J. Crew Group's Q2 fails to impress; avoid the stock

Posted Aug 27th 2008 10:35AM by Steven Mallas
Filed under: Earnings Reports, Gap Inc (GPS), Abercrombie and Fitch (ANF)

J. Crew Group's (NYSE: JCG) stock is not a thing of beauty. The retailer's shares have been weak for a long time, and the latest quarterly numbers did nothing to change my mind about the stock's prospects.

For the second quarter, J. Crew, whose competitors include Abercrombie & Fitch (NYSE: ANF) and Gap (NYSE: GPS), reported a 10% increase in top-line sales. Not bad, I suppose. But I'll tell you what, there is some bad to come. Operating income went down 15%. Gross margin saw an unfortunate decline, dropping from 43.7% to 41%. And earnings per diluted share came in at 28 cents compared to last year's 32 cents per diluted share. That's a better than 12% drop.

Now, there is something to consider with the stats. The earnings release states that a systems upgrade in the direct-sales channel is affecting the results. In fact, there apparently were some costs related to the upgrades that were unexpected. Management says that this sum was equal to $3 million. In theory, these upgrades will help to position the company for long-term growth.

But do I really care at this time? No. Perhaps J. Crew is investing properly for the future. That doesn't mean, however, that the company is a great investment idea. In fact, the market doesn't seem enthralled by the J. Crew story at all. The stock has declined 11% in the past month, and 44% year-to-date. Over the one-year period, shareholders are looking at almost a 50% drop in value! That hurts.

Also, J. Crew has cut its guidance for the year to a range of somewhere between $1.44 and $1.54 in terms of earnings per diluted share. Previously, management was hoping to deliver between $1.70 and $1.75 per diluted share.

The economy is weak. J. Crew's numbers are weak (granted, sales weren't bad). Guidance is terrible. And the stock might be sending would-be buyers a strong message: stay away.

It's fun (at times) to be a contrarian investor, but the story has to be a good one, and there has to be some indication that one could reasonably feel confident about waiting for a turnaround. J. Crew just doesn't do it for me at this time. Maybe when the economy finally turns around things will improve for the company. For now, though, I'd have to believe there are better investment concepts out there.

Disclosure: I don't own shares in any company mentioned; positions can change at any time.

Tags: abercrombie and fitch, AbercrombieAndFitch, ANF, Gap, GPS, inthenews, j. crew group, J.CrewGroup, JCG, retail, retail stocks, RetailStocks

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Reader Comments (Page 1 of 1)

8-27-2008 @ 11:49AM

kaye said...

YOUR COMMENTS MAKE SENSE.
HOWEVER I LOVE THE J.CREW STORES,
THEIR QUICK RESPONSE ON MAIL ORDERS
AND THE SPECIAL SALES.
I HAVE FAITH THEY CAN PULL OUT OF THE PRESENT DILEMMA