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J Crew cuts year earnings outlook, shares drop 15 pct

By Alexandria Sage
/ Source: Reuters

By Alexandria Sage

LOS ANGELES (Reuters) - J Crew Group Inc cut its full-year earnings outlook on Thursday, and its shares fell 15 percent as the high-flying retailer showed it was not immune to weak U.S. consumer spending.

The upscale clothing company headed by Wall Street darling and former GAP Inc CEO Mickey Drexler also posted disappointing same-store sales for the first quarter.

"Clearly there are traffic challenges around America and clearly we are all sharing the same challenges and struggles. I think the whole retail industry is," Drexler told analysts on a conference call.

J Crew, which sells its fashions for women, men, and children in its stores, a catalog and on the Internet, said same-store sales for the remainder of fiscal 2008 would be flat or would rise only in the low-single digits.

In the first quarter, it posted a mere 2 percent rise in same-store sales, compared to 8 percent a year earlier.

"The fear is that trend of slowing will continue," said Stifel Nicolaus analyst Richard Jaffe, who has a "hold" rating on shares.

Drexler, who has led the company to earnings and sales growth in his five years at the helm, revitalizing the merchandise and image of the preppy J Crew brand, assured analysts that the company was planning conservatively.

Consumers were not balking at paying J Crew's higher prices, he said. But he acknowledged that the weakening U.S. economy would affect the company's projected results.

Jaffe said J Crew's first-quarter and projected results were not just negatively affected by lower consumer spending, but by cold spring weather and the company's prior success.

"He's a great success, a phenomenal success," Jaffe said of Drexler. "At some point, having phenomenal success on top of phenomenal success makes it tougher to do better the next year."

In the first quarter, the company beat analysts' earnings expectations by a penny per share, posting a 24 percent rise in net income to $30.5 million, or 48 cents per share, from $24.6 million, or 39 cents per share, a year earlier.

Sales rose 15 percent in the quarter to $340.6 million, driven by stores sales growth of 14 percent and Internet and catalog sales growth of 17 percent.

For the full year, the company said it now expects per share earnings between $1.70 to $1.75, down from an earlier range of $1.85 to $1.87 a share.

For the second quarter, it said it expects earnings between 31 cents to 33 cents per share.

Wall Street, on average, had been expecting full-year earnings per share of $1.86 and second-quarter earnings of 40 cents a share, according to Reuters Estimates.

Peppered with questions by analysts about the outlook, Drexler said it was virtually impossible to predict.

"This is all a forecast. America in the last six months pretty much gets an F on forecasting in most sectors of America," Drexler said. "Understand this is not a science, we are here as responsible shareholders of a company to manage the business with the utmost of prudence and conservative ways."

Drexler told analysts not to underestimate his Internet business, especially given high gasoline prices that force many American consumers to shop online rather than drive to stores.

Shares of J Crew fell as low as 17 percent in after-hours trade before settling down 15 percent to $39.65 after closing on the New York Stock Exchange at $46.91.

(Reporting by Alexandria Sage; editing by Carol Bishopric)