J. Crew Cleans Up

Although I haven't been tempted by J. Crew's (NYSE: JCG  ) stock in the past, I have to admit its fourth-quarter earnings look pretty impressive.

J. Crew achieved profitability in the fourth quarter, reporting net income of $44 million, or $0.71 per share, compared with its net loss of $5.9 million, or $0.37 per share, last year this time. Bear in mind, though, that J. Crew's net income included a $10.6 million benefit from taxes.

Revenues increased 27% to $366.7 million, with same-store sales in the quarter increasing by 7%, compared with an 8% increase last year.

Not only is J. Crew increasing its store count, it has interesting ancillary initiatives as well. These include Crew Cuts, its concept for children, which it's launching as both stand-alone and "shop in shop" stores within existing J. Crew locations. Furthermore, the company launched Madewell in August, which Chairman and CEO Mickey Drexler described as "a collection of real, honest women's clothes that speak for themselves. Not too trendy. Not too girlie. Just cool, everyday clothes."

J. Crew's balance sheet looks much better, too. Its cash stockpile rose 45% to $88.9 million, while it reduced its debt burden by 68% to $200 million.

Still, while J. Crew's financials are improving, I'm still hesitant. J. Crew shares have just about doubled since its IPO in June of last year, and its forward P/E of 30 sounds high for a company that expects to increase earnings by 20% per year. Furthermore, I've never been convinced it has a clear-cut competitive advantage, although it has a very solid brand. There are plenty of retailers that sell preppie fashions, like American Eagle Outfitters (Nasdaq: AEOS  ) and Abercrombie & Fitch (NYSE: ANF  ) . I'm not positive that its reputation for pricey clothes in that genre will always appeal to consumers with so many options, but then again, it's pretty clear that Drexler really has a handle on fashion.

There's a lesson here, too. J. Crew often brings Gap (NYSE: GPS  ) to mind. Former Gap head Drexler has always had a great eye for fashion, although he was associated with Gap's overexpansion years ago. J. Crew's conference call highlighted the fact that the retailer keeps a close watch on its merchandise -- Drexler's statement, "Quality and design is our religion" reminds us of where Gap went wrong, as it lost its passion and lost sight of what its customers wanted, and even who they were. Retail companies must strike a balance between fashion sense and keeping their finances in stellar shape. That's not always an easy thing to achieve, but J. Crew might be getting closer to that end.

Here's more Foolish commentary on J. Crew:

• Jeremy MacNealy took a look at J. Crew's third-quarter conference call.
• One Fool decided J. Crew was overvalued last November.

American Eagle Outfitters and Gap are Motley Fool Stock Advisor recommendations. Gap has also been selected by Inside Value.

Alyce Lomax does not own shares of any of the companies mentioned.