory at quarter end was $174 million representing an increase of 21% over the end of the quarter last year which compares to our 15% revenue increase in the first quarter.

The primary difference between the end of quarter inventory increase and our sales trend is due to an increase in year-over-year in-transit inventory. This is further evidenced by a significant increase in our accounts payable inventory leverage.

We reduced our debt by $25 million in April, ending the quarter at $100 million as compared to $175 million at the end of the first quarter last year. Capital expenditures for the first quarter were $15 million consistent with our full-year forecast of approximately $80 million.

Turning to our outlook. Our long-term goals remain comp store sales growth in the mid single-digit range, direct sales growth in the high single-digits, net square footage expansion in the 7-9% range and diluted EPS growth in excess of 20%. However, given the current macro environment and the comp trend of our business we are revising our outlook for the fiscal year 2008.

We now expected diluted earnings per share for the fiscal year 2008 in the range of $1.70 to $1.75 as compared to our previous guidance range of $1.85 to $1.87. This revised guidance represents a 10-14% increase in fiscal 2007 adjusted diluted earnings per share of $1.54.

Our revised fiscal 2008 earnings guidance reflects comp store sales growth in the flat to low single-digit range, direct sales growth in the high single-digits, net square footage expansion of approximately 11%, essentially flat operating margin versus last year with flat gross margin and SG&A as a percent of revenues, an effective tax rate of 39.8%, approximately 65 million diluted shares outstanding, capital expenditures of approximately $80 million and approximately $15 million in losses associated with Madewell which includes expenses related to the launch of the eCommerce site.

For the second quarter of fiscal 2008 we are increasing guidance for diluted earnings per share in the range of $0.31 to $0.33 which compares to $0.32 in the second quarter of fiscal 2007.

Consistent with our annual guidance our second quarter outlook reflects comp store sales growth in the flat to low single-digit range and direct sales growth in the high single-digits. We expect approximately 100 basis points of operating margin deterioration split evenly between SG&A and gross margin. We also expect merchandise margin to be flat to last year.

We continue to plan our inventory and expenses conservatively and have implemented initiatives to further tighten both which should favorably impact results in the second half of the year.

Now I’ll turn the call back to Mickey.

Millard Drexler

Thanks. As we move into the second quarter we continue to plan our business conservatively and focus on the long-term. We are here every day to provide out customers with the same quality, style and design they have come to know us for.

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