J. Crew 2Q Income Rises but Outlook is Conservative

New York—While J. Crew Group Inc., whose better-than-average performance has made it a darling of Wall Street, reported that its second quarter net income nearly doubled over the previous year, the specialty retailer lowered its forecast for full year citing consumers’ uncertainty.

“The continued economic uncertainty that we are all seeing is leading us to take a more conservative outlook for the back half of the year,” Mickey Drexler, ceo told retail analysts on Thursday. “The customer is more selective with their purchases. More than ever, they are focused on newness.”

For the quarter ending July 31, J. Crew reported earnings of $34.9 million, or 53 cents per share, up from $18.6 million, or 29 cents per share, for the same quarter a year ago.

J. Crew’s total revenue grew 14% to $407.5 million. Store sales increased 14% to $295, with comparable store sales increasing 11%, compared to a 5% drop in second quarter 2009. Direct sales online or by phone increased 16% to $102.5 million. Besides sales increases, the company increased its margins to 44.6% from 41.2% in the second quarter last year.

‘Too Edgy’ for a ‘Nervous’ Consumers?

While the results topped the average estimates of analysts who expected earnings of 46 cents per share on revenue of $403.3 million, Wall Street was disappointed in the retailer’s third quarter and full year outlooks which fell short of their estimates.

Saying that consumers are “deferring, they’re waiting, they’re comparison-shopping, and people are a little nervous,” Drexler said the company cut its full-year outlook to a range of $2.25 to $2.35 a share from a previous projection of as much as $2.45 a share. The company forecast third-quarter profit of 55 cents to 60 cents a share. Looking forward, J. Crew forecast earnings for the third quarter in the range of 55 cents to 60 cents per share, well below analysts’ view of 71 cents per share.

Besides an uncertain retail climate, analysts also stated they believe the company is feeling the pressure from rivals such as Ann Taylor and Talbots, which have ramped up their fashion offerings. In fact, some think that J. Crew’s merchandise may be too edgy for its customer base

“Weak guidance was attributed to weaker spending trends, but we suspect some fashion missteps may have played a role, too,” said analyst Linda Tsai of MKM Partners in a report. “This is not completely unusual and a bit reassuring, as we think J. Crew can correct this for Holiday.”We still think stock is attractive.”

Noting that the company reported a 10% increase in inventory growth per square foot at the end of the second quarter, some analysts said that may force discounts ahead to motivate consumer spending. “Given that J. Crew does not have strong ability to cut orders, we expect accelerated promotional activity resulting in margin pressure,” said analyst Pamela Quintiliano at Oppenheimer & Co.

Factory Outlets to Sell Online

To lift growth, for the first time the company is putting its factory outlet merchandise online for sale starting next month, making it easier for frugal-minded consumers to purchase its reduced price inventor. J. Crew is hoping that it can tap this demand for bargains without undermining sales at its main stores.

The company also has opened its first bridal store and is opened more locations just for men as well as its Crewcuts for kids.

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