Mail Stop 3561
September 13, 2005
Arlene S. Hong, Esq.
General Counsel
J. Crew Group, Inc.
770 Broadway
New York, New York 10003
Re: J. Crew Group, Inc.
Registration Statement on Form S-1
Filed August 17, 2005
File No. 333-127628
Dear Ms. Hong:
We have reviewed your filing and have the following comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
General
1. We note a number of blank spaces throughout your registration
statement for information that you are not entitled to omit under
Rule 430A, such as the anticipated price range. Please note that
we
may have additional comments once you have provided this
disclosure.
2. Please file all required exhibits, such as the form of
underwriting agreement and the legal opinion, in a timely manner
so
that we may have adequate time to review them before you request
effectiveness of your registration statement.
3. Provide us in a timely manner copies of any artwork that you
intend to use. Please be advised that we may have comments on
these
materials and you should consider waiting for our comments before
printing and circulating any artwork.
Prospectus Summary, page 1
4. The summary is intended to provide a brief overview of the key
aspects of the offering. See Instruction 503(a) of Regulation S-
K.
Please remove the "Our Market," "Our Competitive Strengths" and
"Our
Growth Strategy" sections from the summary since they also appear
in
the "Business" section in a lengthier format. You also should
balance your revenue disclosure with the related net income (loss)
amount.
5. Please substantiate or delete the promotional terms and phrases
appearing in the summary and throughout the prospectus. For
example,
we note your reference to "high quality" apparel and design, and
also
note the statement indicating your limited edition luxury items
"create excitement and a sense of shopping urgency in our
customers."
We also note the following examples appearing further into the
prospectus:
* J. Crew brand embraces a high standard of style, craftsmanship,
quality and customer service while projecting an aspirational
American lifestyle. - page 49
* We consistently communicate our vision of J. Crew...through the
circulation of our catalogs that use high quality photography, the
inviting atmosphere of our stores and the imagery on our Internet
website. - page 49
* Our product lines feature the high quality design, fabrics and
craftsmanship as well as consistent fits and detailing that our
customers expect of J. Crew. - page 49.
Please revise these and similar statements appearing throughout
your
prospectus.
6. Please provide support for the qualitative and comparative
statements contained in the summary and throughout your
prospectus.
For example, we note the citation to NPD Fashionworld for the
statistical information appearing under the caption "Our Market"
in
this section and in the "Business" section beginning on page 49.
Please mark your support or provide page references in your
response
to the sections you rely upon for each specific statement. Tell
us
whether the information you cite from these reports is publicly
available. If not, you should obtain appropriate consent to cite
these reports in your filing. To the extent you are unable to
provide support, please delete the qualitative and comparative
statement. Revise throughout your prospectus as necessary.
Transactions in Connection with the Offering, page 5
7. Please provide us with your analysis of the exemption from the
Securities Act of 1933 that you will rely on for the TPG
Subscription
that will take place concurrently with the initial public
offering.
We may have further comment.
Risk Factors, page 10
8. We note disclosure in the first paragraph under this caption
stating that "there may be risks of which we are currently
unaware,
or that we currently regard as immaterial based on the information
available to us, that later prove to be material." Please delete
this statement, as all material risks should be identified and
fully
discussed in this section.
9. Please revise your risk factor subheadings to concisely state
the
specific material risk each risk factor presents to your company
or
investors and the consequences should that risk factor occur.
Avoid
simply referring to a fact about your company or a future event in
your subheadings. Stating that the risk may "adversely affect" or
"harm" your business does not adequately address the potential
consequences. Please revise all of the risk factors appearing
under
the caption "Risks Relating to Our Business."
10. Some of your risk factors appear generic because the
information
could apply to many companies in your industry or even in other
industries. Please revise to specifically indicate how the stated
risk applies to your company, or delete these risk factors:
* We must maintain the value of our brand..., page 12.
* An inability or failure to protect our trademarks..., page 13.
* Our business could be hurt by increased labor costs..., page 16.
* We are subject to numerous regulations and regulatory
changes...,
page 16.
* We rely on our information systems..., page 16.
* The success of our Internet operations..., page 17.
* The price of our common stock may fluctuate significantly...,
page
19
We may not be successful in expanding our store base, page 11
11. In order for investors to better understand the magnitude of
the
risk involved, please quantify to the extent practicable the costs
associated with the opening of each new store.
An inability or failure to protect our trademarks would harm our
business, page 13
12. Please identify the "certain other trademarks" you refer to in
the first sentence.
Our substantial amount of debt may limit the cash flow
available...,
page 17
13. Please quantify the amount of debt to which you refer so that
investors can fully assess the risk.
The price of our common stock may fluctuate significantly..., page
19
14. As currently drafted, the disclosure in this risk factor is
too
vague and appears to include multiple risks. Please revise to
concisely state the material risk to you and investors. The
additional risks addressed in this risk factor should be included
under separate subheadings, if considered material. In addition,
please remove the disclosure indicating analysts will cover your
common stock.
Management`s Discussion and Analysis, page 34
Overview, page 34
15. Please provide a balanced discussion of your past operating
results and history of operating losses and your recent revenue
growth and profitability. Please also provide a more balanced
discussion of material opportunities, risks and challenges in both
the short and long term and the actions you are taking to address
them. Please see SEC Release 33-8350.
Results of Operations, page 37
First Quarter of Fiscal 2005 Compared to First Quarter of Fiscal
2004, page 37
16. Please disclose net sales of each of your operating divisions
for
each of the periods presented. Please also disclose net sales
revenues for your primary product categories for each of the
periods
presented. Please revise to discuss significant changes and
trends
in revenues from product categories to the extent that these
changes
and trends would be material to investors.
17. Where you describe more than one business reason for a
significant change in a financial statement line item between
periods, please quantify, where possible, the incremental impact
of
each individual business reason on the overall change. In doing
so,
please quantify in dollars:
* changes in comparable store sales, non-comparable store sales
and
shipping and handling fees in your analysis and discussions of
revenues;
* the amounts of merchandise costs and buying and occupancy costs
in
your analysis and discussions of gross profit; and
* the amounts of variable store and direct operating expenses and
increases in incentive compensation in your analysis and
discussions
of selling, general and administrative expenses.
In addition, please provide an analysis of the underlying reasons
for
each significant change you identify. For example, please provide
an
analysis of significant changes in merchandise costs and buying
and
occupancy costs in your discussions of gross margin and variable
store and direct operating expenses in your discussions of
selling,
general and administrative expenses.
Please refer to Item 303(a) of Regulation S-K and SEC Release No.
33-
8350.
18. You state on page 39 that shipping and handling fees decreased
as
a result of a decline in orders in the direct business in the
first
half of fiscal 2004. However, we note that direct sales increased
by
14% in fiscal 2004 as compared to fiscal 2003. Please clarify
your
disclosure.
19. You disclose a 2.5% decrease in comparable store sales in
fiscal
2003 compared to fiscal 2002 on page 41 and that you believe the
improvement was the result of an improving economy and an upgrade
in
the quality and style of your merchandise assortments in the
second
half of the year. It appears these statements are inconsistent.
Please clarify.
Liquidity and Capital Resources, page 43
20. Please provide a more informative analysis and discussion of
financial condition, changes in financial condition and cash flows
from operating activities, including changes in working capital
components, for each period presented. In doing so, please
explain
the underlying reasons and implications of material changes
between
periods to provide investors with an understanding of trends and
variability in cash flows. Please also provide an analysis of any
known trends and uncertainties that will result in or that are
reasonably likely to result in a material increase or decrease in
your liquidity. In addition, to the extent that you have material
commitments for capital expenditures, please disclose the nature
and
amount of those commitments as well as the anticipated source of
funds to fulfill the commitments. Please refer to Item 303(a) of
Regulation S-K and SEC Release No. 33-8350.
21. Please discuss the anticipated effect, if any, the public
offering will have on future compliance with the financial
covenants
described in this section.
Contractual Obligations, page 46
22. Please include interest payments on your long-term debt
obligations and dividends on your redeemable preferred stock in
the
table. If you choose not to include these payments in the table,
please include a footnote to the table identifying the excluded
items
and provide any additional information that is material to an
understanding of your cash requirements. In addition, please
disclose that your operating lease obligations do not include
insurance, taxes and other occupancy costs and provide a context
for
the reader to understand the impact of these charges on your total
lease obligations. See Item 303(a)(5) of Regulation S-K and
footnote
46 to SEC Release No. 33-8350.
Business, page 49
Our Sourcing Methods, page 59
23. We note that you purchase approximately 15% of your
merchandise
from one trading company. If formalized, please file the
agreement
you have with this trading company as a material exhibit. See
Item
601(b)(10) of Regulation S-K.
Competition, page 61
24. We note that you compete on the basis of quality, design and
customer service. It would appear that your competitors in the
industry would also compete on the same basis. Please explain
your
methods of competition in greater detail. See Item 101(c)(1)(x)
of
Regulation S-K.
Trademarks and Licensing, page 61
25. Please disclose the duration and effect of all patents to
which
you refer and further discuss the status of all pending trademark
applications. See Item 101(c)(1)(iv) of Regulation S-K.
26. Please file your licensing agreement with Itochu Corporation
as a
material exhibit. See Item 601(b)(10) of Regulation S-K.
Legal Proceedings, page 63
27. We note disclosure in your Form 10-K filed for the fiscal year
ended January 29, 2005 indicating that you were a defendant in a
lawsuit filed on August 16, 2002 in the U.S. District Court for
the
Eastern District of Texas. Please add disclosure discussing the
current status of the lawsuit and the potential ramifications to
you.
If you do not believe the lawsuit will have a material adverse
effect
on you, please advise.
Certain United States Tax Consequences to Non-United States
Holders,
page 89
28. Please delete the term "certain" from the caption and the
first
sentence appearing under the caption.
Shares Eligible for Future Sale, page 91
Lock-up Agreements, page 92
29. Please describe the "certain exceptions" you refer to relating
to
the disposition or hedging of securities under the lock-up
agreements. Also, tell us what factors Goldman, Sachs & Co. and
Bear, Stearns & Co. Inc. would take into consideration in deciding
whether to release any of the securities prior to the expiration
of
the lock-up.
Underwriting, page 93
30. We note your disclosure that if all the shares are not sold at
the initial offering price, the representatives may change the
offering price and other selling terms. Please explain how any
change in the offering price and/or other selling terms would be
reflected in the prospectus. For example, disclose whether a
post-
effective amendment would be filed and declared effective prior to
any offers or sales being made at different prices or with
different
selling terms. We may have additional comment after reviewing
your
response.
31. Please identify any members of the underwriting syndicate that
will engage in any electronic offer, sale or distribution of the
shares and describe their procedures to us. If you become aware
of
any additional members of the underwriting syndicate that may
engage
in electronic offers, sales or distributions after you respond to
this comment, promptly supplement your response to identify those
members and provide us with a description of their procedures.
Briefly describe any electronic distribution in the filing.
Also, in your discussion of your procedures, tell us how your
procedures ensure that the distribution complies with Section 5
of
the Securities Act. In particular:
* the communications used;
* the availability of the preliminary prospectus;
* the manner of conducting the distribution and sale, such as the
use
of indications of interest or conditional offers; and
* the funding of an account and payment of the purchase price.
In addition, please tell us whether you or the underwriters have
any
arrangements with a third party to host or access your preliminary
prospectus on the Internet. If so, identify the party and the
website, describe the material terms of your agreement, and
provide
us with a copy of any written agreement. Also provide us with all
information concerning your company or prospectus that has
appeared
on their website. Again, if you subsequently enter into these
arrangements, promptly supplement your response.
Financial Statements, page F-1
General
32. Please update your interim financial statements and related
financial information included in the filing as required by Rule
3-12
of Regulation S-X.
Report of Independent Registered Public Accounting Firm, page F-6
33. Please file a revised audit report that refers to the
standards
as opposed to "auditing standards" of the Public Company
Accounting
Oversight Board (United States). Please refer to Commission
Release
34-49707 dated May 14, 2004 and PCAOB Release 2003-025
(particularly
Section B.2) issued December 17, 2003.
Consolidated Balance Sheets, page F-7
34. Please present the components of stockholders` deficit on the
face as required by paragraphs 30 and 31 of Rule 5-02 of
Regulation
S-X. In doing so, please disclose the number of shares of common
stock authorized and issued for each period. Please also disclose
the number of shares of treasury stock for each period and present
treasury stock as a deduction from the total of capital stock,
capital surplus and retained earnings as required by APB 6.
Consolidated Statements of Operations, page F-8
35. Please present basic and diluted earnings per share data for
each
period presented. Please also disclose a reconciliation of the
numerators and denominators of the basic and diluted per share
computations for each period presented, the effect that has been
given to preferred dividends in arriving at income available to
common stockholders in computing basic earnings per share and
securities that could potentially dilute basic earnings per share
in
the future that are not included in the computation of diluted
earnings per share because to do so would have been anti-dilutive.
The additional disclosures should also be included in your interim
financial statements. Please refer to paragraph 40 of FAS 128.
In
addition, please present basic and diluted earnings per share data
in
Note 18 on page F-26, on your unaudited condensed consolidated
statements of operations on page F-3 and on your unaudited pro
forma
condensed consolidated statement of operations on page 33.
Further,
please revise related financial information included in the filing
to
present earnings per share data. Please refer to Items 301 and
302
of Regulation S-K and Article 11 of Regulation S-X.
36. We assume the "Interest expense - net" line item includes
interest expense and interest income. If so, please separately
present interest expense and interest income. If the line item
includes other income and other expense, please also separately
present those items. See paragraphs 7, 8, and 9 of Rule 5-03(b)
of
Regulation S-X.
Consolidated Statements of Changes in Stockholders` Deficit, page
F-9
37. It appears that preferred stock dividends should be charged
against additional paid-in capital as opposed to accumulated
deficit
until additional paid-in capital is exhausted. Please refer to
SAB
Topic 3:C. Please tell us your basis in GAAP for your accounting
treatment or restate your financial statements.
Note 1. Nature of Business And Summary Of Significant Accounting
Policies, page F-11
Segment Information, page F-11
38. Please tell us the components of your business that you have
identified as operating segments. If you have not identified the
activities of your J. Crew Stores and J. Crew Direct sales
channels
as separate operating segments please tell us why based on the
criteria in paragraph 10 of FAS 131. In addition, tell us the
operating segments that you have aggregated in accordance with
paragraph 17 of FAS 131 and why each of the aggregation criteria
is
met.
39. Please disclose the factors used to identify reportable
segments
and whether operating segments have been aggregated as required by
paragraph 26 of SFAS 131. Please also disclose revenues for each
product category or group of similar products as reported in the
financial information used to produce your financial statements or
tell us why disclosure of product information is not required.
Please refer to paragraph 37 of SFAS 131.
Revenue Recognition, page F-13
40. We note that other revenues include the estimated amount of
your
unredeemed gift card liability based on historical trends. We
also
note from your disclosure on pages 37 and 38 that you recognized
$1.3
million in revenue related to unredeemed gift certificates that
expired and reversed $1.3 million in revenue recognized on
unredeemed
gift cards in prior years during the first quarter of fiscal 2005.
Please tell us your basis in GAAP for recognizing revenue before
either performance or a legal release from the liability as
contemplated by SFAS 140. In doing so, tell us whether all of
your
gift cards and certificates are redeemable for cash and carry
expiration dates and whether and how your accounting policies
differ
with respect to gift cards and certificates that do and do not
carry
expiration dates. Please provide evidence that demonstrates to us
that the demand for future performance with respect to the
estimated
breakage recognized as revenue is remote and that the estimate is
based on a large population of homogeneous transactions. In
addition, please provide us the historical evidence supporting
your
estimates of breakage. Further, please tell us whether you
recognize
breakage upon sale of the gift cards and certificates or over the
term of your performance obligation and your basis in GAAP for
doing
so. Finally, tell us your basis for recognizing breakage as
revenue
as opposed to a gain classified as other income.
Note 4. Property and Equipment, page F-16
41. Please disclose depreciation expense for each period presented
as
required by paragraph 5 of APB 12.
Note 6. Lines of Credit, page F-16
42. You disclose that there were no borrowings outstanding on your
Wachovia credit facility as of January 31, 2004 and January 29,
2005.
Your table in footnote 7, however, indicates that there were
outstanding borrowings on your Wachovia credit facility. Please
revise or advise.
43. We note that your credit facility is guaranteed by an indirect
subsidiary of Operating. Please tell us the name, purpose and
activities of the indirect subsidiary. Please also tell us the
nature of your indirect ownership interest and your ownership
percentage. In addition, please tell us whether the indirect
subsidiary is included in your consolidated financial statements
and,
if not, explain why.
Note 7. Long-Term Debt and Preferred Stock, page F-17
44. Please tell us the commitment date you are using to measure
the
intrinsic value of the conversion option embedded in the
convertible
instruments you are issuing to satisfy interest requirements on
loans
payable to TPG-MD Investment LLC and the basis for your
determination. In doing so, please tell us whether there are any
provisions in the loan agreement that permit either party to elect
another form of payment and whether the holder will always receive
the number of shares of common stock upon conversion as if all
accumulated interest have been paid-in-kind. Please refer to
Issue
10 of EITF 00-27. In addition, please disclose whether the loans
payable to TPG-MD Investment LLC are convertible into common stock
at
your option or at the option of the holder.
16. Stock Compensation Plans, page F-24
45. We note your disclosures on pages 68 and 70 regarding
restricted
stock awards and options granted to named executive officers and
the
estimated fair value of your common stock on the dates of grant in
2003 and 2004 and as of January 29, 2005 and March 31, 2005.
Please
provide us in a table format from February 1, 2004 to the present
with the following information regarding each issuance of common
stock, warrants, options and debt convertible into common.
Separately identify issuances of options and warrants that do not
qualify for APB 25 accounting. Tell us in detail the date of each
issuance, what was issued, all of the terms associated with each
issuance (number of shares, stock price paid, exercise price and
terms and conversion price and terms), the fair value of a share
of
your common stock on each issuance date, how you determined the
fair
value on each date, and the amount of any compensation expense,
interest expense, or other charges recorded in your financial
statements associated with each issuance, including how you
calculated any amount recorded. If any amounts are being
amortized
rather than expensed immediately, also tell us how you determined
the
amortization period. If the fair value you indicate for your
stock
on any of these issuance dates is less than the anticipated
initial
public offering price, also describe the intervening events which
occurred between the issuance date and the date you filed your
registration statement that significantly increased the fair value
of
your stock. Please reconcile the amounts of compensation expense
and
other expenses recorded in your financial statements to the
analysis
you provide us. Please continue to update your response and the
disclosures in your filing for any issuances through the effective
date. In addition, please provide us with a copy of any
independent
valuation reports used in arriving at the estimated fair value of
your common stock since February 1, 2004. We will not conclude on
any response you provide until you have filed an amendment that
includes your anticipated initial public offering price range.
46. Please disclose the weighted-average grant-date fair value of
equity instruments granted during each of the three years
presented.
Refer to paragraphs 47(b) and 47(c) of SFAS 123. In addition,
please
expand the range of exercise prices included in the second line of
the table at the top of page F-25.
Schedule II Valuation And Qualifying Accounts, page F-27
47. You state that the inventory reserve is evaluated at the end
of
each fiscal quarter and adjusted based on the quarterly
evaluation.
Please confirm to us that inventory reserves established against
specific inventory items are relieved through income only when the
inventory is sold and not based on changes in management judgment.
Item 15. Recent Sales of Unregistered Securities, page II-2
48. Please disclose all securities sold within the past three
years
which were not registered under the Securities Act. See Item 701
of
Regulation S-K. For example, we note disclosure appearing in the
table on page F-9 and Notes 7 and 16 to the financial statements
indicating you have issued restricted stock, common stock, and
preferred stock that should be disclosed in this section. Please
revise your disclosure as appropriate.
* * * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities Act
of
1933 and that they have provided all information investors require
for an informed investment decision. Since the company and its
management are in possession of all facts relating to a company`s
disclosure, they are responsible for the accuracy and adequacy of
the
disclosures they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Andrew Blume at (202) 551-3254 or William
Choi,
Accounting Branch Chief, at (202) 551-3716 if you have questions
regarding comments on the financial statements and related
matters.
Please contact Matthew Benson at (202) 551-3335 or Ellie Quarles,
Special Counsel, at (202) 551-3238 with any other questions you
may
have.
Sincerely,
H. Christopher Owings
Assistant Director
cc: Jeffrey D. Karpf, Esq.
Cleary Gottlieb Steen & Hamilton LLP
Fax: (212) 225-3999
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Arlene S. Hong
J. Crew Group, Inc.
September 13, 2005
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