J.Crew's Got the Looks

You can count on one hand the apparel retailers on a hot streak. But it's hard not to put your hands together for the results coming out of J.Crew (NYSE: JCG  ) . After posting third-quarter numbers that seemed to defy gravity, the company ended 2007 riding a strong tailwind.

Unlike the host of other retailers like Abercrombie & Fitch (NYSE: ANF  ) , American Eagle Outfitters (NYSE: AEO  ) , and Hot Topic (Nasdaq: HOTT  ) , the company kept comps solidly in the black, posting 4% same-store sales growth for the fourth quarter.

Preppy consumers flocked to J.Crew's stores, so revenue -- adjusted for the extra week the previous year -- was up 13%, with the strong comps and 9% extra net square footage contributing to the growth. Retail stores generated 12% growth, and the Internet and catalog business was up 15%. Gross margins expanded by 50 basis points, and that, along with leveraging expenses, helped boost operating income by a solid 22% year over year.

While reported earnings took a nosedive, adjusted earnings in both the 2007 and 2006 fourth quarters led to a 24% increase to $0.41 per share.

J.Crew is going against the typical retail strategy of building cookie-cutter stores as fast as possible. Its total square footage last year increased  9%, spread among a variety of store types including namesake J.Crew stores, Crewcuts for kids ages 2 through 10, and a new Madewell brand offering casual women's apparel.

I don't want to sound too gushy here, but I can't think of another apparel merchant that is hitting the consumer at all the right places (with the possible exception of Urban Outfitters (Nasdaq: URBN  ) ). The company's winning strategy of retail, catalog, and Internet businesses is one that looks like a new standard for how to build an apparel retail brand.

Guidance for 2008 struck a positive note with analysts. J.Crew's management sees comp sales growing in the mid-single digits, direct sales increasing by the high single digits, and  square footage up 7% to 9%. Put it all together, and management expects earnings per share to advance more than 20%.

Of course, a stock performing this well doesn't come cheap; J.Crew shares trade at 24 times trailing earnings. True, a lot of retailers are looking attractive after their stocks fell 20% to 40% from last year's highs. But few of them are enjoying this kind of tailwind.

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