What is going on with J. Crew?

Fashion, News and commentaries

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?

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.

J. Crew’s rumored IPO

News and commentaries

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Back in early 2000s when I was in yachting, J. Crew was (probably still is) the go-to for the typical yachting uniform of white shirts and khakis. In a word, boring – unless preppy is the height of your sartorial taste.

Then, a few years ago in late 2010, a twenty something cousin of mine who dresses more hipster than preppy mentioned that J. Crew was her absolute favorite brand. Being in Montreal, Canada where the brand is absent meant I had to visit the store online to see what she meant.

Sure enough, the J. Crew that I knew was transformed: young, on-trend and completely wearable beyond Nantucket and the Hamptons. These changes could largely be credited to the leadership of Jenna Lyons as creative director and Millard “Mickey” Drexler as CEO. I remember Jenna Lyons as the one who wore a sweater and a maxi feather skirt to the 2011 Met Gala. If that’s not the epitome of cool and owning it kind of style, I don’t know what is. Fast forward to today and J. Crew has only grown bigger and has garnered a cult following. More importantly, that cult following translates to $2.4B in revenue last year, a 9% increase and a valuation of $5B.

If J. Crew IPO’s with the partnership of Lyons and Drexler intact, I would certainly bet on its success. But, there’s also a possibility that J. Crew is not going to IPO at all and instead get acquired at its current valuation by Japan’s Fast Retailing, the parent company of Uniqlo. Either way, it would be a nice exit for TPG Capital and Leonard Green & Partners who bought J. Crew for $2.8B in 2011. I’m wondering though, would an acquisition adversely affect J. Crew’s current leadership structure and company culture? Not to say that Fast Retailing does not know fashion. Its brands: Uniqlo, Helmut Lang, Theory, etc. have themselves good followings. Still, it would be interesting to see how this works out.