J. Crew Says Operating Results May Trigger Impairment

J. Crew Group Inc., the retailer considering a public offering, may write down the value of the business if operating results continue to decline.

The performance for the first quarter and its outlook for future results “have given rise to substantial deterioration in the excess of fair value over the carrying value of our stores,” the company said in a statement yesterday.

Operating income fell 54 percent to $34 million in the first quarter from a year earlier, while comparable sales, based on stores open for more than a year, declined 2 percent.

“We expect weak comparable sales and margin performance were related to a fashion miss, heightened inventories at the start of the quarter, and ongoing light mall traffic,” Jenna Giannelli, a New York-based analyst at Citigroup, wrote in a note to clients today.

J. Crew, owned by TPG Capital and Leonard Green & Partners LP, is considering a U.S. initial public offering for later this year, people familiar with the matter have said. In March, it reported a 42 percent drop in net income in the fourth quarter, as an industry slump hurt holiday sales and triggered a wave of discounting among rival retailers.

The goodwill allocated to its stores is $942 million, while the intangible asset value for the J. Crew brand is $885 million, according to the statement by the New York-based retailer.

Photographer: Brent Lewin/Bloomberg

Women browse clothing at J. Crew Group Inc.'s new women's store inside the International Finance Centre (IFC) mall in Hong Kong on May 22, 2014. Close

Women browse clothing at J. Crew Group Inc.'s new women's store inside the... Read More

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Photographer: Brent Lewin/Bloomberg

Women browse clothing at J. Crew Group Inc.'s new women's store inside the International Finance Centre (IFC) mall in Hong Kong on May 22, 2014.

“A future impairment charge, if any, would not have an effect on the company’s operations, liquidity or financial covenants, and would not change management’s long-term business outlook or strategy,” J. Crew said.

Mall Traffic

Retailers from Wal-Mart Stores Inc. to Macy’s Inc. have reported lower-than-forecast first-quarter sales or profit, citing harsh weather and cautious consumers. The current quarter is also proving daunting for the industry amid a slump in mall traffic and a sluggish job market.

“There’s no secret that the retailing environment was challenging in the first quarter,” Stuart Haselden, J. Crew’s chief financial officer, said on a conference call. “There wasn’t a particular category we’d point to that underperformed. It was a disappointing quarter against all our product categories.”

Yesterday, the company reported a first-quarter net loss of $30.1 million, compared with net income of $29.3 million a year earlier. Revenue rose 4.9 percent to $592 million as gross margin slipped to 38.7 percent from 44.7 percent.

Slow Traffic

The chain saw depressed traffic across all its store concepts, including the Madewell brand, Haselden said on the call. Product margins will likely continue to be pressured this quarter, and the company expects fourth-quarter inventory to be better aligned with sales trends.

J. Crew’s $500 million of 7.75 percent bonds due May 2019, issued through its parent company Chinos Intermediate Holdings A Inc., fell 2.1 cents to 101.4 cents on the dollar, according to prices compiled by Bloomberg. The securities, rated CCC+ by Standard & Poor’s, now yield 7.4 percent.

J. Crew, whose customers include First Lady Michelle Obama, expanded to Asia in May after opening its first overseas locations in the U.K. last year. The retailer is scouting for store sites in Paris and other world capitals as it seeks to generate more sales outside of its home market.

The clothing retailer has no immediate plans for an IPO or a sale as it navigates the current “challenging period,” Chief Executive Officer Millard “Mickey” Drexler said in an interview last month. It held early talks with Japan’s Uniqlo owner Fast Retailing Co. about a sale of the chain, people said in February.

In a public offering, J. Crew may fetch a valuation of as much as $5 billion, one person familiar with the situation has said. That would be a big jump over what TPG and Leonard Green paid for the chain in November 2010, which was about $2.64 billion, net of cash, data compiled by Bloomberg show.

To contact the reporters on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net; Lindsey Rupp in New York at lrupp2@bloomberg.net

To contact the editors responsible for this story: Cecile Daurat at cdaurat@bloomberg.net Bruce Rule, Nick Turner

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