J.Crew against the ropes: doubles loss in 9 months: rising doubts on turnaround plan

J.Crew is going through a troubled period of time. The preppy fashion retailer, which has committed to an ambitious turnaround plan, has doubled its loss in the nine past months, ringing the alarms for investors.

Earlier this month, The J.Crew Group reported comparable sales at its flagship brand were down 12 percent in the fiscal third quarter, that´s it four times last year´s same period´s 3 percent dip. Total sales amounted to 526 million dollars.

Likewise, total sales across all of its brands retreated 6 percent to 619.4 million dollars, what took the company's net loss to 759.7 million dollars. Again, the year-on-year drop is quite substantial, as this came in a 20 percent greater loss than it reported in the same period last year.

Even the formerly rising star of the group, Madewell brand which makes up about a 15 percent of the group's total revenue, had a weaker than expected quarter than usual, disappointing the market. Instead of a double-digit increase, comparable sales were up by a humble 1 percent in three months to October, 31. On the upside, overall sales were up 14 percent to 78.7 million dollars, driven in part by several store openings over the course of the year, as highlighted the company.

In this regard, Neil Saunders, CEO of Conlumino estates that, “As its latest set of results attest, J Crew is a mess. Not only have sales fallen across the board, but the drops are significant and come off the back of declines in the prior year. Even the relatively small Madewell division, which has traditionally performed well in sales terms had a poor quarter, with comparable numbers rising by a slim 1 percent.”

Mickey Drexler, J.Crew's chairman and CEO, said in an earnings call that "And while this has been a particularly challenging period, we are navigating through and taking actions that will benefit us over the long term. Of course, it is important to reiterate that this does not happen overnight."

In the same vein, Drexler recognised that results are "still not where we'd like them to be," although he noted that the customer has been responding well to recent product and merchandising strategies; in particular, women's blazers, dresses and suiting have performed well, as has men's shirting, outerwear, suiting and denim.

Regarding the company´s sought after ‘back to basics’, the company´s CEO also emphasised the success of J.Crew's "iconic classics with a twist" and heritage items. "Overall, we believe the product is where it needs to be," he said. "And again, our goal and focus is to maintain the J.Crew level of design, style and value that our customer expects."

“In our view there is now a very serious question mark over the firm’s survival and it is likely that lenders may seek to take control if performance does not improve in the vital fourth quarter and beyond,” pointed out Colunmino´s CEO.

So...is there a ‘back-to-basics’ plan really in the pipeline for J.Crew?

In the 21 months since the market started talking about a potential initial public offering (IPO) of shares for J. Crew Group Inc., sales have dipped, the turnaround plan hasn’t taken off and the highly awaited helping Christmas sales is now deemed by analysts as unlikely to give the retailer a boost.

Meanwhile, the fact that the bonds have taken a dip down to 25 cents each is not helping investors to remain calm.

“Their fashion isn’t particularly special right now, they still have some quality issues, and people aren’t buying apparel, and the weather’s not cooperating,” said Liz Dunn, chief executive officer of the consulting firm Talmage Advisors. “I don’t think there are many apparel players that are going to stand out this holiday season -- and J. Crew certainly isn’t one of them.”

“Rebuilding the sales line after a series of fashion missteps is now looking like an insurmountable task. Many customers once loyal to J Crew defected elsewhere following the company’s move away from the classic, preppy basics that were once its heritage, and it now proving extremely difficult to win them back. This is not helped by the still fairly premium price J Crew expects its customers to pay; given the brand has lost so much of its equity, and given that today’s more democratic fashion marketplace abounds with retailers selling on-trend, low-priced basics, this position is simply not tenable,” writes Conlumino first executive.

Despite the company´s heavy discounts and reduced prices, the brand’s comeback is still to materialise. Hale Holden, an analyst at Barclays Capital remarks that “The big issue is the inventory. Not only do you have to have stuff in the stores that folks want to buy, but you have to price competitively -- if the store across the street is discounting, you have to mark down as well.”

 

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