**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark  One)**                                         | ** ** | ** **                                                                                              |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **ý**                                              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                    |       |                                                                                                    |
| **For  the quarterly period ended April 30, 2005** |
|                                                    |       |                                                                                                    |
| **Or**                                                  |
|                                                    |       |                                                                                                    |
| **o**                                                   | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |

 
| **Commission  File Number** | ** ** | **Registrant, State of Incorporation  Address and Telephone Number**                                                                                                | ** ** | **I.R.S. Employer  Identification No.** |
|-----------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|
|                        |       |                                                                                                                                                                |       |                                    |
| **333-42427**               | ** ** | **J.  CREW GROUP, INC.**

(Incorporated  in New York)  **770 Broadway  New York, New York 10003  Telephone: (212) 209-2500**                              | ** ** | **22-2894486**                          |
| ** **                  | ** ** | ** **                                                                                                                                                          | ** ** | ** **                              |
| **333-42423**               | ** ** | **J.  CREW OPERATING CORP.** 

(Incorporated  in Delaware) 

**770  Broadway** 

**New  York, New York 10003** 

**Telephone:  (212) 209-2500** | ** ** | **22-3540930**                          |

 

Indicate by check markwhether each registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý    No o

 

Indicate by a check markwhether any of the registrants is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yeso  No ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

Outstanding at June 1,2005:

 
| J.Crew  Group, Inc. |   | 12,473,306  shares of common stock, par value $.01 per share                                               |
|--------------------------|--------|------------------------------------------------------------------------------------------------------------|
| J.Crew  Operating Corp.  |   | 100  shares of common stock, par value $.01 per share (all of which are owned by  J.Crew Group, Inc.) |

 

ThisQuarterly Report on Form 10-Q is a combined report being filed bytwo different registrants: J.Crew Group, Inc., and J.Crew Operating Corp.(a wholly-owned indirect subsidiary of J.Crew Group, Inc.).  The information contained herein relating toeach individual registrant is filed by such registrant on its own behalf.  No registrant makes any representation as toinformation relating to any other registrant.

 

J.CrewOperating Corp. meets the conditions set forth in General Instruction (I)(1)(a) and(b) of the Form 10-Q and is therefore filing this Form 10-Qwith the reduced disclosure format.

 

 

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**PART I– FINANCIAL INFORMATION**

 
| **ITEM 1.** | **FINANCIAL  STATEMENTS** |
|-------------|---------------------------|

** **

**J.CREWGROUP, INC. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                            | ** ** | **April 30,  2005**        | ** ** | **January 29,  2005** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Assets                                                |       |                            |       |                       |       |
| Current  assets:                                      |       |                            |       |                       |       |
| Cash  and cash equivalents                            |       | $                               | 25,401     |                       | $          | 23,647 |   |
| Merchandise  inventories                              |       | 104,503                         |       | 88,093                     |       |
| Prepaid  expenses and other current assets            |       | 23,203                          |       | 22,217                     |       |
| Refundable  income taxes                              |       | 9,320                           |       | 9,320                      |       |
| Total  current assets                                 |       | 162,427                         |       | 143,277                    |       |
|                                                  |       |                            |       |                       |       |
| Property  and equipment - at cost                     |       | 262,892                         |       | 259,098                    |       |
| Less  accumulated depreciation and amortization       |       | (145,608                        | )          | (138,285                   | )          |
|                                                  |       | 117,284                         |       | 120,813                    |       |
|                                                  |       |                            |       |                       |       |
| Other  assets                                         |       | 13,613                          |       | 14,104                     |       |
| Total  assets                                         |       | $                               | 293,324    |                       | $          | 278,194 |   |
|                                                  |       |                            |       |                       |       |
| Liabilities and  Stockholders’ Deficit           |       |                            |       |                       |       |
| Current  liabilities:                                 |       |                            |       |                       |       |
| Accounts  payable                                     |       | $                               | 63,094     |                       | $          | 68,569 |   |
| Other  current liabilities                            |       | 66,807                          |       | 61,148                     |       |
| Federal  and state income taxes                       |       | 1,525                           |       | 1,392                      |       |
| Total  current liabilities                            |       | 131,426                         |       | 131,109                    |       |
|                                                  |       |                            |       |                       |       |
| Deferred  credits                                     |       | 59,137                          |       | 59,064                     |       |
|                                                  |       |                            |       |                       |       |
| Long-term  debt (includes redeemable preferred stock) |       | 589,985                         |       | 576,933                    |       |
|                                                  |       |                            |       |                       |       |
| Preferred  stock                                      |       | 92,800                          |       | 92,800                     |       |
|                                                  |       |                            |       |                       |       |
| Stockholders’  deficit                           |       | (580,024                        | )          | (581,712                   | )          |
|                                                  |       |                            |       |                       |       |
| Total  liabilities and stockholders’ deficit     |       | $                               | 293,324    |                       | $          | 278,194 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

2

----

 

**J.CREWGROUP, INC. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Operations**

 
| ** **                                                | ** ** | **Thirteen weeks ended**        | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **April 30,  2005**        | ** ** | **May 1,  2004** | ** ** |
| ** **                                                | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Revenues:                                                 |       |                            |       |   |   |
| Net  sales                                                |       | $                               | 204,579    |   | $ | 140,575 |   |
| Other                                                     |       | 5,956                           |       | 5,092 |   |
|                                                      |       | 210,535                         |       | 145,667 |   |
|                                                      |       |                            |       |   |   |
| Cost  of goods sold, including buying and occupancy costs |       | 114,089                         |       | 84,935 |   |
|                                                      |       |                            |       |   |   |
| Gross  profit                                             |       | 96,446                          |       | 60,732 |   |
|                                                      |       |                            |       |   |   |
| Selling,  general and administrative expenses             |       | 73,460                          |       | 63,557 |   |
|                                                      |       |                            |       |   |   |
| Income  (loss) from operations                            |       | 22,986                          |       | (2,825 | ) |
|                                                      |       |                            |       |   |   |
| Interest  expense – net                              |       | 17,489                          |       | 20,962 |   |
|                                                      |       |                            |       |   |   |
| Income  (loss) before income taxes                        |       | 5,497                           |       | (23,787 | ) |
|                                                      |       |                            |       |   |   |
| Income  taxes                                             |       | 600                             |       | — |   |
|                                                      |       |                            |       |   |   |
| Net  income (loss)                                        |       | $                               | 4,897      |   | $ | (23,787 | ) |

 

See notes to unauditedcondensed consolidated financial statements.

 

3

----

 

**J.CREWGROUP, INC. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Cash Flows**

 
| ** **                                                                                                                       | ** ** | **Thirteen weeks ended**        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                       | ** ** | **April 30,  2005**        | ** ** | **May 1,  2004** | ** ** |
| ** **                                                                                                                       | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Cash  flow from operating activities:                                                                                            |       |                            |       |   |   |
| Net  income (loss)                                                                                                               |       | $                               | 4,897      |   | $ | (23,787 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities:                                            |       |                            |       |   |   |
| Depreciation  and amortization                                                                                                   |       | 7,766                           |       | 9,163 |   |
| Amortization  of deferred financing costs                                                                                        |       | 259                             |       | 570 |   |
| Amortization  of deferred compensation                                                                                           |       | 155                             |       | 10 |   |
| Non-cash  interest expense (including redeemable preferred stock dividends of $9,362 and  $7,675 in 2005 and 2004, respectively) |       | 9,688                           |       | 15,450 |   |
|                                                                                                                             |       |                            |       |   |   |
| Changes  in operating assets and liabilities:                                                                                    |       |                            |       |   |   |
| Merchandise  inventories                                                                                                         |       | (16,410                         | )          | (18,693 | ) |
| Prepaid  expenses and other current assets                                                                                       |       | (986                            | )          | 1,261 |   |
| Other  assets                                                                                                                    |       | 232                             |       | 225 |   |
| Accounts  payable and other liabilities                                                                                          |       | 61                              |       | 308 |   |
| Federal  and state income taxes                                                                                                  |       | 133                             |       | (345 | ) |
| Net  cash provided by (used in) operating activities                                                                             |       | 5,795                           |       | (15,838 | ) |
|                                                                                                                             |       |                            |       |   |   |
| Cash  flow used in investing activities:                                                                                         |       |                            |       |   |   |
| Capital  expenditures                                                                                                            |       | (4,041                          | )          | (1,886 | ) |
|                                                                                                                             |       |                            |       |   |   |
| Cash  flow used in financing activities:                                                                                         |       |                            |       |   |   |
| Repayment  of long-term debt                                                                                                     |       | —                          |       | (291 | ) |
|                                                                                                                             |       |                            |       |   |   |
| Increase/(decrease)  in cash and cash equivalents                                                                                |       | 1,754                           |       | (18,015 | ) |
|                                                                                                                             |       |                            |       |   |   |
| Cash  and cash equivalents - beginning of period                                                                                 |       | 23,647                          |       | 49,650 |   |
|                                                                                                                             |       |                            |       |   |   |
| Cash  and cash equivalents - end of period                                                                                       |       | $                               | 25,401     |   | $ | 31,635 |   |
|                                                                                                                             |       |                            |       |   |   |
| Non-cash  financing activities:                                                                                                  |       |                            |       |   |   |
| Dividends  on preferred stock (reflected directly in stockholders’ deficit)                                                 |       | $                               | 3,364      |   | $ | 3,364 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

4

----

 

**J.CREWOPERATING CORP. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                        | ** ** | **April 30,  2005**        | ** ** | **January 29,  2005** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Assets                                            |       |                            |       |                       |       |
| Current  assets:                                  |       |                            |       |                       |       |
| Cash  and cash equivalents                        |       | $                               | 25,401     |                       | $          | 23,647 |   |
| Merchandise  inventories                          |       | 104,503                         |       | 88,093                     |       |
| Prepaid  expenses and other current assets        |       | 23,203                          |       | 22,217                     |       |
| Refundable  income taxes                          |       | 9,320                           |       | 9,320                      |       |
|                                              |       |                            |       |                       |       |
| Total  current assets                             |       | 162,427                         |       | 143,277                    |       |
|                                              |       |                            |       |                       |       |
| Property  and equipment - at cost                 |       | 262,892                         |       | 259,098                    |       |
| Less  accumulated depreciation and amortization   |       | (145,608                        | )          | (138,285                   | )          |
|                                              |       | 117,284                         |       | 120,813                    |       |
|                                              |       |                            |       |                       |       |
| Due  from J.Crew Group, Inc.                 |       | 180,185                         |       | 178,757                    |       |
|                                              |       |                            |       |                       |       |
| Other  assets                                     |       | 13,490                          |       | 13,971                     |       |
| Total  assets                                     |       | $                               | 473,386    |                       | $          | 456,818 |   |
|                                              |       |                            |       |                       |       |
| Liabilities and  Stockholder’s Deficit       |       |                            |       |                       |       |
|                                              |       |                            |       |                       |       |
| Current  liabilities:                             |       |                            |       |                       |       |
| Accounts  payable                                 |       | $                               | 63,094     |                       | $          | 68,569 |   |
| Other  current liabilities                        |       | 66,691                          |       | 60,314                     |       |
| Federal  and state income taxes                   |       | 1,525                           |       | 1,392                      |       |
|                                              |       |                            |       |                       |       |
| Total  current liabilities                        |       | 131,310                         |       | 130,275                    |       |
|                                              |       |                            |       |                       |       |
| Deferred  credits                                 |       | 59,137                          |       | 59,064                     |       |
|                                              |       |                            |       |                       |       |
| Long-term  debt                                   |       | 297,326                         |       | 297,000                    |       |
|                                              |       |                            |       |                       |       |
| Stockholder’s  deficit                       |       | (14,387                         | )          | (29,521                    | )          |
|                                              |       |                            |       |                       |       |
| Total  liabilities and stockholder’s deficit |       | $                               | 473,386    |                       | $          | 456,818 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

5

----

 

**J.CREWOPERATING CORP. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Operations**

 
| ** **                                                | ** ** | **Thirteen weeks ended**        | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **April 30,  2005**        | ** ** | **May 1,  2004** | ** ** |
| ** **                                                | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Revenues                                                  |       |                            |       |   |   |
| Net  sales                                                |       | $                               | 204,579    |   | $ | 140,575 |   |
| Other                                                     |       | 5,956                           |       | 5,092 |   |
|                                                      |       | 210,535                         |       | 145,667 |   |
|                                                      |       |                            |       |   |   |
| Cost  of goods sold, including buying and occupancy costs |       | 114,089                         |       | 84,935 |   |
|                                                      |       |                            |       |   |   |
| Gross  profit                                             |       | 96,446                          |       | 60,732 |   |
|                                                      |       |                            |       |   |   |
| Selling,  general and administrative expenses             |       | 73,305                          |       | 63,547 |   |
|                                                      |       |                            |       |   |   |
| Income  (loss) from operations                            |       | 23,141                          |       | (2,815 | ) |
|                                                      |       |                            |       |   |   |
| Interest  expense – net                              |       | 7,407                           |       | 4,913 |   |
|                                                      |       |                            |       |   |   |
| Income  (loss) before income taxes                        |       | 15,734                          |       | (7,728 | ) |
|                                                      |       |                            |       |   |   |
| Income  taxes                                             |       | 600                             |       | — |   |
|                                                      |       |                            |       |   |   |
| Net  income (loss)                                        |       | $                               | 15,134     |   | $ | (7,728 | ) |

 

See notes to unauditedcondensed consolidated financial statements.

 

6

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**J.CREWOPERATING CORP. AND**

**SUBSIDIARIES**

 

**CondensedConsolidated Statements of Cash Flows**

 
| ** **                                                                            | ** ** | **Thirteen weeks ended**        | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **April 30,  2005**        | ** ** | **May 1,  2004** | ** ** |
| ** **                                                                            | ** ** | **(unaudited)  (in thousands)** | ** ** |
| Cash  flow from operating activities:                                                 |       |                            |       |   |   |
| Net  income (loss)                                                                    |       | $                               | 15,134     |   | $ | (7,728 | ) |
| Adjustments  to reconcile net income (loss) to net cash used in operating activities: |       |                            |       |   |   |
|                                                                                  |       |                            |       |   |   |
| Depreciation  and amortization                                                        |       | 7,766                           |       | 9,163 |   |
| Amortization  of deferred financing costs                                             |       | 250                             |       | 432 |   |
| Non-cash  interest expense                                                            |       | 326                             |       | 250 |   |
|                                                                                  |       |                            |       |   |   |
| Changes  in operating assets and liabilities:                                         |       |                            |       |   |   |
| Merchandise  inventories                                                              |       | (16,410                         | )          | (18,693 | ) |
| Prepaid  expenses and other current assets                                            |       | (986                            | )          | 1,261 |   |
| Other  assets                                                                         |       | 232                             |       | 225 |   |
| Accounts  payable and other liabilities                                               |       | 778                             |       | 1,032 |   |
| Federal  and state income taxes                                                       |       | 133                             |       | (345 | ) |
| Net  cash provided by (used in) operating activities                                  |       | 7,223                           |       | (14,403 | ) |
|                                                                                  |       |                            |       |   |   |
| Cash  flow from investing activities:                                                 |       |                            |       |   |   |
| Capital  expenditures                                                                 |       | (4,041                          | )          | (1,886 | ) |
|                                                                                  |       |                            |       |   |   |
| Cash  flow from financing activities:                                                 |       |                            |       |   |   |
| Repayment  of long-term debt                                                          |       | —                          |       | (291 | ) |
| Transfers  to affiliates                                                              |       | (1,428                          | )          | (1,435 | ) |
| Net  cash provided by/(used in) financing activities                                  |       | (1,428                          | )          | (1,726 | ) |
|                                                                                  |       |                            |       |   |   |
| Increase/(decrease)  in cash and cash equivalents                                     |       | 1,754                           |       | (18,015 | ) |
| Cash  and cash equivalents - beginning of period                                      |       | 23,647                          |       | 49,650 |   |
| Cash  and cash equivalents - end of period                                            |       | $                               | 25,401     |   | $ | 31,635 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

7

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**J.CREW GROUP, INC. AND SUBSIDIARIES**

**NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Thirteenweeks ended April 30, 2005 and May 1, 2004**

 

**1.****                      Basisof Presentation**

 

The consolidatedfinancial statements presented herein are as follows:

 

a.       J.CrewOperating Corp. and its wholly-owned subsidiaries (collectively, Operating),which consist of the accounts of J.Crew Operating Corp. and its wholly-ownedsubsidiaries.

 

b.      J.CrewGroup, Inc. and its wholly-owned subsidiaries (collectively, the Companyor Group), which consist of the accounts of J.Crew Group, Inc. and itswholly-owned subsidiaries, including J.Crew Intermediate LLC (Intermediate) andOperating.  Intermediate was formed in March 2003as a limited liability company. Effective May 2003, Group transferred its investment in Operatingto Intermediate.

 

All significantintercompany balances and transactions are eliminated in consolidation.

 

The condensedconsolidated balance sheet as of April 30, 2005 and the condensedconsolidated statements of operations and cash flows for the thirteen weekperiods ended April 30, 2005 and May 1, 2004 have been prepared bythe Company and have not been audited. In the opinion of management, all adjustments, consisting of only normalrecurring adjustments necessary for the fair presentation of the financialposition, results of operations and cash flows have been made.

 

Certain information andfootnote disclosure normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. These financial statements should be read in conjunction with thefinancial statements and notes thereto included in the consolidated financial statementsfor the fiscal year ended January 29, 2005.

 

The results of operationsfor the thirteen-week period ended April 30, 2005 are not necessarilyindicative of the operating results for the full fiscal year.

 

**2**.                      **Recent Accounting Pronouncements**

 

In December 2004,the FASB issued Statement No. 123 R, *Share-BasedPayments.*  This revision toStatement No. 123 requires that compensation expense be recognized for thefair value of stock options over their vesting period and changes the method ofexpense recognition for performance-based stock awards.  The Statement is required to be adopted bythe Company for fiscal years beginning after December 15, 2005 and appliesto all outstanding stock options and stock awards that have not yet vested atthe date of adoption.  Management isevaluating the effects of this Statement.

 

**3.****                      Long-termdebt**

 

Long-term debt consistsof the following:

 
| ** **                          | ** ** | **April 30,  2005**  | ** ** | **January 29,  2005** | ** ** |
|-------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **($ in thousands)** | ** ** |
| Operating:                          |       |                      |       |                       |       |
| 9 3/4%  senior subordinated notes   |       | $                         | 275,000    |                       | $          | 275,000 |   |
| 5%  notes payable                   |       | 22,326                    |       | 22,000                     |       |
| Total  Operating                    |       | 297,326                   |       | 297,000                    |       |
|                                |       |                      |       |                       |       |
| Group:                              |       |                      |       |                       |       |
| 13 1/8%  senior discount debentures |       | 21,667                    |       | 21,667                     |       |
| Redeemable  preferred stock         |       | 270,992                   |       | 258,266                    |       |
| Total                               |       | $                         | 589,985    |                       | $          | 576,933 |   |

 

8

----

 

**4.****                      Other**

 

The Company recorded anadjustment of $1.3 million in the 2005 first quarter to reverse incomerecognized on unredeemed gift cards in prior years.

 

**5.****                      Reclassifications**

 

Certain prior yearamounts have been reclassified to conform to current year’s presentation.

 

9

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**Forward-LookingStatements**

 

Certain statements inthis Report on Form 10-Q constitute “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.  We may also make written or oralforward-looking statements in our periodic reports to the Securities andExchange Commission on Forms 10-K, 10-Q, 8-K, etc., in pressreleases and other written materials and in oral statements made by ourofficers, directors or employees to third parties.  Statements that are not historical facts,including statements about our beliefs and expectations, are forward-lookingstatements.  Such forward-lookingstatements involve known and unknown risks, uncertainties and other importantfactors that could cause the actual results, performance or achievements of theCompany, or industry results, to differ materially from historical results, anyfuture results, performance or achievements expressed or implied by suchforward-looking statements.  Such risksand uncertainties include, but are not limited to, competitive pressures in theapparel industry, changes in levels of consumer spending or preferences inapparel and acceptance by customers of the Company’s products, overall economicconditions, governmental regulations and trade restrictions, acts of war orterrorism in the United States or worldwide, political or financial instabilityin the countries where the Company’s goods are manufactured, postal rateincreases, paper and printing costs, availability of suitable store locationsat appropriate terms, the level of the Company’s indebtedness and exposure tointerest rate fluctuations, and other risks and uncertainties described in thisreport and the Company’s other reports and documents filed or which may befiled, from time to time, with the Securities and Exchange Commission.  These statements are based on current plans,estimates and projections, and therefore, you should not place undue relianceon them.  Forward-looking statementsspeak only as of the date they are made and we undertake no obligation toupdate publicly any of them in light of new information or future events.

 
| **ITEM  2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

 

Management’s discussionand analysis of the results of operations are provided solely with respect toOperating and its subsidiaries since substantially all of the Company’soperations are conducted by Operating. However, Group has additional debt securities that are outstanding.  Accordingly, information with respect tointerest expense of Group is also provided herein.  The discussion of liquidity and capitalresources pertains to Group and its consolidated subsidiaries, includingOperating.

 

This document should beread in conjunction with the Management’s Discussion and Analysis section ofour Annual Report on Form 10-K for the year ended January 29,2005 filed with the Securities and Exchange Commission.

 

**Resultsof Operations – Thirteen Weeks Ended April 30, 2005 Compared to ThirteenWeeks Ended May 1, 2004**

 

Revenues for the thirteenweeks ended April 30, 2005 increased by $64.8 million, or 44.5% to $210.5million from $145.7 million in the thirteen weeks ended May 1, 2004.  The increase resulted primarily fromincreases in net sales of the Retail division (which consists of J.Crew Retailstores and J.Crew Factory stores) of $42.0 million and Direct division (whichconsists of the Internet and catalog operations) of $22.8 million.  We believe that the increase in revenuesresulted from the continuing appeal of our enhanced merchandise product lineacross all channels of distribution and improved customer service.  We note that the magnitude of the increasewas impacted by a scarcity of inventories in the first quarter of 2004.  Included in these sales increases were $1.3million of unredeemed gift certificates that expired in the first quarter of2005.  These certificates were issued inconnection with a customer loyalty program initiated in the fourth quarter of2004.

 

Net sales of the Retaildivision increased by 39.6% in the first quarter of 2005 to $145.2 millioncompared to $104.0 million in the first quarter of 2004 due primarily to anincrease of 37.0% in comparable store sales and sales from new stores openedfor less than a full fiscal year.  Therewere 157 retail stores and 41 factory outlet stores open at April 30, 2005as compared to 154 and 42, respectively, at May 1, 2004.

 

Net sales of the Directdivision increased by 62.3% in the first quarter of 2005 to $59.4 millioncompared to $36.6 million in the first quarter of 2004 due in part to anintensified e-mail campaign and the mailing of three new catalog editions.  The number of pages circulated duringthe first quarter of 2005 increased by 9% to 1.3 billion pages.  Direct revenues in the first quarter of 2004were negatively impacted by a 19% reduction in pages circulated includingthe elimination of two “women’s only” editions and reduced inventory levels.

 

Other revenues increasedby $0.8 million in the first quarter of 2005. This increase was due primarily to an increase in shipping and handlingfees attributable to the increase in net sales of the Direct division offset inpart by an adjustment of $1.3 million due to the reversal of income recognizedon unredeemed gift cards in prior years.

 

10

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Gross margin as apercentage of revenues increased to 45.8% in the first quarter of 2005 from41.7% in the first quarter of 2004.  Thisincrease was attributable to an increase in merchandise margins of 110 basispoints, resulting from decreased markdowns across all channels and improvedinventory management, with the rest of the increase due primarily to theleverage  on buying and occupancy costs, asthese expenses are relatively fixed. Gross profit was increased in the first quarter of 2005 by a freightvolume rebate of $0.7 million which was earned for the twelve month periodended April 30, 2005.

 

Selling, general andadministrative expenses increased by $9.8 million, or 15.4%, to $73.3 millionin the first quarter of 2005 from $63.5 million in the 2004 first quarter.  This increase was attributable primarily toincreases in variable store and Direct operating expenses and employmentexpense, which was partially offset by a decrease in depreciation andamortization of $1.4 million related to fully depreciated assets, primarilycomputer equipment.  As a percentage ofrevenues, selling, general and administrative expenses decreased to 34.8% inthe 2005 quarter from 43.6% in the 2004 quarter resulting from increasedleverage due to the increase in revenues.

 

Group’s interest expensedecreased by $3.5 million to $17.5 million in the first quarter of fiscal 2005from $21.0 million in the first quarter of fiscal 2004.  This was due primarily to a decrease in therate of interest payable on long-term debt as a result of the refinancings inthe fourth quarter of 2004, in which $150.0 million of 10 3/8% seniorsubordinated notes of Operating and $170.0 million of 16%  senior discount contingent principal notes ofIntermediate were redeemed with proceeds of $275.0 million in new term loanswith an interest rate of 93/4% and internally availablefunds.

 

Operating’s interestexpense increased by $2.5 million to $7.4 million from $4.9 million.  This resulted primarily from the increaseddebt outstanding at Operating due to the issuance of the $275.0 million in newterm loans with an interest rate of 93/4% in December 2004,the proceeds of which were used to redeem $125.0 million of 16% notes ofIntermediate, in addition to the $150.0 million of 10 3/8% notes on Operating.

 

The provision for incometaxes for the first quarter of 2005 is based on the estimated effective taxrate for the year, which differs from statutory rates due primarily to theutilization of operating loss carryovers, which for alternative minimum taxpurposes, are limited to 90% of taxable income in any fiscal year.  Net deferred tax assets at January 29,2005 and April 30, 2005 were fully reserved.

 

The increase in netincome of $28.7 million to income of $4.9 million in the 2005 first quarterfrom a net loss of $23.8 million in the 2004 quarter resulted primarily fromthe increase in gross profit derived from the increase in revenues.

 

**Liquidityand Capital Resources**

 

Our sources of liquidityare primarily cash flows from operations and borrowings under our workingcapital credit facility.  Our primarycash needs are for capital expenditures incurred primarily for opening new storesand system enhancements, debt service requirements and working capital.

 

Cash provided byoperations increased by $21.6 million to $5.8 million in the first quarter of2005 compared to a use of $15.8 million in the first quarter of 2004.  This increase was due primarily to anincrease of $28.7 million in net income, which was partially offset by anincrease in cash interest of $2.6 million, a decrease in depreciation andamortization of $1.4 million and an increase in working capital requirements.

 

Capital expenditures were$4.0 million for the first quarter of 2005 compared to $1.9 million for thefirst quarter of 2004.  Capitalexpenditures are planned at $25.0 million for the 2005 fiscal year primarilyfor ten new stores and information technology initiatives.

 

The Amended WachoviaCredit Facility provides for revolving loans and letters of credit of up to$170.0 million and expires in December 2009.  The total amount of availability is limitedto the sum of:  (a) invested cash, (b) 90%of eligible receivables, (c) 95% of the net recovery percentage ofinventories (as determined by inventory appraisal) for the period August 1through December 15, or 92.5% of the net recovery percentage ofinventories for the period December 16 through July 31, and (d) realestate availability of 65% of appraised fair market value.

 

The Amended WachoviaCredit Facility includes restrictions, including the incurrence of additionalindebtedness, the payment of dividends and other distributions, the making ofinvestments, the granting of loans and limitations on the amount of capitalexpenditures.  We are required tomaintain a fixed interest charge coverage ratio of 1.1x if excess availabilityis less than $20.0 million 

 

11

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for any 30 consecutiveday period.  We have at all times been incompliance with all financial covenants under the Amended Wachovia CreditFacility.

 

There were no short-termborrowings at April 30, 2005 or May 1, 2004 and there was $58.0million of excess availability under the Amended Wachovia Credit Facility at April 30,2005.

 

Management believes thatinvested cash, cash flow from operations, and availability under the AmendedWachovia Credit Facility will provide adequate funds for our foreseeableworking capital needs, planned capital expenditures and debt serviceobligations.  Our ability to fund ouroperations and make planned capital expenditures, to make scheduled debtpayments, to refinance indebtedness and to remain in compliance with thefinancial covenants under our debt agreements depends on our future operatingperformance and cash flow, which in turn, are subject to prevailing economicconditions and to financial, business and other factors, some of which arebeyond our control.

 

**OffBalance Sheet Arrangements**

 

We enter into documentaryletters of credit to facilitate the international purchase of merchandise.  Standby letters of credit are required tosecure certain obligations, including insurance programs and duties related toimport purchases.

 
| ** **         | ** ** | **Within 1  Year** | ** ** | **2-3 Years**            | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** | **Total**  | ** ** |
|--------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|--------------------|------------|------------|------------|
| ** **         | ** ** | ** **         | ** ** | **($ in millions)** | ** ** | ** **    | ** ** | ** **         | ** ** | ** ** | ** ** |
|               |       |               |       |                     |       |          |       |               |       |       |       |
| Letters  of Credit |       |               |       |                     |       |          |       |               |       |       |       |
| Standby            |       | $                  | —     |                     | $          | —        |       | $                  | —     |       | $          | 5.7 |   | $ | 5.7 |   |
| Documentary        |       | 43.5               |       | —                   |       | —        |       | —             |       | 43.5       |       |
|               |       | $                  | 43.5       |                     | $          | —        |       | $                  | —     |       | $          | 5.7 |   | $ | 49.2 |   |

 

**ContractualObligations**

 

The following summarizesour contractual obligations as of April 30, 2005 and the effect suchobligations are expected to have on our liquidity and cash flows in futureperiods.

 
| ** **                      | ** ** | **Within 1  Year** | ** ** | **2-3 Years**            | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** | **Total**  | ** ** |
|---------------------------------|------------|--------------------|------------|--------------------------|------------|---------------|------------|--------------------|------------|------------|------------|
| ** **                      | ** ** | ** **         | ** ** | **($ in millions)** | ** ** | ** **    | ** ** | ** **         | ** ** | ** ** | ** ** |
|                            |       |               |       |                     |       |          |       |               |       |       |       |
| Long-term  debt obligations     |       | $                  | —     |                     | $          | —        |       | $                  | 44.0       |       | $          | 275.0 |   | $ | 319.0 |   |
| Redeemable  preferred stock     |       | —             |       | —                   |       | 271.0         |       | —             |       | 271.0      |       |
| Operating  lease obligations(1) |       | 54.3               |       | 99.3                     |       | 81.0          |       | 98.8               |       | 333.4      |       |
| Purchase  obligations:          |       |               |       |                     |       |          |       |               |       |       |       |
| Inventory  commitments          |       | 233.5              |       | —                   |       | —        |       | —             |       | 233.5      |       |
| Other                           |       | 5.4                |       | 6.9                      |       | —        |       | —             |       | 12.3       |       |
| Employment  agreements          |       | 1.9                |       | 2.6                      |       | —        |       | —             |       | 4.5        |       |
|                            |       | 240.8              |       | 9.5                      |       | —        |       | —             |       | 250.3      |       |
| Total                           |       | $                  | 295.1      |                     | $          | 108.8         |       | $                  | 396.0      |       | $          | 373.8 |   | $ | 1,173.7 |   |

 

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(1)               Operatinglease obligations represent minimum annual rentals under various long-termoperating leases entered in the normal course of business for retail andfactory stores, warehouses, office space and equipment.  Operating lease expense is a significantcomponent of our operating expenses.  Thelease terms range for various periods of time in various rented properties andare entered into at different times, which mitigates exposure to market changesthat could have a material effect on our results of operations within any givenyear.

 

12

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**Seasonality**

 

We experience twodistinct selling seasons, spring and fall. The spring season is comprised of the first and second quarters and thefall season is comprised of the third and fourth quarters.  Net sales are usually substantially higher inthe fall season and selling, general and administrative expenses as apercentage of revenues are usually higher in the spring season.  Approximately 33% of annual net sales infiscal year 2004 occurred in the fourth quarter.  Our working capital requirements alsofluctuate throughout the year, increasing substantially in September and October inanticipation of holiday season inventory requirements.

 

**CriticalAccounting Policies**

 

A summary of our criticalaccounting policies is included in the Management’s Discussion and Analysis section ofour Annual Report on Form 10-K for the year ended January 29,2005 filed with the Securities and Exchange Commission.

 
| **ITEM  3.** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK** |
|--------------|----------------------------------------------------------------|

 

Our principal market riskrelates to interest rate sensitivity, which is the risk that future changes ininterest rates will reduce our net income or net assets.  Our variable rate debt consists of borrowingsunder the Amended Wachovia Credit Facility. The interest rates are a function of the bank prime rate or LIBOR.  A one percentage point increase in the baseinterest rate would result in approximately $100,000 change in income beforetaxes for each $10 million of borrowings.

 

We have a licensingagreement in Japan which provides for royalty payments based on sales of J.Crewmerchandise as denominated in yen.  Wehave entered into forward foreign exchange contracts from time to time in orderto minimize this risk.  At April 30,2005, there were no forward foreign exchange contracts outstanding.

 

We enter into letters ofcredit primarily to facilitate the international purchase of merchandise.  The letters of credit are denominated in U.S.dollars.  Outstanding letters of creditat April 30, 2005 were $49.2 million, including $5.7 million of standbyletters of credit.

 
| **ITEM 4.** | **CONTROLS  AND PROCEDURES** |
|-------------|------------------------------|

 

With the participation ofthe Company’s management, including the Chief Executive Officer and the Acting ChiefFinancial Officer, the Company has conducted an evaluation of its disclosurecontrols and procedures as of the end of the period covered by this Report.Based on such evaluation, the Company’s Chief Executive Officer and the Acting ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures were effective as of the end of the period covered by this Report.

 

During the first quarterof 2005, the Company implemented additional procedures to enhance theeffectiveness of its disclosure controls and procedures related solely to its leaseaccounting practices as noted in Item 9A of the Company's Annual Report on Form 10-Kfor the year ended January 29, 2005 filed with the Securities and ExchangeCommission.  

 

There were no other significantchanges in the Company’s internal controls over financial reporting during theperiod covered by this Report that have materially affected, or are reasonablylikely to materially affect, the Company’s internal controls over financialreporting.

 

13

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**PART II– OTHER INFORMATION**

 

**ITEM 6.****                   EXHIBITSAND REPORTS ON FORM 8-K**

 
| (a)                                                                                           |   | Exhibits.                                                                                                                                                                                                                                                                                                                                       |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 4.1                                                                                           |   | Indenture, dated as of  March 18, 2005, among J.Crew Operating Corp. and certain subsidiaries thereof,  J.Crew Intermediate LLC and U.S. Bank National Association relating to the 93/4%  Senior Subordinated Notes due 2014 of J.Crew Operating Corp.  Incorporated by reference to Exhibit 4.1 of  the Form 8-K filed on March 23, 2005. |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 10.1                                                                                          |   | Letter with Neco Can  providing terms of offer of employment.   Incorporated by reference to Exhibit 10.1 of the Form 8-K filed on  March 23, 2005.                                                                                                                                                                                        |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 31.1*                                                                                         |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of  2002.                                                                                                                                                                                                                               |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 31.2*                                                                                         |   | Certification of Acting  Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley  Act of 2002.                                                                                                                                                                                                                        |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 32.1*                                                                                         |   | Certification of Chief  Executive Officer and Acting Chief Financial Officer pursuant to  Section 906 of the Sarbanes - Oxley Act of 2002.                                                                                                                                                                                                 |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| (b)                                                                                           |   | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                       |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| The following reports  on Form 8-K were filed during the quarter covered by this report: |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 1.                                                                                            |   | Form 8-K  filed March 23, 2005 relating to the Company’s entry into an Indenture  relating to new 9 3⁄4% Senior Subordinated Notes due 2014, Director  compensation matters, correction of accounting for leases and hiring of a new  Chief Information Officer.                                                              |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 2.                                                                                            |   | Form 8-K  filed April 5, 2005 relating to the Company’s determination not to  restate its results of operations for prior periods as reported in the  March 23, 2005 Form 8-K.                                                                                                                                         |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 3.                                                                                            |   | Form 8-K  filed on April 6, 2005 relating to the Company’s financial results for  the fourth quarter and fiscal year ended January 29, 2005.                                                                                                                                                                                |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 4.                                                                                            |   | Form 8-K/A  filed on April 14, 2005 amending the April 5, 2005 Form 8-K.                                                                                                                                                                                                                                                    |
|                                                                                          |   |                                                                                                                                                                                                                                                                                                                                            |
| 5.                                                                                            |   | Form 8-K  filed on April 18, 2005 relating to compensation payable to the  Company’s named executive officers and performance targets for fiscal 2005.                                                                                                                                                                           |

 

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* Filed herewith

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, each Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.  The signature for eachundersigned company shall be deemed to relate only to matters having referenceto such company.

 
|   |               | J. CREW GROUP, INC.     |
|--------|--------------------|-------------------------|
|   |               | (Registrant)            |
|   |               |                    |   |
| Date:  | June 14, 2005 | By:                     |  /s/  Millard S. Drexler |   |
|   |               |                    | Millard S. Drexler |
|   |               |                    | Chairman of the Board  and |
|   |               |                    | Chief Executive Officer |
|   |               |                    |   |
| Date:  | June 14, 2005 | By:                     |  /s/  Nicholas Lamberti |   |
|   |               |                    | Nicholas Lamberti |
|   |               |                    | Vice-President,  Corporate Controller and |
|   |               |                    | Acting Chief Financial  Officer |
|   |               |                    |   |
|   |               | J. CREW OPERATING CORP. |
|   |               | (Registrant)            |
|   |               |                    |   |
| Date:  | June 14, 2005 | By:                     |  /s/  Millard S. Drexler |   |
|   |               |                    | Millard S. Drexler |
|   |               |                    | Chairman of the Board  and |
|   |               |                    | Chief Executive Officer |
|   |               |                    |   |
| Date:  | June 14, 2005 | By:                     |  /s/  Nicholas Lamberti |   |
|   |               |                    | Nicholas Lamberti |
|   |               |                    | Vice-President,  Corporate Controller and |
|   |               |                    | Acting Chief Financial  Officer |
|        |                    |                         |  |  |  |  |

 

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