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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 May 3, 2003
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
May 23, 2003
J. Crew Group, Inc.
12,870,373 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 combined Form 10-Q is separately filed by each of J. Crew Group, Inc and J.
Crew Operating Corp. The information contained herein relating to each
individual registrant is filed by such registrant on its own behalf. No
registrant makes any representation as to information relating to any other
registrant.
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
May 3, February 1,
Assets 2003 2003
------ ---- ----
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 19,876 $ 18,895
Merchandise inventories 100,254 107,318
Prepaid expenses and other current assets 20,196 24,886
Refundable income taxes 6,278 6,278
---------- ----------
Total current assets 146,604 157,377
---------- ----------
Property and equipment - at cost 302,385 300,910
Less accumulated depreciation and amortization (138,781) (129,363)
---------- ----------
163,604 171,547
---------- ----------
Deferred income tax assets 5,000 5,000
Other assets 14,959 14,954
---------- ----------
Total assets $ 330,167 $ 348,878
========== ==========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,164 $ --
Accounts payable and other current liabilities 84,552 116,384
Federal and state income taxes 2,777 2,978
---------- ----------
Total current liabilities 88,493 119,362
---------- ----------
Deferred credits and other long-term liabilities 63,660 65,141
---------- ----------
Long-term debt 325,256 292,000
---------- ----------
Redeemable preferred stock 273,645 264,038
---------- ----------
Stockholders' deficit (420,887) (391,663)
---------- ----------
Total liabilities and stockholders' deficit $ 330,167 $ 348,878
========== ==========
See notes to unaudited condensed consolidated financial statements.
2
J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
Thirteen weeks ended
May 3, May 4,
------ -----
2003 2002
---- ----
(unaudited)
(in thousands)
Revenues:
Net sales $ 152,592 $ 157,883
Other 8,903 9,169
--------- ---------
161,495 167,052
--------- ---------
Cost of goods sold including buying and occupancy costs 105,581 100,087
Selling, general and administrative expenses 65,779 75,947
--------- ---------
Loss from operations (9,865) (8,982)
Interest expense - net (9,762) (9,593)
--------- ---------
Loss before income taxes (19,627) (18,575)
Income tax benefit -- 6,500
--------- ---------
Net loss $ (19,627) $ (12,075)
========= =========
See notes to unaudited condensed consolidated financial statements.
3
J. CREW GROUP, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended
May 3, May 4,
2003 2002
---- ----
(unaudited)
(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (19,627) $ (12,075)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,818 8,224
Amortization of deferred financing costs 467 793
Non cash compensation expense 10 305
Non cash interest expense 4,184 4,267
Changes in operating assets and liabilities:
Merchandise inventories 7,064 (4,487)
Prepaid expenses and other current assets 4,690 2,058
Other assets (113) (1,307)
Accounts payable and other liabilities (27,255) (36,901)
Federal and state income taxes (201) (6,895)
--------- ----------
Net cash used in operating activities (22,963) (46,018)
--------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (2,476) (12,067)
Proceeds from construction allowances 1,000 2,190
--------- ----------
Net cash used in investing activities (1,476) (9,877)
========= ==========
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable, bank -- 55,000
Additional long term debt 25,820 --
Costs incurred in connection with debt financing (400) --
--------- ----------
Net cash provided by financing activities 25,420 55,000
--------- ----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 981 (895)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 18,895 16,201
--------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,876 $ 15,306
========= ==========
NON-CASH FINANCING ACTIVITIES:
Dividends on preferred stock $ 9,607 $ 8,356
========= ==========
Interest payable on 13 1/8% Senior Discount Debentures
at February 1, 2003 capitalized and added to the principal
amount of debt $ 4,416 $ --
========= ==========
See notes to unaudited condensed consolidated financial statements.
4
J.CREW GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen weeks ended May 3, 2003 and May 4, 2002
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, "Holdings"). All significant intercompany
balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of May 3, 2003 and the
condensed consolidated statements of operations and cash flows for the
thirteen week periods ended May 3, 2003 and May 4, 2002 have been
prepared by Holdings 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 Holdings, 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 Holdings
consolidated financial statements for the fiscal year ended February 1,
2003.
The results of operations for the thirteen-week period ended May 3, 2003
are not necessarily indicative of the operating results for the full
fiscal year.
2. Exchange Offer
On May 6, 2003, Holdings (through its wholly owned subsidiary, J.Crew
Intermediate LLC ("Intermediate")) completed an offer to exchange 16%
Senior Discount Contingent Principal Notes due 2008 of Intermediate (new
notes) for its outstanding 13 1/8% Senior Discount Debentures due 2008
(existing debentures). Approximately 85% of the existing debentures
were tendered for exchange.
Intermediate exchanged $76,256,000 fair value of new notes for
$120,333,000 face amount of existing debentures. The debt issuance
discount of $44,077,000 will be accreted to the principal amount over the
life of the new notes as additional interest expense. A net gain on
exchange of debt of approximately $41 million will be included in the
results of operations in the second quarter.
Interest from October 15, 2002 through May 5, 2003 was paid on the
existing debentures not exchanged at 13 1/8%. Interest from October 15,
2002 through May 5, 2003 on the existing debentures exchanged was added
to the principal amount of the existing debentures at 16%.
The new notes bear interest at 16% payable in arrears on May 15 and
November 15. Interest from date of issuance through November 15, 2005
will be added to the principal amount of the new notes. Effective
November 15, 2005, interest will accrue and become payable on each May 15
and November 15 thereafter through May 15, 2008.
Commencing on May 15, 2004 and on each May 15 through May 15, 2008, the
accreted value of the new notes will be increased by 10% of EBITDA in
excess of $50.0 million for the immediately preceding fiscal year.
5
J.CREW GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen weeks ended May 3, 2003 and May 4, 2002
3. Debt Financing
(a) On February 4, 2003, Holdings and J.Crew Operating Corp.
("Operating Corp.") entered into a credit agreement with TPG-MD
Investment, LLC, a related party, which provides for a Tranche A
loan to Operating Corp. in an aggregate principal amount of $10.0
million and a Tranche B loan to Operating Corp. in an aggregate
principal amount of $10.0 million. The loans are due in February
2008 and bear interest at 5.0% per annum payable semi-annually in
arrears on January 31 and July 31, commencing on July 31, 2003.
Interest will compound and be capitalized and added to the
principal amount on each interest payment date. These loans are
subordinated in right of payment to the prior payment of all
senior debt and are on the same terms as the 10-3/8% Senior
Subordinated Notes due 2008 of Operating Corp.
(b) The Loan and Security Agreement dated December 23, 2002, as
amended, by and among Wachovia Bank, N.A., as arranger, Congress
Financial Corporation, as administrative and collateral agent, and
a syndicate of lenders (the "Congress Credit Facility") was
further amended on April 4, 2003 to (a) consent to the formation
of J.Crew Intermediate LLC and the exchange offer; (b) carve-out
from the EBITDA covenant for fiscal 2002 a $9.0 million one-time
charge for non-current inventory; (c) modify required EBITDA
covenant levels and (d) eliminate the supplemental loan
availability in fiscal 2003.
(c) On April 8, 2003, Operating Corp. borrowed the real estate
availability of $5.8 million under the Congress Credit Facility.
This borrowing is repayable at $97,000 per month commencing June
1, 2003.
6
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Condensed Consolidated Balance Sheets
May 3, February 1,
Assets 2003 2003
------ ---- ----
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents $ 19,876 $ 18,895
Merchandise inventories 100,254 107,318
Prepaid expenses and other current assets 20,196 24,886
Refundable income taxes 6,278 6,278
--------- ----------
Total current assets 146,604 157,377
Property and equipment - at cost 302,385 300,910
Less accumulated depreciation and amortization (138,781) (129,363)
--------- ----------
163,604 171,547
--------- ----------
Other assets 13,706 13,646
--------- ----------
Total assets $ 323,914 $ 342,570
========= ==========
Liabilities and Stockholder's Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,164 $ --
Accounts payable and other current liabilities 83,047 111,176
Federal and state income taxes 2,777 2,978
Deferred income tax liabilities 910 910
--------- ----------
Total current liabilities 87,898 115,064
--------- ----------
Deferred credits and other long-term liabilities 63,660 65,141
--------- ----------
Long-term debt 174,906 150,000
--------- ----------
Due to J.Crew Group, Inc. 11,360 2,040
--------- ----------
Stockholder's deficit (13,910) 10,325
--------- ----------
Total liabilities and stockholder's deficit $ 323,914 $ 342,570
========= ==========
See notes to unaudited condensed consolidated financial statements.
7
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Condensed Consolidated Statements of Operations
Thirteen weeks ended
May 3, May 4,
------ ------
2003 2002
---- ----
(unaudited)
(in thousands)
Revenues:
Net sales $ 152,592 $ 157,883
Other 8,903 9,169
--------- ---------
161,495 167,052
Cost of goods sold including buying and occupancy costs 105,581 100,087
Selling, general and administrative expenses 65,769 75,782
--------- ---------
Loss from operations (9,855) (8,817)
Interest expense - net 5,060) (5,270)
--------- ---------
Loss before income taxes (14,915) (14,087)
Income tax benefit -- 4,900
--------- ---------
Net loss $ (14,915) $ (9,187)
========= =========
See notes to unaudited condensed consolidated financial statements.
8
J. CREW OPERATING CORP. AND
SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Thirteen weeks ended
May 3, May 4,
2003 2002
---- ----
(unaudited)
(in thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (14,915) $ (9,187)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,818 8,224
Amortization of deferred financing costs 410 737
Non cash compensation expense -- 140
Non-cash interest expense 250 --
Changes in operating assets and liabilities:
Merchandise inventories 7,064 (4,487)
Prepaid expenses and other current assets 4,690 2,058
Other assets (113) (1,307)
Accounts payable and other liabilities (27,966) (36,901)
Federal and state income taxes (201) (5,295)
--------- ---------
Net cash used in operating activities (22,963) (46,018)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (2,476) (12,067)
Proceeds from construction allowances 1,000 2,190
--------- ---------
Net cash used in investing activities (1,476) (9,877)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in notes payable, bank -- 55,000
Additional long-term debt 25,820 --
Costs incurred in connection with debt financing (400) --
--------- ---------
Net cash provided by financing activities 25,420 55,000
--------- ---------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 981 (895)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 18,895 16,201
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 19,876 $ 15,306
========= =========
NON-CASH FINANCING ACTIVITIES:
Dividends to J.Crew Group, Inc. $ 9,320 $ --
========= =========
See notes to unaudited condensed consolidated financial statements.
9
J.CREW OPERATING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended May 3, 2003 and May 4, 2002
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, "Operating Corp."). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The condensed consolidated balance sheet as of May 3, 2003 and the
condensed consolidated statements of operations and cash flows for the
thirteen week periods ended May 3, 2003 and May 4, 2002 have been
prepared by Operating Corp. 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 Operating Corp, 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
Operating Corp. consolidated financial statements for the fiscal year
ended February 1, 2003.
The results of operations for the thirteen-week period ended May 3,
2003 are not necessarily indicative of the operating results for the
full fiscal year.
2. Debt Financing
(a) On February 4, 2003, Operating Corp. entered into a credit
agreement with TPG-MD Investment, LLC, a related party, which
provides for a Tranche A loan to Operating Corp. in an aggregate
principal amount of $10.0 million and a Tranche B loan to
Operating Corp. in an aggregate principal amount of $10.0 million.
The loans are due in February 2008 and bear interest at 5.0% per
annum payable semi-annually in arrears on January 31 and July 31,
commencing on July 31, 2003. Interest will compound and be
capitalized and added to the principal amount on each interest
payment date. These loans are subordinated in right of payment to
the prior payment of all senior debt and are on the same terms as
the 10-3/8% Senior Subordinated Notes due 2008 of Operating Corp.
(b) The Loan and Security Agreement dated December 23, 2002, as
amended, by and among Wachovia Bank, N.A., as arranger, Congress
Financial Corporation, as administrative and collateral agent, and
a syndicate of lenders (the "Congress Credit Facility") was
further amended on April 4, 2003 to (a) consent to the formation
of J.Crew Intermediate LLC and the exchange offer; (b) carve-out
from the EBITDA covenant for fiscal 2002 a $9.0 million one-time
charge for non-current inventory; (c) modify required EBITDA
covenant levels and (d) eliminate the supplemental loan
availability in fiscal 2003.
(c) On April 8, 2003, Operating Corp. borrowed the real estate
availability of $5.8 million under the Congress Credit Facility.
This borrowing is repayable at $97,000 per month commencing June
1, 2003.
10
3. Stockholder's Deficit
On February 20, 2003, the Board of Directors of Operating Corp.
declared a dividend of $9,320,000 payable to J. Crew Group, Inc.
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 MAY 3, 2003 COMPARED TO THIRTEEN
WEEKS ENDED MAY 4, 2002.
Revenues for the thirteen weeks ended May 3, 2003 decreased to $161.5 million
from $167.1 million in the thirteen weeks ended May 4, 2002, a decrease of 3.4%.
Revenues of J.Crew Retail decreased from $85.7 million in the first quarter of
2002 to $81.8 million in the first quarter of 2003. This decrease was due to a
decline of 11.1% in comparable store sales in the first quarter of 2003 offset
by sales from stores not open for a full fiscal year. The number of stores open
at May 3, 2003 increased to 154 from 143 at May 4, 2002.
Revenues of J.Crew Direct (which consists of the Internet and catalog
operations) decreased from $56.2 million in the first quarter of 2002 to $55.0
million in the first quarter of 2003. Revenues from jcrew.com increased to $36.6
million in the first quarter of 2003 from $31.2 million in the first quarter of
2002. Catalog revenues in the first quarter of 2003 decreased to $18.4 million
from $25.0 million in the first quarter of 2002, as the Company continues to
migrate customers to the Internet.
Revenues of J.Crew Factory decreased from $16.0 million in the first quarter of
2002 to $15.8 million in the first quarter of 2003. There were 42 stores open
May 3, 2003 compared to 41 stores at May 4, 2002.
Other revenues, which consist of shipping and handling fees and royalties,
decreased to $8.9 million in the first quarter of 2003 from $9.2 million in the
first quarter of 2002 due to a decrease in shipping and handling fees.
11
Cost of goods sold, including buying and occupancy costs, increased as a
percentage of revenues from 59.9% in the first quarter of 2002 to 65.4% in the
first quarter of 2003. This increase is attributable primarily to a decrease of
440 basis points in merchandise margin. The decrease in merchandise margin
resulted from higher sales of prior season's merchandise (at discounted prices)
in the first quarter of 2003 compared to the first quarter of 2002 and higher
markdowns related to the sale of Spring 2003 merchandise. These results reflect
management's new strategy of disposing of slow moving merchandise in season and
reducing the amount of merchandise held in its Factory division for disposition
in future seasons. Inventories at May 3, 2003 were down 30% from May 4, 2002,
despite an additional 11 retail stores. Comparable retail store inventories were
down 10%. Management expects that this current trend in merchandise margins will
continue through the second quarter.
Selling, general and administrative expenses decreased to $65.8 million in the
thirteen weeks ended May 3, 2003 from $75.9 million in the thirteen weeks ended
May 4, 2002. This decrease of $10.1 million resulted from a decrease in general
and administrative expenses of $8.1 million and a decrease of $2.0 million in
selling expense. The decrease in general and administrative expenses resulted
from (a) $5.0 million of severance charges relating to headcount reductions and
the departure of a former Chief Executive Officer in the first quarter of 2002
compared to $.9 million of severance charges in 2003 and (b) the effect of the
cost reduction initiatives implemented in the first quarter of 2002. The
reduction in selling expense was due primarily to a decrease in the number of
catalog pages circulated in the first quarter of 2003. As a percentage of
revenues, selling, general and administrative expenses decreased to 40.7% of
revenues in the first quarter of 2003 from 45.5% in the first quarter of 2002.
The increase in interest expense from $9.6 million in the first quarter of 2002
to $9.8 million in the first quarter of 2003 resulted primarily from an increase
in the amortization of deferred financing costs and interest expense related to
the additional long-term indebtedness in 2003 which exceeded the decrease
resulting from the reduction in average short-term borrowings in the first
quarter of 2003. There were no short-term borrowings under our short-term credit
facility in the first quarter of 2003 compared to average short term borrowings
of $35.6 million in the first quarter of 2002.
No tax benefit was attributed to the pre-tax loss in the first quarter of 2003
compared to a 35% benefit in the first quarter of 2002. At February 1, 2003 the
Company established a valuation allowance to reduce the net deferred tax assets
to their estimated recoverable amount. The Company does not expect to recognize
any tax benefits in future results of operations until an appropriate level of
profitability is sustained.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operations decreased from $46.0 million in the first quarter
of 2002 to $23.0 million in the first quarter of 2003. This decrease in cash
used in operations resulted primarily from the decrease in working capital
requirements in the first quarter 2003 compared to the first quarter of 2002.
Capital expenditures, net of construction allowances, were $1.5 million for the
first quarter of 2003 compared to $9.9 million in the first quarter of 2002.
Capital expenditures for fiscal year 2003 are expected to be approximately $10
million compared to $20.4 million in fiscal year 2002. Four new stores are
planned to open in fiscal 2003 compared to 16 in fiscal 2002.
There were no short-term borrowings under the short term credit facility at May
3, 2003 compared to $55.0 million at May 4, 2002. Long-term indebtedness
increased by $25.8 million during the quarter consisting of $20.0 million of
notes payable due in 2008 and $5.8 million under the Congress Credit Facility
repayable over a period of 60 months commencing June 1, 2003.
On May 6, 2003, the Company (through its wholly-owned subsidiary, J. Crew
Intermediate LLC ("Intermediate")) completed an offer to exchange 16% Senior
Discount Contingent Principal Notes due 2008 of Intermediate for its outstanding
13 1/8% Senior Discount Debentures due 2008. Approximately 85% of the
outstanding debentures were tendered for exchange. The effect of the exchange
offer on interest expense in fiscal 2003 will be to increase total interest
expense by $2.6 million but decrease cash interest by $15.8 million.
12
Management believes that cash flow from operations and availability under the
Congress 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 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 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 32% of annual net sales in fiscal year 2002 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - J.CREW OPERATING CORP.
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED MAY 3, 2003 COMPARED TO THIRTEEN
WEEKS ENDED MAY 4, 2002.
Revenues for the thirteen weeks ended May 3, 2003 decreased to $161.5 million
from $167.1 million in the thirteen weeks ended May 4, 2002, a decrease of 3.4%.
Revenues of J.Crew Retail decreased from $85.7 million in the first quarter of
2002 to $81.8 million in the first quarter of 2003. This decrease was due to a
decline of 11.1% in comparable store sales in the first quarter of 2003, offset
by sales from stores not open for a full fiscal year. The number of stores open
at May 3, 2003 increased to 154 from 143 at May 4, 2002.
Revenues of J.Crew Direct (which consists of the Internet and catalog
operations) decreased from $56.2 million in the first quarter of 2002 to $55.0
million in the first quarter of 2003. Revenues from jcrew.com increased to $36.6
million in the first quarter of 2003 from $31.2 million in the first quarter of
2002. Catalog revenues in the first quarter of 2003 decreased to $18.4 million
from $25.0 million in the first quarter of 2002, as the Company continues to
migrate customers to the Internet.
Revenues of J.Crew Factory decreased from $16.0 million in the first quarter of
2002 to $15.8 million in the first quarter of 2003. There were 42 stores open
May 3, 2003 compared to 41 stores at May 4, 2002.
Other revenues, which consist of shipping and handling fees and royalties,
decreased to $8.9 million in the first quarter of 2003 from $9.2 million in the
first quarter of 2002 due to a decrease in shipping and handling fees.
Cost of goods sold, including buying and occupancy costs, increased as a
percentage of revenues from 59.9% in the first quarter of 2002 to 65.4% in the
first quarter of 2003. This increase is attributable primarily to a decrease of
440 basis points in merchandise margin. The decrease in merchandise margin
resulted from higher sales of prior season's merchandise (at discounted prices)
in the first quarter of 2003 compared to the first quarter of 2002 and higher
markdowns related to the sale of Spring 2003 merchandise. These results reflect
management's new strategy of disposing of slow moving merchandise in season and
reducing the amount of merchandise held in its Factory division for disposition
in future seasons. Inventories at May 3, 2003 were down 30% from May 4, 2002,
despite an additional 11 stores. Comparable retail store inventories were down
10%. Management expects that this current trend in merchandise margins will
continue through the second quarter.
13
Selling, general and administrative expenses decreased to $65.8 million in the
thirteen weeks ended May 3, 2003 from $75.8 million in the thirteen weeks ended
May 4, 2002. This decrease of $10.0 million resulted from a decrease in general
and administrative expenses of $8.0 million and a decrease of $2.0 million in
selling expense. The decrease in general and administrative expenses resulted
from (a) $5.0 million of severance charges relating to headcount reductions and
the departure of a former Chief Executive Officer in the first quarter of 2002
compared to $.9 million of severance charges in 2003 and (b) the effect of the
cost reduction initiatives implemented in the first quarter of 2002. The
reduction in selling expense was due primarily to a decrease in the number of
catalog pages circulated in the first quarter of 2003. As a percentage of
revenues, selling, general and administrative expenses decreased to 40.7% of
revenues in the first quarter of 2003 from 45.4% in the first quarter of 2002.
The decrease in interest expense from $5.3 million in the first quarter of 2002
to $5.1 million in the first quarter of 2003 resulted primarily from a decrease
in the amortization of deferred financing costs and the reduction in average
short-term borrowings in the first quarter of 2003. There were no borrowings
under our short-term credit facility in the first quarter of 2003 compared to
average borrowings of $35.6 million in the first quarter of 2002.
No tax benefit was attributed to the pre-tax loss in the first quarter of 2003
compared to a 35% benefit in the first quarter of 2002. The Company does not
expect to recognize any tax benefits in future results of operations until an
appropriate level of profitability is sustained.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 May 3, 2003, 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 May 3, 2003 were approximately $32.2
million.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls and
procedures as provided in Rule 13a - 14 under the Securities Exchange Act of
1934, as amended. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed in
this Quarterly Report has been made know to them in a timely fashion. There have
been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Stockholders' Agreement, dated as of January 24, 2003, among the
Company, TPG Partners II, L.P. and Millard S. Drexler.
Incorporated by reference to Exhibit 4.1 to the Company's Form
8-K filed on February 3, 2003.
4.2 Letter Agreement, dated February 3, 2003, among the Company, TPG
Partners II, L.P. and Emily Woods. Incorporated by reference to
Exhibit 4.1 to the Company's Form 8-K filed on February 7, 2003.
4.3 Stockholders' Agreement, dated February 12, 2003, among the
Company, TPG Partners II, L.P. and Scott Gilbertson. Incorporated
by reference to Exhibit 4.1 to the Company's Form 8-K filed on
February 14, 2003.
4.4 Stockholders' Agreement, dated February 20, 2003, among the
Company, TPG Partners II, L.P. and Jeffrey A. Pfeifle.
Incorporated by reference to Exhibit 4.1 to the Company's Form
8-K filed on February 26, 2003.
10.1 Credit Agreement, dated as of February 4, 2003, among the
Company, certain subsidiaries thereof and TPG-MD Investment, LLC.
Incorporated by reference to Exhibit 10.1 to the Company's Form
8-K filed on February 7, 2003.
10.2 Amendment No. 1, dated February 7, 2003, to Loan and Security
Agreement among the Company, certain subsidiaries thereof and
Congress Financial Corporation. Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed on February 14,
2003.
10.3 Amendment No. 2, dated April 4, 2003, to Loan and Security
Agreement among the Company, certain subsidiaries thereof and
Congress Financial Corporation. Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed on April 8, 2003.
99.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002.
99.2 Certification of 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.
The Company filed the following reports on Form 8-K, pursuant to
which various documents and agreements were filed by the Company
as identified therein during the quarter ended May 3, 2003:
Date of Report Item(s) Reported
-------------- ----------------
Feb. 3, 2003 Item 5
Feb. 7, 2003 Item 5
Feb. 14, 2003 Item 5
Feb. 26, 2003 Item 5
April 4, 2003 Item 5
April 8, 2003 Item 5
May 2, 2003 Item 5
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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: June 4, 2003 By: /s/ Millard S.Drexler
--------------------------------
Millard S. Drexler
Chairman of the Board and
Chief Executive Officer
Date: June 4, 2003 By: /s/ Scott M. Rosen
--------------------------------
Scott M. Rosen
Executive Vice-President and
Chief Financial Officer
J. CREW OPERATING CORP.
(Registrant)
Date: June 4, 2003 By: /s/ Millard S.Drexler
--------------------------------
Millard S. Drexler
Chairman of the Board and
Chief Executive Officer
Date: June 4, 2003 By: /s/ Scott M. Rosen
--------------------------------
Scott M. Rosen
Executive Vice-President and
Chief Financial Officer
16
CERTIFICATION
I, Millard S. Drexler, 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;
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;
4. Each registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for such registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to such registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of such registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. Each registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to such registrant's auditors and the audit
committee of such registrant's board of directors (or persons performing
the equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect such registrant's
ability to record, process, summarize and report financial data
and have identified for such registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in such registrant's
internal controls; and
17
6. Each registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
June 4, 2003 /s/ Millard S. Drexler
-----------------------------------
Millard S. Drexler
Chief Executive Officer
18
CERTIFICATION
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;
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;
4. Each registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for such registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to such registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of such registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Each registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to such registrant's auditors and the audit
committee of such registrant's board of directors (or persons performing
the equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect such registrant's ability to
record, process, summarize and report financial data and have
identified for such registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in such registrant's
internal controls; and
19
6. Each registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: June 4, 2003 /s/ Scott M. Rosen
------------------------------------
Scott M. Rosen
Executive Vice President and
Chief Financial Officer
20