J. Crew on Tuesday eked out profit in the fourth quarter, even as sales and revenue slid: Q4 total revenues (including the flagship, Madewell and Factory sales) fell 2% to $695 million. Same-store sales across the apparel retailer’s brands fell 5%, compared to a 4% decrease in the year-ago quarter.
Madewell continues to fare better much better than the company’s flagship brand: Q4 J.Crew sales dropped 5% to $572.6 million as same-store sales fell 7%, compared to a 5% decrease in the fourth quarter last year. Q4 Madewell sales rose 11% to $102.9 million as Q4 same-store sales there rose 6%, though that was a drop from the 12% rise in the year-ago period.
But Q4 net income was $1.1 million, compared to the $7 million net loss in the fourth quarter last year, and adjusted earnings before interest, tax, depreciation and amortization were $51.5 million, compared to $44 million in the fourth quarter last year.
J. Crew has seized some control of its expenses and its discounting, but its flagship brand, once a stalwart for the fashionable preppy set, hasn’t been able to capture meaningful attention from shoppers in recent years. The brand's reputation for fit and quality has suffered, and that has led to a sense among apparel shoppers that it’s not a good deal, unless it’s on sale, says GlobalData Retail Managing Director Neil Saunders.
“As much as the Madewell brand is healthy, this success is more than offset by ongoing challenges at the much larger J. Crew segment,” he noted in an email to Retail Dive. “While declines in the latter were much less severe this quarter, a 7% dip in comparable sales is still indicative of a brand that is still not fully resonating with consumers. It also underlines the fact that the productivity of J. Crew's stores is waning.”
Classic styles from J. Crew, which once garnered it fierce loyalty from fans, are increasingly being interpreted as basic, Saunders said. “As a result, consumers often see the full price as representing bad value for money — which is why J. Crew constantly has to resort to discounting to sell products. It is also why J. Crew Factory stores tend to perform better than full-price stores,” he said. “The second issue is with the assortment. While this changes from season to season, those changes are incremental. This gives the impression of a relatively same offer, which reduces interest and visit frequency, especially to stores.”
CEO Mickey Drexler has been talking about the need to address the quality and appeal of J. Crew’s offering, and on Tuesday said the company remains “focused on delivering the very best, iconic J.Crew and Madewell products our customers love across all channels. As a team, we are taking important steps to drive improved operational excellence across the company."
But the label hasn’t gained much traction so far. It will take greater attention to detail, in Saunders’ view. “J. Crew needs to develop a much clearer brand handwriting and needs to infuse its assortments with pieces that have subtle embellishments,” he said. “This is the thinking that brands like Ted Baker use to stay relevant and to justify the premiums that they charge. At present we believe J. Crew is a very long way from this and, instead, has the position of a nicer, higher quality version of Gap.” This is tough talk from Saunders, who last year described Gap’s dismal sales picture as being “as predictable and boring as its ranges.”
The financial picture is also increasingly dire for J. Crew, which has tussled with lenders over its efforts to restructure its approximately $2 billion debt load. Six years after TPG Capital LP and Leonard Green & Partners L.P. acquired J. Crew for $2.8 billion and took it private, the retailer looks to be the latest in a string of retailers whose turnaround capital needs bump up against the profit-taking goals of private equity owners. Talk of going public have died down in recent months as J. Crew has continued to falter.
“Ultimately, this position is not one that will work, or drive growth, in this market,” Saunders said of J. Crew. “That it won't is problematic for a company that desperately needs higher sales just to keep its head above water.”