Majestic Research

The Wall Street Journal

J Crew Shares Decline Despite Expectations For A Solid 1Q

By Caitlin Nish
Published: May 26, 2010

NEW YORK (Dow Jones)--Shares of J. Crew Group Inc. (JCG) were among the retail sector’s largest decliners Wednesday, suffering from negative sentiment following a ratings downgrade a day before reporting what are expected to be solid fiscal first-quarter results.

Many retailers have reported strong first quarters, but their stocks have taken a hit after offering conservative guidance amid concerns about a weak start to the current quarter.

BMO Capital Markets noted concerns about the second quarter at J. Crew as it lowered its stock-investment rating on the retailer to market perform from outperform, a move some other analysts described as surprising.

BMO said while it believes the first quarter was strong, checks indicate J. Crew hasn’t been immune to the slowdown most retailers are experiencing heading into the second quarter. “If this trend plays out, we believe it could diminish upside potential for 2Q,” BMO said, adding valuation is fair.

J. Crew’s shares were recently off 5.1% to $42.40 as the broader market was in positive territory. They are down 15% in the past month but have more than doubled in the past year. Other teen retailers also traded lowered on disappointing results and guidance from American Eagle Outfitters Inc. (AEO).

A representative from J. Crew declined to comment.

Wedbush Securities’ Betty Chen said her firm’s early checks for May at J. Crew have remained pretty healthy on lean inventories. She said especially in light of Wednesday’s pullback, “we think the valuation is compelling” and suggests buying the stock.

Analysts polled by Thomson Reuters are expecting earnings growth of 77% to 57 cents a share for the first quarter, ahead of the projection from the company, which has had a streak of beating Street estimates. The retailer, a favorite of First Lady Michelle Obama, has benefited from leaner inventories and limited markdowns.

But BMO said the company’s positive factors, including trend-right product and brand strength, are widely recognized. While it still likes the stock over the long term, the firm added investors are likely to become increasingly focused on hurdles in the second half of the year, which are particularly challenging for J. Crew given tougher margin comparisons relative to its group.

But Chen said she believes the success of J. Crew’s online business, which has products exclusive to it that drive traffic, should allow the company to see margin improvement year-over-year in the second half.

Majestic Research analyst Chandi Neubauer cited the company’s strength in merchandising and inventory management, saying that if anyone can pull margin off, it’s J. Crew.

“They’re the retailer I wouldn’t bet against,” she said.