J CREW GROUP INC - FORM 8-K - EX-99.1 - PRESS RELEASE ISSUED BY J. CREW GROUP, INC. ON NOVEMBER 28, 2012

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8-K - FORM 8-K - J CREW GROUP INC	d446085d8k.htm

Exhibit 99.1

Contacts:

Stuart C. Haselden

Chief Financial Officer

(212) 209-8461

Allison Malkin/Joe Teklits

ICR, Inc.

(203) 682-8200

J.CREW GROUP, INC. ANNOUNCES THIRD QUARTER FISCAL 2012 RESULTS

Revenues Rise 16% to $556 Million

NEW YORK, November 28, 2012 — J.Crew Group, Inc. today announced financial results for the three months and the nine months ended October 27, 2012.

On March 7, 2011, J.Crew was acquired by investment funds affiliated with TPG Capital, L.P. and Leonard Green & Partners, L.P. Although the Company continued as the same legal entity after the acquisition, last year’s financial statements were prepared for the following periods: (i) March 8, 2011 to October 29, 2011 (Successor) and (ii) January 30, 2011 to March 7, 2011 (Predecessor). To facilitate a meaningful comparison of our results, we have presented a pro forma statement of operations for the first nine months of fiscal 2011, which reflects the combination of the Successor and Predecessor periods, giving effect to the acquisition and related transactions as if they occurred on the first day of the fiscal year. The results of the third quarter of fiscal 2011 have not been prepared on a pro forma basis, as the transaction was effective prior to the first day of the quarter.

Third Quarter highlights:

•

Revenues increased 16% to $555.8 million, with comparable company sales increasing 10%. Comparable company sales increased 5% in the third quarter last year. Store sales increased 17% to $391.7 million. Store sales increased 10% in the third quarter last year. Direct sales increased 13% to $156.8 million following an increase of 18% in the third quarter last year.

•

Gross margin increased to 47.3% from 42.1% in the third quarter last year. Last year included amortization of inventory step-up from purchase accounting of $5.8 million.

•

Selling, general and administrative expenses increased to $188.6 million, or 33.9% of revenues, from $143.9 million, or 30.0% of revenues, in the third quarter last year. This year reflects additional share-based and incentive compensation of $8.3 million. Last year included transaction-related net insurance recoveries of $3.6 million.

•

Operating income increased to $74.5 million, or 13.4% of revenues, compared to $57.9 million, or 12.1% of revenues, in the third quarter last year. Operating income last year was negatively impacted by amortization of inventory step-up, partially offset by transaction-related net insurance recoveries noted above.

•

Net income was $33.2 million compared to $21.6 million in the third quarter last year. Net income last year included the after-tax effect of the amortization of inventory step-up and transaction-related net insurance recoveries noted above.

•

Adjusted EBITDA increased to $98.9 million from $83.8 million in the third quarter last year. An explanation of the manner in which we use adjusted EBITDA and an associated reconciliation to GAAP measures is included in Exhibit (5).

First Nine Months highlights:

•

Revenues increased 20% to $1,584.8 million, with comparable company sales increasing 13%. Comparable company sales increased 2% in the first nine months of last year. Store sales increased 22% to $1,129.8 million. Store sales increased 4% in the first nine months of last year. Direct sales increased 16% to $434.1 million following an increase of 12% in the first nine months of last year.

•

Gross margin increased to 46.7% from 43.1% in the first nine months of last year.

•

Selling, general and administrative expenses increased to $527.4 million, or 33.3% of revenues, from $418.4 million, or 31.6% of revenues, in the first nine months of last year. This year reflects additional share-based and incentive compensation of $25.0 million.

•

Operating income increased to $212.2 million, or 13.4% of revenues, compared to $152.6 million, or 11.5% of revenues, in the first nine months of last year.

•

Net income was $85.9 million compared to $46.5 million in the first nine months of last year.

•

Adjusted EBITDA increased to $289.2 million compared to $222.8 million in the first nine months of last year. An explanation of the manner in which we use adjusted EBITDA and an associated reconciliation to GAAP measures is included in Exhibit (6).

Balance Sheet highlights:

•

Cash and cash equivalents were $195.7 million compared to $142.7 million at the end of the third quarter last year.

•

Total debt was $1,585 million, consisting of the seven-year senior secured term loan of $1,185 million and the eight-year senior unsecured notes of $400 million, compared to $1,597 million at the end of the third quarter last year.

•

Inventories were $348.6 million compared to $291.7 million at the end of the third quarter last year. Inventories and inventories per square foot increased 19% and 11%, respectively.

Subsequent Event

Superstorm Sandy struck the East Coast on October 29, 2012, resulting in (i) personal property damage in three of our stores, one of which will remain closed indefinitely and (ii) temporary closures of 131 additional stores for periods of one to fourteen days. We believe the impact on revenues will not be material to the results of the fourth quarter.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. A key measure used in our evaluation is comparable company sales, which includes (i) net sales from stores that have been open for at least twelve months, (ii) direct net sales, and (iii) shipping and handling fees.

Use of Non-GAAP Financial Measures

This announcement includes certain non-GAAP financial measures. An explanation of the manner in which we use adjusted EBITDA and an associated reconciliation to GAAP measures is included in Exhibits (5) and (6).

Conference Call Information

A conference call to discuss third quarter results is scheduled for tomorrow, November 29, 2012, at 11:00 AM Eastern Time. Investors and analysts interested in participating in the call are invited to dial (877) 407-3982 approximately ten minutes prior to the start of the call. The conference call will also be webcast live at www.jcrew.com. A replay of this call will be available until December 6, 2012 and can be accessed by dialing (877) 870-5176 and entering conference ID number 403785.

About J.Crew Group, Inc.

J.Crew Group, Inc. is a nationally recognized multi-channel retailer of women’s, men’s and children’s apparel, shoes and accessories. As of November 28, 2012, the Company operates 294 retail stores (including 241 J.Crew retail stores, eight crewcuts stores and 45 Madewell stores), jcrew.com, jcrewfactory.com, the J.Crew catalog, madewell.com, the Madewell catalog, and 106 factory stores. Additionally, certain product, press release and SEC filing information concerning the Company are available at the Company’s website www.jcrew.com.

Forward-Looking Statements:

Certain statements herein, including the statements regarding our estimated impact on revenues as a result of Superstorm Sandy and projected store count and square footage in Exhibit (7) hereof, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect our current expectations or beliefs concerning future events and actual results of operations may differ materially from historical results or current expectations. Any such forward-looking statements are subject to various risks and uncertainties, including our substantial indebtedness and lease obligations, the strength of the global economy, declines in consumer spending or changes in seasonal consumer spending patterns, competitive market conditions, our ability to anticipate and timely respond to changes in trends and consumer preferences, our ability to successfully develop, launch and grow our newer concepts and execute on strategic initiatives, products offerings, sales channels and businesses, material disruption to our information systems, our ability to implement our real estate strategy, our ability to attract and retain key personnel, interruptions in our foreign sourcing operations, and other factors which are set forth in the section entitled “Risk Factors” and elsewhere in our Annual Report on Form 10-K and in all filings with the SEC made subsequent to the filing of the Form 10-K. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Exhibit (1)

J.Crew Group, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except percentages)

(unaudited)


	Third Quarter Fiscal 2012			Third Quarter Fiscal 2011

Net sales:
Stores	$	391,720		$	334,483
Direct		156,786			138,544

Other		7,302			6,548

Total revenues		555,808			479,575

Cost of goods sold, including buying and occupancy costs		292,738			277,806

Gross profit		263,070			201,769
As a percent of revenues		47.3	%		42.1	%

Selling, general and administrative expenses		188,569			143,876
As a percent of revenues		33.9	%		30.0	%


Operating income		74,501			57,893
As a percent of revenues		13.4	%		12.1	%

Interest expense, net		24,089			25,349


Income before income taxes		50,412			32,544

Provision for income taxes		17,233			10,944


Net income	$	33,179		$	21,600

Exhibit (2)

J.Crew Group, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except percentages)

(unaudited)


	First Nine Months Fiscal 2012			Pro forma First Nine Months Fiscal 2011

Net sales:
Stores	$	1,129,769		$	926,706
Direct		434,167			374,860

Other		20,882			22,480

Total revenues		1,584,818			1,324,046

Cost of goods sold, including buying and occupancy costs		845,223			753,050

Gross profit		739,595			570,996
As a percent of revenues		46.7	%		43.1	%

Selling, general and administrative expenses		527,357			418,422
As a percent of revenues		33.3	%		31.6	%


Operating income		212,238			152,574
As a percent of revenues		13.4	%		11.5	%

Interest expense, net		74,860			76,404


Income before income taxes		137,378			76,170

Provision for income taxes		51,496			29,706


Net income	$	85,882		$	46,464

Exhibit (3)

J.Crew Group, Inc.

Condensed Consolidated Pro Forma Statement of Operations

(in thousands, except percentages)

(unaudited)


	For the Period March 8, 2011 to October 29, 2011			For the Period January 30, 2011 to March 7, 2011			Adjustments			Pro forma First Nine Months Fiscal 2011
	(Successor)			(Predecessor)

Net sales:
Stores	$	840,232		$	86,474		$	—		$	926,706
Direct		331,218			43,642			—			374,860

Other		19,358			3,122			—			22,480

Total revenues		1,190,808			133,238			—			1,324,046

Cost of goods sold, including buying and occupancy costs		712,066			70,284		(a)	(29,300)			753,050

Gross profit		478,742			62,954			29,300			570,996
As a percent of revenues		40.2	%		47.2	%					43.1	%

Selling, general and administrative expenses		415,748			79,736		(a)	(77,062	)		418,422
As a percent of revenues		34.9	%		59.8	%					31.6	%


Operating income (loss)		62,994			(16,782	)		106,362			152,574
As a percent of revenues		5.3	%		(12.6	)%					11.5	%

Interest expense, net		66,588			1,166		(b)	8,650			76,404


Income (loss) before income taxes		(3,594	)		(17,948	)		97,712			76,170

Provision (benefit) for income taxes		(856	)		(1,798	)	(c)	32,360			29,706


Net income (loss)	$	(2,738	)	$	(16,150	)	$	65,352		$	46,464

See notes to pro forma statement of operations

Notes to Pro Forma Statement of Operations

(a)	To give effect to the following adjustments:


(in thousands)	Adjustments

Amortization expense(1)	$	813
Depreciation expense(2)		880
Sponsor monitoring fees(3)		700
Amortization of lease commitments, net(4)		1,865
Elimination of non-recurring charges(5)		(110,620	)

Total pro forma adjustment	$	(106,362	)

Pro forma adjustment:
Recorded in cost of goods sold	$	(29,300	)
Recorded in selling, general and administrative expenses		(77,062	)

Total pro forma adjustment	$	(106,362	)

(1)	To record five weeks of additional amortization expense of intangible assets for our Madewell brand name, loyalty program and customer lists amortized on a straight-line basis over their respective useful lives.

(2)	To record five weeks of additional depreciation expense of the step-up of property and equipment allocated on a straight-line basis over a weighted average remaining useful life of 8.2 years.

(3)	To record five weeks of additional expense (calculated as the greater of 40 basis points of annual revenues or $8 million) to be paid to the Sponsors in accordance with a management services agreement.

(4)	To record five weeks of additional amortization expense of favorable and unfavorable lease commitments amortized on a straight-line basis over the remaining lease life, offset by the elimination of the amortization of historical deferred rent credits.

(5)

To eliminate non-recurring charges that were incurred in connection with the acquisition and related transactions, including acquisition-related share based compensation, transaction costs, transaction-related litigation costs and recoveries, and amortization of the step-up in the carrying value of inventory.

(b)	To give effect to the following adjustments:


(in thousands)	Adjustments

Pro forma cash interest expense(1)	$	69,203
Pro forma amortization of deferred financing costs(1)		7,201
Less recorded interest expense, net		(67,754	)

Total pro forma adjustment to interest expense, net	$	8,650

(1)	To record thirty-nine weeks of interest expense associated with borrowings under the term loan facility and notes, and the amortization of deferred financing costs. Pro forma cash interest expense reflects a weighted-average interest rate of 5.6%.

(c)	To reflect our expected annual effective tax rate of approximately 39%.

Exhibit (4)

J.Crew Group, Inc.

Condensed Consolidated Balance Sheets

(unaudited)


(in thousands)	October 27, 2012		January 28, 2012		October 29, 2011

Assets
Current assets:
Cash and cash equivalents	$	195,675	$	221,852	$	142,714
Inventories		348,601		242,659		291,737
Prepaid expenses and other current assets		61,646		58,023		53,258
Prepaid income taxes		7,012		4,087		3,880

Total current assets		612,934		526,621		491,589

Property and equipment, net		321,797		264,572		258,815

Favorable lease commitments, net		38,070		48,930		52,271

Deferred financing costs, net		52,178		58,729		61,129

Intangible assets, net		977,968		985,322		987,773

Goodwill		1,686,915		1,686,915		1,686,429

Other assets		1,784		2,433		2,473

Total assets	$	3,691,646	$	3,573,522	$	3,540,479


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	161,523	$	158,116	$	157,222
Other current liabilities		154,680		116,339		123,096
Interest payable		12,983		26,735		—
Deferred income taxes, net		—		—		5,678
Current portion of long-term debt		15,000		15,000		12,000

Total current liabilities		344,186		316,190		297,996

Long-term debt		1,570,000		1,579,000		1,585,000

Unfavorable lease commitments and deferred credits		65,840		53,700		46,839

Deferred income taxes, net		409,787		410,515		409,704

Other liabilities		37,896		37,065		33,264

Stockholders’ equity		1,263,937		1,177,052		1,167,676

Total liabilities and stockholders’ equity	$	3,691,646	$	3,573,522	$	3,540,479

Exhibit (5)

J.Crew Group, Inc.

Reconciliation of Adjusted EBITDA

Non-GAAP Financial Measure

The following table reconciles net income reflected on the Company’s condensed consolidated statements of operations for the third quarter to: (i) Adjusted EBITDA (a non-GAAP measure), (ii) cash flows from operating activities (prepared in accordance with GAAP) and (iii) cash and cash equivalents as reflected on the condensed consolidated balance sheet (prepared in accordance with GAAP).


(in millions)	Third Quarter Fiscal 2012			Third Quarter Fiscal 2011

Net income	$	33.2		$	21.6
Provision for income taxes		17.2			10.9
Interest expense, net		24.1			25.3
Depreciation and amortization		20.9			18.4

EBITDA		95.4			76.2

Share-based compensation		1.1			1.0
Amortization of inventory step-up		—			5.8
Amortization of lease commitments		0.2			2.2
Sponsor monitoring fees		2.2			2.2
Transaction-related litigation		—			(3.6	)

Adjusted EBITDA		98.9			83.8

Taxes paid		(16.8	)		(9.1	)
Collection of refundable taxes		—			64.2
Interest paid		(30.9	)		(30.6	)
Changes in working capital		(31.1	)		(27.3	)

Cash flows from operating activities		20.1			81.0
Cash flows from investing activities		(34.0	)		(25.0	)
Cash flows from financing activities		(3.9	)		(1.6	)

Increase (decrease) in cash		(17.8	)		54.4
Cash and cash equivalents, beginning		213.5			88.3

Cash and cash equivalents, ending	$	195.7		$	142.7

We present Adjusted EBITDA, a non-GAAP financial measure, because we use such measure to: (i) monitor the performance of our business, (ii) evaluate our liquidity, and (iii) determine levels of incentive compensation. We believe the presentation of this measure will enhance the ability of our investors to analyze trends in our business, evaluate our performance relative to other companies in the industry, and evaluate our ability to service debt.

Adjusted EBITDA is not a presentation made in accordance with generally accepted accounting principles, and therefore, differences may exist in the manner in which other companies calculate this measure. Adjusted EBITDA should not be considered an alternative to (i) net income, as a measure of operating performance, or (ii) cash flows, as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool and should not be considered in isolation to, or as a substitute for analysis of the Company’s results as measured in accordance with GAAP.

Exhibit (6)

J.Crew Group, Inc.

Reconciliation of Adjusted EBITDA

Non-GAAP Financial Measure

The following table reconciles net income reflected on the Company’s condensed consolidated statements of operations for the first nine months (which is presented on a pro forma basis last year) to: (i) Adjusted EBITDA (a non-GAAP measure), (ii) cash flows from operating activities (prepared in accordance with GAAP) and (iii) cash and cash equivalents as reflected on the condensed consolidated balance sheet (prepared in accordance with GAAP).


(in millions)	First Nine Months Fiscal 2012			Pro forma First Nine Months Fiscal 2011

Net income	$	85.9		$	46.5
Provision for income taxes		51.5			29.7
Interest expense, net		74.9			76.4
Depreciation and amortization		59.7			52.3

EBITDA		272.0			204.9

Share-based compensation		3.2			3.2
Amortization of lease commitments		7.2			8.7
Sponsor monitoring fees		6.8			6.0

Adjusted EBITDA		289.2			222.8

Taxes paid		(56.2	)		(18.1	)
Collection of refundable taxes		—			64.2
Interest paid		(81.4	)		(48.4	)
Changes in working capital		(58.0	)		(184.5	)

Cash flows from operating activities		93.6			36.0
Cash flows from investing activities		(109.6	)		(3,053.4	)
Cash flows from financing activities		(10.2	)		2,778.8

Decrease in cash		(26.2	)		(238.6	)
Cash and cash equivalents, beginning		221.9			381.3

Cash and cash equivalents, ending	$	195.7		$	142.7

Exhibit (7)

Actual and Projected Store Count and Square Footage


	Fiscal 2012
Quarter	Total stores open at beginning of the quarter		Number of stores opened during the quarter(1)		Number of stores closed during the quarter(1)			Total stores open at end of the quarter
1^st Quarter(2)		362		10		—			372
2^nd Quarter(2)		372		6		(2	)		376
3^rd Quarter(2)		376		16		—			392
4^th Quarter(3)		392		13		(3	)		402

	Fiscal 2012
Quarter	Total gross square feet at beginning of the quarter		Gross square feet for stores opened or expanded during the quarter		Reduction of gross square feet for stores closed or downsized during the quarter			Total gross square feet at end of the quarter
1^st Quarter(2)		2,138,663		42,057		(1,811	)		2,178,909
2^nd Quarter(2)		2,178,909		38,575		(4,446	)		2,213,038
3^rd Quarter(2)		2,213,038		85,421		(327	)		2,298,132
4^th Quarter(3)		2,298,132		62,838		(22,910	)		2,338,060

(1)	Actual and Projected number of stores to be opened or closed during fiscal 2012 by channel are as follows:


Q1	–	Two retail, one international retail, and seven Madewell stores.

Q2	–	Three retail, one international retail, one factory, and one Madewell store. Closed one crewcuts and one Madewell store.

Q3	–	Six retail, one international retail, four factory, one international factory, and four Madewell stores.

Q4	–	Three retail, one international retail, three factory, one international factory, and five Madewell stores. Closed three retail stores.

(2)	Reflects actual activity.

(3)	Reflects projected activity.

J CREW GROUP INC - FORM 8-K - EX-99.1 - PRESS RELEASE ISSUED BY J. CREW GROUP, INC. ON NOVEMBER 28, 2012 - November 28, 2012

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