J. Crew Group Q1 2010 Earnings Call Transcript

May.28.10 | About: J CREW (JCG)

J. Crew Group (JCG) Q1 2010 Earnings Call May 27, 2010 4:30 PM ET

Executives

James Scully - Chief Administration Officer, Chief Financial Officer and Principal Accounting Officer

Millard Drexler - Chairman of the Board and Chief Executive Officer

Allison Malkin - Senior Managing Director

Tracy Gardner - President of J Crew Retail and Direct Divisions

Analysts

Christine Chen - Needham & Company, LLC

Samantha Panella - Raymond James & Associates

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

John Morris - BMO Capital Markets U.S.

Michelle Tan - UBS

Brian Tunick - JP Morgan Chase & Co

Kimberly Greenberger - Citigroup Inc

Paul Lejuez - Crédit Suisse AG

Jeffrey Klinefelter - Piper Jaffray Companies

Janet Kloppenburg - JJK Research

Lorraine Hutchinson - BofA Merrill Lynch

Roxanne Meyer - UBS Investment Bank

Barbara Wyckoff - Jesup & Lamont Securities Corporation

Operator

Greetings, and welcome to the J. Crew First Quarter and Fiscal 2010 Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you. You may begin.

Allison Malkin

Thank you, and good afternoon. Before we get started, I would like to remind you of the company's Safe Harbor language, which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical fact may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC.

And now I would like to turn the call over to J. Crew's Chairman and CEO, Millard Drexler.

Millard Drexler

Good afternoon, everyone, and thanks for joining us. I'm here with Jim Scully, our CFO; along with Tracy Gardner; Jenna Lyons; Libby Wadle and other senior partners at the company. I'll start with a brief overview of our first quarter results, and then Jim will walk you through our financials in more detail and provide an update to the outlook.

We're very pleased with our first quarter results. Revenues increased 20% while our comps were up 15%, and direct sales increased 20%. Our gross margin expanded almost seven points to 49% of revenues, and our operating income totaled $75 million or 18.2% of revenues. We have made and will continue to make significant investments in our design, our quality, our style and our customer service. This has always been our mission, and while it sounds simple, it requires a relentless commitment to innovation and creativity.

The world changes every day now faster than ever, and if you're doing the same thing today that you did yesterday, someone has caught up to you. The team works incredibly hard every day to not only meet, but exceed each and every one of our customers' expectations. And I have to say today is a pretty special day for us. We've opened our first wedding store ever this morning at 10 a.m. at 769 Madison Avenue, and I can only say, and I never look and we never look at first day indications, but we're really, really happy about what's going on there today. We have had appointments before today booked through July, and if anyone does need an appointment, we have a few extra tables we keep open. And you know what's interesting about all this for us is we put the best fabrics and the best make into everything we do. We're committed to quality and are competing with the best of the best. And what we really find gratifying is, more and more, most customers know this, and most of our customers also know that we have an incredible price advantages over competitors as we are not dealing with multiple layers of profit on merchandise. We design it, we make it, on almost all products we sell, which is not like most of our competitors. So the exciting thing for us is that more and more customers are understanding this and migrating to J. Crew because of lots of things, mostly design, quality, and of course, value's a part of what every consumer keeps in mind today more than ever.

Other major event for us today is we finally launched madewell.com, our standalone e-commerce site today, which is really exciting. It will provide an important new way to reach both new and existing customers. It's been a long time in coming, but it is here, and we're real pleased about that.

Last week, we launched our partnership with NET-A-PORTER, which has given us an instant presence in 170 countries, and it's given us some very important indications on the future. We're always searching for authentic high-integrity brands for collaboration. What we like to, at J. Crew, call in good company. It's really about finding people who are doing interesting things and staying true in their integrity and design of product.

Last week, our team, including myself, took an American tour to visit some of our vendors throughout a number of states. We were in Maine, Massachusetts, Minnesota and Illinois, and we visited some of really unique incredible factories like Quoddy in Maine. And by the way, these are small companies. They're geared to incredible make, and Quoddy in Maine has very limited production. They have no machines to make their shoes. They do everything by hand, and it was quite an experience to see that in person, and we're very proud to do business with companies like that.

More importantly, aside from loving little companies like that, gives our customers the opportunity to buy things that are not easy to find anywhere in the world, and we're committed to that mission. We're going to overseas in the next few weeks to continue the same hunt for goods and visit some of our vendors.

We then visited a small company in Portland, Maine with a tiny workshop overlooking the wharf. They make special tote and beach bags out of old boat sails and we were so inspired, we placed an order on the spot. We'll continue to do the same thing with our Crewcuts business. We are getting a great response to what our customers think and tells us is the best and most quality fashion kids assortment out there. They tell us that, we're not saying it, but we like hearing it, that the mix of practical, everyday items and items for any special occasion, all done in the way you can't find anywhere else. And I think the anywhere else for us is day in, day out mission for differentiation from what others are doing. We need to keep moving forward.

We are now known as the go-to shoe destination for kids with a very cool assortment from Sperry, Bensimon, Adidas and Red Wing, to name a few. We continue to live and breathe creativity every day in our direct business, both in catalog and online, which we were founded as a catalog company as you know. So that's our original DNA. We love that our customers view our catalog now as an editorial magazine. We're thrilled when they ask us what color lipstick a model in the catalog is wearing, and it reinforces the way they see us every time they're looking at us for inspiration.

While as you know, we've strategically slowed the growth of our new stores in 2010, we're opening some exciting new stores this year and are very pleased with the opportunities we are seeing for next year. We opened four new stores in the first quarter, with plans to open a total of 15 this year, including three Madewell stores, and we're very pleased with the performances we're seeing from Madewell.

We're also beyond thrilled with the performance of our stand-alone men's stores. We'll be opening up another New York location at 1040 Madison Avenue at 79th Street, directly across the street from our women's collection store. That store will be opening later in the fall.

As we continue to grow, we remain focused on driving the sales productivity of each and every square foot in our stores and are really pleased to have reached $595 per square foot on the last 12-month basis in the first quarter which is good by any measure.

Given what is going on in the world, we are pleased that we've taken a conservative stance on real estate expansion, Madewell and international. But we have continued to march forward with our mission and have made substantial investments in our products, in our quality, in our associates. We do not live quarter-by-quarter. To us, it is really all about investing for long-term growth. We love what we do because we believe in it. We have a passion to be the best and to continue to exceed our customers' expectations.

With that, I'll turn the call over to Jim to review our first quarter results, second quarter and fiscal 2010 outlook in more detail. Thanks.

James Scully

Thanks, Mickey. Turning to the details. Total revenues increased 20% in the first quarter to $414 million. Our store sales increased 20% to $290 million. This was driven by a 15% increase in comp store sales, coupled with a 4% increase in net square footage. In addition, direct sales increased 20% to $114 million.

Gross profit for the first quarter was $203 million, with our gross profit margin expanding 680 basis points to 49%. The expansion in gross profit margin reflected 560 basis points in merchandise margin expansion, coupled with 110 basis points of buying and occupancy leverage. The merchandise margin performance was significantly better than anticipated, resulting from substantial increase in full price sell-throughs. This drove a significant increase in AUR versus expectations.

SG&A expenses for the first quarter increased 15% to $127 million, resulting in 130 basis points of leverage with the rate declining to 30.7%.

Operating income increased to $75 million from $35 million last year. Our gross margin expansion, coupled with solid SG&A leverage, drove our operating margin to 18.2%. Net interest expense for the first quarter totaled $600,000 compared to net interest expense of $1 million in the first quarter last year.

Net income for the quarter was $45 million or $0.68 per diluted share compared to net income of $20 million or $0.32 per diluted share in the first quarter last year.

Turning to some key balance sheet highlights. Cash and cash equivalents were $332 million at the end of the first quarter compared to $155 million at the end of the first quarter last year, with total debt at approximately $49 million. Inventories at the end of the first quarter were $193 million, flat to last year and down approximately 4% on a per square foot basis.

Capital expenditures for the first quarter were $7 million and if we turn to our outlook, while we were pleased with our better-than-expected first quarter results, we continue to expect that our earnings growth will normalize as we begin to anniversary the recovery in our business which began in the second quarter of last year and gain momentum in the second half. Our guidance assumes that the current macroeconomic conditions essentially remain the same throughout the full year.

For the second quarter, we expect diluted earnings per share in the range of $0.40 to $0.45, which compares to $0.29 in the second quarter of fiscal 2009. Our second quarter outlook reflects comp store sales growth in the high-single digits, direct sales growth in the low-double digits, gross margin expansion of approximately 200 to 250 basis points as compared to the second quarter of 2009, and approximately 67 million average diluted shares outstanding which compares to 64 million shares in the second quarter of last year.

For fiscal 2010, we expect diluted earnings per share in the range of $2.35 to $2.45 which compares to $1.91 for fiscal 2009. Our annual earnings guidance reflects comp store sales growth in the mid- to high-single digits, direct sales growth in the low-double digits, operating margin expansion of approximately 150 basis points. We expect SG&A per square foot will increase in the high-single digits versus 2009 based on our current sales assumptions.

The full year also reflects an effective tax rate of approximately 40%; approximately 67 million diluted shares outstanding, which compares to 65 million shares in fiscal 2009; capital expenditures of approximately $55 million, which includes plans to open 15 new stores with annual net square footage growth of approximately 3%; and approximately $13 million in losses associated with Madewell, which includes expenses for our e-commerce launch; and it is essentially flat to 2009, excluding one-time costs related to store closure and impairment charges.

Operator, we would like to now open the call to some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jeff Klinefelter with Piper Jaffray.

Jeffrey Klinefelter - Piper Jaffray Companies

Question is on the direct business. If you could talk a little bit more about sort of the productivity of the business. I know they’ve been doing a lot of work on page count reductions over the last several quarters, and then I believe this quarter, Jim started increasing those again to go after more of the momentum or further the momentum in that business. Could you talk a little bit more about that page counts and then any other metrics around the direct business that you're seeing?

Tracy Gardner

Sure. First, it's Tracy. I'll talk a little bit about page counts. What we're seeing now is an opportunity to grow. In the first quarter, we did grow in the single digits and it's really a function of three things: one, we're seeing our customer file strengthen. We're acquiring new customers at quite a clip. We're also seeing an opportunity to mail deeper into our retail-only file, which we've done more aggressively as we've taken on new customers in the retail channel. And then thirdly, we're just seeing new incremental growth in opportunities like shoes, crewcuts, the non-apparel business collection. So we only add space where we see we can make money, and we're seeing three opportunities to really go for it.

Operator

Our next question is from Paul Lejuez with Credit Suisse.

Paul Lejuez - Crédit Suisse AG

Mickey, on Madewell, what are you happy with in that business versus not happy with? And what should we think about for the store rollout over the next few years, looking beyond 2010?

Millard Drexler

Well, everyday, you come to work, you're happy, and you're not happy. And my job is usually focusing in on the not happy, right? As I say here, I look for the 5% or 10% every day, that's wrong. What am I happy about? I'm happy about the fact mostly that after three and a half years of working our butts off there and rejiggering and fixing and looking at and getting more creative and getting the word out that our customers actually are really shopping there. It's building a nice repetition, it's getting a little viral, it's got some nice buzz, there's a lot of love going on there with women around. And as I said a while ago, if we weren't happy in general, we wouldn't be so happy. We wouldn't be planning store openings. And so I’m really overall on balance please is always something every day in any business that you don't like what's going on. I can talk about a category. I can talk about an item. I can talk about anything. But as we said, long term, we see a viable niche in the market for a business like Madewell with cool fashion, at not double profit prices. What's going on in the world and keeps going on, is the fact is where do I shop today to buy really cool clothes, modern, hip, designed well and well-made and doesn't really cost a lot? I'm a broken record on this, but the fact is that we have spent three years this August, or is it four? Fourth anniversary coming? Four years, very conservative, I'm happy we've been that way. So I'm really pleased. What I'm not happy about? Sometimes is the rents we see in the marketplace on locations we want. There's some styles or categories that -- by the way, whatever's in the stocks today, you understand it's like over, it’s obsolete because we already have -- we're through next holiday on design. And every day, we're looking forward trying to make it better. But on balance, it's real nice. And more importantly, the customers are there. The performance is much more consistent than it's been on a comp and new store basis. It takes a while to get unknown businesses out there and now that we have, I think it's 17 stores, we're seeing a consistency on results that pretty much gratifying and really good news. And next year, we're targeting, as I said, 10 to 15 stores. So right now, it’s about finding right locations that pencil out and good news, bad news, we just went online today. I'd been unhappy, we've been unhappy about it, but I have to say in hindsight, now that today is here, we probably weren't as ready to be online because our assortment probably wasn't that right. And I also have learned that, as we know, start-ups are not easy. They're painful, they're expensive. But if you have cash and you believe in it long-term, it ends up working. Our shareholders, our board has been very supportive in the investments we've made. But I think if you go into the stores today, you feel pretty good. Is it perfect? No, but more importantly indication on -- a quantifiable indication that it's really moving really in the right direction. I can't make any promises beyond that, but we're really pleased there.

Operator

The next question is from Kimberly Greenberger with Citi.

Kimberly Greenberger - Citigroup Inc

Jim, I was hoping you could talk to us about the way you're thinking about inventory going into the second half of the year? I think we'd talked about the need to possibly grow your inventory. When might we see that? And does the weaker euro present an opportunity for you to contain some of your costs and possibly see some lower sourcing costs?

James Scully

Okay. So Kimberly, on inventory, as I mentioned, we ended essentially flat from a point-in-time perspective and on a per-square-foot basis, we were down 4%. And I think we had said previously, after Q1 we would start to build inventory as we entered into Q2 in the back half. We anticipate inventory being up, I would say, the mid- to high-single digits at the end of Q2. And then we will see it track our sales guidance for the remainder of the year. It's an interesting question on the euro. We source about 25% of our raw materials out of Europe, so there is somewhat of an opportunity to offset some of the costs that we all know exist out there, whether it be raw materials and other categories, whether it's labor in China or whether it's transportation. But that is an opportunity for us to help mitigate some of those costs.

Operator

The next question is from Michelle Tan with Goldman Sachs.

Michelle Tan - UBS

Mickey, I was wondering if you could talk a little bit about how you think about pricing and with the strength of the brand you're seeing now, are there any opportunities to kind of selectively take pricing higher on items or trade up the assortment at all? Are you more focused on just keeping things steady?

Millard Drexler

Well, I know it's a quarterly report. There’s not one day that goes by with our team that we don't talk about pricing. So let me tell you how I think about it, and I think it's consistent what we do. And pricing is interesting, there's no rules. Some companies have you got to have this margin, it's automatic, yah di da yah. I spoke to a company last week that they have an automatic initial margin, and you know what the merchant said, who was clearly not the big boss? They said, the more we are forced to do initial margins at this point, the more markdowns we take. So there's an art here and a science, and Tracy and Libby and team will tell you that you don't take automatic markups. On the other hand, you've got -- it's a mix in the balance of a portfolio. We spend our cash on inventory. What I look at, and I said it in our early remarks is that there is a huge pricing advantage we have in this marketplace, and it's long-term and it takes time to build, but we do not want to alienate anyone on opening price points. We want to give fair value. On the other hand, the inflated values out there on double profits, designer costs, licensing fees and all that, we think play to our advantage. So if you look at our pricing now, and we look at it every day, and we also, as important, we listen to customers every day, and we look at selling in weeks on end. It's a subtle mix. It's kind of like a recipe. And if the food tastes really good, there’s a little more or less spice, a little more or less salt or whatever, we've looked at -- we were in our wedding store this morning and I have to say in that environment, with those dresses and that design, you know something, I don't want to say it's inexpensive, it isn't. We're very happy. But the reason you see us doing what we do is because we price fairly, we price against competitors, we price against perception, we price against figuring how to own more business than our competitors because we all know in America and in the world there's too many clothing stores. But there are not enough stores with great integrity on product, design and value. That's what we live for. We've been really consistent on all that, and yes, where we have rarity or scarcity, our vintage jewelry collections, our specially-designed handmade items, we're looking for extra now. One of the things we talk about is, how much does it cost in fact to have that rarity? But on the other hand and Tracy and Libby and the teams know that it's a matter of turning goods, increasing customers and looking at that landscape and not wanting to have sale goods on the racks. And we much rather have high sell-throughs and quicker turns, use the cash to our advantage. But that's an everyday exercise, it's kind of like what we are happy and not happy about? Every day, we're panning for gold, we're looking for opportunities, and it's actually quite endless.

Operator

The next question is from Brian Tunick with J.P. Morgan.

Brian Tunick - JP Morgan Chase & Co

I guess first question on the outlets. I think PVH might have mentioned that traffic had slowed in the outlets in the last couple of weeks and just curious is there anything you can say about what you guys saw in the quarter? Do outlets have enough inventory if you're full price is so clean right now? And then, Jim, on the SG&A side, you're guiding for high-single digits per foot. Last few years, you've run around $240 a foot, now you're sort of saying close to the $270 a foot in SG&A. Is there any change that's happening in the cost structure? Has your leverage point changed? Just curious what's happening on the SG&A side.

James Scully

Sure. So I think first, when we talk about the factory business, I think was your first question with the current business. Actually they performed pretty consistently in the first quarter. I think one of your questions was, do we see lack of inventory because of full-price selling. Actually 95% of the goods are actually made for factories so they're not dependent on any kind of liquidation that's coming out of retail and really never have been. So we don't see an impact there. But back to the first quarter, we were very pleased with both businesses and they performed very consistently. With respect to SG&A. SG&A per square foot, I think originally we had anticipated being in the mid-single digits for Q1. It came in around 10% for Q1. It was driven by two things. One was just higher-than-anticipated sales that we experienced with a variable component and the second was some incentive compensation as again, our performance exceeded our expectations. So we took that into account in Q1.

Millard Drexler

By the way, one other thing, just to answer, I think we've always said factory stores do not have goods from our regular-priced stores. They are designed and manufactured and delivered only to factory. So they're very independent of leftover goods. Economically, transferring leftover goods from retail stores actually doesn't make a lot of sense except under very, very specific circumstances. And we usually do it in direct which is a very effective way of moving sale goods.

Operator

The next question is from Lorraine Hutchinson with Bank of America-Merrill Lynch.

Lorraine Hutchinson - BofA Merrill Lynch

Your guidance implies about a 15% operating margin, and given the high penetration of the direct business, it seems that you'll have a longer-term opportunity to move that higher. Can you just talk a little bit about what factors you'd expect to really drive margin expansion from here?

James Scully

Sure. So I think I'll go first on that. I think when we came out, coming out of...

Millard Drexler

When you say margin expansion, talking about percentages or dollars?

James Scully

Talking percentages to begin with.

Millard Drexler

Well, yes, because I think you got to be careful on that relative to dollars. Okay. Go ahead.

James Scully

I think I agree because I think what's interesting is if you look at us, we've maintained not only what I would consider to be significant growth on the top line, but also significant margin expansion. And we sent the initial goal when came out of the IPO of trying to get to the mid-teens and operating margin, and actually if you look at the way this 12 months, we achieved that at the end of Q1. So essentially, four years and a quarter post our expectation taking into account the economic climate. Going forward, we still feel very good about 100 basis points a year in EBIT expansion. And we've always said a third of that comes through gross margin, 2/3 comes through SG&A. And some of the big components there are first of all, you'll see us ramp up new unit growth next year from this year where we're 3%. Trying to get back to mid-single digits for our core comps, that's plus Madewell on top of that. I think Mickey just mentioned 10% to 15%’s our target for Madewell. In addition, as we grow – try to grow the penetration of our direct business, we get significant leverage on our buying and occupancy since there is no occupancy related to our direct business. And then there's other things that we're very excited about. As Madewell continues to mature, it helps not only in a gross margin, but also leverage, and it's also contributed to the EBIT margin. So that's a big component as well because right now, obviously, running a loss. If you flip that to a profit, it has a pretty big impact on the EBIT margin going forward.

Millard Drexler

And I also think there's a lot about organic growth. We don't just look at the percentages. You can't win on a percentage gain. If you look at our industry over the last many years, no one's grown to the sky in margin percent because it's somewhat defined by the businesses you're in, i.e. perhaps accessories, a little higher margin than not, versus other categories. We look at organic growth being incredibly important because the return on organic growth is huge. Of course, there's new units, direct, factory and Madewell. But the margin is really just a function of how good we are at day-to-day management of a business. And we could take prices up, but we don't unless we think we're going to get our return on investment and turn the goods. And for us, that regular-priced high-integrity sell-through over the long-term, it’s really critical.

Operator

Our next question is from Roxanne Meyer with UBS.

Roxanne Meyer - UBS Investment Bank

I'm wondering in light of the strength of the direct business, if you can talk to what total sales growth you need to sort of leverage SG&A as we move forward. And then also, what marketing do you have in-store to get the awareness out on Madewell?

James Scully

So first, with respect to where we leverage buying and occupancy and actually SG&A. It's a good question, Roxanne, because we actually do look at total sales. A lot of people look at comp. We look at total sales given how big direct is a component of total sales. So for us right now, it's mid- to high-single digits in total sales growth to leverage both B&O and also SG&A.

Millard Drexler

On Madewell marketing, we started today, slow start, we haven't told anyone publicly, working whatever there is to work out and going to school on it. We are on the J. Crew site, you'll see some of Jenna's Picks being discussed. Will be some Madewell items. We will be, this fall, having a campaign. Alexa Chung, who's doing a collection for us, will be part of our marketing campaign. Viral in the world today, it’s like, kind of, it doesn't take a lot to get people to know because we’ve had people waiting for a long time, but we will have direct, we'll have package stuffers coming out. We'll have catalog inserts. Advertising print and online, aggressive e-mail, and we're launching a sweepstakes at Madewell to build the file. We have very conservative plans as we do with most of our launches. And then the viral thing, Facebook, Twitter and all that is critically important. Search, Google, et cetera. So that's where it is and be a work in progress.

Operator

Our next question is from Christine Chen with Needham & Company.

Christine Chen - Needham & Company, LLC

I was just wondering, Mickey, you talk about the things that you're unhappy with. Can you comment on what you were unhappy with in the back half of last year? I guess, what do you see the opportunities are for the back half of this year from a product perspective, and can you comment about any regional performance differences?

Millard Drexler

Well, I'll try, Christine. The back half of last year was -- it's kind of over in our minds. We're living in 2011 right now. Whatever we've -- well, I think we had a pretty good back half, so by and large -- it's funny when you use the word happy. Again, my job is Mr. Unhappy 10% of the time. But there's always something that you can improve upon. Show me a merchant and I'll show you someone who complained about last year. And that's the way it happens. So I don't know, I'm asking my partners here...

Tracy Gardner

Believe it or not, we could have used more flow, we could have used more newness. Wear-now is what we wanted to be. We still can be more wear-now. We still had too much in the classics although we will always own the classics business because it’s integral, but we still had too much there. The customer wants newness, they want flow, they want to be able to buy it today and wear it today. We continually see opportunities to make ideas that we love bigger, sometimes we actually underestimate how big an idea that we love can be so we're learning how to size up even bigger what we love. The non-apparel business, in both men's and women's, enormous opportunity. Another thing that we need to talk about is, we don't look at averages. That's a bad word around here. And as we look at every store in our portfolio, there is still latent opportunity. And we continually stage that latent opportunity in the future. So we have identified a group of stores that can mix higher into better goods. We've identified a group of stores that certainly owes us more business. So we're constantly, thankfully, seeing mistakes that we've made.

Millard Drexler

Yes, I second the motion. And I think Tracy said an important thing. You visit the stores all the time. Part of organic growth is taking x amount of stores and remixing them, whether it's higher average retail, whether it's playing more to their customer base, and there's a lot of those opportunities around. And one other thing, it's really not what was for us, it's what will be. We need to be smart enough to take ongoing product and evolve it or continue it or keep it on our always list or move forward. If you look at great companies that we admire hugely in America or in the world, they're constantly introducing new product, they're being innovative, they're not doing what others did last year, and I could think of a really good example of one I’m on the board of. When I go to the board meetings I learn every day about this is new, get rid of some of the old and be bold about the new. And that's all we do here. It's not complicated. It is a little broken recordy. It's funny. We say a lot of the same things on every call. It's really what goes on the rest of the year that kind of creates hopefully what the right numbers are. But as we look at the landscape, we continue to be on a mission to grow our customer base at every level of the marketplace, continue to give great value in best fabrics and make in the world and continue to try to take customers away because let's face it, no one is growing total apparel in America or in the world today. It's a take from your competitor’s business and the only you do that is you've got to be better every day and not keep doing what you used to do. So every day, we're trying to figure out what did we do wrong -- by the way, right now, we have a better answer about what was wrong this quarter versus last fourth quarter. Because we're designing into spring 2011 as we speak.

Operator

Our next question is from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Mickey, I wondered if you'd talk a little bit about the men's business. I'm hearing that there's been an acceleration in that business. I'm wondering if you think men are becoming more fashionable or if there's just better clothes out there. And I wondered also if you could talk a little bit about the khaki trend and how meaningful it could be to your business this fall.

Millard Drexler

Well, I’ve said in the opening comments, we are really pleased with the free-standing men's stores. I don't think guys are more or less fashionable. I think that we have kind of made some breakthroughs. I think having had a dormant men's business here and almost everywhere for, I don't know, 10 years, 15, we said either we're going to move forward and differentiate. We're going to take risks, and we're going to figure it out because the same old never works for that long. So for us, we couldn't be more pleased with the response nationally. I've been in about eight cities in the last eight days or so, and I can tell you, the men's customer’s out there. He's out there, and now we're giving him what he think he wants and he doesn't want the same old. He likes the integrity. The favorite thing a guy likes in his closet is always something old. Ask a guy what he likes, it's something old. So it's something that's kind of comfortable. It's been there or it feels like it's been there. I think our men's design team and merchant team has done an incredible job. I'm not bragging about -- the numbers show that they've done a great job in moving forward and figuring out what a guy needs today that he's not being satisfied. I read an article in Times the other day about some khakis. And how if you’re talking about khakis, explaining why a khaki costs $450. Well I read that article and I said oh? Explain it? No explanation, I don't get it. And if you look at guys’ clothes, a khaki’s a khaki. A shirt's a shirt. A jacket's a jacket. And you know what makes the difference? It's the wash, it's the fit, it's the fabric, it's the design. It's the wash, fit, fabric, design, again and the integrity and the quality. I really think when you look at our men's clothes, again broken record, look at the make, look at the designer makes and there's a big difference between a $70 or $69.50 shirt and a $150 shirt. There really isn't. There's a big difference in the price and actually, we do quality testing and it's a little clinical. We do our own research on our garments, on our make, on our fabric. And fashion -- people don't seem to care that much, but they really do care. And I think in men's, if you look at our assortment, we are taking away a lot of business from others because you don't want to spend a fortune on a pair of pants or on a shirt. That's the guys actually doesn't want to spend it. So that's where we have some really incredible things we bring in from worldwide that -- branding items, we bring in. And if we visit a factory, Quoddy in Maine. It's art. It's science, it's art. If you look at what goes on in the iPad, it's a science and an art along with a great product. If you look at great products, it's about having great product s and history and integrity and for us, every day we do something, we want to keep building our reputation. And by the way, it becomes a little viral even on the reputation. You do good, they like you better. So on men's, we went ahead with the liquor store, we went with 484, you went with Garden State. And we show a strong point of view. And even on the suit business now, what's fascinating and it's really not, is we are -- we're not in stock on Ludwig suits. Why? Because the guy knows it's $600 or whatever. It's Italian fabric, it's made as well as anyone, and he knows -- I don't know if he knows we have one profit, not two, but we don't have the two profits. We don't – and by the way, you cannot buy it on sale at a discounter who gives you two-hour sales, or opens a sale store in the middle of Manhattan where 10 blocks from here, every designer label’s on sale at 30% off. And I don't know, I feel like this is what's going on. And everything is available online anywhere in the world, when you want it, and so, it's keeping our products scarce and not any place else. And in fact, not having people get deals which we all do here. Our first exercise of the day is, where is that brand on sale? That's what we do with our competitors. We want to see, we want to learn, and we have to stay out in front. So long answer on men’s -- and by the way, we don't see anything special in the khaki trend at all. So maybe I'm not sure what's out there, but it's nothing beyond what's normal for us which is nice, Valerie, Chino and all that. But nothing beyond. I mean, you’re probably in the New York Times, I think today they had a khaki suit article, but whatever.

Operator

Our next question is from Richard Jaffe with Stifel, Nicolaus.

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Just a question, Mickey, just help me to reconcile my perceptions with what's going on in stores. It seems like you have much broader assortments, more customer choices, both on the men's side, non-apparel and apparel. And on the women's side, with broader range of accessories and more items, whether it's key on tops, patterned skirts, a broader assortment of sweaters. Is that a correct observation or just a well-merchandised store?

Millard Drexler

That's a layup answer. There's not more, but yes, it's better merchandising. You know what it is? It's investing in the annuity businesses, giving interesting assortments and merchandising the store. Pile it high, only speaks to it will be on sale soon. I always translate. In my old days, we piled it high, but that's many decades ago. But no, it's about merchandising and making it interesting, and all the fashion stores we admire out there and there’s a lot of competitors we look at and admire immensely, there's always this mystery, this feeling, this flow, it's the oxygen of our businesses’ flow. But the assortment’s interesting. We hashed all the men's shirt sportswear. We actually -- you see our inventories are where they are. Our sales are where they are. Okay, it's better merchandising. I don't want to sound too whatever.

Operator

Our next question is from Barbara Wyckoff of Jesup & Lamont.

Barbara Wyckoff - Jesup & Lamont Securities Corporation

I have a question for Tracy, I guess. Could you talk a little bit about your wear-now philosophy going into the fall season and into next spring? How are you going to manage it this year?

Tracy Gardner

Well I think Jenna and the team, they design what they love and what's unique and what you can buy the second you buy it. And we’re just -- we're really going after categories that we feel like are differentiated and that we can win on. And as we look at our non-apparel assortments, we continue to see the customer loving our jewelry, loving our ballet flats. And we're just -- the response to the unique, the well-designed, the beautiful is incredible. And again, we see more and more our customers are entering our store more often. They’re developing incredible relationships with our personal shoppers. And it just -- they come in almost once a week. So we find that we want to have a nice balance of the beautiful jacket, cardigan in fresh colors, but at the same time, have the newest thing that Jenna and team deem as the next.

Operator

The next question is from John Morris with BMO Capital.

John Morris - BMO Capital Markets U.S.

Mickey, can you give us an update on your longer-term outlook for the wedding store? And also tell us about Crewcuts and the quality there on the merchandise and how you're continuing to grow that division?

Millard Drexler

Okay. So wedding is about eight hours old now. It's interesting. Tracy and Jenna and the team are here. I don't want to go on one day, but it's a platform and, you know what, speaking to a woman today. Well, we speak to a lot of women obviously and learn, but buying a wedding dress for bridesmaids, is – now I've never done this and don't intend to, but it's a fantastically difficult, uninspiring experience. And we tried again. Skate to where the puck is going. We're actually -- it's funny, this when we first did it six years ago, I remember some of the reactions were really odd and weird and actually, I thought we were a little odd and weird doing it, but it was a quirky fun thing to do. The team insisted that -- and these are women mostly, they insisted that this is a really important opportunity, and Tracy and Jenna wanted a wedding store. They wanted it on Madison. I said, are you sure? Anyway, we now have a wedding store. But before we did that, we had this growing online business. We had this viral reaction to brides around. We had this thing about -- boy, it's really easy. I sound like, again, a broken record on price, price, price. You don't spend a fortune. You do not look at a thousand dresses. You look at maybe 20, 30 or 40. You look at them in pretty colors. And then we started doing the wedding dresses. Now we have some go to work, not go to work. We have party dresses. We put a vintage jewelry section in and shoes. They actually think, and I’m their partner, I don't see why we can't do this in every major city in America. Because from what I've learned and I am certainly not an expert or even close, but I work with a lot of women. We speak to our customers in our stores. A bride and her mother will go anywhere, any place at any time to get the right dress with the right assortment. I spoke to a woman this morning. She happens to be my yoga teacher. She just got married three weeks ago and said – I said, well tell me -- I knew she wore, nothing to do with me, J. Crew bridesmaids dresses. I started with her after she did the dresses. She says, well, if you go in, you go to every single wedding store there is and sometimes you walk right out because they say, describe what you're looking for. It's like describe what you want your husband to be like, describe what the wife and so on, whatever. She said it was the worst experience in the world. But I think this is true. She went -- I don't want to mention the names and she ended up with us. And it was just a matter of -- part of it's what other people aren't doing, but Jenna and Tracy and the team, Jenn Atkins is the store, went into this, studying the market like crazy, fitting rooms, sizes, who shops for the dresses, what do they want? And I would only say we're real excited about the opportunity, but like everything else, it's got to be organic, you've got to keep going to school every day. We were in there evaluating retail, Tracy Gardner, evaluating in retail at 8:00 this morning. So it's always about what's right, what's not right and what fits. So that's that. On kids, it's interesting. We have this little business in factory called Crewcuts Factory. The kids thing’s interesting. Our stores are a little too small to give us the -- we're profitable, we're happy with the returns, but if we did anything wrong, we opened up a few too many small stores, Westchester, a few of the other stores. North Park's the right size. And we found that you kind of maxed out on kids at a certain point. We're really slow on Crewcuts. The direct strategy there is more about priority. And again, it takes time. I never realized how much time it takes for not-a-sale business, for not-a-discount business to kind of move forward. We're really pleased, it's been three years and kind of like Madewell to a degree, really consistent results. We found our niche, you deal with that for a few years. We are the practical and the impractical. We're the fun, we're the special. We play at the high end of the market, no doubt. This is no reason for valued priced middle-of-the-road player in kids. So we've had really incredible success. How big it’ll be? Who knows. I think the nice thing about it, is it's also going to be a really nice umbrella to factory kid. We have tested factory kids in one store. We're opening another and we have, I think, nine or 10 departments. And factory’s always a nice formulaic business. It won't be the tail that wags the dog, but we're really happy with that. So it's good. Always challenges, different lower average retails, you need higher productivity, so on and so forth.

Operator

Our next question is from Sam Panella with Raymond James.

Samantha Panella - Raymond James & Associates

In terms of your e-commerce penetration, obviously, you're one of the highest out there at 28%. But as you ramp up your store growth going forward, what type of challenge does that present to maintain or grow that 28% percentage?

Tracy Gardner

So we see it -- it's not a challenge to us. It's actually an opportunity because what we're seeing, we see our customers as one. We look at our customers as one. We see them shopping as one. They're channel-agnostic. It's more if you're bilingual or not. I think and what we're seeing is our customers are becoming more and more -- the more they know us, the more they shop a channel. In that regard, more is better. The customers spend more when they're shopping both channels, when they have a personal shopper. So we are, in fact, really going after that and encouraging and helping and servicing our customer through really connecting the experience, the customer service experience with the direct channel and the store channel.

Millard Drexler

I think that was the last question so I want to thank all of you for joining us. We look forward to speaking to you second quarter results in August. Take care and thanks again.

Operator

This concludes today's teleconference. You may disconnect your lines. Thank you for your participation.

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