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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2000
Commission file number 333-42427
J. CREW GROUP, INC.
(Exact name of registrant as specified in its charter)
New York 22-2894486
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
770 Broadway, New York, New York 10003
(Address of principal executive offices)
(Zip code)
(212) 209-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No __
----
As of May 25, 2000 there were outstanding 11,726,865 shares of Common Stock, par
value $.01 per share.
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Part I - Financial Information
Item I. Financial Statements
J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Balance Sheets
April 29, January 29,
Assets 2000 2000
------ ---- ----
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 18,370 $ 38,693
Merchandise inventories 135,455 129,928
Prepaid expenses and other current assets 22,125 30,083
Net assets held for disposal 5,056 8,927
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Total current assets 181,006 207,631
Property and equipment - at cost 225,793 216,083
Less accumulated depreciation and amortization (83,837) (77,683)
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141,956 138,400
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Deferred income tax assets 14,830 14,830
Other assets 12,331 12,743
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Total assets $ 350,123 $ 373,604
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Liabilities and Stockholders' Deficit
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Current liabilities:
Notes payable - bank $ 14,000 $ --
Accounts payable and other current liabilities 87,345 111,173
Federal and state income taxes 6,983 14,687
Deferred income tax liabilities 5,842 5,842
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Total current liabilities 114,170 131,702
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Long-term debt 283,890 284,684
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Deferred credits and other long-term liabilities 48,157 48,277
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Redeemable preferred stock 179,809 173,534
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Stockholders' deficit (275,903) (264,593)
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Total liabilities and stockholders' deficit $ 350,123 $ 373,604
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Thirteen Weeks Ended
April 29, May 1,
-------- -----
2000 1999
---- ----
(unaudited)
(in thousands)
<S> <C> <C>
Revenues:
Net sales $ 158,032 $142,280
Other 777 695
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158, 809 142,975
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Cost of goods sold including buying and occupancy costs 85,479 78,918
Selling, general and administrative expenses 73,162 68,173
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Income/(loss) from operations 168 (4,116)
Interest expense - net (8,838) (9,244)
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Loss before income taxes (8,670) (13,360)
Income tax benefit 3,470 5,350
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Net loss $ (5,200) $ (8,010)
========= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
April 29, May 1,
-------- -----
2000 1999
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(unaudited)
(in thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (5,200) $ (8,010)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,850 3,977
Amortization of deferred financing costs 552 552
Amortization of restricted stock 165 140
Noncash interest expense 3,206 2,828
Changes in operating assets and liabilities:
Merchandise inventories (5,527) (6,083)
Prepaid expenses and other current assets 7,958 11,089
Other assets (173) (855)
Net assets held for disposal 3,871 (4,594)
Accounts payable and other liabilities (24,127) (18,590)
Federal and state income taxes (7,704) 2,535
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Net cash used in operating activities (22,129) (17,011)
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CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (9,710) (7,712)
Proceeds from construction allowances 1,516 1,110
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Net cash used in investing activities (8,194) (6,602)
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CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable, bank 14,000 25,000
Repayment of long-term debt (4,000) --
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Net cash provided by financing activities 10,000 25,000
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(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (20,323) 1,387
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 38,693 9,643
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 18,370 $ 11,030
======== ========
NON-CASH FINANCING ACTIVITIES:
Dividends on preferred stock $ 6,275 $ 5,444
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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J. CREW GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended May 1, 1999 and April 29, 2000
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of J. Crew Group, Inc. and its wholly-owned
subsidiaries (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The condensed consolidated balance sheet as of April 29, 2000 and the
condensed consolidated statements of operations and cash flows for the
thirteen week periods ended April 29, 2000 and May 1, 1999 have been
prepared by the Company and have not been audited. In the opinion of
management, all adjustments, consisting of only normal recurring
adjustments necessary for the fair presentation of the financial
position of the Company, the results of its operations and cash flows
have been made.
Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's consolidated financial
statements for the fiscal year ended January 29, 2000.
The revenues and expenses of the discontinued Clifford and Wills
catalog and outlet store operations for the thirteen weeks ended April
29, 2000 and May 1, 1999 were not material and, as a result, have been
netted in the accompanying consolidated statement of operations. In
February 2000 the Company sold certain intellectual property assets to
Spiegel Catalog, Inc. for $3.9 million. In connection with this sale
the Company agreed to cease the fulfillment of catalog orders but
retained the right to operate its outlet stores and conduct other
liquidation sales of inventories through December 31, 2000.
The results of operations for the thirteen week period ended April 29,
2000 are not necessarily indicative of the operating results for the
full fiscal year.
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Forward-looking statements
Certain statements in this Report on Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. We may also make written or oral forward-looking statements in our
periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q,
8-K, etc., in press releases and other written materials and in oral statements
made by our officers, directors or employees to third parties. Statements that
are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of the Company, or
industry results, to differ materially from historical results, any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such risks and uncertainties include, but are not limited
to, competitive pressures in the apparel industry, changes in levels of consumer
spending or preferences in apparel and acceptance by customers of the Company's
products, overall economic conditions, governmental regulations and trade
restrictions, political or financial instability in the countries where the
Company's goods are manufactured, postal rate increases, paper and printing
costs the level of the Company's indebtedness and exposure to interest rate
fluctuations, and other risks and uncertainties described in this report and the
Company's other reports and documents filed or which may be filed, from time to
time, with the Securities and Exchange Commission. These statements are based
on current plans, estimates and projections, and therefore, you should not place
undue reliance on them. Forward-looking statements speak only as of the date
they are made and we undertake no obligation to update publicly any of them in
light of new information or future events.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended April 29, 2000 increased to $158.8 million
from $143.0 million in the three months ended May 1, 1999. This increase can be
attributed primarily to an increase of $14.1 million in J. Crew Retail revenues.
The revenues of J. Crew Retail increased from $64.6 million in the first quarter
of 1999 to $78.7 million in the first quarter of 2000. This increase was due
primarily to the sales from the 16 stores opened during 1999. Comparable store
sales in the first quarter of 2000 increased by 3.2%. The number of stores open
at April 29, 2000 increased to 83 from 81 at January 29, 2000.
The revenues of J. Crew Direct increased from $58.6 million in the first quarter
of 1999 to $60.2 million in the first quarter of 2000. Revenues from jcrew.com
(which are included in J. Crew Direct revenues) increased to $19.4 million in
first quarter of 2000 from $9.9 million in the first quarter of 1999. Catalog
revenues in the first quarter of 2000 decreased to $40.8 million from $48.7
million in the first quarter of 1999, as the Company continues to migrate
customers to the Internet. Pages circulated were approximately the same in both
periods.
The revenues of J. Crew Factory increased from $19.0 million in the first
quarter of 1999 to $19.1 million in the first quarter of 2000. There were 42
stores open during the first quarter of 2000 compared to 45 stores during the
first quarter of 1999.
Cost of goods sold, including buying and occupancy costs, decreased as a
percentage of revenues from 55.2% in the first quarter of 1999 to 53.8% in the
first quarter of 2000. This decrease is attributable primarily to an increase
in initial mark-up and a decrease in buying and occupancy costs as a percentage
of revenues.
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Selling, general and administrative expenses increased to $73.2 million in the
three months ended April 29, 2000 from $68.2 million in the three months ended
May 1, 1999. This increase resulted from an increase in general and
administrative expenses of $8.6 million offset by a decrease in selling expense
of $3.6 million. The increase in general and administrative expenses was due
primarily to the increase in the number of retail stores in operation during the
first quarter of 2000 compared to the first quarter of 1999. The decrease in
selling expense from the first quarter of 1999 to the first quarter of 2000
resulted from higher catalog costs in the first quarter of 1999. As a
percentage of revenues, selling, general and administrative expenses decreased
to 46.1% of revenues in the first quarter of 2000 from 47.7% in the first
quarter of 1999.
The decrease in interest expense from $9.2 million in the first quarter of 1999
to $8.8 million in the first quarter of 2000 resulted primarily from the
repayment of $10 million of the term loan in the fourth quarter of 1999 and a
decrease in average borrowings under revolving credit arrangements from $26.5
million in the first quarter of 1999 to $1.7 million in the first quarter of
2000. Non-cash interest expense increased to $3.8 million in the first quarter
of 2000 from $3.4 million in the first quarter of 1999.
The decrease in the loss before income taxes from $13.4 million in the three
months ended May 1, 1999 to $8.7 million in the three months ended April 29,
2000 resulted primarily from the improvement in sales volume and merchandising
margin.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operations increased from $17.0 million in the first quarter
of 1999 to $22.1 million in the first quarter of 2000.This increase in cash used
in operations resulted primarily from the payment of $4.2 million of federal and
state income taxes in the first quarter of 2000 compared to payments of $.6
million and the receipt of an income tax refund of $8.4 million in the first
quarter of 1999 and a change in the decrease in accounts payable and other
liabilities of $5.5 million; offset by a decrease in net assets held for
disposal of $8.5 million.
Capital expenditures, net of construction allowances, were $8.2 million in the
first quarter of 2000 compared to $6.6 million in the first quarter of 1999.
These expenditures were incurred primarily in connection with the construction
of new stores and systems enhancements.
Borrowings under the revolving credit line were $14.0 million at April 29, 2000
compared to $39.0 million at May 1, 1999. During the first quarter of 2000 the
Company paid down an additional $4.0 million of the term loan, reducing the
balance at April 29, 2000 to $30.0 million.
Management believes that cash flow from operations and availability under the
revolving credit facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to refinance indebtedness
and to remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control.
7
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YEAR 2000
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The Company completed its year 2000 software program conversions and compliance
programs during the fourth quarter of 1999. Total external costs for such
programs were approximately $2.6 million. All costs have been substantially
incurred as of April 29, 2000. The Company has not experienced any material
Year 2000 problems subsequent to December 31, 1999. The Company will continue
to monitor its compliance and the compliance of its third party suppliers whose
operations are material to its business.
SEASONALITY
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The Company experiences two distinct selling seasons, spring and fall. The
spring season is comprised of the first and second quarters and the fall season
is comprised of the third and fourth quarters. Net sales are usually
substantially higher in the fall season and selling, general and administrative
expenses as a percentage of net sales are usually higher in the spring season.
Approximately 35% of annual net sales in fiscal year 1999 occurred in the fourth
quarter. The Company's working capital requirements also fluctuate throughout
the year, increasing substantially in September and October in anticipation of
the holiday season inventory requirements.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's principal market risk relates to interest rate sensitivity, which
is the risk that future changes in interest rates will reduce net income or the
net assets of the Company. The Company's variable rate debt consists of
borrowings under the Revolving Credit Facility and the Term Loan Facility. In
order to manage this interest rate risk, the Company entered into an interest
rate swap agreement which expires in October 2000 which converts the variable
interest rate for $50 million of debt to a fixed rate of 6.23%. If this
interest rate swap agreement was settled on April 29, 2000 the Company would
have received $95,000.
The Company enters into letters of credit to facilitate the international
purchase of merchandise. The letters of credit are primarily denominated in
U.S. dollars. Outstanding letters of credit at April 29, 2000 were
approximately $28.9 million.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the period covered by
this Report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J. CREW GROUP, INC.
(Registrant)
Date: June 7, 2000 By: /s/ Mark Sarvary
-------------------
Mark Sarvary
Chief Executive Officer
Date: June 7, 2000 By: /s/ Scott M. Rosen
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Scott M. Rosen
Chief Financial Officer
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