The problem with being a fast-growing company, quickly expanding your flagship brand and rolling out newer concepts, is that you can forget how quickly consumers’ mood can sour.
J. Crew has learned that the hard way, letting inventories build way, way up even as shoppers seriously cut back on trips to the mall and sought out big bargains.
The casual clothing company reported a big decline in its adjusted profit for the first quarter, primarily because its gross margin, a measure of merchandise profitability, plunged a staggering 6 percentage points to 38.7% of sales. (In contrast, at Gap (GPS) gross margin barely budged, hovering around 39%.)
J. Crew Chief Financial Officer Stuart Haselden blamed a decrease in mall traffic and made allusions to a cold winter hurting sales. But J.Crew’s overly ambitious buying played a big role in the margin depletion, too.
Inventory rose 16% during the quarter on a square-foot basis, while comparable sales fell 2%. That disconnect led to big markdowns as J. Crew tried to clear unsold merchandise. Haselden told analysts on a call the problem would persist until about the holiday quarter.
“We have more than we’d like to have,” he said.
Despite the pressure on sales, J. Crew doesn’t plan any large-scale store closings of the kind underway at Abercrombie & Fitch (ANF), Aeropostale (ARO) and, a few years ago, Gap. “Our store base is very productive,” Haselden said.
That may be, but J.Crew faces some choppy waters through the holiday season. Traffic at J.Crew stores this quarter so far is still down from a year earlier, and the retail environment is not getting any less promotional.
And competitors are faring better- Gap just reported a 1% increase in comparable sales for May.