J.Crew Group, fiscal year 2014 results

J.Crew Groupis an internationally recognized omni-channel retailer of women’s, men’s and children’s apparel, shoes and accessories and, last Wednesday announced financial results for the three months and fiscal year endedJanuary 31, 2015.

• Total revenues increased 3% to$705.3 million. Comparable company sales decreased 3% following an increase of 3% in the fourth quarter last year. Total e-commerce sales increased 4% to$247.8 millionfollowing an increase of 10% in the fourth quarter last year.
• J.Crew sales decreased 0.1% to$620.7 million. J.Crew comparable sales decreased 5% following an increase of 3% in the fourth quarter last year. Madewell sales increased 33% to$73.7 million. Madewell comparable sales increased 14% following an increase of 10% in the fourth quarter last year.
• Gross margin was 34.5% compared to 36.8% in the fourth quarter last year.

• Selling, general and administrative expenses were$236.2 million, or 33.5% of revenues, compared to$213.8 million, or 31.2% of revenues in the fourth quarter last year.
• Operating loss was$18.7 millioncompared with operating income of$37.6 millionin the fourth quarter last year. The operating loss includes a non-cash charge of$26.0 millionrelated to the finalization of the third quarter goodwill impairment.
• Net loss was$30.6 millioncompared with net income of$5.9 millionin the fourth quarter last year. The net loss reflects the impact of the finalization of the third quarter goodwill impairment.
• Adjusted EBITDA was$42.1 millioncompared to$75.7 millionin the fourth quarter last year. An explanation of the manner in which the Company uses adjusted EBITDA and a reconciliation to GAAP measures are included in Exhibit (3).

Fiscal 2014 highlights:

• Total revenues increased 6% to$2,579.7 million. Comparable company sales decreased 1% following an increase of 3% last year. Total e-commerce sales increased 9% to$826.2 millionfollowing an increase of 16% last year.
• J.Crew sales increased 4% to$2,295.1 million. J.Crew comparable sales decreased 2% following an increase of 3% last year. Madewell sales increased 35% to$245.3 million. Madewell comparable sales increased 14% following an increase of 9% last year.
• Gross margin was 37.6% compared to 41.4% last year.
• Selling, general and administrative expenses were$846.0 million, or 32.8% of revenues, compared to$754.3 million, or 31.1% of revenues, last year.
• Operating loss was$585.0 millioncompared with operating income of$249.9 millionlast year. The operating loss includes non-cash impairment charges of$710 million.
• Net loss was$657.8 millioncompared with net income of$88.1 millionlast year. The net loss reflects the impact of (i) non-cash impairment charges and (ii) the loss on refinancings incurred in connection with the refinancing of our term loan facility, the redemption of our senior notes and refinancing of our ABL facility.
• Adjusted EBITDA was$255.2 millioncompared to$370.2 millionlast year. An explanation of the manner in which the Company uses adjusted EBITDA and a reconciliation to GAAP measures are included in Exhibit (3).

Balance Sheet highlights:

• Cash and cash equivalents were$111.1 millioncompared to$156.6 millionat the end of the fourth quarter last year.
• Total debt, net of discount, was$1,548 millionreflecting the new senior secured term loan which matures in 2021. Total debt of$1,567 millionin the fourth quarter last year consisted of (i) the former senior secured term loan of$1,167 millionand (ii) senior unsecured notes of$400 million, which were refinanced and redeemed in the first quarter of fiscal 2014.
• Inventories were$367.9 millioncompared to$354.0 millionat the end of the fourth quarter last year. Inventories increased 4% and inventories per square foot decreased 6% compared to the end of the fourth quarter last year.

During the first half of fiscal 2014, the Company determined that there was substantial deterioration in the excess of fair value over the carrying value of its Stores reporting unit. During the third quarter, the Company saw a further significant reduction in the profitability of its Stores reporting unit, primarily driven by performance of women’s apparel and accessories in stores.

As a result of current and expected future operating results, the Company concluded that the carrying value of the Stores reporting unit exceeded its fair value and recorded a non-cash goodwill impairment charge of$562 million, of which$26 millionwas recorded in the fourth quarter. Additionally, the Company recorded a non-cash impairment charge of$145 millionto write down the intangible asset related to the J.Crew trade name.

These impairment charges do not have an effect on the Company’s operations, liquidity or financial covenants, and do not change management’s long-term strategy, which includes its plans to drive disciplined growth across its brands. If operating results continue to decline below the Company’s expectations, additional impairment charges may be recorded in the future.In the fourth quarter of fiscal 2014, the Company changed its operating segments and reporting units to align with its omni-channel strategy, which focuses on a seamless approach to the customer experience through all available sales channels.

Prior to such change, as a multi-channel retailer, the Company allocated resources to its channels, Stores and Direct. As an omni-channel retailer, the Company now allocates resources to its brands. Therefore, the Company has determined its operating segments to be J.Crew and Madewell, which have been aggregated into one reportable segment. The goodwill allocated to the J.Crew and Madewell reporting units is$1,017 millionand$108 million, respectively.