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Promotions and Write-Down Drive J.Crew to Q3 Loss

J.Crew Group, Inc. reported a third-quarter net loss caused by unusually high promotional activity and store impairment charges.

For the three months ended Nov. 1, revenue increased 6 percent to $655.2 million. Total store sales rose 4 percent to $437.8 million, and direct sales jumped 10 percent to $207.8 million, while company comparable store sales fell by 1.7%.

By brand, J.Crew sales rose 3 percent to $576.4 million, while Madewell sales jumped by an impressive 32 percent to $69 million.

Gross margin fell by 370 basis points to 40.2%. Most of this was due to promotional activity implemented by the company to manage inventory levels ahead of the holiday season.

In the third quarter, the men’s business, which represents about a quarter of revenues, reportedly did better than women’s, a trend that is expected to continue given declining mall and street traffic and the difficult competitive environment characterized by day-in, day-out promotions. The women’s business totaled 55 percent of third-quarter revenues, down from 57 percent in the same period last year.

SGA of $215.7 million represented 32.9% of revenues compared to 30.5% of revenues for the same period last year. Much of the increase in SG&A was due to the 28 new stores opened in the quarter, 11 of which were J.Crew retail, eight were J.Crew factory, and nine were Madewell.

The company posted an operating loss of $636.3 million, compared with a profit of $82.9 million in the third quarter of last year. The loss reflects the impact of a pre-tax, non-cash impairment charge for the write-down of the value of its retail store operations of $684 million. The company suffered a decline in store profitability in the third quarter, driven by the disappointing performance of its women’s and non-apparel businesses, but stressed that the write-down has no impact on liquidity.

Excluding the impairment charge, operating income would have been $47.6 million, or 18 percent of revenues, compared to 30 percent of revenues in the prior year period. The resulting net loss was $607.8 million compared to net income of $35.4 million in the third quarter of last year.

As of the end of the quarter, the company operates 495 stores in the U.S. and internationally, of which 280 are J.Crew, 135 are Factory, and 80 are Madewell.

On the quarterly earnings conference call, COO Jim Scully said that while management was disappointed in the results, “We continue to make important investments in our long-term growth strategies while managing through the tough near-term trends.”