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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 October 28, 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 November 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
<TABLE>
<CAPTION>
October 28, January 29,
Assets 2000 2000
------ ---- ----
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,737 $ 38,693
Merchandise inventories 164,623 129,928
Prepaid expenses and other current assets 26,459 30,083
Net assets held for disposal 4,741 8,927
--------- ---------
Total current assets 217,560 207,631
Property and equipment - at cost 252,295 216,083
Less accumulated depreciation and amortization (94,468) (77,683)
--------- ---------
157,827 138,400
--------- ---------
Deferred income tax assets 14,830 14,830
Other assets 11,384 12,743
--------- ---------
Total assets $ 401,601 $ 373,604
========= =========
Liabilities and Stockholders' Defi cit
-------------------------------------
Current liabilities:
Notes payable - bank $ 32,000 $ --
Accounts payable and other current liabilities 106,746 111,173
Federal and state income taxes 6,550 14,687
Deferred income tax liabilities 5,842 5,842
--------- ---------
Total current liabilities 151,138 131,702
--------- ---------
Long-term debt 290,687 284,684
--------- ---------
Deferred credits and other long-term liabilities 56,085 48,277
--------- ---------
Redeemable preferred stock 193,042 173,534
--------- ---------
Stockholders' deficit (289,351) (264,593)
--------- ---------
Total liabilities and stockholders' deficit $ 401,601 $ 373,604
========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Thirty-nine weeks ended
October 28, October 30,
----------- ------------
2000 1999
---- ----
(unaudited)
(in thousands)
<S> <C> <C>
Revenues:
Net sales $514,231 $464,006
Other 2,169 2,083
-------- --------
516,400 466,089
Cost of goods sold including buying and occupancy costs 280,800 262,346
Selling, general and administrative expenses 218,000 197,964
-------- --------
Income from operations 17,600 5,779
Interest expense - net (27,233) (28,659)
-------- --------
Loss before income taxes (9,633) (22,880)
Income tax benefit 3,900 9,350
-------- --------
Net loss $ (5,733) $(13,530)
======== ========
</TABLE>
See 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
October 28, October 30,
----------- ------------
2000 1999
---- ----
(unaudited)
(in thousands)
<S> <C> <C>
Revenues:
Net sales $193,971 $173,714
Other 796 690
-------- --------
194,767 174,404
Cost of goods sold including buying and occupancy costs 104,000 96,065
Selling, general and administrative expenses 74,017 66,484
-------- --------
Income from operations 16,750 11,855
Interest expense - net (9,213) (9,906)
-------- --------
Income before income taxes 7,537 1,949
Income taxes (3,000) (800)
-------- --------
Net income $ 4,537 $ 1,149
======== ========
</TABLE>
See 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>
Thirty-nine weeks ended
-----------------------
October 28, October 30,
----------- -----------
2000 1999
---- ----
(unaudited)
(in thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (5,733) $(13,530)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 15,993 12,917
Writeoff of software development costs -- 750
Amortization of deferred financing costs 1,647 1,649
Amortization of restricted stock 496 496
Noncash interest expense 10,003 8,815
Changes in operating assets and liabilities:
Merchandise inventories (34,695) (4,078)
Prepaid expenses and other current assets 3,624 (489)
Net assets held for disposal 4,186 1,960
Other assets (398) (858)
Accounts payable and other liabilities (4,145) (6,420)
Federal and state income taxes (8,137) (1,672)
-------- --------
Net cash used in operating activities (17,159) (460)
======== ========
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (39,560) (35,831)
Proceeds from construction allowances 11,776 6,881
-------- --------
Net cash used in investing activities (27,784) (28,950)
======== ========
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable, bank 32,000 39,000
Repayment of long-term debt (4,000) --
Proceeds from the exercise of stock options 14 --
Purchase of common stock (27) --
-------- --------
Net cash provided by financing activities 27,987 39,000
-------- --------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (16,956) 9,590
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 38,693 9,643
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21,737 $ 19,233
======== ========
NON-CASH FINANCING ACTIVITIES:
Dividends on preferred stock $ 19,508 $ 11,092
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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J.CREW GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEKS AND THIRTEEN WEEKS ENDED OCTOBER 28, 2000 AND OCTOBER 30,1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of J.Crew Group, Inc. and its wholly owned subsidiaries (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
The consolidated balance sheet as of October 28, 2000 and the consolidated
statements of operations and cash flows for the thirteen and thirty-nine week
periods ended October 28, 2000 and October 30, 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 a 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 and thirty-nine weeks ended October 29,
2000 and October 30, 1999 were not material and, as a result, have been netted
in the accompanying condensed consolidated statements of operations. In
February 2000, the Company sold certain intellectual property assets of Clifford
& Wills, Inc. 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 and thirty-nine week periods ended
October 28, 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 - Thirteen weeks ended October 28, 2000 versus thirteen
weeks ended October 30, 1999
Revenues for the three months ended October 28, 2000 increased to $194.8 from
$174.4 million for the three months ended October 30, 1999, an increase of
11.7%. This increase resulted primarily from an increase of $23.1 million in
the net sales of J.Crew Retail.
Revenues of J.Crew Retail increased from $79.7 million in the third quarter of
1999 to $102.8 million in the third quarter of 2000. This increase was due
primarily to the sales from the new stores opened for less than a full fiscal
year. Comparable stores sales in the third quarter of 2000 increased by 8.9%.
The number of stores open at October 28, 2000 increased to 103 from 88 at July
29, 2000.
Revenues of J.Crew Direct increased from $61.6 million in the third quarter of
1999 to $61.9 million in the third quarter of 2000. Revenues from jcrew.com
increased to $26.5 million in the third quarter of 2000 from $17.2 million in
the third quarter of 1999. Catalog revenues decreased to $35.4 million in the
third quarter of 2000 compared to $44.4 million in the third quarter of 1999, as
the Company continued to migrate customers to the Internet. Pages circulated
were approximately the same during both periods.
Revenues of J.Crew Factory decreased from $32.4 million in the third quarter of
1999 to $29.3 million in the third quarter of 2000. This decrease resulted
primarily from a decrease of 5.3% in comp store sales.
Cost of goods sold, including buying and occupancy costs, decreased as a
percentage of revenues from 55.1% in the third quarter of 1999 to 53.4% in the
third quarter of 2000. This decrease resulted primarily from an increase in
initial markup and a better inventory mix in J.Crew Factory.
Selling, general and administrative expenses increased to $74.0 million in the
three months ended October 28, 2000 from $66.5 million in the three months ended
October 30, 1999. As a percentage of revenues, selling, general and
administrative expenses decreased to 38.0% of revenues in the third quarter of
2000 from 38.1% in the third quarter of 1999. The increase in dollar amount
resulted from an increase in general and administrative expenses of $9.1 million
due primarily to the increase in the number of retail stores in operation during
the third quarter of 2000 compared to the third quarter of 1999 offset by a
decrease in
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selling expense from the third quarter of 1999 to the third quarter of 2000 of
$1.6 million. This decrease resulted from direct advertising related to
jcrew.com of $3.0 million in the third quarter of 1999 which did not occur in
the third quarter of 2000 offset by higher catalog costs in the third quarter of
2000.
The decrease in interest expense from $9.9 million in the three months ended
October 30, 1999 to $9.2 million in the three months ended October 28, 2000
resulted primarily from the pay down of $14 million of the term loan subsequent
to the third quarter of 1999 and a decrease in average borrowings under
revolving credit arrangements, which were $19.9 million in the third quarter of
2000 compared to $43.1 million in the third quarter of 1999. Non cash interest
expense was $4.0 million in the third quarter of 2000 compared to $3.6 million
in the third quarter of 1999.
The increase in income before income taxes from $1.9 million in the three months
ended October 30, 1999 to $7.5 million in the three months ended October 28,
2000 resulted primarily from the improvement in sales volume and merchandise
margins and the decrease in marketing expenses incurred by jcrew.com compared to
the third quarter of 1999.
Results of Operations - Thirty-nine weeks ended October 28, 2000 versus thirty-
nine weeks ended October 30, 1999.
Revenues for the nine months ended October 28, 2000 increased to $516.4 million
from $466.1 million in the nine months ended October 30, 1999, an increase of
10.8%. This increase resulted from an increase in the net sales of J.Crew
Retail of $53.0 million.
Revenues of J.Crew Retail increased from $215.7 million in the nine months ended
October 30, 1999 to $268.7 million in the nine months ended October 28, 2000.
This increase was due primarily to sales from new stores opened for less than a
full fiscal year. Comparable store sales in the nine months ended October 28,
2000 increased by 5.5%. The number of stores open at October 28, 2000 increased
to 103 from 81 at January 29, 2000.
Revenues of J.Crew Direct increased from $171.4 million in the nine months ended
October 30, 1999 to $172.8 million in the nice months ended October 28, 2000.
Revenues from jcrew.com increased to $63.5 in the first nine months of 2000 from
$36.5 million in the first nine months 1999. Catalog revenues decreased to
$109.3 million in the first nine months of 2000 from $134.9 million in the first
nine months of 1999, as the Company continues to migrate customers to the
Internet. Pages circulated were approximately the same during both periods.
Revenues of J.Crew Factory decreased from $77.0 million in the nine months ended
October 30, 1999 to $72.7 million in the nine months ended October 28, 2000.
This decrease resulted primarily from a decrease in the number of stores from 44
at October 30, 1999 to 41 at October 28, 2000.
Cost of goods sold, including buying and occupancy costs, decreased as a
percentage of revenues from 56.3% in the nine months ended October 30, 1999 to
54.4% in the nine months ended October 28, 2000. This decrease resulted
primarily from an increase in initial markup and a better inventory mix in
J.Crew Factory.
Selling, general and administrative expenses increased to $218.0 million in the
nine months ended October 28, 2000 from $198.0 million in the nine months ended
October 30, 1999. As a percentage of revenues, selling, general and
administrative expenses decreased to 42.2% of revenues in the nine months ended
October 28, 2000 from 42.5% in the nine months ended October 30, 1999. The
increase in dollar amount resulted from an increase in general and
administrative expenses of $24.2 million due to (a) the increase in the number
of retail stores in operation during the first nine months of 2000 compared to
the first nine months of 1999 and (b) an increase in the bonus provision during
the first nine months of 2000. Selling expenses were $43.9 million for the nine
months ended October 28, 2000 compared to $48.1 million for the nine months
ended October 30, 1999. The decrease in selling expenses was attributable
primarily to direct advertising related to jcrew.com of $3.0 million incurred
in the third quarter of 1999.
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The decrease in interest expense from $28.7 million in the nine months ended
October 30, 1999 to $27.2 million in the first nine months of 2000 resulted
primarily from the pay down of $14 million of the term loan subsequent to the
third quarter of 1999 and a decrease in average borrowings under revolving
credit arrangements, which were $9.9 million in the nine months ended October
28, 2000 compared to $34.7 million in the nine months ended October 30, 1999.
Non-cash interest expense was $11.7 million in the first nine months of 2000
compared to $10.5 million in the first nine months of 1999.
The decrease in the loss before income taxes from $22.9 million in the nine
months ended October 30, 1999 to $9.4 million in the nine months ended October
28, 2000 resulted primarily from the improvement in sales volume and merchandise
margin and the decrease in marketing expense related to jcrew.com in the nine
months ended October 28, 2000 compared to the nine months ended October 30,
1999.
Liquidity and Capital Resources
Cash flows from operations decreased from a use of $ .5 million in the nine
months ended October 30, 1999 to a use of $17.2 million in the nine months
ended October 28, 2000. This increase in cash used in operations resulted
primarily from an increase in the change in inventories during the nine months
ended October 28, 2000 compared to the same period in the prior year.
Capital expenditures, net of construction allowances, were $27.7 million in the
first nine months of 2000 compared to $29.0 million in the first nine months of
1999. These expenditures were incurred in connection with the acquisition of
computer hardware and software and the construction of new stores.
Borrowings under the revolving credit line were $ 32.0 million at October 28,
2000 compared to $53.0 million at October 30,1999.
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.
Seasonality
The Company's retail and direct businesses experience 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 in October 1997, which converted the variable interest rate
for $50 million of debt to a fixed rate of 6.23%. The swap agreement expired in
October 2000 and was not renewed because the Company's exposure under the
Revolving Credit Facility and Term Loan Facility have been substantially
reduced.
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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 October 28, 2000 were
approximately $38.2 million.
The Company has a licensing agreement in Japan which provides for royalty
payments based on sales of J.Crew merchandise denominated in yen. The Company
has from time to time entered into forward foreign exchange contracts to
minimize this risk. There were no foreign exchange contracts outstanding as of
October 28, 2000
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In the period covered by this Report, 2000 shares of Registrant's
Common Stock were issued upon the exercise of stock options. The shares
were issued in reliance on the exemption provided by Section 4 (2) of
the Securities Act of 1933, as amended.
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: December 5, 2000 By: /s/ Mark Sarvary
---------------------------
Mark Sarvary
Chief Executive Officer
Date: December 5, 2000 By: /s/ Scott M. Rosen
---------------------------
Scott M. Rosen
Chief Financial Officer
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