Earlier this year, J. Crew rumors ranged between its supposed IPO and a sale to Japan’s Fast Retailing Co. Neither of these were realized. The company’s rumored sale at a hefty price of $5B likely pushed Fast Retailing away. And with the recent quarter report in May showing a net loss of $30.1M, the chance of an IPO is also out the door. Even worse, the company might be forced to reduce the book value of its assets if operating results continue to fall.
The company’s woes don’t necessarily mean bad things for the current CEO, Mickey Drexler. Since becoming CEO in 2003, Drexler has earned about $380M in option awards, salary and bonus. Drexler, along with the other owners and executive management have “extracted more than $650 million of dividends from the company, according to a Feb. 21 report by Moody’s Investors Service,” and most were funded with debt.
When Drexler started as CEO and Jenna Lyons as Creative Director, the J. Crew brand became cool again and earned a cult following among the fashion set. What has happened since?
- Customers have been complaining of J. Crew’s high prices even for basics. With increasing competition from fast fashion retailers such as Zara, those prices have been prodding customers away. Drexler announced in January 2014 that prices for Spring 2014 will be “friendlier” but a spokesperson later corrected the statement to say that the company is “maintaining a balance of pricing across the board and better communicating to our customers what we have and why it is worth the price it is”.
- Retailers in general reported losses for the First Quarter of 2014 and have cited the consecutive periods of bad weather in the US as the main reason. J. Crew blames the weather for weak sales in Fourth Quarter of 2013 and First Quarter 2014.
- Recent fashion misses have translated into ballooning unsold inventory, up 16% on a per-square-foot basis.
The 2014 First Quarter numbers so far:
- Revenues increased 5% to $592.0 million but comparable store sales decreasing by 2%
- Gross margin down to 38.7% compared to 44.7% in the 2013 first quarter
- Increased costs (selling, general and administrative expenses) of $195.2 million, or 33.0% of revenues, compared to $178.4 million, or 31.6% of revenues in the 2013 First Quarter
- Operating income down to $34.0 million, or 5.7% of revenues, compared to $73.6 million, or 13.1% of revenues, in the 2013 First Quarter
- Net loss of $30.1 million compared with net income of $29.3 million in the first quarter last year
- Adjusted EBITDA decreased to $64.8 million from $101.0 million in the first quarter last year
- Inventories were $396 million compared to $308 million at the end of the first quarter last year. Inventories and inventories per square foot increased 28% and 16%, respectively.
- Cash and cash equivalents were $59 million compared to $92 million at the end of the first quarter last year
(Decrease in cash levels reflect refinancing costs of $29 million and dividends of $19 million. For a complete report, the J. Crew press release is here.)
In the meantime, J. Crew is betting on Asia & the Pacific for its growth, opening 2 new stores in Hong Kong last May. The company is also considering Australia for new store openings. In response to customer complaints that their prices are too high, the company might create a budget-friendly brand called J. Crew Mercantile, a name which the company filed a trademark application.