Trouble Is Brewing For J. Crew
The company reported Wednesday that operating income fell 54% to $34 million in the first quarter from a year earlier, while comparable sales fell 2%. (Those sales incude sales at stores open at least a year and direct sales.)
"The first quarter proved to be challenging," Chief Financial Officer Stuart Haselden said on a call with analysts Thursday. "There were disappointing results across all our product categories."
Haselden blamed the disappointing performance on "traffic headwinds" and a "highly promotional environment."
But J. Crew's biggest problems aren't external, Brian Sozzi, chief equities strategist at Belus Capital Advisors, told Business Insider.
He outlined three main problems plaguing the company right now.
1. The company is having trouble getting rid of inventory. Inventories ballooned 16% on a per-square-foot basis, "indicating a management team that has completely lost a feel for the trends surrounding its stores in the mall," Sozzi said.
Haseldon said the unsold inventory mostly consists of in-season styles.
"To commit to these inventory levels six months in advance given weak sales trends is not a sign of prudent management that 'gets' what's going on," Sozzi said.
2. Cash levels are getting "dangerously low while the business clearly continues to deteriorate," Sozzi said. The company had $59 million on hand at the end of the first quarter, down from $92 million at the same time last year.
Sozzi says J. Crew may need to ramp up promotions this summer and into the fall in order to raise cash from inventory that isn't selling.
3. Competitors are beating J. Crew on price and style. J. Crew has always been a go-to place for work attire, but its styles have grown stale and now fast fashion retailers, such as Zara and Forever21, are selling more "fun," work-appropriate clothing at a quarter of the cost of J. Crew, Sozzi said.
"It's getting attacked from all angles," Sozzi said, noting that Ann Taylor, Macy's, and Nordstrom are also becoming more competitive with J. Crew. "Bottom line, like Abercrombie & Fitch, J. Crew has not found the magic potion on how to infuse emotion into its product yet remain true what it is known for by consumers."