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A Tale of Two Brands for J.Crew in the Second Quarter as Madewell IPO Looms

In the second quarter of J.Crew’s fiscal 2019, the contrast between its original brand and the soon-to-be-public spin-off, Madewell, was stark—emblematic of continued weakness for the overall business as it works to implement cost-saving initiatives.

In a Nutshell: The second quarter was a time of contemplation for J.Crew. During the quarter, it completed a “comprehensive review” of its businesses, ultimately deciding to go through with the rumored Madewell IPO and enacting a separate “multi-year cost-optimization program.”

The brand’s debt now stands at $1.688 billion compared to $1.709 billion a year ago, though its current debt inflates when including an additional $96.1 million in asset-based loans. J.Crew’s interim CEO, Michael J. Nicholson, said its new cost-optimization program is expected to generate cost savings of approximately $50 million over the next three years, with $10 million to be realized during this fiscal year.

“This program is expected to reduce overall costs and enable the company to move faster in the execution of our strategy,” Nicholson said. “These actions, combined with our previously announced review of strategic alternatives, further support our initiatives to maximize value, position the company for long-term growth, and deleverage and strengthen our balance sheet.”

Sales: Total revenue at J.Crew was essentially flat in the second quarter at $588.8 million. For the first half combined, total revenue sits at $1.167 billion for the brand group, an increase of 4 percent. Overall, comparable company sales were essentially flat after gaining 3 percent in the first half of the previous fiscal year.

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At J.Crew, sales were down 7 percent in the quarter to $399.1 million and comparable sales decreased by 4 percent after inching up 1 percent in the second quarter last year. Year-to-date sales for the brand are down 6 percent at $775.2 million. On a comparable sales basis, revenue was down 3 percent—the same result filed in the first half of FY18.

Madewell, now on the pathway to becoming a public company, saw its sales increase by 15 percent to $139.7 million in the second quarter, with comparable sales growth at 10 percent. Both total revenue and comparable sales grew at identical rates in the first quarter, making for a consistent first half. In total, Madewell has accounted for $272.6 million in sales during the first two-quarters of FY19.

Gross margin for J.Crew, as a whole, decreased to 35.6 percent in the quarter, a loss of 2.9 percent, year-over-year.

Earnings: J.Crew recorded a net loss of $44.2 million in the quarter, compared to just $6.1 million in the comparable period last year. The brand said this was a result of “transaction, transformation and severance costs” along with a benefit related to a lease termination payment.

Additionally, the group recorded an operating loss of $1.5 million in the quarter, compared to earning $33.3 million in operating income the previous year—another result of increased costs, J.Crew said.

CEO’s Take: Nicholson acknowledged that J.Crew is currently embroiled in activities related to both the Madewell transition and its debt-relief plan. However, he cited the team’s work in both product development and customer experience as reasons to remain optimistic that the second quarter marked the beginning of a turnaround for the brand.

“Our second-quarter results reflect our ongoing commitment to returning J.Crew to profitable growth over time,” Nicholson said. “Our work to reignite the J.Crew brand with new designs, assortments, and brand expressions is well underway and we remain focused on advancing our digital transformation and elevating customer engagement across channels.”