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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 August 3, 2002
IRS Employer Exact name of Registrant, State of Incorporation;
Identification No. Address of Principal Executive Offices; and Telephone Number
22-2894486 J. Crew Group, Inc.
(A New York corporation)
770 Broadway
New York, New York 10003
(212) 209-2500
22-3540930 J. Crew Operating Corp.
(A Delaware corporation)
770 Broadway
New York, New York 10003
(212) 209-2500
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes_x_ No __
The number of shares of Common Stock outstanding of each of the issuers as of
August 30, 2002
J. Crew Group, Inc.
11,748,789 shares of Common Stock, par value $.01 per share
J. Crew Operating Corp.
100 shares of Common Stock, par value $.01 per share (all of
which are owned beneficially and of record by J.Crew Group,
Inc.)
This Quarterly Report on Form 10-Q is a combined report being filed by two
different registrants: J. Crew Group, Inc. ("Holdings") and J. Crew Operating
Corp., a wholly owned subsidiary of Holdings ("Operating Corp"). Except where
the content clearly indicates otherwise, any references in this report to the
"Company" or "J.Crew" include all subsidiaries of Holdings, including Operating
Corp. Operating Corp. makes no representation as to the information contained in
this report in relation to Holdings and its subsidiaries other than Operating
Corp.
J. Crew Operating Corp. meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
Part I - Financial Information
Item I. Financial Statements
J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Balance Sheets
August 3, February 2,
Assets 2002 2002
------ ---- ----
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 13,996 $ 16,201
Merchandise inventories 138,926 138,918
Prepaid expenses and other current assets 22,717 27,026
Federal and state income taxes 1,956 --
---------- ---------
Total current assets 177,595 182,145
Property and equipment - at cost 309,711 293,700
Less accumulated depreciation and amortization (124,578) (106,427)
---------- ---------
185,133 187,273
---------- ---------
Deferred income tax assets 18,071 18,071
Other assets 14,102 13,831
---------- ---------
Total assets $ 394,901 $ 401,320
========== =========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Notes payable - bank $ 48,000 $ --
Accounts payable and other current liabilities 93,788 128,491
Federal and state income taxes -- 8,840
Deferred income tax liabilities 5,650 5,650
---------- ---------
Total current liabilities 147,438 142,981
---------- ---------
Deferred credits and other long-term liabilities 66,502 67,235
---------- ---------
Long-term debt 288,308 279,687
---------- ---------
Redeemable preferred stock 247,452 230,460
---------- ---------
Stockholders' deficit (354,799) (319,043)
---------- ---------
Total liabilities and stockholders' deficit $ 394,901 $ 401,320
========== =========
See notes to unaudited condensed consolidated financial statements.
2
J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
Thirteen weeks ended
August 3, August 4,
--------- ---------
2002 2001
---- ----
(unaudited)
(in thousands)
Revenues:
Net sales $ 160,946 $ 160,455
Other 6,687 7,445
--------- ---------
167,633 167,900
Cost of goods sold including buying and occupancy costs 106,613 107,366
Selling, general and administrative expenses (Note 2) 62,478 65,564
--------- ---------
Loss from operations (1,458) (5,030)
Interest expense - net (9,540) (9,396)
--------- ---------
Loss before income taxes (10,998) (14,426)
Income tax benefit 3,850 5,860
--------- ---------
Net loss $ (7,148) $ (8,566)
========= =========
See notes to unaudited condensed consolidated financial statements.
3
J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
Twenty-six weeks ended
August 3, August 4,
--------- ---------
2002 2001
---- ----
(unaudited)
(in thousands)
Revenues:
Net sales $ 318,829 $ 319,418
Other 15,856 16,328
---------- ---------
334,685 335,746
Cost of goods sold including buying and occupancy costs 206,700 206,956
Selling, general and administrative expenses (Note 2) 138,425 141,049
---------- ---------
Loss from operations (10,440) (12,259)
Interest expense - net (19,133) (17,847)
---------- ---------
Loss before income taxes (29,573) (30,106)
Income tax benefit 10,350 12,200
---------- ---------
Net loss $ (19,223) $ (17,906)
========== =========
See notes to unaudited condensed consolidated financial statements.
4
J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Twenty-six weeks ended
----------------------
August 3, August 4,
--------- ---------
2002 2001
---- ----
(unaudited)
(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(19,223) $(17,906)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 16,496 13,896
Amortization of deferred financing costs 1,343 1,000
Non cash compensation expense (594) 963
Non cash interest expense 8,621 7,480
Changes in operating assets and liabilities:
Merchandise inventories (8) (12,962)
Prepaid expenses and other current assets 4,309 1,759
Other assets (1,696) (1,814)
Accounts payable and other liabilities (33,115) (8,638)
Federal and state income taxes (10,796) (18,591)
-------- --------
Net cash used in operating activities (34,663) (34,813)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (18,787) (33,288)
Proceeds from construction allowances 3,245 5,548
-------- --------
Net cash used in investing activities (15,542) (27,740)
-------- ========
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable, bank 48,000 44,000
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (2,205) (18,553)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 16,201 32,930
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,996 $ 14,377
======== ========
NON-CASH FINANCING ACTIVITIES:
Dividends on preferred stock $ 16,992 $ 14,726
======== ========
See notes to unaudited condensed consolidated financial statements.
5
J.CREW GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-six weeks ended August 3, 2002 and August 4, 2001
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 August 3, 2002 and the
condensed consolidated statements of operations and cash flows for the
thirteen and twenty-six week periods ended August 3, 2002 and August 4,
2001 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 accounting principles
generally accepted in the United States of America 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
February 2, 2002.
The results of operations for the twenty-six week period ended August
3, 2002 are not necessarily indicative of the operating results for the
full fiscal year.
2. Staff Reductions
During the first quarter of 2002 the Company recorded a pretax charge
of $4.6 million related to severance costs for approximately 120
employees and the departure of the former Chief Executive Officer. The
staff reductions occurred in the first quarter and approximately $3.0
million has been paid through the end of the second quarter.
3. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the Company to record
the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. The Company also records a
corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have a significant impact on the
Company's financial statements.
In July 2001, the FASB issued Statement of Financial Standards No. 141,
"Business Combinations" and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 eliminates
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001 and modifies the application of the
purchase accounting method effective for transactions that are
completed after June 30, 2001. SFAS 142 eliminated the requirement to
amortize goodwill and intangible assets having indefinite useful lives
but requires testing at least annually for impairment. Intangible
assets that have finite lives will continue to be amortized over their
useful lives. SFAS 142 applies to goodwill and intangible assets
arising from transactions completed before and after the Statement's
effective date of
6
January 1, 2002. The adoption of these statements in fiscal 2002 did
not have any effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and requires companies to separately report
discontinued operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for
sale. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 did not have a significant effect on the
Company's financial statements in fiscal 2002.
EITF Issue No. 01-9 "Accounting for Consideration Given to a Customer
or a Reseller of the Vendor's Products" (formerly EITF Issue 00-14) was
effective in the first quarter of fiscal year 2002. This EITF addresses
the accounting for and classification of consideration given to a
customer from a vendor in connection with the purchase or promotion of
the vendor's product. The adoption of this EITF did not have any effect
on the Company's financial statements.
7
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Condensed Consolidated Balance Sheets
August 3, February 2,
Assets 2002 2002
------ ---- ----
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 13,996 $ 16,201
Merchandise inventories 138,926 138,918
Prepaid expenses and other current assets 22,717 27,026
---------- ----------
Total current assets 175,639 182,145
Property and equipment - at cost 309,711 293,700
Less accumulated depreciation and amortization (124,578) (106,427)
---------- ----------
185,133 187,273
---------- ----------
Other assets 12,695 12,310
---------- ----------
Total assets $ 373,467 $ 381,728
========== ==========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Notes payable - bank $ 48,000 $ --
Accounts payable and other current liabilities 93,789 128,491
Federal and state income taxes 2,533 10,109
Deferred income tax liabilities 5,604 5,604
---------- ----------
Total current liabilities 149,926 144,204
---------- ----------
Deferred credits and other long-term liabilities 66,502 67,235
---------- ----------
Long-term debt 150,000 150,000
---------- ----------
Due to J.Crew Group, Inc. 1,142 1,142
---------- ----------
Stockholder's equity 5,897 19,147
---------- ----------
Total liabilities and stockholder's equity $ 373,467 $ 381,728
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
8
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
Thirteen weeks ended
August 3, August 4,
--------- ---------
2002 2001
---- ----
(unaudited)
(in thousands)
Revenues:
Net sales $ 160,946 $ 160,339
Other 6,687 7,498
--------- ---------
167,633 167,837
Cost of goods sold including buying and occupancy costs 106,613 107,329
Selling, general and administrative expenses (Note 2) 62,184 65,427
--------- ---------
Loss from operations (1,164) (4,919)
Interest expense - net (5,129) (5,505)
--------- ---------
Loss before income taxes (6,293) (10,424)
Income tax benefit 2,230 4,250
--------- ---------
Net loss $ (4,063) $ (6,174)
========= =========
See notes to unaudited condensed consolidated financial statements.
9
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
Twenty-six weeks ended
August 3, August 4,
--------- ---------
2002 2001
---- ----
(unaudited)
(in thousands)
Revenues:
Net sales $ 318,829 $ 319,302
Other 15,856 16,381
---------- ---------
334,685 335,683
Cost of goods sold including buying and occupancy costs 206,700 206,919
Selling, general and administrative expenses (Note 2) 137,966 140,747
---------- ---------
Loss from operations (9,981) (11,983)
Interest expense - net (10,399) (10,260)
---------- ---------
Loss before income taxes (20,380) (22,243)
Income tax benefit 7,130 9,000
---------- ---------
Net loss $ (13,250) $ (13,243)
========== =========
See notes to unaudited condensed consolidated financial statements.
10
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Twenty-six weeks ended
----------------------
August 3, August 4,
--------- ---------
2002 2001
---- ----
(unaudited)
(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(13,230) $(13,243)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 16,496 13,896
Amortization of deferred financing costs 1,200 886
Non cash compensation expense (1,053) 633
Changes in operating assets and liabilities:
Merchandise inventories (8) (12,962)
Prepaid expenses and other current assets 4,309 1,759
Other assets (1,696) (1,814)
Accounts payable and other liabilities (33,115) (8,577)
Federal and state income taxes (7,566) (15,391)
-------- --------
Net cash used in operating activities (34,663) (34,813)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (18,787) (33,288)
Proceeds from construction allowances 3,245 5,548
-------- --------
Net cash used in investing activities (15,542) (27,740)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable, bank 48,000 44,000
-------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (2,205) (18,553)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 16,201 32,930
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,996 $ 14,377
======== ========
See notes to unaudited condensed consolidated financial statements.
11
J.CREW OPERATING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-Six Weeks Ended August 3, 2002 and August 4, 2001
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of J. Crew Operating Corp. 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 August 3, 2002 and the
condensed consolidated statements of operations and cash flows for the
thirteen and twenty-six week periods ended August 3, 2002 and August 4,
2001 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 accounting principles
generally accepted in the United States of America 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
February 2, 2002.
The results of operations for the twenty-three week period ended August
3, 2002 are not necessarily indicative of the operating results for the
full fiscal year.
2. Staff Reductions
During the first quarter of 2002 the Company recorded a pretax charge
of $4.6 million related to severance costs for approximately 120
employees and the departure of the former Chief Executive Officer. The
staff reductions occurred in the first quarter and approximately $3.0
million has been paid through the end of the second quarter.
3. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the Company to record
the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the
retirement of tangible long-lived assets. The Company also records a
corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Management does not believe that
the adoption of SFAS No. 143 will have a significant impact on the
Company's financial statements.
In July 2001, the FASB issued Statement of Financial Standards No. 141,
"Business Combinations" and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets". SFAS 141 eliminates
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001 and modifies the application of the
purchase accounting method effective for transactions that are
completed after June 30, 2001. SFAS 142 eliminated the requirement to
amortize goodwill and intangible assets having indefinite useful lives
but requires testing at least annually for impairment. Intangible
assets that have finite lives will continue to be amortized over their
useful lives. SFAS 142 applies to goodwill and intangible assets
arising from transactions completed before and after the Statement's
effective date of
12
January 1, 2002. The adoption of these statements in fiscal 2002 did
not have any effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and requires companies to separately report
discontinued operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for
sale. This Statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS No. 144 did not have a significant effect on the
Company's financial statements in the first six months of fiscal 2002.
EITF Issue No. 01-9 "Accounting for Consideration Given to a Customer
or a Reseller of the Vendor's Products" (formerly EITF Issue 00-14) was
effective in the first quarter of fiscal year 2002. This EITF addresses
the accounting for and classification of consideration given to a
customer from a vendor in connection with the purchase or promotion of
the vendor's product. The adoption of this EITF did not have any effect
on the Company's financial statements.
13
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, acts of war or terrorism in the United States or worldwide,
political or financial instability in the countries where the Company's goods
are manufactured, postal rate increases, paper and printing costs, availability
of suitable store locations at appropriate terms, 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 - J.CREW GROUP, INC.
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED AUGUST 3, 2002 VERSUS THIRTEEN
WEEKS ENDED AUGUST 4, 2001.
Consolidated revenues decreased from $167.9 million in the thirteen weeks ended
August 4, 2001 to $167.6 million for the thirteen weeks ended August 3, 2002.
The revenues of J.Crew Retail increased from $91.2 million in the second quarter
of 2001 to $94.1 million in the second quarter of 2002. This increase was due to
the sales from new stores opened for less than a full year. Comparable store
sales in the second quarter of 2002 decreased by 11.4%. The number of stores
open at August 3, 2002 increased to 146 from 113 at August 3, 2001.
The revenues of J.Crew Direct (which includes the catalog and Internet
operations) increased from $45.2 million in the second quarter of 2001 to $45.9
million in the second quarter of 2002. Revenues from jcrew.com increased from
$21.0 million in second quarter of 2001 to $25.3 million in the second quarter
of 2002. Catalog revenues in the second quarter of 2002 decreased to $20.6
million from $24.2 million in the second quarter of 2001, as the Company
continued to migrate customers to the Internet. Pages circulated were
approximately the same in both periods.
The revenues of J.Crew Factory decreased from $24.1 million in the second
quarter of 2001 to $20.9 million in the second quarter of 2002. There were 43
stores open in the second quarter of 2002 compared to 41 stores in the second
quarter of 2001.
Other revenues decreased from $7.4 million in the second quarter of 2001 to $6.7
million in the second quarter of 2002, primarily as a result of a decrease in
shipping and handling fees.
Cost of goods sold, including buying and occupancy costs, decreased as a
percentage of revenues to 63.6% in the second quarter of 2002 from 64.0% in the
second quarter of 2001. This decrease is due to an increase in merchandising
margins of 90 basis points due primarily to a higher initial markup offset by an
increase in
14
buying and occupancy costs as a percentage of revenues of 50 basis points
resulting from negative leverage due to the decline in comparable store sales.
Selling, general and administrative expenses decreased from $65.6 million in the
second quarter of 2001 to $62.5 million in the second quarter of 2002. This
decrease resulted from a decrease in selling expense of $.7 million and a
decrease in general and administrative expenses of $2.4 million. The decrease in
selling expense resulted primarily from a decrease in printing and paper costs
in the second quarter of 2002 compared to the second quarter of 2001. The
decrease in general and administrative expenses was due primarily to severance
payments of $2.2 million which adversely effected the second quarter of 2001 and
the positive effect in the second quarter of 2002 from the cost reduction
initiatives adopted in the first quarter of 2002 offset by higher expenses as a
result of the increase in the number of retail stores in operation during the
second quarter of 2002 compared to second quarter of 2001. As a percentage of
revenues, selling, general and administrative expenses decreased from 39.0% in
the second quarter of 2001 to 37.3% of revenues in the second quarter of 2002.
The increase in interest expense from $9.4 million in the second quarter of 2001
to $9.5 million in the second quarter of 2002 resulted primarily from an
increase in non-cash interest expense, which increased to $4.9 million in the
second quarter of 2002 from $4.3 million in the second quarter of 2001. Non-cash
interest will convert to cash pay effective October 15, 2002 with the first
payment of $9.3 million due in April 2003. Average short-term borrowings during
the second quarter of 2002 were $48.0 million compared to $41.6 million in the
second quarter of 2001. This increase in average borrowings was offset by a
decrease in interest rates.
The effective tax rate decreased from (40.6%) in the second quarter of 2001 to
(35.0%) in the second quarter of 2002 due to a decrease in assumed state tax
benefits.
RESULTS OF OPERATIONS - TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 VERSUS TWENTY-SIX
WEEKS ENDED AUGUST 4, 2001.
Consolidated revenues for the twenty-six weeks ended August 3, 2002 decreased to
$334.7 million from $335.7 million in the twenty-six weeks ended August 4, 2001.
Revenues of J.Crew Retail increased from $176.0 million in the twenty-six weeks
ended August 4, 2001 to $179.8 million in the twenty-six weeks ended August 3,
2002. This increase was due to sales from the stores opened for less than a full
year. Comparable store sales in the twenty-six weeks ended August 3, 2002
decreased by 12.2%. The number of stores open at August 3, 2002 increased to 146
from 113 at August 4, 2001.
Revenues of J.Crew Direct (which includes the catalog and Internet operations)
increased from $100.9 million in the twenty-six weeks ended August 4, 2001 to
$102.1 million in the twenty-six weeks ended August 3, 2002. Revenues from
jcrew.com increased to $56.5 million in the twenty-six weeks ended August 3,
2002 from $46.3 million in the twenty-six weeks ended August 4, 2001. Catalog
revenues decreased from $54.6 million in the twenty-six weeks ended August 4,
2001 to $45.6 million in the twenty-six weeks ended August 3, 2002 as the
Company continued to migrate customers to the Internet.
Revenues of J.Crew Factory decreased from $42.5 million in the twenty-six weeks
ended August 4, 2001 to $36.9 million in the twenty-six weeks ended August 3,
2002. There were 43 stores open at August 3, 2002 compared to 41 stores at
August 4, 2001.
Other revenues decreased from $16.3 million in the twenty-six weeks ended August
4, 2001 to $15.9 million in the twenty-six weeks ended August 3, 2002 due
primarily to a decrease in licensing income.
Cost of goods sold, including buying and occupancy costs, increased as a
percentage of revenues from 61.6% in the twenty-six weeks ended August 4, 2001
to 61.8% in the twenty-six weeks ended August 3, 2002. This increase resulted
primarily from an increase in buying and occupancy costs as a percentage of
15
revenues of 120 basis points resulting from negative leverage due to the decline
in comparable store stores offset by an increase in merchandising margins of 100
basis points due primarily to a higher initial markup.
Selling, general and administrative expenses decreased from $141.0 million in
the twenty-six weeks ended August 4, 2001 to $138.4 million in the twenty-six
weeks ended August 3, 2002. This decrease resulted from a decrease in selling
expense of $5.4 million from $28.3 million in the six months ended August 4,
2001 to $22.9 million in the six months ended August 3, 2002, offset by an
increase in general and administrative expenses of $2.8 million from $112.7
million in the six months ended August 4, 2001 to $115.5 million in the six
months ended August 3, 2002. The decrease in selling expense was due primarily
to a shift in the timing of catalog circulation between the first quarter and
subsequent quarters in fiscal 2002, the mailing of several test editions in the
first quarter of 2001 and a decrease in paper and printing costs. The increase
in general and administrative expenses resulted from $4.8 million in severance
pay in the first six months of 2002 and higher store operating expenses due to
the increase in the number of retail stores in 2002 offset by the effects of
cost reduction initiatives adopted in the first quarter of 2002. The six month
period in 2001 was adversely effected by severance payments of $2.2 million in
the second quarter. As a percentage of revenues, selling, general and
administrative expense decreased to 41.4% of revenues in the twenty-six weeks
ended August 3, 2002 from 42.0% in the six months ended August 4, 2001.
The increase in interest expense from $17.8 million in the twenty-six weeks
ended August 4, 2001 to $19.1 million in the twenty-six weeks ended August 3,
2002 resulted primarily from an increase in non-cash interest expense to $10.0
million in the first six months of 2002 from $8.5 million in the same period
last year. Non-cash interest will convert to cash-pay effective October 15, 2002
with the first payment of $9.3 million due in April 2003. Average short-term
borrowings during the first six months of 2002 were $41.8 million compared to
$26.1 million in the first six months of 2001. The effect of this increase in
average borrowings was offset by a decrease in interest rates.
The effective tax rate decreased from (40.5%) in the twenty-six weeks ended
August 4, 2001 to (35.0%) in the twenty-six weeks ended August 3, 2002 due to a
decrease in assumed state tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations decreased from a use $34.8 million in the twenty-six
weeks ended August 4, 2001 to a use of $34.7 million in the twenty-six weeks
ended August 3, 2002. The decrease in working capital requirements in the first
half of fiscal 2002 resulted primarily from the decrease in inventories and
federal tax payments offset by the decrease in accounts payable and other
liabilities.
Capital expenditures, net of construction allowances, were $15.5 million in the
twenty-six weeks ended August 3, 2002 compared to $27.7 million in the same
period last year. Capital expenditures were incurred primarily for the
construction of new stores in fiscal 2002 and for the construction of new stores
and information systems enhancements in 2001. Capital expenditures for fiscal
year 2002 are expected to be approximately $20 million compared to $42.6 million
in fiscal year 2001.
Borrowings under the revolving credit line increased from $44.0 million at
August 4, 2001 to $48.0 million at August 3, 2002 as a result of the lower
invested cash position at the beginning of fiscal 2002 compared to fiscal 2001.
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.
16
SEASONALITY
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 2001 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - J.CREW OPERATING CORP.
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED AUGUST 3, 2002 VERSUS THIRTEEN
WEEKS ENDED AUGUST 4, 2001.
Consolidated revenues decreased from $167.9 million in the thirteen weeks ended
August 4, 2001 to $167.6 million for the thirteen weeks ended August 3, 2002.
The revenues of J.Crew Retail increased from $91.2 million in the second quarter
of 2001 to $94.1 million in the second quarter of 2002. This increase was due to
the sales from new stores opened for less than a full year. Comparable store
sales in the second quarter of 2002 decreased by 11.4%. The number of stores
open at August 3, 2002 increased to 146 from 113 at August 3, 2001.
The revenues of J.Crew Direct (which includes the catalog and Internet
operations) increased from $45.2 million in the second quarter of 2001 to $45.9
million in the second quarter of 2002. Revenues from jcrew.com increased from
$21.0 million in second quarter of 2001 to $25.3 million in the second quarter
of 2002. Catalog revenues in the second quarter of 2002 decreased to $20.6
million from $24.2 million in the second quarter of 2001, as the Company
continued to migrate customers to the Internet. Pages circulated were
approximately the same in both periods.
The revenues of J.Crew Factory decreased from $24.1 million in the second
quarter of 2001 to $20.9 million in the second quarter of 2002. There were 43
stores open in the second quarter of 2002 compared to 41 stores in the second
quarter of 2001.
Other revenues decreased from $7.4 million in the second quarter of 2001 to $6.7
million in the second quarter of 2002, primarily as a result of a decrease in
shipping and handling fees.
Cost of goods sold, including buying and occupancy costs, decreased as a
percentage of revenues to 63.6% in the second quarter of 2002 from 64.0% in the
second quarter of 2001. This decrease is due to an increase in merchandising
margins of 90 basis points due primarily to a higher initial markup offset by an
increase in buying and occupancy costs as a percentage of revenues of 50 basis
points resulting from negative leverage due to the decline in comparable store
sales.
Selling, general and administrative expenses decreased from $65.4 million in the
second quarter of 2001 to $62.2 million in the second quarter of 2002. This
decrease resulted from a decrease in selling expense of $.7 million and a
decrease in general and administrative expenses of $2.5 million. The decrease in
selling expense resulted primarily from a decrease in printing and paper costs
in the second quarter of 2002 compared to the second quarter of 2001. The
decrease in general and administrative expenses was due primarily to severance
payments of $2.2 million which adversely effected the second quarter of 2001 and
the positive effect in the second quarter of 2002 from the cost reduction
initiatives adopted in the first quarter of 2002 offset by higher expenses as a
result of the increase in the number of retail stores in operation during the
second quarter of 2002 compared to second quarter of 2001. As a percentage of
revenues, selling, general and administrative expenses decreased from 39.0% in
the second quarter of 2001 to 37.1% of revenues in the second quarter of 2002.
Interest expense decreased from $5.5 million in the second quarter of 2001 to
$5.1 million in the second quarter of 2002. Average short-term borrowings during
the second quarter of 2002 were $48.0 million compared to $41.6 million in the
second quarter of 2001, but the effect of this increase was offset by a decrease
in interest rates.
The effective tax rate decreased from (40.8%) in the second quarter of 2001 to
(35.4%) in the second quarter of 2002 due to a decrease in assumed state tax
benefits.
18
RESULTS OF OPERATIONS - TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 VERSUS TWENTY-SIX
WEEKS ENDED AUGUST 4, 2001.
Consolidated revenues for the twenty-six weeks ended August 3, 2002 decreased to
$334.7 million from $335.7 million in the twenty-six weeks ended August 4, 2001.
Revenues of J.Crew Retail increased from $176.0 million in the twenty-six weeks
ended August 4, 2001 to $179.8 million in the twenty-six weeks ended August 3,
2002. This increase was due to sales from the stores opened for less than a full
year. Comparable store sales in the twenty-six weeks ended August 3, 2002
decreased by 12.2%. The number of stores open at August 3, 2002 increased to 146
from 113 at August 4, 2001.
Revenues of J.Crew Direct (which includes the catalog and Internet operations)
increased from $100.9 million in the twenty-six weeks ended August 4, 2001 to
$102.1 million in the twenty-six weeks ended August 3, 2002. Revenues from
jcrew.com increased to $56.5 million in the twenty-six weeks ended August 3,
2002 from $46.3 million in the twenty-six weeks ended August 4, 2001. Catalog
revenues decreased from $54.6 million in the twenty-six weeks ended August 4,
2001 to $45.6 million in the twenty-six weeks ended August 3, 2002 as the
Company continued to migrate customers to the Internet.
Revenues of J.Crew Factory decreased from $42.5 million in the twenty-six weeks
ended August 4, 2001 to $36.9 million in the twenty-six weeks ended August 3,
2002. There were 43 stores open at August 3, 2002 compared to 41 stores at
August 4, 2001.
Other revenues decreased from $16.3 million in the twenty-six weeks ended August
4, 2001 to $15.9 million in the twenty-six weeks ended August 3, 2002 due
primarily to a decrease in licensing income.
Cost of goods sold, including buying and occupancy costs, increased as a
percentage of revenues from 61.6% in the twenty-six weeks ended August 4, 2001
to 61.8% in the twenty-six weeks ended August 3, 2002. This increase resulted
primarily from an increase in buying and occupancy costs as a percentage of
revenues of 120 basis points resulting from negative leverage due to the decline
in comparable store stores offset by an increase in merchandising margins of 100
basis points due primarily to a higher initial markup.
Selling, general and administrative expenses decreased from $140.7 million in
the twenty-six weeks ended August 4, 2001 to $138.0 million in the twenty-six
weeks ended August 3, 2002. This decrease resulted from a decrease in selling
expense of $5.4 million from $28.3 million in the six months ended August 4,
2001 to $22.9 million in the six months ended August 3, 2002, offset by an
increase in general and administrative expenses of $2.7 million from $112.4
million in the six months ended August 4, 2001 to $115.1 million in the six
months ended August 3, 2002. The decrease in selling expense was due primarily
to a shift in the timing of catalog circulation between the first quarter and
subsequent quarters in fiscal 2002, the mailing of several test editions in the
first quarter of 2001 and a decrease in paper and printing costs. The increase
in general and administrative expenses in the first six months of 2002 resulted
from $4.8 million in severance pay in the first six months of 2002 and higher
store operating expenses due to the increase in the number of retail stores in
2002 offset by the effects of cost reduction initiatives adopted in the first
quarter of 2002. The six month period in 2001 was adversely effected by
severance payments of $2.2 million in the second quarter. As a percentage of
revenues, selling, general and administrative expense decreased to 41.2% of
revenues in the six months ended August 3, 2002 from 41.9% in the six months
ended August 4, 2001.
Interest expense increased from $10.3 million in the twenty-six weeks ended
August 4, 2001 to $10.4 million in the twenty-six weeks ended August 3, 2002.
Average borrowings during the first six months of 2002 were $41.8 million
compared to $26.1 million in the first six months of 2001. The effect of this
increase in average borrowings was mitigated by a decrease in interest rates.
The effective tax rate decreased from (40.5%) in the twenty-six weeks ended
August 4, 2001 to (35.0%) in the twenty-six weeks ended August 3, 2002 due to a
decrease in assumed state tax benefits.
19
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 which averaged $41.8 million
during the first six months of 2002 compared to $26.1 million in the first six
months of 2001.
The Company has a licensing agreement in Japan which provides for royalty
payments based on sales of J.Crew merchandise as denominated in yen. The Company
has entered into forward foreign exchange contracts from time to time in order
to minimize this risk. At August 3, 2002 there were no forward foreign exchange
contracts outstanding.
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 August 3, 2002 were $67.8 million.
20
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Amended and Restated J. Crew Group, Inc. 1997 Stock Option
Plan.
10.2 Employment Agreement, dated August 26, 2002, among J.Crew
Group, Inc., J.Crew Operating Corp. and Kenneth S. Pilot.
99.1 Certifications of Acting Chief Executive Officer and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
(b) Reports on Form 8-K.
J.Crew Group, Inc. and J.Crew Operating Corp. filed a report
with the Securities and Exchange Commission on Form 8-K dated
August 26, 2002 with respect to the appointment of Kenneth S.
Pilot as Chief Executive Officer.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company.
J. CREW GROUP, INC.
(Registrant)
Date: September 6, 2002 By: /s/ Scott M. Rosen
--------------------------------
Scott M. Rosen
Executive Vice President and
Chief Financial Officer
J. CREW OPERATING CORP.
(Registrant)
Date: September 6, 2002 By: /s/ Scott M. Rosen
--------------------------------
Scott M. Rosen
Executive Vice President and
Chief Financial Officer
22
CERTIFICATIONS
I, Scott M. Rosen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. Crew Group,
Inc. and J. Crew Operating Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of each registrant as of, and for, the periods presented in
this quarterly report.
Date: September 6, 2002
/s/ Scott M. Rosen
-----------------------------
Scott M. Rosen
Acting Chief Executive Officer
/s/ Scott M. Rosen
-----------------------------
Scott M. Rosen
Executive Vice-President and
Chief Financial Officer
EXPLANATORY NOTE: Since the departure of Mark Sarvary as former Chief Executive
Officer of J.Crew Group, Inc. and J.Crew Operating Corp. on May 1, 2002, Scott
M. Rosen has performed the functions of each registrant's principal executive
officer on an interim basis in addition to being each registrant's principal
financial officer.
23